The Hon Kevin Rudd, AC
26th Prime Minister of Australia
University of Melbourne
27 August, 2019.
Over the course of the coming week, I am delivering a series of public lectures on alternative visions for Australia’s future. I’m doing so because I believe we have become the complacent country – complacent about our economic future, the future of our social fabric, complacent about our climate and environment, complacent about our future in an increasingly challenging region and world given China’s rise, and complacent too about the functionality of our democracy. I believe we have gradually become a nation adrift, untethered to any defined national vision capable of carving out our country’s future in an increasingly uncertain world.
These lectures are based in part on a long essay I wrote earlier this year, well before the last federal election, entitled “The Complacent Country.”
I also sought to outline the foundation stones of a progressive vision for our country’s future, anchored in a definition of our national identity, our national values and our core national interests.
I argued we had to be clear-minded about both these things before defining an effective national policy strategy to secure our country’s future, and that if we failed to do these things first, we will permanently be in the business of revisiting the ultimate premises on which such a national strategy rests.
Ten Major National Challenges
As for the major structural challenges our nation faces for the future, I argued there were ten:
One, the unfolding, unprecedented global technology revolution, on the one hand challenging Australia’s future international economic competitiveness unless we become major innovators ourselves in these next generation drivers of global prosperity, while on the other hand also facing the profound employment, social and economic instability that will flow to traditional industries from technological disruption itself.
Two, the profound challenge of sustaining strong, long-term Australian economic growth, given the ageing of our population, static workforce participation rates and negligible productivity growth, compounded by a declining bipartisan consensus on long term migration flows, inadequate infrastructure investment and, as noted above, a global technology innovation revolution that is leaving Australia behind.
Three, the clear ravages of climate change where our national and global actions to mitigate greenhouse gas emissions are woefully inadequate to prevent unsustainable temperature increases, increasingly frequent extreme weather events and with grave consequences for long term global food and water security, the forced migration of peoples, and, within Australia itself, the sustainability of the Murray Darling Basin.
Four, the failure to prepare sufficiently for the ageing of the population – both though absence of fundamental health, hospitals and aged care reform to sustain a high quality health system for our people, while also managing the costs of the system within fiscally sustainable limits, given the failure of successive governments to sustain the comprehensive reforms in preventative, primary, acute, post acute, aged care and digital records systems introduced in 2010; compounded by a failure to sustain retirement income reform by continuing to increase the superannuation guarantee levee to 12%, thereby underpinning long-term retirement income adequacy and reducing future dependency on government pensions.
Five, a failure to conclude the national reconciliation process with indigenous Australians through sustained investment in the closing the gap strategy and the completion of constitutional recognition of our first peoples.
Six, a fragmenting global order driven by a rising China, an increasingly isolationist America, a divided Europe, a yawning global leadership deficit in an increasingly “G-Zero” world, and the growing danger of a return to pre-1945 notions of survival of the fittest.
Seven, the increasing polarisation of our region between Chinese and American spheres of geo-strategic and economic spheres of influence, reducing the freedom for policy manoeuvre for regional states as they seek to secure their own futures;
Eight, the growing wave of people movements across the world by those escaping political, economic or climatic insecurity in their countries of origin – generating in turn politically and racially charged reactions in the countries they escape to that go to the heart of local political concerns on the deepest questions of collective cultural identity.
Nine, the polarisation of our democracies between rich and poor and an increasingly struggling middle class; the failure of much of the traditional politics of the centre-right and the centre-left to deliver sustainable solutions to fundamental problems; compounded by a national media split between Murdoch’s far right, the faux left and the screaming, balkanisation of social media, destroying any real possibility of a political commons through which to conduct reasonable, national conversation; and though all these factors, bit by bit delegitimising democracy itself in the eyes of the people.
Furthermore, our already troubled democratic institutions are faced with an even more fundamental challenge. They are having to deal effectively with these complex, unprecedented challenges simultaneously. While at the same time, the legitimacy of the national and international institutions charged with dealing with these challenges, is itself under challenge.
Elements of a National Vision – Our National Identity, Values and Interests
I also argued last night that we have to be equally clear-minded about the fundamentals of a national vision to respond to this considerable array of challenges.
Clear about our national identity embracing all Australians – indigenous Australians, traditional Anglo-Celts as well the more recently arrived – anchored in laws that unite us in both our individual rights and our common responsibilities, as opposed to narrowly defining us in terms of race, religion or a particular monoculture.
Just as we must be clear-minded too about our common values – values of individual freedom, the importance of family and prosperity for all; tempered by our other-regarding values of equality of opportunity, compassion, community and environmental sustainability; all undergirded by values of our common security.
And in addition to being confident about our national identity and our enduring national values, also to be clear-minded about our core and continuing national interests. These include the defence of our territorial integrity; the maintenance of our political sovereignty against internal and external threat; the building of our national prosperity so that average incomes rise and our national capabilities continue to strengthen; the protection of our natural environment including our climate so that we can sustain our population and our biodiversity; as well as preserving a global rules based order that helps protect our values, enhance our international security and economic interests and deliver on global climate change responsibilities, which would otherwise be impossible to do on our own.
These make up the foundation stones of a progressive yet pragmatic national vision on which basis we can begin to fashion a credible national policy strategy to respond to the great challenges we now face. Without yielding on who we are as a people. Nor on the values that have long-defined us. While still pursuing a rigorous, disciplined approach on how we prioritise the policies we need to advance our enduring national interests.
The Future of the Australian Economy
Today I want to address alternative futures for our national economy. I want to address the economic pressures now bearing down on us from abroad. I want to address how best to prepare for the real risk of a recession in the year ahead, because a failure to do so would set us back a decade in marshalling the political capital necessary for longer-term economic reform. But importantly, I want to address the future drivers of Australian growth, given the dangers of declining international competitiveness while simultaneously dealing with the unavoidable imperatives of sustainable development, most critically climate change.
The Risk of Recession
Global economic storm clouds are now gathering. Some of the reasons have to do with the nature of the business cycle. Some the new fragilities of the international financial system. Others are patently geo-political.
The United States is already ten years into its current growth cycle. That is the longest in modern American economic history. Markets are anticipating a correction. The stimulatory impact of the Administration’s tax cuts has already washed through, although their economic impact was less than what the Administration promised. The Federal Reserve has historically low interest rates. But there is a general consensus across the west that the classical utility of monetary policy instruments to further stimulate economies have largely been exhausted. Just as there is a view that non-classical approaches through Quantitative Easing, recently used extensively by central banks in the US, Japan and Europe, cannot be taken further because the effect would now more limited than before.
Another factor generating significant headwinds for the global economy is growing geo-political risk. There is increasing evidence that the risk and reality of trade protectionism, particularly between the world’s two largest economies, China and the US, is having a profound impact on business and investor confidence in these countries, and across the globe. Markets are also factoring in expectations from the broader impacts of protectionism, where global trade growth itself is slowing, acting as a net drag on global economic growth. This is new. Historically, trade has led economic growth, rather than the reverse. Furthermore, the bewildering daily array of tweets, statements and threatened executive actions by the US President, coupled with Chinese retaliatory action, is increasingly shredding market sentiment. And that’s before we factor in other significant political and geo-political risks including Brexit, the looming Italian sovereign debt challenge given the rolling crises of Italian politics, the impact of US-Iran relations on Gulf oil supplies, as well as the ever looming crisis concerning North Korea’s nuclear program. Indeed, political and geopolitical risk is now back with a vengeance, creating an all pervasive anxiety across financial markets, investors and the traded sector of the global economy.
Taken together, these various factors have increased the real risk of US, Japanese and European recessions in 2020. Chinese growth is also likely to be depressed considerably by recessions in these countries, as well from the direct impact of the trade war on China’s export sector, and declining domestic business confidence because of problematic domestic policy settings for Chinese private firms. The recent inversion of the U.S. government bond yield curve, which historically has been a reliable predictor of impending recession, along with persistent negative yield curves in Europe also points in a negative direction. The risk of recession in Australia, next year, is significant. In which case the question for the government is how well prepared they are for this in order to prevent it, given the economic carnage it would produce.
There are also fresh concerns about the global financial system. The reforms implemented by the G20, the Financial Stability Board and the Basel Committee after the Global Financial Crisis have been relatively effective so far. Capital adequacy ratios were improved. Stress testing of systemically significant banks has been conducted. The regulators have sought to address of the problems of “too big to fail”. But other systemic problems have emerged as debt has been increasingly transferred to shadow banking sector balance sheets, particularly in the form of collateralised loan obligations or CLO’s, a growing, global $600 billion business operated in large part by private equity firms, while the bulk of CLO’s are in turn owned by the banks themselves. That is not to state that a crisis is imminent. But it is to state that these financial instruments largely fall outside the regulatory parameters laid out for the international financial system after 2009. Should a problem emerge, the cold hard reality is that the financial capacity of sovereign governments to intervene in markets to save such institutions is much more constrained than a decade ago.
How Should Australia Respond to the Risk of Recession
Given the risk of significant recession abroad, and the continued fragilities in the global financial system, Australia should reflect carefully on the lessons from a decade ago when we last faced this challenge, and on the series of coordinated policy actions, both at home and abroad, that managed to avoid it. We should reflect on which of these conditions still exist, what is different, and what new approaches may be necessary.
In 2008-9, we faced the reality of a global financial crisis, collapsing financial institutions, global recession and the real prospect of a second global recession. In response:
- we undertook unprecedented fiscal policy intervention;
- we used major monetary policy stimulus;
- we took radical actions to sustain confidence in financial institutions;
- we coordinated stimulus strategies with other G20 economies;
- we avoided trade protectionism through combined G20 action;
- we benefitted from continued growth in emerging economies, especially China; and
- we were a government politically and psychologically prepared to act when faced with a deep economic crisis, rather than just waiting for the market to mystically “self-correct”, because we not prepared to stand idly by and watch mass unemployment, small business collapse and the social catastrophe that results unfold before our eyes.
A decade later,
- there is less fiscal policy room to move across all major economies;
- interest rates are already near zero, meaning traditional monetary policy mechanisms are not available;
- we are not alert to emerging new challenges to financial system stability, including the explosion of CLO’s;
- the G20 is no longer functioning as an effective policy coordination mechanism, in part because of erratic American leadership;
- there has now been an outbreak of protectionism of the type which the G20 a decade ago explicitly prohibited and largely enforced;
- China too has less capacity and political appetite for the scale of fiscal stimulus which it embarked upon in 2008-9; and
- the current Australian government, rather than returning the budget to surplus over the last 3-6 years when it would have been appropriately counter-cyclical to do so, and as it solemnly promised to the Australian people during the 2013 and 2016 elections, is now politically obsessed with returning the budget to surplus in 2019-20 when it may well be pro-cyclical to do so, thereby exacerbating any slide towards recession.
In other words, we have a government at present with its eyes caught in the headlights, transfixed and immobilised by the fear of its own political obsessions and commitments, seemingly oblivious to the grave dangers of recession now confronting us, and intellectually rigid in its response to rapidly changing global economic circumstances. The government of course will claim that it has introduced significant tax cuts, that the RBA has further reduced interest rates and that APRA has further relaxed the criteria for bank lending. These measures, however, are already factored in within the context of the continued softening of national and global markets, and as we face the growing threat of a significant and synchronised global economic downturn in the year ahead.
The government will therefore require much greater intellectual and policy dexterity to anticipate and respond to this unfolding crisis than we see at present. Instead we see further evidence of political and policy complacency, part of our deepening national disease as the complacent country. The government must revise its approach.
- Canberra will need to double down in its “special relationship’ with Washington to fight against the scourge of protectionism which has become the leitmotif of the Trump Administration and its tariff-obsessed President. What’s the point in having such a close relationship if you can’t in fact use it to good policy effect? Or is it all just about political schmooze?
- Canberra will also have to examine new, innovative approaches to stimulating the economy, including the radical possibility of issuing transfer payments drawing on the RBA’s own balance sheet, on the basis of earlier work of economists including Keynes, Friedman and Bernanke.
- Canberra should also start behaving like a grown-up in the G20 to make it function as the systematic, global macro-economic policy coordination mechanism it was designed to be when we created it during the last crisis, working with a small number of like-minded countries to that effect, rather than simply using it as an episodic forum for national political position-taking.
Unless we are prepared to deal with any upcoming recession effectively, then the rest of my remarks in this address on the imperatives of long-term economic reform will be rendered irrelevant.
The Future Drivers of Australian Economic Growth
The core message I want to convey in this address is that long-term economic growth for Australia is not a given. It has to be earned. Earned through the combined efforts of our entrepreneurial leadership, our working families and effective public policy. Indeed, the domestic economic headwinds are already strong: an ageing population; static wage growth and declining productivity growth. There are five areas of reform that should become national priorities. They are:
- Small business tax reform;
- Mandating superannuation funds to invest 1% of their total portfolio in venture capital to take Australian branded tech innovation to market;
- Radically investing in STEM Education, Training and Research;
- Establishing a New Jobs and Training Agency to manage the impact on work of the disruptions and opportunities flowing from AI; and,
- Providing a new mandate for Infrastructure Australia to plan for a Big Australia and using new Nation Building Bonds to fund Australia’s future infrastructure build;
Tax, Small Business, the Global Complacency of our National Corporate Culture
On growing the economy, the essential challenge is not tax. That is the consistent conservative script. According to the US Congressional Budget Office, Australia has one of the lowest levels of effective business taxation in the OECD. If there are fresh tax measures to consider, it should be to reduce the effective tax impost on small business so that they have the incentive over time to grow into the medium and big businesses of the future. The effective tax mix and rate for small business should slowly taper up to the normal corporate rate once they become confident of their future in the marketplace. The uncomfortable truth, as revealed by the 2018 Royal Commission into the Financial Services Industry, is that the Australian banking industry have by and large had a predatory culture towards small business finance. That must change. The Australian finance industry more broadly must realise that their purpose is to serve the needs of the real economy, not just serve themselves, by over-charging for the services they say they deliver, while under-financing the sustainable aspirations of the small business sector. The finance industry is licensed by governments to provide these services, not just to provide themselves with record levels of remuneration which bear little relationship to the growth of their customers’ businesses. This too must change. A seminal challenge for the Labor Party is to become the clarion-clear voice of Australian small business through reducing the regulatory burden of the sector while also minimising the tax impost on them. Small business are the “little guys” of the Australian economy who provided the bulk of the nation’s employment. They are a natural constituency for the Australian Labor Party. We should champion their success.
Australian big business has always been more than willing in their criticism of governments – in particular Labor governments and the unions. Indeed their peak bodies have been critical of most other institutions and influences at work in the Australian economy – other than themselves and their own members on our national economic performance. That of course is their right. But its time big business also had it served back to them on their own international competitiveness. Against international benchmarks on management, innovation, entrepreneurialism, export orientation and R&D, much of Australia’s corporate leadership does not measure up to most their international competitors. This stands in stark contrast to a self-congratulatory culture among many corporate leaders, despite sub-optimal long-term growth strategies, a general failure to grow market share through exports and a singular inability to grow global brands. It also contrasts with generous remuneration structures which are insufficiently linked to long term corporate growth, but based instead on short term share market capitalisation.
If you were to survey the BCA, for example, on the proportion of Australia’s top 100 firms and ask what proportion of their chief executives or board members have served in a management positions in Asia (the largest centre of global growth or the 21st century) the answer would be thin. Australian corporate elites have remained, in large part, a self-satisfied, white, male elite for whom Asian markets have proven to be just too hard. Yet we are the only western country located on Asia’s doorstep which should provide us with a major natural advantage. But the uncomfortable truth is that beyond commodities, education and tourism, our corporate performance in the world’s largest emerging markets in China, Japan, India and next door in Indonesia has been statistically abysmal. Beyond Asia, the fact that Australia’s major corporates have failed to generate a single, universally recognisable global brand since the war says everything.
There is something deeply lacking in the entrepreneurial culture of much of Australia’s major corporates. Australian senior corporate remuneration structures need to be adjusted to reward national and international benchmarking performance. Asian Australians should be appointed in large numbers to the boards of Australian firms and to senior management positions to build bridges to Asian markets. And innovation and enterprise should be taught in the nation’s secondary schools so that school and university graduates conclude that its natural, not unusual, to start up a business, rather than simply flushing the nation’s talents down the drain by always sending our brightest and our best off to the compliance-based professions of law and accounting. Much of Australia’s business leadership, despite reflexively laying the blame for their own corporate performance at the feet of government and the unions, in reality leads the nation in our self-satisfied culture of national complacency.
One further impediment to economic growth is the rolling failure of Australia’s venture capital markets to back Australian innovation. The loss of Australian IP abroad is the continuing story of much of our post-war economic history. WIFI is the most recent tragic case in point. Developed in large part in Australia, this critical innovation was lost abroad in 1999 because of a failure to locate sufficient venture capital to take it to global market. Imagine the global branding opportunities for Australia if this had become one of ours around the world. Everybody uses WIFI. It could have become our very own Apple. The loss of these opportunities in IT, Biotechnology, Nanotechnology, new materials research, AI, block chain and big data must stop. We have five of the world’s top 100 hundred research universities. We also host world-class bio-medical research institutes in our major cities. They produce world class research and innovation. Yet the constant failure lies on the entrepreneurial and venture capital side in taking world-class innovation to its full global market potential.
Governments cannot mandate the banks to adopt a more creative approach to national wealth generation. But because the nation’s superannuation funds both public and private, and the wider financial services industry benefit enormously from a legislated superannuation guarantee levy, the time has come to consider mandating a small percentage of their combined investments ( say 1%) to be directed to Australian venture capital projects in order to commercialise Australian-sourced innovation. Although representing a tiny amount for each fund, given the overall size of the industry, in aggregate this would create sufficient critical mass in the venture capital industry in this country to meet the demand of our innovators who are hungry for new investment. This could make a strategic difference if funds are forced to work hard to find new investments from our thousands of innovators in generating new sources of long-term wealth for their members. The funds, of course, will scream about the impact any such directive would have on their fiduciary duty to maximise returns to policy holders. The funds scream less, however, when these returns are compromised by the fees structure these same fund managers happily impose on a generally unwitting public.
The Future of STEM
On the impact of technological change on existing industries and employment, the challenge of course is large. Given that these changes are likely to gather in pace rather than the reverse, there are three types of responses necessary for Australia. The first is a large scale re- investment in STEM subjects (i.e. science, technology, engineering and mathematics) across the school, further education and higher education systems. All other serious countries are doing this. Australia, according to PISA rankings, is now falling behind. This must be urgently reversed as a strategic national priority. Second, the creation of a critical mass in Australian venture capital funds, as recommended above, is urgent. This is the only way new industries and new jobs will be created.
Labor Force Displacement from Technology
Given the growing likelihood of major employment disruptions though automation, IT and AI, Australia will need a new National Jobs and Training Agency to provide retrenched or otherwise longer-term unemployed workers with a universal training guarantee for newly emerging industries, as well as placing retrained workers in new jobs within a specified period of time. At present, the training and employment functions of government agencies are separate, underfunded, and ineffectively incentivised. They must be brought together with a new, demanding mandate, and with the resources necessary to give effect to that mandate. Failure to do this effectively will result in a growing generation of unemployed and alienated Australians who no longer have a stake in the country’s future.
National Population Policy – A Big Australia
Finally, and perhaps most controversially, I believe we must aim to build a Big Australia. Neither maximum workforce participation nor productivity growth alone will generate an economy large enough and a workforce young enough to pay for the country’s future. The ageing of our population is real. The impact on future retirement income, health and aged care costs will be prohibitive. These cannot be wished away. This leaves to one side the future cost of our national defence. For Australia to sustain its future standard of living and meet its future social policy and national security policy needs, we will need a much larger population. That’s why we need to plan effectively for an optimum population size. We should aim at doubling our national population in the second half of the century through an enhanced skilled migration program. Countries of around 50 million, so long as their other national infrastructure and environmental sustainability policy settings are in order, are more likely to have sufficient critical mass to sustain themselves. Given the relative size of their domestic markets and their capacity to fund their national security requirements – particularly in a world where we may one day find ourselves on our own were long-term American isolationism ever to take hold.
A big Australia is not incompatible with properly mandated urban planning, infrastructure development and environmental sustainability. Nor is it incompatible with the development of new population centres in the water-rich northern parts of the country. Nor does it prevent mandating new migrants to move to these regions rather than the capital cities to avoid over-crowding. All this is doable. And at a pace and composition of migration flows that maintains social stability on the way through. Of course there will be vigorous reaction to this proposal. There has been in the past. That’s because everybody is running for cover while no-one is answering the core question – that in the absence of continuing significant migration flows, who on earth is going to fund our most fundamental future national needs, from health and aged care, to retirement incomes to national defence in an increasingly unstable region. We run the risk of being a young country which becomes old before its time. These are the seeds of national decline.
To accompany this, we will need an even more robust Infrastructure Australia to ensure we have the roads, rail, ports, electricity supply, water supply, waste management systems and high speed broadband to meet the future needs of a growing nation. The conservatives have effectively destroyed the NBN as an effective fibre optic to the premises network nation-wide. We will have to rebuild the network. Otherwise we will fall even further behind the rest of the world. Infrastructure Australia will also need new sources of infrastructure financing. New types of Nation Building Bonds will be needed, with returns comparable to those offered for regular Australian government paper. This will be necessary if the big projects of the future (for example high speed rail between our major capital cities) are ever to be built. Otherwise we will be full of plans but with limited finance to give them effect. And our growth potential will be strangled as a result.
There are many other elements of a national vision other than the economy. Just as there are many other parts of a national policy strategy if we are to secure our future in the uncertain century that lies ahead. But unless we secure our economy, all else fails. And the complacent country will have become a failed state. Hard decisions must be taken. Not those demanded by the political right. But instead those of the reforming centre. And if we do so, the rewards for our people and the nation will be great indeed.