Rethinking Finance: A new portfolio approach

16 November 2017




Let me begin by acknowledging the elders and traditions of the Ngunnawal and Ngambri people, the traditional owners of the land upon which our national university is built, and all the first Australians.


I’m so pleased to have the opportunity to speak here at the ANU where I spent some very happy years as a postgraduate student in the early 2000s.


And I’m grateful to Helen Sullivan and the Crawford School of Public Policy; to Martyn Pearce and his colleagues for putting this on today and inviting you all here.


I want to cover a fair bit of ground in my remarks but in essence I want to answer a question put to me and the last two Labor Treasurers – Wayne Swan and Chris Bowen – by former UK Chancellor, Ed Balls, in August this year.


He asked:


Why do you have a Finance Department split off from the Treasury, and who does what?


We gave him a bit of an answer but not an especially good or detailed one – it seemed too much to get into over a late-afternoon beer in Chris’ office, wedged between multiple speaking engagements, after Ed’s very long flight.


But his question is an important one.  Not just to me, because I aspire to be the Finance Minister in a Shorten Labor Government.  But because that Treasury-Finance split is not especially common in comparable countries, it’s certainly not well-understood, and yet it affords us another important mechanism to satisfy our broader economic objectives, especially inclusive growth.




It was actually 41 years ago yesterday that Malcolm Fraser, frustrated and in search of contested sources of budget advice, separated the two departments. 


Treasury’s heralded role in the years since is well documented and well understood. 


The same can’t be said for Finance.


It does much of its work behind the scenes; its worth often viewed through a limited or narrow lens; its minister frequently caricatured as one who exists just to say no to colleagues’ spending plans, fix internal problems and robotically recite the Government’s key messages.


But the role of the department and its minister is, and should be, much broader than that, and deeper too – and that’s the main point I want to explore today.


First, a bit more history.


The decision to split Treasury and create Finance wasn’t straight forward.


By the end of the Fraser Government’s first year in office the economy was weak and the relationship between Treasury and the Government weaker still.


Malcolm Fraser and Treasurer Phillip Lynch couldn’t get advice on the budget without the heavy influence of the Permanent Secretary, Sir Frederick Wheeler.


Treasury has always had and prosecuted its own agenda but in the age of the Commonwealth Club this was typically unhindered and unquestioned, until Fraser intervened.


The tensions came to a head in November 1976 when he became determined to devalue the Australian dollar.


The decision was so opposed by Treasury that they wouldn’t provide more than one tortured and unhelpful paragraph for the Prime Minister’s major policy announcement speech.


Fraser was concerned that his Treasurer was being dragged along with the Department.


Sharing his frustrations with his staffer David Kemp, he said: “I am worried about Philip. I think Treasury are badgering him, the bastards."


Three days later on 5 November, Fraser met with Wheeler and also John Stone, to discuss devaluation.


The meeting went so badly off the rails that we are told Fraser called the head of the Public Service Board immediately afterwards.


Ten days later the decision had been announced – the Finance Department was born.


Budget management, forward estimations and expenditure control from the old Accounting and Supply Division were pulled out of Treasury and set up in what was called a ‘Canadian-style’ Finance Department. Fraser also bolstered his own Department.


The intention was clear – the Government wanted to be back in control of the books and it wanted more timely and contested economic advice.


Initially, the change was purely bureaucratic in nature – the Treasurer still held responsibility for both portfolios. But budgets were now the responsibility of not one but three agencies: Treasury; Finance; and Prime Minister and Cabinet simultaneously, all with the opportunity to weigh advice.


The two departments’ roles and emphases have changed with the times and their partnership has evolved.  And not just the relationship between institutions but between secretaries and ministers as well.


I had a very good glimpse of this from the Treasury side, in my years as Treasurer Swan’s chief-of-staff working with two terrific finance ministers in Lindsay Tanner and Penny Wong and top-shelf department heads like Ian Watt and David Tune.


The uneasiness I imagine in those early years had by then settled into a time-worn collaboration – with its fair amounts still of fractiousness and passion, but most of it fought out down the hill and neatly submerged by the time you got into the Expenditure Review Committee.


At those meetings, you would generally expect Finance to give the harshest appraisal of a new spending proposal, PM&C the most lenient, and Treasury somewhere in between.


But it was instances where it would go into “reverse swing” as we called it – when Finance would strangely be a bit more generous, Treasury perhaps a bit harsher – that really made the ears prick up.


I won’t bore you with the ins and outs of ERC, but it does go to the story of a department with its own distinctive and thoughtful role, honed by now several decades of policy practice.


Finance is a serious portfolio led by serious people.


On our side, before Wong and Tanner: Dawkins; Walsh; Willis; and Beazley.


Kim once told me a great story of arriving in Finance as minister, and asking about one of his predecessors, Peter Walsh. The reply came back: “well, minister, there were two types of official in this place under Minister Walsh. One half of the department were absolute devotees, and they would have died for the minister. The other half were not so keen … they would only kill for him.”


So there are those big proverbial shoes to fill in Finance.


And not just big shoes, but a bigger, broader portfolio than most people appreciate.


Not just an adviser on the economy but a participant in it, through fiscal policy, of course, but now also: shareholder responsibilities for the NBN, Moorebank Intermodal, Inland Rail, Western Sydney Airport, Naval shipbuilding, the Future Fund and the Clean Energy Finance Corporation; public service superannuation and insurance; public sector reform; $50 billion of Government procurement; the Shared Services Program; and managing much of the overall machinery of government, which is far more complex now than it was at the time of the split in 1976.




But managing the Budget is still the primary concern of the Finance Department and its minister, as it should be.


In Bill Shorten’s economic team, budget repair that is fair is one of our defining objectives.


Chris Bowen and I spend a lot of time together and much of it is devoted to working through the substantial fiscal challenges we will inherit.


For instance, this year’s deficit is more than 10 times bigger than predicted in 2014; the Budget papers predict record net debt this year and next; and gross debt has crashed through half-a-trillion dollars for the first time ever, with no peak in sight.


Both kinds of debt have been blowing out far more substantially in recent years – since September 2013, gross debt has blown out more than $1.4 billion a month quicker than the six or so years preceding it, which included the Global Financial Crisis, while net debt has grown $589 million a month faster.


Gross debt has increased by around 10 percentage points and net debt by around 5 percentage points since 2013 whereas other advanced economies, including NZ, the Euro area, and the United States have stabilised their debt levels.


We take all these challenges very seriously.  As progressives, we want the fiscal firepower to save jobs in the event of another global downturn, and money spent on interest bills is money not invested in schools.


That’s why we’ve already announced changes to the taxation of trusts; reforms to negative gearing and capital gains; multinational tax crackdowns and other measures including a cap on deductions for managing tax affairs.


All told, tens of billions of dollars in fair Budget repair measures that don’t ask the most vulnerable in our community to carry the can.




Tax reform and spending restraint are two parts of the holy trinity of budget repair, the third is growth.


That’s why we can’t separate narrowly-understood Finance responsibilities from our broader economic objectives: inclusive growth, reward for effort, and a decent social safety net.


The observation I made earlier about Finance sometimes going “reverse swing” in its advice, usefully illustrates a point: if Finance always just rejected new spending, you wouldn’t need a department. You’d barely need an algorithm.


The interest is in when a focus on other factors – long-term economic and budget sustainability, for example – produces different and more nuanced advice. It is that space of interchange between departmental discipline and tradition and the policy priorities of the government of the day that is so fruitful.


Budget repair is an important task but not the only task I’m focused on in Finance.


It needs to be pursued in a manner consistent with the overarching objectives, unlike what we’re seeing now with cuts to human capital and physical infrastructure.


Finance is central to the inclusive growth agenda.


Not just the fiscal prudence which underpins our opposition to a $65 billion tax cut for multinational corporations and the four big banks, or to the continuation of the biggest concessions going to those who need them least – as important as all that is.


We don’t believe that reforms which are budget-positive must always be unfair – on the contrary. That’s what differentiates us from the other side.


We have plans to make the tax system more progressive, not less.  


That’s one way but not the only way to help strengthen the budget and provide the space to invest in the drivers of inclusive growth – the right kind of economic growth.


Because we know that budgets not only underpin job creation, but can and should attack inequality and social immobility as well.


A central theme of our approach to budgeting is to build value.  It provides a coherent framework for decision‑making across most aspects of Finance:


  • Budget decision-making to build value in the economy – our people, our businesses and our community;
  • Building value in the public sector – it’s responsiveness and ability to provide for the community, and;
  • Building value in businesses and on the Commonwealth balance sheet through prudent co-investments in the drivers of growth.


Finance is the truly whole-of-government portfolio.


And with the budget as tight as it is, with record, increasing debt, our task is to be more disciplined but not less ambitious for the country.


We need to be smarter and more sophisticated.


We need to squeeze more juice out of the Budget lemon we will likely inherit.




That’s why co-investment is so important.


After decades of retreat in public service ambition and responsibilities, we need renewed clarity of the aims of policy programs, more rigorous sets of questions, and an expectation that public investment will contribute.


It’s why today I want to make the case for an engaged finance ministry with a renewed focus on co-investment, and for an entrepreneurial state as a source of new inclusive growth in the economy.


The Global Financial Crisis laid bare the economic flaws in neoliberalism and triggered its slow death.


Not every element of the former consensus has disappeared – trickledown persists as the defining underpinning of much of the Government’s policies.


And a new approach should not succumb to the protectionist urges picked at and peddled by others; that misguided yearning to turn back the clock at a time of unprecedented technological change.


We need our economic policies to be forward-facing, upward climbing, and outward-looking – new ways to advance the ‘fair go’ in the new machine age.


That means inclusive growth but also other goals such as the pursuit of a low-pollution economy and the jobs of the future.


It also means supporting a diverse economy. We don’t want to see Australia’s economic output confined to limited regions or sectors.


In the economic jargon, we want a more ‘complex’ economy.


Economic complexity is the measure of the knowledge in a society based on what it produces and how diverse its exports are.


A more complex economy will embrace technological change by ensuring it has a sufficiently skilled and adaptive workforce.


Harvard data tells us that Australia is falling behind its global counterparts when it comes to economic complexity.


This is a problem worthy of our attention.


Addressing it need not rely on the two extremes of outdated political theory or the false dichotomies which litter the economic debate.


This is one of the reasons, I think, why Mariana Mazzucato’s book, The Entrepreneurial State, found such a receptive audience for her urgings to reject the common view of a “boring, lethargic State versus a dynamic private sector”.


Mazzucato doesn’t dismiss the power of markets to drive innovation and foster creativity, and nor do I – far from it.


But, as she points out, private enterprise in many instances dares not tread into new terrain that is untested, or there’s a greater risk.


Mazzucato touts co-investment and other forms of public-private agreements to direct economic growth towards an intelligent, sustainable and inclusive model – “actually making things happen that otherwise would not”.


The ABS tells us that nearly one in three innovative businesses cite access to finance as their major barrier to investment and growth. There are many investments that are in the private and national interest that are not able to access finance.


Responsibly and robustly encouraging greater capital into innovative businesses will help them overcome these barriers.


This is a more sophisticated approach to government – leveraging the Commonwealth balance sheet to invest in ventures and interventions that have the twin virtues of building value and generating assets on the balance sheet.


This approach isn’t applicable to all areas of government policy – obviously – but it neatly captures what we have proposed to do, subject to clear and rigorous tests.


First and foremost, whether the investment is in the national interest.


Next, an understanding of why the market is failing in this particular area and whether the payoff is clear.


And, will the investments be a net positive to the taxpayer?


This is one way to foster job-creating growth that doesn’t require huge outlays, and generates returns, when we have extreme fiscal constraints.


For all of these reasons, building value is a governing principle that will drive the Finance portfolio’s broader approach in a Labor Government.


Consider the opportunities for targeted co-investment afforded to us by the funds that already exist, like the Export Finance and Insurance Corporation; Northern Australia Infrastructure Facility; Clean Energy Innovation Fund; and Clean Energy Finance Corporation.


The CEFC, established by Labor, is a terrific example of the benefits, and potential, of co-investment.


Its expert board facilitates new investment in clean energy businesses and products that the private sector has shied away from as it’s an early-stage market, which has inhibited the efficient allocation of capital.


For every dollar the CEFC invested last financial year, the private sector added more than two.


In its first four years of operation, the CEFC committed $4.3 billion across 79 transactions, leveraging over $11 billion in new clean energy investment in total, helping Australia’s transition to a clean energy economy.


The answer isn’t to push everything off budget or to create fund after fund.  The answer is to work out where, after careful, sober and clear-eyed analysis, the market is not functioning properly and where we can make an affordable difference.


More active doesn’t always mean materially higher levels of risk, but it can mean leveraging more opportunities.


That’s why we are replicating the successful CEFC model in advanced manufacturing.


Bill Shorten last month announced that a future Labor Government would establish a new $1 billion Australian Manufacturing Future Fund to drive innovation, grow businesses and create jobs.


The Fund will leverage finance to help Australian enterprises successfully transition into high-value production – a catalyst to create high-skilled jobs, support firms linking into global supply chains and diversify the national economy.


This will make a big difference without the need for big outlays of grants.


There’s also work to do on existing funds.


The Northern Australia Infrastructure Facility is the perfect example of how not to set up a fund in the national interest.


Its poor design has meant in its two-and-a-half years in existence, there’s been more than half-a-million dollars in executive salaries and travel perks for board members it but not a single dollar for job-boosting infrastructure in Queensland.


It has been set up in a way that gives us little confidence that there is sufficiently rigorous oversight or appropriate structures underneath it.


This is why we’ve seen a political push from the relevant National Party minister to invest in a mining project that should be able to stand on its own two feet and a coal-fired power station that will take seven years to build and not solve our energy crisis.


My colleague Jason Clare is working on reform options for the NAIF.


As part of that effort I can reveal today that a Shorten Labor Government would implement a dual ministerial governance framework for the NAIF, which would give shareholding responsibility to both the Northern Australia and Finance ministers.


This would align it more closely with the governance and objectives of other investment funds, bring Finance’s experience and expertise to bear, and give the NAIF a better opportunity to do its work free of the sense it is there as a slush fund.




This gives you a sense of an activist approach to the portfolio to support our efforts to make growth stronger and more inclusive and our economy broader and more productive.


And we can be active and progressive in plenty of other ways.


Let me give you five examples of things I’m working on, to illustrate this point.


First, we are working on fiscal rules which ensure Budget decisions are formally based on the values that guide us and the best broader interests of Australians.


We want rules that support our economic objectives in the people-facing part of the economy.


This is not inconsistent with fixing the bottom line; it’s central to budget repair which is fair.


We need fiscal policy which invests in employment, human capital, productivity and the future; which strives for value for taxpayers’ money; and, perhaps above all, which seeks to restore the Budget in a way that doesn’t ask the most vulnerable Australians to carry the heaviest burden.


Second, these rules would be against a backdrop of greater transparency, so Australians can better understand Budget decisions and why we make them.


It stands to reason that better, more transparent, more forward-looking budgeting will lead to better, more-transparent and more forward-looking policy decisions.


I’ve spent much of this year consulting widely with academics, experts and economists to see whether we could use modelling and projections of broader economic benefits to better evaluate Budget proposals in areas like social policy and early interventions.  This is a middle path between costing second-round effects and ignoring them altogether – another way to make the Budget more transparent and more conducive to longer-term investment.


This won’t make the front page.  But it gives you a sense of how we’re likely to approach the Budget, including enhancing scrutiny around the 10-year impact of policy decisions, re-introducing cameos to better understand the distributional impacts of key policies, and greater use of data in decision-making and assessment.


The third example is public service reform.


Crucial to any good Government is a supportive bureaucracy that delivers the services Australians expect and the policy advice Government needs.


I’m concerned that public servants aren’t always able to meet those objectives.


Service levels in regional areas have dropped and phones at Centrelink go unanswered.


Arbitrary caps on the number of bureaucrats have left the public service hollowed out and unable to provide strategic advice.


That’s led to far too much taxpayers’ money being wasted on contractors, consultants and labour hire firms to do work that public servants could do at a lower cost.


I want these kinds of effects to be considered.


There is no point hitting an arbitrary short-term headcount target at the cost of building higher consultancy costs into the budget in the future.


At the same time, billions of dollars have been spent to duplicate IT systems, or build them completely from scratch.


Travel costs blow out in an age where video conferencing should be the norm.


The Australian public service needs to be refocused. We need to reprioritise what’s important – quality services and sound advice, investing taxpayers’ money in a careful and considered way.


We also need to think about the demand side of public service, not just the supply.


By that I mean we need ministers and a Cabinet who actively seek policy advice from the public service, encouraging investment in policy capacity and rebuilding skills wasted by years of cuts and top-down policy diktats.


Fourth, we need to ensure we get the best value out of the well over $50 billion we spend annually on government procurement. Value for money should still be front and centre, but we can seek better local and social outcomes too.


We, of course, welcomed the fairly recent introduction of an assessment of economic benefits to the procurement rules.


But measuring and evaluating this is difficult, and the public service doesn’t seem to be embracing the approach as much as it could.


We should facilitate greater local employment and sourcing, and greater SME involvement, especially in big projects, while ensuring we are getting value for money and complying with our international trade obligations. We should ensure Australian Industry Participation Plans return as a part of the project development stage, not as an afterthought.


There is a lot of good thinking going into this, and I am tapping into it.


Fifth, we need to make our Government Business Enterprises more transparent.


Australian public companies have detailed reporting regimes. It’s disappointing that the use of taxpayer funds is not always subject to the same level of scrutiny.


For example, our GBEs and significant Commonwealth entities should have to include more detailed executive remuneration in their annual reports.


We saw what happened when Australia Post salaries were first hidden, then botched in their release, and we are determined not to let that happen again.




So to return to Ed Balls’ question: why a separate Department of Finance?

Because the core economic objectives of the government go beyond macro economic setting.  They go beyond the traditional levers that Treasury manages so skilfully when in good hands. 


We want to think afresh about how we invest and build value in our nation, as a co-investor, a service provider, an owner of significant government-owned enterprises.  This needs specialist expertise and a coherent policy narrative – it needs a Finance function to ensure the micro and the macro talk to each other. 


Finance has its origins in a dispute about who sets the nation’s policy.  Its future is about realising the huge agenda for a progressive and determined national government.


That’s how this fits into a bigger picture.


Across the board, my colleagues are working on policies and plans like this.


We are pleased to see that work recognised.


By Peter Martin, who argued that: “This time next year we will be faced with a choice between a Government that makes things up as it goes along and a Government-in-waiting that knows what it wants to do.”


And by Laura Tingle, who wrote that “Labor frontbenchers have been going back and having a think about what it is they and their party should actually be trying to achieve in government; what values they are trying to promote”.


That’s exactly what’s happening.


And that’s because we want to enter government through the front door of considered policy development, not sneak through the back door of disappointment and despair with our political opponents.


Finance has a role in supporting our broader economic objectives, and I’m grateful for the opportunity today to lay out why, and how, we would harness and empower it differently.


Thank you and I look forward to your questions.