Andrew Leigh

ECONOMIC REFORM: AMBITION VERSUS ZUGZWANG

SPEECH TO AUSTRALIAN COUNCIL OF SUPERANNUATION INVESTORS ANNUAL CONFERENCE

MELBOURNE

WEDNESDAY, 8 MAY 2019

(Check against delivery)

I acknowledge the Wurundjeri people of the Kulin Nation and pay respect to their elders.

Introduction

My thanks to the Australian Council of Superannuation Investors for the chance to speak with you about Labor’s positive plans for the economy.

In an era of shrill soundbites, your organisation has a track record of producing careful research that shapes policy debates. Your research reports have dovetailed closely with our priorities, covering topics such as modern slavery, fossil fuel investments, and whistleblowing. I know this research is closely read by my colleagues Chris Bowen, Jim Chalmers, Clare O’Neil, Madeleine King, and Matt Thistlethwaite. Fresh ideas can help shape the policy debate for the better.

To take just one example, you publish an annual report on CEO Pay in ASX200 firms. Last July, the Australian Council of Superannuation Investors reported that the best-paid CEO in Australia, Don Meij, received $37 million. Commentators were quick to note the contrast between this pay packet and the reported underpayment of Domino’s pizza workers.

Four months later, in November, I announced that a Labor Government would require large listed firms to publish the ratio of CEO pay to the pay of the median worker in that firm. With real wage growth for most workers flatlining, we believe that such reporting will encourage companies to ensure that pay rises happen across the firm – not just in the corner office. Our policy was backed by investors, unions – and Don Meij himself, who said that Labor’s plan would promote transparency and help lift the pay of workers, and that it would not be onerous for firms, who already keep significant data on employee pay.

Pro-Market Progressives

Labor believes that markets, like gardens, grow best in sunlight. That’s why we’re committed to a register of beneficial ownership and country-by-country reporting of tax payments by the largest multinationals, to disclosure of tax haven dealings and reporting of the gender pay gap for big employers. If you’re tendering for a large government contract while headquartered in the Cayman Islands, you’ll have to ‘fess up about it. We’ll work with superannuation funds to develop appropriate guidelines for investments in tax havens.

Now, I imagine that I may have already mentioned a few policies you haven’t heard about before, and that illustrates the broad point I wanted to make today.

Over the past six years, Labor has spent our time engaging with community groups and corporate leaders, union members and thinktanks. We’ve had one leader, one deputy leader, one Shadow Treasurer, one Shadow Health Minister and one Shadow Attorney-General. For that matter, I’ve been the Shadow Assistant Treasurer throughout our time in office – helping craft our policies on tax, competition, charities and productivity. Stability of personnel has meant that our energies have been channelled into policy development.

Lacking fresh ideas of their own, our opponents resort to pre-fabricated fear campaigns. Many Morrison ministers are ducking policy debates. Their energy policy is not to have a policy. There’s no long-term vision for competition reform, tax reform, education or foreign policy. The Germans have a word that sums up the Coalition’s predicament. Zugzwang: the situation where a player would prefer to pass, and only makes a move when compelled to do so.

Headwinds

This is a particular problem because Australia faces some serious economic challenges. Living standards have stagnated. Wage growth has hit record lows. Business investment has fallen. Energy costs have risen. Household debt is at record highs. Government debt has doubled, to nearly $15,000 per person in net terms. Over the past generation, inequality has risen. Home ownership is at its lowest level since the 1950s.

From a productivity standpoint, there are signs that the economy has become less dynamic. A recent study by Sasan Bakhtiari found that the business start-up rate had fallen from 15 per cent to 9 per cent over the previous decade. As the author noted, ‘the Australian entrepreneurial landscape has become less dynamic and more hazardous … relatively fewer entrepreneurs are entering the market, and those that enter are more likely to exit’. Many sectors of the economy are dominated by a few big firms. The Harvard-MIT Atlas of Economic Complexity ranks Australia lamentably low for economic complexity.

When it comes to economic policymaking, politicians have a responsibility not only to incumbent businesses, but also to creating the right ecosystem for new challengers to emerge, and entrepreneurship to thrive.

That means that the relationship needs to be akin to the position of planets in the solar system, orbiting around the sun. Too far away, and you’re out of touch. Too close, and the risk of crony capitalism becomes excessive.

While the anti-growth Greens are on Neptune, and the Liberals are on Mercury (where the heat burns up any intelligent life), Labor comfortably occupies the third rock from the sun. We’re a pro-market party that wants the best for the economy: not just today’s businesses, but tomorrow’s start-ups.

Our plan for productivity revolves around investing. We will invest in individuals by expanding early childhood, boosting funding to public schools, raising apprenticeship rates and uncapping university places. We will invest in infrastructure, with an NBN Service Guarantee, and an ambitious plan for more rail, better roads, and expanded bike paths networks. We will invest in institutions, with an Australian Investment Guarantee, a FutureAsia strategy, and a focus on science and research.

The investment approach to productivity seeks to raise living standards without leaving people behind.  It stands in contrast with our conservative opponents, who typically see productivity as being about cutting: cutting protections for workers, cutting environmental regulation and cutting the social safety net. Theirs is a race to the bottom. Ours is a race to the top.

Banking Royal Commission

When it comes to getting market institutions right, no sector is more important than finance. Simply put, the role of finance is to match the supply of short-term savings with the demand for long term loans. The sector often gets a bad rap. As Nobel laureate Robert Shiller has noted, ‘finance is widely viewed as an activity that promotes inequality’. But he argues that in fact the industry serves a vital social purpose. He says ‘done well, financial institutions can be democratising and can reduce inequality if they are set up right. Finance is not merely about making money. It's about achieving our deep goals and protecting the fruits of our labour. It's about stewardship and therefore about achieving the good society.’ 

Three years ago, Labor made the decision to call for a Banking Royal Commission. I don’t think there are many now who would say that it was a mistake. But at the time, there were plenty of people who argued that Labor was just playing politics. Scott Morrison and Josh Frydenberg variously said it was ‘regrettable’, a ‘populist whinge’, a ‘reckless distraction’ and a ‘QC’s complaints desk’. Unlike them, Malcolm Turnbull has since had the honesty to apologise to the Australian people for delaying the Royal Commission.

The Royal Commission concluded that institutions had pursued short-term profit at the expense of basic standards of honesty. Misconduct either went unpunished, or was met with an inadequate response. Customers paid for products that were inadequate or non-existent. Large banks took advantage of the massive power imbalance with their customers to keep them in the dark. What should have been simple – obeying the law, not deceiving customers, acting in the best interests of the client – was routinely breached. The Royal Commission made 24 referrals to ASIC and APRA to take action over misconduct.

If anything vindicates the ability of Labor to get the big economic calls right, it’s our decision to call for the Royal Commission.

In the wake of the Royal Commission, the Morrison Government claimed it was ‘taking action’ on all the recommendations. Regarding the Commission’s findings on mortgage broker remuneration and trail commissions, Josh Frydenberg simply said ‘tick’.

Thirty-five days later, in what Chris Bowen has dubbed ‘a backflip with triple pike’, the big tick had turned into the big flick. As RMIT Associate Professor Michael Rafferty put it, the decision symbolised the ‘inability within the Liberal Party at the moment to navigate obvious reform’.

The Liberals’ backflip came despite Commissioner Hayne pointing out that the broker’s work is complete when the loan is arranged, and brokers have no obligation to provide continuing services in return for their trail commissions. It came despite a previous Productivity Commission inquiry concluding that ‘trail commissions have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower’.

The backflip is disappointing, but it’s not surprising. As respected commentator Michelle Grattan observes, the Abbott-Turnbull-Morrison Government came to office ‘determined to weaken protections’ in the financial sector. But what the backflip does is to remind Australians that in a choice between vested interests and consumer protection, the Morrison Government will choose the lobby group every time. It leaves little doubt about whose side the Coalition are really on.

Labor takes a different view. We will address the Royal Commission’s recommendations by legislating a flat upfront commission rate to avoid mortgage brokers’ advice being conflicted by the rate of the commission. We will accept the Royal Commission’s recommendation to prohibit trail commissions, abolishing them on new loans from 1 July 2020.  And we will ban volume-based commissions and incentives.

Labor will implement in full the other 75 recommendations of the Royal Commission.

Because we called for this Royal Commission, Labor wants to ensure that it is properly implemented. Under a Shorten Government, we will require the big four banks, ASIC and APRA to develop implementation plans by 1 August 2019, and publicly report to the Royal Commission Implementation Taskforce every six months on their progress in implementing recommendations.  CEOs of the four major banks and the Australian Banking Association will also be expected to report every six months to the House of Representatives Economics Committee. 

Prompt implementation of the Royal Commission’s findings isn’t just the right thing to do for customers. It’s also the right thing to do for the finance sector. If we want our banks to be healthy, respected and ready to deal with upcoming challenges like fintech, then we need to address the Royal Commission’s findings in a thorough and timely manner.

A stronger finance sector will be good for the Australian economy, but it’s not the only reform that’s necessary if we’re to build a more productive economy.

Tax Reform

On tax reform, our focus will be on closing tax loopholes. When I was studying public finance, one of my professors was Martin Feldstein, Ronald Reagan’s chair of the Council of Economic Advisers.  Feldstein emphasised the importance of reducing what he called tax expenditures, or what we call tax loopholes. Doing so, as he points out, raises revenue more efficiently than increasing tax rates. But in addition, tax expenditures tend to be much less fair than budgetary expenditures, so closing loopholes is much more equitable than cutting spending.

That approach has informed Labor's tax philosophy over recent years, as our economic team has made a number of politically challenging decisions to close tax loopholes. We’ll prospectively restrict negative gearing to new built homes, ensuring that that particular tax concession helps add to housing supply.  We’ll prospectively halve the capital gains tax discount from 50 to 25 per cent.  To address unfair income splitting, trust distributions to adult beneficiaries will attract a minimum tax rate of 30 per cent. For people who don’t receive a pension or allowance, we’ll end the practice of giving a fistful of cash to people who paid no tax.

When I hear the Liberals reflexively defending all these tax loopholes, I think of Liberal leader Andrew Peacock, who in 1983 described a pension assets test as an ‘assault on the elderly’, and a ‘callous and cynical grab for funds’. If elected, he pledged that the Coalition would repeal the pension assets test.  Eventually, they did win government, and yet they made no attempt to scrap the pension assets test.  By the time the Howard Government came into office, the only thing the Liberals had scrapped was their unaffordable and economically reckless pledge to wind back the pension assets test.

Climate Change

We also need meaningful action on climate change, which recognises that climate risks are material and substantial.  Natural disasters, which already cost the economy $18 billion a year, are projected to grow more frequent and severe. The Reserve Bank has acknowledged the risk posed to financial stability.  APRA has noted the financial risk of unchecked climate change.  The Investor Group on Climate Change has pointed to the need for adequate carbon risk disclosure.  Yet if the Coalition had a serious plan to address climate change, Malcolm Turnbull would still be the Prime Minister.

Emissions are on the rise, and we’re not getting the renewables investment that should be flowing into Australia.  Labor takes climate change seriously, and we will act to reduce emissions in line with what the Climate Change Authority says is required to meet our international commitments.  And while I’m on the topic, we also believe that it is entirely consistent with the best interests’ duty for superannuation trustees to take account of climate risks in deciding where to invest.

The Economics of Diversity

Finally, under Labor, you will see a stronger recognition of economic value of diversity.  The evidence on diversity is increasingly powerful.  Diverse cities are more productive.  Diverse firms are more creative.  Diverse boards make better decisions. Australia’s multiculturalism doesn’t just make us a more interesting nation; it’s also a core driver of our national prosperity.  Reducing gender discrimination is about productivity as well as equity.

The Australian Council of Superannuation Investors has played a leading role in issues of diversity.  I commend you on taking the ‘panel pledge’, to ‘only participate in events which are gender diverse’.  As a political party, Labor has benefited greatly from more women in our caucus.  If we win government on 18 May, our party room will be, for the first time, 50 per cent women.  And we will be a better government for it.

We also need to recognise the economic benefits of ethnic and racial diversity, and the cost of allowing hate speech and racial discrimination to flourish. Every Labor MP has signed a parliamentary code of conduct on race and cultural ethics, committing to a fact-based debate on issues of race and ethnicity, and valuing diversity.  We have repeatedly encouraged the Coalition to have their members sign up, but they continue to refuse.

As former Race Discrimination Commissioner Tim Soutphommasane has noted, ‘increasingly the Coalition is being defined by its acceptance of right-wing bigotry.  It’s there in Coalition preference deals with Clive Palmer’s United Australia Party and Pauline Hanson’s One Nation.  It’s revealed in the flirtation some Liberal MPs have had with the plight of white South African farmers, a cause popular among white supremacists and neo-nazis.  The resignation this week of three Liberal candidates over anti-Muslim and homophobic statements confirms the Trumpification of the party.  This is what you get when people start believing they have ‘a right to be bigots’.

Right-wing populism isn’t just an issue of politics – it’s an issue of economics too. Imagine if the rest of the world came to perceive that we were engaged in a re-run of the White Australia policy.  What would it do to our tourism sector, our education exports, and our standing in international economic forums?  The social cost would be massive, but so too would the economic impact.

Conclusion

Imagine the next time you wanted to catch a flight, the airline said that they didn’t know exactly where the plane was going, but they’d love to have you buy a ticket, and the pilots would figure out after take-off where the airplane would go. Is that the kind of plane you’d like to board?

Imagine too that while the airline couldn’t tell you where they were going, they had a very firm idea of where they were not going to fly to.  ‘Our competitors like flying to Sydney and Melbourne’, they’d say.  ‘We are definitely not going there.  We’ll take you to a much better place instead.’

If that doesn’t sound like a very attractive airline to you, then you should have a similar scepticism about the economic destination that the Coalition proposes to take us to.  Like Gilbert and Sullivan’s Iolanthe, they seem to think that putting ‘not’ in front of Labor’s policies constitutes a viable alternative.

Australia deserves better than an operetta.  Labor is ambitious for Australia - both domestically and on the global stage.  In the 2069 days since losing office, we’ve worked as a unified team.  We know what we stand for.  We know what we want to achieve.  You know us, and you know how much we value your ideas and constructive engagement.  If we win, we look forward to working with you in government, as we strive to be as good a government as the Australian people we seek to represent.

ENDS

Authorised by Noah Carroll ALP Canberra.