The Economy, the Budget and the Election to Come

05 March 2019

An address to the Committee for Melbourne in Melbourne.



Let me begin by acknowledging the elders and traditions of the Wurundjeri people of the Kulin Nation, and by paying my respects to the first Australians.
We gather today maybe 80 days or so out from the next federal election. That’s not much longer than the marathon campaign we all went through in 2016, although this one is also punctuated by a NSW election and a federal Budget, which makes it unusual if not unique.
So it’s a good time to take stock, to be upfront about the challenges in the economy, and to point out where a different course is necessary.
Can I thank Anna McLiesh for the introduction; the Bank of Melbourne for hosting us; and Martine Letts for the invitation.  Martine has built up an enviable bank of respect and regard during her time in the service of Australia, and at the Lowy Institute, the Australia China Business Council – where I first got to know her – and now at the Committee for Melbourne.
I’m grateful for the opportunity to address so many forward-thinking people who care about how our country is changing, particularly at the hands of technology, and the consequences and opportunities that change presents in cities like this one.
When I co-authored a book called Changing Jobs with former NBN CEO Mike Quigley not too long ago, we wrote about the tremendous upside of technological change – the potential to address, if not overcome, the obstacles to a good life in a thriving society. But we also acknowledged that for many people the impact of automation, artificial intelligence and machine learning was a defining anxiety that policy makers needed to understand and address if we are to make change work for, not against, people.
We need to try to ensure that the costs and benefits of technology don’t fall disproportionately. 
Just as some people have adapted more easily and effectively to technological change, so too have some places. Melbourne has become one of those places, thanks in part to the leadership of people like you in this room.
Melbourne City’s a big economy in its own right, with a Gross Local Product of around $95 billion – not much smaller than Sydney’s.  And as the Grattan Institute has pointed out, in Sydney and Melbourne, half of all jobs growth is within a 2km radius of the CBD.
Wages and living standards
So our inner cities are outperforming the rest of the country.
And this success masks a lot of anxiety and insecurity in our outer suburbs and regions, where the facts paint a more concerning picture.
Central to that anxiety and insecurity is the fact that, for many people, everything is going up except their wages. We hear this repeatedly.
People aren’t wrong to feel that way.
Under this Government –

  • Power bills have gone up faster than wages;
  • Child care costs have gone up twice as fast as wages; and
  • Private health care costs have gone up almost three times faster than wages.

That’s partly a reflection of rising costs, but also because wages growth under this Government is actually the worst on record.
Since the 2013 election, wages growth has dropped as low as 1.9 per cent.
In no quarter under this Government has wages growth been higher than the lowest quarter under the previous one. Even during the Global Financial Crisis, wages growth didn’t drop below 2.9 per cent.
Think about that.  Wages growth has been lower every quarter under this Government than any quarter under its predecessor.
That’s truly remarkable.
And while a five per cent unemployment rate might seem like a relatively strong standalone statistic, it’s easy to forget we’ve gone from a world leader to a laggard when it comes to our jobless rate.
Peak unemployment  during the GFC was 5.9 per cent – 2.6 percentage points lower than the OECD average, and 2.1 and 4.1 percentage points lower than the UK and US respectively. We’re now at basically the same rate as the OECD average and one percentage point higher than the UK and the US.
When we’re underperforming there, and when wages aren’t growing, people are forced to dip into their savings, or borrow more, which in part explains record high household debt and the lowest household saving ratio in a decade.
People are now spending less than they were a year ago on major household items, home improvements, charitable donations, and even on their children.
The latest data we have shows living standards actually went backwards in the last quarter. Tomorrow’s National Accounts data on Real Net National Disposable Income Per Capita – the widely accepted proxy for living standards – will tell us whether that trend continues.
But by that measure, on the latest data available, living standards have grown three times slower under this Government than the previous one.
And Chris Bowen recently painted an even starker picture in his CEDA speech, week before last. He used ANU data to show that the ratio of household incomes less household costs has declined by 2.9 per cent over the last three years. That represents the largest fall in living standards for more than 30 years.
When those National Accounts are released tomorrow they will give us a snapshot of how our economy – and the people in it – are faring in the lead up to the Budget and the election.
Commentators are expecting another soft quarter and some are expecting a second negative quarter of GDP per capita.
We already know households are struggling: consumption is weak, debt is soaring, and savings are falling because pay packets aren’t increasing enough.
Given the lack of policy certainty and stability, it’s hardly surprising a number of economists are expecting GDP growth to slow again.
Sentiment matters here.  The cuts and chaos which define five-plus years of the Liberals is a problem for the economy, because Australians aren’t getting a look-in from a Government focused on itself and on divisive scare campaigns.
We saw that again today in some desperate and irresponsible claims made by the Prime Minister in his Sydney speech a few hours ago.
Insecurity, uncertainty and anxiety
If only he was focused on the insecurity, uncertainty and anxiety we witness in our communities and see in the data.
These are the most important threads which stitch together the political, economic and Budget considerations of this election year.
Insecurity at work –1.8 million Australians are unemployed or underemployed, meaning they can’t find work or enough hours at work, there are higher rates of casualisation and penalty rates have been cut.
Uncertainty in the world – trade tensions between the US and China, a slowdown in several European countries, the recent US Government shutdown, and more. 
And anxiety about the future – particularly around technology and jobs, but other facets of people’s lives as well, stemming from inequality and social immobility.
All of these feelings – insecurity, uncertainty, and anxiety – are even more concentrated in our outer suburbs.
A report released last year by the National Growth Areas Alliance used Census data to map the concerns felt by the one in five Australians who live in our outer metropolitan areas.
Areas such as Logan in Queensland where I’m from, but also Casey, Wyndham, Melton, Cardinia and Whittlesea here in Victoria.
The data shows that although these areas are growing at around three per cent a year, significantly faster than the 1.7 per cent national average, there is a substantial jobs deficit.
For every 100 workers who live in the outer suburbs of our capital cities, there are only 69 jobs.
In fact, every single outer metro local government area – bar Hume in Melbourne’s north – is experiencing a jobs deficit.
And the types of jobs are different too. Almost half (48 per cent) of high-tech and high paying jobs are in our cities’ CBDs, compared to 16 per cent in fast growing outer suburbs and 24 per cent in the regions.
For all these reasons, 61 per cent of outer metro areas report a higher level of psychological distress than the greater capital city average.
A world leader in anxiety
The pockets of anxiety we see on the outskirts of our cities are not only concerning in their own right, but they’re symptomatic of a wider trend.
As a nation, Australia has actually become a world leader in economic anxiety.
The recent NAB Consumer Behaviour Survey found that in the December quarter, anxiety had risen to its highest level in more than three years.
And when you put those findings up against similar surveys of anxiety and wellbeing internationally, the comparisons are confronting.
The latest BNZ New Zealand Wellbeing Report shows when our Kiwi neighbours were asked about their anxiety levels, they scored 3.7 points better than we did on the same measure.
And the latest UK measure, from the Office for National Statistics, showed their anxiety levels were an average of 2.86 on a 10 point scale. A rough comparison to Australia’s latest consumer anxiety rating of 62 points out of 100 suggests Australians are more than twice as anxious as the Brits.
That’s even more astounding when you consider people in the UK are dealing with massive economic and social upheavals associated with Brexit.
So it would be tempting but wrong to attribute Australia’s elevated anxiety solely to global pressures and news from overseas. Key graphs from the NAB survey point to three other culprits closer to home driving the more recent spike: job insecurity, cost of living, and government policy.
Categories which generally correspond with the economic pressures we already know impact those more acutely in our outer suburbs.
And that consumer anxiety felt most sharply in our outer suburbs is cascading into other aspects of the economy. In December, business conditions suffered their steepest monthly fall since the Global Financial Crisis. And the RBA’s most recent Statement on Monetary Policy not only revised economic growth down, but also pointed out the risk of weak household consumption and business investment.
A fork in the road
Many people think, with some justification, that the rules of the economy are written to benefit others at their expense. It’s a phenomenon which has caught the attention of some of the world’s most prominent thinkers.
Political scientist Francis Fukuyama believes the disaffected and the disillusioned yearn for a “demand for recognition”. That yearning, which he calls “thymos”, is what he calls the “master concept” shaping our politics today.
Israeli historian Yuval Noah Harari made a similar point in his book, 21 Lessons for the 21st Century, where he writes about how many people feel as if their lives have lost relevance and significance.
And Financial Times’ chief US commentator Edward Luce groups these people together under a class he calls the “precariat” – people without predictability and security, particularly at work.
Now, as I said, these problems are more prevalent at the periphery of our cities than in the centre.  So I want to address one possible elephant in the room: here we are, in the centre of Melbourne, surrounded by lots of successful people. Why does it matter what’s happening 40 minutes’ drive from here?
It matters, because Australia did manage to do something quite remarkable over the last 10 years or so; something that I think sets us up for potentially spectacular success in the coming decades: we managed to keep growing through the financial crisis, and not coincidentally, we managed to largely dodge the populist firestorm sweeping the US, the UK and so much of Europe.
There are many reasons for this decade of success, starting with world-leading economic policy during the financial crisis, but at its core is a more naturally egalitarian society, bolstered by some vitally important institutions that (roughly) help keep it that way.
People in gatherings like this one do care about what is happening out in Cardinia. Some care a lot and some do a lot, and everyone is bound by a core of policies and institutions that give expression to that basic duty of care.
As I said earlier, it’s been fraying at the edges at alarming speed these last few years, but we’ve managed to hold the core together. That explains the virtually unanimous rejection of the 2014 Federal Budget, and the disdain being visited upon the increasingly divisive politics on display from the Coalition these last few months.
So my call to the Government today is a simple one.
Any Budget handed down in four weeks’ time that doesn’t deal with the anxiety, insecurity and uncertainty that permeates our suburbs isn’t worth the paper it’s written on.
Any Budget that doesn’t acknowledge and address record low wages growth, rampant job insecurity and cost of living pressures will be part of the problem not part of the solution.
The Government has now reached a fork in the road when it comes to economic and fiscal strategy.
It can continue down the path set by Tony Abbott in the 2014 Budget and followed by Scott Morrison as Treasurer.
Or, it can dramatically change course on the eve of the election and try to undo the damage done to people of modest means and the services they rely on.
The first option will not be supported; the second not believed.
The problems in the Budget are already well-entrenched:

  • Unsustainable tax loopholes which are eating the Budget from within;
  • Unfair redistribution of wealth in the wrong direction by giving the most generous tax concessions to those who need them least; and
  • Unreasonable cuts to key services like aged care, schools and hospitals, which will be felt most devastatingly by those most in need.

At the same time, Australia’s debt position has substantially deteriorated:

  • Net debt has doubled to record highs since 2013, and actually grew by $435 million a day in January alone; and
  • Gross debt has crashed through through half-a-trillion dollars for the first time ever and is growing.
  • And this Government is accruing debt amid rosy global conditions $774 million a month quicker than its predecessor did in difficult times.

It’s not hard to see how this has happened.
Positive shifts in the balance of receipts and payments caused by changes in the economy were supposed to be banked as an improvement to the Budget bottom line. But in the latest Budget update, $16 billion of the $30 billion upgrade was spent.
And the arbitrary tax-to-GDP cap leaves the Budget exposed.
Unfunded tax cuts have been locked in far down the track, despite us having little idea of the state of the economy then.
As the International Monetary Fund rightly argues, we should be rebuilding our fiscal buffers.
The IMF has described the cap as “rigid” and “not consistent with the principle of running sustained Budget surpluses in good times”.
And the economic forecasts underpinning the Budget are just not realistic.
Tomorrow’s National Accounts will obviously have some bearing on the forecasts in April, but to date, the projections have been difficult to rely on.
Economic forecasts were written down in December on the back of a soft September quarter, where economic growth was down, investment was down and wages growth was down. It was the strong international economy that drove up the terms of trade and delivered a revenue upgrade.
Wages growth is probably the most fanciful forecast. As Chris Bowen has highlighted, the Government has had to downgrade its wages growth forecasts in every one of its budgets, and we expect wages growth to be written down again, given the December quarter only hit 2.3 per cent.
And finally, it’s worth noting that any surplus announced in April will only be a forecast in itself, and is currently expected to be about 0.2 per cent of GDP.
Tony Abbott said of Labor in the lead-up to the 2013 election that “they’ve talked about a surplus as if it has actually happened when all it has ever been is a forecast.”
The truth is, we won’t know until a surplus is achieved in 2019-20 until September 2020, a year-and-a-half way.
Any projected surplus could easily be blown over by a downturn in the global economy, as history has shown us.
Labor’s approach
In the lead-up to Budget we will be engaging on this issues enthusiastically and robustly, making the case that the Government’s fiscal and economic strategy has been found wanting.
And that any change of course at five minutes to midnight is too little, too late.
We’ve been down the same road for the last five-plus years and we know where it leads.
Australia needs a new approach.
This election isn’t a choice between enterprise and envy, as Scott Morrison has claimed, it’s a choice between a country which grows together or falls apart.
It’s about whether more, or fewer, people can prosper in the years ahead.
We’ve made our fair and responsible fiscal and economic policies known well before the election, in some cases years before.
That has meant we’ve faced more scrutiny on those policies, which we’ve welcomed as we’ve defended them.
Bill Shorten last year released our Fair Go Action Plan, which goes to the core principles that underpin our policy decisions.
Under that plan, Labor will fix our schools and hospitals; ease pressure on household budgets; stand up for workers and pensioners; invest in cheaper, cleaner energy; and build a strong economy that works for all – wherever they live.
This includes includes tax cuts for small and medium businesses; an Australian Investment Guarantee that provides a tax write-off for businesses that invest here, and not offshore; paid for by winding back billions of dollars in unsustainable tax loopholes.
To alleviate the wages squeeze in our suburbs, we’ll restore penalty rates, crack down on casualization and invest in apprentices, skills and training.
To boost long-term productivity growth in this country we’ll make record investments in schools and properly fund infrastructure, reform competition policy and introduce our FutureAsia plan.
We need a Government prepared to make the tough calls when it comes to managing the economy and repairing the Budget in a fair and responsible way.
A Government that acknowledges the rampant pockets of anxiety that exist in the community, and seeks to alleviate them – not exacerbate or play on them.
That recognises that growth doesn’t come from giving the biggest tax concessions to those who need them least, and hoping the benefits trickle down to the rest.
That understands strong and enduring growth comes from making sure it’s people-powered and inclusive; from making the economy more productive and by ensuring middle Australia can spend and invest; and from properly funding skills and infrastructure, and ensuring the industrial relations and tax systems don’t make it harder for people on modest incomes to make ends meet.
And that believes genuinely inclusive growth means making the economy work for more people, not just in our inner cities but our suburbs and towns as well.
I left hanging earlier the idea that if we can put the chaos and anxiety of the last few years behind us, we are set up for a terrific future in this country.
I believe that, because if we are entrusted with the government of this country in 80 days’ or so time, it will happen at a time when I feel the forces of populism might be starting to ebb internationally.
Every day that passes reveals ever more starkly the bankruptcy of populism.
If that populist tide ebbs, we have the chance in this country to draw on what is best about us to be an example to the world – of decency, of social cohesion, of inclusive growth, of a great country with a better future ahead of it.
Thanks and I look forward to the discussion.