Speech by the Hon Malcolm Turnbull MP
Minister for Communications
“Dog Days - Australia after the Boom” by Ross Garnaut
National Press Club
15 November 2013
#Check Against Delivery #
Ross Garnaut is not a latter day Hanrahan telling us “we will all be rooned before the year is out.” He also describes the way to avoid the doom of spiralling deficits and dwindling incomes and employment that will be the consequence of complacency.
Carefully he describes the reform era which he dates from 1983 to 2001 and with a touching nostalgia yearns for the return of that golden age when the world, and Ross, were young.
This was the a time when Ross and other reformers, from both sides of the political fence, were framing and delivering the policies that brought to an end the ‘Australian settlement’ of public policy by releasing from Government control four big prices in our economy: The price of our currency, the price of imports relative to local goods, the price of labour by deregulating our industrial relations system and the price of capital on the financial markets.
What followed was the ‘longest decade’ of economic growth that outlasted serious economic downturns throughout the 1990s and 2000s, including the Asian Financial Crisis, the dotcom bubble and the global financial crisis.
Almost every page of this book reminds us of the wisdom of the The Economist’s famous conclusion, published in the mid-1980s, that Australia is “one of the best managers of adversity the world has seen and the worst managers of prosperity”.
This is one of the central paradoxes of our economic history.
There is no doubt that economic reform should be harder when times are tough – because in any reform where there are winners and losers the latter’s complaints are louder than the former’s thanks (generally they are inaudible). But in good times there are the resources to ease the transition, to soften the blow.
And yet it seems again and again we have been at our reforming best when the TINA imperative - ”there is no alternative” - is at its strongest. We are not alone – after all the reform era in New Zealand and the United Kingdom was driven from adversity, although there is not much sign of that will power among political leaders developing in the United States at the present time.
Ross reminds us, that not for the first time, we have experienced a terms of trade boom and saved very little of it. He is hard on the last years of the Howard government and indeed the early years of the Hawke Government for not running even bigger surpluses than they did – although as the Parliamentary Budget Office’s work in this area suggests, there is little evidence that Howard and Costello ran a structural deficit in any of those years except perhaps the last, just prior to the November 2007 election.
His case at its root is a straightforward one: when a terms of trade boom occurs as it did when China’s growth accelerated so quickly about a decade ago, it is far more prudent to err on the side of saving. The consequence of saving too much is far less damaging than saving too little.
The problem for policy makers of course is working out how much of the revenue bonanza is going to last. Corporate tax receipts, Ross reminds us, rose from $27 billion in 2002-3 to $65 billion in 2008-9, but are forecast according to PEFO to be only $69 billion in 2013-14 – one eighth lower in real terms than five years before. We shall see in MYEFO soon enough whether they are likely to be even lower.
The mistake Ross lays at the door of both the Howard Government (in its last two terms) and the Rudd and Gillard Governments was that by making permanent diminutions in Government revenues (tax cuts) and increases in expenditures (increased entitlements) they spent, rather than saved, the proceeds of the boom.
However even with the 20-20 vision hindsight affords, there is no conceivable equivalence between the two Governments. Howard promised surpluses and delivered them. Rudd and Gillard promised surpluses and delivered the biggest deficits in our history. Howard left the Government with cash in the bank. Rudd and Gillard spent all that cash and left us with a mountain of debt.
Of course managing prosperity as I noted earlier is always hard. It is much easier to keep a tight control on expenses when creditors are breathing down your neck.
That is why I am pleased to see that Ross again encourages us to establish a sovereign wealth fund and to learn that we both justify it in the same way.
The case against a sovereign wealth fund – or running very large surpluses which leads to the same end – is that the taxpayers are better able to manage the excess tax they have paid (over the needs of Government) than the Government is.
An analogy is given of a corporation which, in a bumper year, pays an especially big dividend but at the same time warns its shareholders that next year’s may not be so large.
There are reasons why corporations don’t like doing that which I won’t detain you with, but for Governments that approach is rarely practical. Every payment by Government, every cut in tax, even if it is clearly stated to be a one-off will result in enormous pressure for it to be repeated. And the goodwill engendered by the initial grant will be miniscule compared to the rage and resentment when it is not repeated.
However when there are large surpluses the pressure on Government to “give them back” is enormous and as Peter Costello reminds us when he was the Treasurer there was nobody calling for him to run even bigger surpluses.
So the reason I have always favoured a new sovereign wealth fund is because it would mean that when a Cabinet, presented with a surplus, was considering (possibly unsustainable tax cuts on the one hand and increases in entitlements on the other) there would also be a third option of saving the money.
In other words the case for a sovereign wealth fund is as much grounded in behavioural as it is in macro economics.
Now I hasten to note that given the current state of the budget our focus is on cutting the deficit and reducing debt. We would love to be weighing up how to dispose of a surplus. That would be a high class problem! But nonetheless, as Ross notes, we should be having the debate about saving now in anticipation of better days ahead. In other words we should not be so focussed on managing declining terms of trade and lower receipts that we do not also plan how we would manage shocks on the upside as well.
The Grattan Institute recently calculated that though the uplift in the terms of trade from 2002-03 levels provided around $190 billion in additional receipts for the Federal Government, structural expenditure decisions made by Governments over that period – that is, not even counting short-term stimulus policies – added up to an estimated $180 billion .
While we can quibble about the precise numbers it has become increasingly clear that the last Government not only spent the vast majority of our receipts from the boom – but also entrenched levels of spending that were barely sustainable in periods of record terms of trade.
Ross looks back to the golden error and reminds us that it was Labor that first significantly reduced the size of the federal Government from 27.3 per cent of GDP in 1984-85 to 25.5 per cent of GDP in 1995-96. The Coalition further reduced the size of the Federal Government to 23.1 per cent by 1999-2000.
As George Megalogenis reminds us, the “insistence on surplus budgeting is an enduring electoral trait that has served Australia well over the past generation … The true value of our thrift would be apparent during the global financial crisis, when Australia avoided not just recession but the large public debts that came with it” .
But the wider point is that we are leaving an era in our political economy, as Ross says, when poor policy looks good enough and ordinary policy looks celestial.
The era when policy makers were greeted with unexpected receipts to prop up populist promises are over. Since their peak in 2011, the terms of trade have fallen by 14 per cent, leading to a fall in Government revenue. As Joe Hockey recently observed, in the 18 months since the May 2012 budget there was a $95 billion deterioration in the budget position from the forward estimates .
We are entering an era when we will be forced, more than ever, to explain to the public the difficult trade-offs that are being made, the true costs of populist policies and the need for individual sacrifices to achieve wider economic benefit.
The fall in the terms of trade meant that per-capita incomes fell by three quarters of a per-cent in 2012-13. As Joe Hockey said last week , “with the ebbing of the terms of trade, growth in productivity will more than ever determine future growth in Australian living standards. If we don’t start moving now we could face very different outcomes in the next decade.”
Or to quote Ross, we are entering an era “when celestial economic policy looks ordinary, and ordinary policy diabolical. It will be wise to save much of the economic fruits of the China boom, in case the extraordinary conditions that we are enjoying turn out to be temporary—as they always have in the past.” (p.2)
Now that’s the fork-in-the-road situation we find ourselves in. One of the key features of this book is not just in identifying what road Ross argues we should take – but why in his view Australia, as a nation and a political culture, is becoming more and more likely to take the low road on reform.
Ross is very critical of the disappearance or the shrinking, as he sees it, of the ‘substantial independent centre of national polity’ (p.11). And by that, he doesn’t mean that we need more ‘centrists’ or people who are willing to stand equidistant from two extreme positions or impose a false equivalence on the two sides of politics. He reminds us, for instance, that both unions and big business were equally vociferous in their opposition to the winding back of protectionism (p.28).
What he means is that we need a strong group of independent, thoughtful, intelligent contributors to our public policy. They are not affected by personal or corporate interests, are not aligned with parties, are usually private though there are many public institutions with traditions and rules that support independence. Organisations such as universities, think tanks, the Productivity Commission and to the extent permitted by the Government of the day the Treasury, and at times the news media – though that is not always the case – fit into that category.
Government commissioned reports can be immensely influential – Campbell, Martin, Hilmer – it is hard to imagine the reform era without them.
But politicians have to be prepared to argue the case for the reform and foster, rather than shut down debate.
Ross is rightly highly critical of Wayne Swan’s mismanagement of the Henry Report on Taxation presented to the Government at the end of 2009. Swan sat on the report right through to the eve of the budget in 2010 and then released it with a commitment to implement only a few of its recommendations most notably what became the Resource Super Profits Tax (RSPT). This extraordinarily impractical proposal and the opposition it provoked in no small measure brought down a Prime Minister.
But had the Henry Report been published when it was received and had its contents been debate the problems with the RSPT would have been exposed. All it needed was a Treasurer with the confidence to laugh off demands from journalists and the opposition to “rule in” or “rule out” a particular recommendation and instead to say “I encourage everyone to read the report and debate it. The Government will reach its conclusions after considering the report and the debate that follows.”
Most of all, politicians themselves have to be prepared to explain the context for policy choices and then advocate their preferred approach in a manner which informs, rather than misleads, the electorate.
As it happens one of the worst examples of bad policy formation and then misleading exposition was the Labor Government’s NBN policy.
It is important to reflect on the scale and singularity of the recklessness involved here.
Around the world, almost every country is seeing an upgrade of broadband services. This is the Internet Age – it won’t be long before the vast majority of all people, not just those in the developed world, have access to the Internet and most of them via a smartphone.
The almost universal approach is for the private sector to upgrade their broadband services in response to the demands of their customers. This is the market at work. But there are invariably some areas which are uneconomic. And so the typical model is that Governments provide a subsidy of some kind to ensure that everyone gets connected – often a mixture of the traditional USO (funded by all consumers via their telcos) and direct grants.
The virtue of this approach is that the Government knows what it is up for. It works out what it can afford and writes the cheque. The execution and project risk is all on the private sector which is, after all, better able to manage it.
But not in Australia.
Here the two largest telcos in Australia, Telstra and Optus, are the ones receiving the cheque. The two companies with the most experience of building and operating fixed line networks (Telstra’s experience obviously dwarfing that of Optus) have no execution risk. They are getting the cheque.
The Government on the other hand, created a start up business to build and operate not just two satellites and a wireless network but the largest scale deployment of fibre to the premises in any comparable country.
They did so without any cost benefit analysis and on the basis of financial assumptions which assumed flawless execution, utterly unprecedented revenue growth, equally unrealistic construction costs and a final sale price at a multiple of earnings which was not so much aspirational as delusional.
We are endeavouring to set this right.
There is underway right now a rigorous strategic analysis of the NBN Co which will tell us where the project really is now, what it would cost and how long it would really take to complete it on the Labor Government’s specifications and what our options are to complete it sooner and more cost effectively using a range of other technologies.
As the NBN Co’s repeated failure to meet its forecasts demonstrates there has not been a culture of rigorous, prudent, fact based reporting. My Labor predecessors were told what they wanted to hear and it is worth noting that when, on the eve of the election, the Company finally gave Mr Albanese a set of (yet again) downgraded forecasts he kept them to himself.
By way of contrast we are publishing every week the rollout figures of the project. There will be quarterly financial reports that I will present to Parliament and the company’s management will regularly take questions on those reports not just from parliamentary committees but from analysts and the press.
We will be establishing very shortly an independent panel to conduct a cost benefit analysis and regulatory review of the NBN.
There will also be an audit of both the policy formation leading to the NBN and the governance and management of the company to date.
My goal on broadband is not to deploy one technology or another. If time and money were no object we may very well run fibre into every nook and cranny of the nation. But in this vale of tears time, money, cost, availability and affordability do matter.
And so first we have to tell the truth about the project and about the relevant technologies, in other words treat the Australian people as the shareholders of the NBN Co they truly are and give them the facts Labor denied them, so that we can make informed decisions about our technology choices.
The longer I serve in Parliament the more convinced I am that we should strive to be the best explainers we can. We cannot just leave it to professors and experts and think tanks – no matter how important they may be. Those who have the biggest megaphones have the biggest responsibility and nobody has a bigger megaphone than a member of parliament.
Overall, the Government is very alert to the challenges. Ross sets them out in this book. We recognise that improving productivity is the key to ensuring our future prosperity. We recognise that the only way we can remain a prosperous, high wage economy with a generous social welfare net is by being smarter, faster, more competitive in every way.
Convergence supercharged by the Internet is making more jobs, more businesses trade exposed than ever before. There only alternative to higher productivity is economic and national decline.
Ross places a lot of store in a real depreciation of the Australian dollar and the reduction in real incomes that would bring. I would simply note, as Ross does, that the value of our currency is in large measure dictated by the determined efforts of others, notably the United States, to devalue their currencies. Despite continuing interest rate reductions the AUD has remained very high and while Government can, by spending less and saving more, take pressure off the dollar, it cannot determine its value.
During the campaign I was struck by how often trade exposed businesses, including manufacturers, told me that their competitiveness was undermined not just by higher wages and a higher dollar but by higher “other costs” including compliance and regulation.
That is why we are committed to cutting $1 billion off the cost to business of regulation and red tape.
In my own department we are conducting now a root and branch review of all levels of regulation to ask these questions:-
- What is the policy objective of the regulation in question?
- Is it still valid? If not the regulation should go.
- If it is still valid, can it be achieved more cost effectively.
A smarter use of technology will be a key part of this exercise. Governments are embracing digital platforms – MyGov is a good example as indeed is Australia Post’s digital mailbox. But they are generally well behind the corporate sector. One of the weaknesses of our predecessors’ approach was that they were so concerned to promote and defend their near universal fibre to the premises NBN that they presented a fibre connection as pre-requisite for access to the digital economy and all its benefits.
So unhinged was this political obsession that many of the broadband trials sponsored by the Labor Government, including medical ones, required that the NBN’s network had to be used. In many places the unavailability of the NBN made the trial unfeasible. So I have wherever possible amended the terms to enable any form of broadband to be used in the trial so that our exploration of the opportunities of broadband are not shackled to the progress of a fibre network.
Thank you Ross for yet another challenging contribution to the policy debate – over many years - you have made a formidable, indeed indelible, contribution to our public policy discourse and development. I am delighted to launch the book and look forward to it provoking the type of informed discussion we all enjoy.