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Speech to Chief Risk Officers’ Conference - 17 September 2013
I am pleased to join you for this important conference.
While I have no formal responsibilities in this area – I’ve just been appointed as a Parliamentary Secretary to the Minister for Communications – I have had some exposure to the issues you deal with, including serving on the Parliament’s Corporations and Financial Services Committee in the 432rd Parliament.
The role of risk management in the financial services sector is important both for the prosperity and success of the institutions you work for – and for the overall health of our financial system.
This reflects the unique character of the financial services sector. On the one hand it is comprised, in the main, of private sector entities, many of them for profit, with boards and management teams making decisions in the interests of the entity and its stakeholders.
On the other hand the sector has a vital role in serving the public interest. The financial services sector underpins commerce and trade, it allows Australian households and businesses to save and to borrow money and it facilitates investment and economic growth.
But none of this can happen unless there is public confidence in the system. As we all know, confidence can be a fragile beast. It was quite shocking to see, only a few short years ago, queues of depositors at savings institutions in nations like the UK, desperate to withdraw their money.
Good risk management is vital to provide warning of such scenarios – and to take the necessary actions to head them off.
Today I want to talk about the implications of the public policy environment for stability and certainty in banking and the financial sector.
I want to start by arguing that under the Rudd-Gillard-Rudd Government, there was a suspicion and misunderstanding of the finance industry and the business sector, which was reflected in an approach to policy making which made your life harder.
Next, I want to highlight some key ways in which you can expect the style and approach of the Abbott Government to be very different.
Thirdly, I want to remind you of some of our key stated priorities as they apply to the financial services sector.
The final area I want to talk about this morning is a theme which really underpins much of our economic agenda, and that is improving Australia’s productivity performance.
The Rudd-Gillard-Rudd approach: a government which made your job harder
Let me turn firstly therefore to reminding you that for the past six years the financial services sector has laboured under a government which has made your job harder rather than easier.
1) Poor budgetary management – and escalating debt
The Rudd Government came to office with Mr Rudd promising to be an economic conservative, and saying that ‘this reckless spending has to stop.’
But within a few short years the Rudd-Gillard-Rudd government was delivering deficit after deficit. Even more worryingly, it seemed unable to deliver the budgetary outcomes which it set itself.
In 2011-12, for example, it budgeted for a deficit of $22.6 billion; the final result was a deficit of $43.7 billion. In 2012-13, it budgeted for a surplus of $1.5 billion; by budget time this year that result had turned around to become a deficit of $19 billion.
2) Excess regulation
A key feature of the Labor government was the enthusiastic addition of new regulations – it added over 21,000 new regulations and repealed 105.
This was despite Mr Rudd’s promise in 2007 that his government would have a “one regulation in, one regulation out” policy.
A good indicator of the pressure this has imposed on business is seen in the October 2012 Australian Chamber of Commerce and Industry (ACCI) National Red Tape Survey. That survey of 870 businesses across all States and Territories found:
- 73.1 per cent of businesses believed that the overall regulatory compliance burden had increased in the past two years;
- 60 per cent of businesses spent more than $5,000 per annum directly on costs related to regulatory requirements.
Let me give just a few examples of the burden of regulation applying to many sectors:
- The National Childcare Law is almost 180 pages, plus an additional 345 pages of regulations and 1149 pages of guidelines.
- Universities typically have regulatory compliance departments with 15 to 20 or more staff dedicated to ensuring compliance with over 100 separate State and Federal Acts. A typical university is required to submit over 50 different data sets to the Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education annually.
- In indigenous service delivery, there are more than 200 Indigenous-related programmes administered by 17 Commonwealth agencies. Each programme has its own application forms and processes.
- In resources, one particular project required 4,000 meetings before approval was granted; ultimately, 12,000 State and 300 Commonwealth conditions were placed on the project.
I hardly need to make the obvious point to a room full of risk professionals: trying to stay across this huge and growing volume of regulation is extremely difficult. In turn this makes compliance an enormous challenge.
3) Constant change
Another key feature of the previous government was constant change in personalities and priorities. The Rudd-Gillard-Rudd Government saw two changes of Prime Minister, six small business ministers, five assistant treasurers and four immigrations ministers in just over three years.
Changes in personnel often led to changes in priorities. For example, when Mr Rudd returned as Prime Minister in June 2013, the government largely stopped talking about areas which had hitherto been priorities, such as the National Disability Insurance Scheme and the Gonski Education Reforms. Instead, the government began pursuing novel policy ideas such as converting the Northern Territory to a free trade zone.
4) Media driven approach
A key feature of the previous government was the importance it attached to ‘winning the daily media cycle.’ Decisions were made with a view to what could be announced and when; a careful process of methodical policy development was all too often the casualty.
A different approach under the Abbott Government
Let me talk for a moment about some of the key features of the approach you can expect from an Abbott Government – and how that is likely to be very different from what characterised the Rudd-Gillard-Rudd Government.
1) Consistency of Personnel
Unlike the constant chopping and changing in personnel we saw under the Rudd-Gillard-Rudd government, under an Abbott Government you can expect a consistency of personnel. For example, Prime-Minister-elect Abbott yesterday announced his new cabinet. Of the 19 members, all but one had been a member of the Shadow Cabinet.
2) Better Process
Tony Abbott and other senior Coalition figures have spoken at some length about the importance of good process in government. The Prime Minister elect has committed that an incoming Coalition government will have a functioning Cabinet process with timely submissions, coordination comments from other departments, and regulation impact statements.
Under the Rudd-Gillard-Rudd government, key decisions were regularly taken outside of Cabinet or with inadequate cabinet documentation. One notorious example was the decision to introduce onerous and intrusive new media regulation earlier this year. This was approved in a cabinet discussion even though a paper describing the new system had not been circulated in advance. This would be no way for the board of a listed company to make decisions. Nor is it a way the government of a country should take decisions.
Mr Abbott has committed that under his government, it would only be in an emergency that cabinet would take a decision without the benefit of a properly prepared and circulated cabinet paper. It is a commitment based on his experience, and that of many other senior members of his team, of how a properly functioning cabinet government works.
3) Steady, long term, consultative approach to necessary change
A key feature of the Abbott government’s likely policy approach is seen in a number of announcements we have made about how we will deal with major policy development processes.
For example, we have announced that we will develop a tax white paper in this term of government.
We have announced a federalism white paper to canvass how overlap and duplication between different levels of government can be reduced so that it will be much clearer who is in charge of what and who is responsible when things are wrong.
In the workplace relations area, we have announced a Productivity Commission review of the Fair Work Act.
Treasurer-elect Joe Hockey has announced that we will have a financial system inquiry – variously known as son of Wallis or granddaughter of Campbell – to lay out a roadmap for a safe, robust and efficient financial system which will continue to meet the financial needs of savers, borrowers and investors.
The idea in all of these areas is to have a careful, thorough, comprehensive policy development and review process – with a view to producing sensible, evidence based policies drawing on this work which we could take to a 2016 election.
4) Greater Transparency
Treasurer-elect Joe Hockey has made important commitments to increased honesty and transparency in the reporting of Australia’s fiscal position. He said he will task Treasury with including in the budget papers a more thorough analysis of the sensitivity of Budget forecasts to events.
The Coalition will ask Treasury to publish information on the structural budget position, including both historical data and forecasts, in the annual budget papers.
Finally, a Coalition government will publish full information on the current and projected face value of government securities on issue.
From the point of view of risk assessment in the financial services sector, we believe these measures will equip the professionals in this room to do a better job – as you gain a better understanding of key aspects of the Commonwealth’s financial position.
5) Build Business Confidence
A key feature of the Abbott Government’s approach – which will differentiate us from our predecessors – will be our relationship with business. It is troubling to see how comprehensively the Rudd-Gillard-Rudd government squandered the productive partnership between business and government that has been so carefully nurtured by previous governments of both political persuasions.
At various points the Rudd-Gillard-Rudd Government declared war on mining companies, airlines, construction companies, banks, pharmaceutical companies, logistics companies and even pubs and clubs.
The carbon tax, the mining tax, the backflip on the company tax cut, over $5 billion of new retrospective taxes and the increase in at least 24 other taxes since Labor was elected in 2007 were all decisions that introduced very significant business risk in Australia.
A disturbing consequence of the previous government’s approach has been a growing perception internationally that investing in Australia involves significant sovereign risk.
A survey of the CEO Forum published last year highlighted this perception. It found:
- 60% of global companies operating in Australia felt that policy uncertainty had grown in the last 12-18 months.
- 41% of companies felt that their parent company was now less likely to invest in Australia than was the case 12-18 months previously with only 20% saying the parent company was more likely to invest.
The incoming Coalition government is determined to reverse that perception.
Some key priorities
Having discussed some key aspects of the style you can expect to see an Abbott Government apply, I want to turn now to some of our key policy priorities – with a particular emphasis on issues of relevance to the financial services sector.
1) Financial systems inquiry
In October 2010, then Shadow Treasurer Joe Hockey proposed a nine point plan to lift competition in financial services. A key element of this was to hold an inquiry into the Australian Financial System.
Joe describes this as a “son of Wallis” root and branch inquiry into the financial system. The objective will be to ensure that that the interests of depositors, borrowers and shareholders are met by a competitive financial services industry.
The Wallis Inquiry was established in 1996, after the Howard Government came to office. Among many far reaching changes made based on recommendations of that Inquiry were the establishment of APRA and the removal of the prudential regulatory function from the Reserve Bank.
Of course it is now approaching two decades since the Wallis Inquiry. There have been some profound changes since that time, including:
- Even greater international interconnectedness of individual countries’ financial systems
- The enormous growth of the Australian superannuation savings system
- A cycle of increasing, and subsequently reducing, competition in banking and particularly mortgage lending – if we measure competition based upon the market share of all players which are not the big four banks.
As an indicator, here are some of the issues mentioned in the Terms of Reference issued by then Shadow Treasurer Joe Hockey in 2010:
- An analysis of the developments since the implementation of the Wallis Inquiry recommendations and lessons to be learnt from the implementation of those recommendations.
- The impact on the Australian financial services industry of the Global Financial Crisis.
- Factors likely to affect the evolution of further stability and competition in financial services.
2) Get debt under control
One of the major differences between the Coalition and the Labor Party has been our attitude to government debt. Let me remind you what has been happening to debt under the previous government.
Gross debt, that is the money we actually have to repay, has been going up and up.
The face value of Commonwealth securities on issue will peak at $340 billion according to Treasury. The Rudd-Gillard-Rudd government was forced to raise the debt limit on four occasions, firstly to $75 billion, then $200 billion, then $250 billion and then $300 billion. Interest on the debt will hit $12.5 billion this year.
In government, the Labor Party used to say that debt was not of any great significance because Australia’s debt to GDP ratio was much lower than in many other developed countries.
The problem with this argument is that many of the countries to which Labor liked to compare us are facing very real challenges. Indeed many are deeply regretting their failure to get their houses in order when they could.
History teaches us that once debt levels start to rise in a democratic political system, it can be very hard to get them under control. Before long you are facing debt ratings downgrades, higher funding costs and potentially a loss of policy flexibility.
And we should never forget that Australia had its credit rating downgraded twice under a previous Labor Government when Commonwealth debt was below the levels it is at now.
Of course, you also see it argued by some in the financial markets that if companies can finance themselves using a mixture of debt and equity, why should it be of any great concern if government does the same thing?
I think this is an argument which breaks down because the analogy between a company and a government is a far from perfect one. Companies generally do not fall prey to the temptation to borrow to pay for recurrent expenditure; sadly governments seem to do this all too often. The political rewards for doing so are immediate - while the political pain from this course of action can generally be delayed for years or even decades and will be felt by politicians who may very well not even be in the Parliament yet. That is why governments should be constantly vigilant about debt. Of course the Howard Government inherited a debt of $96 billion and paid it down to zero; Labor regained government in 2007 and drove the debt right back up again.
3) Return to Budget Surplus
If we are to stabilise debt, and start to get it down, we first need to return to an environment of budget surpluses. The Coalition has a very strong track record on this front: ten of the last eleven Howard Government budgets were surpluses.
Our commitment has been very clear on this front. By the end of a first time of an Abbott Government, the budget will be on track for a believable surplus.
4) Reduce Red Tape
Another key priority for the Coalition is to reduce red tape. Our commitment is that red tape costs will be one billion dollars a year lower through sensible reforms to regulation. Indeed the Productivity Commission estimates that the prize from red tape reduction is at least $12 billion worth of economic improvements.
Improving our productivity performance
Let me turn to the final topic I want to address: the importance of productivity. In many ways this is a unifying theme across the whole range of our policies.
When people say ‘productivity is falling’, of course what they actually mean is that ‘the rate of annual growth in productivity is lower than it used to be.’
Economist Saul Eslake discussed this issue in a paper entitled Productivity: The Lost Decade he gave at a conference last year. He pointed out that in the 1980s Australia’s ‘multifactor productivity’ grew by 0.7 per cent each year. Then in the nineties it jumped dramatically – to 1.6 per cent each year. In the first decade of this century Australia’s annual productivity growth has been essentially flat.
Productivity growth is a very desirable thing. Think of Australia as a giant machine, with ‘inputs’ (principally labour and capital) going in to the machine, and output (national income) coming out. Imagine we put enough units of input into our machine in 1990 to get exactly 100 units of output. Throughout the nineties our productivity improved each year by 1.6 per cent. When you do the maths this equates to a 17 per cent increase by the end of ten years. So by the year 2000, for exactly the same amount of inputs, we were getting 117 units of output. That’s like getting 17 units of output for free!
A recent report by consultants McKinsey, entitled Beyond the Boom: Australia’s Productivity Imperative, describes the issues very well.
The report pointed out that Australia has been doing extremely well over the past twenty years: our per capita income has risen from sixteenth in the OECD in 1990 to sixth in 2010. In the six years from 2005 to 2011, Australia’s ‘gross domestic income’ rose from $815 billion to $1042 billion. But this rosy story disguises a steady reduction in productivity growth (the same reduction that Saul Eslake’s paper highlighted.) Multifactor productivity grew 2.4 per cent a year from 1993 to 1999; 0.9 per cent a year from 1999-2005 and from 2005 to 2011 it has actually dropped by 0.7 per cent a year.
So while Australia’s national income grew markedly between 2005 and 2011, the growth did not come from using inputs more efficiently (that is, from productivity improvements). Our national income grew because:
- There was a surge of capital investment (that is, there was more capital at work in 2011 than in 2005, thanks largely to huge investment in mining and resources);
- there were more people doing more work (which helps total national income, but not per capita income – as well as having more people to do the work, you also have more people to share the income across); and
- we got lucky on the terms of trade (the price of our export commodities like coal and iron ore jumped, and the price of many things we import like consumer electronics fell.)
A key reason productivity growth has been so poor is that the microeconomic reform process has largely come to an end. For twenty five years, from the early eighties, there was a steady process of opening up more and more of the economy to competition, moving many businesses from government to private sector ownership, reducing tariff barriers, and making our tax system more efficient through measures like the GST. For a number of years we were getting the productivity benefits from this process: but that has now come to an end.
At the same time, we have seen a torrent of cost-increasing regulation. The Rudd-Gillard-Rudd Government enthusiastically reregulated and made it harder and more expensive to do business (in sectors as diverse as road transport, coastal shipping and banking).
It also cranked up government assistance to sectors such as automotive (around $700 million a year) and “green energy” (a $10 billion allocation to the Clean Energy Finance Corporation). The Coalition has committed to shut down the Clean Energy Finance Corporation.
At the same time the previous government took steps which actively increased the vulnerability of business to union thuggery, such as abolishing the Australian Building and Construction Commission.
The Coalition intends to take a very different approach – designed to unleash productivity improvements rather than suppress them.
The Coalition has already announced a six point productivity plan.
There will be genuine welfare reform to lift participation in work.
There will be reform of the public sector to improve the efficiency of its operations and to ensure it is providing the services which only government can best provide.
We will slash red tape to reduce business regulatory costs.
We will review competition policy to ensure that large and small businesses are competing on a genuinely level playing field.
We will ensure Commonwealth spending on infrastructure provides value for money.
And we will, within the framework of the Fair Work Act, look at cautious, careful and responsible improvements to labour market regulation to ensure better outcomes for workers and for business.
Let me highlight some of the Coalition’s priorities in reducing the red tape burden on business. Amongst the measures we have announced are:
- The parliament will sit for two days each year when its sole focus will be the repeal of regulation
- There will be an annual report to Parliament on red & green tape reduction
- There will be a dedicated unit within each department and agency to drive red tape reduction
- We will link the bonuses of senior public servants to reducing regulation
- There will be one stop shop for environmental approvals, to reduce the duplication and overlap between state and federal processes while making no change to the substantive environmental outcomes.
Let me conclude my remarks today by making the point that as risk officers you are skilled in making an assessment of the environment in which your organisation operates and the risks that it faces.
I have argued today that a number of features of the style and philosophy of the previous government exposed your organisations to greater risk that would otherwise have been the case. That was bad news for your organisations, and bad news for the financial system of which your organisations form part.
I have also sought to demonstrate today that the Abbott Coalition government will take a different approach in many areas. Our style will be different. Our priorities will be different.
I hope you will find us easier, more predictable and more consistent to deal with. You will not necessarily like every decision we take – but I hope you will find that our decisions fall within a consistent and logical framework.
If we can achieve that objective, we will help to reduce the risk that business – in the financial sector and more broadly – faces. We think that would be a very worthwhile outcome. I hope you will agree.