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The key reasons why reforming our economy is non-negotiable

12 Feb 2021

Good afternoon – and can I say how good it is to speak at a UDIA luncheon – and to even do it in person.

I was due to be here late last year.

But last year was the kind of year that illustrated the Yiddish proverb: man plans, God laughs.

It was a year of dislocation and disruption – a dual health and economic crisis.

Australia’s nearly 30 year run of economic growth was cut short.

In NSW the unemployment rate jagged from near record lows to decade highs.

Hundreds of thousands of people lost their jobs – and took substantial pay cuts.

Businesses were brought to the brink.

And none of those indicators give the full picture of the fear, uncertainty and stress that the crisis inflicted on our people.

Even more devastating has been the loss of 56 lives.

To put it another way: 2020 gave us a lot of reasons to be downcast about our present situation and our future.

So today I want to focus on the positive.

And by far the biggest positive – especially in NSW – is that we have responded to the crisis exceptionally well – and that has meant limiting the damage.

The Lowy Institute ranked Australia’s response at number 8 worldwide – and the numbers tell the story.

Yesterday, Australia recorded two (2) locally acquired cases.

In the UK it was more than 13,000, and 1001 deaths – and that’s despite 13 million people having already been vaccinated.

In the second quarter of last year, our national economy contracted by 7 per cent.

But Spain – whose economy is about the same size – contracted by 18 per cent.

The NSW unemployment rate rose last year, but now looks to have peaked at 7.2 per cent.

In the USA it was more than double that.

The EU bounced back to growth in the third quarter of last year, but contracted again in the fourth.

By comparison, even with the Northern Beaches outbreak, we are expecting a positive fourth quarter of last year, after a big bounce in the third.

The situation Victoria is wrestling with right now, shows we can never really declare victory over the virus, so we must keep planning for the future.

In the years to come we will continue to feel the effects of the COVID recession.

But the intensity of the impact will pale in comparison to what the vast majority of nations can expect…

If – and it’s a big if – if we make the most of the advantages we have earned.

But we have to do more than just get back to square one.

We can pat ourselves on the back for a job well done so far.

But, future generations will judge us on what we do next.

That means getting on with the reforms that can set our nation up for the next era of growth.

Today I want to give you 5 reasons why the time for reform is now.

And then I’ll touch on how things are progressing with our biggest reform proposal in NSW: property tax reform

Why reform is so important right now

So why is reform so important right now?

The need for reform predates the pandemic

The first reason is that even before the COVID crisis, the need for reform was clear.

Global economic growth has been sluggish for years.

Throughout 2019 – the year 1 BC (or “before coronavirus”) – the RBA was steadily revising down Australia’s growth projections.

And the Reserve Bank Governor Philip Lowe has spent almost his entire tenure calling for governments at all levels to tackle structural reform to lift economic growth.

Almost four years ago the Commonwealth Productivity Commission called for – particularly state-led reform – as an antidote to stagnating productivity growth.

Here in NSW, public investment in infrastructure has been doing the heavy lifting on state economic growth for several years.

Those projects will drive further productivity and economic gains as they continue open.

But building massive infrastructure is not a standalone economic strategy.

We have to pull other levers. And the most obvious lever is economic reform.

Uncertainty means we must take all available opportunities to drive growth

Secondly, if the case for reform was already strong – COVID has made it even stronger.

Last year compounded slow pre-pandemic growth with nightmarish economic contractions.

Unlike previous global downturns, our recovery this time faces the added challenge of deep uncertainty.

For example, it is impossible to say with any certainty when international borders will reopen

Or whether the vaccines will stop the virus in its tracks.

Geopolitical relations have also changed, including with some of Australia’s most important trading partners.

Domestically, some states have acted unpredictably on border closures, so there is still a reluctance in the community to travel interstate.

All of these factors – and others that are not even apparent yet – can hamper our recovery.

And we can’t assume things will just go back to the way they were.

This is something that the property sector is grappling with in real time.

Changes in population and immigration affect demand for housing.

We can see it in the data on rent and apartment sales, where demand is much weaker than for houses.

We rightly worry about the impacts on ordinary Australians of a loss of international tourists to our shores.

In a similar vein, our economy is facing a loss of around $11 billion because international students can’t get here.

Some commentators have tried to pit students against overseas Australians trying to get home.

This is a mistake.

Of course we have to prioritise bringing our people home – it’s the right and fair thing to do.

But we also have to be fair to Australian’s who are here – education is our state’s second largest export – supporting the jobs of around 90,000 people.

Put another way, for every three student studying in NSW they support one job.

We can’t ignore the fact their livelihoods remain in complete shutdown.

NSW has accepted more than its fair share of Australians returning from overseas – over 100,000 – and approximately 45% are from other states.

From 15 February, NSW will be accepting 3,000 returning Australians each week – while other states refuse to shoulder more of the load.

Even if we were to hypothetically halve this number to allow capacity for international students, NSW would still be accepting more returning Australians than any other state.

The point is – we have to find a balance, and keep adapting to find solutions – because the jobs of tens of thousands of people here in NSW depend upon it.

And we have to act now, because entire industries don’t turn back on with the flick of a switch.

In the meantime, when major sectors are out of action, taking the opportunities that are available to us becomes more important than ever.

Structural economic reform is something we can achieve – to deliver real economic benefits – regardless of the global economic context.

Survival is not enough – we have to keep moving

Thirdly, the political temptation for governments will be to just keep on surviving.

In the short term, Governments are defined by the way they respond to crises.

Of course, how you respond is vitally important.

But there comes a point where you have to get back to governing not just for the immediate term – but for the future.

This is the most important responsibility of any government.

Responding to a crisis is busy work – and it’s rewarding too.

But keeping a virus at bay is like keeping your head above water.

It doesn’t get you to where you want to go. To do that, you have to start swimming.

We must shake off the malaise of “policy by focus group”

The fourth reason reform is so important goes to politics.

Australian politics is in grave danger of succumbing to the curse of government by focus group.

Since the Rudd Government was elected in 2007, Australia’s federal Governments have become extremely risk averse.

Leaders that don’t poll well don’t last.

Policy thought-bubbles get floated, and if the polling isn’t in favour, the bubbles burst.

This is precisely the opposite of the way government should operate.

If you ask the average punter if they want a big change, usually they will say no.

Change is scary.

So politicians instinctively don’t want to rock the boat.

And yet when leaders lead from the front, bring people on the journey, and make hard decisions that are ultimately in the public interest, they win public support.

The pandemic has made this abundantly clear.

Australian leaders have imposed on their citizens some of the most stringent civil and economic restrictions in the history of our federation.

And despite this – those same leaders have extraordinarily high approval ratings.

They have done what they believe is right – and by doing the right thing, it turns out they have done the popular thing too.

As we emerge from the pandemic, citizens are looking for leadership.

They don’t have all the information about health risks, economic costs and the like.

It is government’s job to weigh the information at their disposal and use it to chart a clear course.

Now – more than ever – it is incredibly important for governments to not just do what’s politically palatable and easy.

We have an obligation to stand up and lead.

There is public appetite for reform

The final point is related – and it is simply this: right now there is a clear public appetite for reform.

Late last year, polling for the Daily Telegraph showed public confidence in Australian leaders is at record highs.

This week, polling for the Sydney Morning Herald showed much the same.

Here in NSW, that same polling showed specific support for our tax reform proposal.

And that accords with the feedback we have received as part of our consultation process.

The public has never had more faith and provided greater support in their governments.

What a travesty it would be if we don’t honour the faith they have placed in us by getting on with the job of setting up Australia’s future.

A state-led reform agenda, supported by the Commonwealth

Our willingness to tackle reform today will profoundly affect the prosperity of generations to come.

Earlier this week in an interview I said it was the states’ turn to drive the reform agenda – with NSW leading the charge.

That’s mainly because the reforms that offer the greatest gains are in areas where states control the policy – like property taxes.

But Australia is a federation, and the Commonwealth has an important role to play in helping states get the job done.

Fiscally, the Commonwealth can incentivise reform.

And so it should, given the states ceded their taxation powers midway through last century – and the yawning fiscal imbalance created corresponding fiscal responsibilities.

It also makes financial sense, because successful state reform will lift the national economy and boost the Commonwealth coffers.

But it’s not just about the money – moral support is important too.

Having the unequivocal support of the Commonwealth would improve our chances of success – and demonstrate the leadership our nation needs as we begin our recovery.

Tackling economic reform in NSW

In NSW, we have a wide ranging reform agenda.

Several important planning reforms will help ensure the property sector is a driver of our economic rebound –

From the Planning System Acceleration Program, the new Planning Delivery Unit, e-planning and Infrastructure Contributions reform.

But the reform I am most focused on right now is property tax reform.

Re-capping property tax reform

We launched a proposal at the Budget last November – and at this stage it is still just a proposal, out for consultation.

To recap: it’s a model that replaces both stamp duty and land tax with a single property tax.

Unlike other models – ours would be based around a central principle of choice.

Property purchasers would have a choice to pay stamp duty up front – as well as ongoing land tax, if that applies.

Alternatively, they could scrap those two taxes and opt-in to a new annual property tax instead.

Once a property is in the new system it would stay there.

That means choice would diminish over time – but very gradually.

20 years from now, only half of our state’s properties would be opted in.

A fuller transition would take around 50 years.

Diminishing choice is a feature – not a bug.

The idea is to move away from our current system – which, on any objective measure, is bad for our economy and bad for our people.

Stamp duty chokes growth and locks people out of the property market.

But a sudden overhaul would be a big shock, and raise issues of double taxation.

Choice makes the transition fair.

It means people who have built their lives and their financial affairs around the current system can stick with it if they want to.

If you’re not buying – nothing changes.

If you want to buy a property that you plan to hold for a long time, you don’t have to opt in – you can pay stamp duty instead.

But for people who want more flexibility, an annual charge gives them that freedom.

Choice is the way to get us from a bad system to a better one.

It is slow reform. But that’s infinitely better than no reform.

Even with this gradual transition, the model offers significant economic benefits in both the short term and the long term.

The immediate impact would be an estimated $11 billion injection into the economy over four years.

This would be a huge boost to our recovery efforts.

Over the long term, the structural nature of the reform means it would deliver a sustained productivity benefit – improving mobility, and increasing the number of property transactions conducted every year.

Consultation feedback – working with the UDIA

A reform of this scale will have far-reaching implications for a range of sectors, but especially the property sector – which is subject to the same COVID-induced volatility as the rest of the economy.

The UDIA’s economic action plan from May last year called for the removal of stamp duty from new purchases for 12 months

And while we haven’t removed it entirely, our last Budget raised the threshold for stamp duty concessions from $800 thousand to $1 million for first homebuyers buying a new home.

This has helped thousands more young people get a step on the property ladder.

But as prices inch higher, more people are pushed over the threshold – and we end up in the same vicious cycle.

So my determination is as strong as ever to give the people of NSW an option to reform property taxes.

But before we even consider moving ahead, we have to get the policy right – and that means flushing out issues, nailing down the details, and ironing out the kinks.

That’s why we are conducting a rigorous public consultation.

I want to thank Steve and the UDIA for the role they have played in that process so far, as part of the Property Tax Working Group.

It has been a very fruitful conversation – and one that will continue over the coming months.

A number of key issues have come through in our discussions with the Working Group, including:

  • certainty around timing and thresholds
  • how greenfield developments and unimproved land sites would be treated
  • and ways we can avoid any deferral of purchasing decisions if the policy goes ahead.

We are actively working through each of these issues with the UDIA and other stakeholders – and consultation is due to conclude in March.

From there, we are aiming to finalise the policy by around the middle of the year.

And if the Government decides to proceed, we will have a clear timetable for implementation.

While the consultation paper contains proposals around rate structures and a range of other matters – these details are very much up for discussion.

So if you haven’t already, please get a copy of the paper from the NSW Treasury website, and give us your feedback either directly, or through the UDIA.

Conclusion

Structural economic reform is never easy – and there is never a good time to get it done.

In NSW we have a proposal that has real prospects of succeeding – and that would mean setting up our state for success too.

What we must not do is allow minor difficulties to obscure the bigger picture, and frustrate our efforts.

That bigger picture is a state and a nation where more Australians have an opportunity to get ahead, and enjoy the prosperity and security of living and working in the best state in the best nation in the world.

Australia has earned an extraordinary advantage in the way we have handled the pandemic.

It is an opportunity – but it is a grave responsibility as well. This is a pivotal moment in our nation’s history.

Our national economy has been crying out for reform.

An unprecedented economic crisis means we cannot afford to fail.

But with unprecedented public goodwill – we have a once-in-a-generation chance to get the job done.

 

 

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