SUBJECTS: 2011-12 Budget
I'm pleased to report our economy and finances are strong – amongst the best in the developed world – despite all of the near-term challenges that we face. This Budget gets us back in the black, gets more people into better jobs, and spreads the opportunities of the boom.
Now we have charted the course back to surplus in 2012-13, on track, on time, and as promised. This for the Government has meant some very difficult choices. By now you do know a great deal about the Budget – about the initiatives and the savings. But I would take the opportunity today to talk to you about particularly the fiscal story, the economic story, and most particularly our workforce initiatives, because they do go to the very core of the Budget.
This Budget reflects the whole purpose of the Government – to equip people to make the most of our strong economy. Our training and welfare measures will get more Australians into better jobs and turn this mining boom into an opportunity boom. I will touch briefly on the investments. I want to talk a little bit about the regions and small business and some of the other measures. But I do want to start with the revenue story, because it tells us quite a bit about the fiscal achievement in this Budget, and it talks a bit about our economic position.
Now some of you will remember at this time last year in last year's Budget, we were still carrying revenue losses of around $110 billion. This was due to the global financial crisis and the recession that followed. This year's Budget shows that the overhang of the global financial crisis will be even worse than expected one year ago. All up, tax receipts are down an additional $16 billion in the first two budget years. Businesses losses accumulated during the global financial crisis have turned out to be larger, and are lingering longer, than were previously expected.
Now the chart that you will see on this screen really takes you to the core of those losses. What you see here is the stock of capital losses alone more than doubling after the global financial crisis. Now these are realised loses which have not yet been brought to book, and it shows you the magnitude of the revenue challenge that we're dealing with. So we have seen, for example capital gains taxes revised down by $6 billion over two years. And in addition, we've had the impact of natural disasters on revenue to the tune of $1¾ billion as well.
As you will see from the bars in the next chart, the fall in tax receipts in this Budget accounts for the entire increase in deficit for 2010-11, as you can see very clearly from that chart there on my far left, and about half of the increase in the deficit in 2011-12.
So the downgrades in revenue have had a dramatic impact on the Budget. So these revenue write-downs are a big part of the reason that we're now forecasting a deficit of $49.4 billion in 2010-11 and $22.6 billion in 2011-12.
Now only one-quarter of the increase in the deficit in 2011-12 is due to government policy decisions – mainly our military operations in Afghanistan and the bring-forward of the Low Income Tax Offset.
Now even with a softer near-term revenue outlook and the impact of summer's natural disasters, we still have a budget outlook which is the envy of the developed world. As you can see from this graph here, our deficits are smaller and we get back to surplus much faster, and our net debt levels are only a tiny fraction compared to our peers.
It is interesting, for example, to have a look there just at the budget balance table, and say look at a country such as Germany – which would be one of the stronger developed economies in the world – still not coming back to surplus. And of course you can see that net debt in Australia is a tiny fraction of what it is in other major developed economies.
So what we have confronted in this Budget is a dramatic change to our revenues, and we had a choice between meandering back to surplus at s slower rate and doing it later, or doing the right thing and coming up with tough saves.
Now in the end, we've come up with $22 billion in savings. That is a very significant amount of money. Around two-thirds of them are spending cuts, and the other one-third in revenue changes are dominated by cutting tax expenditures which are also significant structural reforms to our Budget.
So the best thing about our saves is that many of them are structural saves. That is, they have an enduring impact on our Budget and the years ahead. They are not just saves for four years – they are saves for 40 years. These are very important changes. So therefore we will be delivering savings well beyond the Budget estimate years.
And of course you can see this in the next chart, because on a cumulative basis they add up to significant amounts of money over time. And you can see in that chart there that they add up to something like $20 billion worth of saves cumulatively over that period there. Now of course when you add these saves to saves that were taken in the previous Budget, they add up to much more. So the point that I want to make is that the Government has been busy with structural changes which have an enduring impact on our Budget bottom line well beyond our forward estimates.
The other point I want to make very strongly about our fiscal strategy is our 2 per cent expenditure cap. That has been very important, and perhaps more important, than these structural saves in coming back to surplus. Because the 2 per cent cap is a discipline which is not evident in any other developed economy that I'm aware of, and hasn't been evident in this economy for a long, long period of time. Real spending growth over the last decade in this country has well exceeded the real spending growth that you have seen in this Budget. If we had let real spending growth over this Budget period go at the same rate that it had gone in the previous ten years, then we would be booking a very substantial deficit. But we are not, because we have shown real expenditure restraint through the 2 per cent expenditure cap.
So what we have got is real spending growth that averages just 1 per cent a year over the budget period – 1 per cent a year. That's the lowest of any five-year period since the 1980s. And we've had a very substantial fiscal consolidation taking place over two years – 3.8 per cent of GDP over two years – the largest that we have had since records have been kept. So it is this kind of restraint that is producing the quickest return to surplus on record – as I said, 3.8 per cent of GDP over two years. Some people reckon it should be easy to get back to surplus – it's not, but it's certainly worth it, and we have achieved that in this Budget.
But what we also have to do is to make sure that as the boom gathers pace, we don't compound the inevitable price pressures that will come with it. So our 2 per cent cap is not just important in terms of getting back to surplus – it is an important discipline once we get back to surplus, to continue to build surpluses.
So why is that important? Well, I think it is pretty important that we lean against the inevitable pressures which will result from the boom. That's why I want to come back to surplus, and that's why we want to stay in surplus. We need to do that particularly because of fiscal and economic uncertainty that still exists globally. And whilst we see global economic growth relatively high, if you read the reports of many around the world there are still risks to the downside – yet another reason why do need to build our surpluses.
As a consequence of that, we have made some tough calls in this Budget, and I think we'll pay a bit of a political price for those. But returning the Budget to surplus is the right thing to do given the conditions we face and the outlook that we have.
Now I just want to say a few things about the economy, because the economic backdrop is a bit like the fiscal backdrop. It's a tale of two halves – short-term softness and medium-term strength. Now of course what dominates this story is the magnitude of the disasters – not just in Queensland with the floods and Cyclone Yasi, but also the events in Victoria and to some extent in Western Australia. They've had had a dramatic impact on GDP growth this year, losing 1 percentage point of GDP growth this year. That in itself (inaudible) the level of GDP and makes the path ahead of us even harder.
But despite all of that, our medium-term prospects are bright and they are strong. So we do confront the challenges that were given to us from the floods and cyclone of summer from a position of strength.
And of course this chart here shows that position of strength relative to other major developed economies. Because we didn't go into recession, because we didn't see substantial increases in unemployment, because we didn't see substantial business failure flowing from the global recession, we have a position of strength which is unrivalled amongst major advanced economies. And that is why we have an unemployment rate as low as we have. Those economies are still struggling to make their way back to where they were prior to the global financial crisis and the global recession.
A major reason why Australia is not in that position is that we have an unemployment rate with a 'four' in front of it, and lot of them or most of them have an unemployment rate with an 'eight' or a 'nine' or double digits in front of it. And of course that is very important for Australia, because as we move forward and the strength of the growth is evident and the demand for labour flows from that, we haven't seen the skill destruction that's occurred in those countries. Those are remarkable figures you can pull out of all the material that you've got, because Australia has kept up its training of apprentices during the downturn, and we are better positioned when it comes to that area of training than we have ever been before. But we have got to do a lot more given what we see as we go forward.
And of course we see the conditions most robust when we look at the size of mining industry investment in our economy – the biggest in our history. I won't go through all of the forecasts now, but I will just give you a couple of figures. The mining industry is planning to invest a record $76 billion in 2011-12 – eight times more than its annual level before mining boom mark I. We will see another half a million jobs created over the next couple of years, and we will see unemployment fall to 4½ per cent. And as the investment pipeline builds up and unemployment falls further, we will inevitably see capacity and price pressures in our economy.
That is one of the reasons why we're so determined to come back to surplus on time, as promised. But it is also why the core of this Budget is about building a bigger and better trained workforce, boosting productivity and boosting participation. Now the story of our economy and especially our strong labour market really does bring workforce policy to the centrepiece of this Budget. I was asked downstairs before what do you think is the centrepiece of the Budget. Well, it is jobs, jobs and jobs. It's a bigger and better trained workforce. And when we create prosperity we spread opportunity, and we send it to every postcode by taking a look at those who have been left behind in the past and by ensuring that those within the workforce have the prospect of a better job and a better life and better pay and conditions – spreading the opportunity of the boom.
So I think we've got 500,000 reasons for getting cracking on a strategy to really life workforce participation, but also our skills training and also what the Government has been doing from day one, which is very, very significant investment in our human capital through investments in education – not just in tertiary education, right through the school system and right back to the early years.
Now this strategy has two main parts: $3 billion in new skills initiatives over six years, with greater industry partnering, more support for apprentices and longer-term reform of our training system; plus the whole host or range of participation measures focusing on young Australians, single parents, long-term unemployed, disabled and disadvantaged Australians, and partners without kids.
Now we're doing this through a combination of measures. There is no one-size-fits-all measure that deals with the differences between the various groups that may want to enter the labour force for the first time, re-enter the labour force after a period out, or have come from a position where they have never been in the labour force. So what you see here is a variety of tailored measures in dealing with particular groups in the community. So there's a really comprehensive package there.
So basically at the core of this Budget is a conviction that we don't have a single person to waste, and that we have to make the most of this one-off opportunity to really have all Australians sharing in the benefits of the boom. It makes no sense when our labour market cries out for workers to have Australians untouched by the dignity of work and the benefits of work. So the purpose of this Budget is to spread opportunity right across the economy, and of course that means getting more Australians into rewarding jobs.
It means reward for effort, services and programs to encourage work, and sometimes giving a nudge to those who need it. If we are to grow and prosper, we need every capable Australian taking up opportunities a strong economy provides. So our training and participation initiatives will be particularly important to lift productivity, as will our migration and infrastructure measures.
On top of the infrastructure investments you will see we are removing impediments in the tax system that discourage private investors. This is a modest measure but an important one, and when combined with a bigger role for Infrastructure Australia and more certainty in the planning process, we do think this will also make a difference over the longer term.
And finally to health and education, because it's not just the capacity to have a job with decent pay and working conditions that's important in life, important to the peace of mind of families, but what's also important is access to affordable health and education services.
And I'm really proud that in a tough Budget, we have found room to make substantial new investments in mental health. That is a national priority. People with mental illnesses are among our most vulnerable, and we have to do what we can to help them lead better lives. So we are doing some really important things here. In the redesign of service delivery – working in new ways with the sector. We're also investing $1.8 billion in regional hospitals in health infrastructure, on top of the breakthrough health deal the PM has struck with the Premiers. And this Budget does more for regional health care than any before it – a very significant investment there.
And of course education is also another big beneficiary in this Budget. Not just in skills but also in schools, we're working towards making every single school a great school by focussing on teacher quality. And of course we've got another $500 million set aside for regional education.
Now, of course, we do have a patchwork economy as well, and with that uneven growth, we have made it a priority, particularly, to invest in families that are under cost of living pressures – not just families but regions and also small business.
We understand that many Australians out there are finding it difficult to make ends meet. Price pressures, particularly from utilities- they do all impact on the family budget. That's why we are doing our best to bring forward some additional relief, particularly through moving forward the Low Income Tax Offset payments, increasing payments for teens, and of course, including uniforms for the Education Tax Rebate.
And of course, we're also adding to a really important initiative, which is the $5,000 instant asset write-off for small business – a really important measure funded from revenue by the MRRT to make cash flow so much better for small businesses, by bolting onto it an initiative where $5,000 can be used to be written-off from the purchase of a vehicle – a particularly important measure for tradies and those people that are buying utes. So this is also going to be very important for small business as we move forward. Because we do take very seriously the fact that not everyone in business and not everybody in the workforce is in the fast lane which comes from having a very strong mining boom.
We're also taking extra steps down the tax reform road in this Budget – building on the ones that we put in place in our last Budget. We said then that tax reform is a long-term process. There were some things we could do straight away, some would take more time, and others would require more debate. Well, in this Budget we're phasing out the Dependent Spouse Tax Offset to remove disincentives to people without kids to join the workforce; we're reforming car fringe benefit rules to remove the incentive people have to drive longer distances to increase their tax concession; and we're replacing the Entrepreneurs Tax Offset with improved depreciation for small business; and of course we're increasing Family Tax Benefit [Part] A to reflect the fact that the cost of raising your kids doesn't get cheaper as they get older, something that was also commented on by the Henry Review. So these reforms will build on the tax reform package I announced in May last year. They will make the system more sustainable, fairer, reward work and investment, and it will go to all regions of our economy.
So the story of this Budget is a story of an economy in transition. How we manage to change will determine whether we succeed or fail. For the first time in our history, the wave of global economic activity is moving towards us, and with it, untold opportunities in what is the Asian Century. Our position in the world and our success during the global financial crisis makes me an optimist about the future of our economy.
This Budget is all about choosing to succeed during the boom, like we succeeded together during the downturn. It recognises that if we're able to make the most of this opportunity, we do need to invest in skills and boost our labour supply, and most importantly of all, we need to put the tremendous opportunities of a strong economy within reach of more Australians – creating wealth, spreading opportunity and demanding responsibility. Over to you.
Treasurer, with all this talk of fiscal discipline, (inaudible) 1 per cent increase in spending, have you deliberately set out to create a joyless Budget?
The most important thing about this Budget is to do the right thing by the country, and that's what we do. I don't take any joy in some of the measures we have put in place in this Budget, but my job is to ensure that growth is sustainable so that that job pipeline is strong. That's my responsibility. And bringing the Budget back to surplus in 2012‑13 is an economic goal which delivers security and peace of mind to our people. They may not immediately see it that way, but the fact is we need to bring our Budget back to surplus in 2012‑13 so we don't compound the price pressures that will flow from a mining boom the size of which we've never contemplated before in our history.
Treasurer, the majority of the, you talked about $22 billion in cuts, but $2½ billion in that first year, is that designed so that the effect of the cuts coming in in the out years is designed so that at the same time your revenue is increasing at the time of your cuts?
No, it's just horses for courses. It's what you can get started straight away. For example, the fringe benefits tax change on the cars starts today. It has to because when you announce this, it's got to be applied otherwise it affects behaviour out there. So all of the measures that we can start as soon as we can, we are starting as soon as we can, but there's some that you can start now and don't kick in until a bit about later. So there are swings and roundabouts. I think if you actually looked at the various amounts, they will be, naturally, as things build up or they're implemented, deliver more revenue as you go forward, but we were keen to get everything started as soon as we could.
Treasurer, who's going to feel the pain in this Budget?
Well I've been through the measures that we've taken in terms of tax expenditures, and I imagine there'd be some people who will be unhappy about those. But the whole point of this Budget is not to (inaudible) – it's to do the right thing by the country, to get the right incentives in place and the right settings in place, to one, make sure our fiscal policies are sustainable, to build surpluses which don't compound the pressures flowing from the boom, but two, making sure that we get the workforce participation that we need and the skills that we need for everybody to maximise the opportunities that flow from the boom.
Now if some people will be unhappy with some of the measures that we've got in terms of labour force participation, because some people will get a bit of a nudge. But all of my life in politics, I have believed that the most fundamental thing that you can do in public life is make sure that not only do you have a prosperous economy, but you have one that fairly distributes its benefits to all of its citizens. And a life on welfare or benefits, untouched by work, is not a future that I see for large numbers of people in our country. And to me it would be simply obscene as this boom comes through and gets bigger, if those that were on the margins of our workforce and the margins of our society, it would be obscene if they didn't get the benefit from it as well.
That's why we need a bit of welfare reform, that's why we need more training, that's why we need more work experience, that's why we need more place-based welfare reforms. We need all of those things to make sure that we spread the opportunities of this boom.
Do you have the numbers of people you're expecting to move off welfare and into work over the forward estimates?
It's not possible to give an accurate assessment of that, but I can tell you why. You've got to think about a group of people who, from end of the spectrum are people who are very disadvantaged and are long-term unemployed or very long-term unemployed, some people who have never been in the workforce and they're welfare dependent – you've got to deal with that group. Then you move over. Then you think of all the new entrants to the labour market (inaudible). What's the best settings for them? You think about all of those that haven't been in the labour market in recent times. What are the best settings for bringing them back into the labour market?
So how do you maximise the various groups out there that in some way or another experience a degree of disadvantage. Take, for example, the concentration in these measures here on the Disability Support Pension. The fact is that some people are very severely disabled, can't work and will never work. But there are some who are disabled, who have multiple disadvantages, who could do some work, but can't get into the workforce for a variety of reasons. What we are doing here is putting in place a range of policies to make sure that we extend every opportunity we can to those people to get them into the workforce if they can work a few additional hours.
What makes you confident that you can do what Peter Costello tried, that is, to tighten up the DSP, and to stop the growth?
Because I've done a lot of things that Peter Costello's never done. For example, our expenditure on average is 1 per cent [a year] over five years. He never did that. And of course, if you were Peter Costello and the Liberals mob said we should never have done anything during the global recession, but we did move to stimulate our economy. They said it wouldn't create a single job. There's plenty of differences between that former treasurer and myself, and I've got to say I'm proud of most of them.
Treasurer, is there an inherent contradiction by extending the Family Tax Benefit to older kids at school, and then you're capping it at the same time? Doesn't that send a different mixed message on cost of living?
Not at all. The Henry Review noted a very significant gap in our family payments system and it was basically this: that when your child turned , your family payments went down dramatically. And what that reflected was a time when we didn't have high levels of teenagers going on to Year 12. And what they noted was that the cost pressures actually increase the older you get. You know, the feet of a 13 year old are quite different in size to the feet of a 15 year old and so on.
So our objective is to make sure that as many teenagers aged through  through to 19 are in school, but we had a gap in our family payments system where the payments just dropped dramatically. So Henry noted this in the report and suggested that this would be one of the reforms that we should put in place in terms of the family payments system. So we have, because we want to encourage those families, particularly on modest wages, who face the cost pressures of a teenager who eats them out of house and home every afternoon after they get home from school, and we've got to recognise that as a bit of an incentive to get the parents and the teenagers to stay at school. So-
I've got to get to the second part of the question. And the second part of the question is: isn't there a contradiction between that and the fact that we're freezing the upper limits of Family Tax Benefit Part A, and the answer is no. The fact is that we have to target our family payments system. I have been a believer in payments for families all of my political life. You've got a lot of the commentators and the commentariat out there describing family payments as middle-class welfare. I don't think they are. I think they recognise the role that parents play bringing up the next generation of young Australians – the most important job that could be done in the country.
But there is a limit to what can be sustained over time, and how much you do spend in this area. So what the Government was determined to do when it came to office, was we started to means test the upper end of the family payments system. We put a means test on the baby bonus, those sorts of things. Then last year we put a pause on the indexation of the top level payment. The pause of the indexation of the top level payment is a pause on an income test of $98,000 before the payment tapers out, say if you've got two kids, to $113,000. And what we're doing on that is simply not indexing that (inaudible) $98,000. That's what we're doing. And why are we doing it? To better target our family payments.
(Inaudible) cuts in this Budget. What gives you confidence that you can get it through the Senate past the Greens, given that they'll be raking through these cuts to find things they want to take out of it?
Well, we'll go and argue the case for this Budget. It's right for the country and we will argue our case. I guess the only reason this question really pops up the way it does at the moment is that no one can count on the Liberal Party being economically responsible anymore.
No, it's because the Greens have the balance of power. That's why it's –
No it's not. If the Liberal Party was supporting responsible economic policy the Greens wouldn't matter and it would race through the Senate.
Mr Swan, your small business tax cut this year averages less than about $230 per business. Do you think small business will be rejoicing –
Sorry what was that?
Your Pay As You Go tax cut this year in your figures is $700 million for the year divided by 2.7 million businesses, that's about $230 –
This is the $700 million initiative in the Budget.
Well, I'd really love to answer that because it's a really important point and I should have actually went through the fact that we did take a $700 million hit to the bottom line by reducing the uplift factor which was normally imposed by the tax office and done every year by the tax office including for 12 years under the Liberal government but we decided to half that this year.
(Inaudible) $5 a week.
Sure and if the normal arrangements would have happened it would have went through at 8 per cent not 4 [per cent] and that's how it happened under the Liberals.
Treasurer, there seems to be about $2.5 billion being cut from Defence. Can you just explain –
Sure. I won't go through all the detail but I'll give you the broad outline. There is some re-profiling of Defence capital projects. This happens for a variety of reasons. Some projects are not on time, the planning doesn't quite go right. So that gets moved around. The second Government and that's, there's a billion or so there, and the second element are the efficiencies that were announced by the Defence Minister, Stephen Smith, last Friday. They related particularly to the civilian workforce in the Defence Force. There's no impact on those in uniform.
So these are savings that have been found by the Defence Minister within the Defence portfolio but there are some deferrals in terms of capital items. There's nothing particularly unusual about that. That just happens as a matter of course as I now have seen regularly as a Minister who sits on the key committees associated with all of those things.
Treasurer, the (inaudible) on training was off-set in part by about $600 million in savings in redirecting the old Productivity Places Program.
That's right, yes.
So that means that the net spend on training over six years is relatively modest. Could it have been more? Would you have got a better work force participation result if you spent more on training?
Well, we have presented very clearly that we're not continuing with those productivity places because we don't think they've been giving us the best value for money and neither does industry. And as you know, arising from our Budget last year, we sat down with industry and talked a lot about what sort of models we need to deal with the circumstances that are emerging and the sort of model that we have produced is basically an industry workforce driven model where the demands of the economy are what are going to count in the provision of places and the way in which we subsidise things, rather than a supply driven model which is what we've had in the past. Which industry says, and I have to agree with them, has got us completely out of kilter.
So we've been doing a lot on training which has not necessarily been as effective and not necessarily producing what has been the demanded out there. So particularly through this workforce development fund we are sitting down with industry as recommended, by the way, by Skills Australia in a report only a week ago, to really recast the whole way we're doing training and it doesn't stop there. You'll see a whole lot of initiatives when it comes to apprenticeships and so on and you'll also see a sort of a description there of the need for reform in the VET system as well.
We're putting up a pile of money to try and work on a fundamental reform of the vocational education and training system in Australia. As is the case with apprenticeships at the moment, too many people drop out of that and don't complete their apprenticeship. There's something like 400,000 apprentices in Australia and something like almost half of them don't necessarily complete their apprenticeship. These are problems that have been around for a while in the area of apprenticeships and in the area of the VET system, we are seeking to fundamentally reform the delivery model and in the case of the skills in particular to do it working with industry.
Treasurer, if you've got some $22 billion in spending cuts, but you also have about $19 billion in new spending measures. Does that not just underscore that it's the mining boom rather than government restraining government policy that's doing the heavy lifting getting the Budget back into surplus?
Not at all. In fact, quite the converse, quite the converse. The fact this that our saves are $5 billion greater than our spends and what does that tell you? It tells you that we have been really strict with the way in which we've gone about the job of imposing fiscal discipline. We've basically changed priorities. We have made the saves to make room for new priorities. That is basically what we've done and we haven't seen Governments do this prior to this Government's election over three years ago because cumulatively we had substantial savings over four Budgets.
But the real key, the outcome if you like, of everything I have spoken to you about today, to go through all the structural saves I spoke about before, the spends, the saves and so on, is that we are not adding an extra dollar to our spending.
Now think about this for a minute because it is very important. If our spending is only increasing by 1 per cent on average and the economy in the next couple of years is growing by 4 per cent, that is a really savage discipline and you don't see it in these papers, and you don't necessarily see it in the figures all of the people that members of the ERC told as they walked through what they couldn't get which in past years – over the past twenty or thirty years – just would have been tick. Yeah, you've got a new proposal – tick. That's not been happening. We've applied a new rigour to what we are doing in spending and that is what is primarily responsible.
Now, when it comes to revenue, the reason that that has had to be so rigorous is that our revenue has collapsed. I think I demonstrated that when it comes to company taxation, the hangover of the GFC, how badly revenue has gone down. And one of our challenges in 2011-12 is because growth in 2010-11 turned out to be basically plus 2 ¼ [per cent] the whole economy is smaller and weaker as we go through. So getting into this position and back to surplus in 2012-13 given all of those headwinds has basically been as a result of our spending restraint.
You talk about the cash interest rate (inaudible) but infrastructure deferrals is one of the biggest savings over the next four years. Isn't it the wrong time to be deferring major infrastructure spending?
Well, I dispute that infrastructure deferrals is one of the biggest savings, completely. Infrastructure is vital and we have a huge infrastructure spend and a huge infrastructure program and we are working extensively with the private sector to do more because we understand there's no way in the world Government can fund the infrastructure investment that is going to be required to go with the scale of the investment pipeline that we are seeing, which is why we are working on new models for infrastructure Australia to work with industry to ensure that super funds get the opportunity to invest in infrastructure and so on. That's a whole different agenda. Thanks very much.