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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

8 April 2012

Treasurer's economic note

A month out from the Budget, it's good to see there's a healthy debate underway in the media, the economic community and the wider community about our economy and its outlook. This is always an important discussion to have and particularly so at this time of year. It's useful for people to understand the wider context in which the Budget is being put together, and how developments in our economy influence and are influenced by government decisions. Just as there will be a variety of opinions across the community on particular policies, there will also be a variety of opinions about our overall fiscal policy. Some will say the purse strings should be tightened further, others that they should be loosened. As always, the Government's job is to get the balance right, look beyond the calls of sectional interests, and do what's in the long-term economic interests of all Australians.

Striking the Right Balance

I think any fair-minded assessment of our economy's performance would show we've done a pretty good job in getting the balance right over our past four Budgets. With solid growth, contained inflation, very low public debt, low unemployment and a record pipeline of investment, we are the envy of virtually every advanced economy. Back in our first Budget in 2008, I remember there were plenty of commentators calling for much bigger spending cuts. The Government's assessment, however, was that we needed to be very careful about the escalating threats we saw at the time to the global economic outlook, and we adjusted our budget settings to reflect those threats. History, of course, has shown that assessment to be a very good one, given that a few months later we experienced the biggest global economic meltdown since the Great Depression.

And by stepping in to support demand as the GFC hit, we kept the doors of business open across the country and hundreds of thousands of Australians in jobs. We were one of a handful of developed economies to avoid a deep and damaging recession. Just as it was right to step in and support demand when it was needed, it's right now to be stepping back to provide space for the private sector to grow and to ensure the Reserve Bank has the flexibility to cut interest rates further if it thinks that is necessary. This is a key reason why getting the budget back to surplus in 2012-13 is an economic imperative. It's the right strategy for an economy returning towards trend growth with relatively low unemployment and a huge pipeline of investment.

A Clear, Consistent Strategy

Just as there were those in 2008 who said we weren't cutting hard enough, there are those today who say we are cutting too hard. As I explained in an article in The Age during the week, claims that the return to surplus is putting growth at risk overlook the fact that the Government's budget strategy has been clear and consistent for a long time. The return to surplus in 2012-13 was already factored into our economic forecasts in the mid-year update, and the economy is still expected to move towards trend growth. In fact, the International Monetary Fund expects Australia will grow faster than all major advanced economies this year and supports the Government's budget strategy. When asked about Australia's return to surplus next financial year, the IMF's Jorg Decressin said "where you have these strong investment plans in the pipeline, where the growth prospects are still quite good, this strikes me as appropriate." Maintaining our credible fiscal policy also sends a strong message of confidence to investors across the world in uncertain times, and in many ways returning the budget to surplus is our best defence and is a key sign of our strong economy. It's why we've been awarded the AAA credit rating from all three major international agencies for the first time in Australia's history.

The success of our budget strategy is clear in Australia's economic success in the face of the extreme global volatility over the past few years. One respected commentator during the week pointed out that there had been faster growth rates in developing economies and also some developed economies over the past year. Naturally, we haven't matched the pace of growth of China or other developing economies to our north, as they are starting from lower levels of development. Likewise, we shouldn't be surprised that some advanced economies may have posted faster growth than Australia over the past 12 months. Putting aside the impact of the biggest natural disasters in our history, we also need to remember that many developed economies are recovering from deep recessions, so the growth they are now experiencing is still only making up the ground they lost during the GFC. By contrast the Australian economy is now more than 7 per cent larger than it was before the GFC. In fact, Australia was one of only three of the 34 advanced economies to avoid recession during the GFC and our cumulative growth since the beginning of 2008 outranks every single advanced G20 economy with the exception of South Korea. Another key indicator of our economic success is the fact that more than 700,000 extra Australians have gained a job over the past four and a half years, a period in which the world's jobless queues have lengthened by around 27 million.

Helping Make Ends Meet

Our commitment to return the budget to surplus doesn't come at the expense of getting on with the important economic reforms like pricing carbon pollution while continuing to help families and individuals on low and middle incomes make ends meet. That's why one of the important features of the Clean Energy Future package are tax cuts that build on the Government's strong record of tax reform. More than six million Australians will get a tax cut worth more than $300 next financial year. This is being delivered by increasing the tax‑free threshold from $6,000 to $18,200 from 1 July, with a further increase to $19,400 from 1 July 2015. This will benefit all taxpayers earning less than $80,000 a year. Significantly, it will free around 1 million Australians from having to lodge a tax return. Regular wage earners with incomes below the new tax-free threshold will not have any tax withheld from their wages by employers, which will mean higher take-home pay and better incentives to work. This will particularly benefit part‑time workers and those on low incomes. This important reform builds on the $47 billion worth of income tax cuts we delivered in our first three Budgets, and means next year someone earning $50,000 will be paying more than $2,000 less tax compared to when we came to office. It's another example of how the Gillard Government is managing the economy in the interest of all Australians, not just the fortunate few.

Wayne Swan
Acting Prime Minister and Treasurer of Australia

www.treasurer.gov.au
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