Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Non-monetary economy wikipedia , lookup
Pensions crisis wikipedia , lookup
Business cycle wikipedia , lookup
Steady-state economy wikipedia , lookup
Economy of Italy under fascism wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Chinese economic reform wikipedia , lookup
Rostow's stages of growth wikipedia , lookup
The Macro Settings: What IFSA Members Need to Know IFSA Annual Conference 3 August 2006 Gold Coast Mike Callaghan Executive Director Revenue Group Treasury The objective of my remarks is to highlight the connection between the macroeconomic settings for the Australian economy, and policy challenges, with the activities of IFSA members. (slide 1) Some may say this is a case of stating the obvious, for the Australian economy and all its developments are the backdrop, or the context, in which fund managers, the superannuation industry and life insurance companies conduct their day-to-day business. But we readily take things for granted, such as assuming that strong economic growth will be maintained, the investment environment will remain benign and that fund managers will continue to achieve high returns. As stated, however, these are assumptions rather the established facts. Moreover, they will not be turned into reality without decisive actions, and the outcomes are all interdependent. Perhaps as an example of how things can be overlooked, for many years representatives of the superannuation industry focused their lobbying efforts on reducing the tax on contributions, saying it would improve retirement incomes. The same attention does not appear to have been devoted to how fund managers could improve retirement incomes through lifting the return on superannuation savings. Yet a 0.5 percentage point increase in the rate of return over 35 years would lead to an extra lump sum benefit of $35,000 in today’s dollar terms for a male on average earnings. This represents an increase in an individual’s retirement benefit of over 9 per cent. Conversely, a decline in the rate of return on an individual’s superannuation savings would see a comparable decline in their retirement benefits. What does it take to lift the rate of return on the savings entrusted to IFSA members? What does it take to ensure that individuals have a steady employment history over their working lives and rising real incomes such that they can improve their standard of living as well as having the capacity to lift their savings for retirement? Australia’s macroeconomic settings and policy developments are central to answering these questions. A strongly growing economy will provide the opportunities that will allow fund managers to lift their returns. It will provide the opportunity for individuals to have a continuous employment history and rising real wages. A flexible economy will not only allow new opportunities to be realised, it provides the resilience to counter negative shocks and reduce volatility in aggregate economic outcomes. Competitive markets and people having the freedom to choose what they want will help ensure that resources are directed to their most productive uses. Reducing excessive complexity will remove deadweight costs that will drive down the economy’s overall performance. Importantly, these are the outcome of policy choices. In summary, what IFSA members need to know is what it will take to maintain Australia’s strong growth performance. Timeframes 2 In elaborating on this challenge, it is worthwhile first to comment on the timeframe involved. (slide 2) From a policy perspective, there has been a progressive lengthening of the time horizon. At one stage the focus was on the yearly budget, with little consideration, at least in fiscal terms, of the implications of developments beyond the budget year. A four-year timeframe was then introduced for budget purposes, with attention directed to not only the impact of a measure in the budget year, but for the following three-year projection period. The release of the first Intergenerational Report in 2002 lifted the policy horizon to beyond 40 years, as we consider the implications of demographic and longer term trends on the economy. While there is a lengthening in the time horizon for policy considerations, there appears to be a shortening in the timeframes for many fund managers, with most funds turning over the majority of their assets within 12 months. However, I would venture to say that to be effective, fund managers need to be alert to the implications and opportunities posed by long-term trends, as do policy advisers. Australia’s growth performance As regards Australia’s recent economic performance, it has clearly been impressive. (slide 3) A widely used measure of economic performance is GDP per capita growth. Australia’s real GDP per capita is over 2.5 times the level it was in the 1960s, with average wages now around $56,000. What would be the working environment for IFSA members if there had been significantly lower growth in per capita incomes and average incomes were now less than $20,000? More importantly, what will be the environment in which the funds management industry operates over the next 40 years? Will we see comparable growth to the past? Before turning to what the future may hold, Australia’s performance in terms of growth in per capita incomes has varied significantly over the past 40 years. (slide 4) In the 1970s and 1980s Australia’s average annual growth lagged that of the OECD and the ‘benchmark’ economy---the United States. That situation reversed in the 1990s and early 2000s. What has changed and will it be sustained? What is different is the policy framework. (slide 5) To quote from last year’s discussion on the Australian economy in the Executive Board of the IMF: ‘Executive Directors commended the authorities for the sustained strength of Australia’s economic performance, which they attributed to an exemplary setting of economic policies and institutions supported by broad consensus on many issues’. 1 Other important features of Australia’s recent economic performance are not only its strong growth, but its reduced volatility. (slide 6) In contrast to previous periods of ‘boom-bust’ economic activity, Australia has experienced 14 years of continuous growth. It is therefore not surprising that economic volatility in the late 1990s and early 2000s is well below that of the 1980s and early 1990s. Perhaps this is nowhere more evident then looking at movements in official interest rates. (slide 7) 1 IMF Public Information Note, 29 August 2006 3 But the past 14 years has not been free of external and internal shocks, including the Asian financial crisis, the US equity bubble collapse, a downturn in the world economy, terrorist attacks on the US, global health scares, a rapid escalation in oil prices, and the most severe drought in 100 years. We have also experienced positive shocks, such as the current terms of trade boom which is largely a consequence of the rapid rise in the price Australia receives for some of its mineral exports, particularly iron ore and coal. Yet the dramatic rise in the terms of trade has not been accompanied with a rapid rise in inflation outcomes or unsustainable boom conditions in the overall economy. We have seen significant movements in some asset prices over the past decade, although ‘booms’ in asset price movements have not been accompanied with ‘busts’ and IFSA members have been operating in an economy with a more stable aggregate economic performance than was the case in the 1970s and 1980s. Why has Australia managed to navigate successfully such positive and negative shocks? The answer lies in the policy settings and institutional arrangements that have been introduced, including a market-determined exchange rate; a credible medium-term inflation targeting regime implemented by an independent central bank; prudent fiscal policy with a medium-term focus; and flexible and competitive markets, including product, labour and financial markets. Such institutional frameworks will allow the economy to adjust to external shocks, but they will not make the economy immune from sufficiently large shocks nor the problems that can arise from policy ‘mistakes’. Moreover the business cycle is far from dead. Ongoing vigilance is required in setting the course of economic policy just as it is required in taking business decisions. As noted at the outset, continuing strong economic growth should never be taken as a given. Yet it would be interesting to know how many in the funds management industry have only operated in the context of a strongly growing economy. With 14 years of continuous strong economic growth, there would be an increasing proportion of the industry that have not experienced a macroeconomic environment of declining real growth, rising unemployment and declining real wages. Drivers of growth The drivers of growth are productivity (GDP per hour worked), participation (the numbers of hours worked by people of working age) and population (the number of people of working age). (slide 8) For all countries, the main driver of growth is productivity. Some, however, have had a positive contribution from population and participation; while for some others, population and participation have detracted from growth, a consequence of an ageing society. Over the past 40 years Australia averaged real GDP per capita growth of 2¼ per cent a year. (slide 9) The increasing proportion of the population of working age over this period contributed on its own around one-half of a percentage point a year to average GDP per capita growth. Participation subtracted one-quarter of a percentage point a year, with increasing female labour force participation being more than offset by a trend increase in the unemployment rate and falling average hours worked. 4 Based on the projections in the first Intergenerational Report, over the next 40 years, an increasing proportion of the working-age population will be of ages that have lower rates of labour force participation, such that participation is projected to subtract three-eighths of a percentage point from annual growth. Over the next 40 years we expect a continuing decline in the proportion of the population made up of children, substantial increases in the population aged 55-64 and 65 plus, and a falling proportion of the population aged 15-54. With labour productivity growth expected to be 1¾ percentage points per year, all this adds up to future GDP growth of some three-quarters of a percentage point less than what we experienced over the past 40 years. If such an outlook were realised, have IFSA members considered what this would mean for their industry? In the face of these expected trends, the challenge is to maintain Australia’s growth performance and this will depend on encouraging greater labour force participation, particularly among older workers, and maintaining Australia’s good productivity performance. (slide 10) Lifting participation In terms of lifting participation, the focus has been on tax and welfare reforms, and more recently superannuation reforms. The latter is of particular interest to IFSA members. (slide 11) The plan in the 2006 Budget to streamline and simplify superannuation provides a very strong incentive for individuals to postpone their retirement until age 60 — for after age 60 superannuation payments from a taxed fund will be free of tax from 1 July 2007. (slide 12) This is important, for Australia’s participation rate for ages 55 to 64 is below that of New Zealand, the UK and the US. And as noted previously, an increasing proportion of the population will be moving into this age cohort. But what of the incentive to improve labour force participation among those over age 60, where there is a significant fall in participation? While preventative health and retraining will be important, a key policy response to improving participation is to lower the tax impost on any extra dollar earned. This is achieved in the Plan to Simplify Superannuation. With superannuation benefits removed from assessable income, the result is a significant reduction in the effective marginal tax rate on earned income for people over 60. This will have a positive impact on the incentive to remain engaged in the workforce. Sustaining productivity growth As regards productivity growth, capital deepening has remained an important component, but in the late 1990s there was a significant increase in multi-factor productivity growth. (slide 13) The strong growth in multi-factor productivity resulted in labour productivity growing faster in the late 1990s than in any comparable period over the past 30 years. This 5 strong productivity performance has generally been attributed to the dividend from past structural reforms. In the early 2000s, however, the rate of productivity growth has eased to be around the average of the past four decades.2 Maintaining the structural reform momentum is essential if productivity growth is to be maintained. The agenda is well established, including the need to address some of the issues in pricing, competition and competitive neutrality in transport, energy and water markets, as well as labour markets and advancing human capital policies, particularly in education. It will also be essential to ensure that capital deepening is maintained if productivity growth is to be sustained. This will require maintaining strong rates of growth of investment expenditure. This investment can be financed domestically or internationally — the difference reflected in the current account deficit. If strong investment expenditure is maintained but there is no lift in domestic savings, the result will be a rise in the current account deficit. Or to pose this another way, for any particular net level of investment in Australia, then an increase in domestic saving will reduce the current account deficit. Lifting savings IFSA members have a keen interest in Australia’s saving performance — it is the lifeblood of much of their business. At the macro level, the focus is on national saving. (slide 14) But over the past two decades there has been a shift in net saving from households to the government sector, with the corporate sector largely moving into balance. In the most recent few years, Australia’s national saving rate has been close to its two-decade average. A significant strengthening in the budget balance has offset a decline in household saving rates. Does this mean there is some public—private sector trade-off? Perhaps, although it is relevant that in many countries there has been a significant reduction in private saving, even in the absence of a corresponding lift in public saving. The forces influencing private saving are likely to include the combination of financial deregulation and housing booms.3 What can be done to lift Australia’s national saving? Continued fiscal restraint is clearly important. Without the strengthening in the budget balance evident over the past decade, Australia’s national saving rate would have been significantly lower. The introduction of the Superannuation Guarantee levy has likely increased national saving, although it is not straight forward to quantify the effect as allowance has to be made for a reduction in other private-sector saving in response to the compulsory levy. Similarly, it has been difficult to quantify the aggregate impact of past government incentives to promote particular forms of private saving, for it may result in a shift Ben Dolman, Lan Lu and Jyoti Rahman, ‘Understanding Productivity Trends’, Treasury Economic Roundup, Summer 2006 2 See David Gruen, ‘Perspectives on Australia’s Current Account Deficit’, Australian Business Economists Forecasting Conference 13 December 2005 3 6 from one form of saving to another. However most of these studies have dealt with minor and incremental changes. The Plan to Streamline and Simplify Superannuation is expected to boost superannuation savings significantly. Will this largely reflect a shift in forms of saving or will it result in an increase in aggregate saving? A distinguishing aspect of the Plan is the magnitude and nature of the incentive to invest in superannuation and the fact that it is part of a comprehensive package which will substantially reduce complexity and enhance the attractiveness of superannuation as a saving vehicle. Moreover, through reducing complexity and restrictions around pension products, the Plan provides IFSA members with an opportunity to develop innovative products which should encourage saving. Such factors suggest that the Plan is likely to have a positive impact on aggregate private savings. However even if there is a change in the composition of how individuals are saving for their retirement, this could have an overall beneficial impact on the economy’s performance if a greater proportion of saving is directed to the financial markets where it can be used to finance investments which offer the highest returns. Reducing complexity Reducing unnecessary complexity is another key component to sustaining Australia’s growth performance. While some complexity is inevitable, if not beneficial, in order to ensure markets work efficiently, resources devoted to dealing with excessive levels of complexity can be diverted to more productive pursuits, thereby raising productivity. Excessive complexity increases the cost of doing business and limits the effectiveness of markets, leading to a misallocation of resources. As we have seen in the case of superannuation, excessive complexity can increase the cost of investment services, confuse consumers and impede their investment decisions. Conclusion It is not possible to cover everything that IFSA members need to know when it comes to Australia’s macroeconomic settings. (slide 15) I would venture to say, however, that the performance of the Australian economy over the past decade or so has provided a highly favourable operating environment for IFSA members. It can not be assumed that this environment will be maintained indefinitely. Sound institutional policy frameworks have reduced the volatility in the economy, however if the same rate of growth in GDP per capita is to be maintained in the face of an ageing population, then steps are necessary to lift participation and to maintain productivity growth. IFSA members should have a keen interest in ensuring that such steps are taken. 7 8