Thank you for the invitation to speak with you today. It's a pleasure to address the Australia-Israel Chamber of Commerce.
When I spoke with you in June last year I said that Australia's economic future was dependent on our ability to anticipate and capitalise on the challenges ahead. A lot has happened since then but the objective remains the same.
The Australian people have given the Rudd Government the chance to prove to them that we meant what we said. Actions speak louder than words. And our actions in our first three months in office show we are serious about providing national leadership.
In my portfolio alone we have:
But that's just the beginning.
Big challenges are looming just over the horizon. To overcome these challenges, and make the most of the opportunities they bring with them, real leadership is required. But not just leadership – it will also take a new kind of politics. A more open and accountable type of politics than Australia has been used to.
What do I mean by this new politics? You see it in the pitch being put to Democratic primary voters of the United States.
And we saw it reflected in the election result here in November with Australians demonstrating their yearning for new politics.
Our election struck a blow at old politics, and left us confronted with its legacy. A legacy of the old way that said elections had to be bought; spending could be reckless; there was no need to invest in the future because pork barrelling could get you through.
I won't get too political here, but this is a fact: Old politics dictated that the former government was happy to spend the dollars that the families of Australia earned for them. It wasn't just the approach taken by Mr Howard and Mr Costello – but by Dr Nelson and Mr Turnbull as well – they're all cut from the same cloth. They all sat around a Cabinet table dominated by old politics; all of them guilty of reckless spending and a firm preference for the short term over the long term. That is the hologram they projected across the Australian political landscape. And Dr Nelson and Mr Turnbull still haven't worked out that their old politics has been rejected.
We believe we shouldn't have to choose between solid growth, low unemployment and lower inflation – if we get the long term policies right. That said, the failings of our predecessors to invest in the productive drivers of the economy have made the challenge more difficult.
Mr Turnbull doesn't understand that productivity growth is the surest means of successfully managing any trade-offs between key economic objectives. And as was confirmed yesterday, under the old politics productivity growth stagnated.
Our new politics illuminates the path ahead to a modern economy. And our economic success depends on this new approach to governing.
The number one threat to modernising our economy is the inflation legacy the old politics has bestowed upon us.
To the months of October, November and December underlying inflation for the year was running at 3.6 per cent – its highest rate in 16 years. And the Reserve Bank has warned that both headline and underlying inflation are expected to remain at or above 3 per cent for the next two years.
This inflation problem has not emerged overnight – eight interest rate rises over the last three years are testament to that.
We took responsibility from day one for tackling this inflation problem even though it was an outgrowth of the old politics we've left behind.
Put simply the economy hasn't been adequately equipped to meet the challenges that have come with our seventeen years of expansion coupled with the terms of trade boom. The supply capacity of the economy isn't keeping pace with demand. The productive drivers of the economy – skills, infrastructure and participation – have been victims of the old politics. They were neglected because old politics favours over-spending and pork-barrelling.
Not only did the reckless spending add needlessly to demand, it also tied up resources that could have been invested in lifting the productive capacity of the economy.
And now the task of monetary policy has been made that much more difficult. Leaving monetary policy to shoulder all the burden of tackling inflation has come at a very high price for business and families. An eighth interest rate rise in just three years.
We do have the right institutional framework to deal with inflationary pressures — an independent central bank with an inflation target. But there are things we can do to take some of the weight off the Reserve Bank. Strict fiscal discipline to get spending back under control and targeted investment in infrastructure and skills will help. Our approach considers both the supply side and demand side of the inflation equation.
Malcolm Turnbull and the Liberals left the Reserve Bank and monetary policy to shoulder the full burden of the inflation challenge. Our approach deals fiscal policy back into the game and takes pressure off inflation and the Reserve Bank.
It will be no easy task. Many difficult decisions will be taken. There will be budget pain but the alternative is worse.
All budgets are a balancing act. The challenge we face is to strike the right balance between demand and supply side responses to inflation. But this Budget is only the beginning.
Regardless of the cyclical imperatives we face in the years ahead, let me assure you that long term foresight will be a hallmark of this Government's Budgets. The challenges Australia faces in the coming decade demand nothing less. Why? Because Australia is at a pivotal economic juncture and the decisions we take now are as important as any we have faced in a generation.
Our economic performance over the next 10 years and beyond will be shaped by three key factors:
These factors will underpin and inform policy making in the years ahead. That's why we must build a stronger, more flexible and more modern economy. That means a revitalised and far-sighted reform agenda every bit as ambitious as that of the 1980s and early 1990s.
Let's start with climate change – something we are committed to tackling head on – because the costs of inaction far outweigh the costs of action.
We have a three pronged strategy — reducing domestic emissions at least cost; adapting to the effects of unavoidable climate change; and helping shape a global solution.
One of our first acts as a Government was to ratify the Kyoto Protocol.
We are committed to reducing emissions by 60 per cent by 2050 — from 2000 levels — and to introducing an emissions trading scheme in 2010 to make that target a reality. Details of the scheme will be finalised later this year following Professor Garnaut's final report and Treasury modelling.
We have also announced initiatives to promote the use of low emissions technologies and increased energy efficiency. These include a new 20 per cent Renewable Energy Target, backed by investments in renewable energy, and clean coal technology.
Government leadership is essential, but business also has an important role to play.
Business is often best placed to see the opportunities and take advantage of them – the Government has a role in encouraging this. And I note that the Chamber recently launched with Cleantechnology Australia the first draft of the Cleantech Industry Mapping Portal, a very worthy initiative to promote business, government and research co-operation.
When I see forward looking initiatives I am reminded that Australian businesses are more than capable of rising to big challenges and seizing unique opportunities.
But Australia can't do it alone: this is a global problem that requires a truly global solution.
Developed and developing nations must come together to invest in our future with shared goals in an equitable, environmentally and economically effective way. And that means working closely with the emerging economic giants – China and India.
A key to Australia's economic success in recent decades has been our integration with the world economy. We've become much more open to the world, and the world has become more open to us. This gives us immense economic benefits. But it also presents us with new challenges.
The global economic outlook has become much more uncertain. The US economy is weakening following the severe downturn in the US housing market.
We are not immune from these global forces, but these challenges come at a time when strong growth in China, India and other fast growing emerging countries is helping to support global demand.
Setting aside the current global uncertainty, over the medium term it's clear that as China and India continue to grow, they will be key drivers of the global economic, political and strategic landscape.
Over the past decade, China and India have accounted for around 30 per cent of total global growth.
To put that in context, their contribution to world growth in 2007 alone was larger than the size of the entire Australian economy.
Australian businesses have vigorously pursued opportunities to trade with China and India.
China is now our second largest trading partner and second largest export destination after Japan. And India is one of our fastest growing export markets. Combined, China and India accounted for around 40 per cent of Australia's export value growth in 2006-07.
With our terms of trade expected to remain high for some years to come, and the economy now being close to full capacity, adjustment pressures will intensify. Our ability to continue to capitalise on these opportunities will require careful management of our domestic economy.
It is also important that Australia continues to engage with China and India in international forums like the G-20 as well as with other emerging economies like Brazil and Russia.
The rise of China and India and other Asian economies has seen the world's economic activity gravitate closer to our region in recent decades.
But our linkages go beyond simple geography. Australia is building strong ties with both China and India through our universities.
China and India are also providing increasing numbers of skilled workers to Australia. In 2005‑06, China and India were the second and third largest contributors to Australia's skilled migration intake, after the UK. Skilled migration has been, and will continue to be, an important contributor to Australia's labour force growth in the coming decade.
Which brings me to the third of our key drivers – the ageing population.
From early next decade the retirement of older workers will begin to impact on economic growth.
The second Intergenerational Report projects that the proportion of the population of working age – those aged 15 to 64 – will fall from 67-and-a-half per cent to just under 60 per cent in 40 years time.
And by then around one quarter of all Australians will be 65 years or over — roughly double the present proportion. So, rather than having five people of working age to support each person over 65, there will be 2.4 people supporting each person over 65.
The implications for the economy and for policy are profound. These demographic changes will slow economic growth and per capita incomes. Average living standards are likely to rise more slowly – at an average of 1.6 per cent per year over the next 40 years compared with 2.1 per cent over the past 40 years. Again, this will bring challenges and opportunities. Businesses will need to provide goods and services to meet these demographic changes.
And there will also be substantial fiscal implications. Spending on health, age pensions and aged care are projected to rise. This will demand forward looking budgetary decisions to ensure Australia's future economic prosperity.
But effective responses go beyond the budget bottom line. We need to act now to lay the foundations that will enhance labour force participation now and into the future.
We will improve the education and training systems to help lift our overall skill levels.
Skilling Australia will deliver an additional 450,000 training places over four years.
We will increase the Child Care Tax Rebate to 50 per cent and fund the delivery of up to 260 new child care centres.
Our tax reforms will reward effort, enhancing incentives for people to enter the workforce and to increase their hours of work.
The Rudd Labor Government recognises the approaching demographic challenge Australia faces.
We have acted decisively to implement policies that will help address some of the challenges in the medium term. But that's just the beginning.
The strongest defence against an ageing population is to put in place policies that allow our workforce to work more productively – that's the core of our approach.
The challenges in the years ahead are as great as any we have faced in a generation.
I am confident that the Government has the right policies — and the determination — to modernise our economy and meet these future challenges. And I am confident in the capacity of Australian firms, workers and families to overcome the challenges I have outlined today, and to prosper in the years ahead. They have shown a remarkable capacity to adapt to change; to thrive and prosper from it. They recognise that their response has to be based on new approaches, new ideas and new enthusiasm for the horizon ahead.
As the Treasurer in your new Government I'll ensure your endeavours are complemented by our new politics – and our long term approach to the challenges we've discussed today.