The Right Kind Of Recovery

24 November 2021

Address to the Economics Society of Australia 






What an honour to be asked to address the Economics Society here at the National Press Club, on Ngunnawal and Ngambri land.

It’s one of the few audiences in Australia where I can begin with a relatively obscure John Maynard Keynes quote, and rarer still it might be one you have heard before.

It was 1942 and he said:

“Here I am back again in the Treasury like a recurring decimal – but with one great difference. In 1918 most people’s only idea was to get back to pre-1914. No-one today feels like that about 1939. That will make an enormous difference when we get down to it.”  

Substitute 1918 or 1939 with 2019 and you’ll see why I begin with this tonight – to make the point that some think the best we can do in our economy is return to 2019.

And to say from the outset that I think we can and must do much better than that.

And that this is in lots of ways the defining difference between the major parties in the parliament when it comes to the economy and competing economic and fiscal policies.

The Story to Here

It’s not my intention to have a long partisan rant about this tonight, or to re-run today’s Question Time.  It’s not the right forum and besides, the facts from the last eight years of economic underperformance speak for themselves, without political embroidery.

It helps to begin by remembering that COVID didn’t break our economy, it accelerated familiar weaknesses.

When the September national accounts were released at the end of 2019, growth was already well below the long-run average and well-below budget forecasts.

The economy was barely growing faster than the population.

Consumption had grown at the slowest pace since the Global Financial Crisis, increasing by only 0.1 per cent in the quarter and 1.2 per cent over the year.

Those weak results in December were symbolic of similarly disappointing data for much of the past eight years.

Annual average wage growth that has been the lowest on record.

The weakest annual average GDP growth compared with every decade since the 1930s.

GDP per hour worked, as a measure of productivity, growing at an annual average rate just half of that compared to the previous six-year government.

By February 2020, productivity sliding backwards for the first time since the mining boom.

Our human capital depleting, slipping student test scores.

Business start-up rates falling. And business investment as a share of nominal GDP now falling to its lowest point since the 1990s, with most of the fall occurring before 2020.

Those tempted to conclude this weakness coincided with similar stagnation around the world should consider these comparisons:

Our average quarterly economic growth between 2007 and 2013 had us at 8th in the OECD. By the same measure since 2013, we’ve slipped down to 17th place.

On international rankings of unemployment, we slipped from 9th in the OECD in September 2013 to 15th in September 2021.

But the most striking fall is wages. Based on the OECD average annual wage data, Australia ranked 6th in the OECD between 2007 and 2013. The most recent data has us at 21st.

So, in the developed world we’ve dropped nine places on growth; six places on jobs; 15 places on wages comparing this government to its predecessor.

My concerns are focused on the labour market.

Here I don’t just mean the almost 200,000 jobs lost since August, or the spike in the unemployment rate last month.

But the story which goes beyond the headline rate.  A story of two million workers unemployed or underemployed at the same time as skills shortages and labour shortages are holding the recovery back.

The cancer of insecure work and underemployment has fuelled wage stagnation.

At a similar ESA event in July this year, Phil Lowe drew the same very clear link – explaining that “when demand is strong, businesses are able to call on underemployed workers to supply more hours without much upward pressure on wages”.

Some might say or think that this is an inevitable consequence of the pandemic. But the underemployment rate right now is not far off the average underemployment rate during the Coalitions’ eight years in government. 

We are not yet seeing the same upward pressure on wages as the rest of the world, despite seeing upwards pressure on inflation.

It remains to be seen whether this inflation we see now will be temporary or permanent.

The RBA expects that it will die down, others aren’t so sure.

But in the meantime, families who have already been deprived by the disappointing wage growth of the past eight years are being crunched by rising costs of living that they cannot keep up with.

This has left working families struggling to put petrol in their cars, as prices skyrocket 24 per cent this year compared to last.

We’re seeing this crunch elsewhere too.

Supply chain disruptions and a shortage of materials have created the largest quarterly increase in construction costs since the introduction of the GST in 2000.

No wonder the middle class is being squeezed, getting smaller, older, poorer, less mobile, more difficult to get into and harder to stay in.

This is a global phenomenon but felt harshly here.  At 58 percent of the population, our middle class is smaller than the OECD average and has shrunk 3.4 percent since the 1980s.

So, any plan to strengthen the recovery and target growth needs to focus on more job security and more opportunities for middle Australia.

The Right Kind of Recovery

This is not to deny or dismiss the recovery underway.

We are very pleased to be seeing shops reopening and people getting back to work as our biggest cities come out of lockdown.

We are hoping as much as anyone for a quick recovery and satisfied with much of the early signs that the aggregate numbers may be pointing this way.

But it needs to be the right kind of recovery – broad, enduring, inclusive and strong.

And our enthusiasm is tempered by the knowledge we’ve heard it all before. In October last year, at Christmas last year, at the May Budget and again now.

We can’t afford to be complacent again this time – it was complacency over vaccines and quarantine that cruelled the first recovery. 

When many Australians, confronted with lasting lockdowns, separation from family and damage to livelihoods, have thought deeply about what matters to them and what they want their future to look like.

Yet there is no sign of reflection or reset from by those who have the greatest power to shape the future in Australians’ interests.

We need to be more ambitious.

In research, development and commercialisation – to catch the global wave of investment in innovation and technology.

In climate and energy policy – to get energy costs down and create new jobs and industries.

In the labour market, in housing, in education.

And we can’t afford more lip service to struggling small business owners while billions of payments are made to businesses that don’t need support.

Australians have sacrificed too much already. They can’t afford any more false starts.

Especially for those who continue to disproportionately bear the costs of this pandemic across different sectors in different parts of the country.

Too many are still at risk of being left behind.

Youth unemployment rose last month from 10.8 per cent to 13.1 per cent.

The female participation rate remained at 60 per cent last month. It did not budge while tens of thousands of men returned to work.

Since October last year, there are still around 12 per cent fewer payroll jobs in accommodation, arts, recreation and food services.

And in communities like mine, the unemployment rate is almost double the national unemployment rate.

So, we need to set our sights higher than a return to our pre-pandemic economy plagued with wage stagnation and economic weakness and beset by a lack of economic leadership.

Before last year, Australia had avoided recession for almost three decades. Productivity had been a crucial factor, contributing over 80 per cent of growth in real gross national income per person over this extended period.

But as productivity growth has slowed, Australians have had to rely on the prices of key mineral exports as the major buffer of our living standards.

We have not been taking advantage of the opportunities that the 21st century could offer us.

We have failed to embrace new technologies and invest enough in the skills, training, and in the ideas of our people.

This complacent approach to growth puts us entirely at the whim of international markets and the decisions of foreign governments.

We’ve seen this again recently with volatile iron ore prices, but we’re increasingly exposed on a range of other fronts.

As a global laggard on sensible climate and energy policy, we run the risk of trade and investment penalties from other countries – on top of all the other economic, environmental and intergenerational costs of inaction.

And the persistent failure to engage cooperatively on the world stage will only limit our policy options and rob us of trade and investment economic opportunities, which are so critical for our regions.

Five Ways to Strengthen the Recovery and Grow the Economy

What’s missing is ambition, and a genuine plan for strong, broad, sustainable and inclusive economic growth.

Let me suggest tonight five ways Labor wants to fill this void.

Think of it as five ways an Albanese Labor Government would get the economy growing the right way.

One, we will provide energy policy certainty to drive investment in cleaner and cheaper energy, which would create more jobs and investment, especially in the regions.

Business have been pleading for this for years in every boardroom, in all parts of the country that I’ve visited.

The climate policy we release in the coming weeks will make practical changes that support new and existing industries, are good for the environment and reduce cost of living pressures.

We will take the handbrake off investment by finally ending the uncertainty which has been holding us back for much of the past decade.

Two, we will invest in skills, in our universities and TAFEs, and in making sure that training is at the heart of government procurement and projects.

That’s because we know that investment in human capital means investment in higher productivity, in innovation and in long-term growth.

Three, we will fix the NBN, to grow our digital economy by enhancing access, flexibility and productivity in the ‘work from home’ world we are becoming accustomed to.

Four, our plans to reform early education and childcare will not only ease cost-of-living pressures on working families, but they are also an investment in the care economy, which will boost participation and pay dividends well into the future.

Five, we will co-invest in advanced manufacturing and other crucial sectors through the National Reconstruction Fund – to create jobs, diversify the economy revitalise our regions through partnerships with business, and help turn good ideas into good jobs.

Taking Budget Cues from the Economy

There is no separating a plan for growth from a plan for the Budget.

Too often politics has driven the government’s fiscal settings, rather than economics.

And in election campaigns, the focus has been on the difference in levels of spending, not the quality of spending.

I will be asking our alternative Budget to be judged not on whether it’s a little bit bigger or a little bit smaller than our opponents.

We don’t intend to take our cues from the Government on spending, we intend to take our cues from the people and their economy.

A responsible Budget is geared to our economic objectives, responsive to the economic conditions, and gives Australians the value for money they’ve been missing out on.

The size of the spend matters but value for money matters more.

Making sure the fiscal multipliers are there – the bang for our buck.

Recognising the test of responsibility is the quality, not just the quantity of spending.

In recent years we’ve seen tens of billions of dollars paid in JobKeeper to businesses whose earnings actually increased.

We’ve seen hundreds of millions committed to carparks in target seats, most of which still haven’t been built.

We’ve watched multiple times as hundreds of millions have been awarded in contracts without due process.

We’ve seen over a hundred million paid in Robodebt settlements, the cost of which cannot just be quantified in taxpayer dollars given the human harm inflicted by the program.

The submarines debacle will cost us billions more.

Rorts and waste were once an embarrassing aberration but now they’re a shameful norm.

A trillion dollars of debt with not enough to show for it is evidence enough of this.

Let me be clearer, then, about our fiscal strategy which has three main parts:

First, prioritise growth in the ways I’ve just outlined. Bang-for-buck investments that help grow the economy and meaningfully improve peoples’ lives.

Second, target the rorts and waste in the current budget.

Third, piggy-back on welcome and important international progress on multinational tax, so that corporations are paying their fair share of tax in Australia where they make their profits.

We’ll have more to say as the rest of our policies are announced.

There’s still a mid-year budget update, a Budget, and a pre-election update to come and tailoring our spending to the conditions means factoring in the expectations for the economy as they evolve.

But our task in all of this is already clear: to make our economy and society stronger after COVID than it was before.

And to avoid the managed decline and intergenerational disappointment laid bare this year in the Intergenerational Report and Business Council of Australia’s seminal work – both warning of an economy smaller, slower and older over the next forty years than the last and a Budget heaving with record public debt for decades to come.

Treasury at the Centre of the Action

Here, before I take your questions, I hope you’ll forgive some personal observations.

I’m in the unusual, if not unique, position of having worked in the Treasury portfolio in government for more than five years – as Principal Adviser then Chief of Staff to the Treasurer – before putting myself forward as the alternative Treasurer.

I worked on five budgets and more than twice that when it comes to mid-year updates and economics statements, released more regularly during the Global Financial Crisis.

Worked closely with the Reserve Bank, the regulators, the states, and the Treasury.

Valuable experience that informs much of what I’ve thought about in the decade since, what I’ve said today and what I’d like to do if given the chance in office.

Of all the memories of that period, one is the most vivid – and it’s from the very first day.

I remember assembling around a boardroom table 36 floors up in the Brisbane CBD – a new Labor Treasurer, a handful of incoming senior staff, and half a dozen of the most senior Treasury officials including Ken Henry and his deputies.

I remember they’d dressed down for us Queenslanders – and for the late November heat – light coloured chinos and colourful short sleeved shirts.

And I remember being briefed on challenges in the economy, known and anticipated, and being really excited about the tremendous possibilities of working with the most talented public servants in the APS.

I bring this up because whoever wins the next election, whether it’s Josh Frydenberg or I or someone else receiving that briefing, we know what part of that briefing will include.

The challenges laid bare by the IGR – ballooning debt; people and population; a future economy growing slower over the next forty years than the last.

And the geopolitical opportunities and threats, perhaps, the global scramble for talent, pressure on supply chains, cryptocurrency, and much more.

If that Treasurer is me, the day after the next election in March or May, I want to ensure the Treasury is at the very centre of the action where it belongs.

In climate change – modelling and the whole agenda around financial market disclosure, governance and investment certainty.

In measuring what matters – a budget that measures progress and wellbeing; a more robust IGR in the middle year of every term; a proper sense of tax expenditures and their costs; and, in time, some steps towards an Evaluator-General.

In writing a Full Employment White Paper – focusing on wage growth and secure work.

Undertaking a review of the Reserve Bank – and the relationship between our fiscal and monetary policy settings. 

The challenges of the years ahead are going to require us to work together, to take the advice of economists and experts seriously, and to be more ambitious than to go back to how things were in 2019 or before.

If I get back to Treasury, stagnant wages and job insecurity and tepid growth can’t be like the recurring decimal in the Keynes story I kicked off tonight with.

In too many ways, this has already been a wasted decade of missed opportunities in our economy, but we need not consign ourselves to another.

As Keynes said eight decades ago, recognising this “will make an enormous difference when we get down to it”.

We have options, they matter, and I hope I’ve given you a sense tonight of the type of choices we’d make, and why.

Thanks again and I look forward to the discussion.