It's always great to be back here in Victoria. The thing you notice when you step off the plane at Tullamarine these days is the confidence of the State's people.
I was wondering why this is, especially with all the turmoil on the world's capital markets and its flow-on effects. Well, it has started raining. The economy is growing. Employment is strong. But then, of course, it clicked. The real reason was that Victoria is fulfilling the most important KPI of them all: having the top three teams on the AFL ladder.
I was going to try to endear myself to you by apologising for the Brisbane Lion's big win on the weekend, but then I realised there was no need: it was only against Carlton. And nobody likes Carlton!
Today I want to give you some key insights into the thinking that produced last week's federal Budget.
My main point is that the Budget succeeds in doing three things:
I want to spend most of today's speech on this third point – making the case today that this Budget is arguably the most forward-looking in memory.
Now, as business leaders, you know that responsible management requires something in addition to tight budgets. Being responsible means not neglecting the future. This is the point that some of the commentary around the polls of the last two days misses.
For us, responsibility means framing economic policy with an eye to the next decade, not the next poll or the next election. It means seeking long-term prosperity not short-term popularity. Taking the politics out of Budgets. It means investing in the things that will allow the economy to continue to grow in the coming years without putting extra pressure on inflation. It means increasing the rate of productivity growth. And in the contemporary world that means investing in human capital and infrastructure, and ensuring we have an internationally competitive tax system. These are massive undertakings.
It's why we decided the Budget surpluses will be put to work through creating three new funds to invest in our nation's infrastructure, education and health systems.
Also, the Budget not only provides for further personal income tax cuts but also sets in train the most comprehensive review of our taxation system in half a century
Before I come to these initiatives in detail I wanted to outline in more detail the immediate economic challenges which we have had to balance.
I know, as businesspeople, that 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 in the past.
My colleagues and I found ourselves in a similar situation when we sat down to craft the Budget.
We were absolutely determined to do what was necessary to navigate our way through international financial market turmoil, sparked by the difficulties in the U.S. economy, and the inflationary pressures left to us by the neglect of our predecessors, further fuelled by the rising terms of trade here in Australia.
As I said in my Budget speech, this Budget comes at a difficult time for Australia. Our economy is about to enter its 18th year of expansion, built on the structural economic reforms of the past quarter century, the strength of your businesses, and the efforts of working Australians.
But the economic outlook is being affected by powerful countervailing forces – high inflation at home and turbulence abroad.
Underlying inflation was running at 4.2 per cent over the year to the March quarter – its highest rate in more than 16 years.
Interest rates have risen eight times in three years. That's why the Government made the fight against inflation a key priority.
Looking forward, tighter credit markets and a weaker global outlook are expected to result in economic growth moderating, to 2¾ per cent in 2008-09.
Ongoing financial market turbulence, or a deeper or longer than expected slowdown in the US economy, could have a significant negative effect on the Australian economy.
Counteracting this, robust growth in emerging economies is expected to drive Australia's terms of trade to new highs.
These improvements to the terms of trade will further boost income and add to already heightened price pressures.
Looking to the longer-term, there are additional serious challenges that we need to begin preparing for.
As the population ages and the proportion of people in the workforce falls, economic growth is likely to slow and budgetary pressures increase.
And climate change will bring significant economic and social consequences.
The Budget modernises our spending priorities and builds a strong surplus, so we can make the vital investments our economy needs to build capacity, sustain growth, and help us withstand the global pressures we face. This is especially important for an economy like Victoria.
While it has been experiencing solid growth in recent years, it has not benefited to the extent that the resource States have over the past few years.
And the high dollar which has flowed from the commodity boom has made it incredibly difficult for manufacturing and services exports from Victoria.
In light of all these developments we have had to frame a Budget that manages the current risks while putting in place the platform to sustain future economic growth and prosperity.
So that's the backdrop for the Budget. Now let me say a few things about the Budget imperatives – the first being our commitment to responsible economic management.
We ran as economic conservatives in the election, and the Budget demonstrates we are governing as economic conservatives.
Economic conservatism isn't a slogan, it's our guiding principle. It's an approach that recognises all the good things we want to do for society rely first on a solid economic foundation of macroeconomic stability.
We are very proud of the responsible way we went about framing this first Budget.
Let's run through some key points.
We have delivered a surplus of 1.8 per cent of GDP in 2008-09 – the previous Coalition Government forecast a surplus of only 1.2 per cent.
This is a surplus built on substantial savings — $33 billion over four years.
We have delivered these savings by ensuring every single cent of spending this coming financial year has been offset by spending cuts elsewhere in the Budget. It's been a long, long time since a federal Budget has contained that kind of discipline.
An additional 2 per cent efficiency dividend has been introduced to realise efficiencies in the public sector – saving $1.8 billion over five years. And the search for savings will continue into the future – with the second stage of our review of government expenditure to be undertaken over the remainder of this year.
We are never going to let up, when it comes to economic conservatism. Every Budget will be subject to the same fiscal rigour as this first one.
This type of responsible Budget management is what gave us the room to deliver our election commitments – the second imperative of the Budget.
This starts with the Education Revolution. Education is the engine room of a more modern, productive economy.
Our plan to improve education and training covers the whole system, from early childhood education to universities like RMIT, which I visited with Julia Gillard today.
Universities will be big beneficiaries of the Education Investment Fund, and of the $500 million in catch-up funding we are providing this year to begin dealing with 12 years of neglect.
More broadly, the Budget includes $5.9 billion over five years for the Education Revolution, focusing on reforms that will lift educational outcomes and ensure that all Australians have the opportunity to take up further education or training.
We will provide $2.5 billion over ten years to provide all secondary schools with grants of between $500,000 and $1.5 million to build or upgrade trade training facilities, to enhance vocational training for students in Years 9 to 12.
We will allocate $1.9 billion over five years to deliver an additional 630,000 training places in the vocational education and training sector, to help address current and future skills shortages.
We will provide $1.2 billion over five years to provide up to $1 million per school to deliver computers and communications technologies to all students in Years 9 to 12, as part of the Government's Digital Education Revolution.
Now, one of the concerns that business frequently raise with me is the shortage of skilled labour in many industries and regions.
While the Education Revolution will assist in addressing this problem in the medium-term, immigration can provide a more immediate response.
Accordingly, the Government will increase skilled migration by 31,000 places in 2008-09, taking the skilled stream of the Migration Program to 133,500 places.
Climate change is another area where the Budget delivers on our election commitments.
This includes measures costing $2.3 billion over five years to help reduce Australia's greenhouse emissions and assist the transition to a low-emissions economy.
We are providing $500 million over eight years to support projects that accelerate clean coal and low-emission technologies, introducing a Renewable Energy Target and investing $500 million over six years to support and bring forward development of renewable energy technologies in Australia, and investing a further $150 million over four years to support the development of clean energy technologies.
We also will support changes in business practices through the Clean Business Australia program, at a cost of $240 million over four years.
This program will provide support for industry to implement cost-saving energy efficiency measures, develop products for market such as water recycling and saving, green building materials and energy efficient appliances.
Health is another key economic and fiscal priority, particularly given Australia's ageing population and the rising costs of new medical technologies.
This Budget focuses on rebuilding and strengthening public health services and improving preventative health care.
The $3.2 billion National Health and Hospitals Reform Plan will revitalise the public health system.
We will provide up to $600 million over four years to slash elective surgery waiting lists; $491 million over five years to assist families cover the cost of an annual dental check up for eligible teenagers; $275 million over five years for GP super clinics; and $249 million over five years for the Government's comprehensive National Cancer Plan.
And we'll deliver all this by working with the states, not against them.
So we ticked the responsibility box, and we ticked off each of our promises.
But the third imperative – investing in the future – is what I want to focus on today.
As you know, as part of our commitment to long-term reform, we will establish three funds to finance investment in priority areas – the Building Australia Fund, the Education Investment Fund, and the Health and Hospitals Fund.
We will make initial contributions to these funds from the 2007‑08 and 2008‑09 Budget surpluses, and will add to them from future surpluses as appropriate.
These funds will release around $40 billion for investment in coming years in transport and communications infrastructure, education facilities, and health, hospitals and medical research facilities and projects. This is the program that will modernise and reinvigorate our economy.
Both the capital and earnings of the funds will be available to finance appropriate projects.
The Future Fund Board of Guardians will manage the funds, independent of Government, and all projects will need to satisfy rigorous criteria assessed by independent bodies.
The rigour of the framework under which any expenditure from these funds can take place is unprecedented.
Specialist boards will advise the Government in each of the three major areas, and assess and rank needs and priorities. Cabinet will decide the overall spending, and that is as it should and must be.
Not only are we responsible to the Australian people for that money, but we are also in the best position to balance the needs in education, infrastructure and health against the pace of demand, and our economic circumstances at the time.
We will also be laying some tough rules, some of which I indicated in the Budget and in my Press Club speech the following day.
We have said these new funds won't substitute for spending by the States – they will be additional to the spending that would otherwise occur.
We have said we will insist on rigorous evaluation of proposals, so that the costs and benefits of one project against another are quite clear.
We have said we won't override the private sector – we will certainly not be looking for a public sector involvement where the private sector can handle the project.
We want government participation to help market outcomes, and help competitive outcomes – not override them.
In transport, in water, in energy, in communications there are plenty of ways we can become more productive, more competitive. I want to see the Commonwealth's dollar contributing to those improvements, through these funds.
More specifically, we all know how important it is to address the infrastructure bottlenecks that are frustrating supply and putting upward pressure on prices.
The Government has already established Infrastructure Australia, to develop a strategic blueprint for modernising our transport, water, energy and communication assets.
My Cabinet colleague, Anthony Albanese, made an important announcement yesterday in relation to membership of Infrastructure Australia. You'll be pleased to hear four out of 12 members are from Victoria. And, as you know, Rod Eddington has agreed to add his considerable experience and wisdom, as Chair.
Infrastructure Australia will complete a National Infrastructure Audit by the end of 2008, and develop a priority list for consideration by COAG in March 2009.
The Building Australia Fund I announced a week ago will finance the necessary investment in infrastructure over the coming years.
I hope you appreciate the significance of the BAF when it comes to this critical investment.
It will help finance the current shortfall in national transport and communications infrastructure, such as road, rail, ports and broadband, easing urban congestion and enabling greater growth in trade.
We won't be overriding or substituting competitive processes or market disciplines. On the contrary, we will ensure that market mechanisms are robust and strong.
The Fund will receive an initial allocation of around $20 billion.
Both the capital and earnings of the Fund will be available for draw down as projects are identified through a rigorous selection process.
The Building Australia Fund will incorporate the Communications Fund, and provide funding for our $4.7 billion commitment to invest in the National Broadband Network.
It is important that the investment in our nation's ports, roads and railways can start as soon as possible.
So accordingly, the Budget will provide $75 million in 2007-08 to fund feasibility studies on high-priority projects.
Initial priorities in Victoria include upgrading the Western Ring Road and developing an integrated transport plan for the East-West link.
I have had many conversations with you and your companies about infrastructure – it's one of the biggest issues we talk about. Another is tax.
In building the best possible platform for future economic growth the Budget also set in train the most far reaching review of our taxation system in at least the last 50 years.
This review will address the adequacy of social welfare payments, including the age pension, so we get it right for older Australians who have helped build this nation.
As you all know the tax system isn't just a mechanism through which the Government raises revenue. It is also a critical component of our nation's economic architecture.
The objective of the review is to build a modern tax system for the 21st Century:
A tax system that will give Australian business the platform to not only flourish domestically but also on the global stage.
A tax system that will reward the efforts of your employees, and provide them with the incentives to enhance their skills and productivity.
A tax system that takes into account future economic and environmental trends and puts in place the most efficient tax system to help you respond to it.
The review will be ambitious. Unlike reviews of the past, this will be from the ground up. Rather than carving out one piece of the tax system at a time, it will examine all aspects and consider how each relates to each other. It will take into account the effects of the emissions trading system on the economy, on businesses and on households.
The review will examine state taxes and the regulatory burden they place on business operating across borders. The objective will be to deliver an integrated tax system, taking into account international trends for lower marginal rates of tax applied across a broader base.
The review will be chaired by Dr Ken Henry, the Secretary of the Treasury, and will include Heather Ridout who you know as a tireless advocate for business. Consultation will be broad ranging. An initial Treasury discussion paper will be released by the end of July and I would encourage all of you to have direct input into how you believe our future tax system should work.
I would urge you not to be constrained by how the tax system now functions, but to imagine how it could work to help transform your business to grow into the future, as part of a thriving, growing, seamless national economy.
This first Budget of the Rudd Government provides the responsible economic management needed to sustain growth in difficult times. It enlists the States in a massive modernisation effort, through the COAG process. And it begins a new era of investment in Australia's long-term future.
And as well as looking after families, it is a Budget that should provide the business community with confidence. Confidence that the Government is doing what it can to tackle inflation. Confidence that the Government is making the tough decisions needed to rein in Government spending. Confidence that we keep our promises – we do what we say we will. And confidence that we are laying the foundations for a modern economy.
It's the start of something big that, over time, will set Australia up as a high-skilled nation, with first class infrastructure, and a modern tax system.
Let me finish on this point: I've heard commentators say that because of the world economic situation and rising inflation at home, last November's election was a good one to lose. I couldn't disagree more.
The most important time to be in government is in the tough times when hard decisions need to be made. History judges harshly governments that cruise through the easy years and fail to invest for the future.
That's what guided us in the preparation of this Budget, it's what will guide us in the years ahead, and it is the sort of clear, forward thinking the country now needs.