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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

21 October 2012

Treasurer's economic note

Governments around the world and at all levels are having to make do with less. The toughest conditions in the global economy in generations have cut a swathe through traditional sources of revenue. That means the funds that many governments expected to have simply aren't there. For the Federal Government, tax receipts are down by tens of billions of dollars every year compared to where we expected them to be before the global financial crisis struck. And the renewed weakness in the international economy combined with lower-than-expected commodity prices has further hit revenues. This will require more savings to be found in our budget. These will be announced tomorrow as part of the Mid-Year Economic and Fiscal Outlook. The savings will be significant, but they will be targeted and responsible, minimising the impact on the economy. Most of all they will reflect our Labor values in doing the utmost to protect low- and middle-income earners and the community's most vulnerable.

Finding responsible savings

We've already identified more than $130 billion in savings over five budgets  and this will be the fourth consecutive mid-year update to make savings to the bottom line. Previous savings have included:

  • Reforming the fringe benefits tax treatment of cars and living-away-from-home allowances and benefits;
  • Phasing out the Dependent Spouse Tax Offset;
  • Increasing the tobacco excise;
  • Reducing the tax concession received by very high income earners on their superannuation contributions;
  • Means testing the Baby Bonus;
  • Means testing the Private Health Insurance Rebate; and
  • Reforms to deliver better value under the Pharmaceutical Benefits Scheme.

Many of our savings have been delivered by cutting back tax breaks for those on high incomes and ensuring government payments go to those who need them most. Obviously no one likes missing out, but changes like these are absolutely essential to ensure government spending is sustainable. And the savings mean resources are available where they are most needed – things like education, hospitals and other vital frontline services.

It's important to note many of the savings measures don't simply deliver a boost over the forward estimates. They also improve the structural position of the budget so that the savings keep growing over time. Today I can share with you some new Treasury analysis that shows the long‑term savings we have made, combined with the further long-term saves in tomorrow's MYEFO, have improved the underlying cash balance by 0.9 per cent of GDP this year, with the benefit growing steadily to 2 per cent of GDP by 2022-23.

Projected contribution to change in underlying cash balance from savings measures

Projected contribution to change in underlying cash balance from savings  measures

To put this into perspective, the budget bottom line would be around $14 billion lower this year without the long‑term savings, blowing out to a $51.4 billion shortfall in a decade's time. In other words, rather than getting back to surplus this year with the surpluses growing each year after that despite the revenue write-downs, the budget would be in deficit and stay in deficit. And of course without the long‑term savings we wouldn't achieve our forecast of eliminating net debt by 2020-21. Instead net debt would be over $250 billion, with the gap compared to our current trajectory growing by more than $40 billion a year.

Net debt as a proportion of the economy

Net debt as a proportion of  the economy

The right strategy

While finding additional savings is tough, I have no doubts whatsoever about the critical importance of our budget strategy. Despite the challenging global conditions and pressures from a high dollar and changing consumption patterns that are weighing on some sectors, our economy is growing around trend. In fact, the IMF forecasts Australia will grow faster than every single major advanced economy this year and next. We've also got low unemployment, contained inflation, strong business investment and a triple-A credit rating from all the major international agencies. Given these sturdy fundamentals, it's appropriate to return to surplus. It means monetary policy can play the primary role managing demand, consistent with the RBA's inflation target, as we've seen over the past year. The decline in interest rates  has delivered a saving of around $2,500 over the past 12 months for a family with a $300,000 mortgage, and the saving since we came to office is around $4,500. The return to surplus and our consistent record of fiscal discipline underpin confidence in our public finances and economy at a time of global uncertainty.

The flexibility of monetary policy is a crucial difference between Australia and most of the advanced world. In Europe, Japan, the U.K. and the U.S., there's no more room to move on conventional monetary policy. Interest rates are at or close to zero. So the fiscal tightening that these economies are undertaking does not bring the added benefit of lower interest rates. It's what economists often call a liquidity trap. The result is policymakers have very few options to stimulate growth and revive their sluggish economies. This situation is very different in Australia, as Reserve Bank Governor Glenn Stevens pointed out last week at the annual IMF meetings in Tokyo:

"On monetary policy, we have ammunition. Unusually for an advanced country, we actually have materially positive interest rates, so if needed we have scope to move there as long as inflation is okay, which at present it seems to be."

Governor Stevens also noted the Government's return to surplus and very low levels of debt meant that Australia was in good shape in the event of a further slowdown in the global economy.

Amid the volatility we see in so many parts of the world economy, it's important we don't lose sight of our nation's strengths. As I wrote about last week, we've just become the world's 12th largest economy, up three places in only five years. Our growing stature is reflected in the fact that we are hosting the G20 in 2014, the world's most important forum for economic and financial matters. And during the week, we secured a seat on the United Nations Security Council , which gives us a direct hand in shaping solutions to some of the world's most pressing security challenges. It's clear Australia is stepping up on the global stage.

Building a fairer society

As I wrote yesterday in a review of U.S. economist Joseph Stiglitz's latest book  on inequality, the mid-year review is much more than an exercise in number crunching. It's a statement of our values, beliefs and priorities. Each decision of government, large or small, ultimately reflects that type of society we want to create as a nation. Who we are is not just about how we spend our wealth, but also the framework we choose for its creation. As a Labor Government, our belief is that providing opportunity to more Australians is the best way to create prosperity over the long term. We will continue this approach in the mid-year review, making sensible savings that do everything possible to protect jobs and make way for the investments needed to build a fairer society. Going forward, we'll continue to find savings to deliver on our priorities in areas like education and disability reform . It's only through responsible budget management that we can put in place long-lasting reforms to build a fairer, stronger and more sustainable economy for all Australians.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia