Check against delivery.

Introduction

Thank you Peter, and thanks to the G100 for inviting me to present here at your 2015 Congress.

Your network, like the BCA’s network of chief executives, provides a very important vehicle for CFOs to rise above the day to day pressures of your roles to think and talk about issues of national concern.

I have been asked to speak today about The Role of Budget Reform in Facilitating Growth.

I want to touch on three areas:

○    Firstly, I want to address the theme head on by looking at what a strong fiscal position means for the economy overall.

○    In the second part of my presentation, I’ll hone in on this year’s federal budget and also make some comments on the Opposition Leader’s Budget Reply speech.

○    And I’ll finish up by talking about the broader reform task – the things we need to do outside of the budget process to grow our economy and restore our long-term fiscal position.
 
Of course, budgets are barometers of a number of things:

○    whether we can get the things done that need to be done

○    whether the country is headed in the right direction, and

○    whether a government is in touch with the community.

The media tends to asses that final measure in terms of the first post-budget opinion polls.

But, for us, it's a deeper issue about whether the community feels the country is being well governed and is progressing along an agreed path, irrespective of which political party is in power.

That sentiment is best judged through consumer confidence figures and through deeper analysis than a snapshot-in-time opinion poll.

What we know from a major research project conducted this year for the Business Council, is that the community is deeply worried about the country's economic circumstances, including public finances.

Our research found that 47 per cent of people think the Australian economy is OK but getting worse, or that it’s already bad.

59 per cent think the management of government finances across Australia is OK but getting worse, or that it’s already bad.
 
But 62 per cent say they do not trust government to manage reform well enough to create a better system overall.

What our research shows is that while people sense that things aren’t as they should be, they are not convinced about the capacity of government to undertake reform properly and consultatively.

This leaves us with a very difficult environment in which to undertake reform.

Role of a strong budget in the economy

So, let me turn now to why this has to change.

And let me start with the critical importance of having a strong fiscal position and the counter factual of what it means to have a weaker fiscal position.

This group understands what I’m talking about better than most.
 
If your company balance sheets are weak and if you can’t raise money, then you can’t invest in new business models or buffer yourselves against business model attack.

In short, your capacity to grow and your resilience is weaker.

If you think about the economy from that perspective, there is the macro-economic drag effect of a poor fiscal position but also the opportunity cost of what we can’t do as a country.

What if the entire state budget of a particular state was crowded out by health expenditure?

The states already spend more than a quarter of their revenues on health care.

And with the Commonwealth promising to slow its contributions to state health spending from July 2017, the pressure will only intensify.

What if we attempt tax reform with no fiscal room to move?

We know that every time we've achieved major tax reform, we’ve done it with money up our sleeves to make the adjustments.

Without it, there will be so much less scope to compensate people and no scope to offer overall tax relief.

What if net debt to GDP was 60 per cent? What would that mean for the people in this room? 

It would mean the loss of our AAA credit rating and substantially higher interest rates.

It would mean more than a quadrupling of interest payments - to more than $50 billion a year. 

From the ‘micro’ perspective, fiscal discipline is about getting the best value from our scarce resources.

Government spending uses up real resources (labour and capital) which could be used in the private sector.

It also requires taxes to be raised, which inevitably means that valuable activities - working, investing or saving depending on the type of tax - are discouraged.

So, first and foremost, it is critical that the value of government spending to the community exceeds the value of its best alternative use.

This is either the value of the private sector activity forgone plus the cost of raising taxes, or the value of alternative government spending.

Otherwise we are wasting precious resources and unnecessarily constraining growth and living standards.

It’s doubtful that a business would regard outlaying funds not matched or exceeded by revenues as a pathway to commercial success (loss leaders aside!).

This is the critical flaw in the argument that cutting government spending will inhibit growth.

If government spending is wasteful or ineffective it is making us less well off than we could otherwise be.

Certainly, government spending can support growth.

And of course government has an important role in providing and funding a range of public goods and social services that can’t be fully provided by the private sector.

That’s why we have governments. That is why we pay taxes.

But public spending has to be subject to careful scrutiny – just as businesses carefully assess their spending.

Governments should not view themselves as having an open cheque to spend ever increasing amounts of taxpayer funds.

The community returns, even though they are tricky to measure, need to exceed the costs. Services need to be provided efficiently. 

At the ‘macro’ perspective, a strong budget builds confidence and creates a brighter investment outlook. 

The (Keynesian) macroeconomic argument that reducing the deficit too quickly would harm growth is somewhat overblown, especially for a small open economy such as Australia.

Carefully considered and staged steps to strengthen the budget would deliver immediate positive signals for expansion of the private sector.

It would reduce uncertainty about the economy’s capacity to respond to economic shocks and reduce the risk of a ‘perfect storm’.

The community isn’t stupid.

People understand that when the government budget position is structurally weak, when there are large, persistent deficits and growing debt levels, there are inevitable consequences for them at some point.

Our research showed that 83 per cent agree that a worsening in economic conditions will have a negative effect on their own personal circumstances.

They’ll face higher interest rates, higher taxes and/or reduced services. 

The BCA’s recommended response

In response to Australia’s fiscal problems, the Business Council’s budget submission did not argue for a sudden correction, but a steady, phased reduction in the spending trajectory and the deficit.

A medium-term strategy to improve the deficit would allow for considered review and restructuring of spending programs aimed at delivering better outcomes. Importantly, this approach would allow for transition and create durable savings.

Let’s be clear what the structural problem is.

Put simply, we have made expenditure decisions that lock in spending growth over a long period of time, and that were based on revenue assumptions which haven’t eventuated.

This means we need to take action to structurally change the spending trajectory.

So, bringing the micro and macro elements of the story together, the Business Council has identified four, 10-year fiscal goals:

1.    preserving Australia’s AAA credit rating

2.    progressively returning the budget to surplus

3.    ensuring the sustainability of priority services, and

4.    ensuring capacity for investment in infrastructure and human capital which are vital for innovation and productivity growth.
  
The first two goals target the macro – reducing the deficit number if you like. 

But how you do this - the micro - is critical for sustainable growth and living standards.

A business that delivers a good bottom line one year by cost cutting through sacking its most efficient and innovative staff wouldn’t last long.

We need governments to do what they should be doing, and to do it efficiently.  That’s how you create a virtuous circle of growth and prosperity.

2015-16 federal budget
 
Let’s now turn that lens briefly on the 2015-16 federal budget.

We see the budget as broadly consistent with our four fiscal goals.

It's obviously a pragmatic budget.

It’s obviously a political budget.

But it does include two important measures:

○    It does have structural reform on the very sensitive retirement income and asset test.

○    The budget does have some capacity building measures.

People may argue about whether the small business package is where the money should have been spent.

But notwithstanding that we don't represent this sector, the Business Council argues that in a constrained fiscal environment, it isn’t easy to identify meaningful stimulatory spending options.

What the government has done with the small business package is to concentrate a big effort into a sector of the economy that's vulnerable, and that has the potential to innovate and drive diversification in our economy.

While a two-tier company tax rate is not ideal, the government has focused in on a small number of companies.

There are also some capacity building infrastructure measures in the budget and, of course, the child care package to encourage participation.

The real issue for us as the Business Council is whether this budget is the beginning of the end or the end of the beginning - to quote Winston Churchill.

If it's the end of the beginning we can acknowledge, as I’ve just done, that the budget provides a platform for the government to get on with other major adjustments.

If it's the beginning of the end, if it’s a claim of “mission accomplished” because everything else is too hard, we have a serious problem.

If we examine the opposition’s response to the budget, it would appear that there is an unwillingness to discuss with the Australian community that in order to realise some excellent ideas, we actually have to make the fiscal room.

We have to make some tough decisions.

No good ideas will be realised without choices and trade-offs, and some pain.

The business community cannot stand by and allow either major political party to abandon the need for the trajectory of public spending to be corrected in a structural way.

It would be like us telling our shareholders that:

○    our share price will go up

○    our market cap will go up

○    our dividends will be higher

○    we will employ more people ....

But either we don’t know what structural decisions will need to be made or we are not going to tell people what they are.

Imagine going to investor briefings with that story!

As the shareholders of this country, we too should expect proper governance and proper disclosure from our elected representatives.

Broader reform agenda

With this imperative in mind, in the lead-up to last week’s budget, the BCA emphasised that the budget process needs to be decoupled from major economic reform.

Not everything can or should be tackled through the budget and not everything can be done in a short timeframe.

This is why we’ve called for a decade-long process that allows for careful transitioning.

And we think there are four anchor areas that need to be tackled.

○    First, redesign big spending programs: retirement incomes; health; and welfare.

○    Second, fix the tax system.

○    Third, fix our skills system, and

○    Fourth, de-regulate the economy.

1. Program redesign

So, starting with the re-design of big spending programs - what do we need to do here?

Retirement incomes

Let me use retirement incomes as an example and then touch on the other two areas very briefly.

We have to set the retirement income system up for a population with 8 million people aged over 65.

We have to imagine a world where the majority of people aged over 65 are going to be working part time, will have a bit of superannuation and will have a bit of support from government.

This is why we are calling for a review into the retirement income system that will ensure the various incentives are aligned.

We have to go back to some foundation questions here:

○    What will the concept retirement mean?

○    What is the superannuation system for?

Because if we apply old mindsets to these things, we will make a catastrophic error of judgement as a country.

The mindset that people will be retiring at the taxpayer's expense defies the reality that the taxpayer can no longer afford it.

More importantly, there is a growing number of older people in our society who want to continue living rich and purposeful lives.

Health and welfare

Turning to health and welfare, which are closely interrelated to the retirement income imperative:

○    By 2050, total spending on health and aged-related services for people over 65 years is conservatively projected to increase threefold.

○    At the same time labour force participation rates will fall, affecting growth and tax revenues.

As spending is the main driver of the structural deficit, only a slower spending trajectory can fix it at its source.

Only spending redesign can ensure that scarce resources are used to deliver the best value for money, and that savings can be sustained.

This requires redesign in health and welfare that improves the efficiency and effectiveness of services, and that provides for better delivery and better targeting through encouraging greater self-reliance where appropriate.

This kind of redesign does not need to be painful.

In fact there is a double dividend from better targeted spending – we can simultaneously improve outcomes and save money.

A Medical Journal of Australia study in 2012 identified 156 potentially ineffective or unsafe medical services listed on the Medicare Benefits Schedule.

That means these activities add no value, or worse still, they’re dangerous.

We also have some clinical pathways that don’t work.

Talk to any expert in the health system and they’ll tell you we need different pathways and options for patients.

Why aren’t we listening to these experts and implementing their changes?

Fundamentally this about removing waste, inefficiency and improving outcomes. A five percent productivity gain in the health system amounts to an eight billion dollar save.

Of course, reforms in health, welfare and the retirement income system are all dependent on making the fundamental architecture of the federation and the tax system fit for purpose for where Australia wants to be in 10, 20 and 30 years’ time.

2. Tax reform

Moving to tax reform, let me start by telling you something you already know: tax reform is not the answer to Australia’s fiscal challenge.

Imagining that we can tax our way out of our fiscal predicament by permanently increasing federal taxes is shockingly misguided.

Higher taxes would only discourage investment and participation, and depress urgently needed economic growth and job creation.

Tax reform is essential for all sorts of reasons, in particular reducing disincentives to work and invest, and making the revenue base more stable.

But ad hoc tax measures claimed to raise a billion dollars here or there - in most cases from business - must be very carefully assessed on their economic merits rather than short term populist appeal.

Last week’s budget included a number of integrity measures relevant to large corporations, including the Multinational Anti-Avoidance Law.

The BCA is very clear, where companies do not adhere to the law, authorities must take action

Where companies act beyond accepted community norms, governments need to respond.

But the response needs to be very carefully considered and it’s good to see that the government has committed to consult.

Let’s be clear, unless the community is satisfied that this issue is being addressed, the serious task of tax reform will not be possible.

And that task has to focus on the dual objectives of revenue raising, and fostering investment and growth.

It should be of deep concern to everyone in this room, and outside of it, that what we are seeing from both sides of politics at this early stage is a pincer movement in the reduction of ideas.

By the time we finish the tax white paper, what will be left to talk about in the current race to the bottom for the things that we aren’t going to talk about?

The BCA will do everything in its power to ensure that politicians are not allowed to get away with behaviour that is clearly not in the nation’s best interests.

Tax reform may not be the answer to everything but without it we won’t have the economy, the jobs and the living standards people aspire to.

3. Skills

This brings me to the skills imperative.

In the context of massive technological, demographic and global economic disruption, a comparative advantage for Australia must be to train, attract and retain the best and brightest people in the world.

As a country and as companies we have to come to terms with how we are going to prepare our people and workplaces for a very different world.

How many companies are actually thinking about how they are going to organise for workers to retrain and re-tool throughout their working lives:

○    as technology changes

○    as older people remain in the workforce for longer

○    as young people start to participate earlier combining work with study.

We need to create an education and training system that works as a continuum which spans the majority of a person’s life.

If we undervalue any part of the continuum, like VET, we abrogate our responsibility as a nation to maximise the potential of individuals and the nation.

4. Regulation

The last of my anchor areas is deregulation and I simply want to put the question to you - what is the purpose of red tape reduction?

Is it about reducing the number of pages of regulation?

Is it even about cutting dollars out of compliance?

Or do we need the deregulation agenda focused on making the Australian economy more agile?

Making it easier for us to adjust and adapt to stay competitive in a vastly more competitive world.

Every politician from every political party promises to cut red tape.

But we need them to focus on areas of deregulation that are actually going to increase our agility in a global economy that's changing at an unprecedented pace and scale.

Look at the workplace relations system, look at retail trading hours – and tell me if the current arrangements are in sync with the modern competitive economy?

Regulation is an important and legitimate tool for setting and enforcing standards.

But before we regulate, let’s be sure there’s really a problem, specifically what the problem is and, if it’s needed, co-design the regulation with the people and sectors affected.

And recognise that sometimes the best approach to fixing a problem is to do nothing, particularly in sectors that are undergoing massive transformation.

Rather than reducing the number of pages, this is what a sensible deregulation agenda should be about.

The voice of business

Let me conclude by saying that business needs to speak with one voice on these issues, externally and within our own companies.

If current trends are future trends many of you will become CEOs.

It is not enough for the BCA to guide policy makers and the broader community down this path. You need to be vocal also, and the message we convey needs to be a consistent one.

So, I’ll finish by returning to the budget.

We need to speak with one voice on the need for this budget to pass.

Not because it’s the best budget in the world, not because it solves every problem but because it takes the country some distance in the right direction.

○    It needs to pass to give us the headroom to get on with the other essential reform tasks I've mentioned.

○    It needs to pass because if we have another 12 months of obstruction and denial, the consequences for business and consumer confidence will be significant.

Our call to the Senate has to be to approach the budget constructively.

By all means, improve measures that can improved. Focus improvements on even better targeting and protecting the most vulnerable people in our community.

But do it with a view to passing this budget in a timely way.

And the government must then view the budget’s passing as the beginning of the beginning of what needs to be done.

This cannot be a political game people play with a view to holding on to their own jobs.
 
○    It’s about the jobs in our companies.

○    It’s about jobs in the small businesses that every politician says they care so much about.

○    It’s about the jobs of public servants who work hard to provide essential services that ensure people’s wellbeing.

○    It’s about the jobs of people in the community sector who build capacity, particularly among the most vulnerable groups.

Importantly, it’s about the jobs of the future – the jobs we can’t even imagine. And making sure that people down the track aren’t jobless because of decisions we haven’t been prepared to take.

Because make no mistake, we have a long way to go to really fix our fiscal position and grow our economy.

This will involve a difficult, sometimes painful, transition and difficult and courageous decision-making.

In this endless discussion about fairness, to not confront the Australian people with the reality of that transition is perhaps the greatest unfairness of them all.