- Josh Frydenberg on Australia's economic prosperity
Well, thankyou very much Jill for that very warm welcome. Yes, I do feel privileged to be the member for Kooyong, but I certainly won't be getting ahead of my station. I’m very much enjoying the role that I'm playing and acknowledge your leadership role in the journalism sphere and particularly as a lecturer at university, but also as a prominent person on our TV screens too. So thank you very much Jill.
Good evening, ladies and gentlemen and friends. I'm delighted to be with you here at the State Library of Victoria, an important and significant institution in the public life or our city and our state.
When the library was opened in 1856, the colony of Victoria was at the heart of its gold rush prosperity. Victorians were not only thinking big, they were acting big, as well as can be seen in the architecture and institutions of our great city. While our bullion stocks may be depleted somewhat today, we have come a long way over the decades and the library has played a vital role in the cultural and educational life of our city and our state.
I'd not only like to pay tribute to the State Library of Victoria for hosting this event about big ideas, but also thank John Wiley, who’s the President of the board, as well as his fellow board members and the team here at the State Library, for the invitation to join you today. And we really think that you are doing such an important job and trusted as you are with the management of this Victorian institution and icon.
Mark Twain said ‘there is no such thing as a new idea and that we simply take a lot of old ideas and put them in some sort of mental kaleidoscope. We give them a turn and they make new and curious combinations’.
Tonight, I'd like to give that kaleidoscope a turn and consider a fresh idea that has been much debated over the years. That idea is around what is the most effective role for government, particularly as it relates to seizing the economic opportunities today.
Debate over the size and the nature of government has been with us since antiquity. Indeed, it was well underway before Julius Caesar was a boy. It is also a debate, which has been manifesting itself in a very real way in Canberra, as Tony Abbott's Coalition Government sets out plans to repair the budget, to build a stronger and more prosperous Australia for the future, and to engage Australians in conversations about the opportunities for dealing with the changes and opportunities highlighted in this year’s Intergenerational Report. And shortly, will be asking Australians to be part of a discussion around the future of our tax system with the release of a discussion paper as part of the tax-wide paper process. The best role for government will be central to all of these public policy conversations.
The prevailing mood toward governments around the world today is mistrust. There is intense cynicism, especially among the young toward most aspects of government. There is a widespread belief that governments have very few answers for contemporary problems. They are variously seen as the puppets of special interests, or composed of people bent on self-promotion rather than the enhancement of the national interest.
Those words, which may resonate with you this evening, where actually spoken by John Howard in a headland speech he gave some 20 years ago before his election as Prime Minister. In my view, the problem identified by Mr Howard is still manifest today. This problem is essentially two-fold. Government often tries to do too much and in the process creates the expectation that it can solve every problem. When this happens, history shows that both the represented and the representatives are often disappointed. This may also help explain some of the election volatility that we have seen across Australia recently.
In my view, the purpose of government is as explained by that giant of a leader, Abraham Lincoln. Who said and I quote ‘government should do for people only what they cannot do better themselves and no more’. In contemporary terms, this requires the government to provide a social safety net in areas such as welfare, health and education. Support the construction of infrastructure projects, which help commerce to prosper, and in national security provide the umbrella of protection, which safeguards life and liberty. At all times, when government undertakes these roles, it should also be promoting personal responsibility, maximum opportunity and individual choice. In doing so, it must also enable the private sector, including in areas such as health and education, the flexibility to prosper.
If government loses the sight of its key core objectives and gets too big by spending too much and operating in too many areas, it smothers and even extinguishes in some cases an individual's freedom of choice.
The challenge for government today is actually to get that balance right. This challenge was set out in compelling terms in the Intergenerational Report, which was released by the treasurer last week. It sets out the hard choices that government needs to make, if it is going to maintain our standards of living for future generations in light of the demographic and economic trends we face over the next 40 years.
Overall, the Intergenerational Report tells a good story. We are living longer and incomes are rising. It's quite extraordinary to reflect that 40 years ago, there were 122 Australians over 100 years of age. Today, there are 4,000 Australians. By 2055, there will be 40,000 Australians over the age of 100.
Our population will be around 40 million and life expectancy for men will rise to 95 and for women to 97. The number of Australians aged over 65 will double over the next four decades. And significantly, the ratio of people of traditional working age to those aged over 65 will change from 4.1 to 1 today, to just 2.7 to 1 in 2055.
These are big demographic shifts and they require us to focus our energies now on how we prepare for these future challenges. It also requires us to think about how we engage older Australians in the future economy, as well as strengthen workforce participation across other groups, particularly women.
Indeed, in Australia, the proportion of women in the workforce is below that of comparable jurisdictions like Canada. If we could reach their female participation rates, our GDP would be $25 billion higher than it is today.
Another feature of the Intergenerational Report is that we have become more productive as a country. 40 years ago, our output per hour worked was half of what it is today. With new technology helping us to work faster and smarter, our productivity levels should continue to rise. This will be important to support our future standard of living.
The IGR also looks at trends in government spending and revenue. Again, the numbers are compelling. When the coalition came to office, Australia was on a trajectory of having $5.6 trillion of debt by 2055. That's a net debt to GDP ratio of 122%, a level not too far below that of Greece and above that of Spain today. As a result of measures implemented by the coalition, our debt level has been halved to around 57.2% GDP by 2055, or around $2.6 trillion. That is real progress. But we could do better.
If all of our 2014 budget measures, or equivalent measures were implemented, Australia's net debt would be repaid by 2031-32, restoring the nation's balance-sheet to the pristine condition that the previous Labour government inherited in 2007.
In this respect, the fiscal legacy left by John Howard was the epitome of fairness, as there was not only no debt and no interest bill on that debt, but there was also money in the bank which helped insulate the Australian economy against the future shock which was the global financial crisis.
Another conclusion of the Intergenerational Report is about the ageing population, which will generate new demands on government spending. Between the ages of 25 and 58, a person’s consumption of goods and services is relatively constant and on average can be funded through their labour income. Government public-spending per person increases for older Australians, particularly for people aged 65 and older, as they tend to scale down their participation in the workforce. At the same time, demand for government provided services and payments, such as the age pension and aged care tends to increase. For example, aged care spending today is four times what it was in 1975 and only half of what it'll be in 2055. As the population lives longer, our health and ageing bill will only increase.
So the question becomes, what do we need to do?
The Intergenerational Report provides the framework for the task in front of us to secure our opportunity and prosperity for future generations of Australians. The question now is what we do with these forecasts in taking action and shaping policy for the future.
The key will be to ensure that the government is more the enabler than just the provider. Government cannot fund every project, subsidise every industry and meet every individual want. Consistent with the responsibilities that are referred to earlier, I believe that our focus should be on the following. Creating opportunities for Australians to develop their potential, including those arising out of the digital transformation. Continuing to drive productivity through increased workforce participation and investment in skills and infrastructure. And three, putting the budget on a sustainable footing by reducing debt and getting spending under control.
I have great faith in the capacity of individual Australians to create new businesses, spearhead innovation and generate economic opportunities. If government gets out of the way, their job becomes easier.
During my time, as parliamentary secretary to the prime minister, I oversaw the deregulation agenda as part of our commitment to cut $1 billion a year in red tape. Since the 2000 election, the government has announced over 400 individual measures across that whole of Government and a net debt reduction of around $2 billion in compliance costs…a net reduction of around $2 billion in compliance costs. Twice a year, the parliament now devotes a full day of its sittings to repeal costly, unnecessary legislation and regulation.
But we're not just cutting red tape for the sake of it. Inefficient and ineffective regulation hurts productivity, deters investment in innovation, and costs jobs.
Our traditional regulatory approaches are also being challenged by technology and new business models, such as the growth of the so-called sharing economy. Thomas Friedman described this trend as being as big as Gutenberg's invention of the printing press. He said ‘the world is flat, we're going from a world of vertical silos of command and control, to a world where value is created horizontally by who can connect and collaborate with’.
Whether it's the 30,000 listings for accommodation on Airbnb or more than half a million trips taken on Uber just last month, Australians are moving into this new area of collaboration with enthusiasm. Government needs to carefully consider how it embraces the productivity benefits offered by the sharing economy, while ensuring that all industry participants and consumers are treated fairly and we don't stifle the opportunity for innovation through inefficient regulation. We cannot stop the change that is occurring but we do have a role to play in ensuring we harness it, to achieve the best outcome for Australians.
There are of course, other areas where government can help to facilitate trade and commerce, such as opening up international markets for individuals to trade across borders. The free trade agreements that we have negotiated over the past year with our major trading partners in China, Korea and Japan, which account for more than 60% of the goods that we export, these agreements will help our exporters take advantages of opportunities to expand trade and explore new opportunities in the major markets of North Asia, which are seeing a growing demand for their products, particularly as they move millions of people into the middle class.
The entry into force of the Free Trade Agreement with Korea, our fourth largest trading partner, saw 99.8% of Australian-goods export into that country duty-free. The Japan Free Trade Agreement provides preferential, or duty-free access for more than 97% of Australia's exports when fully implemented. And the Landmark Free Trade Agreement with China will add billions to the Australian economy, paving the way for 95% of Australian-goods exports to China to be tariff free, while delivering benefits for Australian consumers through cheaper goods and components from China.
We still think of ourselves, of our exports, as mainly consisting of resources, agricultural products or manufactured goods, but there is the huge potential for the export of services, which account already for around 70% of the Australian economy but only 17% of our exports. Australia has secured the best ever market access provided to a foreign country by China across the breadth of the services sector. Ranging from age care through to education, legal services, architecture and urban planning among others.
Investment in big infrastructure projects is another important area where government, in partnership with the private sector, can support individual enterprise and economic growth. Our record investment in infrastructure, when combined with state governments and the private sector, will see spending of up to $125 billion over the coming years invested in projects that will create thousands of jobs during the construction phase and longer-term productivity gains. We are talking about building the equivalent of eight new snowy hydro schemes, in terms of the transformative effect for the Australian economy, from the projects announced in just last year's budget alone.
We're also investing in our people. As I said in my maiden speech in the parliament, there would be few who would disagree with the words of Thomas Jefferson, who said that ‘education is the first defence of the nation’.
Education is an important driver of productivity and long-term economic growth. It helps to deliver improvements in incomes and living standards and is essential for supporting social opportunity, mobility, and inclusion.
Whether it's through providing financial support for young people to develop skills through apprenticeships, increase funding for schools or providing incentives through programs such as Restart for employers to take on older workers, we are supporting individual enterprise and economic participation.
The reforms we have proposed for the higher education sector are designed to encourage greater innovation diversity and quality in the sector. They are ground-breaking reforms and supported, nearly universally, by the universities themselves. Under these reforms, institutions will be able to respond more flexibly to the needs of students, the labour market and the broader economy, while ensuring that they can continue to exhibit world’s best practice and stay ahead of their fellow institutions that are rising throughout the region.
Having just outlined the areas of priority for government action, you may be asking yourselves ‘Why then do we hear so much about the need to cut spending on other government programs and to focus on repairing the budget? Instead of spending less, should we instead be spending more?’ The answer is, emphatically, no.
At this point, let me remind you, we already have a budget deficit of more than 2% of GDP, meaning that government spending is outstripping revenue by $100 million a day. Around $40 million a day which is spent on interest or on debt. My view is that government needs to spend less and make those dollars work harder. A legacy of debt and deficit will break the Berkian compact across the generations between the past generation, this generation and future generations. As we leave our children, and their children, a life lived with less choice, less freedom and a lower standard of living.
I return to the scenarios outlined in the IGR. We were on track before we came to government to a net debt to GDP ratio of 122%, which would have been equivalent to one of the highest in the developed world. As a result of legislative measures, that number is now below 60%, over halved. This is why the job of budget repair matters. Incremental savings over time make a difference and by so doing government can afford the things we want it to do. It lies at what is the heart of this conversation we are now starting to generate among the broader public about the Intergenerational Report.
It was Adam Smith, who once observed ‘there is no art which one government sooner learns of another than that of draining money from the pockets of the people’. Federal and state governments, more typically the hue of our political opponents, more often than not live up to that observation. But increased taxes dampen productivity and growth, and reduce incentive for people to enter and stay in the work force. However, more efficient and effective taxes can do the opposite and provide the incentives for work and enterprise. This is why we are committed to producing a comprehensive tax discussion paper as we go about boosting the competitiveness of our tax system.
We have 125 different taxes in Australia, but just ten of those produce 90% of the revenue. There is clearly plenty of scope to improve the efficiency of the tax system. The discussion paper and the white paper will also look at the best ways to go about reforming the competitiveness of our tax system.
We also need to address issues arising from the combination of an ageing population, the increasing mobility of labour and capital across borders, and the growing digitalisation of the economy, all of which require us to revisit old assumptions about the traditional sources of government revenue, as well as the economic cost of our decision-making in the first place.
Pressure on our revenue base, which we are seeing with the downgrades in commodity prices, which required us in the midyear economic and fiscal outlook at the end of last year, to reduce our revenue assumptions by around $32 billion, will continue to compound the necessity of taking hard decisions to reduce spending over the medium term. It is really one of the challenges we face in the lead up to this year's budget.
In conclusion, Australia has a lot to look forward to. We are in our 24th year of consecutive economic growth. We are perfectly placed geographically, alongside the rising economies of Asia. We have a highly-skilled and educated population that can look forward to living longer and more productive lives. However, there is simply no room for complacency. This is one of the key messages of the Intergenerational Report and its projections of what Australia will look like over the next 40 years.
Good leadership requires that we resist the temptation to put government at the centre of the economy and as the default provider for all of the solutions. Government must be the enabler so that current and future generations of Australians can prosper. This ladies and gentleman is the best role for government. Thank you very much.
'Government must be the enabler so that current and future generations of Australians can prosper. This is the best role for government.'
- Josh Frydenberg
About this video
Hear Assistant Treasurer Josh Frydenberg as he delivers a Big ideas under the dome lecture on the topic of managing Australia's continued economic prosperity.
Josh looks back to 1856, when the State Library was established, and outlines how far we travelled since those goldrush days.
Looking at today and into the future, he discusses the challenges of managing budgetary and tax reform, and focuses on some of the outcomes of the recent intergenerational report. He also highlights the opportunities currently being offered by free trade arrangements with China, and stresses that Australia has a lot to look forward to in terms of economic prosperity.
This event was part of the Library's Big ideas under the dome lecture series, bringing to Melbourne great minds in the arts, culture, social justice and sciences to discuss, debate and reflect on the big ideas and issues of our time.
Josh Frydenberg is the Federal Member for Kooyong and the Assistant Treasurer. He was elected to the Australian House of Representatives at the 2010 federal election and re-elected in 2013.