Transcript of Question & Answer Session Panel Participation at the ASIC Annual Forum

Tony is an award-winning veteran business journalist, having penned the influential Chanticleer business column for the Australian Financial Review for 13 years. He’s held multiple senior editorial roles, covering banking, financial services, global markets, telecommunications, industrial companies and information technology. He’s also worked as a foreign correspondent in London and Tokyo. Tony remains a contributor to the Financial Review. I would also like to invite the panellists for today’s first session, ‘The state of the economy’, to come and join us on the stage here. Thank you Michele Bullock, Governor of the RBA, Dr Raphael Arndt, CEO of the Future Fund and Danielle Wood, Chair of the Productivity Commission.

Thank you for that lovely introduction, Joe. It’s my pleasure to really bring that genuine exchange of ideas about important policy issues. I’m sorry you’re sitting directly behind me there, but this is a fantastic opportunity. It’s the first time that the ASIC Forum has been in Melbourne for about a decade, so this is probably the most influential panel that you’ll see at any conference, forum or summit in Australia. If we could just start with a question for all of the panellists. The Australian economy is showing extraordinary resilience, and it did through the COVID-19 pandemic and its immediate aftermath. So I’d like to ask each panellist: what makes you optimistic about the Australian economy in the year ahead? Perhaps I could start with you, Michele, if that’s okay.

Thank you. What makes me optimistic? I think one of the things that I’ve become increasingly optimistic about is the labour market. Coming out of the pandemic, we have had, as the Treasurer actually highlighted, a fabulous performance on unemployment but more generally across the board. Underemployment and hours worked; all of these things have been really, really positive. I think one of the things that I’m optimistic about is the way that we have drawn people into the workforce who weren’t in the workforce before, and women and youth in particular have benefited immensely from this. So I’m really optimistic that we can keep these gains. We’ve made great gains, and I’m really confident that we can keep them, so I’m optimistic about that.

The second thing that I’m optimistic about is that, again, through the pandemic, I think businesses demonstrated how agile they are, and I was really impressed with the way they adapted. It was really appalling conditions, but the way … the stories of how they adapted, they innovated – I wasn’t going to use the ‘pivot’ word – but pivot. So that for me, was really optimistic as well. I’m sort of really optimistic about the ingenuity of businesses and Australian workers, so that’s what makes me optimistic.

That’s very good, and I’m sure that there will be other questions perhaps from the audience later. Raph, do you mind giving us your reasons? You are optimistic, I gather. We had a chat earlier. You have the $205 billion Future Fund under your management and, I think, $18 billion in Australian equities. What’s your perspective?

Yes. Thanks, Tony. It’s a great question because we’re always talking about everything that’s wrong in the world – the issues and why we’re pessimistic – but, actually, Australia has a lot going for it, and the Treasurer actually did a pretty good job of summing it up, I think. Over the shorter term, for us anyway, like, the next year or so, the economy is going really strong. Demand is really strong. Notwithstanding a huge, by historic standards, increase in not just interest rates but real interest rates, which is what really matters, we’ve got a strong investment pulse. It’s been in the news in the last few days that infrastructure spending, both in the private sector and in state governments, has a long tail and most of it will help the economy to be more productive and more efficient going forward. And inflation, of course, is moderating, and that’s in some ways remarkable. I think, if we go back a few years, in the middle of the pandemic and we had negative real interest rates and close to zero nominal interest rates and we said that we were going to normalise rates to the extent that we have, and we’ve had long-term bond yields in the US, for example, that have hit 5 per cent, no one would have said that we wouldn’t be in a deep recession. No one would have said, ‘There’s an investment boom going on.’ No one would have said, ‘Unemployment will have a 3 in front it.’ So I think, actually, all of us who are actors in the Australian and other economies deserve a pat on the back for that.

I think, in the slightly longer term, Australia’s fiscal position is actually really strong relative to other countries. Let’s not forget – and I need to say this – the Future Fund and the other funds that we manage actually are offsetting a quarter of a trillion dollars of that gross debt, so net debt is quite a lot lower, and that gives the government the ability, if there is another crisis, to respond. So that actually allows us to take more risk in the day-to-day to reform things to keep the economy going. And I think the superannuation system and the savings that exist in this country are a remarkable tool as well, and I think maybe we’ll talk about it later, but there is a global competition for capital going on. Every country in the world is trying to attract capital to fund decarbonisation, to re­engineer their industrial base and to uplift their technology. Actually, we have a lot of home-grown capital. Australia hasn’t been a net savings country until the last decade or so, and that’s a remarkable turnaround, and I think we have a lot of reasons why foreign capital will want to come here.

Very good. Well, I look forward to talking about that, particularly what may happen in the United States, should Donald Trump be elected. Danielle, you started at the Productivity Commission last week, after a stellar career at the Grattan Institute. What would you say? Are you optimistic?

I always try to be optimistic. I think it’s extremely important to look at the positive side, as Raph has said. I also couldn’t go past the labour market; it has been absolutely a huge bright spot of the post-COVID recovery. As Michele has said, when the labour market is strong, we see people who would otherwise be at the fringes – women, young people, people with disability and people with lower levels of education – get brought in. We see at the moment that job ads, for example, saying ‘no experience required’ have risen during this period. So we’ve seen these people brought into the labour market, some for the first time. With that comes, essentially, an increase in the human capital in our economy. People are now getting exposure to skills and on-the-job training that they might not otherwise have had. What I really hope to see are the long-tail effects of that. So, even as the economy slows, inevitably we will see some rise in unemployment. When I look around the world, I’m actually heartened by the fact that you can actually see inflation coming under control in countries, without unemployment shooting up. The US has inflation with a 3 in front and unemployment with a 3 in front. So, hopefully, we can preserve a lot of those employment gains. But really importantly, hopefully, for those people, we can maintain that attachment to the labour force, with all the benefits for individuals but, frankly, benefits for the economy as a whole that that brings. So that to me has been a huge bright spot and one that I hope will continue.

Thank you. There are some more questions later about productivity. But, Joe, just from your speech, it’s obviously clear that you’re intent on helping, through regulation, to make the economy more efficient. Could you just talk about your perspective? I think I did gather from your speech that you are optimistic.

I am. On my left are all these economists, and I’m going to take a slightly regulatory approach, reflecting my background. In fact, the Treasurer made a very wide-ranging set of remarks. The remarks that had a particular resonance for me were about the strength of Australia’s institutions, and I think we should really take some pride in that. We have a strong Reserve Bank, strong regulators, independent judiciary, a strong rule of law and good values as a fundamental society, and they are enormous strengths to bring to the various problems that we’ve been talking about. So, from my perspective, I really want to call out the need – one, we should acknowledge that we have strong institutions and, secondly, there’s the need to support them to make sure that they’re properly funded and resourced and that they play their role within the broader framework. The other reason I think we should be optimistic – and, again, it’s part of our strong institutional culture and framework – is that isn’t it a terrific thing to be part of a community that has such an open discussion and debate about the problems that we’re facing and the challenges. So that debate is well informed and it’s internationally engaged. So none of the issues that we’re talking about today are issues that we haven’t engaged in with our colleagues, our peer institutions offshore. And I think that’s another reason for optimism That we’re not trying to solve these problems by ourselves; we are taking into account the best thinking globally and benchmarking ourselves accordingly.

I’d like now to turn to the challenges facing Australia against all of the things that are occurring in the world. We’ve got a war in the Middle East and a war in Ukraine, and there’s enormous uncertainty about what will happen to the US economy. Raph, if I could ask you: what do you think is the single biggest economic challenge facing the world at the moment?

Well, I think it’s definitely inflation. Inflation is coming down, as we’ve said, right around the world, and it’s a bit more advanced in that descent in the US and Europe. That’s because their monetary policy cycle started earlier, I think, and there are some differences, of course, in Australia and those economies in how the transmission works. But we’ve got this backdrop now of a whole lot of inflationary ‘headwinds’, I guess. The decarbonisation that’s so important for not just the climate but actually in many, many countries from a national security point of view, because they don’t want to be reliant on importing oil from the Middle East or other countries. That requires a whole lot of capital and a whole lot of investment that, by its nature, is inflationary. I think we’re seeing a political dynamic right around the world – you touched on the US election, and who knows what’s going to happen there – where we’re seeing more and more populist governments getting elected, and the nature of these things is more-populist governments direct capital to intervene in markets more and not always from a purist economics point of view and, therefore, they reduce potential economic growth, and that’s inflationary. Then the other thing is that the cost of money is increasing. That also is inflationary because every time a business decides to make an investment they need a bigger return on that investment. So it’s not that, in the services sector, workers don’t deserve pay rises; it’s just that there’s a consequence to that, if there aren’t offsetting productivity gains and so we need to have the bigger picture in mind. For central bankers, like Michele here on my left, I think that challenge will remain. And even if inflation comes down, the history of other periods like this, if you look back over a few centuries, is that inflation does go down again in response to these policy shifts but it can stay very volatile. And so how fiscal policy works with monetary policy is important, How regulatory policy works is important. I think one of the other risks that is just starting to become apparent is that central banks know what to do. They’ve done an excellent job, I would say, over the last decade or two in response to various crises. They’ve certainly helped us, after the financial crisis, to avoid a depression, which would have been terrible. But unless we go back to some sort of experimental balance-sheet-type monetary policy, which doesn’t look like anyone wants to do that, they’re only playing with the front end of the curve. So, in the US, although there was a successful auction overnight, we’re seeing that, actually, fewer and fewer people want to buy long-dated government bonds, it would appear, given the size of the deficit there, and that’s going to suck in capital from all over the world. And at the end of the day, large parts of the economy and asset valuations that ASIC regulates, ASIC manages, usually price off the long end of the curve and not the short end, so that’s something to watch as well.

Michele, I think Raph may have actually thrown down a challenge to you to talk about inflation.

He’s sort of stolen my thunder in many ways. I think inflation is the crucial challenge over the next one to two years. As Raph said, it is coming down. There is a bit of a perception around that the inflation at the moment really is all a supply-driven thing: petrol prices, rents, these sorts of things, energy. But, actually, there’s an underlying demand component to it as well, and that’s what the central banks are trying to get on top of. It’s often said that, if there are just supply shocks, central banks should just look through them and let them naturally decline and come out of the numbers. And we are observing a lot of that; that’s why headline inflation has come down quite quickly overseas and it has also come down in Australia. But if there’s this underlying demand component to it as well, that is actually something that central banks can do something about, and that’s been part of it.

I think there’s another few things that I’d like to highlight about the inflation challenge. The first is the productivity challenge. I won’t say a lot about that; I’ll defer to Danielle. At least according to the numbers, we haven’t had any productivity growth in Australia for a number of years. And although wage rises of around about 4 per cent in the normal context of productivity growth aren’t necessarily inconsistent with our inflation target, if we don’t have any productivity growth, they’re on the high side and they’re going to contribute to rises in costs. And we know that unit labour costs, as measured in the last few years, have been rising quite substantially

6, 7, 8 per cent, depending on how you might measure it. So that’s not helpful for the inflation thing. The other point that Raph mentioned was about the geopolitical situation and the fragmentation; the Treasurer also mentioned this issue. Prior to the pandemic, we were living a world of increasingly open trade and there was arguably a big deflationary impulse coming from China and Asia. In a world of fragmentation, conflicts and so on, we’re going to see more potential for supply shocks and, although you want to look through supply shocks, if you keep getting them, there comes a point where everyone just expects inflation to remain high and, if inflation expectations adjust, then that’s a problem. So that’s sort of why you can’t completely ignore supply shocks when thinking about this. I’ll stop there, thanks.

Thank you. I think it’s a good segue for Danielle to talk about the Productivity Commission. The Treasurer mentioned this morning and he has said earlier that he wants to revitalise the Productivity Commission. Can you talk about how you’re going to renew the organisation and get a greater focus, and, actually, is it possible for your institution to influence this endemic problem that we’ve had of low productivity and even declining productivity for two decades?

I was really heartened by the Treasurer’s words this morning and the engagement that we’ve had through – he talked about the Statement of Expectations that was put out a week and a half or so ago, which is the first time in the Productivity Commission’s history. What that really set out, from my perspective, was a statement of the value of the work that the commission does. Having this body that sits independent of the government, looking at big, challenging policy issues – big drivers of productivity – and going away, doing the research and making evidence-based recommendations, I think, is a really powerful part of the policy framework that we have in Australia. Really, what that Statement of Expectations is going to is making sure that we are really a world-class institution in doing that. So there are a number of different components of the way that we’re talking about revitalisation, which is around how we communicate our work and package it up for decision-makers. It’s around the way that we use data and the types of analytical techniques that we do. For all the data nerds in the room, the availability now of linked administrative datasets allows you to drill down and answer policy questions that we have not been able to answer in the past. This is a relatively new phenomenon with hugely exciting potential to do even better policy work. The Statement of Expectations also touched on the sort of breadth of the skillsets so when we’re thinking about big productivity challenges now, we’re not in the old world, where it was, say, relatively straightforward with floating exchange rates or removing tariff barriers. These days we are talking about how do we get productivity gains in services sectors; we’re talking about revitalising education, our health system and our care sectors. These are very big, complex challenges. We want to be able to give high-quality advice on the policy levers that will make a difference, so we need to make sure that we have the breadth of the skillset not just in areas of economics but in areas of social policy and other areas that will allow us to do so. But, yes, do I think we can provide advice to governments that will help turn this around? Absolutely. I think, when we talk about productivity, we do need to be careful. A lot of it is outside of the government’s control, and I think I always want to be clear on that. The rate of technological change and the way that it diffuses; a lot of that will be really important for future products and growth. What happens inside business is crucial for productivity growth; are they actually adopting technologies, sitting on the best practice frontier? But government policy can and does make a difference and, really, what we want to be doing is putting forward the best possible recommendations to government on that and then continuing to advocate for them to get picked up.

And do you get a sense from your conversations with the Treasurer that this government is actually going to embrace the recommendations that you make? Previously, we might have thought the Productivity Commission reports were very valuable and very data rich, but they tended to sit on the shelf.

Look, I’ve got a real sense that both the federal and state governments, I should say, have an appetite to do things and have an appetite to do policy at the moment. I think that’s evident, when we look around. We see some pretty big reforms on the table in areas like housing, migration and climate transition, which are some of the things that the Treasurer touched on this morning. So I think they appreciate that this challenge is real and they’re looking for good ideas. By definition, we’re independent. Some of the things that we say will not always be the most sort of politically convenient and they may not all get picked up straight away. But part of what we are doing is shifting the conversation and saying the hard things, talking about the big levers that we think need to change; and over time, hopefully, those things will become more palatable.

Could I just switch the topic slightly to artificial intelligence. There will be a panel discussion in plenary session number three later today. You may all know that next week marks the first birthday of ChatGPT, a company that has revolutionised the use of data through large language models. It is currently going through its own existential crisis, as the founder finds himself suddenly working for Satya Nadella in Seattle, which is a very different proposition to the one that was there before. But my point is that digitisation was identified in the Intergenerational Report as one of the biggest potential agents for transformation of the Australian economy, and AI is really at the heart of that. I’m not sure which person would like to take this first. Michele, is this going to be good for the job market and good for productivity?

Again, I’d probably say that I’m optimistic on this. With the productivity challenge that we were talking about in the services sector, I think potentially AI has a very big impetus there for productivity improvements. I think if you think of the sorts of things that it could be utilised for to free up people, say, in the care sector. I’m thinking I have a daughter who’s a nurse, for example; are there things that AI could assist with to allow her more time to be actually caring for patients rather than filling in forms or doing things like that? Look, I’m no expert on AI – I want to preface what I say with that – but I do think there’s plenty of opportunity here to think how can AI help to take some of these tasks away that gives people opportunities to do things that actually are of more value That would be my feeling.

Danielle?

Yes, I’m also very optimistic. We always need to be modest, when we’re sort of trying to work through what might be the future impact of some of these changes, but generative AI is a technology which potentially has a very broad reach across all sorts of segments of the economy, particularly services, as Michele has said. There are various estimates that about 80 per cent of jobs in advanced economies can be touched by this technology in some way. This stuff is new, but there’s some pretty phenomenal research coming out about the way that it can impact productivity and jobs that are there now. Coders using it can actually double their coding output. It’s been used in call centres and you can see, just by using the AI, that they kind of shape the conversations. I think, on average, you can get about a 15 per cent increase in output in call centres, with the biggest impact on the newest workers, those with less experience. That means, one, big productivity kicker but, potentially, two ‘opening up’ job opportunities for people for whom writing, language or other barriers were there previously, so a potential improvement in job market outcomes for the most disadvantaged. Then the really interesting component, I think, is that, one, we might get this productivity kicker across different sectors but that, two, AI itself can be a driver of innovation. So we can use this to do better R&D to improve the way that technology diffuses, and that’s really where you get the big unleashing of productivity gains. So this has the potential to be one of those technological changes that unleashes successive waves of productivity gains across the economy. It comes with challenges and risks, and I know that you’ll be talking about that this afternoon, but it’s hard not to be optimistic about just the sheer potential of it.

Joe, is it something that could transform regulation? What are you seeing and hearing from your peers around the world?

Yeah. I’m not quite as ardent, I think, about the future of AI for all of its beneficial consequences. I think what Michele and Danielle have said is obviously correct about the potential upside of AI but, from a regulatory perspective, from my perspective, I think there are some very profound issues that need to be discussed. In the end, AI is data driven, and there’s a big question about the quality of the data that’s feeding into these models.

I think it’s called ‘hallucination’ in the trade.

Secondly – I know that we’ll talk about this later in the day – I think we need to be a bit sober about how we approach this. From my perspective, and you’ve asked about the international perspective, I think the regulators are still getting a bit of a grip on: what are we dealing with here; what are the key problems? So, from my perspective, just very quickly, I think, as for what we can expect of AI and the issues that it can present, it really does go to the data and how that’s used. Right back to the time of Turing, the big issue has been ‘explainability’: how can we explain what the algorithm is doing or whatever it is that the AI is doing? Is it explainable? In the end, I would like that to be explainable by a human being and not by another algorithm. There are some very day-to-day types of issues: insurance premiums and lending decisions; and a lot of work has been done on financial stability and the potential for AI or AI-driven systems to be disruptive of markets. So I think, at this stage, the promise of AI is huge, and I really obviously agree with what Danielle and Michele have said, but I think part of my job, ASIC’s job, is to sort of step back and look at the impact on consumers and investors, and that takes me back to the trilemma. So, in the end, do I let the situation unfold and let the market drive the innovation and, as for any harms, well, that’s the cost of innovating; or do we intervene and try to regulate it because we’re trying to prevent harm but then for that to have a chilling effect, potentially, on innovation. So that’s all ahead of us, I think.

It’s probably also worth pointing out, Tony, that it’s not a free kick. There’s a huge investment that needs to go into it to make it work and be productive and not just in the technology but in the infrastructure that supports it. We’ve got something like $4 billion directly invested in AI companies through the venture program, but it’s four times that if we add our investment in data centres and communications infrastructure around the world. Also, the orders that the big tech companies have just put in for data centres are, like, four to 10 times what they thought two years ago right around the world, and that compute power does not exist. So finding places in the world where you can put it on the nodes, building the communication infrastructure, finding the labour that you’re going to need and with there being the water demands from an environmental point of view and the energy demands: these are not small problems.

Sam Altman is the founder of OpenAI, which then was invested in by Microsoft and now is being apparently wooed by Microsoft to solve a problem there. What’s your take on what’s going on there and do you see any parallel with the huge divisions in the United States at the moment?

I only know what I read in the newspaper overnight. But it would appear to me that what we’ve got is a company that was founded on a dream and a promise about being scientifically pure that’s actually being backed by venture capitalists or, in this case, Microsoft, a listed company that has shareholders that it has to be responsible for, and there appears to have been a schism about where the focus is there. As I was saying before, it’s nice to be purist, and I think we need regulators and others to ensure that we don’t step beyond some line that we think is a step too far. But the capital has to come from private savers, private investors, that will need return on that investment, and so I think what we’re seeing, probably, is that playing out in the US.

So that’s a conflict between almost what you might say is an altruistic charity-driven organisation, which the shareholder is Elon Musk, needing capital and the CEO wanting the capital and ending up in the arms of one of the world’s biggest companies. What’s the parallel with what’s happening with Donald Trump and the divisions in America? This is like the left and the right splitting down the middle, isn’t it?

At the Future Fund, we’ve published a couple of discussion papers over the last two years, talking about what we call a ‘new investment order’, but it really comes from the difference in equity in outcomes for different generations across the world. I think most people who are under 40 or 45 have had a very different life experience to older people. They have a different access to wealth, they have a different access to various types of life outcomes, and they’re not very happy about that and are starting to exercise that at the ballot box in democracies. That’s what I was talking about before. So I think what we’re seeing in the US is an extreme example of where different people in different situations are getting different life outcomes, and that country is saying, ‘that’s not good enough’. It will be resolved eventually and, let’s hope, peacefully. But it’s a country that, unfortunately, has gone down various paths of conflict in its history. So it is quite a dangerous point in history, I think, next year, that US election. Someone told me last week that there’s a pretty public process underway by the Trump campaign to identify and replace every senior position in the US public service that they can.

I think it’s 25,000 people, isn’t it?

Something like that. Project ‘25, I think they call it.

With the Blue Book, it’s ‘four to eight thousand’ for a change of administration.

That’s a legitimate right of a new government, in that country, that’s elected, but it will be a profound impact on the direction of what is the biggest economy in the world and the biggest military in the world, and that’s something that we have to take seriously.

Just one question for you, Danielle: I read in the Financial Review that you, last week, indicated support for comprehensive reform of the tax system. Could you elaborate?

Tax is the issue that just keeps following me around. Look, I’ve spoken about tax a lot in my previous role at Grattan. I have been very clear: I think it’s important, it’s an important lever that governments have. The way we collect tax has implications for productivity and incentives to invest and earn money. It also is really important for questions of long-run budget sustainability, and the Treasurer touched on that this morning. We do have a longer term challenge of some pretty fast-growing expenditure areas, and I think we have to have a conversation about both the tax and spending sides of the budget. So that was the kind of context in which those comments were made. We will look at that at the Productivity Commission if we are asked to, as per the normal process; the government sends us inquiries on particular topics. I do think, just to make a sort of broader comment about tax and the public debate, often we use tax and IR as kind of shorthand for serious economic reform: you’re not a reformer, if you’re not doing tax policy. Those levers are really important, but there’s a whole range of other really important levers as well, as I touched on before. So the way that we respond to the green transition, what we’re doing in services sectors, the way that we’re meeting the challenge of the digital revolution. Those are all really critical levers as well, and I think sometimes we need to make sure that we’re having a holistic conversation about economic reform, recognising those other things as genuine economic reforms as well. ‘If you’re not doing tax, you’re not serious’: I don’t think that’s correct.

Okay; thank you. Michele, under your leadership, how will the new governance model at the RBA affect, in any way, if at all, your ability to align monetary policy to ensure short-term stability and long-term sustainability of the economy?

I think it will help us. I think the focus of the Review has been on having a Board that is much more focused on monetary policy and having more ability. You might have seen that we’ve recently appointed a Chief Communications Officer, so we’re actually going to uplift our communications; Danielle spoke about that earlier. We’ll have a Governance Board which will be assisting in the running of the Bank. People forget that, actually, most of the Bank is not in policy; most of the Reserve Bank is actually in operations. We have about half the Bank is in IT because we run payment systems and banking. We do all these sorts of things. There’s a big operational burden on the Governor and the Deputy Governor, and so I think a Governance Board and a Chief Operating Officer are going to help us. It will help us to focus; we’ll still be responsible, but we will have someone else to focus on some of that and a Board to focus on that, and we can focus more on monetary policy.

Joe, could we expect these challenging times to lead to more regulation? You’ve mentioned that AI might be something that we need to be concerned about and perhaps there needs to be the introduction of principles about ethics that are applied to every AI program. But is it possible to still get an efficient economy, with these challenges?

Well, I think what we’re really talking about is the modern state. If history, certainly in the last 30 years, tells us anything, regulation is going to be a constant feature of our lives, and all of the issues that we’ve been touching on will always have a regulatory aspect. In my remarks, we’ve got a whole lot of new regulation coming our way; we know it’s coming because it’s been announced. Crypto regulation is a good example, There may very well be some new forms of regulation that aspects of AI will encourage. But I think, with these modern circumstances, particularly with the way that Raph very well put them, there a massive re-negotiation or re-analysis of the role of the state in people’s lives. Martin Wolf has written about this with The Crisis of Democratic Capitalism. The fact of the matter is, as Raph has said, that a lot of people are feeling left behind. We have a big inequality issue – although, hopefully, not as big as in the US – throughout the world in the democracies. That’s a big issue, and we need to figure out what the policy and regulatory settings are that are going to deliver for a whole lot of people who feel that they’ve just been left behind. And so I think regulation is going to be a constant feature of that.

Finally, Raph, you recently visited Japan and had the privilege of meeting the Prime Minister and half a dozen ministers in the government. Can you tell us: what was your biggest takeaway from that and how it would relate back to Australia?

I was talking before about the global competition for capital, and I think governments around the world are starting to run structured, organised programs to attract large capital investors, large pension funds and sovereign funds, and the Future Fund is one of those representing Australia, to try to attract capital into their programs that are national strategic priorities, so decarbonisation, AI, critical minerals extraction, new industrialisation and these types of things. Japan is really quite interesting because it’s been in this sort of malaise for decades. Most of us, especially older people, will just write it off because our knowledge of Japan is that returns are zero, inflation is zero and the population is declining. But the government there has woken up to that, and Japan has a few things going for it. One is that it’s not China, but it’s a developed economy with a skilled work force in that region. So, actually, from the re-shoring, re-adjusting or ensuring of supply chains, it’s actually attracting a lot of global investment right now from countries and companies that don’t want to keep investing in their Chinese supply chains. Secondly, it has a huge savings base. That’s been dismissed globally for decades because returns were zero and Japanese household savings were directed offshore to somewhere where returns were better or to JGBs, where returns were zero. But the Bank of Japan is pretty deliberate now in allowing inflation to pick up – it’s not high by global standards, but it’s certainly very high by Japanese standards – and they got a really clear program of trying to improve corporate governance in their listed companies to unwind, cross-ownership provisions, or de-list companies to drive return on equity and to change the tax system to encourage Japanese households to invest in risky assets in Japan. If that’s successful – it’s an ‘if’, because governments in Japan for a long time have tried these things and they haven’t been so successful – that could fundamentally change the nature of investing into Japan. We certainly think that. We have had an overweight for Japan for some years, and the Japanese equity market is the highest performing in the world, really, over a few years. But the critical thing to understand here is that there’s global competition for capital; the Japanese government understands it and is acting on it.

Well, thank you for that. It’s a pity that the Future Fund doesn’t offer an open offer superannuation fund because, from the sounds of things, you know how to pick markets.

Thanks, Tony. Nice to see you again. This is a question for Michele mainly but also the other panellists. Immigration has caused a bit of a shock to the economy’s …

Just wait on, James. I think we might get another microphone, because nobody can hear you, unless I repeat it. There’s a technician coming over. Actually, why don’t you come up to the lectern?

Tony, while we’re waiting, I’ll speak loudly. ABC News. There was a really substantial institutional massive shift when the crisis of COVID occurred. Why are we being so timid in all of our institutions on climate when it’s a slow-motion crisis, but every learned person in the field says, ‘It is happening.’ When are we going to see the really substantial shifts that we saw in COVID?

Would anyone like to take that?

I’m actually not 100 per cent sure what the question was.

Well, we saw really big moves really quickly, right, when the crisis hit. This is a slow-motion crisis, but everyone says, ‘It is happening.’ So why are our institutions being so timid when what is required is probably going to be as substantial or more than what occurred within weeks and months when COVID hit?

Well, I suppose that this has two legs to it. One is the speeches that have been made by Philip Lowe in the past that – I don’t want to answer the question, but I think this is the context – if we do not take enough action fast enough, the impact on the economy will be so great that there will be disorder in the economy. Did you agree with that?

Well, I guess that I’d make a couple of points. First of all, interest rates can’t address that issue; right? We can lower interest rates dramatically at the beginning of a pandemic and we can increase them when inflation goes up, but we can’t do anything. Having said that, I think we are moving. I think the current government has taken very firm steps in this direction now, and I think that’s been really important because it’s giving certainty to businesses. People know the direction in which we’re heading now, whereas there was a lot of uncertainty. I know that the regulators are working through the Council of Financial Regulators; we’re working on issues to do with disclosure, and Joe talked about some of these issues. So I think the institutions, at least on the financial side, are working on it. I can’t speak for the others, but I think we are moving. So that would be my response.

Obviously, we’ve seen a big shock to the economy with immigration this year; in terms of the numbers, there are 500,000 or maybe 600,000 on an annualised rate. That creates some short-term pressures on the economy. Are there long-term gains from immigration? This is probably for Michele or Danielle.

The answer is: yes, there are long-term gains from a strong migration program and Australia, historically, has run a strong program, by developed country standards. The gains, particularly in our skilled migration program, are around bringing in talent from overseas. There are spillover benefits in doing so. There are also fiscal dividends in order to do that. But we need to make sure, first of all, that we are maximising the benefits to the Australian economy from that program. My former colleagues at the Grattan Institute have done a lot of work, thinking about how we make sure that we’re getting the best ‘bang for the buck’ from skilled migration and how we’re making sure that that program selects those migrants that are going to deliver those benefits for the economy. I think the government is actually going down a positive path here, with the migration review really considering some of those issues, because this is an important productivity lever. The second component is really just the way in which migration has come back at speed post-COVID and hit into particularly housing markets where we’d had another shock which had led to a decline in household size. So we’d had this increase in domestic demand for housing; with a large migration program, obviously that has created some challenges. The right answer there I think is, first of all, to improve housing supply. We need to be actually building the capacity to absorb that side of the migration intake, and I think there are what I think are some pretty positive signs of movement there from state governments. There is a secondary question around the kind of temporary migration intake; a lot of it is students. We did expand the amount of time that students could stay after they’d finished their degree. There’s a question mark about whether that was the right policy: keeping people here for longer, which increases the size of the intake, where they don’t necessarily have a long-term path to permanency. So I think there’s probably some policy work around the temporary migration settings that will need to shift as well.

Do you want to say anything, Michele?

No. I think Danielle has covered it off well. I just do want to highlight, though, that the current surge in migration is a catch-up, and we’re, basically, going to get back up to our trend where we were before. So there’s been a massive increase, basically, all of these students in particular who are coming back and not leaving. So there will be a point at which there will start to be an outflow as well. I agree that, ultimately, it’s beneficial. The challenge at the moment is that the infrastructure isn’t there; the housing market in particular is an example of that. Immigration adds to both supply and demand, and different people focus on different things. During the pandemic, when there was a shortage of labour, I had a lot of businesses saying to me, ‘We need migration,’ and I said, ‘Well, yes, that’s true, but then that adds to demand as well’. And now we’ve got the opposite: people are forgetting about the supply and are saying, ‘Oh, all it’s doing is adding to demand’. Well, no; it’s actually adding to supply as well. So I just want people to keep that in mind when thinking about the impacts of migration on the economy.

Thank you. We have a question that’s come through on the app. It says: the Australian economy has been remarkably resilient and the labour market is strong but, in the last year, the standard of living for most Australians (except baby-boomers) – thank you for that – are not impacted by rate rises. How do you think of that challenge, Michele? I’m sorry; the question just changed.

The question just flipped.

It basically said that we’re in a ‘GDP recession’, and I don’t actually understand that term.

No, I don’t either. So standard of living: I’m going to interpret that what was meant by that question is real wages. It’s true that real wages have declined, and they have because inflation has been high. So I think this just demonstrates the reason why we need to get inflation back down; it’s because, ultimately, low and stable inflation is good for employment, good for people’s pay packets – their real wages – and good for the Australian economy. So that would be my response. It hits the nail on the head: yes, it’s not desirable and that’s why inflation has to come down.

Right, okay. I’m not a journalist; I’m a non-executive director. I just want to ask a question about the terms of macro risk and the world economy. One of the things that I worry about is the increasing disregard for the rule of law and also the ability to manipulate – thank you; that’s easier – truth, like with the rise of alternative facts. I would just be interested in the panel’s thoughts in terms of that as a sort of macro risk and whether that is something that you worry about. I’d be very happy to be told that I’m wasting my brain cells in worrying about that, but I’m just interested in your views. Did you hear the first part of it?

Look, I think we understand what you’re saying. For example, one of the most popular social media platforms in America is TikTok, which is owned by the Chinese. Washington doesn’t want to do anything to disturb that company’s success, because it is basically playing to generations X,Y and Z; it’s one of their favourite tools for communicating. Does anyone want to talk about the potential for disinformation through social media and other forms of communication outside?

Well, it’s profound, isn’t it? In my world, the world of ‘finfluencers’, social media – and AI will turbocharge this – the amount of misleading and deceptive material that consumers and investors are exposed to is enormous. We’re living in a post-truth world. I think it fundamentally erodes any democracy and it fundamentally erodes the rule of law and getting things done, if we can’t even agree what the facts are. I’ve talked about greenwashing as a major priority for ASIC at the moment, but that’s an example, isn’t it, where you’ve got misleading and deceptive conduct in connection with an activity that’s really quite fundamental to what a lot of us want to do in our investments and in our choices, when we’re engaging with the economy.

We’re seeing at the moment that Mrs Gina Rinehart and Dr Andrew Forrest have both sued Meta to stop them putting or attaching their images to scams, and the company is just ignoring them. This is quite amazing. These people have deep pockets, but there’s no legal avenue for them to stop this. I just wonder, Joe, have we got to a point where certain companies are outside the reach of the law?

Well, you’ve touched a really fundamental problem about the role of, certainly, large transnational corporations in the modern world and, basically, there’s a real issue about undermining the sovereignty of states; that’s the point that you’re making. There’s no easy solution to it. There are some very major corporations that are operating across jurisdictional lines, transnational lines. Holding them accountable by conventional methods – taking them to court, for example, or other mechanisms – is increasingly going to feel unsatisfying. I think what’s going to have to be explored more energetically – more than it’s already being explored – is an intergovernmental arrangement to help make these entities accountable. But I think it’s a major issue.

Does anyone else want to comment on this topic?

I might just say that, from an investment point of view, most of these companies are the highest-performing companies in global stock markets this year. All of you probably own them through your superannuation. What we’ve been saying is that this changing of the world – this disruption that we’re talking about for the next couple of days – will manifest in a whole lot of different ways, and one of them is more-intrusive government squeezing corporate margins. The world has been through this cycle before but not with the same technologies. After the boom of the 1920s, we went into a phase in the US of ‘trust busting’, which was all about re-regulating corporates that were unfettered, because it wasn’t working for society. I expect – we’re already seeing it – that the world or at least developed economies, democracies, will go through some sort of social contract review with their populations and with their companies to work out what is acceptable and what isn’t and, ultimately, compared to today, that will impact corporate margins.

And who are the corporations there for? I think there are very fundamental questions there for the shareholders; are they there for society? I absolutely take your point, Raph, that many of us benefit, directly or indirectly, from the activities of some of these major corporations. That’s fine from a strictly financial point of view, but we all know – I think the economists call it ‘negative externalities’ – that a lot of bad stuff happens as a result of the activities of these corporations, and that’s contributing to inequality and harms in our society and community that have to be addressed. So we need to pull some levers to, I think, recalibrate, which I think was your last point.

It was interesting to hear your comments about the potential chilling effect of regulation on innovation. I’d also be interested to hear how you think about the potential flow-on cost of regulation to the consumer and whether we’re getting to a point where it might be exacerbating particularly the intergenerational divide between the affordability of financial services to younger or less wealthy consumers.

Well, a lot of fundamental questions are wrapped up in that series of questions. There is no such thing as a free lunch. The fact of the matter is that we have a lot of regulation that’s designed to protect consumers and investors, and that comes at a cost. In the end, it’s a profound policy decision, and it’s a matter for government in the end, as to which regulatory lever one pulls. The cost benefit of regulation: I personally don’t think we’re that good at it in Australia. I’ve been doing this for a long time. Anyone who tries to pick up the Corporations Act had better go to the gym first. Certainly don’t expect it to be written a language that’s readily digestible even by highly educated English speakers. So we’re really grappling with a big problem of complexity. I think regulation is good. I can’t imagine a society that hasn’t got regulation. I think it’s a hallmark of a civil society; it’s sort of like the echo of the rule of law. But having said that, our society has to be accessible to everyone, and I think we are now at risk of having a very complex set of regulatory arrangements where, unless you’re a major business and well resourced, it’s very hard to comply. Secondly, a lot of the arrangements are intended to be there for the benefit of consumers, and they’re not finding it that easy either to access the system. I don’t think there’s any easy answer to those questions, but I think it’s appropriate that, as a society and a community, we at least acknowledge that we have this challenge. In my remarks already this morning we were talking about climate disclosure changes; that’s going to affect everybody and not just the big end of town. By the time 2027/28 rolls around, many thousands of Australian companies will have to comply with some really challenging standards, and we’re at the early stages of figuring out what they mean and how they’re going to be implemented. So I think they’re all good questions with no easy answers.

We have one last question on the panel here in front of us, and it’s for you, Michele. It appears that monetary policy, as a tool, is increasingly contested, given that those that are spending (mainly older Australians) are not impacted by rate rises. How do you think of that challenge?

So, a couple of points. Monetary policy actually works. We know that it works and it is working. It’s in a restrictive phase, and we know that it is dampening spending. We also know – we’ve said it before – that it’s a blunt tool and it affects different people differently. Having said that, there’s a lot of focus in Australia on what we call the ‘cash flow channel’, which is what this particular question is referring to, in that people who have debt are impacted by rate rises and, in Australia, it impacts quickly and strongly because we have variable-rate debt in Australia, and many other countries have much more fixed-rate debt. In the United States, for example, with 30-year mortgages, interest rates don’t impact them in that sense. What that tells you, though, is that monetary policy doesn’t just operate through the cash flow channel, because it works in other countries where they don’t have as strong a cash flow channel. It works here as well. It works through what economists call ‘intertemporal substitution’. So, as interest rates rise, people are incentivised to save rather than to spend. That also impacts older Australians. They earn more if they save, so they’re incentivised to save. In fact, people with mortgages are also incentivised to save because the more they stick in their offset account, the less they pay on their mortgage. So there’s that channel. The final channel is the exchange rate channel and, if we don’t increase interest rates, you could imagine, as other countries increase their interest rates, our exchange rate would be going down and that would be adding to inflation. So I just want to make the point, again, that monetary policy has a useful role to play. The Treasurer also commented that fiscal policy needs to be working in the same direction as monetary policy, and that’s positive. But the idea that monetary policy isn’t useful anymore, I don’t buy that.