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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

15 May 2011

NO.017

Treasurer's Economic Note

For me the most satisfying part of the Budget process each year is getting out and about across the country to talk about what it all means for individuals, families, businesses and communities. After debating issues in Parliament and through the media all week, it's a welcome change to talk directly to people about the Budget's policies and priorities. Given the impact natural disasters had on this year's Budget, it was appropriate that after the end of the parliamentary sitting last week the first place I went was Goodna, one of the Queensland communities most devastated by the floods. I visited the suburb in January when large parts of it were still underwater, and again when the waters had receded and people had only just finished pulling up their sodden carpets and shovelling the mud out of their homes.

On Friday, it was pretty inspiring to see how far this community has come over the past few months. I was there to officially reopen the store of a local butcher, Steve Bateman, whose business went two metres under, causing tens of thousands of dollars of damage to stock and equipment. It's been a hard slog, but Steve has rebuilt his business, and with hundreds of others is helping the community get back on its feet as well. After what he's been through I was impressed by his resilience and also by his optimism. Like Steve, I'm confident about our nation's future. The floods, and the cyclone that came after it, had a big impact on growth and government revenues in the short term. But they haven't knocked our economy off its longer-term course. That's why the Budget last week was all about getting the economic settings right to maximise and spread the opportunities that lie ahead for our nation.

A Few Facts about the Budget

Like most Budget weeks, it was a hectic one with plenty of colour and movement in Parliament, as well as dozens of media interviews. Of course, beyond the trivia and headlines it's the substance of the Budget that really matters. I wanted to share with you a few important facts about the Budget:

Fact One: Around an extra 500,000 Australians are forecast to get a job in the next two years, building on more than 700,000 positions created since the Government came to office.

Fact Two: Real spending growth will average just 1 per cent a year over the next five years. To put that in perspective, no government since the 1980s has budgeted for such discipline, and in the ten years leading up to the global downturn, spending grew at almost four times that rate.

Fact Three: We are achieving the fastest positive turnaround in the Budget position on record and returning to surplus in 2012-13 – well ahead of any major advanced economy.

Fact Four: Government revenues are down $40 billion this year and $130 billion over the five years to 2012‑13 because of the lingering effects of the global financial crisis, as well as the impact of the high Australian dollar and natural disasters.

Fact Five: We've put in place $22 billion in savings, with a net return to the Budget bottom line of $5.2 billion over the forward estimates. Many of these will deliver ongoing savings that improve the structural position of the Budget for years to come.

Fact Six: We're delivering significant tax reform, with 12 measures announced since the last Budget based on reform directions identified by the Australia's Future Tax System Review. These include improving participation incentives for spouses without children by phasing out the Dependent Spouse Tax Offset, and changes to the fringe benefit treatment of cars to remove the unintended incentive for people to drive more than they need to in order to obtain a larger tax concession.

The Budget isn't about winning the next week's opinion polls. It's about getting the settings right for a strong, secure and sustainable economy that will benefit all Australians in the years to come. I took no joy in implementing the difficult savings decisions in the Budget, but they were the right and necessary things to do. Tough decisions now will avoid tougher decisions in the future. Our strict spending rules that will return the Budget to surplus in 2012-13 are critical so that we're not compounding the price and capacity pressures in the economy as the mining boom hits top gear.

Positive Reaction

Given this backdrop, it was pleasing to see the really positive reaction to the Budget from such a wide range of economists, business groups, social organisations, health experts and serious commentators. Jennifer Westacott, chief executive of the Business Council of Australia, said it was a sound Budget that supported a stronger future: "It has the right mix of spending restraint and measures to support growth, such as the skills package and the focus on infrastructure."

Economists at the Commonwealth Bank, Westpac and Citi all described the Budget as "contractionary," meaning that it would take pressure off interest rates. "The Government has maintained its discipline on spending, found some savings but at the same time hasn't saddled mum and dad Australians and small businesses with extra burdens," Craig James, chief economist at CommSec, said in his report. "Overall, it is a smart Budget, and a Budget right for the times and challenges ahead." Bill Evans from Westpac wrote: "There is no doubt that the Budget will impose a contractionary influence on the economy... the fiscal position will improve by 3.8 per cent of GDP over only two years – this is by far the sharpest two-year drag on the economy in the fiscal position since 1970".

UBS also published some interesting analysis comparing the previous government's spending in mining boom mark I to the current spending discipline, noting that "the contrast between now and 2005-2007 could not be more stark". UBS said that the direction of fiscal policy during the global financial crisis was appropriate, but "this contrasts the first phase of the commodity upswing, when spending measures accumulate to a stunning 4½ per cent of GDP stimulus by 2007-08 (well above the current government's GFC response...)".

Social groups like Mission Australia and the Brotherhood of St Laurence welcomed initiatives in the Budget to get people off welfare and into work. Likewise, the mental health package, skills and training policy, as well as new measures to promote investment in infrastructure, have also been widely supported. As I've said, this was a tight Budget and tough decisions had to be made so we obviously didn't fulfil everybody's wish list.

Opportunity Boom

Last week's Budget is part of a broader story about how our country and its people can prosper from opportunities presented by the Asian Century. As well as generating huge demand for our energy and mineral resources, sustained rapid growth in Asia is creating a burgeoning middle class. This means the benefits for Australia stretch well beyond the mining boom. With a highly educated and skilled workforce, we are well-placed to benefit from supplying services to these hundreds of millions of new consumers. As I said in my speech to the National Press Club on Wednesday, there are firms of architects, planners and consultants in my own home town of Brisbane who make their living designing buildings in China. There are accountants and lawyers for whom Asia is now an important and growing part of their business. And as I noticed when I was in Cairns over the Easter long weekend, Chinese visitors make up the fastest growing segment for our tourist industry.

So the 500,000 or so jobs to come in the next few years in Australia – and the many more to come in the years and decades ahead if we keep getting the policy settings right – won't all be jobs working in iron ore or coal mines. In fact most won't be. This is why skills, training and participation was at the centre of the Budget. This is not just about lifting labour supply so that our economy can grow, although that is important. It's also about ensuring we don't leave people behind.

Coming Up

After visiting Goodna on Friday, I spoke to my local chamber of commerce on Brisbane's northside about the importance of getting the national books back in the black. It was the first in a series of five speeches over the next week that will tell the story of our economic position, and explore key themes of the Budget and the challenges facing our nation. Tomorrow in Sydney I'll speak about the importance of jobs for our economy, and the following day in Melbourne the topic will be about spreading opportunities to all corners of our patchwork economy. On Wednesday, I'll talk in Adelaide about how the Budget will help deliver a more inclusive society, and later in the day the series will end with an evening speech in Perth about the mining boom and beyond. I look forward to expanding on some of these themes in my 100th economic note next week.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 15 May 2011

www.treasurer.gov.au
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