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Treasurer's economic note: 1 April 2012

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If the events in Europe over the past 18 months teach us anything, it’s the importance of budget discipline. Many governments ignored the necessary economic reforms over a long period, allowing their spending to blow out and their budgets to become unsustainable. We see the consequences of this today in the region’s sovereign debt crisis. The failure to maintain fiscal discipline has undermined confidence and economic growth across Europe. This has led to lengthening jobless queues and unemployment rates that are two, three and even four times our own. In Spain, for instance, the jobless rate is nearly 23 per cent. Early yesterday morning we saw news that European finance ministers had agreed to increase funds for an emergency war chest to ward off any new threats. It’s another positive step, but certainly European leaders have plenty more work to do to get budgets back on a sustainable footing in the medium term, while at the same time supporting growth where possible. Europe faces a long, difficult road ahead so we shouldn’t be surprised to see turbulence in the global economy for some time to come.

The Best Defence

Australia’s continued strict budget discipline is our best defence against this uncertain global outlook. When we confronted the biggest economic downturn in around 80 years, we stepped in to support demand. Our stimulus package protected hundreds of thousands of jobs and helped keep the doors of business open across the country. It meant Australia was virtually the only developed economy not to fall into recession. While Europe and other developed economies have yet to make up the ground they lost in the GFC, our economy is today more than 7 per cent larger. Just as it was right to step in and support demand when it was needed, it is right now to step back and provide space for the private sector to grow - as we have been doing. This is the appropriate strategy for an economy moving back towards trend growth with relatively low unemployment and a record pipeline of investment.

Maintaining our credible fiscal policy sends a strong message of confidence to investors across the world in these uncertain times. This was demonstrated at the end of last year when Australia received the gold-plated AAA credit rating from all three major international agencies - something never achieved before in our history and making us one of only eight nations to have a AAA rating with a stable outlook from Moody’s, Standard & Poor’s and Fitch. Our financial strength is evidenced in the fact that our return to surplus in 2012-13 is well before many other major developed economies have even halved their deficits and our net debt will peak this year at less than a tenth of the level of major advanced economies.

Budget balance

Government net debt

Australian data are for the Australian Government general government sector for financial years beginning 2010-11 based on the Mid-Year Economic and Fiscal Outlook. Data for other economies are total government and refer to calendar years beginning 2010.


Returning the budget to surplus ensures that we won’t be adding to the price pressures of a strengthening economy experiencing a once-in-a-generation investment boom. This in turn provides more flexibility for the Reserve Bank to cut interest rates if they think this is warranted. Of course the Reserve Bank takes these decisions independently, but it has on many occasions acknowledged Labor’s strict fiscal policy and has said it has room to cut interest rates further if it thinks that’s necessary. I’m proud of the fact that a family with a $300,000 variable mortgage is now paying around $3,000 a year less in repayments since Labor came to office. It’s further proof of the benefits of the Government’s sound budget management.

Obviously delivering a surplus has been made much harder due to the crisis in Europe which has weakened global growth and further reduced government revenues. Since the GFC, we’ve seen write-downs in revenue of $140 billion and that figure is likely to be revised up at the Budget. On top of this, as I explained on Thursday in a speech to the Australian Business Economists, the changing structure of the economy means tax revenue as a share of GDP is likely to remain lower than it was before the global downturn for some time to come.

Balancing the Books

Lower revenue means we will have to work hard to find extra savings in next month’s Budget. There will also be very little room for any new spending. You may have heard me describe this Budget as the toughest I’ve faced. That’s because we’ve already made plenty of difficult decisions in our past four Budgets - decisions that have saved well over $100 billion. A good example is our decision to means test the private health insurance rebate, which will save $2.4 billion over the next three years alone. It simply makes no sense for the health insurance of households with incomes of more than a quarter of a million dollars a year to be subsidised by those earning a fraction of that amount. Finding savings allows us to direct spending to where it’s most needed - to things like education, training and frontline health services. Of course there will be many stories in the newspapers over the next few weeks speculating about the savings to be announced next month. All I can say is that as a Labor Government, our decisions will always balance fiscal discipline with fairness for those that need help the most, particularly families and individuals on low and middle incomes.

Building Tomorrow’s Workforce

Returning the budget to surplus is the right strategy for the economy, for confidence and for jobs. As I discussed in last week’s economic note, I’m really proud of the fact that more Australians are studying a trade today than ever before in our nation’s history - some 460,000 people are doing a trade apprenticeship or a traineeship. Not only does this help deliver our growing economy the skilled workforce it needs, it also means that more people have the opportunity for a better, more rewarding job with higher pay. The Government is working much more closely with employers than ever before to make sure the training system delivers the workers industry needs. A great example of this is the agreement the Prime Minister signed today with Woolworths, which is creating 10,000 new jobs this financial year. The deal streamlines access to the Government’s skills and training programs, and will help tailor our services to be more effective. It will also ensure Woolworths is able to employ people that reflect the diversity of our community, including the long-term unemployed, Indigenous Australians, older workers and workers with a disability. It’s an example of how we can work together with industry to give more Australians the opportunity for a better job and a better life.

Wayne Swan Deputy Prime Minister and Treasurer Sunday 1 April 2012