Check against delivery.
Thank you Laurie.
My thanks to the National Press Club and to colleagues from across the business community and other sectors, who have taken the time to be here today.
In two weeks time the Treasurer will address this Press Club having brought down the 2015/2016 Federal Budget.
For some weeks now I have been arguing that it is time we decoupled the process of major policy change from the Federal Budget process, and addressed it through the rigour of Cabinet analysis and debate, together with community consultation.
This is in no way intended to diminish the urgent need for the growth in expenditure to be reined in, but policy reform, tackled only through the lens of the budget process, is failing the community.
So I am not here today to talk about the Budget. Instead I would like to talk about a ten year plan for adaptation and growth.
The Intergenerational Report (IGR) tells us we need a new plan for the country, not just a process to improve our fiscal position.
Unfortunately, while the IGR presented us with the challenges of expenditure, it did not confront the context for change - the extraordinary disruption that is now upon us.
We are experiencing what physicists would call a 'phase change' in our economic environment, where previously held assumptions about causal factors and relationships no longer seem to hold:
• we see debates around secular stagnation
• countries issuing bonds at negative interest rates, and;
• weak investment in spite of very low real and nominal interest rates.
Even the recent past is no longer a basis for predicting the future, and we are in a constant state of revision as to what constitutes normal.
As fast as we gain understanding, the disruptive forces seem to change the rules.
Given this context, I would like to canvass four themes:
• the underlying drivers of disruption
• the implications for policy, and on our reliance on the traditional growth tenets of productivity, participation and population
• the need for a fundamental reset in the philosophical underpinning of our major spending programs – health, education and retirement income, and;
• finally the need to reframe our leadership model, which is so obviously struggling with the task at hand.
These themes provide the building blocks of the plan.
No Ordinary Disruption
First, to the forces of disruption.
As a soon-to-be-released publication from McKinsey states, this is no ordinary disruption.
We have reached the point where a confluence of trends, digital disruption, shifts in the locus of economic power, globalisation and demographic change - each of which on their own would rank among the strongest economic forces the global economy has ever seen, are casting our world into a completely different reality.
At the heart of this disruption is connectivity. Mass connectivity.
This connectivity has enabled human generated data, and now machine generated data, to flood through our global networks of fibre and copper.
Combined with orders of magnitude increases in computing power, what and who is possible to know is almost limitless. And in real time.
We thought that the connectivity enabled in the mid-nineties by the fixed line Internet and browser technology was disruptive; that was before 2007, when the mobile internet became a reality with the first smartphone.
But that is nothing compared with the disruption we will see with the advent of the ‘internet of things.’
By 2030 there may be 50 billion devices connected to the internet, and the average home is expected to have more than 20 such devices.
So, why is connectivity so disruptive?
Because innovation happens most powerfully at the interface. The more interfaces, the greater the potential for innovation; and the more connectivity the more interfaces.
These interfaces can be human to human, human to machine, and now even machine to machine.
Connectivity is changing the power relationships between consumers and companies; it is fragmenting supply chains and disrupting business models.
It is changing the nature of work and workplaces, and the shape of cities and urban environments. It is also opening up new possibilities and new frontiers of discovery.
Let me give you some data points on trends enabled by mass connectivity:
• In America, 40 per cent of the work force or 53 million people, are now freelancing through new business models like Airbnb, Airtasker and Uber. So what is this doing to patterns of demand where income security is uncertain and long term expenditure commitments can't be made?
• Online markets are supplanting companies as an organising force - representing a material risk transfer to the individual. Uber doesn't own a single vehicle; Airbnb doesn't own a single bed.
• There is growing momentum in the sharing economy, as part of the broader theme of the so called Circular Economy - this is good news for resource sustainability, but threatening for business models based on ever growing consumption.
• Machines are now learning - advances in artificial intelligence and neural computing, combined with the connectivity possible through cloud computing, mean that machines can now be said to learn, and it turns out that they learn better together, which they can do in a connected cloud environment.
• Just last week, Google announced that its search algorithm will prioritise 'mobile friendly' websites when people search using their smartphone or tablet: desktop only sites will still appear but ranked lower - what will this do to Australia's competitiveness when 66 per cent of the nation’s websites are not optimised for mobiles, including 51.5 per cent of ASX 200 companies?
• And finally, on competitiveness, connectivity has enabled global supply chains, with 70 per cent of global trade now in intermediate goods and services and capital goods, not in finished goods - so while we were intent on preserving an automotive industry focussed on producing finished vehicles, others recognised the opportunity in manufacturing components for supply into global niches.
No business model is immune from impact. This applies also to country business models.
My contention is that, given the disruption of a hyper-connected world, many of our policy settings are simply not fit for purpose.
They have exceeded their design tolerance limits.
The Three P’s
That takes me to my second theme - the three P’s.
If we are to adapt to these disruptive forces, we must do more than rely on the simplistic exhortations to focus on productivity, participation and population as the route to growth.
The fact is that these are lag indicators and are not policy amenable in their own right.
Productivity, in this age of disruption, is achieved through innovation.
Innovation requires the mobilisation of an entire ecosystem:
• the building of knowledge infrastructure through both research and business
• a skilled work force
• creative workplaces
• business models built around the customer and competition
• engagement in global supply chains
• a culture of experimentation and entrepreneurship
• contestability of government services, and government acting as a demanding customer in its procurement activities.
It is time for government, the union movement and business to come to a meeting of the minds as to what improving productivity actually requires.
Use the word, and it is incumbent on people to engage in the complexity and the detail of what it entails.
Participation. We talk endlessly about participation, but a precondition for participation is that the underlying jobs are there.
While we are debating the minimum wage and penalty rates, jobs are moving to Airtasker or being replaced by machines.
If 47 per cent of total US employment is at risk of being automated using artificial intelligence, we need to move urgently from a discussion about protecting the jobs of today, to creating the jobs of the future.
This includes ensuring that there is a workforce skilled in the attributes required by business.
Precision welders and robotics mechanics will be more useful in the growing advanced manufacturing sector than yet more law graduates for whom there are no jobs.
There is no more disturbing evidence of the potential dislocating effects of the disruptive forces than the fact that we now sit with around 400,000 young people neither in work nor full time study.
This would suggest that it's not a participation problem, but a jobs and skills match problem we have on our hands.
Population. The third P.
Australia’s population has grown the fastest among major OECD economies. It has grown by almost 25 per cent since 2000. And its composition has changed dramatically.
The population policy imperative underpinning growth can’t be confined to the level of population and migration quota settings.
It must include:
• the planning and prioritization of infrastructure
• the design and liveability of our cities and regions
• the affordability of our housing, and;
• the preservation of our environment.
If these aspects are not integral to a discussion of population policy, an increasing population may result in a net cost and hence drag on growth.
The three P's probably lend themselves to a speech in their own right.
But they are an example of how our lack of nuance, lack of sophistication, lack of granularity and lack of context in policy design, are letting us down.
Nothing short of a philosophical and mindset shift is required.
Health, Education and Retirement Income
So let me now turn to three public policy areas that exemplify the degree of change required: health, education and the retirement income system.
I have selected these because addressing them will have a catalytic effect on our capacity to respond to the forces of disruption and they also relate directly to the three P's.
They are input lead indicators to the abstract lag indicators.
They are central to the human interface with disruption, and will determine whether individuals can take advantage of this disruption or will be displaced by it.
That is, if we manage these properly, with the required degree of policy granularity and design sophistication, our productivity, the contribution of population growth and our capacity to increase participation will dramatically improve.
It will take a decade of transition but it will mean that we will be designing policies that are fit for purpose for 2025 and beyond.
Happily, they also represent 43 per cent of total Commonwealth and state government expenditure. So getting them right will be the best way of securing a better fiscal position.
I am not going to talk about the technical policy change that is needed in each of these areas.
That is what we always tend to do - we begin with a solution, like a price signal, or a fee change, or an eligibility change, and it's the wrong place to start.
We have to start by asking ourselves “what is the problem we are trying to solve, what outcomes are we seeking and what do we want to move from and to?”
If we do not adopt this architecture in our approach to the big policy issues, we will continue to have the community reject what they perceive to be disconnected and short sighted interventions.
Health – Philosophical Shifts
In health, we need to change the mindset from one of fixing people when they are sick, to enabling them to stay healthy for as long as possible.
Put bluntly, the focus needs to shift from the second 50 years of life, to the first 50 years; that is, preventing the things that are preventable and preserving constrained resources for those which are not.
For example, the emerging research into the microbiome - that 1.5 kilograms of flora (bugs) which reside predominantly in our gut - suggests that the first 1000 days of life are even more determinant than we realised in terms of genetic expression, a robust immune system, and lifetime avoidance of conditions such as arthritis and obesity.
These huge advances in science will allow us to predict and prevent conditions, and can be applied in conjunction with technologies which empower consumers to take control of their health care from a very early age.
This means we need to move the system from a transactional fee for service model to a fee for outcome model that offers providers the incentives to keep people well as part of a more shared responsibility model for health.
We must shift our philosophy from a provider and institution driven system, to a person or customer driven system.
As NIB’s Mark Fitzgibbon says, this will facilitate an explicit conversation, as a community, of what we are prepared to 'trade off' to accommodate increased spending on health.
A customer driven system would also move us from an institutionalised setting for dying, to a more dignified end of life.
Why is it that 70 per cent of people in Australia want to die at home but only 14 per cent have this wish fulfilled?
Education – Philosophical Shifts
Turning now to education and training.
We must move away from the notion that work is something we begin after a long period of study, to one where work is integrated with learning.
Here, the philosophical shift is to move from a system which has a rigid discontinuity between education and work, to one which is more of a continuum, enabling simultaneous engagement in education and work for all from Year 11.
The discontinuity between education and work was perhaps relevant when, for most, formal education ended at age 15, only 10 per cent of students went on to university and degrees were three years in duration.
It is not helpful now, with over 30 per cent of students at university and degrees of four and five years.
Given that the late teens and early twenties is a period of very high innovative thinking capacity, not to have those young people participating in the workplace in some way is a waste of intellectual capital and a loss of productive capacity.
Coupled with this philosophical shift would be a more explicit recognition of the stock of skills intrinsic to employability.
Given that an estimated 75 per cent of the fastest growing occupations, including those in the creative industries and humanities, will require STEM related skills and knowledge, the imperative for introducing these foundational skills into the primary and pre-primary curricula should be unassailable.
By STEM skills, I mean maths and science, yes, but also computer coding, computational thinking, problem solving and design thinking.
As it stands in Australia, however, the gap between the digital literacy of our young people and that of our competitor nations is increasing.
If we want increased productivity and participation, we need urgently to embark on a ten year plan to close that gap.
This will be essential to tackling structural youth unemployment.
In order to achieve these philosophical shifts, we need to move our national preoccupation with class sizes needs to be replaced with a national obsession with teacher quality, teaching standards, learning methods and curriculum.
Finally, on the so-called retirement income system, the philosophical shift we need is to rethink the current concept of retirement.
Retirement has moved from being seen as the brief interregnum between finishing work and dying, usually a period of around five years given life expectancy at the time; then to a reward for a lifetime of hard work; to a point where now it is often planned as an entitlement to an extended phase of life marked by a focus on leisure, and underwritten by access to the aged pension.
Through entrenching the concept of retirement we have again created an artificial discontinuity, this time between work and the mature phase of life, and have compounded the problem by extending what was designed as a financial safety net, to a broader entitlement.
A fundamental change in philosophy will underpin a new social contract between government and citizens as they age.
If we think the only task is scrimping and saving on eligibility and concessions, versus harnessing the potential and the very real wish people have to continue to contribute, we will have missed the point.
This is about valuing people and about recognizing the dignity and belonging that flow from continuing to have an appropriate form of paid work.
This means a paradigm shift about people working longer and training later in their life as the types of jobs available, and the type of work they can do, change.
The role of government would be to provide an adequate safety net, but more importantly to assist people to become, and stay, independent by fully participating in the economy.
To recap, I have proposed a fundamental change in philosophy in three core areas of policy: in health; education; and retirement.
These are complex policy areas, which have inevitable intersects with both tax and federation reform, but too often we are seduced by their complexity and trapped by their detail.
I do passionately believe that the starting point to navigating our way through this complexity is to gain agreement on philosophy. The right philosophy also offers the best road to a degree of bipartisanship, and an end to damaging and costly policy reversals.
I am in no sense underestimating the degree of difficulty here, nor suggesting that the proposed reorientation of philosophy is the answer: it is however the first step to asking the right question.
It is difficult to convey the level of anxiety and urgency we should have in the face of the disruptive forces I started today by describing.
The ageing of our population combined with the impact of hyper-connectivity will literally overwhelm us if we don't rapidly increase our rate of adaptation.
I am not exaggerating when I make this point.
The discussions at the Davos Forum in January, for example, were very sobering.
Many country and business leaders expressed real fear about their ability to manage the rate of job displacement and its impact on communities.
They are afraid because they feel unable to imagine the future given the rate of change.
They are also afraid that the rate of change in technology now exceeds our capacity to adapt to it. But adapt we must.
If we embark on a ten year transition now, we might just have policy frameworks fit for purpose by 2025. If we do not, we face certain loss of standard of living and social cohesion.
The degree of philosophical shift I have described will require extraordinary levels of leadership, from government, business and the community.
In the first instance, however, the leadership must come from our elected representatives, and this includes the opposition, minor parties and independents, who are all part of our governance structure.
The role of these representatives is to provide leadership, not to be re-elected.
It must be leadership characterised, not by positional power and, as Jennifer Hewitt notes “a preoccupation with the political present, but by strong personal values, consistency, respect and transparency.”
Instead of dealing in hollow assertions of certainty, this leadership must admit to doubt, while providing hope.
It is the role of political leaders to engage with the community, and to mobilise the aspirations we all have for ourselves, our children and our grandchildren.
These leaders must lead the conversation on why we need to adapt through a new social contract, and they must frame the transition path over the next decade.
The community is absolutely ready for this conversation.
Research undertaken by the Business Council has revealed that the community knows we have had a privileged position, and 83 per cent understand that the worsening situation will affect them.
However, the concerning sentiment which has come through strongly is that the community has a very low expectation of the ability of political leaders to manage the huge changes underway; to provide a strategy and to execute.
Only 13 per cent believe the management of our finances is good, and for an unprecedented 18 per cent, the competency of government ranks as a major concern.
They want to know that the risks can be managed.
The researchers noted that this level of concern is unprecedented in over 30 years of polling in Australia.
This loss of reputation and trust in our governance model has profound implications for our democracy.
We are already experiencing the first order effects:
• one term governments
• minority governments
• poll to poll decision making
• disruptive policy reversals, with newly elected governments claiming as ostensible mandates what is actually an expression of underlying frustration and cynicism.
Filling this void we also have, as one commentator so aptly put it, the emergence of a derivative market in politics through the media, particularly social media.
Social media is amplifying the disconnect between the community’s expectations of leadership and the observed behaviour.
This turbulence represents a huge loss of value to the country.
Such a loss would be unacceptable in a business context; it is even more unacceptable when it comes to the national interest.
So before we talk about new philosophical bases for major policy areas, and the negotiation of a new social contract, it is clear that confidence must be restored in the governance model for the country.
From the government of the day, there needs to be evidence of respect for process, particularly the Cabinet process and of the rigorous review of, and community consultation over, policy changes, and then action within appropriate timeframes.
From those elected representatives not part of the government of the day, there needs to be constructive debate and probing of policies.
But no-one has given the Opposition, minor parties and independents the mandate to obstruct.
It is harder to be thoughtful in opposition than to obstruct, but to deliver the latter rather than the former is to abrogate the critical role of the Opposition in our democracy.
Above all, we need to see that the personal priorities and values of our elected representatives are congruent with what is truly in the national interest, not in their personal interest in being re-elected.
Ironically greater transparency reduces electoral vulnerability, and confidence in competence is a major driver of the national vote.
This is the leadership challenge at this time of no ordinary disruption.
While there is much talk about the need for a new narrative, what does this actually mean?
It is not a new marketing strategy or a more compelling ‘to do’ list.
We need a transition plan which reconciles the concerns people have given the rapidly changing environment confronting us today, with our hopes for the future: for ourselves and for our children.
Leadership has to define the path between current reality and future aspiration, one that requires working through these core policy areas, approaching them from a different philosophical starting point and setting them on a 10-year path.
Because that’s how long it will take to make them fit for purpose to preserve our well being as a nation.
View the transcript of the Q & A section of Catherine Livingstone's National Press Club Address here.