Speech
Address to the Eidos Institute
Thursday, 23 April 2009
Citigate, King George Square, Brisbane.
Mr Terry Moran AO
Good afternoon.
It is a great pleasure to speak at this lunch hosted by the Eidos Institute. Eidos is making a huge contribution to public debate and public policy formation both in Queensland and across Australia.
I think, for example, of the Institute’s external evaluation of the Queensland Government’s trials of its new preparatory year for pre-school children – work that was warmly commended by Premier Anna Bligh. I think also of the Institute’s work on training, on pre-school education, on human capital development. I think of its commitment to evidence-based policy-making and to working with the private sector, with state and federal public sector agencies and with governments, in order to produce outstanding and highly relevant research.
In fact, looking at the Institute’s broad research portfolio, what strikes me is how much its concerns intersect with some of the central priorities of the Australian Government. That is why this event hosted by Eidos is such a fitting forum for the subject of my talk today.
Next month we will reach the halfway mark of the first term of the Rudd Government. It is therefore timely to reflect on the achievements of the Government so far, in light of its own commitments and ambitions coming to power, and on what remains to be achieved.
In this reflection, I want to focus on the Government’s response to arguably the two great challenges of our age: the challenges of the global economic crisis and of climate change. And I want to briefly consider what these challenges mean for the respective roles of the state and of markets in an advanced economy such as Australia.
Asked by a journalist what worried him most as Prime Minister, Harold Macmillan is famously said to have replied: “Events, dear boy, events.”
Events indeed shape the fate of governments. But it is a poor government that simply responds to events. As a former Australian Prime Minister, Paul Keating, liked to say when dismissing the everyday squalls of politics: the dogs bark, the caravan moves on. It is a good description of how a good government must operate: one eye on the canines, the other firmly on the direction of the caravan.
From the moment of taking office, Prime Minister Rudd made it clear that his Government intended to govern with the long-term national interest always in view. But how does a Government sustain its long-term vision when the environment in which it must operate bears almost no resemblance to the one that accompanied its election a mere 17 months ago?
That is the situation facing the Rudd Government today. In November 2007, unemployment was at a 30-year low; business regularly complained that it could not find enough workers; and after a 16-year boom the big economic problems were seen to be rising interest rates and inflation.
The Government came to power promising to invest some of the proceeds of the boom years to produce long-term economic growth. In the issues it identified and the approaches it offered, the Government tuned carefully into contemporary debates about what needed attention in the economy and society.
It pledged an all-out effort to raise national wealth by lifting productivity through investment in education and training and infrastructure. It promised to reform and modernise the health system to meet the needs of an ageing population; to advance a nation-building plan that included a national broadband network, and to work energetically to close the gap in Indigenous disadvantage.
It was, and is, an ambitious agenda. Already the Government has made significant progress on it. In particular, it has made substantial investments in education, health and services to Indigenous people, among other areas, through the reinvigorated Council of Australian Governments, or COAG.
The new COAG seeks to end the inefficiencies, duplicated or absent service delivery and evaded responsibilities that marked federal-state relations in the past. Instead, it seeks to harness the strengths of the federal system by encouraging Commonwealth, State and Territory Governments to actively work together. It dramatically reduces tied payments and gives the states far more flexibility to spend money than they had before, but in return also establishes clear responsibilities for all levels of government.
Critically, it insists that governments be far more accountable for outcomes – and it requires them to produce clear, public data to show they are delivering the services they have promised to deliver. This is not glamorous or eye-catching work, but I believe that over time the new framework of federal-state relations will come to be seen as a profound reform.
Another Government initiative that I believe deserves attention is the 2020 Summit a year ago. The Government came to power committed to a new, more open way of governing – one that did not see all wisdom as emanating from Canberra but sought to learn from the ideas and initiative of the Australian people.
In its response to the Summit, which the Prime Minister announced in Perth last night, the Government indicated that it would take forward half of the 962 separate ideas that the Summit generated. Another third of the ideas remain under consideration. The detailed response is available on the 2020 website but it is fair to say that the Summit has influenced many parts of the Government’s agenda – including its plan to reform the tax system and to build a seamless national economy.
Last night the Prime Minister announced that the Government would adopt nine iconic ideas that emerged from the Summit. They include research toward the development of a bionic eye, a dedicated ABC Children’s Channel, the creation of a Deployable Civilian Capacity to respond to emergencies in our region, and a Golden Gurus or Mentoring in the Workplace program to enable the passing of knowledge from skilled older Australians to the rest of the community.
For the moment, though, the Government has a more immediate challenge than preparing the nation for 2020. That is the Budget in three weeks time.
In its first Budget, it delivered a fiscal surplus of $21.7 billion. Approaching its second Budget, it faces a projected hole of more than $100 billion in tax revenues over the next four years – as the global recession hurts the balance sheets of Australian business.
Of course, it is an iron law of politics and history that it is extremely rare for a government to come to office and not find its program radically reshaped by external circumstances. As its fiscal situation tightens, the Government will have to make hard decisions about expenditure priorities in order to keep pursuing reform.
However, as Machiavelli said, one should never waste the opportunities afforded by a good crisis. Even in tough times – especially in tough times – there are large opportunities for the Government to pursue a bold, reforming agenda. And this is particularly true in relation to the economy and climate change.
Today, one often hears media commentary that the Government ran for office as economically conservative but has since shown its true colours as a big spending government. I confess I don’t understand the criticism. When private economic activity is strong, government steps back. When it is weak, government steps in. Or as John Maynard Keynes said: “When the facts change, I change my mind.”
I think we can safely say that in the past year, the facts have changed. In the United States, 13 million people are now unemployed. Two million lost their jobs in the past three months alone. In Britain, two million people are unemployed; in Spain, the jobless rate has soared to 13.9 per cent. In China, 20 million migrant workers have lost their jobs and returned to their villages, according to Chinese officials. In Australia last month, jobless numbers jumped by nearly 53,000 to 650,000, and by 0.5 per cent to a total of 5.7 per cent – the highest monthly rise in 18 years.
Even so, Australia’s unemployment rate is lower than that of all but one of the G7 countries, and remains low by comparison with most of the developed world. We can in part thank the actions of successive Australian governments to maintain low public debt and budget surpluses during the boom years, coupled with sensible prudential requirements on Australian banks, for our relatively low jobless rate.
Nevertheless, Australia cannot escape what began as a global financial crisis but has since become a global economic and employment crisis. In response to these seismic events, I believe the Government has responded swiftly and effectively – with a strong focus on doing all that it can to protect jobs.
As the downturn deepened in October, the Government moved to guarantee the deposits of ordinary Australians and the wholesale funding on global markets of banks, building societies and credit unions. In January, it acted to protect 150,000 jobs in the commercial property sector by creating the Australian Business Investment Partnership – a $4 billion investment by the Government in partnership with the major banks to support large commercial projects threatened by the potential withdrawal of overseas financing as a result of the crisis. These decisions – coupled with aggressive Reserve Bank reductions of its official interest rate to 3 per cent – have had a powerful effect in shoring up the economy against the worst effects of the global economic tide.
The wholesale funding guarantee, for example, supports Australia’s banks in their fund-raising on global markets. As a result, up to the end of March, Australian banks have issued 10 per cent of global government-guaranteed bank debt – which makes Australia the world’s fourth biggest issuer of such debt, behind the US, France and the UK. Their prudent lending policies in recent years, coupled with Government backing, mean that Australia’s main banks are now among the strongest in the world. Of the world’s 100 largest banks, only 11 are rated AA or higher – and of these, four are Australian.
The Prime Minister has also worked intensely on the global, national and local dimensions of the crisis. In the lead-up to the G20 Summit in London this month, he spoke to each of the key participants, often more than once, stressing the need for quick, collective action to stimulate economies and to neutralise the toxic assets in the banking system. In London, as co-chair of the G20 committee on reform of the International Monetary Fund, Australia helped to shape the Summit commitments to strengthen the Fund – including the trebling of its resources to $750 billion to assist economies in crisis.
I believe that these efforts, supported by a team of senior officials from my department and the Treasury, have built considerable respect for Australia and were reflected in the priorities of the Summit communiqué. However, the Government’s main policy response to the crisis has been its recent stimulus packages worth a total of $57.1 billion. The packages are designed to lift consumer demand in the short-term, increase economic activity in the short to medium-term, and speed the transformation of the Australian economy in the longer term. There has been debate about whether the two one-off cash bonuses paid to more than seven million Australians have succeeded in stimulating the economy. I think the answer is clear.
In December, retail sales increased by 3.8 per cent -- the strongest monthly growth since August 2000. In February, retail trade was 2.3 per cent higher than in November, before the payments came through. Over the same three-month period, levels of retail trade fell in the US, New Zealand, Canada and Japan. Overall, employment remains steady in the retail sector, which is Australia’s largest employer, with 11.3 per cent of the workforce. As the National Australia Bank’s latest monthly survey says: “Retailing remains the strongest performing sector – no doubt boosted by recent government handouts.”
The Government has also trebled the rate of assistance to first home-buyers who buy a new home – a measure that has almost certainly contributed to the absence of a housing slump in Australia to date. But in the long run, what counts most is what the Government has spent its money on.
In the 1930s, Keynes said – only half joking – that how governments spent stimulus packages did not much matter. In a depressed economy, any spending would help to revive economic activity and get people working. Treasury, he said, and I quote, could even “fill old bottles with bank notes, bury them at suitable depths in disused coal-mines…and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again.”
I like to think that Australia’s stimulus packages are a little more targeted than that. In the largest school modernisation plan in our history, the Government is funding a school library, hall or upgraded classroom for every one of Australia’s 7400 primary schools. It is spending $1 billion on science and language laboratories for 500 secondary schools. It is also funding the largest-ever single investment in housing – most of it low-income housing -- by building more than 20,000 community and defence homes. And its $3.9 billion Energy Efficient Homes package will install ceiling insulation in up to 2.7 million Australian homes, and subsidise householder purchases of solar hot water systems. the package will save energy, save householders money, support jobs and reduce Australia’s carbon emissions.
In the same way, the new National Broadband Network has enabled the state to step in to both stimulate the economy and achieve a desired policy outcome when – in part because of the economic crisis -- private investment cannot do so.
Few projects are more emblematic of the current approach of the Rudd Government. Few projects offer a better opportunity to create a stronger and a fairer society than this plan to extend the benefits of the most up-to-date broadband technology to 90 per cent of Australian homes, schools and workplaces – including most citizens of rural and remote Australia.
The Government is making an initial expenditure of $4.7 billion and the company created to build the network will invest up to $43 billion over eight years in the project. From when rollout begins in July next year, the project will provide an immediate stimulus, support 25,000 jobs over eight years, and help to build the high-skilled economy and workforce of tomorrow.
In health, for example, the network will offer remarkable opportunities to improve service delivery, including the monitoring of home-based, elderly and isolated patients by video. In relation to climate change, the network opens the possibility of creating smart grids that will enable electricity users to save energy, money and emissions by managing their energy use.
According to Larry Smarr, head of the California Institute for Telecommunications and Information Technology and one of the creators of the Internet, the NBN project “puts Australia several years ahead of the US."
Nevertheless, despite the ambitious scope of the stimulus projects, expenditure on them is not extravagant. The stimulus packages are worth 4.7 per cent of GDP, expressed at 2007 levels. President Obama’s stimulus package of $US787 billion equals 5 per cent of GDP. Japan’s stimulus package is 5.3 per cent of its GDP. China’s is 15.5 per cent.
The Australian Government’s packages are backed by a plan to return the Budget to surplus and to reduce debt over time. As the economy returns to trend growth – which Treasury projects that it will start to do in the near term – the Government will hold real growth in spending to 2 per cent a year.
At the same time, Australia’s budget deficit remains one of the lowest in the OECD. The main ratings agencies have described the Government’s medium-term fiscal framework as sensible and achievable – while both the IMF and Australia’s main industry groups have supported the Government’s stimulus strategy. Australian Chamber of Commerce and Industry director Greg Evans has said: “Such is the scope of our current economic difficulties that this package is absolutely essential. The size of the package … is appropriate.”
The Government has also acted and invested boldly in response to the downturn because it is determined to learn from the mistakes of the past. It is now widely agreed that during the early 1990s, the Government responded too slowly to the onset of the recession, failing in particular to lift consumer demand. Hence Finance Secretary Ian Watt’s advice to the Government last year on its stimulus plan: “go early, go hard, go households.”
What is more, after previous recessions, even as growth picked up, youth and long-term employment took much longer to recover. That was partly because governments had reduced their commitment to training in order to save money – even while employers were also cutting training budgets. As a result, during the 1990s recession, the number of Australian apprentices fell by as many as 20,000.
To stop that happening again, the Government is increasing the pre-apprenticeship intake of its $2.1 billion Productivity Places Program – which already provides for 711,000 training places. It has set aside $145 million to assist apprentices who have been laid off to find new jobs or undertake new training. And its infrastructure projects will give preference to businesses that demonstrate a commitment to take and retain new apprentices and trainees.
However, more must be done to engage young people at risk of unemployment. We know that people without post-school qualifications are more than twice as likely to be unemployed as those who have them. And we know that about 300,000 Australians aged 19 to 24 do not have these qualifications.
Accordingly, the Prime Minister has signalled that the Government will propose to next week’s COAG meeting that every Australian under the age of 25 is guaranteed access to a school, apprenticeship, training or higher education place. And that the Commonwealth will ask State and Territory Governments to lift the mandatory age at which young people must be in school, in training or in work. The goal is to keep reducing the nation’s long-term skill shortages by encouraging unemployed workers of all ages to use their time out of a job to acquire new skills. In a downturn, no less than in a boom, Australia must keep investing for the long-term.
Which brings me to climate change. You still hear it said that a huge global recession is not the time in which to act against global warming. But how much longer can we wait, when Nature is not waiting for us?
According to Treasury modelling, economies that defer action on climate change face long-term costs that are about 15 per cent higher than they are now. And the Garnaut Climate Change Review found that unchecked climate change would mean the virtual destruction of the Murray Darling Basin and the Great Barrier Reef – with massive loss of jobs, not to mention some of our great environmental riches.
Conversely, Treasury projects that even with deep emissions cuts, all Australia’s major industries will grow in the years to 2020. And that by 2050, Australia’s renewable energy sector will be 30 times larger than it is today, creating many new jobs in solar, wind and geothermal energies. The coming low-carbon economy – the question is how quickly it will come, not if – provides a challenge and an opportunity.
The challenge – for governments, companies, consumers and citizens – is to start to factor climate change into everything we do. The way we generate and consume energy, the way we make things, the goods and services we buy, the way we travel, the way our cities, buildings and homes work.
In the longer run, market forces will drive the private sector to make the investments to drive these changes, but they will not do so alone and not quickly enough – especially in tough economic times. Government, then, has an opportunity to step in – to make investments that will promote a shift to cleaner energy and what the G20 communiqué called “an inclusive, green, and sustainable recovery”.
The Australian Government has begun to make these investments. Over time, it will make more. Provided it passes through the Senate, the Carbon Pollution Reduction Scheme, or emissions trading scheme, will come into force. The Scheme is the primary mechanism by which Australia will meet its emissions reduction targets: a 5 to 15 per cent reduction over 2000 levels by 2020 and a 60 per cent reduction by 2050.
It works by putting a steadily reducing cap on the amount of carbon that may be produced across the economy, then auctioning or issuing permits to emit consistent with that cap. To cover the amount of carbon they emit, firms will choose to reduce their emissions or to purchase or trade a sufficient quantity of permits – whichever is cheaper.
To the Scheme’s critics – businesses who say it goes too far, environmentalists who say it falls short – I would say this. It is indeed being introduced gradually, with generous compensation to householders and industry for the higher energy prices it will cause. This partly reflects that fact that it is being introduced amidst the worst economic crisis in 80 years – which creates a political and economic climate very hostile to this kind of reform.
But this is not a trivial reform. Over time it will build momentum, eventually transforming our economy. For the first time in Australia’s history, the Scheme imposes a cost on carbon emissions. Putting a price on carbon will ensure that future investment, production and consumption decisions incorporate the costs of climate change. It will induce companies and households to conserve energy, and to switch to cleaner sources of energy.
But the Government recognises that the Scheme will not sufficiently change behaviour on its own. So the Government is introducing measures to assist and nurture the growth of cleaner energy generation. They include substantial investments to support energy efficiency – including home insulation – renewable energy, and carbon capture and storage.
The Government has signalled Australia’s intention to be a world leader in the development of low-emissions coal technology. It has announced a $500 million National Low Emissions Coal Initiative to support research into carbon capture and storage. It has established the Global Carbon Capture and Storage Institute to accelerate the deployment of CCS technology worldwide, and it has committed to invest in a number of industrial-scale CCS demonstration projects in Australia.
Given that coal-fired power stations account for 80 per cent of Australia’s electricity generation, and given also the soaring demand for cheap energy in developing nations, Australia believes that any solution to rising emissions must include new technologies to produce cleaner coal.
But it recognises there is no one solution to climate change. That is why it has made a $650 million investment in research and development, demonstration and commercialisation of renewable energy technologies. And why it will establish a Renewable Energy Target to ensure that 20 per cent of Australia’s electricity comes from renewable sources by 2020.
Under its requirements, all electricity retailers and wholesale purchasers of electricity must purchase a percentage of their electricity generation from renewable energy sources. This means that between 2010 and 2030, retailers and purchasers will have to buy about $25 billion worth of clean energy between 2010 and 2030. In effect, this represents a substantial industry assistance measure to the renewable energy sector.
But the Government is not trying to pick winners, nor offering an open-ended subsidy. The Target does not stipulate which renewable energy industries should be supported. And it will be discontinued once emissions trading matures and the renewable energy sector becomes strong enough to stand alone.
The Renewable Energy Target offers a good case study in a productive public and private sector relationship – with the government setting the outcome it wants to achieve, and the private sector determining how the outcome is achieved.
Nevertheless, there is no doubt that the state is taking on an increased role in contemporary society. That is partly because in a depressed economic climate, only the state can provide the spark to make certain things happen, and partly because the global nature of our problems changes the rules of the game. Only governments, working in a spirit of co-operation and trust, will be able to produce the international agreements essential to combating climate change. Only governments can ensure that companies and citizens change their behaviour so that countries honour these agreements.
Similarly, governments working together can play a vital role in reducing the worst effects of the global recession, as I believe the outcomes of the recent G20 Summit and processes will prove. Yet this is no time to lose sight of the power of markets to promote prosperity, opportunity and human ingenuity. The task is to get the balance right: for the state to intervene to set the outcomes it desires, while harnessing the dynamism of markets to achieve them.
I believe the Rudd Government is getting that balance right. In the years ahead, we face a new economic reform agenda. Australian Governments of all stripes have pursued economic reform for more than 30 years. These reforms have served us well, creating a sophisticated, diverse service-based economy that has shown its resilience through its capacity to withstand such external shocks as the Asian financial crisis and the dot.com bust.
Today climate change is throwing up the need for a new, technological transformation of our economy. At the same time, the communications revolution and the new national broadband network will unleash the potential for extraordinary changes in the way we live our lives.
In good economic times, any Government would be tempted to step back and leave responsibility for much of this innovation to the market. But in tough economic times – with private capital in short supply – a government has an obligation to step in and direct the development of these technologies and industries in the interest of the nation’s long-term goals.
The Australian Government is taking that obligation seriously. However, it has no desire or intention to act alone. It is forging new partnerships with the private sector that offer huge opportunities to business to exploit the technological innovation that will be created by these new industries.
More broadly, as the 2020 Summit last year demonstrated, the Government is intent on building partnerships not only with the private sector but with education bodies, research institutes such as Eidos, non-government and community organisations and individuals. The goal is to tap the resources, energy and intelligence of the Australian people – because, ultimately, that is how we will solve the great challenges of our time.
Thank you.