growing together: the australian social democratic model · (change slide to chart 2) the...

(SLIDE ONE ‐ TITLE)

GROWING TOGETHER:

THE AUSTRALIAN SOCIAL DEMOCRATIC MODEL

Presentation by Hon Wayne Swan MP Member for Lilley

Treasurer (2007 – 2013) Deputy Prime Minister (2010 – 2013)

Over the last thirty years – and eighteen years of social democratic Government ‐ the Australian economy has become one of the most open in the developed world. Despite the headwinds of the global financial crisis over the past six years, the Australian economy grew by 15 per cent.

While we’ve seen some increase in concentration of wealth amongst the very rich, pleasingly we’ve seen lower and middle income earners hold their ground.

Unfortunately there does remain, however, pockets of intergenerational disadvantage.

Overall, lower income earners in recent times have done even a little better.

Two areas of policy within Hacker’s framework stand out.

Firstly, our industrial relations framework which secures a relatively high minimum wage and also the ability of labour to collectively bargain. Secondly, high quality and affordable health and education services which produce a skilled and productive labour force.

A third area is more traditional and that is a targeted, effective and progressive tax and transfer payment system.

And Australia also has a good record in setting the broader rules of the game in which things like CEO pay and prices for basic goods and services are decided. As the potential rewards at the top and the complexity of day‐to‐day life increases, these less obvious forms of pre‐distribution become more important.

The Australian experience outside industrial relations and superannuation has steered away

from heavy government regulations and has stressed competitive markets. Our direction is

within the empowerment stream of pre‐distribution with a heavy emphasis on investment

in education, health, infrastructure as well as competitive markets.

(CHANGE SLIDE to Chart 1) THE MACRO ECONOMY

Australia is in its twenty‐third year of economic growth which is quite a remarkable achievement.

Australia is the fifth richest nation in per capita GDP terms, according to the IMF behind only Luxembourg,

Qatar, Norway and Switzerland.

There has been more than ten years since Australia’s unemployment rate was above 6 per cent (a figure

reached again in January this year). Over the last twenty years, inflation has averaged 2.5 per cent.

The level of net Government debt stands at 10 per cent of GDP. For the OECD the average is around 100

per cent of GDP.

There are many reasons for this remarkable quadrella of economic achievements.

Firstly, sound fiscal policy settings.

Secondly and most importantly, thirty years of structural reforms that have made Australia more open to

the world and the world more open to Australia.

To name a few; floating of the dollar, bringing down of the tariff wall, enterprise bargaining and a decent

minimum wage, Medicare and national superannuation.

Australia is also a significant beneficiary of being in the right part of the world at the right time. Growth in

Asia has driven increases in our terms of trade and national income, and good productivity growth has

delivered higher living standards.

The Australian economy is 15 per cent bigger than at the end of 2007.

Chart 1 shows that we have outperformed almost every advanced economy during the global financial

crisis.

CHART 1 ‐ GDP growth since 2007, G7 economies and Australia, per cent

Source: IMF World Economic Outlook database Source: IMF World Economic Outlook database

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(CHANGE SLIDE to Chart 2)

The Australian economy does, however, face a productivity challenge.

The answer lies in lifting investment in infrastructure, educational reform through funding

and quality initiatives and boosting labour force participation.

This challenge can be seen in the chart below.

Chart 2 shows the increase in our living standards – measured by the rise in real income per

hour worked – together with the increase in productivity.

CHART 2 – Productivity and Income

HOW DID WE GET HERE?

As our Deputy RBA Governor has said, twenty years ago these economic outcomes could

hardly have been described as typical or expected.

While it’s true that the China story has driven national income, it’s not just a China story. In

particular, Australia grew during the global financial crisis despite a downturn in mining.

We have been lucky, but we’ve also made our own luck through:

• good fiscal and monetary policy;

• a strong financial sector;

• a reform strategy to increase our competitiveness and an investment strategy to lift

our productive capacity; and most importantly

• Policies aimed at growing together.


INCLUSION ‐ THE FAIR GO – EQUALITY OF OPPORTUNITY

There has been healthy median income growth in Australia over the last decade despite the

global financial crisis, and the initial downturn in terms of trade that came with it.

This contrasts with the concerns that have been coming out of the US regarding near

stagnant income growth for the typical household.

In 2012, the real median household income was down to $51,017 from $51,100 in 2011.

In 1989, the median American household made $51,681 in current dollars. That means

around 25 years ago, a middle class American family was making more than a middle class

family was making two years ago.

Chart 3 shows an index of real median household income based on ABS Income Surveys

since 1981–82. For middle‐income Australian households, income growth over the first

decade was very low, with small gains in the late 1980s lost in the recession of the early

1990s. But it is fair to point out that many other countries had similar or worse experiences;

real median incomes in New Zealand, for example, fell 15 per cent in the 1980s.

Chart 3: ‐ Trends in real median equivalised household income, Australia, 1981–82 to

2011–12 (1981–82 = 100)

Source: Calculated from Johnson and Wilkins (2006) and Australian Bureau of Statistics, Household Income and Income Distribution surveys, various years.


Although the poorest households aren’t doing as well as the higher income earners, real

disposable incomes are now 40 per cent higher than they were in 1995.

Middle (median) income households are more than 50 per cent better off than in 1995.

The 2013 ABS survey of wealth and wealth redistribution shows real median wealth is about

8% higher in real terms than it was in 2005‐06. In the US, by contrast, real median wealth is

about 35 per cent lower than in 2005.

Chart 4 shows the pattern of growth for households at different points on the overall

income distribution, ranging from households at the tenth percentile (where only 10 per

cent of the total population have lower incomes) and for different decile points up to the

nineteenth percentile (where only 10 per cent of the population have higher incomes).

Chart 4: Trends in real incomes at different decile points, Australia, 1994–95 to 2011–12

Cumulative percentage change in real equivalent income‐unit income

Source: Calculated from Australian Bureau of Statistics, Household Income and Income Distribution surveys, various years.


SOCIAL MOBILITY

As well as sharing the gains of economic growth, Australia has done a good job at preserving economic and social mobility – the idea that success can be determined by effort, not by where you were born or the wealth you inherit. The chart below shows that across 17 OECD economies, Australians that are in the bottom 20 per cent of income earners and are equally the third most likely to lift themselves out of that situation within three years. Canadian economist Miles Corak has surveyed a wide range of studies into mobility across generations by looking at the extent to which a father’s income is a predictor of what his son will earn. Chart 5 shows this comparison. The lower the value is in the chart means the less a son’s income is determined by his father’s in that country. It shows that economic mobility is twice as great in Australia as it is in the US and the UK.

Chart 5: Extent to which a father’s income is a predictor of what his son will earn

Source: Miles Corak 2012


Another indicator that’s received a lot of attention over the past year is the rising share of

global income. Australian research shows that shortly after the Second World War, we

were roughly equal with the US and the UK in the percentage of total income going to the

top 1 per cent – around 10 per cent. The latest data has Australia’s richest receiving an 8.9

per cent share – around half the level in the US and well below the UK. It shows although

we’re more equal than other countries, we will still need to work hard to retain the fair go

and the fair society that we have built together.

To date, Australia has held back the tide engulfing low and middle income earners

elsewhere in the world. But this is at risk again from Tea Party political strategies familiar

around the world. In particular, a massive campaign from the Right in Australia has

demonised deficit and debt as a precursor to making the argument for a savage attack upon

the Australia social safety net and industrialisation system.

Chart 6 shows the income share of the top 1 per cent across Australia, the US and the

UK(%).

Chart 6: Income share of the top 1 per cent across Australia, the US and the UK(%)

Source: The World Top Incomes Database


WHAT HAS DRIVEN THESE TRENDS

JOBS AND INDUSTRIAL RELATIONS

One of the most important influences has been the growth in wages and employment after the

recovery of the recession in the early 90s. An enterprise bargaining system for wages and

conditions, over a safety net of mandatory minimum conditions, has delivered a degree of

bargaining power to the workforce.

Australia has a relatively high minimum wage by international standards (see chart below).

In Australian dollar terms this means $32,000 a year or around $18 per hour.

Chart 7 shows Australia’s minimum wage relative to other developed economies.

Chart 7: Minimum relative to average wages of full‐time workers, per cent, selected OECD countries (2011)

Source: OECD.

Flexibility above that is provided through enterprise bargaining.

Consistent with international research, arguing the best way of significantly flattening pre‐tax

inequalities is to raise the bargaining power of wage earners.

Rates of unionisation in Australia are continuing to drop.

In 2006/07 the conservatives tried to remove minimum standards and replace enterprise

bargaining with individual bargaining.

With a return to Government last year, this agenda will be bitterly contested in Australia over the

next two years.

In Australia, there is also an ongoing debate about the quality of permanent/casual employment

and whether insecure employment gives better long term outcomes for the young.

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OTHER FORMS OF PRE‐DISTRIBUTION

There are other forms of pre‐distribution that Australia does well too.

The Government introduced in 2011 laws to give shareholders a greater say on executive

remuneration. This helps shareholders to ensure pay is based on performance, as it should

be.

And both our existing competition laws and reforms, such as to boost competition in the

banking sector, help prevent businesses exploiting market power or consumer failures (eg.

difficulty understanding complex contracts, failure to take into account hidden costs etc) to

extract higher prices.

Higher prices for essential goods and services erode the real wage of low and middle

income earners just as surely as a wage cut.

You can also see this in the approach the Government takes to negotiations on goods like

pharmaceutical drugs, where prices are regularly reviewed to ensure they are appropriate

and not too high.

These policies are just as important to protect. Indeed, with globalisation and technology

pushing up the salaries of top income earners, the complexity of day to day goods and

services that consumers are expected to grapple with on the rise, and increasing value in

intellectual property, which governments set the rules for, this is an area that might

become increasingly important.


TAX AND TRANSFER PAYMENTS

Australia has a progressive tax system with a value added tax at 10 per cent (not covering

fresh food) and a relatively higher reliance on progressive personal income tax.

A highly targeted, efficient and poverty alleviating transfer payment system that supports

workforce participation and low income earning families.

Transfer payments including age pensions and support for the unemployed, are usually

based on a means test, so relatively high benefits at relatively low cost to the Budget (total

Federal Government spending 25% of GDP).

Government tax and benefit pattern has substantially mitigated widening before‐tax‐and‐

benefit income inequality, evident in Australia as elsewhere.

Chart 8 shows that our welfare expenditure is modest by international standards.

Chart 8: Total welfare expenditure, per cent of GDP (2009)

Source: Australian Institute of Health and Welfare, Australia’s Welfare 2013.

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HUMAN CAPITAL – HEALTH AND EDUCATION

Health

Australia is one of the most efficient and effective universal health systems offering free or

minimal cost medical or hospital treatment with options for private insurance for private

hospitals and choice of doctor.

The cost of healthcare, particularly for middle and low income families, is a critical factor in

maintaining decent living standards. Over the long term it is one of the most important

investments that we can make in our people and more particularly in the quality and health

of our workforce.


Education

Universally accessible mixed state and private education is a pillar of the Australian social

democratic model. All children are entitled to free primary and secondary education which

is a standard around the middle of the OECD.

Participation in university education is encouraged with fee deferment until employment,

and then modest share of income. We have seen a rapid increase in university education

share, though we are still catching up to the US.

The public and private vocational education system is extensively supported with public

support for a wide range of skills training.

Labor has identified further reforms to lift the quality of teaching and educational outcomes

as an urgent priority for lifting national productivity and wealth creation. This is made even

more urgent by declining educational performance in key cohorts and a dramatic lifting of

educational outcomes among our Asian neighbours.

Chart 9 shows Australia has to lift its standards considerably to maximize returns arising

from the Asian century.

Chart 9: Test score Inequality and earnings inequality

Source: Economic Journal


The Asian Century White Paper published by the Gillard Government last year provides a

very important reference point as to how this agenda will play out globally.

Australia’s Performance in International Student Assessments (PISA) shows we have an

above‐average schooling system. However, Australia’s average rankings in PISA have

declined over the past decade, and mask significant variation within and across the three

schooling sectors.

In 2000, only one country outperformed Australia in reading literacy and mathematical

literacy, and two countries outperformed Australia in scientific literacy. By 2009, Australia

was significantly outperformed by six other countries in scientific literacy and reading

literacy, and 12 countries in mathematical literacy (see Chart 10).

Chart 10: Australia’s mean scores in reading, mathematical & scientific literacy in PISA,

2000 and 2009

RETIREMENT INCOMES

Our retirement system is built on three pillars:

• The means and asset tested Age Pension;

• Compulsory Superannuation; and

• Tax assisted Voluntary Superannuation.

The big leap in the structure came with occupational superannuation which evolved into

compulsory superannuation with the introduction of the Super Guarantee Charge in 1991

and its extension to universality in 1992.

That change was a defining one for Australia.

Few democracies can encourage their workforce to save at least 9 per cent of the wages –

let alone 12 per cent ‐ and even more – voluntarily on top of that.

But Australia did.

We did it through the unlikely combination of:

• A then centralised wage fixing system; • A formal government policy structure with the workforce – The Accord; and • A boost to productivity coming from a decade of macro and micro‐economic policy reform.

Labor legislated a staged increase from 9 per cent to 12 per cent over a period of eight years, and this is now threatened.


TAX EXPENDITURES

Across developed countries Budgets are stressed and governments are looking for either

increased revenue or cuts to existing expenditure.

In Australia, a strict fiscal policy has paired expenditure to the bone and further cuts will

endanger key investments in education and health.

In Australia, the last remaining source of revenue lies in a series of tax expenditures which

disproportionately benefit high income earners.

Chart 11 shows that Australia’s tax expenditures are skewed towards high income earners.

Chart 11: Tax expenditures for superannuation by income decile, per cent (2009‐10)

Source: The Treasury, Distributional analysis of superannuation taxation concessions.

Putting integrity back into the tax system is a critical way of government continuing to

provide support through the tax and transfer system to low and middle income earners.

Tackling poorly targeted tax expenditures have also been one way in which we've been able

to create a more progressive tax system in a way that has been easier for the community to

accept.

And we've seen that over the past couple of years.

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For example, we closed off a loophole in fringe benefits tax that had allowed CEOs to

receive tax free allowances for renting luxury homes and apartments, and removed

generous tax concessions for golden handshakes.

And in the long run, these initiatives can help strengthen the social contract. People are

much more likely to be happy to pay their taxes to support the social safety net if they think

everybody else is doing the same.

Example: The World Values Survey shows that in the early 1980s only 48% of Australians

thought it was never ok to cheat on your taxes, compared to 67% of US respondents. By the

mid 2000s it was 64% in both countries. We didn't slash taxes and spending over that

period, but we did introduce capital gains tax, fringe benefits tax and plug a lot of holes in

the system in doing so.

(CHANGE SLIDE to Conclusion)

CHALLENGES AHEAD

In a country which didn’t suffer savage increases in unemployment or reductions in income

during the global financial crisis, the case for our social democratic model is now under

fierce attack from those who believe our public sector is too large and our pattern of

expenditure is too unproductive.

The challenge for Labor in Australia is to centre our agenda on an overarching theme of

intergenerational mobility and its maintenance.

There is a strong reservoir of support for our existing industrial relations system and a deep

attachment to Medicare and universal education.

Finding new ways to carry our message and update our policy, in the face of the savage

counter attack from conservatives, well‐funded by large multinational companies and the

Murdoch empire is the task ahead.

(CHANGE SLIDE to Finish)

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