Can we talk about a fairer, more prosperous Australia?

It was only nine months ago that these challenges were clearly set out for us in Treasury’s Intergenerational Report:

• An ageing population putting pressure on public spending and services, and creating structural workforce shortages;
• Climate change – both the physical impacts that are already upon us, and the task of transforming our economy to achieve net-zero emissions;  
• A less stable geopolitical environment; and
• A tax system in urgent need of reform to ensure fairness and sustainability.

Now all this may seem quite dismal, so let me be clear up front. We are a rich and lucky country. We enjoy one of the longest life expectancies in the world. We have one of the most highly educated populations in the world. And this continent we all share is a remarkable place.

We have some real strengths, reasons that we should hold faith that the future can be bright – provided we face up to tackling our challenges and make good policy choices.

We’ve been hearing a great deal recently about our natural resources, and how they will equip Australia to thrive in a net-zero world.

And I will come shortly to the minerals in the ground and the sun in the sky, but first I want to talk about our greatest resource: our people.

From a structural, or long-term perspective, our people are critical.

A growing population, in which people come from around the world to build their lives here, has underpinned Australia’s prosperity for more than half a century. More than 30 per cent of us were born overseas. Add to them those who have a parent born overseas, and you get the majority of Australians.

When we talk about migrants, we are talking about ourselves.

Our ability to be diverse, dynamic, and cohesive as a society – including how we treat people when they come and live here – will be the basis on which we can continue to attract motivated and skilled people, who help provide essential services, boost our productivity with knowledge acquired overseas,^[1] and contribute to our community far beyond their day job.

Our other people-advantage is women. Women. In Australia are among the most educated in the world, and the evidence shows they have aspirations to match, and yet Australia has an embarrassingly gender-segregated economy and entrenched gender norms in society that devalue women.  

When I think about our future society and economy, I imagine what women could achieve if we truly tackled the inequality that affects all aspects of our lives.

Let me now turn to what’s on the horizon, and I’ll focus on two fundamental challenges for Australia.

The first is our existential imperative to transition to a decarbonised global economy over the coming decades.

Here we have considerable natural advantages in this country – the abundant land to generate low-cost solar and wind, and a range of minerals that will be required for a net-zero global economy.

The government has signalled that in this Budget, and in the lead-up to the next election, it wants to make some big bets on Australia’s industrial transformation to realise these opportunities.

Now, the mere mention of this type of deliberate industry policy seems to operate like a kind of public policy Rorschach test. Everyone sees something different.

For some, government intervention to underwrite or unlock investment in green industries, will enable a necessary structural transformation of our economy away from coal and gas and ensure Australia is keeping pace with other countries as they seek to carve out new industries.

Others see a risk of wasted public money, as the government tries to pick winners, decision-making becomes distorted by too many objectives and too much lobbying, and we end up propping up uncompetitive manufacturing for decades.

Like a Rorschach inkblot, it can be both.

Grattan Institute has set out the necessary role for a 21^st Century industry policy.[2] That is not the same thing as “Made in Australia”; the objective should not be to shield Australian industries from competition. Rather, it is necessary because of the scale of the economic transformation we need to achieve.

Markets alone do not generally provide adequate incentives for research and development in new technologies, and investing in low-emission technologies is particularly complex and uncertain. Investors face high costs, low returns, and the risk of competitors free-riding on lessons learned.

At the same time, we have failed to give markets the clear signals about the price of carbon that they need to make the right long-term investments. Yet we require investments in assets that will last for decades, or even longer.

Finally, we have a real, binding deadline. Market forces are not good at managing structural transformations at high speed. So there is absolutely a role for government in ensuring we get to net-zero emissions in time to avoid run-away climate change.

Is there a risk of a return to the bad old days of protectionist objectives? Of throwing good money after bad on a lost cause, where we are unlikely to ever match global productivity?

Yes. 

But unlike a Rorschach blot, the ink on the Future Made in Australia Act is not yet dry. The choices the government makes about how it sets up this policy will have a big impact on the policy’s success or failure.

Disciplined use of limited public money will be critical. We need to be clear-eyed about where our comparative advantage may realistically come from.

Take the case of batteries. Our research shows that while Australia might be able to compete on the early stages of critical-mineral processing, our labour, logistics, and import costs add up to too much to be competitive for the final stages of battery manufacturing.[3]

The thing I’m most worried about is that while governments are making these design choices – which we can’t afford to get wrong – they’ll be pulled in multiple directions by trying to meet multiple policy objectives at once. And they’ll have to swat away the lobbyists and rent seekers who will inevitably emerge.

The IMF has recently warned that the social benefits of industry policy decrease when politically connected sectors have more say over who wins subsidies.[4]

This is why decisions about government support should be made by experts, at arm’s length from government – like the Australian Renewable Energy Agency, which has an independent board. Decision-makers should have clear criteria, but they should be aiming for outcomes – not specific technologies, projects, companies, or regions.

And it’s essential that grants and investment come with clear evaluation and exit criteria, so we don’t end up wasting money, people, and resources that we need elsewhere.

The second looming challenge is Australia’s structural budget deficit.

Whether or not we see a surplus in two weeks, Australia is not raising enough revenue for what we spend.

We are a relatively low-tax country with high service expectations. Pre-COVID, Australia was the eighth-lowest ranked country in the OECD for tax collections relative to our economy’s size, 5 percentage points lower than the OECD average.[5]

Yet, Australians expect high-quality healthcare, aged care, and disability care, among many other things. Like other rich nations, government spending in Australia has grown as a share of the economy, particularly in recent decades.

But our tax base is going in the opposite direction: narrowing as the population ages and with the growing cost of tax concessions.

This leaves a structural gap.[6]

You can tackle the structural problem by reducing spending, increasing revenue, and by growing the economy.

Growing the economy is the easiest solution to sell, but it is the hardest to achieve in practice. Australia, like other advanced economies, is expecting slower economic growth over the next 40 years than we’ve had over the past 40 years.[7] Even if productivity growth exceeds expectations, it is still unlikely to close the structural gap.[8]

As a relatively low-tax country, we can afford to raise more revenue, but of course there are better and worse ways to do this. Broadening the tax base and reducing tax concessions tend to be much less economically damaging than simply raising the headline rates of tax.

Australia’s tax mix asks workers and companies to shoulder most of the burden, while offering substantial concessions for wealth. Wealth in housing and superannuation gets particularly generous treatment.

Take superannuation tax breaks for example. They cost the budget almost $45 billion a year and are projected to cost more than the Age Pension by 2036. These tax breaks predominantly benefit the top 20 per cent of income earners, so they do little to actually reduce Age Pension spending.

Meanwhile, the combination of capital gains tax breaks and negative gearing encourages speculation in the housing market, in place of other more productive uses of funds.

We know from experience that governments baulk at these types of politically difficult choices around tax. Because it gets pretty noisy when there are any losers to be found – as though there is some world where we don’t have to countenance any trade-offs.

But frankly, we are sitting on a wretched generational bargain, and it has gone on for long enough.

Young people today already face the prospect of weaker wages growth, higher hurdles to owning a home (or more likely a lifetime of renting), and a future shaped increasingly by extreme weather and natural disasters.

Yet, we ask our young people – our children and grandchildren – to contribute more towards supporting older generations, than our older generations ever contributed when they were of working age.[9] 

Received wisdom holds that pre-election Budgets aren’t ambitious. Neither are governments with small majorities.

But we need to make some tough choices. Our future can be bright, but not if we squander our strengths. And here I come back to people, and specifically, not taking for granted our social cohesion, the importance of our shared stake in our democracy.

Democracy isn’t just a vote in a ballot box once every three or four years. Democracy is us, all of us, governing ourselves, and to do that we need to be informed, and we need to be talking to each other about the type of society we want to create.

I believe that Australians are ready and willing to have these difficult conversations about complex problems, if they are given the facts and the evidence.

Grattan Institute has previously argued that the public are more open to tough conversations on tax than the media is.[10]

We’re also seeing a willingness to talk seriously about the fact that our planning system is creating profound housing inequities in our cities.[11]

We shouldn’t need things to reach a breaking point before we have these conversations.

I’ve talked today about the task of the Treasurer, but I would also say this to the Shadow Treasurer – let’s have the real debates that we need to about this Budget, and leading into the next election: about tax reform, about how we get enough housing, about 21^st Century industry policy, about how we ensure our public services are sustainable, how we ensure we have the workforce and the skills we know we need – and ultimately, about what is fair in such a rich country.