Rebuilding foundations for economic and social reform

The 2015 Outlook conference delivered thought-provoking debate on the key issues facing Australia today.

In the lead-up to the 2016 federal election, the 10th Melbourne Institute/The Australian Economic and Social Outlook Conference (ESOC) provided unrivalled access to policy evolution inside the major parties, and identified the essential ingredients of successful policy implementation. Australia’s premier public policy event, it ran over two days (5-6 November 2015) at the Grand Hyatt, Melbourne.

Opened by Prime Minister Malcolm Turnbull, the conference brought together political leaders from the major parties, experts from Australia’s top universities, and leading policy thinkers and practitioners from both private and public sectors, to discuss economic and social reform.

The Prime Minister used the conference, the first major policy event for the Turnbull government, as an opportunity to demonstrate commitment to “a high-wage Australian economy that is more innovative and more productive than ever before”.

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Dr Jenny Gordon, Productivity Commission

“We are living in the most exciting times in human history,” he said. “Free markets, globalisation, long periods of peace, and above all the acceleration of technological change has produced economic and political transformations never seen before.”

He asserted the importance of demonstrating that decisions are made in a thoughtful, consultative manner “(which is why) we are not trying to reduce complex decisions to three-word slogans”.
With major change on the agenda, debates on innovation, tax reform, competition policy, trade and investment, and retirement policy spilled over from the plenaries into informal discussions between sessions.

Here is a highlight of some of the debates that took place. Full audio from all sessions is available online.

Innovation matters

Innovation has become a buzzword of late, on the tips of the tongues of students, young entrepreneurs, business leaders and politicians alike. In his opening address, Mr Turnbull said a key focus of his government is to encourage a culture of innovation and ensure our children are equipped with the STEM skills they need.

Later, speaking in a session focused on innovation, Deena Shiff, Non-Executive Director of the Citadel Group, observed that the move from policy to practice hasn’t always been carried out well. Identifying the need for three key changes, she called for the government to deliver an innovation statement that clearly defines the purpose and plan of attack:

  1. Encouraging growth in the stock of new companies that are innovative/use new technologies
  2. Commercialisation of intellectual property from universities, chosen government-certified growth centres or the CSIRO
  3. A focus on education to improve the skills base while continuing to maintain Australian standards and competitiveness.

David Dyer, Principal, McKinsey & Company said we should be optimistic, observing that a shift in the drivers of national income is providing an incentive for innovation within Australia, alongside the competitiveness challenges of the Australian economy and the disruptive forces within the global economy – industrialisation and urbanisation of emerging economies, a global ageing population, disruptive technologies and greater global interconnections. “There are lots of opportunities, but we have to understand it’ll be a very different world in which we operate,” he said, and recommended that the government prioritise innovation even in uncertain conditions.

Dr Matthew Butlin, Red Tape Commissioner for the Department of Treasury and Finance, echoed his view and added, “Innovation is primarily about business behaviour”. He noted the importance of not thinking about innovation as a game of who wins, but rather about the overall performance of enterprises, and coming up with avenues to strengthen their performance.

In the perfect world, we would know exactly how much we’d need, with the last crumb just enough to put the petrol in the hearse to take us to the cemetery.

Eating the icing, and not the retirement cake

Australia’s ageing population prompts economic challenges and opportunities. As our demography shifts, retirement policies and pensioners become central to the discussion and recommendations from researchers in the area came with a sense of warning. Karen Chester, Commissioner, Productivity Commission, told the audience that the ageing Australian population is the biggest policy imperative facing the government. “Older Australians tend to be income poor and asset rich. Most older households rely on government payments and around 70 per cent receive full or part payment, with health and aged care taking up the bulk of the cost,” she explained.

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Prof Glyn Davis, Vice Chancellor, The University of Melbourne, Prime Minister Malcolm Turnbull MP and Mr Paul Kelly, Editor-at-Large, The Australian

She recommended viewing retirement income as three buckets that can and should be drained – age pension, superannuation and private savings, and the family home.

“The age pension bucket is pretty well drained and forecast to grow to 20 per cent of GDP by 2050,” she explained.

“Retirees tend to rely on super and private savings to fund their retirement lifestyles in conservative ways.
“Older households are unwilling to tap into the family home bucket and it is not drained that well.”

At current rates of ‘drainage’, the retirement income for most ageing couples is not sustainable.

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Senator Penny Wong, Shadow Minister for Trade and Investment

Professor Susan Thorp, Professor of Finance at the University of Sydney Business School, explained that people retiring from work now face a new challenge – covering their expenses from their savings and pension payments, and not knowing how much to spend, and how slowly or quickly to spend it, potentially leaving behind more than what they intend to.

Uncertainty makes it hard to know how to slice the retirement cake.

Rather, retirees tend to live in a haze of uncertainty, unsure how much to consume or even what size the cake will be as investments move from year to year.

She has found that wealth preservation is a much more important issue than wealth dissipation, and her study with colleagues shows that annual consumptions are far lower than what would be needed by the Association of Superannuation Funds of Australia’s standard for a comfortable lifestyle.

“What we see is people eating the icing off the retirement cake, but keeping the cake intact,” she explained. The reason for this is self-insurance – because retirees don’t know when they are going to die, they feel the need to create a wealth perpetuity, which is difficult to calculate accurately.

Her recommendation is “CIIIPRs”: comprehensive income, insurance and intergenerational equity products for retirement; products that will distribute income from current earnings and enable decumulation of capital.

“CIIIPRs could offer insurance against aged-care costs, medical expenses and other shocks, not just longevity, and reduce buffer stock savings,” she said. “We are seeing accumulation of private lump sum savings, and we need to think about how to create intergenerational wealth transfers.”

More on the topic of ‘reform’

Acknowledging the problematic nature of implementing reforms, Michael Thawley AO, Secretary, Department of the Prime Minister and Cabinet, said that it was a major factor affecting public opinion. “It is very striking just how many reforms we’ve introduced that have ‘hooks’ attached to them, and have not done what we intended,” he warned. He pointed particularly to Indigenous policy reform, which, he said, had unintentionally created another layer of bureaucracy. He acknowledged that federal-state relations are problematic because economic and social reforms could not succeed without full support from the states and territories.

In the closing session of ESOC 2015, David Uren, Economics Editor at The Australian, drew further focus to the general framework, and said achieving reform had become “much harder than it used to be, and indeed, (much harder) than it ought to be”.

Liberal MP Josh Frydenberg told the audience that one major oversight of governments attempting reform was the failure to effectively explain the need for reform in the first place, which has led to public confusion and mistrust of politicians.

In response, Paul Kelly, political journalist and Editor-at-Large for The Australian, recommended that the government rely more heavily on the media, which could play a far more purposeful role in enlisting support for reform.

The consensus of the speakers and the audience at the conference was a clear need for reform, with general agreement that achieving meaningful economic and social reform is one of the biggest challenges facing state and federal governments today.