The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

1 May 2013

Global forces, the dollar and the budget

Address to CEDA Pre-Budget Luncheon

Melbourne

***Check against delivery***

Introduction

Thanks, I always look forward to coming here because CEDA is one of the best forums we've got to discuss the challenges we face as a nation. Australia is a young, inclusive and optimistic country, on the cusp of something really special as the world economy shifts to our doorstep. But the same global forces that bring our opportunities have brought a set of challenges for our economy that are fluid, complex and evolving. We're confronting some of the most unique economic circumstances in our nation's history. And we're doing it through the prism of a budget. Our opponents, some commentators and interest groups have made a concerted attempt in recent weeks to create a climate of crisis around the budget preparation process and the Australian economy. Of course, this reckless campaign is as false as it is dangerous. The budget I deliver in 13 days will ensure our economy remains the envy of the developed world. Yes, we have to face our challenges, and that's what I'll talk about today. But what we need is a calm, mature and considered discussion about the direction we take as a country. We cannot lose sight of the fact that we start from a position of strength.

Our economy has notched up 21 consecutive years of growth, a record unmatched by any other advanced economy over this period. We have the 12th largest economy with only the 51st largest population. Our economy is 13 per cent larger than it was in late 2007, and we've created around 900,000 new Australian jobs in that time. We've got solid growth and low unemployment at the same time as we have contained inflation and low interest rates. Over the past five years, our real GDP per capita has grown more than all of the major advanced economies, and we've moved up six places in the world rankings. We have low debt and a gold-plated AAA rating from all three global ratings agencies – a status never achieved before in our history. But global forces and the sustained high dollar have savaged the revenue coming into our nation's budget. The money simply isn't coming in the door like it used to. That means as a country we are facing some very difficult choices. Choices about who we want to be as a nation.

As you'll be aware, the Prime Minister, Minister Macklin and I today announced an increase in the Medicare Levy as an enduring funding source to support profoundly disabled Australians and their families. This was a difficult but necessary decision. It was the fairest way to sustainably fund a more dignified life for Australians with a significant and permanent disability. Australians who have been cruelly left behind for far too long. Today's announcement means many Australians will be asked to make a modest contribution to help support our most vulnerable. Of course, I don't think anyone would really question the need for our big hearted nation to provide support to Australians who have been dealt some of the cruellest blows in life. But I also know that Australians work hard for their weekly pay cheque. Just today, I read in the papers that the Business Council of Australia has come out calling for no new levies in this year's budget.

Now I think you have to question the priorities of a business group that gives Joe Hockey a leave pass to whack a 1.5 per cent tax on its members but rails against a levy to support people with a disability.

I think this is just heartless. For Mr Hockey and the Liberals' part, why is it fair for Mr Abbott to put a 1.5 per cent levy in place to pay his gold-plated paid parental leave scheme but a levy to improve disability services for hundreds of thousands of Australians is unacceptable? Personally, I think these are very cruel and callous priorities for the Liberal Party. Every single cent raised by this morning's announcement will go directly to fund DisabilityCare Australia, but we also understand that every cent counts when you're trying to make ends meet around the kitchen table. So today I want to talk about the context in which this difficult decision was made and in doing so give you a bit more insight into the challenges we've confronted in framing the budget I'll hand down in 13 days.

Economy in transition

I want to start by talking about the big shifts occurring in our economy.  Over the past 10 years, the forces bearing down on our economy have been unprecedented in both their speed and magnitude.  I'm really proud of the fact that we got the big calls right during the depths of the worst global economic crisis in three generations. I don't apologise for one second for our decision to borrow responsibly to prevent our economy from being driven into the ground with hundreds of thousands thrown on the unemployment scrap heap. Since then we've been buffeted by rolling fiscal crises in Europe and the US. But at every turn, around every corner, we've kept a steady hand on the tiller - doing everything we can to support jobs and growth. At the same time, rapid growth in our region has underpinned a historic resources boom which has fundamentally changed the structure our economy. Over the last decade, our terms of trade have risen by more than 60 per cent, and resource investment has risen by 600 per cent.  These massive economic adjustments we've been through have at times been painful, particularly for some sectors and communities.  But as a country, I'm really proud of how well we've managed them.

Anyone who suggests our economy is not in better shape than most of the developed world either doesn't have their facts straight or is simply running their own agenda. But as the Prime Minister said on Monday, we do have challenges. Just as two big forces have tested our economy in recent years, there are two big transitions approaching which will test us in the years ahead. The first big transition will occur in our resources sector, as we pass the peak of our nation's largest investment boom in the next year or so. We've already started to see resources exports ramp up as the resources investment approaches its plateau. And it's been encouraging to see some positive signs in non-mining sectors like housing construction after a decade of lacklustre growth. But what we really need is non-mining investment to pick up as growth in mining investment winds down. This is where the doggedly high Aussie dollar makes things so tough. The high dollar is a big part of the reason why our economy's transition may not be seamless. There may be bumps along the way, including in the labour market as resources projects enter a less labour intensive phase and the non-mining economy takes time to pick up. The high dollar has become a dominant force in our economy.

Of course, the Australian dollar has stayed high against the US dollar since MYEFO, but that's only one part of the story. Central banks in our other major trading partners are unleashing huge amounts of liquidity in an effort to stimulate their moribund economies. That wall of global money is seeking safe investment and with our AAA-rating Australia has increasingly become a destination of choice. Consider this. The Australian dollar is up a staggering 23 per cent against the Japanese Yen since MYEFO, after climbing as much as 28 per cent higher in early April – a five and a half year high. Many firms thought the high dollar wouldn't last, and put off their adjustment to the elevated currency, but others have made better progress in adapting, innovating and becoming more productive. In fact, we're already seeing an upswing in productivity growth, with market sector labour productivity growing by 3.3 per cent over the past year. This is more than twice as fast as the average rate over the last ten years.

Why revenues have collapsed

So we've got a great economic story to tell, but a perfect storm of torrid global forces and the high dollar have smashed our budget revenues. As the Prime Minister said, we had $160 billion ripped from our budget revenues between the start of the GFC and MYEFO last year.  Since MYEFO, we've seen an additional hit to tax receipts of over $7½ billion to the end of February, and as the PM said on Monday, we expect this shortfall will grow to more than $12 billion by the end of June.  For the first time since records began, nominal GDP growth has been weaker than real GDP growth for three consecutive quarters. While the massive hit to commodity prices we saw in the second half of last year has generally been unwound, it has already taken its toll and our terms of trade are now significantly below their 2011 peak.   And even though iron ore prices came back a bit more than we expected, what's been highly unusual is the enduring nature of the high dollar in the face of a lower terms of trade.

So the high dollar is now having a more acute impact, contributing to subdued growth in domestic prices and hitting profits more than we previously expected – not just in the mining sector but right across our economy. The high dollar has squeezed the profit margins of many industries, as firms absorb costs rather than passing them on as higher prices. Gross operating surplus - the national accounts measure of profits - has fallen consecutively over the past five quarters – hitting our revenues. Some of the lower taxes are temporary - throughout history, every downturn in taxes has eventually been followed by some rebound.  But in the GFC, taxes took the biggest hit we've seen in at least 40 years, so picking the timing of the revenue recovery from this unusual event has been difficult and the recovery is taking longer than expected.  We can be confident that the recovery will continue despite some taxes remaining below their expected ‘normal' levels. 

But we do also need to recognise that some of the tax loss is more structural in nature and likely to be much longer term. Gone are the booming revenue years pre-GFC where booming capital gains tax receipts came in on the back of double-digit growth in sharemarkets and house prices, together with a maturing CGT system. Gone are the days of rapidly rising commodity prices, rapid credit growth and negative household savings rates. In fact, come Budget day, if we had same tax-to-GDP ratio in 2012-13 as the Howard Government had in 2007-08 -  equal to 23.7 per cent – our revenues in that year alone would be around $34 billion higher. So if our level of tax receipts was as high as Howard and Costello had, we would have a budget surplus in 2012-13.

What this means for the budget

So it's clear that the massive write down we've seen in revenue means the budget will remain in deficit for longer than previously forecast. And sure, I've lost some political paint for saying that, but I'm happy to wear it - because it's the right decision to support jobs and growth. Just because the global economy and the doggedly high dollar have taken a sledgehammer to our revenues, that doesn't mean we will take a sledgehammer to Australian jobs and economic growth. Some of you will say we should have predicted the big hit to revenues.

Well I think the answer to that is pretty clear. It's impossible to perfectly forecast the impact of unprecedented economic circumstances as they unfold. At MYEFO, we knew that revenues were dramatically lower, but we didn't know the depth and enduring nature of the revenue reduction. We also couldn't foresee that the GFC would have such a prolonged impact on our revenues, which we thought would recover more quickly. I've been talking about this at length over the last few months. The last ten years has been one of the most remarkable periods in our nation's history, but it's also been a forecaster's nightmare. And when the facts change, it's incumbent on the Treasurer of this country to change with them, whatever the political cost. We have a choice between supporting jobs and growth, or driving the economy into the ground and putting tens of thousands of jobs at risk.

My predecessor got a $334 billion revenue windfall and failed to invest in our nation's future. I've copped $160 billion in revenue downgrades. But I won't for one second use that as an excuse for making the same mistake as our predecessors and failing to invest for the future. None of this changes our medium term fiscal strategy – setting out a pathway to surplus and delivering surpluses on average over the cycle. We'll maintain our spending restraint, fully offsetting all new spending. It's bleedingly obvious that spending in dollar terms will grow over time – no matter who is in government - because our economy and our population have been getting bigger every year and prices and wages rise. But our expenditure as a percentage of our economy over the forward estimates is set to come in at less than the average of the 30 years prior to Labor coming to office in 2007.

In this Budget, we'll announce further measures to build on the very substantial structural savings we've already put in place to address long-term fiscal pressures by permanently improving the bottom line. Over five budgets, we've put in place more than $150 billion in savings.  That's eight times the savings delivered by the previous government in their last five Budgets when tax revenues were going through the roof.

We've been putting structural savings in place since day 1 – the changes we've made so far will deliver cumulative savings to the budget of over a quarter of a trillion dollars by 2020-21. Like means-testing the PHI rebate, reforming FBT and superannuation concessions for very high incomes and increasing the tobacco excise. We've also taken steps to address the sustainability of health and aged care spending as Australia's population gets older. I also want to make a few comments about responsible borrowing, because this is another area where we need a more mature discussion. Let's be clear about this: Australia's debt levels are a fraction of the levels seen in the major advanced economies. We have the sixth-lowest net debt position of all advanced economies.

But responsible borrowing has acted as a shock absorber to help insulate Australia from savage swings in the global economy. If we had not borrowed responsibly during the GFC we would have gone into recession, unemployment would have gone through the roof, and revenues would have fallen further – leading to higher levels of debt. But we made the right choice to support jobs and growth. And since then, Australia has become part of an exclusive club with the gold-plated AAA rating from all three global ratings agencies. Of course, we'll continue our medium-term fiscal strategy to set out a pathway to surplus and reduce our modest debt levels over time. But it is downright dangerous for ideologues to use fiscal fear mongering as cover for their desire to cut to the bone and dismantle the social safety net, and in the process, drive the economy into the ground and debt higher. These are people out there who advocate austerity for austerity's sake – people from the IPA – the Liberal Party's policy think tank. This is the kind of ideology that would smash the economy and send unemployment rocketing.

A broader measure of success

Which brings me to a discussion of how we measure our budget and economic success in Australia. Returning the budget to surplus is a central feature of our economic policy, but we know it's not the only one. While it's true that the previous government had budget surpluses, they were not surpluses built on the hard work of finding savings – they were built on unsustainable revenues from the first phase of the mining boom. And those revenues were largely spent - in the 2007 Budget alone the Howard Government spent nearly $70 billion in new measures. They may have left a budget surplus, but they also left:

  • An education deficit with university funding going backwards in real terms, while under us Commonwealth funding for university places has increased by over 66 per cent between 2007 and 2012.
  • A skills deficit, while under us annual Commonwealth funding for vocational education and training has grown from $2.3 billion to $3.4 billion since 2006, an increase of almost 50 per cent.
  • An infrastructure deficit – by failing to address capacity constraints, while we have doubled per capita spending on vital transport infrastructure through our $36 billion nation building program – improving congestion and lifting productivity
  • And they left a hospitals deficit, with the Commonwealth share of hospital funding falling to under 40 per cent under the Liberals. . . . while we are restoring it to 50 per cent – putting more beds in our hospitals and more nurses on duty.

Australia's success can never be measured by just one number.  We can't afford to starve the future because of the hit to our revenues. By making responsible savings, we can put the budget on a pathway to surplus while we make the smart investments for the future. We need to invest in our economy to manage the big transitions underway that I touched on earlier. We've put in place policies to support for industries in transition, provide tax relief to small businesses so they can continue investing and support businesses so they can innovate for the future. We will keep our focus on the five pillars of productivity, like the huge investments we've made in building infrastructure and skills capacity.  In this Budget we'll fund our National Plan for School Improvement to build on our $3 billion skills package in the 2011-12 Budget. We know that investing in our classrooms will give our kids the best start in life and set them up for the high skilled, high paid jobs of the future. To win the economic race, we must win the education race by seeing our education system climb up the world ladder. The Gonski school reforms are right at the core of our productivity agenda to create jobs and prosperity in the Asian Century. It's a big part of our plan to build a stronger, smarter and fairer Australia.

The Opposition

On 16 May, the stage will be set for Mr Abbott to detail very clearly to the Australian people the choices he would make as Prime Minister. He will know the full extent of the revenue write downs which add to his $70 billion budget crater to give him his starting point. I can assure you that the Treasury does not have one set of numbers for this government and another set for the alternative government. Australians rightly expect Mr Abbott to outline the alternate choices he would make to return the budget to surplus while he funds his promises. He must present his fully funded, fully costed plan for our nation's future. Anything less will be an admission that he is just not up to the job.

Conclusion

The Budget I'll deliver in less than two weeks has been crafted in some of the most unusual economic circumstances in our nation's history. But as we've done at every turn over the last five years, we'll make the responsible decisions to strengthen our economy and our community. I'll be proud to hand down a budget that supports jobs and growth, sets a pathway to surplus and makes the smart investments for our future

Thank you.