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Thursday, 27 November 2014
Page: 9584

Senator SINODINOS (New South Wales) (16:41): It is a pleasure to get up in this debate, and I take the opportunity to commend Senators Leyonhjelm and Day for framing the issue in the way that they have. The Senate does have a responsibility to the Australian people to propose and discuss options to cut government spending. I would go further and say that we have, as an institution, a responsibility to assess the overall macro level of government spending and its economic impact. While it is open to senators to vote for or against individual spending measures, every time we reject such savings measures we make the task of getting the budget into shape that much harder, and it potentially results in more tax debt and deficits.

I would like perhaps dispel some misperceptions about the coalition. We are not the enemy of appropriately targeted public spending. This is not an exercise where we seek to reduce public spending to zero—that is not what this is all about. We believe in providing the resources necessary for the peace, order and good government of the country—along the lines that Senator Day referred to when he talked about the constitutional responsibilities of the Commonwealth. That includes a sound legal framework to underpin the property rights that provide confidence in the operation of our market system. We believe in a strong social safety net for those who cannot look after themselves, and I believe there is sufficient compassion on all sides of politics to be able to assess who genuinely needs looking after and who does not. We believe in government as a catalyst in some circumstances for infrastructure and for desirable social ends that markets cannot provide because we are a complex society and there are private activities that can have social costs and benefits. And governments, as the ultimate democratic expression of our society, have the responsibility to address those desirable social costs and benefits.

But we do not believe in public spending as a substitute for what we can do for ourselves, or a spending burden that results in unfair, inefficient and unnecessarily high taxes. Let me build on something that Senator Day said. Government spending is not a free lunch. There is an opportunity cost—if I can introduce an economic term into this hallowed chamber—in terms of the output that we forgo through the taxes that we have to levy to pay for that spending or the debt that we incur. That debt, of course, leads to higher taxes on future generations. This is the nub of it—the money comes from somewhere. The aim always should be to minimise the economic cost of providing such spending. As a small, open economy—we are one of the largest economies in the world, we are in the G20, but we are relatively small—we cannot accumulate too much debt.

It is inappropriate for us to think that, if Europe can get to certain debt levels, that gives us plenty of headroom and we can just keep growing the debt. As we see in Europe, the costs of dealing with that debt escalate as it gets larger. The people who pay the price for that—to return to Senator Bilyk's interjection—are ultimately the poor and those most vulnerable in the community. That is the tragedy of what is happening in Europe. The tragedy in Europe is that there is a lost generation of young people locked out of the labour market through various rigidities in that labour market. The budget spending that has occurred in Europe has not saved their jobs but has led to increased debt. My forebears come from a country which has been at the forefront of the economic adjustment in that process where GDP has fallen below where it was before the global financial crisis and is still to exceed those levels. That is the tragedy when you allow these issues to get out of control, so we cannot be complacent.

Just hark back to 2007 and the Howard-Costello legacy of surpluses which served us well during the global financial crisis. It gave us a shock absorber which actually made it easier to deal with the global financial crisis. It gave confidence to the community. We must always be ready for a rainy day with a strong savings culture. I was in Singapore a couple of weeks ago and a strong savings culture has given them the capacity to determine their own economic fate and to punch way above their economic weight and, Senator Di Natale, to afford all sorts of social goods, because you can afford them when you are economically strong and you have control of your own economic destiny.

We recognise, as a coalition and as a government, that the budget balance will be affected by, and influences, the state of the economy. Our spending and tax changes have been calibrated to support economic growth, and the stance of fiscal policy is taken into account by the Reserve Bank in its interest rate settings. So, when we go too hard and too fast on spending we can actually make the job of the Reserve Bank harder, not easier. When we had to deal with the Asian financial crisis in 1997 and 1998 it was largely dealt with through the market system, the exchange rate and the flexibility which had been built into the economy over the 20 years before that. That is how we dealt with it—not by having a huge splurge of spending or by raising rates to defend the currency, as some people were suggesting. We let the currency go and we counselled the Reserve Bank accordingly, and that helped the economy adjust.

Do not underestimate the adjustment mechanisms in the economy. Do not think that it has to be just up to public spending to provide that adjustment. There will be circumstances, such as in the initial phases of the global financial crisis, where measures were necessary to restore confidence because we did not know what we were dealing with. We did not know the impact of capital markets freezing overnight. That is a different world to the world that we are now in in the sense that we must look at the state of the budget in the context of where the Australian economy is now and where the Australian economy is going.

On coming to government the coalition took on the challenge of transitioning our economy from a strong reliance on record levels of mining investment. Two to three per cent of GDP mining investment traditionally, historically, went up to something like eight per cent of GDP—a huge jump. We are transitioning from that to be empowered by growth in the non-mining parts of the economy. That transition was never going to be smooth or seamless. The budget must play its role in transferring resources to new, more productive activities and to promoting structural reforms in the structure and competitiveness of our markets that will lift of potential rate of growth. If we lift our potential rate of growth, if we grow from a trend rate of growth of, let's say, 3¼ to four per cent we can run the economy harder without igniting more inflation. Higher economic growth brings with it more jobs and lower unemployment payments. Tony Blair, when he was Prime Minister of Great Britain said that fairness in the workplace starts with the prospect of a job. That is the best welfare system—creating a strong economy that creates jobs, and looking after, through the social security system, those that cannot look after themselves.

On coming to government we were briefed by the Treasury on the situation we faced with the terms of trade. We cannot rely, as we have been doing for the last few years, on continuously increasing terms of trade. National income and budget revenue is now being depressed by falling terms of trade. It has whipped around. Export prices were going up relative to import prices for quite a while over the last few years, now it has flipped and it is going the other way. Commodity prices continue to ease. We have seen, in recent times, iron ore prices going down, which is depressing growth in national income, which feeds through to budget revenue. We have had a 22 per cent fall in the terms of trade from its peak, as my good friend Senator Cormann mentioned, in 2011 to June 2014 with falls since then. The answer to that is not to say that because the terms of trade are against us it is getting harder to do things on the budget, the answer is to say that, if we are to achieve the same average growth in our national output per capita and our national income, we need to double our productivity growth in the period ahead.

Senator Day is looking sceptical. We need measures to double the rate of productivity growth. That is an arithmetic certainty. We may do it or we may not do it, but what we are talking about is the challenge to falling terms of trade. The challenge to raising our national income over the next few years is to raise our productivity. We need a more competitive, less regulated and more innovative economy if we are to get sustained growth in productivity.

According to the Parliamentary Budget Office in a report released yesterday on their analysis of how sensitive the budget is to various parameters, a fall to one per cent in annual productivity growth would lower our GDP, our national output, by 1.1 per cent in a decade.

Net debt would be five per cent higher. So you are talking about net debt going to $15 billion, $30 billion at least and the interest payment consequences of that. We need, in these circumstances, to be increasing our productivity. That means that when we look at the budget, the budget has got to make its contribution to that productivity task. The budget priority should reflect this productivity imperative as well as the demographic imperative that we face, because over the medium term we need more workers to offset the ageing of the population. With respect to the point that Senator Day made, whether it is about the labour market or about the rules around labour force participation, we need older workers to stay longer in work by tackling the economic and social barriers, which can include, of course, discrimination against older workers—and as I get older, I am becoming more sensitive to that—and we need to get more women back into the workforce, because our rate of labour-force participation by women is below the OECD averages. We need to do more to encourage more women back into the workforce.

Some people do not like our paid parental leave plan, but that is Tony Abbott's response to that major imperative. Ultimately, it will also include measures which will make it easier for women coming back into the workforce to keep more of their income when they are in work. Because what happens is, because of our tax and transfer system, the benefits you lose when you go back into work mean that often if you are the second income earner in a household you are penalised when you try and go back to work, and too much of your income is taken by a combination of tax and the withdrawal of benefits.

We also need to keep working on creating more entry-level jobs and more training opportunities to get young people on the ladder of opportunity. This was alluded to by Senator Day in his contribution, and I also quote the President of the Business Council of Australia—and she is now the Chairwoman of Telstra as well—Catherine Livingstone, who said that the great tragedy of Europe, as I alluded to earlier, is the loss of jobs for young people, because if they do not get on the ladder of opportunity early, that affects their income prospects and career prospects for the rest of their lives. So this is an imperative. What I am saying is that the structure of the budget, the priorities we put into the budget, have to reflect, as we have sought to do, those measures that encourage greater labour force participation. For me these are fairness as well have efficiency measures, because they spread economic opportunity through the community.

Senator Day mentioned this earlier in the day, and I was happy that he took it up in his contribution this afternoon. We talk about more spending being a recipe for higher taxes, but where does that leave us when it comes to issues like bracket creep? The opposition have opposed $28 billion of potential savings, including over $5 billion that they themselves had proposed. Based on the spending measures that we put into the 2014-15 budget, which incorporated these particular savings, the government has built in future tax relief through an assumed tax cap of 23.9 per cent of GDP, which was the average tax ratio of 2001 to 2008.

Senator Conroy: So you are increasing taxes.

Senator SINODINOS: No, we are cutting taxes if we can get our spending cuts through, because we are seeking to reduce the bracket creep that would otherwise be there if your opposition spending measure—

The ACTING DEPUTY PRESIDENT ( Senator Lines ): Order please!

Senator Conroy interjecting


Senator SINODINOS: Through you, Madam Acting Deputy President: the opposition of some in this chamber to spending measures means taxes are going to be higher than they would otherwise be, because we have budgeted to reduce bracket creep in the years ahead.

The tax cut that we have incorporated into our budget projections will relieve low- and middle-income earners from bracket creep as inflation pushes workers into higher tax brackets. Those higher taxes reduce the incentives to work, to save and invest. While I am on the topic of tax, let me deal with this issue about tax during the Howard years. The tax cuts during the Howard years were not a waste. The tax cuts during the Howard years were all about improving the incentives to work, to save and to invest. And the Treasury, year after year, when those tax cuts were being provided, measured the impact on labour force participation of those reforms. And they were reforms. We took the opportunity to cut tax where we could. I am disappointed, in a sense, that we did not get more opportunity to do that.

When we talk about tax reform and returning bracket creep, we are not talking about the big end of town. We are talking about our fellow Australians, about the people who largely pay tax, who are the wage and salary earners, who are the decent backbone of the country and who may want to work a few more hours, but they realise that over the next few years—as was alluded to in question time by Senator Cormann in response to a question—the average tax rate would be going up over the next few years for middle-income earners. So it is the people up there; it is the people in the gallery. It does not matter about us and the salaries we are on, but it is you up there. You pay the price when there is too much government spending. You know that because your taxes go up. Your taxes are feeding that. We want to cut your taxes—

The ACTING DEPUTY PRESIDENT: Senator Sinodinos, through the chair please. I have given you a fair leeway. Please address your remarks through the chair. Thank you.

Senator SINODINOS: Madam Acting Deputy President, the exuberance of being in your presence caused me to look over there, but I apologise.

The ACTING DEPUTY PRESIDENT: Just obey the rules and we will all be happy.

Senator Conroy interjecting

The ACTING DEPUTY PRESIDENT: Senator Conroy, thank you.

Senator SINODINOS: May I conclude by again commending Senators Day and Leyonhjelm for taking the initiative to bring this debate on. We have had an opportunity—and this includes the contribution by Senator Ketter and others—to kick some of the ideas around in a way that we do not normally do. And that is very important. If one of the benefits of having crossbenchers in this chamber is that it will force both sides of politics to engage more seriously in explaining the rationale for the measures that we seek to take, that will be to the benefit not only of this chamber but also of the Australian people.