Thank you for inviting me here tonight and for that warm welcome.
There are a lot of people who run major businesses here this evening. You are accustomed to making decisions when the future is uncertain; when there are difficult trade-offs between competing objectives; when you need to assemble the most thoughtful analysis; and when the success of your business sometimes depends on you departing quite radically from the way things used to be done. This is also the context in which I am framing the Budget.
Recent months have seen some remarkable changes in global markets. These swings and roundabouts remind all of us who have a role in economic policy that change is our constant companion. As Greg Gailey wrote in The Australian yesterday, our economy has "changed almost beyond recognition over the past 20 years".
We won't profit as a nation by ignoring or resisting change. We must harness change – with leadership, foresight, the right policies and the right relationship between governments and businesses of all sizes.
Over the years I have met many of you in the room tonight. In that time – in boardrooms, around dinner tables, and often at airport lounges – we've shared ideas and discussed our common goals. Many more of you have expressed your views to me and my colleagues through the Business Council.
And as the Treasurer of Australia I have kept that communication open – talking with you and listening to your individual and collective views. That's been my approach, and long will it continue. It's why I made Greg my first phone call on the Monday after the election.
We meet again tonight at an important time – with your Budget submission having been released this week, and with Budget formation gathering pace.
In considering both events, my emphasis tonight is on common ground; and on the challenges and opportunities of change.
Your submission demonstrated that, in so many ways, there is a strong overlap between your priorities and ours.
In this job and the one before, I have always welcomed the considered views of the BCA, not just when I agree with them, like I did with the emphasis on social prosperity and human capital investment in Michael Chaney's annual conference speech last year, but even when they differ from my own views – like on industrial relations. I have always read with great interest your work on skills shortages, infrastructure bottlenecks, and participation, in particular.
Together we recognise that we face some serious hurdles. Not just the highest domestic underlying inflation in 16 years. But the challenges of climate change, of demographic change, and global uncertainties as well.
Despite these substantial challenges, we stand on the threshold of momentous opportunity. And while our economic future lies in part in the expanding economies of China and India — Australia's economic future is still ours to write.
For Australian families to prosper well into the future, we need a partnership between government and business that goes beyond the old divisions and arguments and agendas of the past.
Take climate change, for example. We've all now recognised that the costs of climate change inaction greatly outweigh the costs of action. Of course, we also recognise that we face a hard road ahead in reaching our climate change mitigation goals.
The Rudd Government was only sworn in 85 days ago, but we have really had our skates on. In addition to climate change action, in my own portfolio alone, we have:
I've also been consulting closely with our regulators and advisors to assess the impact of international financial turmoil on Australia — and can assure everyone here we are keeping an eagle eye on those developments.
All these initiatives are just the beginning.
In exactly 11 weeks I will bring down the first Budget of the Rudd Government – the first major step down the path of future economic reform.
When I read your submission, one key line jumped off the page at me: "There is real opportunity – and challenge – for the Federal Government to undertake major fiscal reforms in this Budget."
I agree, but I want to make this point: this Budget is just the beginning.
There is so much to do – one Budget can't do it all. This Budget and those that follow are the key policy documents for laying down our agenda to tackle future challenges. Budgets that will make long-term foresight a hallmark of our tenure. Budgets that will recognise that it may take us some time to meet the big challenges – which is why it's vital we begin immediately.
The reforms we put in place in this and successive Budgets will be instrumental to building a more flexible, modern economy which creates a dynamic platform for business, and delivers for working families.
One of the biggest transformations of the Australian economy over recent decades has been increased integration into the world economy. While this has provided us with great opportunities, it also ties us more closely to fluctuations in world markets and the fortunes of the global economy. Clearly we are not immune from these global forces, as many Australian households and businesses facing higher borrowing costs know.
Uncertainty in global financial markets and the weakening outlook for the US pose significant challenges to the global outlook and the Australian economy. But these challenges come at a time when China and other fast-growing emerging economies are continuing to drive global demand. In 2007, the emerging economies were responsible for two-thirds of global economic growth.
Australia's resource endowments mean we are well positioned to take advantage of the economic expansion within our region – but seizing these opportunities requires careful management of our domestic economy.
Greater demand for our output, and rising incomes, have placed great pressure on an economy pushing up against the limits of its capacity.
A lack of investment in infrastructure and skills has left our economy ill-prepared to deal with the demand surge flowing from the terms of trade boom.
We see this in the inflationary pressures rippling through our economy.
Underlying inflation has been on the march since the start of 2006. To the months of October, November and December, underlying inflation for the year was running at 3.6 per cent - the highest in 16 years.
The Reserve Bank is forecasting both headline and underlying inflation to remain at or above three per cent for the next two years. This forecast of continuing high inflation reflects the expectation that pressures on capacity will remain for some time. It also explains why the Government moved from day one to tackle the inflation challenge, and why we must fight it on multiple fronts.
We already have the right monetary policy framework to deal with inflationary pressures – an independent central bank focused on targeting inflation. But let's be honest – the previous Government's lax fiscal policy made the Bank's job harder. We want to make it easier – with a new era of fiscal discipline.
The Government is determined to ease some of the burden that has been placed on monetary policy in recent times – and easing the burden that has been placed on business and families through higher interest rates.
The terms of trade boom presents a once in a generation opportunity to modernise our economy to meet the challenges of the future.
Strong global demand for our commodity exports has seen our terms of trade rise to 50 year highs. This has provided a significant stimulus to our economy – boosting employment, company profits and incomes.
While the resource-rich states of Western Australia and Queensland have experienced the largest direct benefits from the terms of trade, the impact has been felt across the whole economy. The Reserve Bank has stated that the rise in our terms of trade has boosted real national income by around eight per cent – the equivalent of around $80 billion in the last year alone.
Unfortunately, it's clear Australia has been facing a slow-burning emergency for several years as the capacity constraints in our economy have been laid bare by this ongoing terms of trade boom.
It is vital we learn the lesson the previous government failed to.
The terms of trade are pushing harder on the accelerator of our economy. When that happens, you have to find a higher gear. Unfortunately our predecessors sat there as we climbed above the red line. Their spending was pushing even harder on the accelerator when it should have been directed towards finding a higher gear. In other words, they should have been modernising our economy by investing in the skills of our people, in participation, and in vital economic infrastructure.
Boom times are the best times to invest in strengthening the economy to prepare for the future.
In an economy operating at close to full capacity, our policy efforts need to be directed to expanding the supply side of the economy.
Our ports, roads and railways are straining under the weight of the largest commodities boom in a lifetime. You see this lack of foresight in the ships sitting off our ports or the job ads that fill our papers and web pages.
A lack of past investment in the nation's infrastructure and skills has contributed to current inflationary pressures.
The situation has not been helped by lax fiscal policy in recent years. Since 2004-05 Commonwealth spending has grown on average at around 4 per cent per year in real terms – more rapid growth than in any other four year period in the past decade and a half.
And while spending has been growing rapidly, it has not been directed towards addressing the supply side constraints in our economy. This has meant the RBA has been left to shoulder all the responsibility for tackling inflation.
But monetary policy is a blunt instrument.
By its nature, monetary policy cannot be used to target specific sectors or regions; its impacts are national and felt most heavily by those households that have a higher debt servicing burden. Leaving it to monetary policy to do all the heavy lifting has meant that the businesses and families whose hard work has made our economy strong are facing heavy financial burdens. That's why governments have a responsibility to do what they can to put downward pressure on inflation and make the Reserve Bank's job easier.
The Rudd Government took responsibility for tackling the inflation legacy from day one.
Our immediate goal is to strengthen the budget position – taking pressure off demand by running a strong budget surplus and cutting wasteful spending. We have already outlined the fiscal target that will guide the 2008-09 Budget – a surplus of at least 1.5 per cent of GDP in 2008-09, provided growth prospects remain as currently anticipated.
In addition to finding savings, we will also let the automatic stabilisers that are built into the budget do their job. In this way, fiscal policy assists monetary policy — rather than work against it.
It's not just the overall budget position that matters, the quality of spending is equally important.
Your pre-Budget Submission rightly noted that my predecessor's spending focussed too heavily on increasing demand instead of enhancing the long-term productive capacity of the economy.
To ensure the Budget delivers high quality spending, we need to ensure there is sound analysis of economic costs and benefits, and we need to be willing to cut or reprioritise poor quality spending programs. Where possible, we will direct budget priorities towards measures that improve capacity.
This means investing in what the BCA has itself referred to as the "the key supply inputs of economic growth – labour, infrastructure and skills". As you are aware, these three economic inputs drive the economy by expanding its productive capacity.
In this context, Australia's future economic prosperity requires sustained productivity growth. The higher our productivity level the more our economy can grow without fuelling inflation and higher interest rates. There is no short-term fix, but there are steps that can be taken to improve productivity in the medium term.
The single most important thing we can do to lift the productive base of our economy is to invest in the education, skills and training of all our people.
Our Education Revolution recognises Australia must become a leader in developing human capital.
Increasing the quantity and quality of our human capital will meet the skills needs of business, increase the productivity of our workers and lift our capacity to absorb new technologies from abroad. In a competitive global economy, we also need to think smarter and work up the innovation ladder – this means providing more, and better quality, training.
Investment in skills and training will also boost the flexibility of Australia's labour market, helping to reduce inflationary pressures and complementing our flexible and fair industrial relations system.
That's why the Government's Skilling Australia policy will:
We will also address many of the issues the BCA has helped bring to the forefront of the national debate, such as lifting the long-term school retention rate; and delivering universal early childhood education.
Australia's future productivity, competitiveness and wealth creation also demands considered strategic investments in key national infrastructure.
Without serious improvements in our infrastructure, we simply won't be able to turn the mining boom to our long-term economic advantage.
As those of you dependent on supply chains will be aware, Australia's domestic freight task alone is set to double over the next 20 years.
To meet this and similar challenges the Government will provide new policy and political leadership on national infrastructure.
That's why we have:
National leadership and greater investment will result in more efficient production and delivery of goods and services, and further drive investment.
Increasing Australia's economic capacity will also require lifting labour supply – something which the BCA has also identified as a key economic driver.
Our budget blueprint will lay the foundation for long-term improvements in workforce participation.
This task is being driven by short term challenges – most notably elevated inflation – and the long‑term challenge of the ageing of our population. Today there are five people of working age for every person over 65. In less than 40 years that figure is projected to decline to just 2.4.
Without remedial action to lift labour supply the effect will be to slow annual economic growth per capita, from an average of 2.1 per cent over the past 40 years to a projected 1.6 per cent over the following 40 years.
We have already developed a suite of policies to lift labour supply, including:
Let me expand on this final point.
There's been much comment on our tax plan – I understand that. But what this commentary often misses is the debate we have championed for many years now to re-inject participation incentives into the tax system.
Many people are not aware that the personal income tax reforms I introduced into Parliament this month are expected to add an estimated 2.5 million additional hours of work to the economy each week. Further, these tax cuts support after-tax incomes, so there is less pressure for big increases in before-tax income by way of wage and salary increases. Putting incentive in the personal tax system is just part of the equation.
As the BCA's submission also points out, the tax system plays a critical role in ensuring resources are allocated efficiently.
Company profitability has seen growth in corporate tax revenues that we cannot assume will continue indefinitely. For businesses to continue to prosper we need an internationally competitive tax system. This is not just about absolute rates, but the tax regulatory burden all levels of government place on business. This is something the Government has already turned its attention to through the COAG reform process.
Building a modern economy requires the cooperation of all levels of government – a point you also make in your submission.
Unfortunately recent years saw the Commonwealth inventing ever less productive ways to spend the windfall revenue gains of a resources boom, while the states scrimped, saved and borrowed to fund critical infrastructure.
There was only one reason for this, and that was politics.
This approach has cost Australia dearly, as every business faced with a choked supply chain or lack of skilled workers can attest.
This is not a partisan point; it's about cooperation in the national interest.
Most of the challenges facing our economy need a joined-up response by governments – including the challenges of improving skills, delivering better infrastructure and lifting workforce participation. These are challenges which defy state boundaries, and which we will only address successfully as a nation if we work together.
The best way to comprehensively raise the human capital of our workforce, for example, is for governments to coordinate their investments in education and training - from early childhood education through to tertiary education. That is why the Government welcomes the BCA's support of recent reforms to Commonwealth‑State relations.
Reforming the Federation, and ending the blame game and buck‑passing, is central to our long-term modernisation project.
New streamlined arrangements for Specific Purpose Payments which we recently floated will provide the states with more flexibility to deliver high quality services, while ensuring governments remain accountable to taxpayers for the money they spend and the services they deliver. These reforms will promote more wide-ranging reforms in areas of shared responsibility, from infrastructure and education, to climate change and water.
I know Australian businesses are well placed to meet the challenges and seize the opportunities I've talked about tonight.
Let me assure you all of the Government's determination to meet the big challenges as well.
These are our common priorities. They will be reflected in the forthcoming Budget. A Budget that begins to set out our blueprint for a modern economy. An economy flexible enough to meet future challenges, create the right environment for business to flourish, and deliver for Australian families.