Transcript of Question & Answer Session The Path to Prosperity

David Cox from Challenger. This is I guess directed at Peter and Glenn, before the GFC there was a fair amount of agitation from the business community about the extent of regulation and there was a government process, a short government process of a few months run by Peter's predecessor which produced a bit of a stock and flow of regulatory impediments and I've got to say not a lot happened as a result of it and I just wanted to drag Glenn into it because I have a very clear memory that in either his first or one of his first speeches he said at that time that regulation was actually becoming a drag on economic growth or on activity. Do you have an idea for a process or a way of moving forward on this which might be a little bit more successful than the last effort?

Do you want to go first?

No I'm going to defer to you he says out loud to make sure it's really obvious.

Well I can only speak I suppose about the regulatory dynamics in the financial space, which is a thing that keeps me awake at night on conference calls with Basel and so on. And I think you know the fact is that the conclusion that the global community has drawn, rightly or wrongly, is that there needed to be more regulation, a lot more actually, in the financial space. You could argue I think, and we would have, I think, put this view that maybe what was wrong was not so much that the regulations weren't any good but they weren't very well enforced and I think there's a lot to that. But the juggernaut, the tide of international regulation in the financial space, I think is still coming in. We're now seven years after Lehmann and this thing is still building. I think we're probably pretty close to being in sight of where we think the ending point is for things like Basel III et cetera, but in other spaces regulatory initiatives are still unfolding. I think the key thing to remember here is what are the incentives that regulators and the political leaders that pass acts of parliaments that give regulators their power or their mandate and their incentives, what are those people responding to.

And in the financial space they're responding to a very deep perception that the system was flawed, that it was in some sense rigged for the large players, I'm not saying they're right but I think that is the strong perception and it was inevitable we were going to get a very large tide of regulating coming out of that. There's going to be another point here down the track a bit where the unregulated parts of the system will grow to be larger and more of the action will be there and we'll agonise over whether we should regulate them and so on, and I've seen this movie before in our own country, that's coming some years down the track. But right now the incentives that I think the regulatory community internationally faces in the financial space are those that come from stuff went wrong, people lost money; governments had to put money into banks. There's got to be more regulation, these guys have to be more controlling, you know there was no way anybody was going to stand against that tide. So I'm not sure that that would generalise to any other regulatory space, but in the part that I'm familiar with, that is a very powerful dynamic and it's about the lessons that people drew—whether they were correct or not—they drew them from what happened and the incentives that then created to create more regulation, and that's as I say I think it's still coming in this tide.

Michael Foley, my question will be directed primarily probably to Glenn Stevens but also probably to Mr Harris. The debate we've just been having has been ongoing, it's basically reform atrophy, my question comes back to a talk given by the Governor I think about 18 months ago where you made your very cautious and considered statement, you felt that probably the long term capacity growth of the Australian economy which is normally – it's usually about 3% is actually possibly lower; maybe something like I don't know if you ever put a number like 2%, because you're so cautious, but would you like to update your thinking on this matter?

It wasn't quite that long ago, it was earlier this year there was a puzzle that we observed in the data. We observed quite low growth in GDP, you know 2% or so, but we saw the unemployment rate not rising and employment growth picking up and there was the puzzle, which is often our business, how do we fit the pieces of the jigsaw together in a way that makes the most sense and it was a possible reading of the puzzle was that potential growth was lower. As far as what we have done—and we make an assumption about potential growth and that's been lowered a little bit—basically because the assumed rate of population growth that we get from other places, we get that from population projections and the border protection people that make assumptions about immigration and so on, we take that data to work a population assumption and that seems to be a bit lower. So we've lowered the potential or trend growth rate just a little bit because of that. We haven't taken a particular view about productivity performance which is actually the bit we're talking about here. I think the focus needs to be – there's a whole set of issues about how much population we want in the country, separate discussion, but productivity per head of person working is the key thing given that the world isn't giving us a terms of trade gain now and given that the proportion of people who are of working age and the total population is going to be going down, so it all comes back to productivity at which point I throw to the chair of the PC.