The Services Story

SPEECH TO THE VALUE ALLIANCE ANNUAL RECEPTION

‘THE SERVICES STORY’

SYDNEY

THURSDAY, 18 FEBRUARY 2016

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On this land traditionally owned by the Gadigal people of the Eora nation, let me begin by acknowledging their traditions and their elders past, present and enduring. Thanks Julie Bennett for that introduction and Claudia Pritchitt for the invitation to join you tonight. I know you’ve welcomed a number of very interesting speakers to this forum over the years so I’m honoured to be here. I’ve been looking forward to it.

This is a great opportunity to take stock of the more than 110 stakeholder meetings I’ve participated in so far in my first few months as shadow minister for financial services, and also to sketch out some broader themes.

My main passion in politics is for economic policy and my main concern is for the living standards of middle Australia. Central to all this is the financial system and the retirement income system, including superannuation.

Yesterday in Adelaide I spoke to around 1,500 investors about the macroeconomic context for the current debate about superannuation policy and about some of the implications of the recent volatility in the stock market, which I’m sure you’ve been following as closely as anyone. Earlier today, I discussed Australia’s broader reform challenges at a smaller forum in Melbourne.

But tonight in Sydney I want to do two different things. The first is to provide a brief overview of the year ahead in super and financial services because, perhaps unusually for an election year, there’s still a lot of work going on in this policy space.

Having largely agreed with the Government on most aspects of their response to David Murray’s Financial System Inquiry, you would have noticed that some major differences remain between the parties, and that these are concentrated in super.

You’d understand, for example, our different positions on superannuation tax concessions. Labor has had a clear plan on the table since April last year to make the system fairer at the top end, while the Liberals now seem to be considering some more large-scale changes in the accumulation phase with particular consequences for middle-income earners.

On governance, the Assistant Treasurer has indicated that she will continue her campaign against representative superannuation boards, despite the Senate emphatically rejecting her plans last year.

On choice, we’re open to considering ways to give more workers super fund options, but reject the Government’s attempts to conflate this issue with the vexed question of default fund choice for employers and the removal of important safeguards for workers.

On the super guarantee, you would have seen reports that the Government is contemplating another delay or even a freeze in an already-delayed schedule of increases, while Labor is looking for ways to affordably address the important adequacy issue for more Australians.

We’ll continue to oppose plans to scrap the Low Income Superannuation Contribution, which will see 3.6 million Australians lose up to $500 in super per year from 2017.

This will disproportionately affect women, who are already let down by the current super system, and Labor will be looking for ways to help close the gender gap, including through my colleague Senator Jenny MacAllister‘s Senate Committee Inquiry.

Finally, we will continue to draw attention to the Government’s plans to make it easier for employers to shirk their superannuation obligations, at the same time as 690,000 Australians miss out on around $2.6 billion per annum and growing.

These issues will dominate the coming year in superannuation policy, and that’s a good thing. Super is central to our financial system and the broader economy so it should be central to the political contest too.

My job, and Labor’s job, is to ensure that real people are front and centre in our policy considerations; that the various players in the system are serving their needs and not vice versa; and that it doesn’t degenerate into the usual self-interested battle between superannuation’s warring tribes.

If you forgive me one political remark it’s that too often this Government thinks it’s all about boosting one set of institutional players and diminishing another, taking an ideological approach when what’s needed is a level-headed assessment of what’s best for working people and their retirement.

You could see this in action when the Government decided not to proceed with our proposed Council of Super Guardians which – at its core – was about bringing all the voices into the room and to promote stability in the super policy space.

This election year you can expect to hear a lot more about all of these issues, where we differ and what we can do better within the fairly substantial fiscal constraints dictated by the serious deterioration of the budget in recent years.

There are so many other issues in financial services at the moment: cybersecurity, capital adequacy, blockchain, fintech, payments reform, data management, life insurance, advice, market volatility and many more, but the defining political contest this year will be in super.

That’s my first point. My second point is much broader and longer-term.

It’s to take the opportunity afforded by a financial services audience of this calibre to talk about the puzzling under-appreciation of the services sector in Australia – something which is of great interest to me and the core question of some terrific work done by my colleague Clare O’Neil.

What do I mean by the services sector?

As Clare has pointed out, it’s the sector responsible for every one of the ten fastest-growing high-skill jobs in Australia over the coming five years.

That includes people like you in the financial services industry, but also registered nurses, accountants, ICT Managers, programmers, primary school teachers, construction managers, advertisers, solicitors and management analysts– all at the top of the list in terms of jobs growth over the next half a decade.

This services jobs growth is being felt already, with the last Statement of Monetary Policy highlighting a substantial uptick in both household and business services employment over 2015 while goods-related employment remained sluggish. According to the RBA, this is partly what explains the fact that employment growth in 2015 was above average, even though GDP growth was not.

When you drill down industry-by-industry, the statistics are even more striking. Education and training account for around eight per cent of all jobs, which – as Ross Gittins pointed out in the Herald recently – makes it a bigger employer than manufacturing. Health is the biggest employer of all, accounting for more than one in every eight jobs. And you in the financial services industry make the biggest contribution to our economy in value-added terms and are the second fastest-growing industry, according to the ABS National Accounts figures.

Australia is not unique in the importance of services to our economy, but we are unusual in the way that the services sector attracts so little attention in Australia’s economic narrative. When commentators lament the challenges facing mining and manufacturing, why do we hear so little about the opportunities in our services sector?

Of course there is an understandable interest in mining, manufacturing and agriculture – those sectors which have long been the basis of Australia’s economic success and will always play an important role.

But if we want to be forward-looking and plan for the future sources of our growth, it’s clear that the services sector should be our focus.

For one thing, it’s perfectly natural for a developed country to change their focus to services. As incomes have risen over the past few decades, so have our consumption preferences changed in favour of services. One way to think about it is to imagine what you’d do if your income doubled suddenly tomorrow. Chances are that you wouldn’t double goods consumption, but you would more than double your services consumption.

Beyond this effect, Australia also has clear competitive advantages in parts of the global services economy. Of Deloitte’s Fantastic Five next waves of growth opportunities, services industries – tourism, international education and wealth management – make up the majority, alongside agribusiness and gas.

There are real costs and missed opportunities that flow from Australia’s inattention to the services sector.

The first is a social cost. A failure to recognise the importance of services is a failure to embrace the societal benefits of a services-based economy. The weight of academic research suggests that services jobs offer better pay, better conditions, more flexibility and more interesting work than their goods-producing counterparts. Countries with higher economic reliance on services tend to have a better educated and healthier populace. That’s a good thing.

The second cost is economic.

Of course, Australia has medium-term growth projections which are smaller than most of our trading partners. That’s a natural consequence of being the most developed economy in our region and one of the richest countries in the world.

But what’s less well-known or acknowledged is that Australia’s volume of trade compared to our GDP is lower than other comparable nations as well. This is almost paradoxical, given our proximity to rapid growth and the nature of being an island economy.

The message is this – if we want Australia to grow faster, then we have to export more.

And while services represent around 78 per cent of industry value-add in total, they comprise only around 20 per cent of Australia’s total exports, according to statistics from the Australian Services Roundtable. Much less than international averages.

The great opportunity for Australian trade is in the services economy.

This means a lot for the Australian labour market. Over the last seven years, tradeable jobs – those in sectors open to world markets – have fallen 20 per cent or around 400,000, while non-tradeable jobs – mostly in the domestic services economy – have grown by a quarter or 1.5 million. We need to turn these statistics around by increasing our trade in services.

So where should we focus our efforts to take better advantage of the opportunities in the services economy?

I have five key points I hope you’ll take away.

Firstly, we need to take better advantage of the opportunities present in free trade agreements.

Consider some statistics. Sixty years ago, in 1950 or so, just 15 per cent of the world's GDP fell within 10,000 kilometres of Australia's shores. Today this share has more than doubled and by 2030, with the continued expansion of China and India in particular, close to 60 per cent of the world GDP is projected to fall within 10,000 kilometres of Australia.

This is the biggest story in the world economy of our lifetime – and we need to take advantage of it.

Recently, during the work of a parliamentary committee I was surprised to learn that only 19 per cent of Australian exporters make use of Free Trade Agreements. That’s well below the international and regional average.

Meanwhile, the recent FTAs open up substantial opportunities in the services sector. For instance, in China, where economic data revealed for the first time last May that the services sector makes up more than half of the Chinese economy: 51.6% of gross domestic product. In financial services there, the opportunities are huge. Australia has a strong, experienced financial sector, where China has strong financial ambition but less experience.

That’s why we need to take advantage of the gains in the China-Australia FTA, like for example the opening up of the Chinese market for compulsory third party motor vehicle insurance, in a country with more than 127 million cars.

For all of its faults, the Trans-Pacific Partnership Agreement, signed only a fortnight ago, also contains a number of new opportunities in professional, financial, education and health services. The number of middle-class consumers in the region covered by the TPP is set to grow significantly in the coming years, opening up services markets across the board.

Secondly, we need to embrace the opportunity of our changing demographics when it comes to our expertise in the ageing and caring industries.

You’d all know the statistics, that the proportion of over-65s will rise from 14% to 22% by 2061. Deloitte Access Economics has estimated that the number of Australians living with dementia will quadruple by 2050. These demographic changes bring their own challenges, but they also bring services-sector opportunities.

When Japara Healthcare listed on the ASX last year, its stock jumped 35% in its first day of trade reflecting investor’s interest in this burgeoning industry.

Not just in Australia, but overseas with several Australian companies embarking on joint ventures in China and even more looking at ways to transfer skills and knowledge to these less developed care markets. China’s aged population today is around 200 million and is expected to double by 2050. Meanwhile, there’s only around 5 million aged care beds.

We need to transform our thinking from aged care as a burden, to the caring industry as a source of jobs and trade opportunities.

Thirdly, there’s the sharing economy and the incredible changes that technology is bringing about in the services industry.

There are estimates by Upwork that around 4.1 million people in Australia participated in freelance work in 2015, accounting for $51 billion of the Australian economy. It’s hard to see these numbers going anywhere but up.

Governments need to respond to these changes in the labour market and be ready to adapt to changing technology. Federally, we need to resolve some important questions regarding industrial relations and income tax, while the States need to work together to harmonise the patchwork of regimes governing the industries.

That’s what Labor’s National Sharing Economy announcement – the brainchild of my colleague Andrew Leigh – was about.

Fourth is closely related – the data revolution underway in Government services.

This means making de-identified data available for innovative use in the public, private and community sectors. Doing so safely is at the core of Labor’s announced National Information Policy.

Then we must go further and use this data to transform the delivery of Government services. We will soon be able to observe each child’s educational progress in real-time, and be able, in theory, to apply resources to immediately help. Same for health. Rather than dealing with the consequences of falling behind, we’ll be able to intervene during the fall.

Australia must get ahead of the wave of innovation in the services sectors associated with Government – like education and health. Not only to improve the quality, but also to save costs from better targeting and to take advantage of export opportunities internationally.

Finally, we need to prepare our domestic economy to take full advantage of the services transformation.

This means enabling people from all backgrounds and all parts of Australia to take part in the services jobs of the future. One of the beauties of services is that associated jobs need not discriminate geographically. With appropriate infrastructure – like high quality broadband and public transport – work in our services economy can be shared widely. In the skyscrapers and office buildings that surround us today, and in the suburbs and satellite cities of Australia – like Logan City in Queensland, where I am from.

So while much of Australia’s attention will be focussed on the politicking and debates of an election year; with little fanfare, our economy will continue its structural transition towards services.

There’s a real need to develop Australia’s services story and to confront the challenges and opportunities that lie ahead. There’s a big role for Government to play in this, but also an important role for the people in this room and for my colleagues in Canberra.

To talk up the value of our services sector and to better understand and prepare for a service-focused future – not only financial, which is what keeps all of us in this room busy – but right across the board.

ENDS

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