Speech to the Australian Industry Group
TUE 26 OCTOBER 2010
I'm very pleased to be able to speak at the Australian Industry Group's annual dinner.
As Deputy Prime Minister, as Minister for Education and Minister for Workplace Relations, and as a Labor frontbencher since 2001, I've long had dealings with the Australian Industry Group.
But this is my first opportunity to address you as Prime Minister.
As Prime Minister, I want to share with you not just my Government's economic agenda, but my own economic thinking.
We've got a reform agenda to deliver, and I'll come to that.
But I want to put our reforms in the context of three more specific challenges that government and industry face right now.
The dollar rising. Electricity prices rising. And anti-reform voices rising.
Australia has come out of the downturn as the strongest advanced economy. Now, the Government is working to turn the hard work through the downturn into lasting prosperity.
Our economy is strong overall, but I know that many sectors are finding conditions difficult.
The policy of my Government is to support broad-based growth and a balanced economy for the long term.
Commodity exporters have served our country tremendously well, raising the living standards of every Australian, but an economy that becomes too dependent on any one sector takes too big a risk.
Even while demand for commodities remains strong, we face the risk of a "patchwork economy" - where some sectors thrive while others hang on and hope.
And if demand for commodities moderates over time, then we will only remain strong if we have ensured that our economic growth is broadly based: growth across all sectors - in services, manufacturing and agriculture, not just mining and resources.
I know the strong dollar is making life hard for some.
I know that the upward pressure on our currency makes life harder for manufacturing exporters as well as exporters of services like tourism and education and agriculture exporters too.
Consumers and capital-intensive industries and those who rely on inputs like fuel and transport do benefit from a strong dollar, and have an opportunity to make productive investments.
But that doesn't make life any easier for those who are feeling the pinch.
What we also know is that the root cause of our strong dollar is our strong economy.
Compared to the rest of the world, we have strong growth, employment is expanding, investment flows into Australia are high, and we have record terms of trade. Interest rate differentials are obviously a factor, though in turn they reflect our higher growth.
And given our floating exchange rate, all of that will mean a stronger dollar.
I appreciate that no one here is arguing for costly direct interventions in currency markets to drive our dollar down, much less fixing the rate.
That floating dollar is an invaluable pressure valve for our economy. Easing pressures on inflation and wages while we manage a phase of strong growth.
The floating dollar is the founding fact of the modern Australian economy.
At the same time as the dollar is so strong, I'm also conscious that electricity prices are rising and that this is also hard for Australian industry.
I think it is important that the origins of these price rises be clearly understood. The current rises are a significant economic fact in themselves but I also think their connection to future policy should be clear as well.
The current price rises in a number of states have been principally caused by a sustained period of under-investment.
Over the past three years residential electricity bills have risen by more than 40 per cent across Australia.
We continue to see electricity prices increase. From July this year the Queensland Competition Authority will allow prices to rise by just over 13 per cent.
In NSW, the Independent Pricing and Regulatory Tribunal has announced price increases of between 7 and 13 per cent from 1 July as well.
In Western Australia the Government has increased prices by 17.5 per cent during 2010.
These increases have been overwhelmingly driven by a lack of investment.
Significant investment is required to replace ageing network infrastructure and deliver energy security.
State and Territory Governments have no longer been able to ignore the need for electricity providers to recoup the costs of these investments through higher prices.
The Premier of Western Australia has effectively apologised for the situation, saying:
I regret it, but it's something that simply has to happen.
There is another way to manage these issues.
Living in Victoria at the time, I saw the reforms of the energy sector undertaken by the Kennett Government and continued by the Bracks and Brumby Governments. This provides an example that other states could learn from.
A leading industry commentator - Keith Orchison, previously the CEO of the Energy Supply Association of Australia - put it this way in the Australian newspaper last week:
After almost two decades in which Australia has coasted, meeting its power needs with cheap coal and putting off until tomorrow a higher level of augmentation of networks, while state Governments have reaped a handy dividend from the revenue earned by the electricity businesses they own, the reckoning is at hand.
It's not a pretty picture.
We'll all live with the legacy of those decisions. But my commitment is this.
I'm not going to allow a repetition of this problem in another 10 years by allowing another sustained period of under-investment now.
That is one reason why I am so determined to deliver a carbon price.
Obviously, the fundamental motivation for our carbon price policy is pollution reduction. If carbon didn't create an externality by warming the planet, we wouldn't be pricing that externality in.
However the industry consequences are then immediate. Delaying a carbon price makes the eventual adjustment shaper and more costly. And the absence of a carbon price is already a problem.
Producers and consumers accept the science of climate change. Because they believe it, they are already responding, and their responses are already changing our energy economics.
Without certainty on a future carbon price, businesses won't invest in long-lived assets, because they won't know what their returns will be or what the environment will be for their competitors.
Investors already face perverse incentives for solutions which are driving them to adopt stopgap solutions rather than long term investment.
This is particularly the case in the electricity generation sector where uncertainty will direct what capacity growth there is towards meeting incremental rises in energy demand, rather than long-term baseload growth.
Where his predecessor is critical of some state governments for lack of investment and policy prudence, the current CEO of the Energy Supply Association of Australia, Brad Page, is imploring policy makers to underwrite investment by injecting a carbon price into the economy.
He has said that without a clear carbon constraint over the next few years, generators will be forced to make stop gap investments in technologies like open-cycle gas turbines to meet immediate increases in demand rather than take long term large scale investment decision. In Brad Page's words:
That's not a zero-cost outcome - our lights would stay on but power prices will rise. Delaying a clear carbon constraint is going to cause electricity prices to go up anyway.
Inaction on a carbon price means higher prices.
There are other significant advantages to acting on a carbon price.
Revenue from the carbon price delivers transition support to households and industries. No such revenue is available to assist with the costs of the current price rises around the country - nor for future rises from an on-going investment strike.
That's because carbon pricing is a major structural economic reform.
So unlike the current catch-up round in the states, any price rises which do flow from carbon pricing bring with them the dynamic benefits of reform for the long-term.
Real carbon pricing reform will ensure industry uses energy more productively - increasing outputs compared to emissions.
Decoupling economic growth from growth in emissions is a key micro-reform.
This reform will also help us compete in a carbon-constrained global economy. Energy productivity is an emerging new arena for global competition in production costs and it's one where investment decisions now have an effect for years, for decades, to come.
Like all structural reforms, we need consensus and discipline to deliver good outcomes which are sustained for the long term.
I know the climate change committee and the business and community roundtables are working hard to deliver this consensus.
And the Government is determined to maintain this discipline, by taking the lead in a richer, deeper reform conversation which encourages thinking about the long-term.
Australia did not come out of the downturn as the strongest advanced economy by accident.
Government made good decisions.
And industry did too.
Having experienced acute skills shortages at the height of the last boom, during the downturn you sought to retain rather than shed valuable workers.
Labour demand did weaken during 2008-09 - but this was mostly reflected in a decline in average hours worked, with firms seeking to put in place arrangements that avoided redundancies.
I pay tribute to the role that Australian industry has played.
But Government and industry alike had the benefit of 25 years of good decisions behind us.
25 years of hard won economic reforms, most particularly the reforms of Hawke and Keating.
Reforms which mean that our open economy's ability to resist global shocks has become the envy of the world.
Governments don't do economic reform because it feels good.
Reform is not easy - but it works.
When you get economic reform right, you fuel the drivers of sustainable long term economic growth. Reform lifts participation, and greater participation will ease the constraints on growth from the increasing number of Australians who no longer work.
Reform also lifts productivity, and this is the heart of the matter.
Treasury analysis finds that if we can get productivity growth up to what it was in the 1990s - up to where it stood following the Hawke-Keating period - our economy could grow an extra 15 per cent by 2050.
In Government, we must walk the reform road every day.
One or two big ticket reforms is not enough.
Reform is a seamless robe, which cannot be divided to suit sectional interest.
We all share the long-term benefits when we all share the short-term difficulties. No economic or social sector will have only beneficial reforms.
I said recently that minority Government is no excuse to walk away from reform. I mean that.
This country has had a reform agenda for a generation.
There are big differences between the parties and big issues at stake in politics - industrial relations and climate change obvious among them. At our best, though, there has been a historic reform project which spans the political divide.
A shared understanding between Governments of both persuasions and industry that modernising our economy creates opportunities for all Australians.
That shared understanding should ensure that minority Government does not mean an end to reform.
But I believe the reform consensus is now under serious threat.
I never thought in the 21st century I would hear a Shadow Finance Minister debate the need to allow our dollar to float.
I never thought that in the 21st century I would hear a Shadow Treasurer debate the need to allow a competitive market for interest rates.
Equally, I never thought I would hear a NSW Premier deny that a deal is a deal and a signature means you agree.
And I never thought, following a legislated reform direction, I would hear a NSW Opposition Leader threaten a reform of a river that belongs to the nation.
In our country we are hearing rising voices against reform.
Not just in the community as a whole, but in major party politics as well.
And strikingly, in the Parliament, in the once reform-advocating Liberal Party.
If a strain of economic Hansonism takes hold on the conservative side of politics in a Parliament which is so finely balanced, our long-term prosperity is at real risk.
Without the legacy of reform, our economy could never have resisted recession through two decades and three global shocks.
And at this time, with global uncertainty over growth and domestic uncertainty over carbon pricing, the reform consensus is as important as ever before.
Everyone who is committed to economic reform now has a job to do.
Simplistic solutions abound.
The risk of a return to economic populism is real.
The reform conversation needs many voices.
Leaders must lead, and my voice will be loudly heard.
Industry has a stake in the reform project - in opportunity, in prosperity, in growth - so you must have a strong voice in the reform conversation too.
My Government has an ambitious reform agenda: financial consolidation; building capacity on the supply side with tax, superannuation, infrastructure and skills; extending market-based reforms to health and education, carbon and water. We will pursue it with discipline and rigour.
As Prime Minister and Leader of the Labor Party I can guarantee we will not unilaterally withdraw from the post-1983 reform consensus.
Others must speak for themselves.
By nature, I am an optimist.
And by conviction, I am optimistic about our economy's future.
I am also a reformer.
The Labor Government I lead puts reform at the centre of all our economic decisions.
I also believe the way we approach reform will be a case study for the best way to govern.
Making steady progress on our plans, day by day, week by week.
Working hard for all Australians, wherever they live.
Preparing Australia for the long-term with modern market-based solutions.
Carefully weighing the hard decisions, at the right time, for the right reasons.
Driven by our values - hard work, a fair go through education, respect.
And always keeping our economy strong.