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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

24 February 2013

Treasurer's economic note

It's been another busy week as we get stuck into 2013 with budget preparations now well underway and the announcement of the Gillard Government's plan to support innovation, boost our competitiveness and create more Australian jobs.

The economy

On Friday, I spoke to the country's leading economists at an Australian Business Economists' breakfast in Sydney. In most of my five years as Treasurer, I've spoken to this group about the big challenges and opportunities in our economy and what they mean for our budget. As some of our nation's best economists, they appreciate the importance of having this national conversation based on the hard facts.

This year I spoke about the challenges we face improving the sustainability of our budget over the medium term. Governing for the nation means making the tough decisions to set our country up for the future and that's exactly what this Labor Government has been doing over the past five years as we have built up over $150 billon of saves through progressive reforms guided by our core values of fairness and equity.

At the centre of our challenges we face in this year's Budget is the huge hit to government revenues we've taken since the global financial crisis. Australia was virtually the only advanced economy to avoid recession but we didn't come out of the GFC unscathed and we're still feeling the reverberations of the biggest global downturn in 80 years. The financial crisis was the catalyst for lasting changes in business and household spending and borrowing behaviour, which have weighed on government revenues.

More recently, dramatic falls in commodity prices in the second half of last year together with the sustained high dollar in Australia have come on top of continuing global volatility to lead to further massive write-downs in revenues.

The write-downs to revenue reflect an unusual situation we are experiencing in the Australian economy at the moment, one that has only been seen a handful of times before in the nation's history and that is the breakdown in the relationship between real and nominal GDP.

Unlike many advanced economies, Australia has increased the volume of what we produce each and every year through the financial crisis, or put more simply, we have seen real GDP grow, reflecting the strong fundamentals in place here. But nominal GDP, which not only reflects the volume of production but also the prices we pay and the incomes we earn, has been unusually low. In the year to the September quarter, real GDP grew around trend at 3.1 per cent. Over the same period, nominal GDP grew well below its trend at 1.9 per cent, reflecting the massive hit from the fall in commodity prices last year, the high dollar and subdued price pressures across the board.

This situation of nominal GDP growing below the rate of real GDP has only happened four times in the 53 years since quarterly national accounts were first prepared by the ABS. The big hit to nominal GDP together with other forces at play in our economy have had significant implications for budget revenues and the budget bottom line. As you can see in the chart below, tax to GDP dropped from around 24 per cent before the GFC to around 20 per cent.

Taxation to GDP

Taxation to GDP

This massive hit to revenues has been the primary driver of our budget outcomes and continues to have significant implications for our budget. While our expenditures are on track to be around 23.8 per cent of GDP in 2012-13 – lower than half of the budget outcomes delivered by the Howard Government – revenues are coming in lower than expected. This is why it is unlikely the budget will return to surplus in 2012-13. If we were to try to fill this hole in revenues by cutting further and deeper, it would put jobs and growth at risk.

The Gillard Government will approach the 2013-14 Budget supporting jobs and growth within our medium-term fiscal strategy. This includes continuing to offset new spending over the forward budget years, as we have been doing since the 2009-10 Budget. We will ensure real spending continues to average no more than 2 per cent over the forwards and we will also keep tax to GDP, on average, below the 23.7 per cent level we inherited from the Howard Government.

A contest of ideas

Some of these facts make putting a budget together much more difficult – and of course many of them are politically inconvenient – but that doesn't change my strong belief that the facts must be the foundation of our public debate no matter how hard they are to swallow. And that's more important than ever in an election year when Australians have such an important decision to make.

That is why I have also announced some important reforms that will deliver greater transparency in election promises and election costings. I'm proud that it was the Gillard Labor Government that introduced the Parliamentary Budget Office that will prepare and release election policy costings so voters can see the real cost implications of all political parties' policies before an election. But this relies on all parties being straight with the Australian people, releasing their fully-costed policies well before the election.

I announced that we will increase the resourcing of the PBO so there is no excuse for any political party not getting its policies costed now and releasing them publicly. We will also put forward legislation that will ensure the PBO does a comprehensive audit of all parties' election policies within 30 days of the election. Just as companies are forced to get their accounts into shape because they know they will be audited at the end of the year, this reform will help ensure all political parties are straight with the Australian people before the election. Because if they aren't, they will now be exposed after the election for cooking the books. This will help make our public debate a contest of ideas, not a dispute over what the basic facts are.

Building our nation

While Australians should be proud of how the country has performed in recent years, we can't become complacent and we must continue to put in place critical national economic infrastructure to power our economy for the years ahead. I switched on Brisbane's first NBN site this week, the sort of first-class technology Australia needs to stay competitive and to be more competitive in the 21st century.

On a lighter note, I really enjoyed a night with Australia's surfing community in Sydney at the Australian Surfing Awards this week where I had the honour of awarding four-time World Champion Mark Richards with the title of Australia's most influential surfer of the past 50 years.

Surfing is a great love of mine and I admire the surfing community, a group of people who have a deep love of our unique land and coastline and who have successfully punched above their weight on the world stage.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia

www.treasurer.gov.au
twitter.com/SwannyDPM