Peter Costello

Speeches

The Australian Revival - Address to the National Press Club, Canberra

ADDRESS TO
THE NATIONAL PRESS CLUB

THE AUSTRALIAN REVIVAL

WEDNESDAY, 1 MARCH 2006

I want to take you back to the early 1990s to the kind of nation we were then – insecure, uncertain about our economic prospects, battered by recession, suffering high unemployment and job insecurity; and scarred by the recent experience of 17 per cent mortgage interest rates.

Bob McMullan, Parliamentary Secretary to the Treasurer wrote back then in the Canberra Times (5 May 1991):-

“I know that it is unfashionable to have anything positive to say about the Australian economy at present. However last week I had the opportunity to represent Australia at meetings of the International Monetary Fund…three things struck me during the course of these meetings. First, we should never forget our relatively favourable situation. As I have said before in these articles when compared to the problems of Mali, Peru or Bangladesh all Australians should rejoice in our good fortune – however much we are determined to improve our own position.”

On a visit to Australia in 1994 the former Prime Minister of Singapore Lee Kuan Yew reiterated a previous warning that Australia could become the “poor white trash of Asia”. This was partly a reflection on Australia’s economic state. It was also a reflection on the rise of the Asian Tigers. East Asians he said are highly competitive people “training themselves to win life’s marathons”. Australia looked at that time as if it had spent its best energies in the early part of the Century and was fading badly.

In 1996 Samuel Huntington published his famous work “The Clash of Civilisations and the Remaking of World Order”. He included an intriguing section on Australia. Huntington claimed that in the early 1990s Australia’s political leaders had decided that Australia should defect from the West and redefine itself as an Asian society. I do not think this was a correct analysis of the intentions of the then Government. But Huntington wrote as follows:-

“The case for redefining Australia as an Asian country was grounded on the assumption that economics overrides culture in shaping the destiny of nations. The central impetus was the dynamic growth of East Asian economies…”

The dynamic growth of East Asia was in stark contrast to the economic malaise of Australia. When the Government appealed for ‘enmeshment’ in Asia it was making an economic appeal. The thinking was that if we could join a region that was successful we could overcome our own weakness.

In 1992 in their book “Shutdown” Robert Manne and John Carroll claimed:-

“The most important contemporary example of economic success is Japan. It is widely accepted that the Japanese economic miracle is due to a very significant degree to the way the state guides economic development, principally through an elite bureaucracy which determines industry policy – the Ministry of International Trade and Industry (MITI). Japan and MITI have vital lessons for Australia.”

This was a variation of the enmeshment policy. Enmeshment was designed to allow us to get the benefits of the so-called Asian economic model. Manne, Carroll and a whole host of industry policy advocates wanted Australia to adopt the Asian economic model.

And there were others who believed we should just accept a lesser place in the world.

The left wing writer Cassandra Pybus wrote in August 1997:-

“I fail to see why we should get so distressed at the idea of living in a third world economy”.

The rise of the Asian Tigers through the 80s and the comparative decline of Australia through the recession of the early 90s sapped our confidence as a nation. And what is more, it sapped the respect for Australia amongst our neighbours and the wider international community.

The Coalition Government was elected in March 1996. We laid down an economic programme setting out medium-term targets on fiscal policy, monetary policy and debt management. We commissioned an audit of national finances, we enshrined Budget accountability and reporting in legislation and we began working towards strengthening the Australian economy. By July 1997 we were on track to balance the Budget for the first time in seven years. It was a close run.

Beginning with mass capital outflow from Thailand in June-July 1997, financial contagion began spreading around the region. By Christmas 1997 Korea, one of the Asian Tigers, had run out of foreign reserves and its Government was appealing to citizens to give gold to a national collection campaign. Indonesia was the most severely affected by the crisis. The Government of President Suharto, which had been in Office since 1967, was swept away in May 1998.

Those in Australia who had marvelled at the growth rates and saving rates of Asian Tigers saw these countries stagger and reel. They could only shudder to think what would happen to Australia – considered by many to have a weaker economy. The drive to a enmesh Australia with Asia had been premised on dynamic Asian economic growth which would carry Australia with it. What chance would Australia have when that dynamic growth turned to collapse? It was widely anticipated amongst many in the local press that this financial collapse would affect Australia creating deep recession or worse.

But Australia did not succumb to the Asian financial and economic collapse. In 1997-98 our growth rate was 4.5 per cent. We produced the first balanced Budget in 7 years. Paul Krugman writing in Fortune Magazine in December 1998 dubbed Australia ‘the miracle economy’.

I bookend this chapter with the recollection of two very different regional meetings.

In March 1996 the APEC Finance Ministers met in Japan. It was the first APEC meeting I attended. We were given a polite welcome but we were not respected. Australia was tolerated much as a fading uncle is tolerated at Christmas dinner:- there out of politeness and past association rather than present or future expectation.

But we proved strong and resilient through the Asian economic crisis. We didn’t turn out to be a weak link. We turned out to be the strong man of the region. We survived and we offered financial assistance to badly affected economies in the region.

In May 1999 APEC Finance Ministers met at Langkawi in Malaysia. We were not the fading relation at this meeting. Australia had won a great deal of respect. The region knew Australia was a success story and they wanted to learn from its experience. Now we had people talking of the “Australian model”. Many Ministers who I had met at previous meetings were unable to attend – some were in jail, some were under house arrest, many had been dismissed. But Australia had shown itself stable, reliable and strong.

Since 1996 Australia has had continuous growth averaging 3.5 per cent per annum. During that period Singapore has had three recessions, Hong Kong has had three recessions, Korea has had one recession, Taiwan has had two recessions, Japan has had four recessions, the United States went into a recession in 2001.

Over the last 10 years Australia has earned a great deal of respect amongst its neighbours and the other economies of the world. Australia’s achievements have given its people a lot more self respect. The nation feels more secure about itself.

This is the Australian Revival.

The Australian economic revival has led to the revival of confidence and respect. And we can measure the economic revival against other developed nations. Through the 80s and 90s we fell below the average GDP per capita of the OECD countries. From the beginning of this decade we turned positive in the rankings.

Australia’s economic revival
(The difference between Australian and OECD average GDP per person)

Australias economic revival (The difference between Australian and OECD average GDP per person)

    * 'OECD' includes only the 24 oldest member countries
    Source: Groningen Growth and Development Centre and The Conference Board, Total Economy Database, January 2006, http://www.ggdc.net.

Since 1996 we have had eight surplus Budgets, we are on the verge of eliminating Commonwealth debt, inflation has been stable notwithstanding huge pressures from what in truth has amounted to the third oil shock.

Today briefly I want to recount some of the steps that were important in getting us where we are. Today I will not be comparing the Australian economy to Mali, Peru or Bangladesh. We can now afford to compare ourselves with developed economies.

As we know, the March 1996 election was fought on the basis that the Commonwealth Budget was in surplus. The December 1995 Mid-Year Review forecast a surplus of $115 million. Kim Beazley, then Finance Minister, repeatedly affirmed in the campaign that the Budget was in surplus, for example, saying on 1 February 1996:- “…we’re operating in surplus, and our projections are for surpluses in the future.”

On the day after the election on 2 March 1996 the Treasury estimated the deficit at $9.0 billion (1.9 per cent of GDP). The outcome was in fact a deficit of $10.1 billion (2.1 per cent of GDP).

Immediately after the election the Coalition Government announced that it would legislate to prevent such deception ever occurring again. The Charter of Budget Honesty Act 1998 provides mandatory reporting standards and the preparation of a pre-election statement by the Secretaries of Treasury and Finance. Now the public is told the actual state of the Budget before the election campaign and is able to assess policy against agreed facts before they vote.

The new Government also announced an immediate Commission of Audit to identify all assets and liabilities of the Commonwealth including all contingent liabilities and unfunded superannuation to get a true picture of Commonwealth finances.

On 14th August 1996 upon the appointment of a new Governor of the Reserve Bank, the Governor and I entered an Agreement to set inflation targets, to direct monetary policy at those targets, and to guarantee the independence of the Central Bank. This was the origin of a medium-term framework for monetary policy.

On 20th August 1996 in the first Budget of the new Government the Government laid down a medium-term framework for fiscal policy. The objective was “maintaining an underlying balance on average over the course of the economic cycle. This approach will ensure that over time the Commonwealth Budget makes no overall call on private sector saving and therefore does not detract from national saving.” (Budget Paper No.1)

Later further objectives were added to the strategy – the objectives of:-

  • halving the Commonwealth net debt to GDP ratio by 2000 (1998);
  • improving the Commonwealth’s net asset position (1999);
  • no increase in the overall tax burden from 1996-97 levels (2000).

In ten Budgets since 1996-97 there have been eight surpluses cumulating to an estimated $59 billion over 10 years. Commonwealth net debt will, this year, be eliminated. Net interest payments which were $8.4 billion (1.5% of GDP in 1996-97) will fall to $0.3 billion in 2006-07 (0.0% of GDP). And thereafter net interest payments will be negative. In 2006-07 1.5 per cent of GDP represents a saving of around $15 billion – this shows the value of our debt reduction strategy.

Net Government Debt

Net Government Debt

    Source: Mid-Year Economic and Fiscal Outlook 2005-06

Few today would dispute the success of these policies. But monetary targeting, fiscal targeting and debt management were all vigorously opposed by the Opposition. Kim Beazley warned of the 1996 Budget:-

“The problem is that when you bring down your budget, you will ultimately be held responsible for those consequences. Those consequences are going to restrain growth. Those consequences are going to mean rising unemployment. Those consequences are going to mean, as a result of that, a lifestyle for Australians which they have not had to confront for a very considerable period of time.”

Labor went further in opposing the Government’s framework for monetary policy claiming the agreement was illegal:-

“…if Mr Costello is proposing to make the incoming new Governor of the Reserve Bank sign a letter which commits the Bank to a hard-line, ‘fight inflation first’ strategy, inflexible and excluding, in effect, the relevance or the applicability of the jobs or full employment criteria, we believe there is every chance that that course will prove illegal and be held to be determined to be so by the Courts and we will certainly be very closely scrutinising the terms of that letter and seeking legal advice to establish that.” Gareth Evans, Shadow Treasurer, 13 August 1996.

There are several other key policy settings that have made a difference. The first is tax reform.

From 2000 the introduction of GST paved the way for the abolition of:

  • Wholesale Sales Tax
  • Financial Institutions Duty;
  • Bank Account Debits tax;
  • Stamp duty on marketable securities;
  • Conveyancing duties on business property;
  • Stamp duties on credit arrangements, instalment purchase arrangements and rental (hiring) agreements;
  • Stamp duties on leases;
  • Stamp duties on mortgages, bonds, debentures and other loan securities;
  • Stamp duties on cheques, bills of exchange and promissory notes; and
  • Bed taxes.

The introduction of a uniform value added tax gives Australia one of the most streamlined indirect tax bases in the world. For example in the United States where indirect taxes are set at State and local levels with varying rates and bases, I am told there are 260 different systems to comply with. In Australia there is one single system.

The 2000 Tax Reform cut 12 family and childcare payments to 3. Taper rate reductions have eased effective marginal tax rates. From 1 July 1996 to 1 July 2006 the income tax rates have changed:

Personal Income Tax Cuts

Personal Income Tax Cuts

Company tax has been cut from 36 cents to 30 cents. Capital gains tax for individuals has been halved.

Competition

The Government’s policy is to promote competition in all of Australia’s products and services markets. Since 1996 the Australian Government and the States have undertaken a comprehensive review programme of legislation that restricts competition. Those restrictions that cannot be justified on a public interest basis have been abolished.

We have brought maximum textile, clothing and footwear tariffs down from 37 per cent in 1996 to 17.5 per cent now, and due to fall to 10 per cent in 2010 and 5 per cent in 2015. We have reduced passenger motor vehicle tariffs from 25 per cent in 1996 to 10 per cent now and 5 per cent in 2010. We removed more than 250 nuisance tariffs in 1999, and have negotiated Free Trade Agreements with the United States, Singapore and Thailand.

Labour Market

The Government has now enacted several rounds of labour market reform - the first of which was 1997 and the most recent is to commence in March 2006.

Labour market reform has broken down centralised wage fixation. Enterprise bargaining has protected against the transmission of uncompetitive wages out of profitable areas of the economy to unprofitable ones, a process which in the past promoted business failure and unemployment.

Employment

Of all of the economic indicators the one that means the most to me is the reduction in unemployment.

Having a job is not only crucial to people’s financial health, it is also a critical part of people’s sense of worth.

During the recession of the early 90s unemployment rose and the unemployment rate neared 11 per cent of our fellow Australians without a job. Nearly every Australian family was affected one way or another through family or friends.

The Minister for Employment (Kim Beazley) at the time stated that high unemployment was a permanent part of the landscape and that people should get used to this idea. This was defeatism. It excused inaction on the tough decisions that had to be made.

Economic growth is the most lasting solution for unemployment. As you can see from the graph a gradual steady decline in unemployment has followed from solid economic growth.

Unemployment Rate

Unemployment Rate

Interest Rates

In March 1996 the standard variable mortgage interest rate stood at 10.5per cent. The standard variable mortgage rate now stands at 7.3per cent.

The reduction in interest rates over the past ten years has provided borrowers with substantial reductions in interest expenses. With the average new mortgage today at around $220,000, the fall in interest rates from the 1996 level of 10.5per cent represents a monthly interest saving of $585.

Home Loan Interest Rates

Home Loan Interest Rates

Tax and Spending Policy

As you compare Australia with other developed countries it is clear that Australia is a low tax country.

We are the eighth lowest taxing country in the OECD.

Total Tax Revenue (as a percentage of GDP, 2003)

Total Tax Revenue (as a percentage of GDP, 2003)

    Source: OECD Revenue Statistics, 1965-2004, 2005 edition.

Our tax levels are actually in an even better position than the table would indicate, because our Budget is in surplus and Government debt is practically zero. Many of those countries shown in the table to have lower tax than Australia, like the US and Japan, have massive government deficits. What this means is that this component of lower tax levels now is only accomplished by postponing collection into the future. They have a nasty tax surprise coming around the corner, we don’t.

It should not surprise people that we are a low tax country, because we are a low spending country compared to international practice. The two go hand in hand.

Government Spending (as a percentage of GDP, 2005)

Government Spending (as a percentage of GDP, 2005)

    Source: OECD Economic Outlook No 78, December 2005

In the OECD Australia has the second lowest level of government spending as a share of GDP at 35.7%, lower even than the United States.

According to the OECD the Australian level of government spending as a proportion of GDP has declined from the 1996 level of 38 per cent to 35.7 per cent.

Some people may wonder – that tax and spending have declined as a proportion of GDP, when they see that the Government seems to be spending more.

This is an important point to understand is that the government has been spending more in critical areas but the rate of increase has been lower than the growth rate of the economy. And don’t think that reducing expenditure to GDP ratios is easy. Every pressure in a democratic system is to increase spending. Resisting calls for increased spending on worthy causes (and all causes are worthy in the eyes of those who want it) is a daily struggle – week in week out, month in month out, year in year out.

The results are coming in

What is the end result of all of this reform? Well, we are currently in the longest growth phase in Australian history. Longer even than the famous 50s boom which ended in recession in 1961.

People’s incomes have risen substantially, and more people are in jobs.

We are moving up the ladders of all the major international tables on well-being and incomes.

This work has been recognized by respected international bodies.

The most recent IMF report commended Australia for its “exemplary settings of economic policies”.

In its 2004 Survey of Australia, the OECD noted that Australia has become:-

‘a model for other OECD countries in … the tenacity and thoroughness with which deep structural reforms were proposed, discussed, legislated, implemented and followed up in virtually all markets, creating a deep-seated “competition culture”’.

The Financial Times editorialised last year praising Australia’s reform record and said that it was “hard to pick holes in Australia’s economic record.”

Reflecting on this

What do I think when I reflect on these ten years? Let me go through a few disparate thoughts.

Economic management is a weighty responsibility. People’s livelihoods depend on it. Their mortgages, their jobs, their businesses, turn on it. People can see the discipline and seriousness we have brought to the task. They can judge for themselves the results.

Aside from what we have done, it is important to also remember what we have not done.

We could have tried to jump on the Asian Tiger model and run a corporatist government – we didn’t. We could have been swept up by dotcom mania, as urged by many – but we didn’t. We could have miscalculated in the face of the Asian Financial Crisis, or the worst drought in 100 years, or in the face of threats from terror or war or SARS or the current oil shock. We didn’t. And while we have improved our position in the world we cannot sit back and relax.

The world economy is ruthless, competition unrelenting, and to compete in the future we need to make all of our policy settings first class.

We need to make every post a winner. In every area of governance across all portfolios our settings must be top grade. We need to be willing to re-examine our existing policies to see if they cannot be improved.

Here are the tasks for the future:

  • Working within the framework laid down by Australia’s Intergenerational Report to deal with our greatest long-term structural issue:- Ageing of Population;
  • Establishing a Future Fund to invest for the future to give the young people of today a chance to meet their liabilities and fund their future;
  • Developing a Welfare to Work policy designed to increase participation rates in the workforce particularly for the older members of society and those who would otherwise be classified as disabled;
  • Labour market reform which will boost individual contracts create more flexible work practices;
  • Technical training to create higher skills amongst young people;
  • Regulatory arrangements which will allow competitive access to monopoly infrastructure whilst still promoting competitive investment;
  • A system of national economic regulation – in competition, in access arrangements, and in export infrastructure;
  • Nationally integrated utility markets – in gas, electricity and water.
  • The Bogor goal of free trade in our region.
  • An energy freeway in the region linking producer and consumer nations.

In the economic domain we must strive for efficiency and flexibility, with taxes as low as possible and as simple as possible, with regulation limited to where it is strictly necessary, with welfare as a safety net not a feather bed.

We must ensure that Australian workers are skilled and educated enough to adapt to new circumstances and if necessary change jobs.

We must aim to lift those that remain marginalised or living in poverty or suffering health problems or disabilities. We must lift those Australians so that they can enjoy the wonderful opportunities that most Australians take for granted.

We must look at how to improve opportunities for women, create the most female-friendly environment in the world.

Our natural environment needs to be nurtured and sustained, and our dry continent needs solutions to our water shortage problems.

Our defence forces need to be well equipped, our health system needs to meet best international practices.

We have many, many issues to address.

Our future in Australia will be a positive one and an exciting one if we can continue to embrace change and adapt to new circumstances.

When you look at the record since 1996, the decisions the Government has taken have reflected our philosophy and values. We are a centre-right Coalition and I am a Liberal that believes in Liberal values. I came into Parliament with my priorities as helping families, helping the unemployed, and getting small business back to prosperity. My values were shaped as a youngster in a modest suburb – by my parents, family, school, church – it was a million miles away from fiscal policy and tax law and international finance.

But the simple principles are the most important, and even when dealing with the most complex and large issues I keep coming back to them – living within your means, working hard, being careful and not squandering your money – not bad principles for a youngster, not bad principles for an economy.

1 Mar 2006

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