11 March 1996 - 3 December 2007
SHANGRI-LA HOTEL, SYDNEY
THURSDAY, 20 APRIL 2006
As best as we can tell, tomorrow, the Commonwealth of Australia will eliminate its net debt.
That makes tomorrow:- April 21, 2006:- Debt Free Day.
It is the day we pay off the mortgage. From tomorrow our Government will no longer be a net borrower. In fact from tomorrow we will start to save to save for some of the big challenges of the future.
As you can imagine in a large and complex operation with many Government Departments and many contracts, the Government is being invoiced and making payments on a constant basis. The Government is borrowing from some and lending to others all the time. But when you take into account all of the Commonwealth borrowing and all of its lending, in net terms, from tomorrow the Commonwealth will owe nothing.
This is a far cry from the $96 billion the Commonwealth owed, in net terms, in 1996.
Let me take you back to those days and explain how the Australian Government eliminated $96 billion of debt.
In the early 1990s the Australian Labor Government spent a whole lot of money that it didn't have. Because it ran a long series of deficit budgets it had to borrow to cover the shortfall. The money it spent was of course, in part, borrowed money. From 1991 to 1996 Labor ran Budget Deficits as follows:-
|5 year total||-69.0|
In 1996 the Labor Government was thrown out and the Coalition set about balancing the Budget. After balancing the Budget we have set about repaying Labor's debt.
Since 1997 there have been eight surpluses cumulating around $64 billion as follows:-
|7 year total||64.2|
I'll come back to how we repaid the balance of the $96 billion in a moment.
But I'll ask you to notice two things. The first is that it is so easy to run up big deficits. The largest was 3.9 % in 1992- 93 the year Labor won its last election. If we ran a deficit of a similar size today it would amount to $37 billion.
By comparison it is hard to run a counterveiling surplus of the same magnitude. The largest surplus our Government has managed has been 2.0% of GDP in 1999-00:- in today's economy that would amount to a $19 billion surplus.
The effort to correct failed economic policy takes much longer than the failure. It takes years of good government to undo short periods of bad government. Beware of bad government. It takes a long time to recover from it.
The second observation to make is that a sustained performance requires sound structural policies.
You will recall that in 1996 when the Budget was in deficit by around $10 billion Labor flatly denied it. The Finance Minister, Kim Beazley, claimed the Budget was in surplus and tried to conceal the situation before the election. This was the Beazley Black Hole the missing $10 billion.
To my knowledge even ten years later Mr Beazley has never acknowledged that deficit. He has never apologised for misleading the public. He has never come to terms with that failure.
The first step to a recovery is to end the denial.
The policies we put in place to turn things around were as follows:-
- Admit the problem
- Determine to do something about it.
- Enact a Charter of Budget Honesty to prevent, by law, false and misleading accounting designed to hide or cover up the true situation.
- Publish independent pre-election forecasts.
- Set up an independent mechanism for costing election promises.
- Set medium term Budget goals and stick to them.
Our medium term goals were to balance the Budget; to halve the debt to GDP ratio by 2000, then to eliminate it; and now to improve the Australian Government net worth position.
We are meeting all these goals.
When we become debt free tomorrow it will not be the first time. The Commonwealth was debt free for a short period in the early 70s more than 30 years ago.
As you know the Commonwealth was established in 1901. The Commonwealth began borrowing to finance the First World War. Borrowing stayed high through the Depression years.
Commonwealth borrowing peaked in the mid 1940s as a result of the cost of financing the Second World War effort.
Through the long post-war expansion under the Coalition Government, Government debt was progressively reduced and, in net terms, eliminated at the start of the 1970s. It was the Whitlam Government, and the series of events it set in train that sent us back into borrowing. Net borrowing started at a low level in the mid 70s then debt peaked under the Keating Government at $96 billion or 18.5 per cent of GDP.
Let me come back now to how we repaid the balance of that $96 billion. Aside from Budget surpluses, the Howard Government used the proceeds of asset sales to retire debt. When you think about it, this is the responsible course of action.
If you sell an asset, you no longer have the asset but you have the proceeds. If you spend the proceeds on recurrent items you no longer have the asset and you no longer have the proceeds. Your asset position has deteriorated.
If you use the proceeds to buy another asset, or to retire your debt your asset position is maintained. You no longer have one asset but you have another or, in the case of debt retirement, you have reduced or extinguished a liability.
Major asset sales under the Government have totalled $46.1 billion. All of the proceeds since we balanced the Budget in 1997-98 have gone to debt retirement.
The Hawke-Keating Governments undertook major financial asset sales of at least $6.8 billion. None of this went into debt retirement. The entire proceeds were spent on recurrent expenses. After spending all the proceeds the Hawke-Keating Government still had to borrow further to cover its shortfall.
When the Keating Government sold Australian Airlines and Qantas the Commonwealth lost the airline and the proceeds in their entirety and finished up borrowing more as well!
The same applied to the sale of the first stage of the Commonwealth Bank.
The benefits of eliminating debt
At the peak of Commonwealth debt at $96 billion in 1996 Government interest payments amounted to $8.4 billion per annum, or around 1.5 per cent of GDP. With the retirement of all Government net debt, next year we are forecasting net interest payments of $0.3 billion1.
This means every year, year after year, the taxpayer is saving billions in debt servicing costs. Today, 1.5 per cent of GDP devoted to interest payments would be $14 billion. The reduction of these costs is one of the reasons why Commonwealth spending has fallen and is now the second lowest in the OECD.
We are not the only country in the world that is debt-free, but we are part of a pretty small and select group comprising just seven countries of the OECD:- Norway, Finland, Korea, the Czech Republic, Sweden and New Zealand.
Norway in fact has a massive asset position. It decided to invest its North Sea oil revenues in a government pension fund that would lock away the benefits for future generations long after the oil is depleted.
The average net debt to GDP ratio of the countries in the OECD for 2006 is estimated to be 47.5 per cent. If Australia were to carry this amount of net debt it would amount to $454 billion.
The United States net debt is estimated at 47.2 per cent and the UK net debt is estimated at 41.1 per cent.
The US has been running budget deficits since 2001. The United States spends more (proportionate to its economy) than Australia but it taxes less. It finances the gap by borrowing. This means that the current generation finances some part of its expenditures by shifting the cost to future generations.
By running deficits since 2001 the US has been running up Government debt and servicing costs for future generations.
Why is it so important that we get our costs down and make our financial position strong?
The most important reason is the ticking clock of demographic change which is relentlessly ageing our society.
Our Intergenerational Report projects that over the 35 years out to 2042 the number of people of working age in Australia is going to increase by 17 per cent but the number of people over 65 will increase by 250 per cent. Currently we have over 5 people of working age to those over 65. By 2042 that will more than halve to 2.5 to 1.
The ageing of the population together with rising medical costs will open a big gap between Government revenue and Government expenditures over the decades to come. On current projections the gap is not sustainable. So we must start preparing for this now, wherever we can, by taking preventative measures, which will minimize the exposure. Getting the Government debt free is a big start.
Retirement costs in the Government sector are also rising. When our Government was elected the unfunded superannuation of the Commonwealth was $66 billion. This year it is estimated at $95 billion.
If we had taken no steps to contain the growth of this liability it would have grown by much more. A defined benefit scheme which offers benefits to retirees and the dependents for life grows considerably as life expectancy grows. And an unfunded scheme puts the cost of the benefits in the hands of future generations. With the exception of the Military Superannuation Scheme we have now closed the major Commonwealth Superannuation Schemes to new entrants. The retirement benefits of new public servants will now be fully funded as part of the cost of their employment.
By closing the scheme to new entrants we have capped the growth of the liability. The liability has declined as a proportion of GDP from 12.1 per cent to 9.9 per cent of GDP. And our Future Fund will begin to provision for the future when things will be harder. We know the next generation will face greater costs on a proportionally smaller workforce. We cannot shift current costs to future generations. We should meet current costs now in this generation because the next generation will have enough problems meeting their own costs without paying ours as well.
Our generation has moved the Commonwealth to a debt free position, it is meeting the costs of the current generation and it is beginning to provision for some of the costs accrued by past generations.
We are making enormous progress.
There are two other reasons why the Government should be a net saver. First, by saving our government is reducing the saving - investment gap. Business is investing more than it saves and so are households. By adding to saving Government is reducing the gap rather than adding to it.
Second, by saving rather than borrowing the Government is exerting downward pressure on interest rates. All other things being equal if the Government borrows it exerts upward pressure on the price of money through interest rates.
Our financial position now offers more freedom to build for the future.
In the same way that paying off a mortgage allows the homeowner to look at new opportunities, so too a Government that pays off its debt is freed up to invest for the future.
Our debt-free position gives us the ability to plan for the future with greater certainty and pursue greater opportunities.
I pay tribute to my Coalition colleagues for supporting a politically tough, disciplined and difficult programme over ten years, and I thank the Australian people for having faith in our Government to allow us to see the job through.
And what now that the debt is paid off?
Let me disappoint some people and say that now is not the time to let our hair down and make whoopee.
If we lose focus and discipline we could easily go backwards. As I said earlier bad management is much easier than good management. And the results from bad management come much quicker.
While I won't comment on the deliberations of the upcoming Budget, I repeat as I have before that if we can fund the services that Australians legitimately expect, if we can properly defend our country and secure it against terrorism, if we can still balance the budget and reduce taxes we should aim to do so. We have cut taxes in four of the last ten budgets.
Good management, which builds a foundation of wealth and prosperity, must be used responsibly. Most of us have heard the biblical parable of the talents. One man squandered the talents left to him to manage, another buried them, too scared he would lose them to use them. But the third and wisest invested and made his manager a fortune. This is a principle we should use today.
We have used and continue to seek ways of generating more growth, encouraging more productivity, driving more jobs and creating better living standards for people across the country.
As the chief steward of the economy, it is my job to ensure we continue to take strides toward prosperity.
Since we have put the Budget into surplus there have emerged calls from many quarters on ways to spend it. That's fine. People are entitled to voice their opinions and to push their barrows. That is democracy.
But we are a Party of low tax and to keep tax low we have to keep spending down. We have the second lowest spending (proportionate to the economy) in the developed world and the eighth lowest tax burden. If we can be wise about spending we can, as we have in years past, return money to taxpayers by lowering the tax burden.
Although they are the most important responsibility, our responsibility is not just to today's taxpayers. Our responsibility extends to the taxpayers of tomorrow, the future of our country, the ones we expect to carry us when our generation is in its old and declining years.
This is generational equity. This is nation building.
Australians are entitled to the sort of governance that a well managed economy affords. In repairing the books we have built a strong fiscal foundation to build for the future.
But for tomorrow, we can reflect on a milestone many thought was unachievable. It was hard but it was worth it. And after reflecting on that for a very short moment we should than get straight back to work on our next set of goals, our new challenges, our new opportunities.
1. Some may wonder why there are any net interest payments if there is no net debt. The Commonwealth does borrow through the issue of securities such as 10 year bonds. It does not borrow to finance its activities. It issues these bonds as a result of a deliberate decision to maintain a triple A rated Government securities market to support the pricing efficiency of Australia's financial markets. The interest rate on new bonds is around 5.5 per cent. This Commonwealth also lends. Its largest lending programme is to students through HELP (formerly known as HECS). These are subsidized loans which carry a nominal interest rate fixed to the CPI around 2.5 per cent. In this way the Commonwealth lends at a lower rate than it borrows to subsidise students and can incur a net interest charge. As the Commonwealth improves its net worth its assets will increasingly outstrip liabilities and net interest payments will be eliminated. This is forecast to occur by 2007-08. From that year there will be no net interest payments by the Commonwealth, instead it will receive net interest payments.