02-June-2010
Portfolio Media Releases, Speeches, The Economy
LinkClick.aspx - The Sydney Institute Speech - June 2010.pdf
On the eve of an election, after three years of governing, the extraordinary thing is that people still ask the question of Mr Rudd, “what do you really stand for, and what can you actually deliver?”
In this speech tonight I would like to contrast the Rudd Government’s approach, and its consequences, as opposed to what the Coalition stands for, and the roadmap of real action that we will follow in regaining control of Australia’s finances, and protecting and growing our economy.
There is no sense in the community that the Government is in control of things, no sense that Mr Rudd has a plan to protect and grow the economy.
In fact, people feel the Government is simply responding to events as they occur, and with a political strategy not an economic strategy.
Australians actually need a government with the capability and conviction to deliver on the things they promise.
To this end the Coalition is determined to offer a clear alternative choice of government to the Australian people.
Australia’s Mood
I sense the mood among Australians as one of uncertainty and caution about the future.
As a consequence, Australians are looking for leadership, they are looking for calm and sure-footed judgement, and they are looking for a policy road map consistent with the uncertainties and opportunities we face.
The recent wild swings in global equity, bond and currency markets compounds this mood.
Australians understand that the major advanced economies of Europe, the US and Japan are deep in debt, without an obvious exit strategy.
They know that the global financial woes that be-devilled the world twelve to eighteen months ago have not been put to bed.
In one sense they are worse. Eighteen months ago the crisis was one of banks and financial institutions, but recently this has been compounded by the risk of default by western countries.
Yet, the Rudd Government’s view of the future is confused.
One minute Mr Rudd is warning that the debt crisis in Europe means Australia is ‘not out of the woods’. The next minute he is saying that the next commodity price boom has arrived, and is here to stay.
The fact is that the renewed volatility in global financial markets underscores the risk of massive levels of sovereign debt, and the fragility of much of the developed world.
The response is to urgently re-build the economic resilience that the Rudd Government inherited if we are to build business and consumer confidence, and weather any new world-wide financial crisis.
The response is to bring down the debt, embark on a bold productivity-based growth strategy, stop the reckless spending, lock in budget surpluses, rein in the make-work projects which add nothing to productivity growth and protect the ‘safe haven’ reputation for global investment that we have enjoyed for 30 years.
We must not forget that events in Europe, in particular in Greece, Spain, Portugal and Italy, are due in large part to reform fatigue. As The Economist noted “they relaxed and gave up the tiresome business of pushing through reforms to enhance competition, hold down labour costs and boost productivity.”
The Rudd Government Approach
Mr Rudd came to office with enormous support for reform. Expectations ran high. There was trust.
Yet, after three years of the Rudd government I despair at the lost opportunities, the cynicism, the incompetence and the extraordinary growth of government in our lives.
I despair at the loss of international respect, the emergence of major sovereign risk for those who look to invest in Australia, the mounting cost pressures on families and the impact these pressures have on their enjoyment of life.
Wealth is best created when people and organisations are empowered to maximise their potential, to go with their strengths, to take risks, to take responsibility for their own decisions and actions.
Labor does not understand this dynamic.
Rather, for them, government knows best, and if you see a problem, throw our money at it, even if it is borrowed.
Labor believes that they know how to spend your money better than you do.
And, for Rudd Labor, all reform revolves around spending money. And if the country’s multi-billion dollars surplus and reserves run out, then spend borrowed money, and increase taxes.
Mr Rudd has initiated no fundamental reform, much less any unpopular reform, even if it means revealing, for all to see, that he lacks the courage of his convictions. His promises have proven worthless.
The Rudd Government harks back to the worst of the Whitlam era, minus the conviction.
It is a far cry from the Hawke era, with the likes of Peter Walsh, where the importance of markets and productivity was understood, as was the notion that you don’t solve all problems by throwing money at them.
Shame about the impulsiveness and pigheadedness of Paul Keating, which delivered “the recession we had to have”, with its 22 per cent interest rates and one million unemployed.
The Coalition Alternative Roadmap
The Coalition believes that the Australian community is best served by backing the particular talents, strengths and decisions of each individual Australian.
With this in mind a Coalition government will shape a secure economic future for Australia around sustainable, strong growth and prudent financial management.
High productivity, without debt and deficits, will provide the foundations of this secure economic future.
To this end, the economic roadmap features:
• Smaller government, with a greater reliance on the private sector and individual initiative, and a keen focus on improving the quality of government spending;
• A flexible, fair and internationally competitive tax system for business and individuals, with flatter and lower levels of income taxation;
• Fairer and more flexible workplaces, where real wage increases can be expected;
• World class education, training and health services, where excellence and efficiency is rewarded, and greater local control is achieved;
• A compassionate welfare system, where personal responsibility is encouraged and expected;
• A sustainable population, involving a plan for immigration and growth which values and enhances individual quality of life;
• Flexible energy, water, transport and telecommunication markets;
• Improved efficiency of existing infrastructure including social infrastructure (aged care, hospitals etc), plus new infrastructure based on publicly available cost benefit analyses;
• Sustainable water use;
• A more competitive financial sector, with particular focus on small business;
• Improved housing affordability, where land release is encouraged and other investments are made more attractive;
• A major focus on indigenous education and work opportunities, without paternalism;
• A sustainable and clean environment, where research and rehabilitation is prominent;
• Less regulation, with a priority attack on excessive reporting requirements;
• More effective Federal-State relations, with a return to the “Competition Policy” model applied to a range of policy objectives; and
• Playing to our strengths, by further reinforcing areas of comparative advantage.
Playing to our strengths means, among other things, not over taxing industries where we have comparative advantage compared with our overseas competitors.
Australia spent decades over taxing industries such as mining, agriculture, and other successful export and import competing industries, through a wall of manufacturing tariffs which significantly increased the cost of so many inputs.
The Rudd Government is now reverting back to this long discredited practice of over taxing a major area of comparative advantage, the mining sector.
It is a great folly to return to a policy approach which reduces competitiveness, kills investment and jobs, and undermines the great strengths with which Australia is blessed.
The Rudd Government ‘Experiment’
Reviewing the three years of the Rudd Government ‘experiment’ tells us much about what we must do to turnaround the mess of debt and deficits.
Before the global recession, monetary policy, in the form of interest rates was typically used to increase or discourage consumer and business spending, as required. Government spending, or fiscal policy, was primarily focussed on incentives, savings and funding government services.
Following the arrival of the financial crisis, lowering interest rates to stimulate spending was not an option for many OECD countries because their interest rates were nearly zero, and most households in those countries have fixed mortgage rates.
For this reason the northern hemisphere governments were forced to massively increase public spending to soften the impact of the recession.
Rapid increases in public debt and deficits resulted.
The Rudd Government panicked, and over-reacted, by mimicking this high spending northern hemisphere solution. Rubbing shoulders with the northern hemisphere ‘big boys’ clouded the judgement of Mr Rudd and Mr Swan; they were blinkered, and failed to see the alternative Australian solution.
Unlike the northern hemisphere, Australia entered the global financial crisis with no public debt, a $20 billion surplus, $45 billion in the bank, a record low 4 per cent unemployment, a strong pipeline of projects and a properly regulated financial sector. Alternative solutions were possible and far more appropriate in Australia.
In Australia, the automatic economic stabilisers kicked in. The exchange rate dropped from 90c to the US dollar to 60c to the US dollar. This proved a massive aid to exports, prompting Australia’s largest ever trade surplus in the first quarter of 2009.
Unlike the northern hemisphere, lower interest rates were able to work to significantly stimulate spending in Australia.
The prevalence of variable mortgage rates in Australia, rather than the overseas fixed mortgage rates, meant that lower interest rates flowed straight through to people’s pockets. The progressive reduction of interest rates by 4 ¼ per cent saw immediate and very significant injections of cash into millions of households.
Combined with long-standing, effective banking regulations and a very strong mining sector, both in the lead up to and during the down-turn, these measures, in combination with some of the first $10 billion fiscal stimulus, which was backed by the Coalition, ensured Australia had a soft landing.
Yet, much of the second tranche of $42 billion of stimulus money in 2009 was an unnecessary over-reaction which saw debt and spending expand rapidly, making it very difficult to wind back deficits, and putting strong upward pressure on interest rates.
This reckless spending continues, putting major pressure on interest rates, and leading to six interest rate rises in a row. And we have the ludicrous situation where fiscal policy is at loggerheads with monetary policy – one stimulating the economy and crowding out private investment, while the other puts the brakes on.
Australia is now paying the price through a $57 billion deficit, debt approaching $130 billion once the broadband billions are borrowed, Government borrowing of $700 million a week for the next two years, multi-billion dollar interest repayments for years to come, six interest rate increases in a row and much greater vulnerability for all of us if the world experiences a double dip recession.
Households who took out a typical mortgage last year are now paying $4000 to $5000 per year more in loan repayments, resulting in enormous cost of living pressures.
This reckless stimulus spending, a response to one-quarter of negative growth in the December quarter of 2008, is programmed to continue until 2012, four years after the global financial crisis. It makes no sense.
This spending has been accompanied by the greatest growth of government in our lives since the disastrous Whitlam era.
Despite Kevin Rudd coming to power as a self-proclaimed ‘fiscal conservative’, championing risk, enterprise and lower taxes, the Rudd government used the world recession as a Trojan horse to push an old-style Labor, interventionist agenda:
• to be the only country in the world to re-regulate its labour market during the financial crisis;
• to be the only country I know that is re-nationalising its telecommunications sector, through the $43 billion broadband proposal;
• to design an emissions trading scheme which maximised government revenue and maximised government involvement in investment decisions, rather than leaving company balance sheets strong enough to invest in low emissions technology;
• to further undermine private health insurance;
• to seek to dismantle employee share ownership;
• to kill competition in the financial markets that had taken nearly 30 years to build;
• to seek to establish a government bank – the Ruddbank;
• to limit the choices of our children and grandchildren as they pay higher taxes for decades to repay the hundreds-of-billions-of-dollars of Commonwealth, and guaranteed Commonwealth State Government, debt; and,
• to enter into a so-called ‘passive’ partnership in every mining project in the country trough the imposition of a great big new mining tax.
Along the way, in seeking to introduce this agenda of taxing, spending, borrowing and government intervention, the Rudd Government has established a reputation as an incompetent administration after the monumental mismanagement of the $2.4 billion home insulation fiasco, the $6-$8 billions of dollars wasted in delivering the $16.2 billion school halls program, the $1.2 billion blow-out with the computer and schools program, the extra $1 billion price tag from the failure to control our borders and stop boats coming, the embarrassing indigenous housing program, the broken promises over the emissions trading scheme, private health insurance, childcare, GP super clinics, broadband, political advertising by the Government, tax hikes on employer superannuation, and a huge new tax which will make our resources sector the highest taxed resources sector in the world by a country mile. So much for protecting our competitiveness.
And the incompetence, spin, arrogance and electoral panic continues.
The Deputy Prime Minister, Julia Gillard, has just authorised the spending of a further $5.5 billion for the next phase of the Building the Education Revolution stimulus program, despite promising to wait and consider a $14 million investigation, she commissioned, into this chronically wasteful and discredited program.
A Coalition government will tackle the debt and deficits head-on, and stop the reckless spending.
Already we have announced $22 billion dollars of capital account savings which will come straight off the Rudd Government’s projected debt.
In addition, we have announced detailed cuts to 39 Rudd Government spending programs, totalling $24.7 billion. This is an unprecedented pre-election commitment.
Significant additional cuts have been identified, and will be announced ahead of the election.
In addition to better quality spending, the cuts will see a multi-billion dollar reduction to next year’s deficit, and hasten real, not imagined, progress in getting the books back in the black.
China
To this end, we must not squander the financial benefits that will flow from the demand from China in the immediate future.
We must not be lulled into adopting the naïve Rudd Government assumption, on which the Budget was based, that the commodities boom will continue indefinitely, predicting a ‘decades-long’ resources boom.
A commodities boom will have a limited future if we face a world experiencing another major loss of financial confidence, and a flight from risk.
Furthermore, eighteen years of professional involvement in agriculture exposed me to many commodity booms and busts. Almost always the booms tapered off much sooner that expected.
Invariably, forecasters and industry members badly underestimated the size and speed of the world-wide supply response to surging commodity prices.
The same is happening now in the resources sector. The world is awash with mineral resources, and thousands of projects are on the drawing boards in Eastern Europe, Asia, North America, South America and Africa.
There is a four or five year window in which to capture many new resource projects that will benefit Australia for 30, 40 or 50 years. If we don’t capture this opportunity we will have missed the boat, and future generations of Australians will be much the poorer for it.
It is why the Rudd Government’s introduction of a deeply flawed and onerous 40 % resources rent tax in the middle of all this is so stupid.
The proposal and the manner in which it has been announced puts this investment at risk.
It is why Australians no longer believe that the Rudd Government has the right answers, or the courage to see reform through.
Banking Competition/Small Business
The Rudd Government’s panicked response to the financial crisis had another long-term adverse consequence; the destruction of much of the competition in the banking sector built up over nearly 30 years.
The small business sector has suffered most.
The taxpayer funded bank guarantee, designed to secure credit supply and reduce the borrowing costs of the banks, was not passed on to customers despite having perhaps the lowest cost guarantee among OECD countries, at 70 basis points.
Banking analysts estimate that of the four and a quarter per cent reduction in interest rates that occurred from 3 September, 2008, around 3.8 per cent was passed on to home loans, yet 2 per cent or less was passed on to small business and farmers.
In the middle of a financial crisis we saw the four big banks not only secure much greater market share through mergers, acquisitions and the flight of deposits, but also make record profits.
During this time the banks chased the home mortgage market, while neglecting lending to businesses. In particular, the bar was raised for small business with a significant hike in risk premiums, and a marked reduction in credit availability and length of loans.
Banks work for their shareholders. So, given the opportunity, the banks used the Government guarantees to minimise risk, maximise market share and maximise profits.
The failure was the Rudd Government’s. The Government was intimidated by the big four banks.
The taxpayer funded guarantees should have come with conditions attached to ensure that business, especially small business, shared properly in the benefits of the guarantees.
Higher productivity is the foundation on which debt and deficits will be eliminated.
Given that small business is the engine room of innovation in Australia, from a productivity and employment point of view particular attention should have been given to protecting these productive assets. The reverse happened.
As well as cutting the size of Government to reduce the crowding out of small business seeking finance, the Coalition is exploring additional ways in which the continuing squeeze on credit can be addressed by the banks and others, as well as opportunities to restore more competition into what is now one of the most concentrated banking markets in the world.
Resource Rent Tax
The Government’s so-called super profits tax on the resources sector is a bugger’s muddle.
Each day brings forward a new unintended consequence, confirming how little thought went into the consequences of the tax.
It is a great big tax grab to pay for continued reckless spending, it is not tax reform.
A decade ago, when the Howard Government introduced the GST, at the same time reducing income tax and abolishing a whole raft of inefficient taxes, the catchcry was “It’s not a new tax, it’s a new system.” Well, this is not a new tax system, it’s just a great big new tax.
The tax will increase the retail price of gas and electricity. When you increase the cost of producing energy, someone will have to pay. No doubt it is the end user.
The superannuation savings of millions of Australians will be significantly affected, and all to pay for the Government’s reckless spending.
One thing I did observe working on farms in my teens, even before studying economics, was that when the profits from producing wheat or sheep or beef went down significantly, farmers produced less of that product, and moved to producing more of something else which gave greater returns.
In a similar vein, I would have thought that if the returns from producing minerals in Australia went down significantly because of a 40 per cent tax on profits, then companies would be inclined to set up new mines in other countries where returns for the same generic commodity were much higher, and where the rules didn’t change mid-stream, without consultation, at the whim of an ignorant government.
No matter what the theoretical models say, with their assumptions of perfect capital markets and guaranteed growth, the real world doesn’t work this way.
The tax will see dozens of future new mining projects shelved. Billions of dollars of investment, and tens of thousands of jobs will go elsewhere in the world.
Before standing for Parliament in 2004, one commercial project I was involved with was two years as a member of one of Chevron’s investment teams assessing the massive Gorgon gas field off the North-West shelf. One of the many things I learnt was the existence of many such Chevron investment teams running a similar ruler over similar projects in the four corners of the globe. There was intense competition between these projects. A 15 per cent return of investment was merely the starting gate of getting your project ahead of any others. My abiding conclusion was that these big resource companies have options, and many of them. As well, the competitive position of each project was extremely sensitive to relative taxation positions between countries.
It wasn’t a rash claim when Rio Tinto chief Tom Albanese said recently “from my own perspective, this is my number one sovereign risk issue on a global basis”. Xstrata chief executive Mick Davis has backed these comments.
The Rudd Government is playing with fire.
Bank finance will be further discouraged because banks value the loss reimbursement component of the tax at zero. As well, banks don’t like interest and other tax not being deductible in determining the profit figure which will be taxed.
The 40 per cent funding of the losses of firms that go bust is part nationalisation of the mining sector. To suggest it is a ‘passive’ involvement by government is spin of the highest order.
If I was the Finance Minister, and taxpayers faced the prospect of rewarding failed mines to the tune of tens-of-billions-of-dollars, I would have a responsibility not to remain ‘passive’.
Our country is not some African dictatorship. This level of involvement of government in industry has no place in 21st century Australia.
As well, I can see thousands of pages of reporting requirements emerging from bureaucrats looking to cover many a backside.
Yet, the current Finance Minister, Mr Tanner, said last Sunday “these are overwhelmingly very, very large companies with very sophisticated accounting and computer systems where questions of this kind are always going to be able to be dealt with, so I do not believe this is a substantial issue in the debate”.
Mr Tanner has to get out more. If he did he might discover that there are 4200 mines around Australia, including hundreds of family owned sand and gravel quarries, limestone mines, small opal operations, and thousands of other mid-size mineral and precious metal businesses that pour millions of dollars into their local communities. For these more bureaucracy, red tape and the absence of finance is not a trivial issue. It is the difference between surviving or not.
The government has cleverly and deceitfully implied that the mining sector currently pays nothing extra for the privilege of mining a resource that is finite and belongs to all Australians; implying that only by paying more tax will it pay its ‘fair share’.
What is never made clear is that the mining sector does pay around 33 per cent more tax than every other sector of the economy, namely around 40 per cent average effective rate of tax versus 28, 29 or 30 per cent paid by every other sector. And the mining sector should pay this extra 33 per cent tax as its ‘fair share’.
However, what the Government never makes clear is that it wants to increase the extra tax paid by the mining sector from 33 per cent to around 85 per cent more tax than every other business in Australia, namely an increase from 40 per cent to 55 per cent effective rate of tax versus 28, 29 or 30 per cent paid by other business sectors.
Contrary to the nonsense the Government has been asserting, these numbers were confirmed overnight with the release of KPMG work, modelled over the life of the projects across key minerals.
This study, by the same company that did the Government’s analysis, confirmed dramatic reductions in the net present value of up to 57 per cent, making nickel, copper and goldmines economically unviable.
The problem is that Australia’s mining competition in other countries pay much less than the proposed 58 per cent in Australia, with the US at 40 per cent, Brazil at 38 per cent, Canada at 32 per cent and down from there.
Now Australia looks a lot riskier and far less profitable.
The brutal and personal political attacks by the Government on this important export industry and its leaders, combined with the naïve and dangerous design of the tax and the deliberate failure to consult, has left Australian business and overseas investors bewildered.
There is a growing sense that the Government and their advisors don’t understand the nature of investment in a globalised world, nor how key markets work, that they are dangerously out of their depth.
Business confidence in the Government has been shattered.
In particular, optimism that once surrounded the Prime Minister is rapidly fading.
Trust has ebbed away.
Attracting international investors will be much harder going, and not just for mining, now that Australia has gained a reputation for reckless decision making and retrospective taxation. We now have a sovereign risk problem.
The widespread community uncertainty that prevails in Australia has been compounded by this very damaging tax, and the events that have surrounded its proposed introduction.
A Coalition government will cut through this uncertainty, and the great threat to the current engine of economic growth in Australia, by scrapping this job destroying resources tax.
Conclusion
Ronald Reagan said Government’s view of the economy could be summed up in a few short phrases: ‘if it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it’.
I suggest Kevin Rudd’s approach could be summed up even more simply: If money has been saved, spend it; if an industry is profitable and successful, tax it; if it questions or opposes you, vilify it.
This is not reform. It is governing by the news cycle.
We need a government that makes decisions. Mr Rudd has yet to make a hard decision; he can’t see over his groaning to-do list.
He’s all talk and no action.
The next twelve months are critical; the next three years are absolutely critical.
What if Australia has another three years like the last? Australia needs clear policies, but also the resolve to see it through. And the strength to say no - a word foreign to Messrs Rudd, Swan and Tanner.
The Coalition has a plan, a roadmap, and the strength to do the job.
If Australia supports that plan, we will see any future challenges through, and make the most of the wonderful opportunities Australia presents.
You make your own luck.