Speech by The Hon Lindsay Tanner MP
Minister for Finance and Deregulation
Richard Searby Oration
Melbourne
Wednesday 30 September 2009
Having survived the global financial crisis in better shape than any other developed economy, Australia now faces a more insidious threat.
Complacency.
Some nations suffer from chronic angst. That’s not an accusation you could level at Australia. Our sunny optimism and pragmatic character are great drivers of national progress, but they sometimes leave us vulnerable to serious emerging risks. We’re terrific in a crisis, but when the crisis is over, we relax.
We’re now at the point in the global financial crisis where the threat of resurgent complacency is very serious. We’ve lived through a year of pre-crisis apprehension, and a year of actual crisis. Now that the economic data have once again become positive, you can hear the sighs of relief reverberating across Australia. The public mood could move from panic to complacency in the twinkling of an eye.
Our conservative opponents are the nation’s cheer-leaders of complacency. They’ve consistently downplayed the seriousness of the global financial crisis, consistently understated the risks to Australian economic activity and jobs, and consistently exaggerated the burden of temporary budget deficits.
And while it’s unreasonable to expect oppositions to lead the charge on serious economic reform, it’s hard to think of a single contribution from the Opposition on this theme since the 2007 election. Given their modest track record in government, that’s hardly surprising. It’s no accident that distinguished economist Ross Garnaut has dubbed the Howard era “the great complacency”.
Australia must heed the lessons from earlier crises that threatened our competitiveness and living standards. Do we simply bask in the glow of Chinese demand and global growth, or do we work hard to compete, innovate and grow?
Paul Krugman once said “productivity isn’t everything, but in the long run it is almost everything”. Of course Keynes also pointed out that in the long run we’re all dead. But I’m with Krugman.
If Australia is to emerge as a more competitive, resilient and vibrant economy, improving our productivity performance is absolutely paramount. That’s the view the Hawke Government adopted in the 1980s. Its reform agenda led to a productivity renaissance, with average annual productivity growth hitting 3.3 per cent in the mid-1990s. That’s well ahead of the historical average of 2.3 per cent, and much higher than recent levels around 1 per cent.
Australia’s geography and natural resources provide us with enormous advantages, but they don’t guarantee high living standards. A century ago, we had the highest per capita living standards in the world. Why? Because we had a tiny population exploiting immense natural resources, and much of the world’s peoples lived in economically underdeveloped colonies.
Since that time we’ve slipped down the world living standards league ladder largely because the world has changed. Our own complacency, always likely to drift to the surface in the absence of a good crisis, has sometimes been a factor.
In the 1980s Australia’s political leaders finally grasped the nettle. We floated our currency, deregulated the financial system, liberalised product markets, and introduced competition reforms. And in 1993, the reform process was sealed with the decentralisation of labour market regulation and the introduction of enterprise bargaining. For the first time, work arrangements could be negotiated to meet the needs of individual enterprises. That delivered greater adaptability and flexibility to deal with the fluctuations of the economic cycle, and more opportunities for better rewards for productive workers.
These microeconomic reforms left Australian businesses very well positioned to take advantage of the ensuing information and communications technology boom. I experienced this wave of change first-hand, as leader of the clerical workers union. I saw many workplaces transformed by ICT innovation in the late 1980s and early 1990s.
Australian businesses were quick adopters of new information and communications technologies. Microeconomic reform, labour market reform, and ICT investment formed a virtuous circle that generated a surge in productivity growth in the 1990s.
Some of these reforms occurred during the recession of the early 1990s. This period in our recent economic history demonstrates we must confront serious policy challenges as they emerge. Ducking hard decisions simply delays the pain, and makes the issues harder to resolve.
Australia’s productivity performance in recent years illustrates what happens when we sit back and enjoy the ride. The mining boom masked underlying weaknesses in the Australian economy. The boom has receded, but the problems haven’t.
After averaging 3.3 per cent through the mid-1990s, Australia’s productivity growth slowed to an average 2.2 per cent from 1998-99 to 2003-04. Since that time, partly because of the short-term effects of the mining boom, it has fallen to an average barely above 1 per cent.
The Productivity Commission points to short-term shocks in 2000-01 and structural shifts in particular industries to explain Australia’s recent poor productivity performance.
There has been some public debate recently about the scope of the Howard Government’s contribution to economic reform. I think the criticisms of its reform record are justified. While the former government deserves credit for some specific reforms, such as those in financial regulation and the dairy industry, its overall performance over nearly twelve years in office was very mediocre.
The productivity benefits from the introduction of the GST were modest at best, and undermined by a significant increase in business compliance costs. The privatisation of Telstra created a giant private monopoly and an industry structure that rewarded regulatory gaming rather than innovation. Workchoices did little to enhance the most crucial industrial relations reform of the modern era, enterprise bargaining, and eroded the pay and conditions of many lower-paid workers without discernible improvements in productivity.
The former government ventured into the productivity domain occasionally, through its Intergenerational Reports and a belated Council of Australian Governments reform agenda in 2006. While it did make some tough political decisions, they were generally more about ideology than productivity.
If we are to revive productivity growth in the Australian economy, we need more competition and more investment. Will we be content to bask in the glow of Chinese demand for our resources, and accept the associated economic fluctuations as they occur? Or will we strive to become a nation of more educated, innovative and competitive people and businesses?
Delivering above-trend productivity growth is not a task for a fly-by-night political salesman. It usually means tackling issues and decisions that have been ignored, deferred, or mismanaged.
The productivity reforms of the 1980s and 1990s involved big, bold, sweeping decisions, like floating the dollar, slashing tariffs or introducing enterprise bargaining.
Today’s world is different. With one notable exception, the Rudd Government’s productivity reform agenda is more incremental, and less optically spectacular. Yet it is no less important.
The central elements of this agenda are infrastructure, skills, innovation and deregulation.
The Government has committed many billions of dollars to long-term infrastructure investment. Capacity constraints inhibited Australia’s most recent surge in economic growth. We can’t afford to ignore that lesson. Investments in projects like Victorian regional rail, the Hunter expressway, Gold Coast light rail and the Oakajee port are fundamental to our future. Upgrading our interstate rail infrastructure through the Australian Rail Track Corporation is also crucial.
These investments will help to shape and enhance economic opportunities for decades to come. They will change the viability equation for many projects, activities and businesses.
We are also expanding Australia’s commitment to education and training. Only 68 per cent of Australians of work force age [25 to 64] have qualifications equivalent to Year 12. The comparable figures for nations like the United States, Canada, and Germany are 88, 87 and 84 per cent respectively. Under the Howard Government, Australia was the only developed nation reducing public investment in higher education.
The Rudd Government is completely overhauling our national commitment to learning. From early learning access in childcare centres to new school infrastructure to expanded productivity places for training to big increases in higher education funding, we are reinvigorating Australia’s efforts to develop the capabilities of our people. Highly trained, creative and adaptable workers are critical to the needs of the twenty-first century business enterprise. Without productive workers there will be no productivity improvement.
In tandem with these efforts is a renewed commitment to innovation. Heroic efforts by the Hawke and Keating Governments helped lift Australia’s national research and development activity to more respectable levels. The Howard Government made some important investments in research, but business efforts slackened for much of its period in office. In the 2009 Budget, the Rudd Government committed to a reformed research and development tax credit, now accessible for newer companies not yet making profits, and a major boost to innovation funding across a number of delivery mechanisms. The Government has introduced important new funding opportunities for elite researchers, such as fellowships for key post-doctoral research leaders.
The Rudd Government has accepted the challenge thrown to it by the Business Council of Australia to make Australia a seamless national economy. As Minister for Deregulation, along with my Assisting Minister Dr Craig Emerson, I have direct responsibility for the Council of Australian Governments process that’s designed to achieve this goal.
We are working with the States and Territories on 27 regulatory reform agendas, covering areas such as financial regulation, consumer protection, trade licences, food regulation, occupational health and safety and chemicals and plastics laws.
We’ve also commenced reform processes in other areas such as legal profession regulation and non-government organisation regulation.
It’s tough going. In each of these areas we have to negotiate an outcome with the eight States and Territories, then ensure the outcome is implemented. That can involve plenty of wrangling, and lots of time and effort. Progress is good so far, but we’ve got much further to go. In each case, the aim is to achieve a national regulatory system that eliminates unnecessary red tape, delays and costs. The means might vary, from a single national system, to harmonised State and Territory laws to mutual recognition of other jurisdictions’ regulations. It’s a reform process of countless small steps, but the longer-term outcome will be vital for business efficiency and productivity.
There is one initiative, though, that is at the very heart of the Rudd Government’s productivity agenda. That initiative is the National Broadband Network.
The thinking behind some of the critical commentary about our broadband initiative is so antiquated I can almost hear terms like “new-fangled” and “tarnation” in the chatter. Every time a major new technological leap is on the horizon, many insist on seeing its possibilities as limited to what currently occurs through established technologies.
Hence some economists have calculated the price monthly vanilla broadband access plans will cost based on a minimum commercial return for the broadband network. This is rather like replacing a goat-track with a four-lane freeway but assuming it will be used only by the same vehicles.
Superfast broadband will change almost everything. Some things will change quickly, others more gradually. Just as the universal rollout of electricity transformed our society, so will broadband.
The small town I grew up in didn’t get connected to the state’s electricity system until I was seven years old. Pretty quickly, our ice chest gave way to a fridge. Our copper was replaced by a washing machine. Our wood-fired stove was superseded.
Superfast broadband will open up possibilities that we can barely imagine. It will allow smart business people to create new applications, products and business models which all exploit the new capacity to shift discrete parts of the production process online.
Digital technologies are transforming the world. If you think I’m exaggerating, go and have a chat to Kodak, EMI or Australia Post. In the modern economy, most production consists of processing information. Even very traditional physical processes now depend heavily on the manipulation of information. Usually it’s embedded in a wider set of physical processes.
We’ve already seen a massive wave of economic change flow from information technologies. Outsourcing, the rise of independent contractors, and the emergence of service franchises are all linked to the arrival of the mobile phone. The broadband revolution will produce even wider and more pervasive structural shifts.
The relative value of land and location will change. Transport dynamics will change. Business processes will change. Consumer behaviour will change.
Every business will be asking about the threats and opportunities that broadband entails. The CEO of Woolworths will be scrutinising every last aspect of his business, from farm gate to checkout, looking for ways to improve productivity and cut costs that weren’t previously possible. And he’ll know that the CEO of Coles will be doing exactly the same thing. So if he doesn’t treat it seriously, he gets beaten. And he’ll have a galaxy of small businesses, and even his own staff, offering to show him how to do it.
Sure, none of this is guaranteed. We’ve set out the vision. Now we have to make it work. Telstra chair Catherine Livingstone expressed the challenge clearly in her recent Sir Walter Murdoch lecture:
The NBN …could change the way we live and work in ways we cannot imagine – if we get it right. And getting it right will not be cheap – or easy. … The NBN could be the macro innovation that launches a nationwide revolution in micro innovation systems…
When the mobile phone appeared in the late 1980s, who predicted it would also become a camera, a video recorder, an alarm clock, a diary, an email device and a music player?
We have a chance to generate a huge surge in productivity across the Australian economy. Our capacity to export services will be turbocharged. The efficiency of our traditional agricultural and resources sectors will soar. Countless small businesses will deliver better services more quickly and cheaply.
At the heart of all these issues lies a simple psychological challenge. Can we embrace the new, discard the obsolete, and face the future? Will Australia retreat into its past pattern, luxuriating in the short-term income effects of commodity booms while the world changes around us? Or will we grasp the opportunities that are right in front of us?
Distributing the proceeds of mining booms is easy. Forging long-term sustainable growth by improving our productivity us much more challenging. That task is no longer centred on big sweeping individual initiatives. It certainly doesn’t happen through empty slogans and ideological posturing.
A return to strong productivity growth in Australia requires relentless hard work and innovation. It needs continuous reform processes that gradually reconfigure the fundamentals of our production process. And it demands bold political leadership that looks beyond the distractions of noisy interest groups.
All of these things are at the heart of the Rudd Government’s productivity agenda.
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