13 March 2015
Speech - #2015006, 2015

Address to the Chatswood Chamber of Commerce Lunch

Check against delivery

Thanks very much Steve. Can everyone see the screen? I don't know. Can we pull that down a bit so you can see the screen, is that possible? Because that table there can't quite see the screen. We're going to have a little slide show. [inaudible]

So Steve, thank you, and to your Worship the Mayor Gail, and Angela, and everyone else, thank you so much for inviting me along.

My father, when he came to Australia, started a small business, at first in Bondi in 1948, and then in the early 1950s he opened the first delicatessen in Victoria Avenue, here in Chatswood, and gradually built up the business, and then managed to buy the building, and managed to save up enough and buy the building next door. That's now Lemon Grove, which is down the road. I grew up in Coolaroo Road, early on, in Chatswood West. So, I've had a deep engagement with Chatswood over many years, and my word, it's changed. How it's changed in such short period of time.

So, it's always good to reflect on the past, but it's even better to look to the future. That's what the Intergenerational Report has done. The Intergenerational Report is required under the law to be delivered by the Treasurer every five years. It looks 40 years ahead. It is a social compact between the generations; between grandparents, parents, our generation, our children, and our grandchildren. If you think 40 years ahead is a long time, just go to a childcare centre. In my case, you go to a childcare centre and all the children at the childcare centre will be younger than me in 40 years' time – than I am today. So, it just shows you that 40 years really isn't too long to go.

This is really how Australia is changing. The first part is population. This is life expectancy. It's increasing quite dramatically. As you can see, the beginning of the 1900s, life expectancy was around 58. Today, life expectancy is over 80, and in 40 years' time, life expectancy will be well into the 90s, most likely around 100 for a child born in 40 years' time.

The interesting thing here is you can see it plateaus around the '60s, early '70s. So, life expectancy plateaued, but governments introduced laws relating to seatbelts, and random breath testing a little bit later, and there were significant medical achievements, particularly in relation to dealing with heart disease. Then life expectancy took off. So essentially, when you take into account new technologies and developments in health, you take the average development speed over the last few years, it's quite likely that a child born in 40 years' time will live to 100.

The age pension, when it was introduced for –  at that time, men aged 65, life expectancy was 58. So, most people actually didn't quite get there. Of course, the age pension today has still been – well, till recently, 65. Then the previous Labor Government increased it to 67. We announced that we'd continue it to 70. But even so, this gap here, as you can see, is the gap between longevity and what the age pension eligibility is for the moment. This is the number of people who are going to be 100. You can see, basically by the middle of this century, you'll have a city the size of Dubbo full of 100 year olds, couldn't you [inaudible] which is fantastic Stan, isn't it? Given Stan's still working here at 91, and six days a week he said to me. So, that will be quite a common occurrence in the next few years if you choose to keep working.

I suppose this is one of the more revealing charts, but, [inaudible] is traditional working age is to 65. So, in 1970, there were equivalent of 7.5 people to every person aged over 65 –  7.5 people to a person aged over 65. Today, it's 4.5 people to someone over 65. Middle of the century it's just under three people to someone aged over 65.

What does that mean? Well, it effectively means that we need to extend the working age if we're going to raise the income to pay for services. One way to do it is migration, and migration has had its surges. So, here's the spike, that's when my dad and many others came to Australia after World War Two. You can see between 1973 and 2006, there was a decrease in the amount of migration to Australia. That increased from 2007 to 2018, which is the current trend period; about 1 per cent of the population every year around – is new migration. What we're forecasting is that migration is going to fall to about 215,000 per year. So, here it's around 230,000 a year, [inaudible] 1 per cent of 23 million, but it comes down over time.

Migration, provided you've got the right mix, if it's not family reunion and bringing out grandpa and grandma, but if you're bringing out younger people who are going to work during the course of their lives, in the local community and so on, it is a financial and economic contributor to the economy. So, population growth over the next 40 years will be pretty similar to what it has been over the last 40 years, which is quite interesting. That population growth as a comparison is actually a lot better than many other Western nations.

So, the question is, how does this affect Australia? Participation rates are effectively the amount of people who are looking for work – people that are looking for work. As you can see, people looking for work is declining over the next 40 years as a percentage of the population. Why? Because the population's getting older, and what this illustrates is that this is the most telling figure in the IGR. People aged over 65 are going to increase in their participation but, arguably, this isn't enough to make up for the shortfall in the number of workers in Australia.

You see it's quite low here until around 2003, which is the beginning of the mining boom, and as you can see, the number of people aged over 65 participating in work surged. That's because we started to run out of workers and – I was the Employment Minister that had national unemployment down to 4.1 per cent and, of course, what happened was, the Global Financial Crisis hit, the assets and income of all Australians fell, and so over 65s kept working. It also is part of the choice of work. Now, we believe that's going to continue to rise and rise quite significantly, but this relies heavily, also, on a change of attitude of employers. That's a very important part of the equation, which I'll come to in a minute, but if people over the age of 65 choose to work, they should be very much encouraged because that helps the national economy and builds our prosperity.

The second key area is female participation – workforce participation. As you can see, male work – now, to give you a clear indication, for those of you who can see the slide, the green bars are Australia, the red bars are Canada and the purple-blue bars are New Zealand. Workforce participation in New Zealand is quite high. They have no compulsory superannuation system, so people stay in the system in order to earn the income to support their quality of life. So, our level of workforce participation for men is quite similar to Canada, but it's dramatically different in relation to women. If Australia had the same level of female workforce participation as Canada, our economy would be around $25 to $40 billion larger, which is a huge amount of money.

It's interesting that Western Australia, which had very low unemployment because of the mining boom, and Queensland, which was quite similar, have higher female workforce participation rates than the rest of the Australian economy, but still not as high as Canada. Now, one of the things that you take into account in Canada is, for example, in Quebec, I understand childcare costs $5 a day, which is heavily subsidised, but even here in Australia, between two-thirds and three-quarters of the childcare costs every day are subsidised by taxpayers, and yet it's still quite expensive in Australia, particularly in this area here around this community. So, as you can see, our total workforce participation is well below New Zealand and substantially below Canada.

So, they talk about the three Ps: population, participation, and productivity. What is productivity? It's the amount of output per hour. Labor productivity is defined as output per hour from an individual of work. Our productivity has doubled since 1970. So, our output per hour as individuals has doubled since 1970. The assumption that we have built into the 40 year planning is that we're going to have roughly the same productivity contribution to the economy as has happened over the last 30 years, around 1.5 per cent per annum. That means it increases and improves our quality of life. The interesting thing is this is by far the biggest contributor – productivity – to what is our wealth creation.

So, you can have basically the same levels of population, you can have little variations in workforce participation, but what we do, how we work – how we work is going to be a massive driver of our growth and prosperity over the next 40 years. We'll be a country that lives longer. We'll be a country that is obviously wealthier, but the question is, on a per-person basis level, are we going to be more prosperous? The biggest driver is unquestionably going to be how we work, how we use technology, how we use infrastructure, and ways that we can be more flexible in responding to what will be a fairly volatile world.

Over the last 40 years, our economic growth has been around 3.1 per cent, and over the next 40 years, we're expecting it'll be around 2.8. So, slightly lower, and that's again a slight variation. So, what is going to drive this productivity? Well, investment in new capital, unquestionably – huge issue, and particularly in infrastructure. Infrastructure, better infrastructure, be it the National Broadband Network or be it better use of electricity and energy, and some of the most exciting global developments in innovation are associated with energy use. Better energy use, a longer energy and more affordable energy use. That's part of the innovation and technology agenda – hugely important.

Entrepreneurship and competition; that's a key. Small business is more empowered than ever before. Many of you represent small businesses. Small business is going to be the engine room of the 21st century, not just for the Australian economy, but the 21st century. There's no doubt about that. If you think about companies that weren't around 10 years ago. When Peter Costello delivered the first Intergenerational Report in 2002, Facebook hadn't even been conceived. Alibaba, a small business just a few years ago, listed for over $200 billion on NASDAQ. Its role is to facilitate the growth of small and medium enterprise in China.

In the final area is skills and education. We can't get enough in lifting our skill levels, but also, importantly, reskilling during the course of our lives. So, the traditional life cycle of study when you're young, work during the middle years, retire when you're over 65, is going to be increasingly challenged. For many people, it's challenged already. I think of Merv, who's the school-crossing supervisor in Hunters Hill. Merv celebrates his 86th birthday next week. He'll be 10 years as a school-crossing supervisor, the paddle pop man. He loves it, absolutely loves the job. When he said to my own children that he'd been working since he was 15, they thought he'd been at the school crossing since he was 15. So, he hadn't – obviously – he'd had many careers. But this is the career that suits him perfectly and keeps him engaged with the community and he loves it and he chooses to do it.

I suppose this is a new graph that I've added to the presentation. I came across this only this morning. There are more people living inside this circle than there are in all the rest of the world. This little circle right here, right next to Australia. This is our future. This is our future. It is, when you look at the demographics here, when you look at the population, the scale of the market: China, India, Korea, Indonesia, Vietnam, Malaysia and so on, and that excludes Russia, believe it or not, they haven't counted Russia into that, that part of Russia, you can start to see that this is the proximity that matters for our future.

What we need to do is start thinking about how we are going to be at our best for the future. We need to be able to afford our future, that's the starting point. What we show – what this Intergenerational Report shows, is that we've started as a Government and the Government more generally, has started the process of getting the Budget back on track. This is what we inherited when we came into Government. This is the Budget bottom-line. This is where we break even every day. Okay? So, we never actually broke even. And over the next 40 years we would never have broken even.

That's what we got through as the result of the last Budget. It's actually already passed through the Senate. So, we actually reduced the deficit by $267 billion in today's dollars - $267 billion –  if you say it quickly doesn't sound like a lot, but it's a lot - $267 billion That's what we've implemented from last year's Budget. So, we get halfway there.

This is what is still outstanding in the hands of the Senate, that's why it's in red – the Senate Chamber. But even then, this assumes that the Australian economy is going to have 40 more years of consecutive economic growth; that is, no recession. No significant recession for 40 years. Australia is in the 24th consecutive year of economic growth. Japan had a huge period of economic growth after World War Two, but it was rebuilding from scratch. Along this period, comparable to Australia is that of the Netherlands, which had a surge in North Sea oil until 2008. It had 26 years of consecutive economic growth before it went into recession. Australia's in its 24th year – this is based on 64 years of continuous economic growth. Otherwise, there's a big dip in revenue and of course you never get there.

The issue has been spending. All those things locked in like extra money for schools in the form of Gonski, extra spending on hospitals in the deal that was done by the previous Government with the states; the National Disability Insurance Scheme, which wasn't fully funded. As well as a backlog in Defence; submarines that were not properly paid for but you need to have, particularly given we've got so much exposure with new gas pipelines right around the country. A range of other things. The bottom line is that based on the spending commitments locked-in in legislation that we inherited, expenditure was going to from this [inaudible] just over 25 per cent of GDP, the size of the economy, right up here to 37 per cent of GDP.

That means the Government's – this is the Federal Government alone – the Federal Government goes from being around a quarter of the economy to a third of the economy. Then the state governments that are running all the hospitals and schools and so on have that on top. This is the highest ever level of taxation received – down here –  around a quarter of the economy. So, either you increase taxes dramatically, and I'm talking dramatically, or else you have to reduce your spending.

So, in the last Budget, we reduced spending. That meant that we had to make some really hard decisions on foreign aid. We had to make some hard decisions about hospital funding into the long-term, even though hospitals keeps rising, but we just couldn't keep giving the bonus payments. That's how far we've come. But you still see, the government goes to nearly a third of the economy. Again, this is where it gets to, about the same level as it is today in 40 years time. But again, that's based on no significant recession.

So, what does this mean? Here's the international debt comparisons. This is – so you've got to think carefully about this table. This is the current level of debt of countries. Net debt, being – after taking into account assets and so on. So, Greece is right up here. It's not in good shape, self-evidently. It's around 170 per cent of GDP. So, in Australia, that would be the equivalent of around $2.5 trillion to $3 trillion of net debt. Right? And they're basically in default. Japan is next, just short of 150 per cent of GDP.

One of the reasons why Japan is there is because the Government – it's not just about how much debt you have, it's how you fund it. Japan has huge household savings – over the years, they're called – there’s a colloquial term of Japanese house mums, housewives, used to save a lot of money and in charge of the household savings. But Japan was able to fund all of its debt from domestic savings. It never had to import money to fund its debt. So, this year is the first year that Japan is going to have to start importing money to fund government debt.

Then you can see Italy, France, United Kingdom, United States here. United States is the reserve currency of the world, so they have no problems getting people to buy US Government debt. This is what Australia would be like if nothing had changed at the last election and you can see that was the previous policies. That's where we would have been at in the equivalent of 2055. This is where we are going to be in 2055, halfway down. This is where we are now. So, you can see the growth in spending is that trajectory there. If we got the whole Budget through, it's that green area there, we'd actually have money that we could lend people in the rest of the world. So, we'd be a banker, rather than be a receiver – a borrower. And it's that trend that is the concern. This is what debt levels were going to, the equivalent of $5.6 trillion in today's dollars. Currently, we're at around $254 billion. So, we're a long way short, but it's the growth trajectory. This is what we've actually implemented and that's what would have happened, we would have become a lending nation at that point.

So, why am I telling you this? Because it comes back to how you fund the services. How you fund Medicare, the Pharmaceutical Benefits Scheme, how you fund your Defence spending, especially given they're always pretty uncertain times in national security. How you fund the environment. How you fund industry policies. Sooner or later, you've got to find the money and there's no money tree.

So, how do we pay for our future? First thing is, we've got to lift workforce participation. That's where we call for the Grey Army. The Grey Army is going to be not necessarily all the people here, but it's certainly going to be my generation and beyond. [Inaudible] going to have to – if we choose to, because you can choose not to work at any point in life – but if you choose to, you're going to have to keep working. And we want you to keep working; that's about changing attitudes, particularly of employers.

But also, we've got to think about whether our superannuation system needs to be changed, about the way we [inaudible] our life, whether you think that the house you buy when you're a young couple is going to carry you right through, or whether you're going to downsize your house at various points during your life. The sorts of things that are already being discussed now. And what about retraining and reskilling? When you're in your 60s or your 70s or maybe even in your 80s, you start to think about how you reskill and how do you maintain your quality of life during that reskilling period?

Second one is female workforce participation. How do we encourage, particularly mums, to come back into the workforce after having a child? Then the second area, which is key, productivity, increasing our output per hour. Technology's going to play a huge role from everything from the use – better use of apps for commercial purposes, of course apps weren't around seven or eight years ago, they weren't even considered. Apps are completely changing the way people live at the moment and how. Well, the apps – great example, you know, you can use an app now to identify people in your local neighbourhood that'll mind your pet on the weekend and pay them, how good is that?

For retired Australians or people in the local area who are retired who you can pay to mind your pet if you go away for the weekend, maybe even mind the kids  - that'd be a great combo, but you know who they are in the neighbourhood and it also starts to build communities and you start to think about all the capital that is sitting out there from the boats floating on the harbour that are remaining dormant to the disruptive behaviour of Uber on the taxi market or Netflix on broadcasting more generally but also on pay-TV and you're going to see more and more of that disruptive technology that dis-intermediates the traditional intermediator, be it a real estate agent like my family or be it any number of areas – you're seeing it all the time, particularly in retail. Right through to, how do we get more entrepreneurship along the way?

What has the Government got to do? It's got to enable consumers. This is hugely important. We are – every government in the world is increasingly losing the power to regulate a market, any market, TV broadcasting, gambling – just information markets, censorship, the whole thing. We're losing it because consumers are marching and consumers are marching in partnership with new technology basically to breakdown the regulated environment. That's a good thing in many ways but what it means is consumers are sovereign and they're going to be even more powerful into the future. We've got to, as government, facilitate change rather than trying to regulate change and the best way to help us to do that is to make sure that we can afford our future along the way and live within our means.

So, it really is over to you; this is where we come to the conversation side of it. The questions you have, as a nation, we need to start talking about it. Is our superannuation system built for the 21st century? It was built, for example, in 1992. Our current superannuation system was built in 1992; life expectancy at that time was in the 70s – around 72, 77, depending on what measure you use. Today, we are looking at life expectancy into the future of 90 to 96. So, they're very different [inaudible]. I get terribly upset when I hear people that have saved super all the way along and now they're running out of super as they're hitting their 80s as it was never anticipated even though they thought they had enough.

So changing lifestyles – about how we can get, obviously, the family home. It's far more expensive for people to get into housing now than it was 20 or 30 years ago and there are many reasons for that but it's something that we need to think about and what does it mean for our children or the next generation that are trying to get into their first home. How are they going to be able to afford it, particularly given they're paying university fees which they are now – they are now paying university fees under legislation that was put in place by other parties. So, the question is you start off in a [inaudible], you're paying your university fees and now you need over four times household income to be able to cover the average house as opposed to about 2.6 times, two decades ago.

So, these are the things we need to think about, the future, and it's a conversation that needs to be had. Now, the Government has various plans in place but we have to be mature enough as a community to engage in a proper conversation that takes into account and empowers the modern consumer. So, [inaudible] that's the intro from me. I think that it’s gone on longer than I would have expected so it really is over to the audience. I'm happy to take as many questions on any topic that you'd like and there's a microphone over there. Thanks.