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Tuesday, 31 May 2011
Page: 5454


Mr TURNBULL (Wentworth) (21:26): It will not come as a surprise to anyone familiar with the way that the Rudd and Gillard governments have managed our economy over the past 3½ years to learn that this year's budget is not just weak; it is also irresponsible and risky. The strategy chosen by the Treasurer to dig this nation out of the fiscal hole we find ourselves in is utterly dependent on the continuation of the current China-led resources boom. There is no plan B. The budget papers make even plainer the extraordinary expense to taxpayers of the current design of Senator Conroy's National Broadband Network. Regrettably, it appears that there is also no plan B there. If the plan for the NBN has to be altered in coming years—as seems highly probable—taxpayers will be slugged again. But I will return to that issue shortly.

Let me begin by discussing the budget in a broader context given the government's barely credible plan to move from the record deficits of the past two financial years to a lesser deficit in the coming year and a tiny surplus for 2012-13. Many of the financial market economists have already pointed out that if this meagre $3.5 billion surplus projected for 2012-13 does eventuate it should be stamped 'made in China' given the importance of buoyant commodity exports, especially iron ore and metallurgical coal, to China and other economies in Asia, to the achievement of fiscal consolidation.

Australia's resources sector is certainly in the midst of a remarkable boom, arguably already the largest and the longest lived in our history. Thanks to urbanisation in China, India and elsewhere, prices for Australia's commodity exports have risen dramatically since 2003. The Reserve Bank's commodity price index is currently at an all time peak and more than three times its average level of the two decades prior to 2003. The Prime Minister and the Treasurer claim that it requires a new resource rent tax for the federal government to properly benefit from this boom.

In the run-up to this year's budget, the government also attempted to suggest that the cupboard was entirely bare and that mining boom mark II, as the Treasurer describes it, would not boost revenues at all. Neither claim is correct. We know that the boom has been substantially boosting budget revenues for many years without a minerals resources rent tax, although there is an uncertainty or at least a controversial debate about by how much. Last October the Treasury's economic forecasters released work on the 'structural' budget deficit, suggesting that the resources boom has been delivering ever-larger revenue windfalls since around 2004. The central case in that work assumes that Asia's economic ascent and growing demand for food, raw materials and metals means that Australia's average terms of trade in the early 21st century will be about 20 per cent higher than they were in the late 20th century. That assumption seems reasonable and broadly matches the expectations of most market economists. But as Martin Parkinson, the Secretary of the Treasury, correctly pointed out on 17 May, estimates of this sort are always highly sensitive to the assumptions which underlie them and it is difficult to be entirely precise about the impact of changes over time in the terms of trade or, indeed, many other economic variables in the budget.

Nonetheless, Kevin Rudd and Wayne Swan were entirely willing to use a crude earlier version of the Treasury's work published in the 2009-10 budget without any such qualification to try and trash John Howard and Peter Costello's reputations by claiming that they squandered the resources boom. In fact it appeared that the work had been commissioned for that very purpose. So I acknowledge Dr Parkinson's point that Treasury's estimates are sensitive to various assumptions, but I will take the central case figures provided as a reasonable estimate of the revenue windfall arising from the current terms of trade. According to the Treasury's central case the resources boom delivered a revenue windfall of about $25 billion over the last three budgets delivered by Peter Costello. Those three budgets were in surplus by $53 billion so all of the income from the boom and more was banked, although Treasury's central case estimate suggests the budget was in a small structural deficit in 2007-08. So much for claims that the Howard government blew the boom! While its last term could have been more disciplined, as my colleague Joe Hockey acknowledged on 18 May, there was nothing like the thoughtless orgy of frenzied spending and borrowing that we have seen under Labor.

During the four budgets delivered so far by Labor in this term of government the Treasury figures from October last year suggest that the federal government has benefited from a terms of trade windfall of at least $90 billion, with the largest single boost coming in the 2011-12 financial year we are about to commence. According to the latest government forecasts deficits run up by Labor over those four years from 2008-09 to 2011-12 will total $154 billion. Regardless of the impact of the global financial crisis those figures speak for themselves.

And for all Labor's claims that its record deficits have been caused by weak revenues, first because of the GFC and more recently because of the strong exchange rate, capital gains losses, which have reduced post-GFC capital gains tax collections, and the patchwork economy, if we really want to understand what has been going on with the federal budget we need to look at the outlays side—the spending side. There we can seen that annual spending has risen by $90 billion since the last year of the Howard government. That is a rise of 33 per cent in nominal terms and more than 20 per cent after adjusting for price changes. That is the equivalent of adding the annual expense of four additional Defence forces, three extra education and training systems or two new national health and hospital services to the existing expenses in the last Costello budget—in just four years. No wonder we are in deep deficit despite full employment, an unemployment rate starting with a four and the strongest terms of trade in our history.

The bottom line is simply this: Labor has already spent all of the extra income and budget revenue that the resources boom has delivered to Australia, and then some. Now, that raises an obvious red flag. What if the resources boom fades more quickly than Treasury and, indeed, most market analysts expect or is interrupted by an unanticipated and uncontrollable external shock? Where will the budget, and our nation for that matter, be if China's amazing growth story overheats and temporarily, if not in the long term, slows, or if another global financial upheaval perhaps starting in Europe triggers the same massive slump in international trade as we saw in 2008-09 but over a prolonged period? Where will we be if global low-cost production of what are already relatively abundant resources such as coal and iron ore ramps up faster than we expect, slashing market prices and Australia's national income?

We know more supply is going to come on line. For example, Rio Tinto is negotiating with Chinalco and the government of Guinea in West Africa to develop Simandou, which would be the largest iron ore mine in the world. That is just one of many projects in West Africa.

In short, does the Gillard government have a plan B? The unfortunate reality is that they do not. A plan B would require far more intellectual and fiscal discipline than has so far been shown by this cynical and incompetent government. It is far easier to live for the day, spend everything that comes in and more and say whatever it takes to cling to power, and the future be damned.

Fortunately, Australia's fundamental prospects are good. Asia's growth story will continue for many years although there will be many hills and hollows along the way. Although increased global supply of some commodities will lower our terms of trade from current levels, there is every chance they will remain higher in the next decade than they were in the 1980s and 1990s as Treasury's central case forecasts assume. But it is very dispiriting to see this government's complete lack of vision about where the resources boom is taking us and what Australia might look like at its end, its refusal to honestly canvass the difficult structural adjustments that our economy will experience along the way and its failure to acknowledge the increased volatility that our greater exposure to the commodity cycle likely entails.

When we talk about the resources boom and the value of having a fallback plan, it is important to anticipate and prepare for unexpected adversity. It is important to be clear that this does not mean trying to somehow resist the forces currently changing our economy. The rise of China and India—and the return of China and India to a position in the economic order of the world proportionate to their size, a return to the same position they had in the global economic order in the 18th century, proportionate to their population—is in effect a return to normalcy. This will result in extraordinary shifts in relative prices for commodities and other traded goods. These are immensely powerful trends. Australia, as a small and open economy with some of the world's best resource endowments and some of the most expert and technologically sophisticated resources companies, has little choice but to go with the flow. I tend to agree with the Secretary of the Treasury when he suggested recently that Australian businesses and other trade-exposed sectors cannot resist the challenges that this is creating, such as the higher exchange rate. Firms are going to have to evolve their business models and find different ways to compete and become more specialised and become more effective.

The government, however, does have some choices it can make about how it responds to the resources boom and the associated structural changes. It can make decisions in areas such as industrial relations that impede or smooth the movement of labour and capital from one sector to another. Let us be clear about this. We are talking about major changes and shifts in our economy from one sector to the other. Industrial relations laws and labour laws which impede the movement of labour—the flexibility of labour from one sector to another—will make that transition harder. The government also has the opportunity to make policy choices that can influence whether the extra income arising from the boom and accruing to both the private and public sectors is saved or spent. The desirability of saving some of what may turn out to be a temporary boost to income is why I have advocated a sovereign wealth fund. The idea behind a sovereign wealth fund—indeed, in this case a second sovereign wealth fund after the Future Fund—is to smooth consumption of income arising from temporarily high commodity prices or the exhaustion of finite resources. This is achieved via substantial public saving which enables later consumption or preferably investment. Smoothing can be over a years-to-decades horizon, as in the case of Chile's fund, which stabilizes the impact of volatile copper prices on its budget, or a longer intergenerational horizon, as in the case of Norway's $550 billion fund, which invests oil income. If as in Norway a wealth fund invests offshore, preferably in assets uncorrelated with the commodities cycle, the high exchange rate and pressure on non-resource exporters can be mitigated to an extent, although it is unclear by how much, and risks can be better diversified.

There is a lot of talk about what we can do about Dutch disease—the resources boom and the high exchange rate prejudicing the non-resources part of the economy. The one thing that a government can definitely do is to save more. That is a focus that this government lamentably lacks. I find it incredible that the Gillard government's leaders, including some of its alleged rising stars, such as the Assistant Treasurer, Mr Shorten, have so airily dismissed this proposition, with the most flimsy arguments imaginable. (Extension of time granted)

I continue to believe that the proposal for a sovereign wealth fund is appropriate to our economic circumstances. I note that The Economist magazine, unquestionably the most influential and important mainstream financial journal in the world, has made the point that it is incredible that Australia is not establishing a sovereign wealth fund. Take your pick; whether it is the IMF, the OECD, The Economist or the Financial Times, leading economists around the world are all asking, 'Why is it not a key focus of the government of Australia, which is enjoying this resources boom, to establish a new sovereign wealth fund to put some of this money aside?' If you despise the views of international organisations and international journals, the most distinguished public sector economist in this country by a country mile, the Governor of the Reserve Bank, Glenn Stevens, has argued again and again that the focus of the government should be on saving. If they want to put downward pressure on inflation, if they want to put something aside for future generations, if they want to have something to show for the resources boom, there must be a new sovereign wealth fund. That should be a key focus.

Let me turn now to the National Broadband Network, where there is also an emerging and very worrying indication of a lack of a plan B. As we all know, the NBN as it is currently planned involves running a fibre-optic cable into 93 per cent of all the homes and businesses in Australia at a cost that will ultimately exceed $50 billion once payments to Telstra for migrating customers and using its ducts are counted. The gigantic cost of the NBN is largely a consequence of the decision to build an entirely new fibre-to-the-premises or fibre-to-the-home customer access network regardless of whether cheaper network architectures, such as fibre to the node or upgrade of the existing hybrid fibre-coaxial pay TV cables that run past almost a third of Australian homes, could achieve comparable broadband speeds. Fibre to the node is an architecture that pushes fibre beyond today's telephone exchanges further into the field to nodes or cabinets nearer to homes and businesses, but uses the existing copper for the last part of the connection. Therefore it avoids the vast expense of digging up every front garden and drilling holes in the walls of every house or apartment in Australia. Were the NBN being built in an economically rational way, fibre would extend to the furthest economically viable and technically necessary point in the network and no further. The decision that 93 per cent of Australia will receive fibre to the home is an ideological choice. It is not an engineering or economic necessity.

The cost differential of using almost as fast but much less expensive alternatives is huge. Upgrades to the HFC pay TV cables could achieve speeds of 100 megabits per second to a third of Australian households for about 10 per cent of the cost of a fibre-to-the-home overbuild.

Rolling out a fibre-to-the-node or fibre-to-the-kerb network design can deliver speeds high enough to be indistinguishable from fibre to the home at half or less of the cost. As Alcatel-Lucent notes, in a 2007 technology white paper: 'The economics of fibre to the node are hard to resist, given cost points that can be 50 per cent or less than those of fibre to the home.'

Under the terms of the Telstra/NBN deal currently being negotiated, the NBN will pay Telstra about $9 billion in net present after-tax value terms—about $16 billion in nominal dollars—in return for it decommissioning its copper customer access network. But as the deal is apparently envisaged at present, if NBN Co. or a future government from either side were to try to redesign the NBN so as to build a cheaper and equally effective fibre-to-the-node network in part or most of Australia, NBN Co. would be required to renegotiate its deal with Telstra to use a part of the copper network it has already paid Telstra to decommission. That is more billions of dollars of your taxes out the door and yet another case of having no plan B.

At the recent hearing of the Joint Standing Committee on the NBN, its CEO, Mike Quigley, was unapologetic about NBN Co's failure to seek the right to use any part of the Telstra copper customer access network so that it had the option to deploy fibre to the node, instead of fibre to the home. Mr Quigley said that he had not sought to acquire the right to use a portion of the Telstra copper because the government had not told him to do so and, in any event, he said it would be complex. No doubt, many of us thought, as we listened to him, it was simpler and less complex to drop a few more lazy billion dollars of taxpayers' money.

It is utterly mind-boggling that a government would pay a private company $16 billion to decommission a network asset but not reserve for itself, as part of the deal, the right to use as much of that network as it chooses, if the current NBN design were to be changed. But this is the bizarre world that Senator Conroy, Treasurer Swan and Prime Minister Gillard inhabit—a world where risk does not matter, because there are always new tax hikes available to cover up for any mistakes.

Unless there is a change of direction on the part of the government, the Telstra/NBN deal may set Telstra up to be paid twice for its copper network if, as seems inevitable after the failure of NBN Co's recent construction tender, the current architecture of the network is exposed as unaffordable, unnecessary and unachievable.

Let me say one more thing about the current negotiations between the government, NBN Co. and Telstra, and the apparent attempt to use long-term contracts to lock future Australian governments into the Conroy model regardless of the democratic right of voters to choose a different government with different policies on broadband. We in the coalition respect the rule of law and property rights. But, nonetheless, we will be utterly committed to ensuring that, if we are returned to government, the interests of the taxpayers are protected. We will use every measure available to us to ensure that taxpayers get value for money with the NBN and that consumers of the NBN service get broadband at an affordable price. (Time expired)