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Growth, jobs and the importance of living within our means: speech to the Sydney Institute, Sydney



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SPEECH

Speech to the Sydney Institute Address by Senator The Hon Mathias Cormann Minister for Finance Deputy Leader of the Government in the Senate

Monday, 22 August 2016

Growth, Jobs and the Importance of Living Within Our Means

There have been countless conversations since the election about how close it was.

And it was.

The bottom line is - the Coalition won and Labor lost.

The reason Bill Shorten lost the election is because the Australian people decided they could not trust him with their money.

Having been a senior member of a Labor government which put Australia on an unaffordable and unsustainable government spending growth trajectory, he spent his first period as Opposition Leader irresponsibly undermining the Government’s budget repair efforts.

While it may have been good politics for Bill Shorten along the way, at the conclusion of the last term of Parliament it got him into a real fiscal pickle during the election campaign proper.

Ultimately that cost him the votes he needed to win.

Remember:

In the middle of an election campaign he had to walk away from longstanding spending promises, like his promises to restore the schoolkids bonus or his promise to reverse our reforms to pension asset test arrangements. He had to finally admit - arguably at an inconvenient time for him - that those promises were unaffordable;

Also in the middle of an election campaign he was forced to change his mind and express support for billions of dollars in unlegislated spending reductions which he had steadfastly opposed for years.

Then there was Bill Shorten’s Spend-O-Meter, with one unfunded election spending promise after another.

He had already been forced to admit that if elected - compared to the Coalition - he would increase the tax burden on our economy by more than $100 billion over the medium term - something that was demonstrably bad for our economy - in particular for investment and jobs.

But to top it all off - after dropping longstanding but costly spending promises, being forced to back many of our savings he had previously opposed, promoting billions of dollars in higher taxes - in the most crucial phase of the election campaign - when he had to reveal the bottom line impact of all his adopted policy positions, Bill Shorten had to admit that Labor in government would deliver bigger deficits and higher debt than was reflected in the Pre-Election Economic and Fiscal Outlook.

Incredibly to many, he admitted to $16.5 billion worth of bigger deficits over the forward estimates period, which respected economists said would put our AAA credit rating at risk.

Bill Shorten went into the last election campaign unprepared for the important task of responsibly managing our economy and our public finances.

That is why he lost.

He was not strong enough during his first term as Opposition Leader to back a genuine budget repair effort by staring down his high spending Rudd/Gillard era Caucus colleagues.

Out of a combination of political convenience and opportunism he went for the lazy option of promoting tax hikes and more debt instead of doing the hard yards of presenting an alternative plan for genuine budget repair based on reductions in unsustainable spending growth.

To cover up that lack of preparation during the election campaign period, he went for the big lie about a non-existent government plan to supposedly privatise Medicare.

That worked for him then, to a point.

Labor still recorded its second lowest ever primary vote in its history. Importantly, this sort of political operation won’t work for him next time when people can see that Medicare not only remained strong, but was manifestly not privatised under our government.

So why does all this matter now?

Why do I dwell on this tonight? Why do we all need to dwell on this, given we won and it is our job now to implement our plan for the economy and to continue with our efforts to repair the Budget?

Because, consistent with a long established pattern in Australian politics, the government does not have the numbers to pass any legislation through the Senate in its own right.

So Labor’s attitude to budget repair will again matter in this Parliament and Bill Shorten remains as the Leader of the Labor Party.

For somebody who continues to aspire to be the next Australian Prime Minister, it is not good enough for Bill Shorten to try and keep hiding behind the Senate crossbench.

As it wasn’t good enough for Bill Shorten to eventually support savings during an election campaign, when they could have long been legislated and put Australia on a stronger fiscal foundation much earlier - If only he had been able to make such a decision in a more timely fashion.

So when we go back to Parliament in a week’s time, the question for Australia is whether Bill Shorten has learnt the lessons of this past term of Parliament and how his failure to develop and embrace a credible fiscal strategy ultimately hurt him at the election.

Will he be stronger in this term of Parliament than in the last?

Will Bill Shorten step up to the plate on budget repair in this Parliament?

Or will he be like jelly on that plate - the Wibble Wobble Wibble Wobble Jelly on a Plate, first opposing, then supporting, then not knowing what to do?

He has said since the election that he would be constructive in this the 45th Parliament.

But will the Labor caucus let him? Will he be strong enough to force his Shadow Cabinet and his Caucus to accept that budget repair and getting spending growth on a more affordable and sustainable trajectory is important for our economy and for every Australian?

His reaction to the Prime Minister reminding him last week of the savings commitments he made during the election campaign - specifically his commitments to support some of our unlegislated savings measures - was sadly not very encouraging.

We should not even have to have a conversation about those.

We should be able to accept as read the bi-partisan pre-election commitment to implement $6.5 billion in savings, which Labor endorsed during the last election campaign.

In fact that should only be the absolute minimum starting position.

Labor is a mainstream political party, which aspires to government.

Our message to Labor is - live up to your best instincts and best traditions of national interest reform and work with us to restore the necessary fiscal foundations for stronger growth, higher living standards and stronger sustainably funded public services into the future.

The time for game-playing is over. The election is behind us. But the budget challenge and the economic reform challenge is front and centre, here and now.

I have long maintained that the real hero of the Hawke-Keating years of government was the late Peter Walsh, the tough-minded wheat farmer from Western Australia who, as Finance Minister, drove his colleagues mad by opposing spending proposal after spending proposal that he saw as wasting taxpayers’ money.

What I would say to Labor is this: You can be the party of Peter Walsh, or the party of the ‘Spend-o- meter’, leaving more and more debt to future generations.

You cannot be both.

IMPLEMENTING OUR NATIONAL ECONOMIC PLAN FOR GROWTH

A key purpose of any government is to ensure our economy can be as strong and as resilient as possible, to ensure families across Australia and our future generations have the best possible opportunity to be successful and get ahead.

That is what we committed ourselves to as a government over the past three years and this will be our unrelenting and persistent focus over this next term - building on the progress we have made in our first term by implementing our plan for the economy, our plan for jobs and growth.

Despite additional global economic headwinds over the past three years, our economy is stronger today than it was three years ago. Employment growth today is stronger than it was three years ago.

But there is so much more work to be done - to ensure we are in the best possible position to deal with any future economic or financial shocks and in the best possible position to take advantage of economic opportunities in particular in our region.

While we are entering our 26th year of continuous economic expansion, we continue to face global economic headwinds.

As a trading nation we continue having to confront the implications for our economy of slower global economic growth and of lower global prices for our key commodity exports.

We continue to be an economy in transition from record resource investment driven growth to broader based growth in a more diversified economy.

Such a transition inevitably comes with challenges and at times difficult though necessary adjustments in individual sectors of the economy.

Yet, achieving about 3.1% growth in real terms, our economy is comparatively strong by international standards.

And as I mentioned, employment growth is also stronger than three years ago, with the current unemployment rate of 5.7% lower than previously anticipated.

This doesn’t happen by accident.

There are structural features of our economic framework which are important facilitators of our transition.

Our floating exchange rate and historically low interest rates have helped our economy transition.

But the government’s economic reform agenda, focused on making our economy more internationally competitive, more productive and more innovative have made and continue to make an important contribution to the success of our economic transition.

A key attitudinal difference between us and our Labor competitors is that we understand that for individual Australians to be the most successful they can be the businesses that employ them need to be as successful as they can be.

Our national economic plan recognises that by giving business the best possible opportunity to be successful, employ more Australians and pay them better wages.

The government remains focused on making our tax system more growth friendly. First we abolished the carbon tax and the mining tax, followed by tax cuts initially for small business.

In this term we will build on that by delivering lower taxes for hard working families and by putting forward legislation to bring the corporate tax rate down to an internationally more competitive 25 per cent for all Australian businesses - progressively over a ten year period and starting with small and medium sized businesses initially.

As any credible economist will tell you - an internationally more competitive business tax rate will help boost investment, productivity, jobs growth and over time real wages.

Personal income tax cuts, our ten year enterprise tax plan as well as our omnibus savings bill, will be among the first budget measures to be introduced into the 45th Parliament - alongside our Bills to re- establish the Australian Building and Construction Commission, on Registered Organisations and to protect volunteer fire fighters.

Those tax cuts will help underpin stronger growth and more jobs in the years ahead and alongside our innovation agenda, our defence industry plan, our export trade deals and our ambitious infrastructure investment program will help us secure the successful transition of the Australian economy to broader drivers of growth in a more diversified economy.

THE IMPORTANCE OF BUDGET REPAIR

I have spoken before, here at the Sydney Institute, about the importance for our future prosperity and success as a nation of Budget repair and getting back into a position where we can live within our means.

Clearly that remains important:

1) To ensure the important benefits and services provided by Government remain affordable in our economy over the long term. Our social safety net, our world class health and education system, our national security all need a strong and sustainable fiscal foundation. This is particularly important given the structural challenges we are facing as a nation associated with the ageing of our population; An ageing population impacts significantly on a number of spending programs - moreover, on current trends, an ageing population also means slower potential economic growth, which in turn has unfavourable implications for government revenue growth;

2) To reduce and over time eliminate the risks associated with increasing public debt. Rising indebtedness reduces the Government's ability to ride out severe adverse shocks. It reduces the room we have to use fiscal policy to cushion those shocks while still keeping debt to prudent levels. With our terms of trade more than twice as volatile as the average for developed economies - meaning we are more exposed to external shocks than other advanced economies, Australia needs a stronger balance sheet if we are to weather the inevitable future storms safely.

3) Because it is plain wrong to pay for our public consumption today, with billions of dollars borrowed

from our children and grandchildren every year. To keep doing this, forces our children and grandchildren to pay higher taxes or accept deeper cuts in government expenditure down the track to pay back the debt accumulated on the back of deficit funded recurrent expenditure today. This would lead to lower living standards for them than they could have otherwise expected, had they not have to pay for too large a chunk of ours. Today's debts are tomorrow's taxes. Restoring fiscal sustainability is every bit as important as ensuring we respect the environment future generations will inherit.

4) To give ourselves a solid foundation from which to strengthen growth and create more opportunity for Australians to get ahead - by helping us make our tax system more efficient and internationally more competitive.

And 5) while Australia’s government debt position still compares favourably with that of most other advanced economies, unless we continue to improve the spending and related debt growth trajectories left behind by Labor in 2013, Australia would be increasingly exposed to unacceptable risk.

With the increasing government debt trajectory locked in by Labor during their period in government, the Commonwealth has gone from receiving more than $1 billion in net interest payments to paying $12.6 billion this financial year, with interest payments expected to peak at $14.2 billion a year in 2018-19, before starting to decline as a share of GDP in 2019-20.

That makes net interest payments one of the biggest areas of Commonwealth spending. For example, it is more than what we spend on pharmaceuticals, or non-government schools or job seeker income support.

This increase in government debt and interest payments has occurred in a global low interest rate environment.

Interest rates will not always be at current record low levels. Even though the timing is uncertain, eventually they will return to more normal levels.

If and when this occurs, if government debt levels were still at higher levels at that point, there would be a significant adverse impact on government payments and the budget balance. This is another important reason why budget repair cannot be delayed.

There is much more work to be done on budget repair and getting back to a position where the Australian Government genuinely lives within its means, however we have made good progress.

We are certainly in a stronger position than we would have been if we had not changed direction over the past three years by bringing our spending growth trajectory down.

Budget Repair Record

Given the size of the challenge we inherited in 2013, Budget repair was always going to be a marathon and not a sprint.

We remain committed to the marathon.

Our fiscal strategy is underpinned by our commitment to:

Reduce government spending as a share of the economy over time in order to free up resources for private investment - with the payments-to-GDP ratio falling, and stabilising before reducing net debt over time; Redirect Government spending to quality investment to boost productivity and workforce participation; Support revenue growth by supporting policies that drive earnings and economic growth;

Our strategy sets out that:

New spending on higher priority policy pressures must be more than offset by spending reductions in other parts of the Budget; and that Any positive impact in revenue or spending as a result of changes in the economy are banked as improvements in the budget bottom line.

When we came into government we inherited $240 billion worth of accumulated deficits and a further $123 billion worth of projected deficits over the then 2013-14 forward estimates period.

Spending growth was running at 3.7% above inflation over the medium term with spending as a share of GDP expected to reach 26.5% by 2023-24 (according to the National Commission of Audit) and expected to keep rising and rising - according to the most recent Intergenerational report well past 30% within a few decades.

We have been able to reduce the medium term spending growth to 2.9% and stabilise spending as a share of GDP at 25.8% and are projected to bring it down to 25.2% over the current forward estimates period.

Many of our savings measures are structural savings measures which improve our spending growth trajectory over time - starting low and slow in their impact and building over time.

I'm pleased to report that the net effect of our more than 800 policy decisions on the spending side of the budget, which we have implemented since we came into Government in September 2013 deliver a $221 billion net improvement over the medium term to 2026-27.

$26 billion of that net saving falls into the period of the current forward estimates building up to a further $195 billion in the period from 2020-21 to 2026-27.

Savings measures are expected to build over time with the value of projected gross savings growing from $30 billion in 2019-20 to around $50 billion in 2026-27.

Put another way, if we had not made the decisions we have made over the past three years, to reduce spending growth, our debt position would be increasing by about an additional $221 billion over the next decade, with the related additional public debt interest burden which would come with that.

This is an additional burden we are able to avoid based on the aggregate value of all the spending related decisions made by our Government since September 2013.

We are now on a lower spending growth trajectory and a lower debt growth trajectory than we would have been if we had not changed Labor’s past policy settings.

Consequently - a return to surplus of around 0.2% as a share of GDP is projected for 2020-21, with the Budget projected to remain in surplus over the medium term to 2026-27.

UNLEGISLATED MEASURES

The net impact of all unlegislated policy decisions of the government - as confirmed by the Pre- Election and Fiscal Outlook - is about $18 billion in underlying cash terms over the current forward estimates.

This includes about $15.8 billion worth of savings decisions made prior to the most recent budget and $2.2 billion worth of net improvements as a result of decision announced in the 2016-17 Budget.

Our pre-election policy commitments delivered a further $1.1 billion net improvement to our budget bottom line.

A substantial component of the 2016-17 and subsequent savings can be implemented either administratively or by passing the annual appropriations bills.

$6.5 billion in savings will be the subject of our Omnibus Savings Bill for which we expect to receive bi-partisan support.

We will engage with Labor and all Parties to achieve the successful passage of further budget improvements through the Senate.

Ultimately - if we were unsuccessful in our efforts to bring the Budget back into balance as soon as possible - it would mean higher debt levels than necessary, which ultimately means higher taxes or deeper spending cuts down the track.

Labor’s solution to their past decisions to permanently increase the level of Australian government spending and to put federal government expenditure on an ever increasing trajectory as a share of GDP was to pursue significant increases in the overall tax burden in the economy.

The truth is that increasing the tax burden in the economy as Labor proposed during the campaign would lead to less investment, less growth and fewer jobs in our economy.

That is manifestly not what Australia needs right now.

CONCLUSION

Returning the budget to balance is an important part of our overall economic plan to deliver jobs and growth. This economic plan is what Australians voted for at the election.

As I have already mentioned our economic plan will make our tax system more growth friendly.

We will lower taxes for hard working Australian families. This will reward families who choose to work more hours to get ahead.

Our commitment to bring the corporate tax rate down to 25% - starting with small and medium sized businesses - builds on the tax cuts we have already delivered and will drive investment, productivity, jobs, growth and over time real wages.

Despite slower global economic growth, our export trade deals will open up new business opportunities with China, Japan, Korea, Singapore and the members of the Trans Pacific Partnership. This will create jobs across Australia, in particular opening new growth opportunities for our highly successful service export industries and our agricultural sector. We are working to deliver additional free trade agreements with two of the other biggest economies in our region, India and Indonesia.

Our ambitious infrastructure investment program will support our growing industries by better connecting them to international markets. This includes projects such as the Western Sydney Airport and Inland Rail.

Our innovation agenda will drive growth in new industries and help current industries maintain their international competitiveness in this era of rapid technological change. This agenda includes ensuring our children are prepared for the jobs of the future by boosting participation in science, technology, engineering and maths.

Our defence industry plan will help build the technology and industry base that will help deliver a stronger economy, as well as boosting our military capability.

Our microeconomic reform agenda will boost productivity growth. We are committed to restoring the rule of law to the construction industry by re-establishing the Australian Building and Construction Commission. We will ensure that unions and employer organisations have to comply with the same standards of governance and accountability as the company directors.

Our response to the Harper Review will increase competition across the economy, including strengthening the protection of small business from uncompetitive behaviour by big firms.

This is the economic plan that Australia needs.

This is the economic plan that Australians have just voted for.

This is the economic plan that the Coalition is working hard to deliver.