5 March 2015
Transcript - #2015040, 2015

Press Conference, Canberra

TREASURER:

Firstly, can I begin by thanking my colleagues for their work – Mathias, Kelly, Josh, and Bruce Billson from the Treasury and Finance portfolios. I particularly want to thank the Treasury for the enormous amount of work they've put into this and also those from a number of other departments who have been involved in this discussion.

I might do it from here because I think the handheld – so we'll just go through the slides and then go to questions. The IGR is a social compact between the generations. It represents where we've been, where we're at and where we're going. Just to remind everyone, it was established under the Charter of Budget Honesty Act. It's meant to be produced every five years. It is a document of the Treasurer and always has been like every other document in terms of Budget and so on. It presents 40 years of projections of the changing shape of Australia's population and economy and the Budget impacts of Commonwealth Government policy.

Question is how is Australia changing? And you start with population, the first P. Life expectancy is increasing, as you can see. The good news is that by the middle of this century, it's expected that a child born will live to 100 and that's quite remarkable given that 100 years ago – just over 100 years ago, life expectancy was around 55. It is a dramatic change. The historic numbers are obviously quite different to the projections. The age pension eligibility age should better reflect increases in life expectancy. That is, where life expectancy has been and that's the age pension eligibility age. You can see the increase in the age pension eligibility age was actually introduced by Labor to go to people to the age of 67. We continued that trajectory to go to 70, the same trajectory, and obviously they're opposing it but you can see that the gap there is still very significant given what forecast life expectancy is. Particularly, this excludes technological change so if you take it to 100 the gap is even larger.

The number of centenarians – it’s an extraordinary story – there are only 100 in 1971, there's going to be 40,000 in 2050. Now, what does that mean? Well, there will be fewer people aged between 15 and 64 relative to each person aged over 65. Sixty five is traditional working age, obviously that is changing, but in 1970 there was the equivalent of 7.5 people for everyone aged over 65. It's currently 4.5 and it's dropping to nearly three. 

Migration as a share of the population is anticipated to fall. Now, you can see the averages in various points. After World War II we had around 1 per cent of population per annum, down to half a per cent. In more recent times, again during the mining boom, it went back up to 1.1 per cent, but as Labor forecast in the last IGR, they said over the medium-term it would go to 180,000 a year; we're suggesting over the medium-term it would be about 215,000. So, we're higher than what they forecast in 2010. Population growth will be slightly lower or slower over the next 40 years but it's essentially pretty much the same at around 1.3-1.4 per cent. And again, you can see the change in the population is not making a huge difference to the wealth of the nation as it stands.

The second part is participation. Participation rates will decline as a result of the population getting older. Now, as you can see, that increase has happened in recent times but it's expected to come off quite significantly. That does have an impact on wealth creation in the economy.

Aged over 65 is a remarkable story. As you can see, the bottom of the point in 2003 – that was when it started to pick up. Older Australians started to go to work because there was full employment, employers were working harder to create the jobs for older Australians, and then when the GFC hit, they stayed in work because their asset values and income fell during the GFC. The trend is continuing, but this is the grey army that is going to deliver prosperity in Australia's future and we need older Australians – we want older Australians if they choose to do so, to remain in the workforce and to come back into the workforce. And that is where there is going to be a lot of structural effort over the next few years.

There is potential to lift participation. As you can see, the green is Australia, the red is Canada, and the blue is New Zealand. New Zealand has a much higher male workforce participation rate. The New Zealand Government hasn't got compulsory superannuation, so people have a need to continue to work; it's also the case that they remove discriminatory policy towards older workers.

But the interesting one is female workforce participation. This is a debate we truly need to have. Again, the second major army that we have of potential workers is women coming back into the workforce, particularly after having children. There's much debate about what's going to change that. You can see Canada and New Zealand are well ahead of Australia in terms of female workforce participation. There's a debate about what it is. You know, in Quebec, apparently, they have childcare that's $5 a day. Does that increase workforce participation? Is it more flexible workplace environments? There are many factors that are in play, and my colleague Scott Morrison is addressing this particular issue this very moment in our families package. But it can make a massive difference to the wealth of a nation in terms of participation, but even then, they're not the biggest contributors to what is going to be our wealth as individuals.

The third area is productivity and by far the most important. Productivity is how much output we have per hour of work and our productivity as a nation has grown significantly over the years. In fact, compared with 1972, we are producing twice as much in one hour as an individual than we did in 1972. Our productivity assumption is the big ‘if’ for the next 40 years. The 30 year average is 1.5 per cent that we've taken for this document. You can see the surge in the 1990s as a result of reforms that were undertaken. You can see it was much lower in the '80s so that was when Australia had to make the significant change, the structural changes to deliver productivity growth. We're assuming the same going forward, 1.5 per cent.

As you can see from this graph, productivity improvements are the biggest contributor to the increase in real GDP per person. That is how much we earn, how much we get, how much money we have in our pockets. And that's why labour productivity – as well as capital productivity – labour productivity is hugely important for our future. Projected economic growth is only going to be marginally lower over the next 40 years and that's based on the best assumption, that's based on the economic inputs.

So, the key drivers are productivity; investment in new capital and infrastructure, absolutely essential that we do that. Innovation and technology is going to completely change the way we live our lives. When you think about it, 10 years ago, you might not have had access to the same sort of technology you have access to today, quite obviously, such as accessibility on mobile phones; apps weren't around 10 years ago. When Peter Costello delivered the first Intergenerational Report, Mark Zuckerberg had never even thought of Facebook. So, there’s been massive changes in technology and technology is moving faster than ever before, which is really exciting for Australia and exciting for our future because it's broken down the traditional barriers of distance and it's also smashing the barrier of regulation because technology, new technology, means consumers are empowered so much so that they are smashing the traditions that are part of our economy, like licensing systems. You look at whether it be broadcasting licences, gaming licences, taxi licences, they're being challenged by disruptive technology.

When you look at other parts of our lives that are being absolutely turned on their heads by technology, and new innovation, it means we've got an opportunity to get much more bang for our buck through innovation. Medical research is hugely important. That's why we are determined to stick with our Medical Research Future Fund because that's going to delay the ageing process. We'll live longer but it's actually going to give us a better quality of life into the future.

Entrepreneurship and competition. We are entering into a generation of small business, like never before. It is going to be the innovative hub of the economy, and of course, skills and education. At various points during our lives we're going to have to reskill and that means we've got to take a new approach to education over the medium and long-term. We've got to take a new approach to the moments when we're not going to be in the workforce.

Of course, we are obligated under the act to deal with the existing position of government policy and it's vitally important that we be able to afford our future as a nation. What this report shows is that we have come a considerable way, but more needs to be done. This is the underlying Budget position that we inherited. Deficits would have reached, in today's dollars, $533 billion and that's based on massive growth in spending and planned growth in spending.

That's what we've actually achieved so far. That is legislated, that is implemented. That is under way, and then you can see what has not been achieved so far, proposed policies that have not passed through the Senate or been introduced to the Senate. So, we have made a difference. I emphasise, this is based on another 40 years of uninterrupted economic growth. That has been the tradition in the IGRs. We are sticking with that tradition. Australia has the second longest period of continuous economic growth of any country in the world after Japan post-war and the Netherlands, but particularly the Netherlands had 26.5 years of continuous economic growth based on North Sea oil, and that ended in 2008. Australia's in its 24th year now, we're assuming another 40 years in order to live this.

Now, you never forecast a downturn, there will be ups and downs along the way but you can see we're not gilding the lily about the numbers at all. It comes down to payments and as you can see, the payments keep rising and you can see, for example, many of them have bipartisan agreement in a number of areas, like the NDIS, but it is a huge new addition to payments – it makes government much bigger. The key thing is the historical high on receipts is 1986 at 26.2 per cent of the economy, and of course payments go to 37 per cent. Now, you can't tax your way to 37 per cent of the economy, you won't have much economy left and obviously it slows down economic growth, which becomes a circular hole.

You can see we've made progress in reducing the amount of expenditure and the growth in payments over the medium-term but again, there's more to be done. There's much more to be done if we are going to get close to living within our means. Why did we put this graph up? Well, it is a communication graph. People keep saying I don't know how to compare our debt with future debt. So, you can see these are the current levels of debt – international net debt of various countries, Greece at over 160 per cent, Japan at nearly 150 per cent. This here is the first time I understand Japan's Government debt will exceed the total pool of domestic savings in Japan. So, a lot comes down to whether you can fund your debt. It's not just the level of debt, it is about whether you can actually fund it from the pool of domestic savings, or whether you need to get it from other countries, and in our case we are a massive importer of capital. We don't have enough domestic savings to fund our growth.

So, as you can see, without the changes in the last Budget we would have had a trajectory that took us up there. You lose your credit rating around 30 per cent of GDP in net debt. Currently legislated you can see is halfway down the table, which means our debt would be the equivalent currently of Spain or Germany, which is obviously, you know, in a much different position, and you can see where we're at –  down the bottom. So again, it comes down to the trajectory of debt, the trajectory of spending, not where it's at particularly, but where it's going.

Obviously, net debt was heading towards unsustainable levels – $5.6 trillion in today's dollars, the debt, and that doesn't even take into account what the interest burden would be on that should they get back to normal levels. This is how far we've gone, that's actually been legislated, and again, if everything is implemented, then you can get back to surplus. What it shows is our last Budget was addressing 40 years of challenges in the Australian economy and it did bite off too much, but it was a structural Budget for a generation and the implemented measures have made a big difference, but there's still much work to be done.

As you can see with healthcare, we have made a difference but health as a percentage of GDP does increase, and most importantly, we invited the states to participate in this process but they declined. The states have a massive growing burden in hospital costs. Then you can see education per person. It is important it include lending because we've massively expanded the Help program in relation to education. It's based on per person but the number of students is declining. We decided not to go, particularly, to number of students, because we're going to need older Australians to go back and study, if they choose to do so, to re-educate. So, it was more appropriate to take per person.

The question is how do we pay for our future? Participation – we need that grey army. It's hugely important, and that's about attitudinal change in business, it's about policy change. We also need to increase female workforce participation and that's, in a sense, happening in any rate because you can't live in a capital city in Australia without having at least one and a half incomes. It's very challenging.

Productivity increasing output per hour, investment in new capital and infrastructure, innovation and technology, entrepreneurship and competition, skills and education. So, how can the Government help? Well, we need to enable consumers. Consumers are on the march; consumers are changing the world through the use of technology. They are disintermediating everyday life; they are disintermediating government and regulation, and consumers need to be empowered, they need to be sovereign.

We've got to facilitate change rather than trying to restrict change, and that is a problem facing governments everywhere in the world. Maybe it's a good problem to have. We need to live within our means. So, the purpose of this IGR in this shape is to begin a conversation with the Australian people; every town hall, every street corner, over every barbecue, we want Australians to embrace the future. It's a great future. Our nation has a fantastic future, but we've got to own it. We need to individually own our destiny and this is a conversation that we know the nation wants to have, so we are going to work with the Australian people to develop the policies ahead that are going to make a difference to their quality of life. Over to you.

REPORTER:

Treasurer, you said you invited the states to participate, but they declined. Can you explain what happened?

TREASURER:

Well, I invited them. I said, ‘do you want to be part of an IGR’, and various states had different reasons. Some said they didn't want to put the effort in, others said that they, you know, had different priorities, that's their call. I thought I'd do that. Previously, I'm not sure the States have participated but it varies. You know, there are very few countries in the world that are doing this. So, understandably, in many cases totally focused on the challenges of the day, whether it be, you know, continuing massive unemployment or, you know, war or whatever the case. We are in a privileged position Australia that we are doing this. It's fantastic that we can do this, and this is about how we plan for our future.

REPORTER:

Are there any states that agreed to take part?

TREASURER:

Not that I'm aware of, no, no.

REPORTER:

The report sets out some big increases in the cost of looking after older Australians. I'm not thinking so much aged care as the cost of the pension. You've got some difficult pension reforms there on the table at the moment, does this report mean that if you can't legislate those pension reforms a future government will have to do that including increasing the pension age?

TREASURER:

Well, obviously when Labor was last in Government they increased the pension age, we agreed with it. When we want to increase it they disagree with it. So, someone's going to have to move in that regard but you've got to give people notice and really, it's going to be a different dynamic going forward because you need to have the interaction between the pension and superannuation to ensure that people have good quality of life. You also need to have a safety net that is going to ensure that no-one in our community is disadvantaged. So, it's a balancing act for government and this, is you know, the conversation. I've had discussions with people like Susan Ryan and others; I think it's really important that we have a discussion about what our lives are going to look like in the future. It may well be the case that people are coming back into the workforce at the age of 80.  I mean, I stood with a man that's 83 and still working five days a week at Bunnings. One fourth of the workforce at Bunnings is over the age of 50 and that's fantastic. So, if people want to, we've got to get the balance right, but people might want to contribute for longer to their superannuation, they might want to draw down their superannuation at various points where they have career changes. There may well be a change to the age pension system that is actually responding to the changing demographics of Australia. So, it’s…

REPORTER:

[Inaudible] Do you think that a future government, if not yours, has to look at the tax treatment of superannuation on exit, and just secondly, on the retirement age, if you were to follow that trajectory that we saw on the graph, it looks like a future government might have to look at 75 being the retirement age. Would you like to stomach that one?

TREASURER:

I don't want to get into policy prescriptions for a future government. I'm focused on ours. And I think the main point to understand is that we're beginning the conversation about the changing nature. Every – almost, you know, every government number here will change over the next 40 years, we know that in one form or another, whether it's Liberal or Labor, whatever the case. But one thing that you can be absolutely sure of is the demographic trend. That's the one that is moving and it probably may move faster. So, with that demographic trend, the question is how do we shape policies for the future rather than nostalgically looking at the past. How do we make sure all along the way that the quality of life of every day Australians gets better – actually gets better?

REPORTER:

[Inaudible] Do you think you have to revisit that quickly?

TREASURER:

We will release a taxation discussion paper in April after we've engaged in the first round of consultation on the IGR.

REPORTER:

[Inaudible] The thrust of much of this report suggests that you should be doing – you should be repairing the Budget faster than you are signalling will be the case in this coming Budget?

TREASURER:

Well, there's no doubt … I mean Michelle, last year's Budget was a Budget that tried to do 40 years of work in one year and it did bite off too much. The Prime Minister said that, I accept that. But the challenge is still there. We've come a long way, but we've still got a long way to go.

REPORTER:

[Inaudible] to quite a soft line to come in the…

TREASURER:

I think, you know, we want the economy to lift more and that's very much my focus. It was my focus in MYEFO and, you know, obviously having things like iron ore –  commodities like iron ore drop in price from $90 a tonne to less than $60 a tonne has had a big impact on revenues. It's also the case that the Terms of Trade have come off much faster than we expected. That affects our national income. There are many moving parts here. I've got a responsibility to do my best for the economy now but also to lay down the road map for the future and that's what we're trying to balance.

REPORTER:

To clarify that answer, Treasurer, is what you're saying that the Government needs equivalent savings from last year's Budget, in the future?

TREASURER:

Yes, whether it's us or anyone else, and that assumes 40 years of continuous economic growth. So, that's based on demographic needs, right? So, you know, if there was a demographic change and really the only one you could do is massively increase immigration, that would require a massive increase in infrastructure as well, which would then put different pressures on the Budget. It would also be the case that you have to look at the competition of immigration, which has changed quite remarkably over the last two decades.

REPORTER:

A double banger if I could just regarding productivity? Pending outcome of all your processes under way at the moment –  white papers and productivity commission, are you resolved to taking structural reforms to the next election on taxation, IR and so forth as part of driving productivity? And secondly, one of the key drivers, you said, is innovation. Do you think it's a bad look while you're launching that push, you've got your Education Minister putting a gun to the head of scientific research because the Senate won't pass a bill on universities?

TREASURER:

On the second matter, no, I don't agree because what we are trying to do is to free up the universities to be their best and to compete in the world. Now, if universities, like anyone who is entirely reliant on the Government for its income or overwhelmingly relying on the Government for income, as you can see the Government sooner or later hasn't got the income to sustain everything people might expect. So, if we can have a tertiary education system that is making sure that those who do not have access to university do get access to university, but at the same time it is an engine room of innovation, particularly in partnership with the private sector, that is going to build our capacity as a nation and this is an endorsement. This is all the reason why we should have higher education reform. Also aligned with that higher education reform is our improved access to vocational education and training and about finding ways that we can further incentivise people to retrain at various points in their lives. So, this is a call to arms in relation to reform and that goes to your first question. I don't think any political party, if it's being fair dinkum with the Australian people could pretend that the status quo is acceptable. You can't be nostalgic for 20 years ago. Public policy – the public policy of free education or free healthcare for everyone, that was 20 years ago. It's not actually the case today – hasn't been the case for 20, 30 years. So, that nostalgic debate is unreal. What we need to do is frame public policy for the future and that means giving – empowering individuals to have more control over the government's services they access, and government services need to be more flexible to respond to the needs of individuals as they change their lives.

REPORTER:

So we can expect some sort of structural reform agenda?

TREASURER:

I think there has to – the nation has to have a debate about structural change.

REPORTER:

Treasurer, given the scale of the fiscal task you've just talked about, are tax cuts to address bracket creep in 2017 realistic or are we now more realistically looking towards the 2020s for those adjustments?

TREASURER:

The challenge at the moment is that we have average wage earners approaching the second highest tax bracket. When they go into that second highest tax bracket it starts to detract from economic growth and also the interaction with the welfare system as it stands means that there will be more and more disincentive for people to work. So, we have to give tax breaks to Australians, otherwise if we don't give them those tax breaks then it starts to constrain the wealth production in the nation. Obviously, the faster we can get to the point where as a nation we live within our means – as a government we live within our means –  the more capacity we've got to incentivise people through tax cuts.

REPORTER:

[Inaudible] Would you say to Australians out there working now that if all your Budget agenda was passed, that you could return bracket creep to them and they could get that tax break?

TREASURER:

Yes, of course, of course. I mean that's self-evident.

REPORTER:

The last IGR had Australia's population hitting just short of 36 million by 2050. This one says you're going to reach that point about five years earlier. What does that mean to Australian cities where most of these extra people are going to live and does that mean that the Government has to relook at infrastructure, not just focus on roads, but the other parts of infrastructure within the nation's cities?

TREASURER:

Yeah, look, we've never been opposed to engagement with state governments in relation to public transport and other things. In fact, here in the ACT our asset recycling program gave the ACT Government the money for a light rail, even though it's contentious and hotly disputed by my colleagues at a state level. It will be the same in relation to New South Wales when the asset recycling initiative is announced there. So, we're in fact putting a lot of money into partnerships with the states in relation to public transport. We're also putting a lot of money into freight rail, we're putting a lot of money into all infrastructure – we're building an airport in western Sydney. Western Sydney's only airport of any great scale we are building because that infrastructure helps to lift the capacity of the nation and the more infrastructure we can get out there that is actually productive infrastructure, the more capacity we're going to build, so that we can get greater income and greater prosperity in the future. In last year's Budget I announced that over the next decade we're building the additional infrastructure the equivalent of eight Snowy Mountain schemes, and despite the Victorian Government inexplicably tearing up East-West and 7,000 jobs and so on, I'm waiting to hear from Queensland about what they're going to do with their massive pipeline of need, but obviously, you know, the case in New South Wales and other places.

REPORTER:

Treasurer, ahead of the release of this report you talked about Australians falling off their chairs. Which particular figures would you nominate as the scariest? And also, how much of a risk do climate – does climate change pose?

TREASURER:

Well, climate change was the commitment I gave to the Greens but also [inaudible] dealt with in the report. Look, if you portray any number as scary I think you're on the wrong track. I think we should celebrate that we are living longer. I mean, we are the envy of our great-grandparents and beyond, really are. We've got a better healthcare, we've got better quality of life, it's all moving a bit faster than our great-grandparents would have known but my god, our generation is the luckiest to have ever lived. What we've got to do is make sure that the next generation is even luckier and the one after that, and the fact that we can stand here and look forward 40 years and know that people are going to live longer and have a decent quality of life, provided no-one screws things up – that's exciting. That is really exciting. The number that, you know, stunned me is, and it's backed-up what I said at the beginning of the year, is we're living longer. Someone born in the middle of this century is on average going to live to around 100, and, you know, as the front cover of Time magazine last month had, you know, ‘could this child born live to 142?’ And as many have said, you know, demographers and others have said it's quite possible someone has been born in this world that's going to live to 150. What we've got to do –  we've got to compact between the generations to make sure that everyone going forward has a better quality of life than that which we have today. This is about preparing for it and there aren't many countries in the world that would prepare for this sort of challenge.

REPORTER:

How much of a risk is climate change?

TREASURER:

You know, the thing that I think is going to be transformative in climate change is technology change. It is going to be – it is going to change the nature of the debate over time. Having said that, we all have responsibility to do some heavy lifting and quite obviously this Government is doing part of that heavy lifting. Thanks everyone for your time and patience.


Attachment: 2015 Intergeneration Report Presentation Slides [PPTX 2MB]