Today's economic note comes soon after the Finance Minister Penny Wong and I released the Government's Economic Statement on Friday. This statement provides the Australian public with an update of our economic situation, the challenges ahead and how the Labor Government plans to meet those challenges, while presenting a clear path back to surplus in 2016-17.
Since becoming Treasurer, I have been talking about the economic transition underway in Australia. As latest Treasury forecasts show, this transition has implications for the Government's budget and the economy more broadly. In responding to increased pressures, the Government has chosen to strike a responsible balance between support for jobs and savings to bring the budget back to surplus.
The response from the international ratings agencies has been welcome. Fitch Ratings agency stated:
"…authorities remain committed to sound fiscal management",
"Australia's rating remains AAA and outlook is stable", and
"Nation's public finances compare favorably to high-grade sovereigns around the world…"
Standard and Poor's stated:
"Statement is consistent with S&P's view that government will continue to take a conservative approach to public finances"
"With government taking further action to improve budget position, S&P expects government debt to remain low", and
"The government has the flexibility and willingness to address further revenue pressures that arise going forward."
These are unbiased assessments of the Government's Economic Statement by professionals who have no reason to either sugar coat the reality or trumpet Labor's achievements.
Our Fiscal and Economic Outlook
The statement reaffirmed our strong economic fundamentals: the Australian economy is still performing ahead of our advanced comparators and is expected to continue to outperform. We will continue to outclass other advanced economies with solid economic growth, contained inflation, low interest rates and moderate unemployment.
However, the statement also makes clear that since the May Budget, we have seen some dramatic changes. Dramatic observed falls in our terms of trade and commodity prices have prompted downward revisions to the economic forecasts. This has led to an upward revision in the expected unemployment rate, to 6.25 per cent in 2013-14 and 2014-15 and downward revisions in nominal GDP which is now expected to grow at 3.75 per cent in 2013-14 and to a lesser extent real GDP which is now expected to grow at 2.5 per cent in 2013-14.
I will not go through these impacts in detail in this note. I refer the interested reader to the Economic Statement itself which contains all the detail that could be expected from a clear and open account of the economic and fiscal outlook. It can be accessed on the Budget website. These revisions have significant implications for expected Government revenue, which is $33.3 billion lower than at Budget.
In releasing the statement, I referred to the challenges that this outlook makes apparent as just that, challenges. They are clearly the result of transitioning away from a situation where we rely on one booming sector to drive growth, to a more normal situation where productivity improvements not commodity prices will need to drive jobs and income growth.
In the longer term, the economy is expected to adjust to lower commodity prices and terms of trade with more broad based growth, unemployment falling back to 5 per cent, and nominal and real GDP growth recovering to their trend rates; 5.25 and 3 per cent respectively. For an economy that has an exceptional record of flexibility and is recognised as such, this is a very justifiable expectation.
With our institutional settings, including a floating currency, independent Central Bank and flexible labour, capital and product markets, it would be odd for anyone to expect that over the medium to long term the economy wouldn't adjust to shorter term challenges.
Responsible Fiscal Strategy
Our strategy calls for a return to surplus over the medium term, while remaining sensitive and accommodative to short term pressures. Both of these aspects of the strategy are crucial to our longer term stability and prosperity. Without a clear path to surplus, confidence, both domestic and international, in the longer term prospects of the economy would be significantly damaged. At the same time, responding to prevailing economic conditions, especially when they involve unexpected changes and challenges, is sensible and prudent.
When applied to the current circumstances, this strategy means that we need to chart a path back to surplus while still maintaining support for the economy in the short term. This means we should not attempt to recover the entire fall in expected revenue in the immediate future, because this would only exacerbate short term pressures, hurting families, hurting businesses and hurting the economy more broadly.
This is an extremely important point and one that differentiates our approach from that of our political opponents. The Government could have made the decision that all lower revenues needed to be offset with savings, year by year, with no regard for the broader economic impacts.
We chose not to take this approach because we firmly hold the view that to do so would have hampered not helped the economic transition underway. Put simply, it would have cost jobs, lowered economic activity, lowered consumer and business confidence and the quality of life of millions of Australian who rely on Government programs and services every day.
The approach we have taken should not be viewed as being fiscally weak, it should be viewed as what it is, economically prudent and responsible.
As a result of our approach, the Government is allowing reduced revenue to flow through to a $21.1 billion increase, since Budget, in the expected 2013-14 deficit, putting the deficit at $30.1 billion in 2013-14. This will represent a deficit of 1.9 per cent of GDP. In comparison, the U.S. deficit is expected to be 5.4 of GDP, Japan's at 7 per cent and the euro area's at 2.6 per cent in 2013-14. It is also worth noting the EU's Growth and Stability Pact calls for deficits of below 3 per cent of GDP to ensure fiscal and economic stability.
Similarly, the expected deficit in 2014-15 is forecast to be $24 billion, or 1.5 per cent of GDP. By 2015-16 however, with the transition well under way and significant fiscal consolidation taking place, the deficit is expected to be just $4.7 billion, and by 2016-17, the Budget will return to a $4 billion surplus.
While allowing the lower than expected revenue to be absorbed by the budget in the short term will provide significant support to the economy, the consolidation to track a path back to surplus is very substantial, with a total of $17.3 billion of saves over the forward estimates. These saves are largely structural, improving the structural position of the Budget. For example the increases in Tobacco Excise and an increased public sector Efficiency Dividend all contribute to improving the Government's fiscal position far beyond the forward estimates.
This reality flies in the face of some commentators who have chosen to focus their criticism on a particular savings decision and have tried to use their particular gripe with that decision as evidence the entire Economic Statement is flawed. The facts are different. Regardless of any individual's views on any specific save, this Economic Statement and the decisions it contains have improved the structural position of the nation's finances, now and long into the future.
An important and related point I made when releasing the statement on this issue has unfortunately been largely ignored since. To return the Budget back to surplus in a context of lower terms of trade is not only more difficult, but by itself it represents an improvement in the structural position of the Budget. For any level in the terms of trade we may see in the future, because of the decisions we have made in this statement, the Government's Budget will be in a more solid and more sustainable position.
Australians can be assured that with sound economic management, like that demonstrated in the Economic Statement, they can continue to look forward to a secure and prosperous future.
Chris Bowen MP
Treasurer of Australia
Sunday, 4 August 2013