The Shadow Treasurer, Joe Hockey, has delivered the traditional Budget reply speech to the National Press Club, in Canberra.
- Listen to Hockey’s speech (31m)
- Listen to Hockey’s responses to questions (29m)
- Listen to Hockey’s response to a question from Fairfax journalist Peter Martin (2m)
Prepared text of Joe Hockey’s Address to the National Press Club.
THE WRONG BUDGET FOR THE TIMES
The Budget is the most important economic statement of the year. It provides the Government with an opportunity to detail its response to the policy challenges of the day.
It is also a unique opportunity to lay down a policy road map that will contextualise Government statements and give confidence to business and consumers that the nation is navigating a clear and decisive course.
The Budget should be shaped by, and respond to, economic and fiscal circumstances both now and into the medium term. And ultimately it should be aimed at ensuring a better quality of life for all Australians.
This is the first Budget delivered by the Gillard Government and expectations were therefore high that it would chart the course for her Prime Ministership.
Instead, the Government missed its Budget opportunity and has left Australians confused about its economic agenda.
The Challenge
The Australian economy is changing in a way far too few policy makers appreciate.
The current resources boom is the continuation of a surge in demand for our natural resources that first started in 2001. There is really no Mining Boom Mark I or Mark II. It is the same boom with a Financial Crisis hiccup along the way.
As you can see in this chart the mining boom has been far larger since Labor’s election in 2007. The Coalition had a surge in the Terms of Trade from 2004, very late in its time in office, and the boom really kicked in, in the year we were kicked out.
It is human nature to assume that boom times will last forever but experience tells us that they never do. Prices of commodities will inevitably fall as new global supply comes on line. Moreover China and Asia generally will slow from the current breakneck pace, and central banks of developed countries will begin to withdraw the extraordinary amounts of stimulus they have pumped into the global economy.
Experience also tells us that prices rarely adjust smoothly. From the tulip bust of 1637, through to the bursting of the South Sea bubble of 1720, to the many stock market crashes in the 1920s,1970’s,1980’s and 2000’s and of course to the latter day house price crashes in the UK and USA, when booms bust they tend to do so spectacularly, and the bigger the boom the bigger the bust.
According to the Budget’s own sensitivity analysis, a 4% fall in the Terms of Trade will wipe out any semblance of a Budget surplus in 2012/13. We had a 4% variation on the upside in the last 6 months alone which came about due to rises in the prices of Australian exports.
While the obvious risk to Australia’s terms of trade is through turbulence in our buyers’ markets, we could equally find an adverse terms of trade shock care of rising import prices. This is already starting to happen with rising wage costs in China driving up the price of goods we import.
This has profound implications for the way the Budget is managed. I will come back to this a little later.
This massive change in our Terms of Trade explains the very significant changes in the economy over the last decade.
As you can see from this chart the Mining industry which comprises around 10% of the Australian economy and 2% of employment, has increased its share of total expected business investment from around 15% in early 2000 to more than 50% today. This leaves little room for new investment for the remaining 90% of the economy.
The structural changes will continue and ultimately they will deliver huge benefits. But those Australians who work in sectors of our economy with less flexibility run the risk of being left behind. It is understandable that they are often angry and frustrated.
For example take two big employing industries in Australia, retail (with 1.2 million workers) and hospitality (with 800,000 workers). These are industries living the structural change.
Tourism, particularly in Queensland, is overwhelmingly small business and it has been hit hard with a high Australian dollar and workplace law changes that make weekend and after hours trade more expensive.
In retail, despite the benefits of a stronger dollar that makes imports cheaper, the industry is facing the challenge of structural change associated with new technologies as well as the volatility of sales following the financial crisis.
This takes me back to mining and resources. The growth in that sector does create jealousy in other parts of Australia. The emergence of massive profits and seemingly many new billionaires is seen by some as creating a prosperity gap across the Australian economy.
The Coalition greased the wheels of structural change in our economy with tax cuts and targeted spending so that everyday Australians felt they were getting some dividend from the mining boom which did deliver higher company taxes, higher royalty revenue and lower unemployment. The Coalition will never neglect Menzies “forgotten people”.
The anger of middle Australia today is unsurprising, because as the mining boom continues this Government is making the transition in the economy more difficult and not less difficult.
The annual pre Budget rhetoric about a “tough Budget” made people even angrier. It reminded Australians of the waste by this Labor Government in Pink Batts, school halls, solar panels, and $900 cheques that they and their children will now have to pay for.
The confused messages on cutbacks to medical research and child care left people bewildered and cynical. And what the Government did deliver has been seen as a new vehicle for spending waste – a $400 set top box.
In the meantime for everyday Australians the daily grind gets harder and harder.
On Monday this week the ABS released its updated analytical Cost of Living Indicies. These are the best indicators of the financial pressures Australians are really feeling.
Over the year to March the cost of living for everyday families rose by 4.9%, well above the official increase in headline inflation of 3.3%. For pensioners the increase was 4.1%, for other welfare recipients it was 5.1%, and for self funded retirees it was 3.4%.
These numbers better reflect the purchasing power of the after-tax incomes of households. They include costs which are excluded from the CPI like mortgage interest and consumer credit charges.
They also account for the different spending patterns of household types. For example, the proportion of expenditure allocated to food and health costs is high for age pensioner households. Employee households spend more on transport, education and financial and insurance services.
These numbers confirm what a politician in touch with the electorate knows – that cost of living is the number 1 issue for Australians.
And with three children aged 5 and under I know how expensive raising a family can be.
In this Budget there is no grease for the wheels in our economy’s transformation from a diverse economy to an economy more reliant on mining and resources.
Many economists I speak to throw their arms in the air and declare that there is nothing a Government can do if this change is occurring. I don’t accept that proposition.
The electorate knows this change is happening and they expect some help along the way.
Let me give you some examples of the way to manage change.
At the last election, with Cairns in the throes of an unemployment rate of over 11% and a massive downturn in foreign tourists, the Coalition promised $10 million for a domestic advertising campaign for the coming winter months to promote sunny Far North Queensland to the rest of Australia. Our proposal won huge support as it helped in a practical way an industry and town doing it tough.
In this Budget the Government not only failed to deliver any additional assistance to the Tourism industry but it reduced Tourism Australia’s spending in real terms. Instead of helping Cairns with a new $10m campaign it is spending an extra $10m on Trade Unions to “provide tailored information and education resources to their membership”.
Sure, in a $360 billion Budget this is not a lot of money, but it is symbolic of this government’s priorities.
A further practical example is the $40m of direct support we provided to Newcastle after BHP moved out in 1999. Tony Abbott was the responsible Minister and Newcastle has re-birthed as a more dynamic multi dimensional economy as a result of the adjustment package we delivered.
We were able to provide this targeted industry relief because of our strong fiscal position. And because of our strong fiscal position people expected some assistance during that period of transition in the economy.
BUDGET
Given that context, this Budget has failed all its tests.
It does not ease the pain associated with the transition in our economy.
It does not lay the foundations for a long term robust fiscal position.
It does not capture the benefits of the mining boom because it makes the debt and deficit worse not better.
It delivers slower jobs growth in a faster growing economy.
It is a confused Budget that, when analysed carefully, even fails the fiscal tests the Government set for itself.
Labor’s rhetoric is way out of line with reality.
They talk about tough budgets but increase their spending.
They talk about surpluses but deliver deficits.
They talk about the need to repay debt but lift borrowings to record levels.
They talk about easing the cost of living pressures but then slug families $2billion to pay for their wasteful spending.
From all of that it is a Budget that will make our economy’s transition more painful and not less painful for everyday Australians.
Last week Wayne Swan tried to get credit for a Budget he hopes to deliver next year.
As shown in this first graph the Budget numbers 6 months ago were more optimistic than today.
This years deficit has blown an additional $8 billion. The only Budget we actually vote on is for 2011/12 and it shows a blow out in the forecast deficit of $10 billion to $22.6 billion. As you can see in the new black markings the deterioration in the deficits is far greater than the combined Budget surpluses.
One issue that has been completely ignored in the surplus/deficit debate is the expenditure on the NBN.
As you can see in this chart the blue line which Wayne Swan is claiming as a surplus actually becomes a red line once the NBN spending is added into the equation.
EXPENDITURE
In this Budget for the first time the Government states that the direct funding for the NBN over the next 4 years is $18.2 billion. The Government treats this as cash into equity and takes it off Budget despite the very significant impact on infrastructure expenditure and the capacity issues in the economy it will create.
Let me be very clear; spending on the “single largest nation building infrastructure project in Australia’s history” is not included in government cash payments.
No one I have spoken to can recall an “off-Budget” treatment anywhere near this scale. Usually there will be an appropriation “off-Budget” in the millions, not in the tens of billions. It makes the underlying cash position look grossly misleading.
Treasurer Swan insists the accounting is all above board. Treating the NBN spend in this way may well meet the accounting test but it doesn’t meet the credibility test.
If the NBN and the Carbon tax are included, and all the carbon tax revenue is spent, expenditure will increase significantly as you can see in this chart.
The Government has chosen to use the last year of a Coalition Government as its benchmark for responsible collection of revenue. (i.e which was 23.5%of GDP). It does not however seem to like the using the last year of the Coalition as a benchmark for expenditure which is just 22.9% of GDP.
The Government is spinning a line that they are engaged in spending restraint.
This is not true.
Even though spending growth is slower, it is off a considerably higher base. As this chart illustrates the surge in Government expenditure in their first Budget has never been peeled back.
The Government would want us to believe that they have made tough savings.
Our argument is that overall, the Government has not been tough enough on its own spending and where some of those cuts have been made, they are poorly directed.
The truth is, that of the $22 billion of announced savings over four years, the Government is spending $19 billion. To make matters worse, next year the Government is spending over $2 billion more than it is saving.
So it is back-ending savings into an election year Budget with the added expectation that there will be no new substantial expenditure in a hung Parliament over that period.
The Coalition in the last twelve months has announced over $52 billion of savings in detail. That was a substantial task never before undertaken by an Opposition. Despite repeated pleas for help from this Government we are not going to do that every year. We have shown them the way to get a surplus in the past. If they don’t feel they are up to it then they should step aside and give us a chance at running the Budget.
Whilst the Government asks Australians to shave their family Budget the Government is afraid to cut its own.
This graph illustrates the growth in the public sector of more than 20,000 employees since Labor was elected in 2007. The Government is employing 1100 new additional public servants this year alone with an extra 200 people in the Prime Ministers own Department.
We stand by all of our commitments to reduce expenditure which includes reducing the Canberra bureaucracy by 12,000 through natural attrition within two years.
In 2012/13 the Treasurer hopes to deliver a budget surplus. After more than $150 billion of accumulated deficits the Treasurer wants praise for delivering his first surplus of just $3.5 billion in two years time.
If a surplus is delivered in 2012/13, and we won’t know that until September 2013, then it will be a Budget based on larger tax receipts rather than cutbacks in expenditure.
It is worth noting here that the Government set a fiscal goal to collect no more than 23.5% of GDP in tax revenue which is the last year of the Coalition Government. If a carbon tax of $26 a tonne were actually in the Budget rather than excluded then, as you can see in this graph, one of the Government’s own fiscal goals is broken.
All of this leaves us with a fragile Budget that few people understand and many people misread.
There are two very significant legacies of the Government’s failed Budget.
Firstly the debt is getting worse and secondly this Budget does nothing to reduce the upward pressure on interest rates.
When asked why the Government was increasing its own borrowing limit from $200 billion to $250 billion the Treasurer’s great parliamentary defence was that the Coalition took 24 hours to raise the issue.
The truth is that net debt is growing.
As you can see from this graph there has been a significant deterioration in the last six months alone.
The Treasurer reports in this Budget a blow out in net debt from $94 billion to $107 billion. That is all in an economy with much faster economic growth, lower unemployment, a 30% increase in company tax next year alone, and a continuation of the best terms of trade in 140 years.
The Treasurer is always keen to compare our net debt with other developed countries like Japan, the USA, the UK and Europe. But Australia started this journey with no net debt unlike those countries that he always compares us to.
A more realistic comparison is one where we compare ourselves with the fastest runners in the field rather than the slowest runners.
There are a number of developed and commodity exporting countries with balance sheets in the black such as Chile, Sweden, Saudi Arabia, Finland and Norway.
Against these peers Australia with net debt of 7.2% GDP looks like a very poor performer.
For those who are interested in a new sovereign wealth fund don’t hold your breath. With $107bn of net debt unless we borrow money for the sovereign wealth fund you will need to be around for my 2021 Budget in a decade’s time before a dollar is available for such a fund.
You would think that with net debt reaching $107 billion and then allegedly coming down the interest burden would come down as well. Not so.
As this graph shows net interest payments keep growing to $7.5 billion a year which is substantial for a Budget that has only a small level of funding available for discretionary purposes.
Some people question why repaying debt is important. Why does it matter to Australian households? The answer is simple. Australian families have to pay the interest on that debt. At a time when family finances are already under intense pressure, they don’t want to be saddled with debt servicing costs that are already running at $12.5 million a day and are headed towards $20 million a day by 2014-15.
The second legacy of this Budget is higher interest rates.
Labor is fond of comparing interest rates with those of the Coalition.
What they don’t tell you is that effective interest rates paid by families have already been higher on average under Labor than under the Coalition despite the economic downturn.
Mortgage rates have been higher under Labor.
Credit card rates have been higher under Labor.
And small business overdraft rates have been higher under Labor.
The Reserve Bank has signalled that further increases will be necessary and some market analysts believe Australian families will be slugged with another 1 percent increase over the next year.
The chart which is even more interesting is this one:
You can see that the Reserve Bank cash rate is not as dominant an influence on the headline borrowing rate as it once was. To be clear, households and businesses don’t borrow at the cash rate as Wayne Swan would love you to believe. They borrow at real world bank lending rates, which is what the Reserve Bank targets when adjusting its cash rate.
The fact of the matter is that spreads between the Reserve Bank Cash Rate and what people are actually paying have grown .This reflects a number of issues including ongoing global volatility. However a key influencer is the fact that this year the Government is still borrowing money at a current rate of $135 million a day in competition with the private sector.
At a time when it is tough enough for the private sector to raise funding, the Government’s demands on the capital markets over 4 years will be a staggering $154 billion.
Crowding out of capital markets occurs when there are limited funds in an economy running at close to full capacity. To make matters more difficult, the Governments deficits and debt are worse than the markets and the Government expected just six months ago.
Let me be very clear. This government owns every interest rate slug to Australian families.
The Government’s continued effort to avoid responsibility for higher interest rates is an insult to every household with a mortgage.
This Budget is shifting far too much of the inflation fighting responsibility on to the shoulders of the Reserve Bank and its very blunt monetary policy tool.
Since Budget night there has been near universal consensus amongst independent market economists that Labor’s Budget will have absolutely no impact on the Reserve Bank’s need to raise interest rates.
The RBA itself has been warning that even if you accept market expectations of two rate rises over the next two years underlying inflation will still exceed its target 2-3% per annum band.
So with no real courage and no clear vision the Government has left itself in a policy and a political hole as a result of Budget night 2011.
The Coalition offers an alternative.
Tony Abbott and I have detailed over the last twelve months a comprehensive strategy to get the Budget to surplus and ease the pressure on families by reducing the size of Government.
Step one is to get to surplus and pay off the debt by cutting expenditure including the $52 billion of cuts we have announced.
Step two is to reduce tax by stopping the Carbon tax and the mining tax – that reduces revenue as a share of GDP and because we are not proceeding with the tied payments it reduces expenditure by the same amount.
Step three is a strong productivity agenda.
The Coalition took a productivity and participation agenda to the last election. This included a generous paid parenting leave scheme, allowances to encourage young unemployed to relocate to find employment, and a scheme to subsidise the employment of mature workers on Centrelink benefits.
The government has been so impressed with our policies that they have pinched some. For example, Labor has introduced a less generous paid parenting leave scheme. They have introduced versions of our young unemployed relocation scheme and subsidies for the employment of mature workers. And the Treasurer has, at last, been prodded into action on banking reform. On this front there is more to do and I repeat my call for a full root and branch Wallis style inquiry into Australia’s financial system.
Gary Banks, Chairman of the Productivity Commission, suggests that the productivity enhancing reforms that deserve some priority right now are those that can reduce business costs and enhance the economy’s supply-side responsiveness.
Tony Abbott has announced a Coalition government would reduce the regulatory costs on business by at least $1 billion a year with a scheme that is very similar to the red tape reduction program in Victoria.
There is one area of regulation where reform is long overdue and that is in housing construction.
Australia has the highest housing costs in the world according to the Economist magazine and Demographia. For most of this century Australia has failed to build sufficient houses to meet demand. There is now a critical shortage of housing.
The Australian dream of owning your own home is fast becoming a financial nightmare and a big impediment to building more housing is Australia’s poor regulatory environment.
International surveys show that Australia ranks particularly badly against its international peers in the regulation of construction.
Reform of construction industry planning and regulation is critical to addressing the housing affordability crisis in Australia. The task is becoming urgent and this was recently recognised by the Productivity Commission.
The objective should be to reduce the complexity of the regulations and the overlaps between different jurisdictions. This can be delivered with a National Competition Policy styled process that includes incentive payments to the states as a means of distributing the economic and fiscal benefits of regulatory reform.
Having been involved in State Government reform in the past I know that this model of incentive payments to states actually works.It is Budget neutral for the Commonwealth and it is revenue positive for those states that deliver positive change.
The payoff would be faster construction, lower costs, and, most importantly, more affordable housing. This should not be a dream, we can make it happen.
Step four will be to explore better approaches to fiscal management.
Labor is behind world’s best practice. It is no longer good enough to target the simple budget surplus or deficit. What is required is a measure of the budget balance adjusted for the impact of the economic cycle.
A budget which is in structural balance over the cycle ensures surpluses in the good times and offsetting deficits in the tough times. It ensures the government doesn’t lock in years of high spending against a one off Christmas bonus. It ensures the government is living within its means.
Chile has focussed on the structural budget position since 2000. And last year the United Kingdom adopted the structural budget balance as the yardstick for fiscal performance. In addition the IMF and the OECD regularly publish estimates of structural deficits.
I am therefore surprised that the new Secretary to the Treasury, Dr Parkinson, now believes it is too difficult to measure the structural deficit when the Budget papers just two years ago included such estimates. And late last year four Treasury economists published their own estimates which showed the budget in deep structural deficit over the forward years.
Their work showed that the only year of structural deficit under the Coalition was its last year at half of one per cent of GDP. It showed that under Labor that had deteriorated to five and one quarter per cent of GDP.
The Australian people deserve to know the state of play.
To let the light shine in the Coalition will direct the new Parliamentary Budget Office to provide estimates of the structural budget position, including a sensitivity analysis around the assumptions. We will publicly release this information.
In government we will commit to publishing estimates of the structural position in the budget papers every year.
We will also have more to say about this and other fiscal reforms before the next election.
This all shows our purpose and our intent.
In the meantime and over the months ahead, we will continue to be a voice for those who need to be spoken for, as the economy restructures and the Government leaves them behind.
