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Tuesday, 16 August 2011
Page: 8129

Mr HOCKEY (North Sydney) (13:33): The Treasurer's statement today is an update on his view of the global economy. I have no doubt that parts of the global economy are facing volatile and challenging times, but there is a disturbing subtext to the Treasurer's words. In his statement the Treasurer is clearly preparing the ground to break his promise of delivering a budget surplus in 2012-13. In his budget speech in May, only three short months ago, the Treasurer said, 'We are on track for surplus in 2012-13, on time, as promised.' He even devoted a whole section of the speech to this promise to get the budget back in the black, with a core undertaking, and I quote: 'We will be back in the black by 2012-13, on time, as promised.' The Treasurer has repeated that promise in this House on no fewer than 17 occasions and on at least 47 different occasions in the media. The government has led Australians to believe that good fiscal management in the form of a budget surplus is so crucial that it has had to introduce a surprise: a $1.8 billion flood tax to make up for an unexpected expense.

The Treasurer also gave guarantees that the carbon tax would be budget neutral. Of course, in the Treasurer's shared opinion piece with a number of other finance ministers—published today in the Financial Times—the opening words are: 'The world faces a crisis of confidence.' To have Australia's Treasurer utter those words does nothing to alleviate nervousness. A Treasurer who in recent days has effectively described a $4.2 billion hole in his carbon tax as 'broadly budget neutral' is hardly confidence-inspiring. And in relation to the much-vaunted budget surplus, only last week the Treasurer commented that this promise has now become an objective, and today that promise is a determination.

It is ironic that the Treasurer is today laying the ground to break his core fiscal promise. It is just one year since he himself solemnly promised Australians that there would be no carbon tax under Labor and described our allegations as 'hysterical'. The promise on the carbon tax was broken and the promise on the budget surplus will, I expect, be broken. This shows yet again that this is a government whose word cannot be trusted and whose solemn promises mean nothing. The best thing that can be said about the Treasurer's opinion piece and his statement in the House today is: thank goodness most people around the world do not know him; and those who do know him will not be listening.

Credibility and honesty build trust. Consumers will listen to the message only if they trust you at your word. I agree with the view that the recovery of the world economy from the North Atlantic financial crisis was never going to be smooth. I also agree that recent volatility has been linked to concerns about sovereign debt. A third point of agreement is that substantial fiscal austerity will be required to bolster financial stability and to foster stronger economic growth. Despite these points of agreement, I do not want anyone to think there has been a sudden outbreak of love. The fiscal difficulties in many developed nations should be a wake-up call that governments cannot continue to spend more money than they collect in tax revenue. Sooner or later the credit card bill will be called in, and I doubt the Treasurer has heeded this warning.

The Treasurer identified four core strengths of the Australian economy, and I want to focus on two of these. The first is the claim that our fiscal position is strong. The Australian situation is far from comfortable. This year the budget had a forecast deficit of $22.6 billion, the fourth consecutive year of deficit. It will be worse than that because of the $2.9 billion hole relating to the carbon tax. Let us be very clear: the budget deficit number was undermined at the government's own hands just 10 days into the financial year and a few weeks after the budget was delivered. This should not come as a surprise. Over the last four years of Labor the deficits have totalled $154 billion, which is the fastest accumulation of debt in Australia's history.

The government keeps blaming the financial crisis, but that argument is starting to wear thin after three years. On current projections Australia's net debt is likely to total over $110 billion, including the net spending from the carbon tax—well above the $96 billion the coalition inherited from the Hawke and Keating governments. Note that this excludes the $10 billion debt for the clean energy finance corporation, the Gillard bank, and the full $36 billion for the original $4 billion national broadband scheme. The Treasurer wants you to believe that this is not of concern, because it is lower than that of most other developed countries. But what he fails to mention is that Australia pays a higher rate of interest on its debt than most other developed nations.

At the end of July the yield on Australian government 10-year bonds was 5.02 per cent. This is compared with one per cent in Japan, 2.56 per cent in Germany, 2.82 per cent in the USA and 2.87 per cent in the United Kingdom. The interest on Australia's debt is significant. This year the net interest on the federal government debt will be $5.5 billion. It will rise over the next four years to $7.5 billion a year in 2014. This annual interest bill could build five major teaching hospitals every year. It could actually fund the national disability insurance scheme.

A further concern relates to Australia's very high reliance on offshore capital markets to fund the debt. As of March, 73 per cent of Australian federal government debt was held by nonresidents. The Australian government is not as well prepared for today's challenges as it was in 2008. Labor of course inherited a budget surplus of over $20 billion, which is now a deficit of over $20 billion. The coalition left net assets in the bank of around $45 billion, which, as I have noted, is now heading towards a net debt of around $110 billion.

The global community recognises the urgent need for budget belt tightening. But Labor have no track record of that. Labor have not run a budget surplus since 1989-90. Their commitment to a surplus in 2012-13 is waning and not strengthening. Today's statement by the Treasurer does not provide the comfort and confidence international investors and Australian households and businesses want and require.

The second point I want to address is the reference to our underlying economic strength. I remain very confident about Australia's medium-term economic prospects. We are in the right place at the right time, geographically located near Asia—the world's largest and fastest-growing economic region—and we are blessed with the resources and the rural output that they want. With the terms of trade at 140-year highs, it can be argued Australia has never been such a beneficiary at the moment as it should be now. Yet confidence is low, and activity in the non-mining sectors of the economy has lost momentum. The slowdown began about a year ago, well before the US downgrade and the recent volatility in global markets. Curiously, the slowdown dates back to about the time of the election and the formation of a minority Labor government. It is primarily a function of domestic factors rather than global influences. I will give some examples.

Consumer confidence has been falling steadily for a year. The Westpac-Melbourne Institute index of consumer sentiment in August is now at its lowest level since May 2009. Growth in retail sales began to slow in the middle of last year. Retail sales have been particularly soft in recent months, falling in three of the past four months. Employment growth also began to slow about a year ago, easing from trend monthly increases of around 0.3 per cent to just 0.03 per cent in July. The number of people unemployed rose by 18,000 in July to the highest level since November 2010. The unemployment rate has increased to 5.1 per cent—also the highest rate since November last year.

Turning to other data, demand for credit from households and businesses is very weak. Housing construction approvals are falling. Share prices are volatile and well below recent highs. And household prices are soft. Households are cocooning. The household savings rate is climbing to historic highs. The government want you to believe that it is someone else's fault. That is typical of Labor. They have tried blaming it all on global uncertainties. But that will not wash, because this data has been trending downwards for up to 12 months.

More recently, the government have said it is all the opposition's fault. They claim the coalition is talking down the economy through its attacks on the government's policies, such as, the economy-wide carbon tax which will increase the price of everything. The truth is that it is the government's actions, their own policies and their lack of a mandate that have destroyed consumer and business confidence.

Households are struggling under higher cost-of-living pressures. The headline consumer price index increased by 3.6 per cent over the year to June, the highest rate in 2½ years. The government claims it is all due to higher food prices, stemming from natural disasters. But a look at the underlying measures of inflation show that price pressures are widespread. On top of this, households have suffered two additional imposts. The first has been the added burden of the seven interest rate increases, as well as those increases beyond RBA cash rate movements. The second has been an ever-rising tax burden. The government has introduced or increased 19 taxes in four years. The flood levy commenced on 1 July this year and the mining and carbon taxes are yet to hit from 1 July next year. The impact of higher interest rates and higher taxes is not measured by the official inflation data. The cost of living for households and businesses is increasing much faster than the CPI. The latest analytical cost-of-living indexes show that over the year to June for employees the cost of living rose 4.5 per cent, for pensioners it increased 4.4 per cent, for recipients of other government transfers it increased 4.6 per cent and for self-funded retirees it increased four per cent. All of these increases are well above the official headline inflation rate of 3.6 per cent, and even these higher figures do not include the effect on household budgets of higher taxes. The budgets of everyday Australians are groaning under the strain and the government is also eroding business confidence by making it more difficult for business to go about its legitimate affairs with consistent policy positions. In the last 18 months the government has had five positions on a carbon tax, four positions on a mining tax and at least four positions on live cattle exports.

What we are seeing in Australia is a significant loss of confidence. It is crucial the government does all it can to maintain investor and household confidence through credible and consistent economic management. The government's words must match its deeds. The government must immediately repeal the flood levy and cancel the introduction of the mining tax and the carbon tax. A recent comment from Warwick McKibbin, arguably Australia's most eminent economist, is worth noting:

Bad fiscal design always has an unexpected cost. Why is a flood tax being introduced just as the economy slows?

The government must cut wasteful spending and start to live within its means. The government must cease its demands on capital markets. If the current economic malaise continues, there will inevitably be pressure for the government to engage in further spending, and that means more government debt. It should be clear now from the global experience that debt is the problem. It is also crystal clear that more debt is not the answer. A recent IMF report on Australia made two important points that the Treasurer failed to refer to. The first is that the government should be running much larger surpluses from 2013. The IMF says that a tighter fiscal policy would help ease upward pressure on interest rates:

We recommend targeting a budget surplus of more than 1 percent of GDP, on average, for the period beyond 2013/14, while the mining boom continues to support growth.

Then it said:

… a further strengthening of the Commonwealth government balance sheet should continue to contain economy-wide debt-servicing costs.

The report's second point is a related point that surpluses should be larger in the upswings:

This would imply running surpluses during upswings to avoid overheating, and these surpluses should be larger than in past upswings.

The IMF is in agreement with the coalition's calls for Labor to be running much larger budget surpluses. In fact, we just want Labor to deliver a surplus—its first surplus. It is about time, and we want Labor to keep its promise for a surplus. All we want is a promise that is kept, and to be saving much more of the additional revenues being collected during this the mining boom, which is meant to be the best terms of trade in 140 years.

I believe that Australia's destiny is prosperous. The medium-term outlook for Australia remains strong. We are much more closely linked to prospects in Asia and particularly China, even if China is facing some domestic challenges, rather than being totally exposed to the volatility of the Northern Hemisphere Western economies. There is no doubt that Australia can continue to benefit from the realignment of global economic strength from the West to the East. This should be our decade and it should be our century. We can get through the current malaise in the global economy. We can get through the challenges, but it will require this government to recognise that it is its own policies of wasteful, debt fuelled spending, increased taxation and interference in the running of businesses that is unnerving Australians and causing our collective loss of confidence in this government.