Australia is known for our ‘fair-go’ approach, but are we still delivering? Are we getting the balance right between risk and return as a nation? future[inc]’s latest thought leadership insight starts the conversation around how much risk we should expect government to regulate, how policy makers can provide equality of opportunity and what impact these decisions are likely to have on growth. This paper is the second in a series looking at the changing nature of policy-making in Australia. Download your copy.
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Risk-wise and a fair go? A plan for Australia’s continued prosperity.
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RISK-WISE AND A FAIR GO?
A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
Community engagement
Non-negotiable
Equality of opportunity
Capital cities
welfare
Policy reform
Climate change
Wealth management
leadership
SYSTEMIC
RISK
Resources
creative destruction
PREVENTION BETTER THAN CURE.
CHANGE IS INEVITABLE
DIGITAL DIVIDE
Risk management
Natural disasters
Fair go
Social cohesion
Strong political leadership
Rapid
pace of change
AGEING POPULATION
INNOVATION
DISRUPTION
CHANGING LANDSCAPE
EQUALITY
THE BEST RESPONSE TO RISK
IS NOT TO AVOID IT BUT RATHER TO MANAGE IT.
EDUCATION IS NOT A PANACEA FOR DISADVANTAGE,
BUT IT IS JUST ABOUT THE NEXT BEST THING.
TECHNOLOGICAL CHANGE WILL CREATE WINNERS AND LOSERS IN BUSINESS.
FISCAL SUSTAINABILITY
ASIAN CENTURY
URBANISATION
THE MEGATRENDS AFFECTING AUSTRALIA IN COMING YEARS WILL IMPOSE NEW AND GREATER RISKS
ON THE ECONOMY AND INDIVIDUALS.
3. FOREWORD
If Australia was a business – and in many respects it exhibits similar fundamental features to any ordinary business – success could be highly dependent on whether or not sufficient time has been invested in planning its strategy and clearly defining its market position, goals and objectives.
This thought kick-started our future[inc] thought leadership series about
18 months ago. We wanted to look at major economic and social megatrends and the impact they could have on
our ability to compete internationally.
We discussed Australia’s strengths, weaknesses, opportunities and
threats concluding that whilst we
will no doubt benefit from the major growth engines of the 21st century,
we can’t be complacent when planning and applying policies that could
either hamper future generations
of Australians, or which could contribute to a better way of life
for our children’s children.
Since then, future[inc] has also
looked at how we measure the
success of a nation and posed the question ‘Is it time to move beyond measuring national progress with GDP?’. We published ‘A Plan for
New Zealand’s Continued Prosperity’ and ‘An Economic Policy Platform
for the Next Term of Government’.
Mel Ashton FCA
President designate
We’ve also looked at cyber security, as cyber crime now, more than ever before, poses a major threat to individuals and businesses. Indeed,
it could herald the next financial crisis and is becoming one of the hot topics
for boards and CEOs.
Our intention with future[inc] was to fill a void that we believe exists in our current policy debate. This paper, ‘Risk-wise and a Fair Go? A Plan for Australia’s Continued Prosperity’ takes our thinking to a more granular level by focusing on our attitudes to risk, and questioning whether Australia is in danger of losing its ‘fair-go’ image – which would be very un-Australian.
I’d like to thank the team at Deloitte Access Economics and the many individuals at Chartered Accountants who contributed to the thinking in
this paper.
I look forward to continuing the
debate with you.
charteredaccountantsanz.com/futureinc
4. … WHAT WOULD THE ATTRIBUTES
OF INCLUSIVE CAPITALISM BE?
Trust, opportunity, rewards for
all within a market economy –
allowing everyone’s talents to flourish.
Certainly, that is the vision.
CHRISTINE LAGARDE, MAY 20141
5. CONTENTS
06
EXECUTIVE SUMMARY
08
INTRODUCTION
10
THE CHANGING
LANDSCAPE
17
MEGATRENDS
24
RISK
33
AUSTRALIA: LAND OF
THE FAIR GO?
44
CONCLUSION
46
REFERENCES
6. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
6
EXECUTIVE
SUMMARY
Policy is developed in an increasingly
changing landscape. The global financial
crisis has influenced economic policy and
outcomes for much of the last decade
and the developed world is still feeling its
effects. Australia and New Zealand have
benefited greatly from the rise of Asia in
recent decades but we cannot take this
prosperity for granted.
Looking forward, several trends are likely
to dominate the environment in which
policy is made. In addition to the rising
importance of Asia, the list of ‘megatrends’
includes an ageing population, urbanisation
and the advancing technology frontier.
These forces cannot be avoided; instead,
policy must adapt to make the most of the
opportunities they present and to manage
their disruptive impacts.
Eighteen months have passed since the
launch of ‘Developing a Plan for Australia’s
Economic Prosperity’, yet while we have
seen a change of government and numerous
reviews, in many respects the issues facing
Australia into the future remain largely
unchanged. This paper extends our thought
leadership into new areas – areas that are
exposed in public debate but still require
consideration as part of a broader policy
discussion. Specifically, they include risk and
equity, and the roles and responsibilities of
businesses, individuals and governments in
dealing with the associated challenges.
7. 7
future[inc]
RISK
Are we as individuals and as a nation
approaching risk in the right way? Wellbeing
can be improved by raising income, but this
also requires managing the uncertainties
around that income. Aggregates such as GDP
provide one measure of welfare but ignore
the uncertainties or risks that people face.
The notion in financial markets that there is
a trade-off between risk and return holds
more generally. Over time we appear to have
become a more risk-averse society, with
people increasingly looking to government
to regulate away potential risks.
But avoiding risk carries cost, both in terms of
the compliance burden imposed on business
and government and in limiting the power
of ‘creative destruction’ to deliver welfare-enhancing
innovation. The best response to
risk is not to avoid it, but rather to manage it.
Policy should seek to measure aggregate
risks and ensure that they are borne by those
best placed to do so. Of concern is that the
policy response will seek to avert risk rather
than manage it. The issue is not whether we
should be risk-averse or risk-seeking, but
rather that we should be more literate and
better informed about risk—that is, we should
become risk-wise.
AUSTRALIA: LAND OF
THE FAIR GO?
Australia’s self-image typically highlights the
notion of a ‘fair go’: the idea that any of us
should have the opportunity to get ahead
regardless of his or her circumstances. While
high levels of social mobility have tended to
support this self-image, increasing disparities
in income between the wealthiest and the
poorest among us are challenging this
view. On several key measures of equality,
Australia’s performance is only ‘average’
by developed-world standards.
International Monetary Fund (IMF) and
Organisation for Economic Cooperation and
Development (OECD) studies show that,
beyond a point, wider dispersion of income
can both increase social tension and decrease
economic growth. In such circumstances
there is a role for government to address the
worst inequalities through tax and transfer
mechanisms.
The megatrends – especially globalisation
and new technologies – are raising wealth
levels overall but are also widening the
dispersion of outcomes. This reflects the
market at work, as individuals and businesses
take advantage of the opportunities provided.
The challenge for policy is how best to foster
economic growth while ensuring that the
more vulnerable members of society are
not left behind.
Policies directed at creating equality of
opportunity are the starting point when
dealing with inequality, especially policies
aimed at increasing participation by those
marginalised from the labour force. Indeed,
increasing the engagement of these people
will deliver double-dividend outcomes, where
both the size of the national income pie grows
and much of the growth accrues to those who
previously received the smallest portion.
Bipartisan support for the National Disability
Insurance Scheme (NDIS) shows that such
policies can be implemented. Policies that
allow the market to work coupled with
policies directed at promoting equality of
opportunity are essential.
If Australians are to emerge from these
challenges at least as well off as we enter
them, strong political leadership will
be required.
Short-term political and budgetary
pressures often work against long-term
solutions, but engagement with the
community and building the case for
reform can help align these priorities.
8. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
8
INTRODUCTION
In April 2013, Chartered Accountants
Australia and New Zealand (then the
Institute of Chartered Accountants
Australia) launched the future[inc] series
with the release of Developing a Plan
for Australia’s Economic Prosperity. It
highlighted long-standing areas of policy
debate: productivity, infrastructure
investment, federalism, balancing economic
growth, fiscal sustainability, and climate
change. Collectively, the issues identified
encompass many of the policy challenges
facing Australia now and in the future.
The policy landscape has shifted over the
past 18 months:
• there has been a change of federal
government and a corresponding shift of
policy direction in a number of key areas;
• the National Commission of Audit handed
down its report on government spending,
parts of which were incorporated into the
May 2014 Federal Budget;
• the Productivity Commission has
embarked on new reviews, including into
child care and natural disasters; and
• a number of dedicated policy inquiries have
been announced and commenced their
work, including:
–– the Murray Financial System Inquiry (FSI);
–– the Harper Competition Policy Review;
–– the Vertigan Review of the market and
regulation of the National Broadband
Network (NBN); and
–– the Commonwealth White Papers on
tax, defence agriculture and reform of
the Federation.
9. 9
future[inc]
Given these developments, it is important to
understand what progress has been made
since April 2013 and how the policy goals
have shifted.
It should also be noted that, taken together,
these reviews represent a significant number
of large-scale policy agendas being tabled
within a relatively short period of time. To
elevate this discussion above the noisy policy
environment, there is a greater focus on
anticipating or ‘foresighting’ longer-term
‘megatrends’ that policymakers will have to
contend with. Some trends can be projected
with greater accuracy than others; the
ageing population and evolving technology
being two examples at opposite ends of
the predictability spectrum. However, the
common factor is that these developments
will unfold regardless of the shorter-term
policy measures that are put in place.
There is uncertainty about how these trends
will affect society and individuals, and about
the risks we will be facing. Clearly, the best
way for society to meet the big challenges
is to enable everyone to contribute to the
best of their ability. Consequently, the policy
framework needs to accommodate both the
risk and equity dimensions.
How we manage risk in our economy and
in social policymaking is important. Current
thinking and evidence in the area suggests
that poor allocation and management of
risk is constraining the economy. Further, the
ways that risk is borne and flows around our
economy are changing, as a result of the long-term
megatrends we face now and into the
future. The risk-taking behaviour associated
with the GFC has dominated the airspace
in recent times. While there are clear policy
lessons from that episode, there is a need for
a separate public conversation about risk.
The megatrends will affect people in different
ways. Inequality has been increasing over
time in almost all countries for which reliable
data is available. In some parts of the world
this is starting to undermine social cohesion,
a cost which cannot easily be captured in
GDP or measurements of income dispersion.
Apart from their impacts on the economy
in aggregate, the megatrends need to be
explored to understand their effect on income
and wealth distribution, to ensure that the
equity of Australia’s society is not diminished
and all parts of our society benefit from
collective progress. The policy measures of
today need to maintain a healthy balance of
both equity and growth into the future.
To elevate this discussion above the noisy policy
environment, there is A GREATER FOCUS ON
ANTICIPATING or ‘FORESIGHTING’ LONGER-TERM
‘MEGATRENDS’ that policymakers will
have to contend with.
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10. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
10
THE CHANGING
LANDSCAPE
CHANGING POLICY
LANDSCAPE
STATE OF PLAY AND
THE SWOT ANALYSIS 01 02
11. 11
future[inc]
Australia is in a fortunate position, with
a history of strong institutions and
policymaking, a well educated population
and an endowment of natural wealth.
However, these factors should not be taken
for granted; nor should they be seen as
sufficient to overcome all future challenges
posed by rapidly changing technology and
geographical shifts of economic power. Strong
leadership will be required to introduce the
policy reforms that inevitably will be needed:
‘leadership of vision, leadership of thinking
and leadership of communication’.2
Evidence-based policy has produced some
of the largest economic gains in Australia’s
economic development. Microeconomic
reforms of the 1980s and 90s were politically
difficult to implement but yielded significant
gains to the community. Despite the clear
gains from such policy formulation, there are
aspects of today’s policymaking environment
that have shifted the scales against it.
01 CHANGING POLICY
LANDSCAPE
Governments use their first terms to define
their leadership on both social and economic
issues. As with many first-term governments,
the Coalition has set in motion a series of
policy reviews and inquiries to identify policy
options for the future. There are both benefits
and costs to this approach. On the one
hand, inquiries and reviews can provide the
information and consultation needed to
inform sound policy decisions. But too many
inquiries can lead to confusion and the
possibility that interrelated issues are siloed
in separate reviews.
… too many inquiries can lead to
confusion and can silo interrelated
issues into separate reviews.
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EVIDENCE-BASED POLICY HAS PRODUCED SOME OF THE LARGEST
ECONOMIC GAINS in Australia’s economic development. Microeconomic
reforms of the 1980s and 90s were politically difficult to implement but
yielded significant gains to the community.
12. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
12
Reducing red tape
whole of government
initiative
Tax Financial
Advisers
Regulation
Competition
Inquiry
Senate Inquiry
into the role
of ASIC
Senate Inquiry into
FoFA Amendments
Review of
retirement
income stream
regulation
Review of financial advice
in relation to SMSFs
Tax Reform
White Paper
Financial Systems Inquiry
Parliamentary Joint Committee
into professional, ethical and education
standards in the financial services industry
Cooper Review/Stronger Super reforms
– governance and efficiency of super system
Senate Economics
References Committee:
inquiry into forestry
managed investment
schemes
FIGURE 1: CURRENT INQUIRIES AND REVIEWS
SOURCE: Chartered Accountants Australia and New Zealand3
13. 13
future[inc]
Figure 1 shows a subset of the inquiries
and reviews currently underway in Australia.
When viewed as a Venn diagram, it is clear
that the terms of reference of many of the
inquiries overlap. In such an environment it is
difficult for policymakers to adopt a holistic
approach: individual recommendations
which make sense in the specific context
of one review may not be optimal in a
broader context or when combined with
the recommendations of other reviews.
Independent reviews can be a useful
process for consultation and independent
analysis of important issues, thereby
supporting evidence-based policy.
However, it is important that reviews
do not defer real action being taken on
important issues or represent a missed
opportunity for a young government to
implement meaningful reforms.
Developing a Plan for Australia’s Economic
Prosperity identified five key challenges
facing evidence-based policy. As Figure 2
shows, many of these pressures are unlikely
to disappear soon, meaning that the
environment in which decisions are made
is unlikely to become any less complex
and demanding.
OBSTACLES STATUS COMMENTS
The three-year electoral cycle
of Federal government
Unlikely to be resolved Here to stay
The 24-hour news cycle Unlikely to be resolved Here to stay
Policy capability and talent Unclear magnitude Cuts to the Australian Public Service may
reduce capability in the short term
Lack of information sharing Unclear magnitude Improvements in some areas but no
broad developments
Constitutional boundaries
and limitations
Unclear magnitude Federation White Paper may address this issue
but may also undo previous COAG gains
SOURCE: Chartered Accountants Australia and New Zealand, Deloitte Access Economics
FIGURE 2: OBSTACLES TO EVIDENCED-BASED REFORM
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14. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
14
STATE OF PLAY AND THE SWOT ANALYSIS
The last eighteen months have seen a new Federal Government sworn in and some
developments in parts of the SWOT analysis. We identify the key changes over this period
and how policy developments may shape these themes into the future.
STRENGTHS WEAKNESSES
• Soundness of economic policy
• A strong and resilient economy
• Geography, abundant natural
resources and close proximity
to dynamic emerging Asia
• Productivity growth
• Infrastructure deficit
• Intergovernmental relations
and the tax transfer system
OPPORTUNITIES THREATS
• Global economic
structural change
• Opportunity for reform
• Opportunity for greater
diplomatic role
• External economic threats
• Fiscal sustainability
• Climate change
SOURCE: Chartered Accountants Australia and New Zealand, Deloitte Access Economics
FIGURE 3: SWOT ANALYSIS FROM DEVELOPING A PLAN FOR AUSTRALIA’S ECONOMIC PROSPERITY
While we will benefit from the ongoing higher volumes of resource exports, the
economy will require STRUCTURAL SHIFTS AWAY FROM THE RESOURCES
SECTOR IF RISING UNEMPLOYMENT IS TO BE AVOIDED.
02
15. 15
future[inc]
STRENGTHS
The mining boom has made the transition
from the investment phase to the production
phase. While we will benefit from the
ongoing higher volumes of resource exports,
the economy will require structural shifts
away from the resources sector if rising
unemployment is to be avoided.
At the same time prices of bulk commodities
have fallen sharply, particularly for the key
export commodities of coal and iron ore.
While the recent fall in the exchange rate will
help cushion this somewhat, the overall effect
on national income will be negative. These
recent adjustments illustrate that relying on
receipts from the mining export boom is not
a long-term plan.
The transition away from reliance on the
resources sector has been anticipated for
some time. The challenge now is to create
an environment in which surplus capital and
labour can be used efficiently elsewhere in the
economy. Spending on urban infrastructure
is an area where this can be achieved, all
the more so as an infrastructure deficit was
considered a weakness.
The transition away from reliance on the
resources sector has been anticipated for
some time. The challenge now is to create
an environment in which surplus capital
and labour can be used efficiently elsewhere
in the economy.
WEAKNESSES
The infrastructure deficit has continued to
receive focus, with the agenda largely driven
by the States and receiving general support
from the Federal Government. Record low
interest rates internationally have led to calls
for increased spending on infrastructure as
a relatively low-cost, high-return stimulus
measure for weakened economies.
As always, choosing the ‘right’ infrastructure
programs will be important. The recent
Productivity Commission Public Infrastructure
report claimed that, ‘there is an urgent need
to comprehensively overhaul processes
for assessing and developing public
infrastructure projects’4. Given these
comments the recent reduction in resourcing
for Infrastructure Australia may be a move
in the wrong direction, impeding its ability
to offer strong independent analysis of
proposed infrastructure projects.
A second weakness identified in the earlier
paper was intergovernmental relations
and the tax-transfer system. Over recent
years the COAG agenda has made slow
but significant progress in education and
health reforms, as well as harmonisation of
regulations across the States and Territories.
It will be important that the recently
announced Federation White Paper builds
on this agenda.
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16. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
16
THREATS
Fiscal sustainability has been brought to the
fore by the spending cuts announced in the
Federal Budget 2014, foreshadowed by the
National Commission of Audit. Whether or
not Australia is facing the ‘budget emergency’
being discussed in public debate, some
efforts will be needed in the medium term
to bring about changes on both the revenue
and spending sides of the ledger. If the
Government is serious about fiscal reform,
the upcoming tax White Paper will provide
such an opportunity.
A second threat identified was the potentially
devastating effects of climate change.
The scientific consensus is synthesised in
the latest IPCC report:
Continued emission of greenhouse gases
will cause further warming and long-lasting
changes in all components of the climate
system, increasing the likelihood of severe,
pervasiveandirreversibleimpactsforpeople
and ecosystems. Limiting climate change
would require substantial and sustained
reductions in greenhouse gas emissions
which, together with adaptation, can limit
climate change risks.5
The consequences of moving now on
climate change and being wrong about its
impacts are significantly less damaging than
doing nothing and the opposite being true.
In that sense, climate change policies are
insurance policies.
The most recent evidence from the IPCC
indicates that swift and effective steps need
to be taken to reduce emissions. The current
government has discontinued the previous
mechanism of directly pricing emissions
(initially via a tax with the intention of moving
to an ETS), which provided incentives for
emitters to reduce their emissions. Under the
new policy, emitters will tender for payments
to reduce emissions.
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17. MEGATRENDS
THE ASIAN CENTURY THE AGEING POPULATION
THE ADVANCING
URBANISATION TECHNOLOGY FRONTIER
01 02
03 04
18. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
18
Planning for the future requires fresh
ways of thinking. This chapter adds to the
broader narrative by examining the large-scale
megatrends that will shape the policy
landscape in the decades to come.
These megatrends are the ‘non-negotiables’
of Australia’s future.
In order to have a conversation about
Australia’s future, it’s fundamental to
understand the forces that will shape the
economy and society over the coming
decades. These forces, or megatrends, are
macro-scale shifts that cannot be controlled
or reversed by changes to business or
policymaking. Indeed, they are the ‘non-negotiables’
of Australia’s future. Here we
focus on four of the megatrends:
• the Asian century;
• the ageing population;
• urbanisation; and
• the new technology frontier.
The common denominator for all of these
topics is the increased pace of change,
relative to 20 years ago.
The New Zealand policy landscape provides
an interesting point of comparison for
Australia, as shared issues are being dealt
with in different ways. The urban sprawl of
major cities and the ageing population are
two such examples discussed in this chapter.
THE ASIAN CENTURY
Besides the GFC, the largest event in recent
world economic history has been the rise of
Asia. The economy of the Asian region has
been growing at an average annual rate of
approximately 6.4% since 2000; the rest of
the world grew at 3.8% over the period6,7.
This has led to a shift in the economic centre
of gravity progressively toward Asia.
China is clearly playing the lead role in the
Asian century story, but there are several
other countries that have similar growth
trajectories. This growth is not just evident in
GDP figures but also in other social, economic,
and financial indicators:
• net primary school enrolment rates
increased from 79% in 2000 to 93% in
2011 in South and South-West Asia;8
• the average annual growth in merchandise
trade over the past 20 years has been
12.7%;9 and
• combined financial market capitalisation
annual average growth over the past ten
years for India, China, Indonesia Malaysia
and Philippines has been 35%.10
Healthy international trade is a function of the
political as well as commercial ties between
countries. There needs to be an appreciation
that engaging with Asia is a two-way
street. Much like the ‘diversity dividend’ from
immigration, greater openness to foreign
business will create a dividend of its own.
Foreign investment policy must be shaped
with this two-way street in mind.
Much like the ‘diversity dividend’ from
immigrationpolicy, greateropennesstoforeign
business will create a dividend of its own.
01
19. 19
future[inc]
THE AGEING POPULATION
While demographic change is the most
gradual and predictable of the megatrends
canvassed here, it has large economic and
social implications. Future demographic
change in Australia will be dominated
by the ageing population, with trends in
immigration playing a secondary role. The
number of older Australians is expected to
increase dramatically by 2040: the number
of people aged 65 and over will double,
and those aged 85 years and over will
almost triple.15
By 2040 the number of people aged 65 and
over will double, and those aged 85 years
and over will almost triple.
Building the lucky country
It is not a secret that Australia has already
benefited greatly from the economic rise of
Asia over the past 20 years. But the economic
mega-boom in Asia is shifting gears. Asia will
soon count for over half the global middle
class, projected to reach 3.2 billion by 2030.11
The Australian economy needs to adapt to
this shift in investment and export-led growth
to consumption-led growth, by developing
sectors of the economy including:
• Agribusiness;
• Natural Gas;
• International Education;
• Tourism; and
• Wealth Management.12
These industries are facing increased demand
from Asia. In 2013 international education
generated $15.6 billion in exports from the
Australian economy.13 China visitor arrivals
have more than tripled in the past decade.14
Collectively, unlocking the potential of
these sectors could add $250 billion to the
Australian economy over the next 20 years.
Policy initiatives to facilitate trade with Asian
nations will help realise the growth potential
of these and other sectors.
02
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20. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
20
• changing spending patterns:
Older people generally spend more on
essential services such as healthcare,
rather than discretionary services, such as
holidays and recreation. Healthcare largely
cannot be imported, so we need to grow
this industry at home.18
• a changing fiscal outlook:
Figure 4 shows the projected fiscal gap
over the coming decades as estimated
in the three previous editions of the
Treasury’s Intergenerational Report (IGR).
The long-term outlook is consistently one
of large-scale budget deficits, as a result
of demographic change.
This has clear impacts on the economy,
through:
• a relative reduction in labour supply:
The age dependency ratio is the number
of people outside working age relative to
the population of working age (15 – 65).
Projections indicate that the dependency
ratio will rise from 49.4 in 2012 to 59.5 by
2040.16 Western Australia, the State with
the lowest dependency ratio, will have a
similar dependency ratio as the State with
the highest does today, namely Tasmania.
A smaller working age population needs
to be offset by boosts in productivity
and participation.17
FIGURE 4: FISCAL GAP PROJECTIONS OF INTERGENERATIONAL REPORTS
SOURCE: Swoboda, Kai (n.d.)19
Percent of GDP
3
2
1
0
-1
-2
-3
-4
-5
-6
2002-03 2007-08 2012-13 2017-18 2022-23 2027-28 2032-33 2037-38 2042-43 2047-48
YEARS
IGR1 (2002) IGR2 (2007) IGR3 (2010)
21. 21
future[inc]
Urban population per km2
10,000
8,000
6,000
4,000
2,000
0
URBANISATION
Australians are changing where they live.
We will increasingly reside in capital cities –
capital city populations are projected to
rise by 57% by 2040.20 The New Zealand
experience is even more pronounced.21
US cities are over six times denser than
Australia’s. We cannot expect empty
highways and high-speed trains to solve
our transport woes – infrastructure can
only take us so far.
That means urban planning will affect
Australians more than ever before. Decisions
on key transport infrastructure, whether it be
road or rail are already hot-button issues in
State politics. Accurate Cost-Benefit Analyses
(CBAs) are important at the individual project
level, but the broader transport agenda
around road vs. rail is more difficult to analyse.
The next question on transport infrastructure
is who should pay? The user-pays system
of toll roads is most efficient, but traffic
should be managed across the network as
a whole, rather than as a series of separate
transport linkages.
FIGURE 5: URBAN POPULATION DENSITY, BY COUNTRY
03
SOURCE: Ellis, Luci (May 2014)22
AUSTRALIA
NEW ZEALAND
CANADA
SWITZERLAND
NORWAY
SWEDEN
GERMANY
NETHERLANDS
US
ITALY
BRAZIL
JAPAN
SPAIN
CHILE
FRANCE
SOUTH KOREA
Urban populations are defined as within cities with populations above 100,000
22. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
22
Australians are increasingly moving
into urban areas, but by global standards
we dislike living near one another. Only
New Zealand’s experience is close to ours
among the advanced economies. Figure 5,
on the previous page, shows that US cities
are over six times more densely populated
than Australia’s. We cannot expect empty
highways and high-speed trains to solve
our transport woes—infrastructure can
only take us so far.
The other face of increased urbanisation
is the relative flight of population and
businesses from the regions. There is a
risk of exacerbating social issues as the
urban-regional divide widens. For example,
rural Victoria is four times more culturally
homogeneous than Melbourne, and
hence missing out on a potential ‘diversity
dividend’ of the social, cultural, and economic
contributions that migrant communities bring
to their neighbourhoods.23
Urbanisation and an ageing population
– the NZ experience
Ageing growth is expected to accelerate
as baby boomers begin to enter the over
65 age group. This group is expected to grow
by 200,000 people between 2011 and 2021.
By 2051, there are estimated to be 60 % more
elderly than children. This has significant
implications for policy in areas such as
superannuation, health and aged care.24
There are also policy implications arising
from geographical differences between
areas where people reside. Over two thirds of
New Zealanders live in major urban centres
(86% of the population), however 22% of
older people reside in secondary or minor
urban areas compared to 16% of the general
population.25 The 2013 census confirmed
a significant shift in people from regional
areas to major urban centres, especially
among those of working or child bearing age.
Auckland accounted for 75.8% of growth
between 1997 and 2001 and is forecast
to comprise 74% of national growth by
2041. Compared to urban areas, rural areas
typically have a smaller population aged
between 20 and 34 years.
This age-geographical distribution has
implications for New Zealand’s farming
industry with labour shortages expected.
Services, and employment in the services
sector such as schools, may also come
under threat.26 It is estimated 34% of small
– medium enterprise owners intend leaving
their businesses within the next five years,
rising to 64% within 10 years.27
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23. 23
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THE ADVANCING
TECHNOLOGY FRONTIER
Robert Solow made the above statement
around a quarter of a century ago, yet it
applies even more powerfully today. The
unprecedented rate of technological change
poses more challenges and opportunities
for policymakers than any of the other
megatrends discussed. Just over 20 years
ago, in January 1993, there were 50 World
Wide Web terminals in existence. Now the
internet is a central part of our everyday
lives, in how we communicate, consume,
do business, socialise, and govern.
Some of the more recent themes in digital
technology include:
• businesses are increasingly going ‘mobile-first’
with their digital presence, as more
digital content is consumed through
smartphones and other mobile devices –
this can be either through apps or
dedicated websites;
• cloud-based computing means more
information is being shared and centrally
located than ever before;
• the cloud combined with mobile and
internet technologies are allowing small
and medium sized businesses the ability
to both cut costs and better engage
customers, thereby lowering barriers
to enter new markets;
• harnessing data as part of everyday
business, where data can be collected
and analysed by digital technologies, then
patterns and relationships can be found
through the volume of observations that
are available to be analysed at once; and
• information technology spreading into
other parts of our lives, where smart
technology is being embedded around
the house and the built environment,
for example in our electricity and
transport networks.
On an individual basis, Australians are
early adopters of new technology. In 2013
smartphone penetration in Australia was
65% of the population, among the world’s
highest.28 Australian businesses are slower
to move than businesses in other parts of the
world, but new technologies are forcing their
hand. A third of Australian industries face
the ‘big bang’ scenario of major disruption
within the next three years from these
technologies.29 Technological change will
create winners and losers in business, but
will have even greater implications for people
in the workforce. Some 47% of US jobs are
at risk of being automated over the next
20 years.30 Besides helping workers displaced
by technology to reskill and stay in the labour
force, governments need to help foster
those technologies which have greater social
benefits and assist productivity growth.
Developments in technology will interact
with the themes discussed in this paper:
• improving access to Asian markets for
Australian businesses, and vice-versa
but it will also increase competition;
• enabling the productivity gains required
to offset the reduced productive capacity
from the ageing population, and enable
participation of young parents and
semi-retired; and
• helping cities to work more efficiently and
help address disparities between urban
and regional areas.
Importantly, technology will be a key
consideration in the discussion of social
equity into future.
“WE SEE COMPUTERS EVERYWHERE
except in the productivity statistics.”
Robert Solow, Nobel Laureate 04
24. RISK
WHERE ARE THE POLICY
CHALLENGES?
WHERE IS RISK MANAGEMENT
HEADING? 01 02
25. 25
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Risk is a pervasive feature of our lives and
yet it rarely features as a standalone theme
in public debate.
The megatrends highlight the fast pace of
change in many aspects of our lives, which
creates and amplifies risks for governments
and people. The Asian century and global
economic integration are changing the
macroeconomic landscape, and exposing
people to greater uncertainty in the labour
market. Digital networks are now critically
important for governments, businesses,
and people. The ageing population and
government retirement policies mean more
people face greater financial risks in funding
their retirement.
The risk-taking behaviour associated with the
GFC has dominated the airspace in recent
times. While there are clear policy lessons
from that episode, there is a need for a
separate public conversation about risk.
The issue is twofold:
• the megatrends in Australia are making
risk a challenge in new parts of our
economy and society, and a greater issue
in others; and
• attitudes to risk need to evolve from risk
avoidance to risk management.
Not all risks can be eliminated or even
reduced, and efforts to avoid them can be
more costly than the negative outcome
itself. Similarly, people may believe that risk
has been avoided when it has just been
transferred to another party. For example,
insuring against natural disaster risk doesn’t
eliminate it; it simply shifts the risk (or most
of it) to the insurer or guarantor. Narrow
measures aimed at avoiding these types of
risk are not only futile but can be detrimental
to fostering a vibrant, dynamic economy.
The consequences of maintaining the current
(or historical) attitudes to risk are significant.
On the downside, there are indications
that risk mismanagement is hampering
productivity growth. On the upside, better
risk allocation and awareness will foster
productivity. Individuals, businesses and
policy-makers should seek to be ‘risk-wise’,
as opposed to risk-averse or risk-seeking.
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26. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
26
WHERE ARE THE POLICY
CHALLENGES?
THE INCREASINGLY SYSTEMIC
NATURE OF RISK
The megatrends of digital technology and
the Asian century make digital, financial and
economic systems more interdependent.
As we saw in the GFC, this increased
interdependence makes risks more systemic
than in the past.
The World Economic Forum released the
ninth edition of its global risk perceptions for
2014, including a risk interactions map, which
shows how global economic, environmental,
geopolitical, societal and technological risks
could potentially interact.
It is important to conceptualise how risks
from different peripheral areas can
compound to cause political, financial and/
or social instability; it is also useful to see all
manner of risks represented in one place.
The method of stress-testing banks, which
has been implemented around the world as
part of the new Basel III regulations, is one
example of efforts to better understand
systemic risk. Those risks which are less
systemic can be successfully managed
through aggregation – the key is to identify
which parts of risk are genuinely diversifiable
and which are not.
01
FIGURE 6: GLOBAL RISKS 2014 INTERCONNECTIONS MAP
SOURCE: World Economic Forum (2014)31
Number and strength
of connections
(weighted degree)
ECONOMIC RISKS GEOPOLITICAL RISKS TECHNOLOGICAL RISKS
SOCIETAL RISKS ENVIRONMENTAL RISKS
Data fraud/theft
Failure of financial
mechanism or institution
Unemployment and
underemployment
Organised crime
and illicit trade
Political and
social instability
Global
governance
failure
Extreme weather events
Weapons of
mass destruction
Critical information
infrastructure breakdown
Biodiversity loss and
ecosystem collapse
Antibiotic-resistant
bacteria
Natural
catastrophes
Man-made
environmental
catastrophes
Liquidity crises
Oil price shock
Decline of importance
of US dollar ice shock
Fiscal crises
State collapse Income disparity
Cyber attacks
Corruption
Mismanaged Chronic diseases urbanisation
Failure of critical
infrastructure
Climate change
Water crises
Food crisis
Interstate conflict
Economic and resource
nationalisation
Pandemic
Terrorist attack
27. 27
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IDENTIFYING RISKS IN THE
MACROECONOMY
Besides national security, the largest scale
risk-management effort is sustaining
economic growth. The set of financial
regulation agencies have this as a key
mandate. There is little doubt that active
monitoring and management of the economy
is a worthwhile endeavour. The most difficult
part of that job is predicting the source of the
next adverse shock to the economy.
Where will the next recession start?
Public consensus is that the next shock will
come from overseas, most likely in the form
a sudden contraction of demand from our
Asian trading partners. Significant credit
events in Europe are also not out of the
question; but with the Basel III measures
applied by governments around the world,
this issue is being addressed.
International policy directives on systemic
risk, such as Basel III, have been a focus of
the G20 meetings in Australia this year.32
Domestic regulators are in some senses
the victim of their own success – their role in
Australia’s 23 years of continuous economic
growth leads many to presume that the
Australian economy cannot create the next
mess on its own. Yet there are reasons to
believe the opposite is true – for example,
our flexible exchange rate means an external
demand shock, while not pleasant, wouldn’t
be as calamitous as a severe ‘correction’ in
domestic asset prices, specifically housing.
Some of the megatrends discussed
earlier, particularly the ageing population
and increased urbanisation, will serve to
compound such an event. This is an area
of active policy discussion—from the FSI to
the latest commentary from the RBA on
measures to contain housing price growth.33
The key point is that we need to remain alert
to the internal and external stressors of the
Australian economy.
FROM RISK AVOIDANCE TO
RISK MANAGEMENT
What is the harm in avoiding risk? If the
primary aim is to avoid risk, this can lead to
distortions in behaviour and the economic
consequences can be considerable. The RBA
Deputy Governor Phil Lowe discussed how
risk interacts with the concepts of innovation,
productivity and demographic change:
“In my opinion, it is appropriate occasionally
to ask whether we have got the balance right.
Reducing risks is not always cost free –
resources need to be devoted to the task and
this means that these resources cannot be
used for other tasks. And perhaps even more
importantly, it might also be the case that
a more risk-averse society is naturally less
inclined to support and finance innovation,
toimplementnewprocessesandtoapplynew
technologies. If this is indeed the case, it has
implicationsforfutureproductivitygrowth.”
Phil Lowe, RBA deputy governor, Speech to
The Sydney Institute, Sydney –12 March 2014
28. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
28
The balance that Dr. Lowe refers to is between
the risk-seeking behaviour witnessed in the
lead-up to the GFC, and the compliance-paralysis
caused by red tape instituted by
both business and government.
The case for policy action was made
clear with the events between 2000 and
2010 including the collapses of Enron and
WorldCom and the GFC. These examples
also reinforced the benefits of prudent
regulation in Australia relative to other parts
of the world. However, the increased level
of regulation has led to a situation where
compliance dominates responsible strategy.
Businesses are more focussed on following
the regulatory traffic lights, rather than
taking the best possible route.
At an economy-wide level, these regulations
can be very costly. The process of making
and following rules costs Australia over
$250 billion each year, with two-thirds of this
burden coming from the private sector34.
Specific examples are not difficult to find:
over 45% of costs in electricity networks are
due to growth in peak demand.35 Hence
regulations that ensure electricity outages
are limited to, say, four minutes per year
rather than five would involve significant cost
per consumer. Until recently, these reliability
standards have been set with limited regard
for their economy-wide cost.
The process of making and following rules
costs Australia over $250 billion each year,
with two-thirds of this burden coming from
the private sector.
There is no such thing as riskless innovation or
entrepreneurship – some level of risk needs
to be tolerated, and even encouraged. As
the Austrian economist Josef Schumpeter
described it, the ‘creative destruction’ within
a vibrant economy is inherently risky for
participants. But, it is a key ingredient, and
must be managed. The management task
should be undertaken by those who can do
it most effectively.
ROLES FOR INSURANCE
MARKETS AND GOVERNMENTS
IN RISK MANAGEMENT
Managing an adverse or negative risk is a
threefold task:
• measuring and monitoring: risks need to
be quantified frequently to design and
implement an appropriate response;
• active minimisation: taking steps to reduce
the overall uncertainty where it is beneficial
to do so; and
• resilience and mitigation: planning for the
event of an adverse outcome to mitigate
the impact.
As the Austrian economist Josef Schumpeter described it, the ‘CREATIVE DESTRUCTION’
WITHIN A VIBRANT ECONOMY IS INHERENTLY RISKY for participants. But, it is a key
ingredient, and must be managed.
29. 29
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FIGURE 7: PRINCIPLES FOR ALLOCATING (INSURABLE) RISK
It is a complex task, but one that we do in
our everyday lives. There is a natural tension
between centralising risks, where risks can be
pooled, and more resources can be devoted
to the measurement and mitigation, and
localising risks with those parties who are
able to most directly observe them and take
steps to manage them. Allocating risk to
those who are best placed to bear it is the
most efficient outcome.
Where risks are insurable, there is a good
argument to develop a market for insurance,
which generally will allocate risk effectively
between insurers, governments, businesses
and individuals. Figure 7 above shows the
how the market for insurable risk allocates
it in an effective manner.
A number of issues remain with an insurance-based
approach to managing risk:
• moral hazard of insurance;
• government’s role as an insurer of last
resort; and
• affordability and underinsurance.
These issues span the full spectrum of risk
as outlined in the figure above, and are also
affected by the megatrends. In the financial
services context the moral hazard and implicit
insurance of banks that are ‘too big to fail’ falls
within the scope of the FSI and are current
topics of public debate. The best ways to
manage natural disaster risk, whether through
formal insurance or otherwise, are the topic of
a current Productivity Commission inquiry.
SOURCE: Insurance Council of Australia (2014)36
• Risk is allocated and pooled within the economy
• Risk is allocated towards those best placed to manage it
• The market provides price signals to encourage an
efficient allocation of risk
INSURERS
GOVERNMENT
BUSINESS
INDIVIDUAL
SPECTRUM OF RISK
Disaster
Financial
Individual income
Life/health
Home/property
Motor vehicle
Travel
30. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
30
This is a change from 10 or 20 years ago,
when the risk of retirement was more largely
borne by government through pensions and
defined benefit schemes. Given their role
to potentially fill the gap, the incentive for
governments is to educate people about how
risks work in investment, and how longevity
risks can be better understood, if not reduced.
The ageing population, combined with
the self-managed superannuation model,
means decisions over a large part of
Australia’s accumulated wealth are made
by non-professional investors.
Strategies to reduce people’s reliance on the
pension safety net, such as taking retirement
savings as an income stream rather than a
lump sum, may be a more efficient allocation
of risk and so should be considered.
Beyond education and financial literacy, the
complexity of managing individual finances
shows the increasing need for professional
advice. Shortcomings in the current regulation
of financial advice have been revealed,
leading to policy reform of the sector. Ensuring
any advice provided is in the best interests of
consumers will increase confidence, and allow
better informed management of retirement
and superannuation risk.
The decisions about funding retirement beyond
superannuation guarantees should be left to
individuals but governments need to ensure
that people have the capacity to make good
decisions. Governments also have responsibility
to regulate the sector, given the compulsory
superannuation contribution system.
New digital technologies are breaking down
barriers to entry to selling insurance, and are
also improving the accuracy of risk-based
pricing. Improved risk-based pricing can lead
to fewer cross-subsidies between low-risk
and high-risk individuals. In some cases, this
may price high-risk individuals out of the
market. This may be an issue for policymakers
where reduced affordability results in
underinsurance.
Ultimately, the government is in a unique
position to bear risk but cannot manage risk
very well relative to an ideal market-based
outcome, where decisions can be decentralised
and well-informed. However, using markets to
manage risk has its limitations: where people
have little information, or where insurance
markets cannot be effectively regulated,
privatisation may not be the answer. In any
case, the upfront fiscal benefits of the
privatisation of risk management should
not be the primary concern.
In any case, the upfront fiscal benefits of
privatisation of risk management should
not be the primary concern.
RISK ATTITUDES AND PRACTICES
IN WEALTH MANAGEMENT
Risk is an integral part of wealth accumulation
and management. The business of the
finance industry is to understand and exploit
these risks. The ageing population, combined
with the self-managed superannuation
model, means decisions over a large part
of Australia’s accumulated wealth are made
by non-professional investors.
31. 31
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As research and technology improves our
understanding of these natural hazards,
and the best measures that can be taken,
the case for proactive investment in disaster
mitigation is growing: a $250m investment
on an annual basis has the potential to cut
natural disaster costs by 50% by 2050, which
are projected to grow to $23 billion each year
by that time.38 Prevention is clearly better
than cure in terms of efficient and effective
natural disaster risk management.
How should the government response to the
inevitable occurrence of natural disasters
be funded? While government’s role in
managing catastrophic risk is clear, the
funding of this risk can be more efficiently
and fairly targeted to those exposed, rather
than a long-term implicit subsidy between
individuals with different levels of exposure.
This is particularly relevant for bushfire risk
where return periods are generally shorter,
and where certain people have much higher
exposure than others.
Rather than ex-post funding of natural
disasters, it is best to spread the cost before
and after the event. The New Zealand
Earthquake commission model does this by
requiring exposed individuals to contribute
on an ongoing basis through insurance
premiums. The Victorian Government has
recently changed its fire services levy to be
based on land rates and geographic region,
rather than insurance premium.39 This more
equitably funds the government’s role as
the insurer of last resort, as opposed to
levying all taxpayers.
MANAGING NATURAL
DISASTER RISK
The Australian natural environment is
savage. Whether it is drought, bushfire,
flood, or cyclone, Australia gets more than
its fair share of environmental disasters and
disruptions. Australians have been coping
with natural disaster since long before
European settlement. The evidence from the
latest Intergovernmental Panel on Climate
Change (IPCC) synthesis report shows that
it is likely these extreme weather hazards
have grown in frequency and/or severity
in recent decades, as a result of human
influence37. At the same time, increased
built infrastructure in hazard-prone areas
increases the value at risk to natural disaster.
Australians spend $1 in pre-disaster
resilience and mitigation for every $10
that is spent on post-disaster response.
What are the right types of policy measures
to deal with disaster risk – adaptation,
mitigation, resilience, or response?
In 2013 the IAG business roundtable for
Disaster Resilience and Safer Communities
released a report showing that Australians
spend $1 in pre-disaster resilience and
mitigation for every $10 that is spent on
post-disaster response.
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32. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
32
Bringing risk-based thinking into policy
and individual decision-making:
• The megatrends affecting Australia in
coming years will impose new and greater
risks on the economy and individuals;
whether they be labour market risks,
retirement risks, or natural disaster risks,
we need to ensure Australians are capable
of managing these effectively.
• Rules and regulations set to minimise risk,
rather than mange it, collectively impose a
large burden on the economy. The process of
making and following rules costs Australia
over $250 billion each year.
• In general, risk should be borne by those
who can best manage it, rather than
who can afford it, or who would be most
vulnerable (though one party might be all
three of these).
• Generally, proactive steps are better than
reactive ones – action (not just planning)
ahead of the event is usually a more
effective and efficient use of resources.
• Risk management itself isn’t the end game
– the resources allocated to managing risk,
whether it be by individuals, policymakers
or business, should be commensurate with
the expected gains or losses avoided.
WHERE IS RISK
MANAGEMENT HEADING?
At the policy level, a number of reform
proposals will come from the Future of
Financial Advice and FSI reviews, which are
due to be finalised at the end of the year.
Both enquiries received a large number of
submissions from the business community,
including from Chartered Accountants
Australia and New Zealand.
Besides these more strategic policy decisions,
there are specific policy actions which are
targeted at altering people’s behaviour,
and also simple business strategies separate
from policy that can help limit the burden of
risk management.
STRATEGIES TO ENABLE PEOPLE
TO BETTER MANAGE RISK
Both natural disaster and financial risks
warrant coordinated, proactive steps from
government and individuals. If policymakers
get it wrong, the political system provides a
level of accountability. Individuals facing tail
risks – those that severely affect a small share
of people exposed – are inclined to take a
‘head in the sand’ approach.
These individuals appear not to understand
the risks very well, including their own
exposure. Rather than greater risk exposure,
the solution is to increase risk understanding,
through education. By enabling people
to undertake an achievable level of risk
management, the task of centralised risk
management can be significantly reduced.
02
34. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
34
The trends identified so far point to inevitable
changes to the policy landscape into the
future. Globalisation, technological change
and an ageing population all have the
potential to change market outcomes and the
distribution of wealth through the economy.
Change is not to be resisted; indeed, there
are many opportunities to be grasped
from rapidly increasing technological and
geographical linkages with the rest of the
world. But rapid change can leave some
people behind.
Inequality has been increasing over time in
almost all countries for which reliable data
are available. In some parts of the world
this is starting to damage social cohesion,
a cost which cannot be captured in GDP or
measures of income dispersion. As noted
in an IMF working paper:
“inequality can undermine progress in health
and education, cause investment-reducing
political and economic instability, and
undercut the social consensus required to
adjust in the face of shocks, and thus it tends
toreducethe pace and durability of growth.40”
While Australia is not at this point, however,
earning disparities have been increasing over
time. The concern is that this may be due, at
least in part, to disadvantaged groups not
having the same opportunities to participate
in the nation’s continued prosperity as other
groups. If we are to maintain our image as the
‘land of the fair go’, policy needs to ensure that
vulnerable people do not get left behind.
Structural change on a large scale is not
a new phenomenon. The microeconomic
reforms in the 1990s significantly altered the
economy and led to large net gains, while at
the same time causing disruption to many
industries and their workers whose skills were
no longer valued in the new environment.
On a wider scale, the forces of globalisation
have had similar effects. Economists have
largely welcomed the impacts of globalisation
in opening up new markets to trade,
thereby allowing less developed countries
to participate in the world economy. Rapid
growth in these countries has tended to
reduce inequality at the country level as the
developing world has caught up with the West.
But not everyone has been a winner, and
while income inequality has fallen across
countries, inequality within countries has
tended to become more pronounced. Low-skilled
workers in developed countries have
faced increasing competition from labour
in the developing world and this has placed
downward pressure on their wages. Likewise,
workers in developing countries have not all
gained from the spoils, as only those with
sufficient skills and education have been able
to participate in the new global industries.
35. 35
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Varying levels of access to technology
has driven ‘digital inequality’, which has
also tended to benefit relatively highly-skilled
workers who have been able to
take advantage of innovation. Indeed,
the IMF found that technological progress
has a greater impact than globalisation
on inequality within countries, particularly
developing countries, as shown in Figure 8.
Developing Asia has a greater spread of
ICT adoption and a closer correlation
between ICT and inequality. But even in
developed countries greater ICT adoption
is associated with higher inequality.
Overall, it has been the low skilled, more
vulnerable workers, in each set of countries
who have gained least from growth, while
those with skills and access to technology
have moved ahead. This hollowing out of the
middle class across the globe led the World
Economic Forum to declare inequality as the
biggest threat the world currently faces and
the risk ‘most likely to cause serious damage
globally in the coming decade’.42
Overall, it has been the low skilled, more
vulnerable workers who have gained least
from growth, while those with skills and
access to technology have moved ahead.
FIGURE 8: INEQUALITY AND TECHNOLOGY
SOURCE: IMF (October 2007)41
ADVANCED ECONOMICS
Residual inequality
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-3 -2 -1 0 1 2 3
ICT CAPITAL (percent of total capital stock)
DEVELOPING ASIA Residual inequality
0.3
0.2
0.1
0
-0.1
-0.2
-0.3
-3 -2 -1 0 1 2 3
ICT CAPITAL (percent of total capital stock)
36. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
36
EQUITY AND INCLUSIVE GROWTH
Is addressing inequality harmful to economic
growth? Given that raising taxes and
redistributing the proceeds through cash
transfers imposes inefficiencies, the equity
versus growth debate has often been framed
as one of a trade-off: greater equity can only
be achieved at the expense of GDP.
More recently, this conventional wisdom
has been questioned as strong growth
in developing countries has not tended to
reduce inequality. Research is increasingly
finding that causality may run the other way:
higher inequality may cause lower growth.
For example, a recent Standard and Poors
report claimed:
“[Large] income imbalances tend to dampen
social mobility and produce a less-educated
workforce that can’t compete in a changing
global economy. This diminishes future
income prospects and potential long-term
growth, becoming entrenched as political
repercussions extend the problems.”43
This thinking has led to a shift towards a focus
on ‘inclusive growth’; growth that raises both
GDP and the incomes of all members of
society along with it. The World Bank, OECD
and IMF have increasingly focussed on win-win
economic reforms that obtain the dual
goals of raising both equity and growth. Such
reforms can broadly be classified as those
which increase access or participation into
the health and education systems and the
workforce by low-income and disadvantaged
members of society. That is, they can loosely
be labelled as those policies which promote
equality of opportunity.
What do we mean by equality?
Targeting the ‘right’ level of equality is
difficult. Few would argue that a completely
uniform distribution of wealth is desirable
or even achievable, in part because of the
costs of doing so but also because inequality
in earnings can reflect legitimate decisions
around individuals’ labour-leisure trade-off.
What level of equality should we target, and
how would we know when we got there?
Commentators often distinguish between
two notions of equality:
• Equality of opportunity – the notion that
all people should have access to the same
opportunities regardless of their position
at birth; and
• Equality of outcomes – the realised distribution
of incomes (or other welfare metrics).
Equality of opportunity is usually supported
as the desirable target for policy. It embodies
the Australian concept of a ‘fair go’—the
idea that individuals should not be in some
way pre-destined to lead a certain way of life
simply because of the wealth of the family or
neighbourhood they were born into. Achieving
equality of opportunity not only helps those
who are most disadvantaged, it also grows
the size of the ‘economic pie’ by improving
education and employment outcomes.
Equality of opportunity is best achieved by
promoting participation in activities that
are keys to positive economic outcomes,
in particular education and employment.
Equality of outcomes on the other hand is
achieved through policies that ‘even out’
realised differences in incomes. This is
achieved primarily through the transfer
system where a progressive tax system
funds payments to low-income individuals.
37. 37
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The lexicon of inclusive growth has begun to
find its way into political discussions. A recent
G20 Labour and Employment Ministers
statement noted that:
“promoting and creating quality jobs,
and tackling the economic and social
consequences of unemployment,
underemployment, inequality and social
exclusion, areprioritiesforalloureconomies”44
Equality of opportunity and equality of
outcomes can be thought of, respectively, as
prevention and cure. Equality of opportunity
can lead to inclusive growth and therefore
less disparity of outcomes (it helps prevent
inequity). With equality of opportunity in place,
market outcomes can be better relied upon
to distribute income according to the value
of people’s output. However, if some groups
do not have opportunities or circumstances
prevent people from taking up opportunities,
so that not everyone can benefit from
economic growth, equity policies can
provide the safety nets for those who fall
through the gaps.
Equality of opportunity and equality of
outcomescanbethoughtofaspreventionand
cure. Increasing equality of opportunity can
lead to inclusive growth and therefore less
disparity of outcomes: it helps prevent inequity.
INEQUALITY IN AUSTRALIA
Using broad measures of income inequality,
Australia performs close to the average of
the developed world. The Gini coefficient is
the most commonly used single measure of
inequality. It takes a value of 0 for a society
where income is perfectly evenly distributed,
and 1 where all income accrues to only a
single individual. The closer the value is to 1,
the less equal the distribution of wealth.
Before taxes and transfers, Australia’s
Gini coefficient is 0.46, slightly below
the OECD average. After taxes and
corresponding transfers between members
of society the coefficient falls to 0.32, around
the OECD average again but above the
Nordic countries which have values between
0.25 – 0.27. Figure 9 provides a summary
of Australia’s performance against other
OECD countries against several common
measures of inequality.
38. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
38
AUSTRALIA NEW ZEALAND UK US NORWAY OECD
Gini (pre-transfers) 0.46 0.45 0.53 0.51 0.42 0.47
Gini (disposable income) 0.32 0.32 0.34 0.39 0.25 0.32
P90/P10* 4.4 4.2 4.0 6.2 3.0 4.4
Relative poverty rate** 14% 10% 10% 17% 8% 12%
* The ratio of disposable income of the top 10% of income earners to those in the bottom 10%.
** The proportion of individuals with disposable income less than 50% of the median.
FIGURE 9: SUMMARY MEASURES OF INEQUALITY FOR AUSTRALIA AND OTHER OECD COUNTRIES
These measures have tended to show a rise
in the dispersion of disposable incomes over
time in Australia. This has its source in both
labour market and policy outcomes. On the
labour side, the continuous growth of the
economy over the past quarter century has
seen wages increase at a faster rate for
higher income earners than for those at the
bottom of the income band. Low-income
people have benefited in absolute terms
from economic growth but have received
a much smaller share of the spoils.
Low-incomepeoplehavebenefitedinabsolute
terms from economic growth but have
received a much smaller share of the spoils.
While increased incomes to those at the top
could have facilitated increased transfers,
various policy changes have meant the
reverse has occurred. Successive reductions
in the marginal tax rate at the top of the
income band (from 60% in 1981 to 45%
currently), and a general reduction in the
progressivity of the tax system has reduced
the redistributive power of taxation (Figure 10).
At the same time, allowances have fallen
in relative value as they have been indexed
against CPI, which has grown at a slower
rate than average wages.
SOURCE: OECD StatExtracts (2014)45
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FIGURE 10: REDISTRIBUTIVE POWER OF TAXATION OVER TIME
The story in New Zealand has been similar.
Inequality rose dramatically in the late 1980s
to mid-1990s, the second largest rise in all
OECD countries. As with Australia, this has
been driven by a combination of market
and policy outcomes. Labour incomes of the
wealthiest decile rose at more than twice the
rate of the poorest 10%, while at the same
time the tax share fell for those at the top,
with marginal tax rates falling from 60% in
1980 to 33% by 2010. Since 2000, inequality
of disposable incomes has remained largely
unchanged despite the dispersion of market
incomes narrowing, indicating that the
equalising effects of government transfers
have achieved less over this period.
In Australia there are clear differences in
earnings across different groups: those
aged 65+ are around four times more
likely to be in a position of relative poverty
than those in the 18 – 25 bracket (33% and
8% respectively). There is also a marked
difference between genders, with female
ordinary time earnings around 18% lower
than for males. The Productivity Commission
estimated that in 2009 around 25% of the
Gini coefficient could be attributed to the
gender gap.47
SOURCE: Productivity Commission, March 201346
AVERAGE TAX RATE BY EARNINGS DECILE
(10 = highest earnings)
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8 9 10
1988 – 89 1993 – 94 1998 – 99
2003 – 04 2009 – 10
CORRECTION TO GINI COEFFICIENT THROUGH
TAXES AND TRANSFERS
0.5
0.045
0.4
0.035
0.03
1988 – 89 1993 – 94 1998 – 99 2003 – 04 2009 –10
YEARS
40. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
40
EQUALITY OF OPPORTUNITY
The discussion so far has focussed on
realised distributions of income across
society, that is, equality of outcomes. While
equality of opportunity is the focus of policy,
it tends to be harder to measure. One way
of doing so is to look at the correlation of
incomes between parents and children: if all
children have equal opportunities regardless
of the family or neighbourhood they are
born in to, we would expect this correlation
to be low. Research indicates that this is the
case, with around 17% of children born into
the highest earnings quintile ending up in
the lowest, and 12% of those in the lowest
moving into the top quintile.48 This degree
of social mobility ranks close to the top
of the OECD.
Overall, Australia experiences levels of
inequality similar to the average of the
developed world and this has tended to
rise in recent years. Behind this is a mixture
of structural changes in the labour market
which have tended to see gains accrue
relatively more to the wealthy than lower
income individuals, as well as policies which
have gradually reduced the redistribution
of income throughout society. While the
relatively high levels of social mobility
indicate the notion of a ‘fair go’ is still
relevant, a lack of action to address rising
inequality and declining participation among
the most vulnerable members of society
could see an Australia where this no longer
can be taken for granted.
POLICIES TO INCREASE
EQUALITY OF OPPORTUNITY
The bipartisan support for the National
Disability Insurance Scheme (NDIS)
shows that there can be significant public
support for programs which assist the
most vulnerable members of society, even
if it means a direct increase in taxes. Such
reforms can be expected to deliver economic
benefits and hence need not be interpreted
as welfare. In the case of the NDIS, policy
is achieving the dual goal of encouraging
disabled individuals and their carers back
into the workforce and reengaging these
individuals with society.
The Closing the Gap program represents
another example of how increasing the
participation of isolated members of society
can achieve dual objectives of growth and
equity. While this is still in its early stages
and some elements of the program have not
progressed, other elements are beginning
to see some results. The benefits from
achieving the goals are significant. Closing
the gap between indigenous health and
employment outcomes with those of the
general population could yield net economic
gains of $24 billion a year by 2031.49
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Education is a key area where public
investment can result in both social and
economic dividends. Studies of equity
typically place particular emphasis on the
importance of early childhood education
and care (ECEC) which has been shown
to significantly improve student progress
throughout the entirety of a child’s
schooling life. These effects are likely to
be more significant for students from
disadvantaged backgrounds.
In one study the impact on student outcomes
of a 10 percentage point increase in free
ECEC places for three-year-olds has been
shown to increase literacy levels by twice
the level for children from disadvantaged
neighbourhoods compared to all children.50
Yet this does not overcome the educational
challenges that disadvantaged children
have over higher socio-economic status
(SES) peers. Figure 11 shows that for UK
children with equal scores at 22 months,
those from a low SES background will
perform worse over time than those from
higher SES backgrounds. It appears that
parental income may matter more in child
development than the ability of the child.
CLOSING THE GAP BETWEEN INDIGENOUS
HEALTH AND EMPLOYMENT OUTCOMES with
those of the general population could yield net
economic gains of $24 billion a year by 2031.
FIGURE 11: PERFORMANCE IN ECEC BY SES CATEGORY AND
INITIAL STARTING POSITION
Average cognitive test score
100
80
60
40
20
0
0 20 40 60 80 100 120
AGE IN MONTHS
High SES, High Q Low SES, High Q
High SES, Low Q Low SES, Low Q
SOURCE: Feinstein, Leon (2003)51
42. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
42
In Australia, children from Aboriginal and
Torres Strait Islander and non-English
speaking backgrounds, children with a
disability, children in low SES families, and
children who live in rural and remote areas
are all under-represented in early childhood
programs.52 Increasing participation for
these groups has the dual benefits of
improving education outcomes for the most
disadvantaged, while increasing the labour
force participation of their parents.
Low-income families are also more
responsive to ECEC price increases as the
opportunity cost of reducing work hours
to care for a child is lower. Recent reforms
under the National Quality Framework in
early childhood education have helped to
improve the quality of education, but have
also increased ECEC prices through the
increased costs they impose on providers.
DIGITAL DIVIDE
Access to technology in education will
be important in addressing the digital
divide in Australia and ensure that digital
literacy develops early in life. The ABS’
most recent Household Use of Information
Technology survey indicates that households
with annual income less than $40,000
are around four times more likely to be
without the internet than those earning
$40,000 – $80,000, and around eight times
more likely than those earning more than
$80,000.53 Access to technology at schools
is crucial in breaking this divide, but will
require ongoing committed funding if it
is to be achieved nationwide.
Households with annual income less than
$40,000 are around four times more likely
to be without the internet than those
earning $40,000 – $80,000, and around
eight times more likely than those earning
more than $80,000.
While policies that promote equality of
opportunity have the potential for double
dividend outcomes of increasing both growth
and equity, safety nets in the form of cash
transfers to low income households will need
to form part of any strategy to address
equity. These, along with significant reforms
to areas such as health or education, will
require a sustainable fiscal environment.
The upcoming tax White Paper provides
an opportunity to address structural issues
with the tax base.
While policies that promote equality of opportunity
have the potential for double dividend outcomes of
increasing both growth and equity, SAFETY NETS
IN THE FORM OF CASH TRANSFERS TO LOW
INCOME HOUSEHOLDS WILL NEED TO FORM
PART OF ANY STRATEGY TO ADDRESS EQUITY.
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WHAT SHOULD BE DONE?
While on broad measures of equality
Australia performs reasonably, we still live
in a society where education, health and ICT
outcomes are worse for those at the bottom.
High levels of inequality can reduce growth
through its limiting effects on education and
labour mobility, particularly in periods of
rapid change. Remedying this gap would not
only increase equity but also lead to more
economic growth and higher government
revenues. And not all gains can be
measured economically; the social cohesion
promoted by increased equity helps bind the
community together and increase wellbeing.
Going forward, policies will need to address
deficiencies in equality of opportunity
where they exist. Promoting access to
early childhood education for low SES or
disadvantaged children will help improve
both educational and labour force outcomes
for these families. The current Productivity
Commission review into child care may
go some way to addressing this. Ongoing
funding for technology in schools will also
address digital inequality early on in life,
but this needs to expand beyond simply
access to computers to include a suite of
technologies. Increasing digital infrastructure
will help improve literacy, but learning how to
communicate effectively using technology is
also important.
Addressing short-falls in safety nets will
also be important if inequalities in realised
outcomes are to be reduced. One partial
solution would be to raise the indexation of
cash payments to a level commensurate
with wage growth.
Policies to address equality of opportunities
and outcomes will inevitably place pressure
on government budgets and, along with
short-term political incentives, may mean it is
easier to delay reform on longer-term issues
such as health, aged care and education.
Engaging the Australian community will be
important in building support and to align
long-term national interests with short-term
political priorities. The current Senate Inquiry
into the Extent of Income Inequality in
Australia is a useful start in building an
understanding of the need for change.
The inquiry reflects the increasing attention
that inequality is receiving both globally
and in Australia.
Engaging the Australian community will
be important in building support and to
align long-term national interests with
short-term political priorities.
44. CONCLUSION
… GIVING EVERYONE A ‘FAIR GO’
has never been more important.
The Australian economy is handling
the transition from mining-dependent
growth to something that is more evenly-spread and sustainable.
THE INHERENT STRENGTHS OF
THE ECONOMY HAVE BEEN
RE-AFFIRMED.
Policymakers need to consider how to inject positive risk-taking back into the economy to
foster innovation. An important part of this is making sure risks are borne by those best able to manage them. The Financial System Inquiry arose out of the GFC concerns about system stability. Yet some of the most far-reaching recommendations are likely to focus on issues
that enable people to make better choices. Adopting these recommendations, along
with the Future of Financial Advice reforms,
will help to ensure retirement risks are best managed in the future.
45. charteredaccountantsanz.com/futureinc
Education is not a panacea for disadvantage, but it is just about the next best thing. Investing money in getting education policy settings right today will reap rewards in
10 to 15 years, when graduates obtain
higher paying jobs (and pay higher taxes)
than they would have without access to
a good education.
Policymakers should look to the NBN review to work out how Australian’s can fully participate in the new digital economy: citizens need to have access to good infrastructure, the hardware to access
this infrastructure, and the knowledge
of how to navigate it.
Government’s ability to implement policy
will continue to be influenced by the strength of its fiscal position. Tax, especially the sustainability of the tax base, is tangled up in federal-state relations and superannuation, as well as intergenerational considerations. The challenge is for governments to sell the need for a stronger tax base to the electorate. The White Papers on tax and the Federation will provide government with an updated suite of policy options to address these important issues.
CHANGE IS INEVITABLE; the powerful megatrends shaping Australia’s economy over the next 10 to 15 years cannot be turned aside or avoided. To maximise growth and welfare, everyone needs to have the opportunity to make the most of these changes. The concept of giving everyone a ‘fair go’ has never been more important.
46. RISK-WISE AND A FAIR GO? A PLAN FOR AUSTRALIA’S CONTINUED PROSPERITY
46
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