Over the past few months we've seen riots on European streets and protestors occupy Wall Street. There have been wild swings in exchange rates and share prices on financial markets around the world. Global activity has slowed, trade has weakened, and Europe's unemployment queues have got longer. These are uncertain times for the global economy. It's not surprising that many people feel anxious about the future.
During the week, we saw the fallout of the tough international conditions on our own economy and finances. The Mid-Year Economic and Fiscal Outlook showed more than $20 billion had been wiped away from Australia's budget revenues in just six months – that's equivalent to the amount we spend each year on schools and higher education gone in a single hit. But despite the uncertain global conditions, the mid-year update also showed Australia still has plenty to be confident about. Economic growth is forecast to remain solid, debt to remain very low, and the budget to return to surplus in 2012-13. Our fundamentals are strong and we remain streets ahead of our peers on just about every measure. While we shouldn't downplay the challenges confronting the global economy, it's just as important not to lose sight of our own strengths. At the end of the day, strong public finances and strong economic fundamentals are the best protection to support workers, families and businesses.
Our determination to return the budget to surplus is right for the economy, for confidence and for Australian jobs. You only have to look to Europe to see why this is so important. The turmoil in global markets has been created by governments around the world failing to set out and stick to credible paths back to surplus. Maintaining our fiscal rigour is absolutely essential at a time when markets are punishing those without discipline. As you can see from the charts below, our economy is on track to be back in surplus before other major developed economies have even halved their deficits and our net debt will peak this year at 8.9 per cent of GDP – less than a tenth of the level of major advanced economies.
Government net debt
Australian data are for the Australian Government general government sector for financial years beginning 2010-11.
Data for other economies are total government and refer to calendar years beginning 2010.
The Business Council of Australia said the Government's strategy to return to surplus was the right economic policy for the times. "The unmistakable lesson from economic developments around the world is the fundamental importance of governments living within their means," the Council's President Tony Shepherd said. "By delivering a surplus next year, the Government will send a strong signal to households, businesses and investors that Australia can keep its house in order." Our strong record of financial management was this week rewarded by ratings agency Fitch by an upgrade of Australia's sovereign credit rating. Now, for the first time in our history, we have the coveted, gold-plated triple 'A' rating from all three global ratings agencies.
The return to surplus is driven by budget savings – an extra $11.5 billion in savings have been delivered in the mid-year update – as well as an improvement in government revenues as tax receipts recover from the global financial crisis. The Federal Government's tax-to-GDP ratio is estimated to increase from 20 per cent last year to 21.2 per cent this year and 22.3 per cent next year, which is consistent with revenue recoveries experienced after previous downturns. What's worth noting however is that even at this increased level, government tax revenues remain well below the record high set in the middle of last decade of 24.2 per cent. A new report out from the Organisation of Economic Co-operation and Development (OECD) shows that Australia is the sixth lowest taxing nation among the 34 member countries. We pay considerably less tax than the British, the New Zealanders, the Germans and the French. Australia's total tax-to-GDP ratio (including federal, state and local government taxes) was 25.9 per cent in 2009, compared to the OECD average of 33.8 per cent.
Total tax-to-GDP ratio (including federal, state and local government taxes)
The release of the National Accounts on Wednesday will look at how our economy travelled in the third quarter. Although the road ahead is much less certain, the capital expenditure figures released last week show why Australia is better placed than just about anyone for the journey. Companies in Australia are continuing to build their businesses, investing in new buildings, machinery and equipment. Spending is expected to rise 32 per cent to a record $158 billion in the year ending June 30, 2012. Of this, mining companies account for just over half of this investment ($87 billion) with manufacturers spending $14 billion, and other industries investing $57 billion. These figures are a resounding vote of confidence in our economy. Businesses are spending more money to expand production and add capacity because they have faith in the future – that's good news for jobs.
A large part of the growth in investment is being driven by the mining boom. While there has been plenty of scare mongering and irresponsible claims made over the last 12 months about the impact both a carbon price and the new resource tax arrangements could have on the resources sector, the figures tell the real story. The scale of the investment pipeline was reinforced by separate figures out from the Bureau of Resources and Energy Economics on Tuesday that showed the total value of projects under way or on the drawing board had risen to a staggering $456 billion in October, up from $430 billion in April. Breaking that down by commodity shows about $80 billion is planned for coal-related projects, $100 billion for iron ore, and $224 billion for oil and gas. Of course we can expect to see some lumpiness in investment from quarter to quarter due to the massive scale of individual projects, but there is no doubt that the mining industry has a very bright future and is continuing to power ahead. This record level of investment provides a solid bedrock for our economy that will help us withstand the global turbulence we're likely to see continue for some time to come.
The past four years have been amongst the most difficult for the global economy in a lifetime. Over this period, the Government has had to maintain the right economic settings to suit what have been rapidly changing circumstances. In the mid-year update, we've taken the middle path between those who say we don't need a surplus and those who say we should take an axe to spending. This is the right course at a time of great global uncertainty. We've got the big economic calls right in the past – avoiding recession and keeping hundreds of thousands of Australians in jobs – and we'll keep getting them right. Strong and stable economic management is all about securing long-term prosperity for all Australians.
Deputy Prime Minister and Treasurer of Australia
Sunday 4 December 2011