Australia 2020 Summit

Future Directions For The Australian Economy

April 2008
 These background materials aim to tell an evidence-based story about how Australia is
faring. They are not intended to be definitive or comprehensive, but were put together to
stimulate discussion on the main challenges and opportunities facing the country and
the choices to be made in addressing them. They do not represent government policy.

The materials end with a set of questions. We hope that these, along with many other
questions, will be the subject of conversation both prior to and during the Summit.
The Australian economy faces a period of significant change both
domestically and internationally

Evolution of the global

Demographic transition Climate change
economic landscape

Proportion of population aged 65+ (%)

Trend in annual total rainfall,
30 1970-2007 (mm/10yrs) United 21.1
States 19.0
6.8
23.4 China 16.6
5.4
20 Germany 3.6
4.4
India
6.6
13.1
3.6
UK
9.6 3.1
10
1.9
Canada
1.7
1.0
Australia
1.0
0
1980 2005 2030 0 5 10 15 20 25

1992 Share of world GDP (%)

For more on Australia's demographic
transformation and climate change, see Population,
2008
Sustainability... For more on the
changing economic
landscape, see
The Australian economy will need to adapt to meet Australia's Future in
the World (p 1-3, 7)
coming challenges while grasping future opportunities
Source: ABS 3222.0, Population projections, Australia, 2004-2101 (2006); ABS 3201.0, Population by age and sex, Australian states and territories (2006); Australian Bureau of Meterology (2008);
IMF, World Economic Outlook Database (2007)
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To meet these challenges, the economy will need to be flexible,
productive, and highly participative

Sustainable growth

A working A productive A flexible

economy economy economy

Human capital
Competition Mobility
investment Infrastructure
High
Participation Digital Market
Regulation
rates Capacity efficiency

Covered in Education, Skills And

The Productivity Agenda Covered in this stream

3
Improvements in labour participation and productivity will be key
drivers of our economic growth

Relative to other countries, there is room

Productivity growth has been declining
to improve on our workforce participation rate

Labour productivity growth - market sector:

Labour force participation rate, OECD countries 2005
1991-2007 (5-year rolling average) (%)
4
Switzerland
Denmark
Norway
Sweden
Canada 3
New Zealand
United Kingdom
Australia
United States
2
Finland
Germany
Portugal
Japan
Spain 1
Ireland
France
Greece
Italy
0
0 20 40 60 80 100 1991 1995 1999 2003 2007
Inactive Participation rate (% of adult population)
Unemployed For more on Australia's workforce participation, see
Employed Education, Skills and the Productivity Agenda (p15)

Source: ABS 6202.0.55.001, Labour Force, Australia, spreadsheets (2007); Productivity Commission, Indexes of productivity and related measures (2006); ABS 5260.0.55.001, Experimental
Estimates of Industry Multifactor Productivity, 2006-07 (2007); OECD, Employment outlook 2006 Statistical Annex (2006)
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Flexibility will be critical to future success…

Flexibility of both labour and capital

A well educated, flexible labour force Case study - Labour mobility

A geographically mobile labour force Strains on our resources are being more heavily felt in different
parts of the country
An education system capable of re-skilling people throughout
their lives Annual growth (%)
WA
10
A creative workforce able to adapt to the new knowledge QLD
economy AUST
5
A consistent and minimised set of business regulations
0
A policy of enabling business rather than "picking winners"
GDP (2003-07) Wage Price Index CPI
(Dec 2006-2007) (Dec 2004-07)
Interstate mobility may be helping to reduce labour shortages
and to moderate wage and price growth in QLD and WA,
however a number of barriers to geographic mobility still exist

These include:
• Different occupation and business licensing arrangements
across the states
• Varied workplace relations systems
• Differences in school systems

Source: ABS 6401.0, Consumer Price Index (2007); ABS 5204.0, Australian System of National Accounts, 2006-07; ABS 5220.0, Australian National Accounts: State Accounts, 2006-07; ABS 6416.0,
House Price Indexes: Eight Capital Cities, Dec 2007
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…as will infrastructure, where under-investment has contributed to
capacity constraints

Decreasing infrastructure Shortfall in Port capacity starting

investment as a percentage of GDP1 Australian infrastructure to limit export growth

Major infrastructure construction Level of under-investment in Export volume growth (%): 1984-07
as % of GDP: 1986-2007 Australian infrastructure: 2003 (A$b) (5-year rolling average,)
2.0 10
Private sector
Road
for the public sector
Public sector
8
1.5 Rail

Water 6
1.0
Gas
4

0.5 Electricity
2

Total
0.0 0
1986-87 1992-3 1998-99 2006-07 0 5 10 15 20 25 1984 1992 2000 2007

Public sector infrastructure investment has Investment in infrastructure will yield In the face of consistently high demand,
fallen significantly since the 1980s significant economic benefits infrastructure bottlenecks may be limiting
our export growth

Source: ABS, Engineering Construction Activity (2007); ABS, unpublished data (2008); ABS 5204.0, Australian System of National Accounts, 2006-2007; CEDA, Infrastructure, Getting on with the job
(2005)
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Providing for future infrastructure demand is a
significant challenge

The costs of road New electricity generation Freight haulage

congestion are forecast to rise capacity is required is growing dramatically

Forecast costs of congestion1 Projected future energy demand:

in capital cities: 1995-2015 (A$b) 2004/05-2029/30 (TWh) Billion tonne-kilometres (all modes)
10 500 800
Forecast

8 400
600

6 300

400

4 200

Bulk
200
2 100

Non-bulk
0 0 0
Syd Mel Bris Adel Per Can 2004-05 2010-11 2019-20 2029-30 1975 1990 2005 2020

1995
2015

1. Costs of congestion are calculated as the cost of additional travel time lost and resource costs (for instance, petrol used) given forecast congestion conditions above those costs under completely
free-flow traffic conditions
Source: Bureau of Infrastructure, Transport and Regional Economics (BITRE), Information Sheet 14 (1999); Port Jackson Partners, Reforming and Restoring Australia's Infrastructure, (2005); BITRE,
Freight measurement and modelling in Australia (2006); ABARE, Australian Energy, national and state projections to 2029-30 (2006)
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New and existing infrastructure can also be made to work harder

Case study - demand

management in central London

Since 2003 drivers entering or driving within a cordon

Examples of measures that could make infrastructure around central London (below) on weekdays have
work more efficiently been charged £5 (increased to £8 in 2005)

• Service delivery measures, for example, co-

location of services, enhanced consumer price
signals (in areas such as public housing,
health care)

• Congestion road pricing: charges which vary to

reflect the full cost of using transport
infrastructure (e.g. higher in peak travel periods
or in certain areas)

• Pricing of natural resources (e.g. water, energy),

to reflect full economic and environmental costs
of provision

After the introduction of this charge, congestion

inside the charging zone declined by 30%, car speeds
rose and public transport use and reliability
increased

Source: Transport for London, Congestion Charging – Update on Scheme Impacts and Operations (2004), Santos. G and Fraser. G, Road pricing: lessons from London (2006) 8
Climate change presents a number of challenges, but also
opportunities

Electricity generation is carbon intensive – We have a number of

we will need to look at new, cleaner energy sources advantages in a carbon constrained world

Share of Australian electricity generation (2005-06)

• Demand for low emission technologies like
Black coal carbon capture and storage (CCS), geothermal,
solar and other renewable sources will
Brown coal increase, presenting huge opportunities to our
researchers
Gas
• Demand for gas, a commodity Australia has in
Oil abundance, will grow significantly

Hydro • Provision of "ecosystem services" like carbon

abatement and biodiversity may open up new
Other
markets in which Australia is well positioned to
renewable
succeed
Total
• Investments occurring in clean coal technology
0 20 40 60 80 100

(%)
For more on the challenges climate change
To meet future carbon emission targets our electricity represents, see Population, Sustainability... (p1-6)
generation will need to move towards lower and zero
carbon sources

Source: ABARE, Energy in Australia 2008

9
The digital economy will also be vital, but Australia currently lags
in broadband penetration and speed

Our broadband penetration leads ...our speed is below average

the OECD average but trails the leaders... compared to international peers

Denmark Japan
Netherlands France
Korea Korea
Canada Sweden
United Kingdom OECD
Australia New Zealand
United States Italy
Japan Portugal
Germany Australia
OECD United Kingdom
Spain Germany
Italy United States
Hungary Canada
Slovak Republic Netherlands
Turkey Ireland
Mexico Turkey

0 10 20 30 40 0 25,000 50,000 75,000 100,000

Average broadband penetration – Average advertised broadband download speed –
selected OECD countries (%) selected OECD countries (Mbit/s)

Source: OECD, Broadband Statistics to June 2007; OECD, Broadband Statistics to Oct 2007
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To capitalise on the growing digital economy, we need to consider:
Connectivity
Infrastructure and technology
• Computers in schools
• Digital TV transition
• Convergent services and devices
• Spectrum planning and licensing
Confidence
A secure and trusted environment for digital
information
• E-security
• Cyber-safety
• Identity management
• IPv6
• Service reliability
• Anti-spam
Capabilities
Ensuring all potential users have the skills to access
the digital economy
• Digital/ICT literacy
• Community readiness/connectivity
• ICT skills training (students and teachers)
Content
Opportunities for innovative content creation for
community and commercial use
• Content regulation (online and convergent
devices)
• Codes of practice (broadcasting and internet
regulation)
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Questions

Is Australia in a position to respond to the challenges and opportunities that we know about?

What events might be over the horizon that we cannot forecast? How should we prepare for them?

In which areas could governments cooperate to achieve reforms that will boost Australia's productive potential?

Is there scope to make greater use of market mechanisms to regulate access to natural resources?

Are current regulatory regimes the best to respond to future challenges and opportunities?

Are there impediments to the movement of labour and capital that we can address? Are governments responsive to a changing
population distribution?

What options should we be exploring in energy production?

What will be the future roles of the Government and private sectors in financing, building and managing
public infrastructure?

Do we have a shared understanding of infrastructure investment priorities - across sectors (e.g. social services, transport,
environment), and across state boundaries?

Are there opportunities to get more international players into infrastructure, introducing true markets to replace
existing oligopolies?

What can be done with policy incentives to make our existing infrastructure work "smarter"?

What does a modern infrastructure network designed to incorporate sustainability challenges look like?

What can we do to ensure ongoing universal access to high quality communications infrastructure?

How can we drive productivity growth and competitiveness so that we can succeed in the world economy?

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