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Bridging the ambition gap: Labor's wealth creation agenda: speech by Wayne Swan to the Investment and Financial Services Association (IFSA): Sydney : 26 August 2005. \n



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Wayne Swan MP Federal Labor Shadow Treasurer

BRIDGING THE AMBITION GAP: LABOR’S WEALTH

CREATION AGENDA

SPEECH TO THE INVESTMENT AND FINANCIAL SERVICES ASSOCIATION (IFSA)

SYDNEY, FRIDAY 26 AUGUST 2005

WAYNE SWAN, SHADOW TREASURER

** CHECK AGAINST DELIVERY **

I would like to talk with you about Labor’s ambitions for our future. About our

strategy for wealth creation.

The Statement on Monetary Policy released this month by the Reserve Bank painted

a generally upbeat picture of the Australian economy.

News of this type is always welcomed by the Labor Party - the architects of

Australia’s modern economy and its 14 years of economic growth.

But what are the challenges we face as a nation?

We have enjoyed enormous prosperity in recent times. The reforms put in place in

the 1980s and early ‘90’s set us up for a period of growth that has now lasted 14

years.

We’ve also had our fair share of good luck. Most recently, our terms of trade have

reached 50-year highs and the price of our commodity exports are at record levels.

But some things have changed in recent years that have put future prosperity at risk.

Yet the Howard Government is using the strength of today’s economy as an excuse to

ignore the clouds gathering on the horizon.

Growth rates are slipping, productivity is falling, exports of manufacturers and

services are struggling, household savings are in decline and foreign debt has

become a dangerous and costly addiction.

The burden on future generations of servicing our spiralling foreign liabilities

threatens to rival the intergenerational burden imposed by the ageing of the

population. I will return to this issue later.

The Government’s response has been dangerously complacent.

If we don’t deal with the issues soon, nobody will bail us out.

Their “she’ll be right” attitude, narrow and extreme obsession with industrial relations

and unwillingness to do the hard yards leaves us dangerously unprepared for the

opportunities and challenges ahead.

Australian needs a comprehensive strategy that locks in growth for the future.

Labor’s wealth creation strategy does just that by investing in skills and education,

rewarding innovation, delivering world-class infrastructure, putting incentive back in

the tax system and easing the burden of regulation.

At its core, our strategy recognises the need to lift exports and saving. And here the

financial services industry has a vital role to play.

Australia needs to get back on the high productivity, high export path if it is to deliver

rising incomes without excessive and ultimately unsustainable reliance on debt.

And it must finance more productivity enhancing investment through higher private

domestic savings so that future investment income and profits flow to Australians,

not overseas.

Labor’s strategy backs the concerns and priorities expressed by the business

community, most clearly articulated by the Business Council of Australia.

The BCA has been strident in its criticism of the Government’s policy inertia and

inaction.

Launching their report “Locking in or losing our prosperity”, BCA President Hugh

Morgan called for a comprehensive strategy to deal with a litany of economic

challenges.

The report warns “Australia is heading for trouble” and “is reaching the limits of its

productive capacity and further reform is required for the economy to grow at rates

similar to the last decade”.

The report’s economic modelling shows real and lasting gains and higher living

standards could be achieved if Government put in place an economic strategy that

encompasses education, skills, infrastructure, tax and regulation.

Though Labor doesn’t agree with everything the BCA proposes, it’s striking just how

much of Labor’s agenda parallels the BCA’s.

As the BCA knows, at the end of the day there is only one way to deliver prosperity -

and that’s lifting by lifting productivity.

And the BCA recognises that to secure our prosperity you need a long-term strategy.

Strategy for the Future

So I ask you, what is the Government’s plan for the future? Where’s its map? What’s

its ambition for our country for the next twenty years?

The Government’s inertia reminds me what some Americans refer to as an “ambition

gap”.

At the core of this Government there is an ambition gap. An inability to think big. A

lack of confidence in what Australians can achieve on the world stage despite over

two centuries of evidence to the contrary.

Who would have thought that in the 1980s Australia would lead the world in

reforming and opening up its economy? But who can imagine Australia alone riding

out the global financial crises of the 1990s had it not done so?

It’s the ambition gap of the Howard Government that has led to the gap in skills and

education, infrastructure and innovation.

It is the ambition gap that has saddled Australia with a tax system that crushes

incentive and a regulatory structure that stifles investment.

It is the Howard Government’s lack of ambition, its lack of imagination that explains

its narrow focus on its extreme industrial relations agenda.

It is simply unable to embrace fresh policy options despite hard evidence that they

will yield far more substantial and sustainable gains in productivity.

I won’t dwell on the Government’s extreme industrial agenda today other than to

challenge the Treasurer to provide hard evidence that these changes will lift

productivity. Despite all the analysis that has taken place both in Australia and

around the world, the evidence is simply not there.

As Professor of Economics at Harvard University, Richard Freeman, recently noted,

even the OECD and IMF have expressed doubts about the impact on productivity of

such reforms. The OECD had been a strident supporter of the New Zealand

experiment but now openly admits it did not deliver.

My message to Government is simple. It time to face reality and get on with it.

The Economic Challenge

Most worrying is Australia’s increasing reliance on borrowing to maintain spending

rather than lifting our living standards by producing and exporting.

In recent years our exports of goods and services have flat-lined but this has not

diminished our appetite for imports.

In nine years, Australia has lost 22% of its export market share according to the

OECD. What this means is that for every $100 of goods and services Australia

exported in 1996, it today sells an equivalent of $78.

Yet we now spend more than one quarter of every dollar we earn on imports - more

than 50% higher than in 1996.

The result is the longest run of trade deficits in our history and - as the cost of

servicing our liabilities mount - a steady rise in our income deficit - the structural

component at the heart of our current account deficit.

The trade picture will improve this year as a softer domestic economy cools demand

for imports while export receive a lift from stronger global demand.

But even the most optimistic forecasts do not expect the current account deficit to

fall below 5 per cent of GDP.

Even under an optimistic scenario of the current account deficit falling to 5% of GDP,

foreign debt will continue to rise from 65% of GDP today to 75% of GDP by the end of

the decade.

Foreign lenders will continue to be asked to fill the gap between our capacity to earn

and our capacity to spend.

And it is foreign lenders attracted by our high short-term interest rates that are

financing the current account.

In the 1980s, our current account deficit was mainly funded by investment in

Australian companies either directly or via the stock market. It is now funded

exclusively by debt inflows from international money-lenders.

And that lending is increasingly for the short term: one-quarter of our stock of foreign

debt - or over $100 billion - now has a tenor of less than 90 days versus 12 per

cent in 1996.

And the situation could deteriorate abruptly if the commodity price high tide recedes,

global interest rates move higher or foreign investors simply lose their appetite for

our debt.

The Government is now alone in its disregard for the risks. The OECD and IMF both

now argue that high debt is a problem whether is private or public.

And Standard & Poor’s have also signalled their concern. The current account and

foreign debt are two of the four indicators S&P uses to assess our credit rating. And

on both measures we perform badly not just against our peers but also against

countries rated AA or even single A.

Even if you are confident foreigners will continue to lend to us - albeit with an

increasing interest rate premium - you cannot ignore rising external liabilities.

As our liabilities continue to climb to pay for consumption and non-productive

investment, so does the bill our kids will have to pay in the future. This is the

intergenerational legacy of the Howard Government.

This burden is measured by the income deficit, which captures the interest

repayments on foreign debt and dividends and repatriated profits on foreign

investment.

Make no mistake the income deficit represents a tax on living standards that future

generations will have to pay.

This burden has increased in recent years and will continue to climb into the future to

the point where it could rival the ageing of the population as a drag on growth.

The Government’s intergenerational report predicts that as a consequence of the

ageing population of the population, “by 2041-42, the gap between spending and

revenue is projected to grow to 5.0 per cent of GDP”.

Let’s assume that external liabilities were to continue to rise at their current pace,

nominal GDP expand by the 5% per annum assumed by the Government and the cost

of servicing our liabilities average 6% per annum.

The result would be that the annual income deficit would have increased by almost

5% of GDP between 1996-97 and 2041-42.

This is an intergenerational issue on the scale of ageing of the population yet you

hear nothing on it from the Treasurer.

He was not so “Marcel Marceau” nine years ago.

To avert this, Australia needs to turn our trade deficit of around 3 percent of GDP into

a trade surplus.

To do so we need an long term agenda that tackles the issue head on - that gets us

back on the high productivity path, restores our competitiveness, lifts our export

performance, reduces our reliance on foreign savings and secures us against

external threats.

Labor’s Approach

That’s where Labor’s agenda comes in.

And it is a long-term agenda.

It recognises that as Asia continues to lift its game and we need to match and even

exceed it.

Industry by industry, product by product, business, workers and Government need to

work together to offset Asia’s low-cost advantage.

This requires a Government that has confidence in Australia’s future. A Government

that is prepared to bridge the ambition gap

Australia will continue to benefit from strong demand and prices for its commodities.

But the opportunity for further price gains is limited. New global capacity will come

on stream and cap further price increases.

Australia will have to lift its competitive game in existing goods and services markets

just to stand still. Even at the high end of the scale, Australia is facing mounting

competition - for example on education from Malaysia.

But the rising incomes of countries like China and India present spectacular new

opportunities.

As their incomes rise, their discretionary income will increase and the composition of

spending will change. And as “one-child policy” China ages before its time, still

further opportunities will present.

This will open up new markets in which Australia is well placed to compete, such as

health services and - of particular relevance to this audience - investment and

retirement income products.

Government has a crucial role to play here - whatever the current incumbents might

say.

The Government must drive an economic agenda that lifts productivity and

competitiveness.

But they must also partner with business to seek out new export markets in

manufacturing and services- just as Labor did so successfully in the 1980s.

To this end Labor’s strategy has five components: private savings, infrastructure

investment; education, skills and innovation; taxation; and finally regulation and

competition.

Savings

Can anyone imagine what would have happened to national savings if Hawke and

Keating had not introduced compulsory superannuation in the 1980s?

At the very least the financial services industry would not exist in its current form and

I would not be here talking with you today.

Other than housing it is the only area of significant household savings growth in

Australia set against a backdrop, for the last five years, of negative savings.

Since Labor introduced compulsory superannuation in 1987 coverage has lifted from

4 out of 10 to just over 9 out of 10 employees.

Australians now have some $710 billion in superannuation savings, exponential

growth from $35 billion 20 years ago.

Government guarantees through compulsion and incentives a massive flow of funds

to the private sector.

On an annual basis some $30 billion in super guarantee contributions and $1 billion

in co-contributions underwritten by almost $10 billion in tax breaks.

Of course there is always room for further improvement.

Labor is well aware of the case made for restoring its original target of 15 per cent for

compulsory super contributions and the case for reducing the size and frequency of

the tax take on super.

My colleagues and I are giving superannuation reform a high priority, particularly

Senator Nick Sherry.

Labor will bring serious policy initiatives to the next election that build on the success

of super consistent with the “65 at 65” commitment we took to the last election

which had the backing of significant tax concessions.

One other area of particular attention is the need to streamline and ease the

regulatory burden.

Regulation

One of Labor’s key priorities is to reduce the drag on productivity from ineffective or

unnecessary regulation.

The Productivity Commission’s recent review of competition policy drew attention to

the need for a more targeted review of new regulation.

But Labor is acutely aware of the creeping tide of regulation of in recent years much

without due regard to the cost to business and ultimately consumers.

I am also aware that our competitors are, right now, are adopting new flexible

regulatory models to ensure standards are maintained without unnecessary costs for

business.

The only way to deliver is to introduce structural change. Words about reducing the

regulatory burden are cheap. The key here is reforming the Regulatory Impact

Statements process to ensure it has teeth.

As you would all be well aware the Financial Services Reform introduced in 2001 was

a case study into how not to implement regulation.

Regulations attached to these reforms ran to 600 pages, impacted up to 9,000

businesses and imposed a cost on business of at least $200 million.

Despite the scale and cost of the reforms, the financial impact statement amounted

to just five paragraphs with no dollar estimates of the cost - a toothless tiger.

This year the Government made a number of changes in this area to reduce the

deadweight on business - the thrust of which Labor generally supports.

However, Labor in Government will go further.

At the time these reforms were introduced, Labor said they should be subject to

future review to ensure the benefits delivered outweighed the cost.

In March the Financial Services Authority in the United Kingdom announced a review

of the cost of financial services regulation on the prices that firms charge and their

capacity to remain innovative and internationally competitive.

Labor in Government will undertake a similar review.

The FSA has also stated that “if such a study highlights areas of regulation that are

expensive but offer little benefit to consumer or the markets, (they) will look at ways

of easing the burden of firms”.

Labor is prepared to make the same commitment.

Product Disclosure Statements is one such area. There is still far more that can be

done to distil these documents into something consumers can digest. PDS’s that run

to 80 pages of legal jargon are costly to produce and offer no real protection to

customers.

Infrastructure Investment

If you’re serious about lifting productivity growth and competing on the world stage,

Australia must have world-class infrastructure.

Dealing with the backlog of economic infrastructure projects alone could add an extra

1 per cent to long run GDP growth and 2 per cent to export growth, according to

recent modelling.

The Finance Minister, Nick Minchin, recently contended the Future Fund would

represent a drag on economic growth.

Used in the wrong way it most certainly will. Used as a place to hoard cash for no

other benefit than to meet the superannuation liabilities of public servants it will lock

us into higher average taxation than would otherwise be the case. As it is, super

liabilities and associated cash payments are already declining as a share of GDP.

It will also constrain the ability of the Government to invest in the productivity raising

reforms needed to facilitate the economy to grow faster.

The recent debate over the sale of Telstra shows how confused the Howard

Government is about the purpose of the Future Fund.

In the rush to get the Telstra sale away, the Government has plundered the assets of

the fund to appease the Nationals and sacrificed its independence by forcing it to

stockpile unsold Telstra shares.

As a consequence the role and purpose of the fund has come under a cloud.

Labor takes a different view.

Labor believes that the Future Fund can play an active role in lifting our productivity.

But unlike the Government Labor will ensure that the Future Fund is managed at

arms length from the Government by independent experts.

But it will ask the Board to consider the full range of investment opportunities

suitable to the return and risk objectives of such a Fund - including commercially

attractive infrastructure investments.

Unlike the Government, Labor will maintain all assets of the Future Fund in our

Building Australia Fund, and add to it through the proceeds of any asset sales. The

assets will not be plundered for short term political bribes.

Labor sees great value in an intergenerational fund but believes it would best meet

the challenges of an ageing population by playing a role in lifting productivity, not

simply paying public servants’ super.

Labor believes the income stream of the Fund should be used to enhance the

productive capacity of our economy.

But a lack of capital is not they main obstacle to infrastructure investment.

Superannuation funds, for example, have a healthy appetite for infrastructure as an

asset class as it offers scope to both boost returns and reduce portfolio risk due to its

low correlation with more traditional investments.

The issue is a lack of leadership from the Federal Government, a lack of co-operation

between different tiers of Government, a lack of dialogue with the private sector and

the complete absence of any national strategy for the delivery of essential

infrastructure projects.

That’s why Labor in Government will establish Infrastructure Australia.

Infrastructure Australia will be charged with responsibility for developing an strategic

blueprint for our nation's infrastructure needs and facilitating its implementation, in

partnership with the States, Territories, local government and the private sector.

Under a Labor Government, infrastructure will be a top priority.

Before I move on, industry has been waiting for two years for the Government to

deliver workable proposals to reform of Sections 51AD and the related Division 16D

dealing with the tax treatment of infrastructure projects.

The delay is indicative of the low priority this complacent Government places on filling

the infrastructure gap. The Government should get on with it.

Education, Skills, Innovation

With Australia’s share of global exports declining, Australian-based firms simply

aren’t winning enough international business opportunities.

There is a major challenge to be faced in dramatically improving our capacity to win

more international business opportunities - none more so than in knowledge

intensive activities higher up the value added chain.

We should be actively pursuing these high skill, high wage activities - they must form

the core of our economic future.

Central to enhancing our competitiveness is addressing the skills crisis and fostering

innovative new products and business processes.

The Government’s neglect of education and skill development is harming our

economic potential and leaving us unprepared for the challenge posed by the fast

growing economies of China and India.

The lack of trade and tertiary qualified workers is costing business and the economy

dearly.

Many businesses, particularly those in value added industries, are finding it difficult

to attract skilled labour, and this is pushing up labour costs accordingly.

An example of this is shipbuilding, where that industry has warned that the shortage

of skilled labour is the single biggest threat to the growth of the industry and its

ability to win big contracts.

The shortage of qualified science and engineering graduates is holding back projects

in the resources sector, and endangering the establishment of high tech industries.

The trends are nothing short of alarming:

o Australia has had one of the largest declines in investment in universities and

TAFEs of any OECD country with investment falling 8.7 per cent while the majority

of our competitors increased their investment.

o Last year the number of Australians at university fell last year - only the second

time in the last fifty years.

o Between 1980 and 2002 the number of students taking chemistry or physics

nearly halved.

o Since 1997 there has been almost a ten per cent drop in the number of

Australians commencing a bachelor’s degree in Engineering - that’s almost a

thousand fewer Australians entering the degree each year.

These trends show that rather than smartening up we are dumbing down as a nation.

We need to develop ambitious plans to reverse these trends and ensure there is

enough highly skilled labour to meet the needs of the market. We need to look at the

curriculum in our schools, the pathways from secondary education into further

education and training, and the financial impediments to study particular courses.

But having a skilled workforce is not enough. Industry and Employer Associations

need to be better resourced to research and disseminate information on world’s best

practice business processes and technologies to their members. While their

advocacy role is important we need to beef up their capabilities to be a cutting edge

resource for their members to go about doing business better.

Taxation

After nine long years another area where the Howard Government has failed to lift

the burden is in tax.

This Government says it believes in low taxes, but it is the highest taxing in our

history. Tax as a share of GDP has continued to increase since it came to office

almost a decade ago.

It is taking more tax out of the economy than ever before - burdening families'

budgets and harming our international competitiveness. This Government is not only

high taxing, it's bad taxing.

Marginal tax rates are still too high for just about everyone but especially low and

middle income earners who are having most if not all of their hard earned pay rises

and overtime clawed back in tax and reduced transfers.

Punishingly high marginal tax rates are not only a barrier to increased workforce

participation but also a ball and chain on productivity.

What incentive is there for employees to upgrade their education and skills or adopt

more efficient work practices if the reward of higher wages and bonuses never reach

their pockets?

Then there is the horrendous complexity of it all. Just ask Liberal backbencher

Malcolm Turnbull. He has referred to the practice of complying with and exploiting

loopholes in the Tax Act as a ‘black art’.

Malcolm Turnbull’s comments have raised the ire of Treasurer Costello - that’s

understandable considering he now presides over Income Tax Acts (yes there are

three!) which run to more than 9000 pages - more than the Sydney, Melbourne,

Brisbane, Adelaide and Perth White Pages combined.

This complexity is a deadweight on the economy and something individuals and

business can do without.

None of this can be solved with tinkering - such as adjusting thresholds while leaving

the current marginal rates largely in place - something Peter Costello has turned into

a fine art.

We need to take an axe to Tax Act and think long and hard about the need for many

of the concessions, exemptions and deductions which mean our marginal tax rates

are higher than they need to be.

Competition

A reinvigorated competition policy agenda is central to Labor’s wealth creation

strategy.

Labor has a strong track record in these areas. Our program of economic

deregulation in the 1980s and early ‘90s created a more productive and flexible

economy that proved itself better able to compete in global markets and withstand

economic shocks.

A recent review from the Productivity Commission drew attention to the “substantial

benefits” of competition policy which, overall, have greatly outweighed costs and

have underpinned the last 14 years of economic growth.

However, it also noted that there is the scope and the need to do better - that further

reform is needed and that national co-operation is critical to the success of such

reforms.

The Howard Government's failure to take the tough decisions in the Australian

telecommunications sector has left Australian business at a competitive

disadvantage to its international peers.

Because of the Howard Government's failure to tackle Telstra's anti-competitive

behaviour in the telco market, Australian broadband prices are amongst the highest

in the OECD and, consequently, the take up of broadband by Australian businesses

has plummeted in a recent study to 21st out of 30 surveyed OECD countries.

The importance of these figures to the Australian economy cannot be understated.

Broadband is not merely a toy for tech geeks, it is an enabling technology that is

currently driving substantial productivity gains around the world. Australia's status as

a broadband backwater is holding back the Australian economy.

Privatisation will not address these issues.

Labor is committed to taking the tough decisions to remedy Australia's poor

performance in this area and will soon be releasing a comprehensive set of policies

designed to revitalise the sector through a new round of competition reform.

Conclusion

Labor is determined to pursue a wealth creation agenda that delivers prosperity and

security.

These two principles combined are the best way to create a stronger economy and a

stronger nation.

Simply reducing people’s workplace and financial security will actually lower

productivity - which is bad for business, employees and the nation.

A real wealth creation agenda must be underpinned by economy wide reforms that

help make our businesses more competitive and innovative.

We must decide what future we want for our export industry - are we prepared to let

our manufacturing and service exports markets be eaten away - and what practical

role can Government in partnership with business play in lifting our export

performance.

In an international economy governed by survival of the fittest we cannot afford to be

anything other than world’s best.

We need world class infrastructure and regulatory frameworks, a highly skilled

workforce, and a simpler tax system that delivers more incentive.

Australia’s fortunes lie in out-innovating our competitors - developing new and better

products and services. This is the only way we can sustain higher wages and a higher

standard of living.

We have many challenges and opportunities ahead - we can’t afford to be

unprepared.