Today's Budget week economic note comes to you from Brisbane where I've just celebrated the completion of the second Gateway Bridge at a Community Day with Queensland Premier Anna Bligh. The $350 million second Gateway Bridge is the centrepiece of the $2.12 billion Gateway Upgrade Project – the largest bridge and road project in Queensland's history. It is a big day for Brisbane, a big day for nation building, and I'm glad I could be part of it. Our historic investment in critical economic infrastructure was further boosted in Tuesday night's Budget.
One of the things I'm most proud of in the 2010-11 Budget is the responsible economic management which meant Australia avoided recession and is leading the recovery. We will now get the budget back to surplus in three years – three years early and ahead of every major advanced economy, as can be seen in the chart below.
This year's Budget is all about building a stronger, more secure economy for working families. The Government has met the strict fiscal rules we announced in February last year – offsetting all new spending over the forward estimates and capping real spending growth at 2 per cent in above-trend growth years. NAB group executive Joseph Healy remarked that “particularly in an election year there's always a temptation or a concern that governments might spend more, but I think this particular Budget certainly ticks that box of conservative responsibility.”
As shown in the chart below, net debt is now expected to peak lower and earlier at just 6.1 per cent of GDP – half the level expected one year ago and less than one-tenth of the average across the major advanced economies. Commonwealth Bank chief economist Michael Blythe observed that “the rapid return to surplus and a peak government debt level of 6.1 per cent of GDP highlights just how much better placed is the Australian economy relative to other advanced economies.”
Economic stimulus, together with the cooperation and resilience of the Australian people, has led to remarkable results in Australia's labour market. Thursday's labour force figures showed our economy added 33,700 jobs in April, keeping unemployment steady at 5.4 per cent. The Budget forecasts that our unemployment rate - already the second lowest compared to the major advanced economies – will fall further, to 4¾ per cent by mid-2012.
The Budget delivers major economic reforms so Australia can prepare for future challenges and take full advantage of opportunities to come. On top of our plans to gradually increase the Superannuation Guarantee from 9 per cent now to reach 12 per cent by 2019-20, the Budget will further boost national savings by providing a 50 per cent tax discount for the first $1,000 of interest earned by Australians on a range of savings products from 1 July 2011.
The Budget delivers the third round of personal income tax cuts starting from 1 July 2010, targeted particularly at low and middle income Australians. The Budget will also make tax time easier for working families and deliver a bigger tax refund for millions of Australians by providing taxpayers with a standard tax deduction. This will be phased in over two years, starting at $500 from 1 July 2012 and then increasing to $1,000 from 1 July 2013. Yasser El-Ansary of the Institute of Chartered Accountants described this as “a giant leap forward in terms of simplifying our system.”
The Budget builds on our core productivity agenda with major new investments in skills and infrastructure. Our $661 million Skills for Sustainable Growth strategy will provide up to 70,000 new training places and support 22,500 new apprentices. We recently announced that we will use some of the proceeds of the Resource Super Profits Tax to invest more than $5.6 billion over the next ten years in a new infrastructure fund. The Budget continues this massive investment in vital economic infrastructure, investing nearly $1 billion in the Australian Rail Track Corporation to fund rail freight works across Australia. These investments will further expand our economic capacity to help us grow sustainably with low inflation into the future.
The Government is determined to manage the next mining boom better than our predecessors managed the last. So we're using some of the proceeds of the Resource Super Profits Tax to cut the company tax rate to 29 per cent in 2013-14 and 28 per cent in 2014-15, and giving small business companies a head start with a cut to 28 per cent in 2012-13. And we're giving all small businesses an instant write-off for assets costing up to $5,000 and a simple but generous depreciation pool for other assets. NAB group executive Joseph Healy said on Budget night that these initiatives for small business were “significant developments”, and believes “businesses will now start to feel more confident about making investment decisions and starting to make sure the economy keeps on moving right across the economy, not just in certain segments of the economy.”
The Commonwealth Bank also produced some interesting analysis on the Resource Super Profits Tax (RSPT) last week. As every miner knows, the key factor in a project getting backing is whether it generates a sufficient rate of return. This rate of return reflects both the riskiness of the project and normal risk-free returns. Banks and other financiers know that there are risks of failure, and take account of those downside risks in deciding whether to provide finance. Some projects don't generate enough return to justify their riskiness, and they are the ones that don't get financed.
As I discussed in last week's note, the RSPT helps marginal projects by sharing in both the risks and returns. Slides 18 to 21 of the Commonwealth Bank's analysis show that the RSPT design reduces the rate of return that a mining project needs to generate for it to be a viable investment. The analysis means that more mines will be able to get financing under the RSPT than under royalties – and that mining output will be higher under the RSPT than under royalties – at any commodity price level.
After delivering my Budget speech in the Parliament on Tuesday night and addressing the National Press Club the following day, I always take the opportunity to travel around the country and answer as many people's questions about the Budget as I can. This year's Budget roadshow kicked off in my home town of Brisbane with an address to the Queensland Media Club on Friday. This afternoon I fly out to Perth where I'll be speaking to the West Australia Chamber of Commerce and Industry tomorrow, before travelling on to Adelaide, Sydney and Melbourne later in the week. Every year I look forward to talking to locals about the difference that initiatives in the Budget, and I look forward to updating you on those discussions in next week's economic note.
Treasurer of Australia
Sunday 16 May 2010