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Australia’s Economic Independence: Speech By Cheryl Kernot

This is the edited text of the speech given by the Leader of the Australian Democrats, Senator Cheryl Kernot, to the Australian Democrats’ National Conference in Hobart.

Speech by Australian Democrats leader Senator Cheryl Kernot.

Australia’s Economic Independence – Economic Rationalism Or Economic Nationalism?

Cheryl KernotThe election we “have to have” is almost upon us – in all probability less than 8 weeks away.

It’s not just a contest for political survival between John Howard and Paul Keating.

It’s also an election which is crucial to the future of the Australian Democrats and crucial to what sort of nation Australia will become in the next century.

And both the nation – and the next century – need the Democrats.

They need us because we are all that stands between another decade of hard-line economic theories of “two-party Australia” and the survival of such notions as the public interest and community responsibility.

They need us because we are all that stands between the entrenchment of “hands-off” governments and governments which choose to afford to care – governments which see value in placing social and environmental considerations on at least an equal footing with economic ones.

They need us because we are the only party which has looked beyond the limited horizons of so-called “economic rationalism” to put forward a different economic vision and generate debate about a different set of policies and ideas.

In his book, Tumbling Dice: the story of modern economic policy, Brian Toohey summed up “rational economic man” like this: “So long as he doesn’t get caught, rational economic man has no regard for laws, and still less for social conventions, moral principles or the feelings of others. There is no natural urge towards cooperative endeavour, no sense of community, no tribal loyalty. Given half a chance, he would steal coins from a blind beggar”.

That is the kind of political and economic approach we are fighting against – an approach which places little value on the notion of community or society and which sees little need for social, environmental or community interests to be upheld or protected by governments.

It is an approach which threatens to bring about an irreversible shift towards a more selfish, less caring society.

Last year, the British writer Julian Barnes published a book of articles he had written for the New Yorker magazine, articles which basically deal with various aspects of life in post-Thatcher Britain.

I was struck by his observation that what Margaret Thatcher had done to the country could not now be undone. He commented that – until Thatcher – post-war politics in Britain had been a case of “little pendulum swings to the left and then to the right over the years”.

But, he said, “post-Thatcher, the pendulum continues to swing, but inside a clock that has been rehung on the wall at a completely different angle”.

Of course, Margaret Thatcher did say [late in her Prime Ministership] that “there is no such thing as society” – a comment which Julian Barnes describes as ‘a defining moment’ because he finally realised she was mad, even madder than he had previously imagined, but at least he could now see what it was she thought she was up to!

I doubt if any Australian politician would be bold enough to say there was no such thing as society – but many of the policies and decisions of the past decade certainly carry that implication.

It is that shift away from the notion of society – or community responsibility – which concerns me the most and it is that concern which lies at the heart of most of the Democrats’ policies, ideas and actions.

Whether we are talking about investing in education, or protecting the environment, or better community services, or even parliamentary accountability – we are essentially talking about the building blocks of a fair and cohesive society.

We are fighting against the “corporatising of the community” – and the sort of approach adopted by Wayne Goss in Queensland and Jeff Kennett in Victoria – where we are constantly told our priorities must be economic and where we are in danger of becoming a community which is oriented solely towards economic ends.

As we go into the next election, the Democrats are established as the only political party which stands against this trend.

Our challenge is to get the message out to Australian that a vote for us is a vote for – not just a credible party with a fine track record – but also a party offering a genuine policy alternative.

In the words of a senior press gallery journalist: we are not only about keeping the bastards honest, we are also about giving the bastards a few ideas.

An economically independent Australia

Today, as my major theme, I want to set out the Democrats’ ideas for creating an economically independent Australia.

There are very few things which are more important to the well-being of a nation than the ability to remain economically independent.

Some two hundred years ago, the first President of the United States, George Washington, warned the American people that the surest way to lose their hard-won independence was to become over-reliant upon foreign borrowings. His words ring just as true today as they did then.

Let’s be very clear about this: if we lose our economic independence, we lose our capacity to make economic, social and environmental decisions in our own best interests.

If we lose our economic independence, we will find ourselves compelled to make decisions which are not in our interests, but in the interests of other nations, of multinational corporations, of foreign investors and of the financial markets.

That is not a road we should go down.

I am quite sure that it is not a road the vast majority of Australians want to go down. And yet it is precisely the road down which the policies and actions of both Labor and Liberal parties threaten to take us.

There has never been a more crucial time in our history than now when it comes to the question of our economic independence.

Throughout the world, national economies are becoming less and less relevant in a climate in which capital is flowing freely across national borders – and usually coming to rest where taxation is minimal, where labour is cheap and where environmental standards are poor.

In such a climate, Australia is increasingly exposed to the winds – and whims – of global finance.

Let me be very clear about this: the Democrats do not seek to reverse or deny that reality. We do not want to turn back the clock and re-build the protectionist walls.

What we want is for our leaders and policy makers to acknowledge the dangers inherent in this new era of globalisation and to take action to safeguard Australia’s interests.

If anything, the Democrats have our feet more firmly planted in reality than either the Government or the Coalition – and we are not alone in sounding the alarm.

Professor Fred Argy [one of the architects of financial deregulation in this country] recently warned of the danger of Australia becoming over-exposed to world financial shocks and destabilising speculation.

He warned that the capacity of our Federal Government to set its own [and the community’s] social priorities is now much more constrained and becoming a matter of growing concern.

It is time, he said, to heed the warning signs and take action.

The reality is that our economic independence is under threat and how we deal with that threat now – in its relatively early stages – is going to determine not just our ability to maintain our living standards in the next century, but also our ability to build a more equitable and sustainable society.

Part of the problem is that Australians are among the worst borrowers on the planet.

We run proportionately the highest current account deficit of any industrialised country and we add daily to what is already the third highest level of net liabilities of foreign debt and foreign investment.

Last year, we spent $27 billion more than we earned as a nation. Of that, 70 per cent – or $18.3 billion – was interest on our growing foreign debt and profits repatriated from foreign investments in Australia.

No matter how good our trade performance, no matter how many tourists come here, no matter how effective is the Budget deficit reduction strategy – the current account will remain bad because of interest on our foreign debt and profits on foreign investment.

And whereas debt can – at least – eventually be paid off, profit streams to foreign owners can never be retrieved without “buying back the farm”.

As the trade cycle improves, the current account deficit will probably fall. But, because of our unsustainable appetite for foreign debt and foreign investment, in a few years [four, maybe five], the current account monster will be back – bigger, uglier and scarier than it is now.

And each time the cycle turns on us, as it did last year, the domestic interest rate rises will have to be bigger, the Budget cuts tougher and the national belt pulling tighter.

And for each year that passes without addressing the underlying problem of our current account, our economic independence slips that much further away from us.

Reserve Bank Governor Bernie Fraser summed up the problem in a recent speech when he pointed out that who owns the capital we use in Australia is of “some consequence”.

He underlined the need for Australia as a nation to save more “so that we might own more of our assets”.

In short, making our nation pay its way is the key to economic independence.

That is the key to reducing our $180 billion foreign debt, and reducing the exponential growth in the $180 billion of Australian assets now owned by foreigners.

Now a lot of political hot air is generated around the current account. But not much emerges in the way of concrete suggestions – the debate is not really a genuine one because neither the Government nor the Coalition can break out of their ideological strait-jacket. And the end result is a lot of name-calling and a schoolyard-level of debate: The current account’s too high. Tisn’t. Tis. Tisn’t. And so on.

It’s time to raise the standard of the debate, stop the name-calling and start to set out positive and concrete policies for change.

Essentially, our economic independence depends upon our nation doing three things: earning more, saving more and investing more wisely.

Earning more [raising our national income] really comes down to improving our trade performance – that is, increasing our exports and improving our import replacement abilities.

The Democrats have long called for sectoral industry planning as the key to nurturing a better trade performance. Yet, both major parties continue to oppose such an approach.

In the free-market, level playing field world, intervention, regulation and planning are dirty words.

This is despite the fact that most of the improvement in exports of manufactured goods in recent years has come from industries subject to industry plans.

For example, the Centre for Economic Studies found that, since 1985, the increases in exports in those industries subject to structural plans were almost twice that of deregulated industries. [But, of course, that doesn’t fit the rationalist theory – so that evidence is largely ignored].

Raising our national income also requires a recognition that, in the longer term, our economic advantage as a nation will increasingly rest on the skills and quality of our workforce. That means spending more – not less – on education and training.

In this new global era, education is – more than ever – one of the most important building blocks of economic success. And yet funding on schools in Australia, as a proportion of GDP, has plummeted 25 per cent since the mid-70s.

That is a national disgrace – and it threatens to become a national disaster.

What it means is that we can no longer say with any certainty that we can guarantee Australian children access to a good standard of education irrespective of their birth, their wealth, or where they live.

The picture of the current state of education in Australia is one of low teacher morale, of underfunded public schools, of increasing financial pressures on parents as they face new fees and charges for the most basic of school services, and of growing regional and locational differences in the quality of schooling.

In short, Australian education is in a state of chaos and crisis.

In the next few weeks, I will release a major policy statement on education. That statement will reinforce the Democrats’ credentials as the only political party committed to free, quality education and it will map out a path to reversing the running-down of public primary and secondary schooling in this country.

It will reflect our view that education is critical to our capacity to raise our national income and retain our economic independence.

Six achievable initiatives

As well as raising our national income, we must also increase the amount of income we save as a nation and change the way in which we invest those savings.

Today, I want to put forward six key, achievable initiatives which will set us on the path to attaining those goals.

The first area we need to address is privatisation.

While the Democrats accept the need for deficit reduction, we are firmly of the view that it should not rely upon privatisation.

Aside from the issue of the desirability of retaining public ownership of key assets, privatisation does not add to national savings – all it does is shift debt from the public sector to the private sector.

Nor does privatisation increase the long term financial position of Government.

As economist John Quiggin and accountant Professor Bob Walker have shown, too often the price Governments obtain for selling off a profitable asset [such as Qantas] is less than the net present value of its profit stream.

And, far too often lately, privatisation means moving assets from Australian control to foreign control. That is something which makes no sense whatsoever, and detracts from our economic independence as a nation.

Since 1987, the Labor Government has sold-off – or partially sold-off – 30 public assets. Among these have been: Australian Airlines, Qantas, the Commonwealth Bank, the Williamstown dockyard, the Commonwealth Serum Laboratories, the Australian Industry Development Corporation and the Sydney/Moomba gas pipeline.

On economic grounds, the Democrats have opposed much of this Government’s privatisation programme.

I can assure you we will certainly oppose the sale of Telstra by any future Government, Labor or Liberal.

Privatisation for its own sake – or for the sake of balancing the Government’s books – must stop. It is no real economic solution and it is occurring simply because the Government – with the support of the Coalition parties – refuses to bite the bullet on the much harder issue of reform of our taxation system to enhance national savings.

And taxation is the second area which needs to be tackled as part of our plan to retain Australia’s economic independence.

Over the years, the Democrats have proposed a number of reforms designed to make savings more attractive, and borrowing for purely consumption or speculative reasons less attractive.

Today I want to add to that list by announcing our plan to reduce tax on medium term savings.

We will introduce legislation in the next parliament which will provide for a tax rebate of up to 30 per cent on the first $20,000 of savings in medium term accounts, with the rebate increasing as the period of the deposit rises.

Such a well targeted measure, combined with compulsory superannuation, should add significantly to national savings at the lowest possible revenue cost.

The third area we need to address is superannuation.

Contrary to the Government’s TV advertisements, superannuation funds do not grow on trees. They do not come out of thin air. That money comes out of the pockets of ordinary working Australians – fuelled by $7 billion worth of taxation subsidies and a huge fee kick from compulsory superannuation. For such a huge public cost, there needs to be a much greater public benefit.

For a start, we need to inject a bit of healthy nationalism back into our super funds. In the last five years, super funds have increased their overseas holding by three times the rate they have increased their Australian investments.

In other words $32 billion of Australian workers’ money is now invested in creating jobs in other countries.

The Democrats recognise that super funds should be able to run a balanced set of investments, with some overseas income. But, when one dollar in every six invested in our national superannuation nest egg is going offshore, you have to wonder whether we are getting value for money.

The Democrats will introduce legislation which will prohibit superannuation funds from investing more than 10 per cent of their assets overseas.

That would free up $12 billion to be reinvested back into Australia – a measure which would help reduce our call on foreign investment and increase our ability to sustain our economic independence.

The Democrats also believe that building up our national income requires a new commitment to get serious about removing the impediments to growth of small business.

One potential source of small business finance is that rapidly expanding pool of superannuation pool savings.

Since 1988, the assets of super funds have doubled from $100 billion to $200 billion, will double again by 2002, and are projected to hit $2 trillion by 2020.

Yet little of this money is finding itself back into small business, or into enterprises on the cutting edge of raising our national income because of the risk averse investment strategies of fund managers.

As moral arguments have clearly failed to persuade the funds to invest in Australian innovation, the Democrats’ legislation will also require one per cent of super funds to be invested in a fund accessible to small and emerging Australian enterprises.

The fourth area we need to address is that of labelling.

As you all know, the Democrats are long-time supporters of stronger labelling laws to ensure consumers know exactly what they are buying, where it came from and whether the company producing the goods is Australian or not.

This is now, I think, a real test of our economic independence and we have undertaken to introduce legislation in the next parliament to implement the Australian Owned Companies Association’s labelling system – a system which enables consumers to see at a glance just how truly “Australian” a product really is.

The fifth area we need to address is that of foreign transactions.

Basically, we need to reform financial sector rules to ensure that debt is pursued for productive reasons. A key part of that is making it less attractive for purely speculative money to shuffle in and out of the country.

The Democrats call on the Government to campaign internationally for the introduction of a 0.5 per cent tax on foreign exchange transactions.

This tax was first proposed a decade ago by Nobel Prize winning economist, James Tobin, who listed two reasons for such a tax. Firstly, he said, it would increase the weight the market gives to long-range investment relative to short-term speculation. Secondly, it would allow greater autonomy in national monetary policies by making possible greater differences between short-term interest rates in different countries.

In other words, such a tax would give countries – including Australia – more room to manoeuvre. Instead of a “hands-off” approach, it would enable our Government – while acknowledging the reality of the market – to use it more intelligently. It would give just that little bit more economic independence.

It would also strengthen the international economic system by encouraging stability and penalising speculation.

Fairly obviously, it should be introduced on a multi-lateral basis – perhaps as part of what tax expert Professor John Head has called “a new GATT on taxes”, covering transfer pricing, debt shuffling and other forms of international tax avoidance.

Such a campaign would be a better use of an Australian Government’s time, money and energy than many of our other forays into international politics and trade over the past 20 years.

In the next parliament, the Democrats will initiate a Senate inquiry to fully explore the repercussions of such a policy.

One of the great strengths of the Senate is its capacity to generate policy oriented [rather than politically motivated] enquiries – and I would expect the Labor and Liberal parties to at least have sufficient interest in a full exploration of the foreign transactions tax to support such a move.

The final area which is crucial to our economic independence is that of foreign investment.

I want to make it very clear that asserting our economic independence does not mean opposing all foreign investment.

The Democrats accept that Australia needs to attract foreign investment to fund our economic development. But why do we need foreign investment? Because of our poor savings performance – and it should be pointed out that much of the blame for that can be laid at the feet of the Labor Government, which [despite repeated warnings] has basically sat on its hands for the past 12 years and done very little to improve our savings performance.

But we must make sure we make foreign investment work for us, and not against us. We must make sure we only accept foreign investment which is to the long-term benefit of Australia.

At the moment, 80 per cent of foreign investment coming into this country is for the takeover of existing businesses.

Much of it goes towards the purchase of real estate. Our two key value-adding growth industries – tourism and manufacturing – account for just 10 per cent. That hardly adds up to making foreign investment work for Australia.

It is painfully obvious that the part-time Foreign Investment Review Board – which advises the Government on foreign investment applications – is a joke.

It is nothing more than a neat little device to take the focus away from the fact that it is the Treasurer who has the ultimate decision-making power.

In the lead up to the Federal poll, I will be seeking the response of both the major parties to the long-standing Democrat proposal of abolishing the Board and replacing it with a powerful, independent, accountable and transparent statutory authority to approve and monitor foreign investment.

I believe foreign investment policy in this country is at great – and growing – odds with the Australian community’s expectations.

I believe Australians understand that a sale to foreign interests may be the only option in some cases, but they expect a full and open canvassing of the options before such a sale is approved.

The Democrats are calling on both major parties to commit themselves to ensuring that foreign investment applications are not approved unless they pass a two fold test: firstly, that the investment will provide a net economic benefit to Australia and secondly, that a comparable Australian bid is not available.

Such a test should be written into our foreign investment laws and the Democrats will move to do so in the next parliament.

At the end of the day, coming to grips with these six key areas would do much to advance the cause of Australia’s economic independence.


In addition to my list of six key initiatives – although in a slightly different category – I would also add the need to acknowledge the long-term ecological sustainability as a cornerstone of economic independence.

For that reason – among our many other initiatives on the environment – the Democrats support setting up a Bureau of Environmental Economics as a key adviser to the Federal Government. If nothing else, it would have to be a better way of spending taxpayers’ money than the Industry Commission.

The great hole in Australian public policy is our refusal to understand the necessity of linking environmental outcomes with economic performance. Our pursuit of economic goals which remain almost entirely divorced from considerations of sustainable development will ultimately threaten our economic independence.

The Democrats’ record of action on the environment is second to none. We are Australia’s original, and still its best, environment party – and our record and credentials will be reinforced yet again when we release our environment policies for the coming election.

A new role for government

Maintaining our economic independence requires a fresh approach to government in this new global era.

As national boundaries start to mean less and less, in terms of both capital and labour, governments must reassess their role.

For a start, I believe the time has come for governments around the world to take a much more internationally cooperative approach to solving common problems – problems which are likely to be exacerbated by the new global economy.

As well as the issue of controlling financial speculation, there are many other areas which are under threat from the free flow of global capital: workplace health and safety, the protection of the environment, the exploitation of children, and so on.

To successfully tackle these issues, governments must start to get serious about setting the national and international rules under which nations and cooperations will play the new global game. Governments must also develop a kind of “economic nationalism” – where their role is to reduce the impact and polarising effects of globalisation on their economies and to enhance the capacity of their citizens to lead full and productive lives.

Over the past decade, the Labor Government in this country – aided and abetted by the Coalition – has embraced some aspects of globalisation, but has been blind to the safeguards it needs to put in place: safeguards such as massively increased public investment in education and training, research and infrastructure or large scale taxation reform.

Of course, many of those measures do not sit comfortably with the “hands-off” approach of the past 15 years.

But the Democrats see the choice as a simple one: we see it as a clear choice between economic rationalism and economic nationalism.

In this coming campaign, the Democrats are challenging the Labor and Liberal parties to tell Australians where they stand – will it be more of the same or will they come down on the side of economic nationalism and put up concrete policies to preserve our economic independence?

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Malcolm Farnsworth
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