It is a pleasure to be here today to talk to you on the Government's economic agenda, at a time of significant economic challenge.
Countervailing forces are creating high inflation at home and economic turbulence abroad.
High inflation has pushed up interest rates putting pressure on families and slower growth in the US and global financial market turbulence is impacting many countries including our own.
Counteracting this, robust growth in emerging economies has led to the largest increase in the terms of trade in a generation.
This will boost incomes and add to already heightened price pressures.
This comes on top of the highest underlying inflation rate in 16 years.
As we reap the benefits of a world commodity boom, that same boom means individuals and businesses are paying higher petrol prices.
In the short term we need to put the macro-economic settings in place both to weather the global turbulence and to place downward pressure on inflation.
But just as importantly, the Government's economic agenda needs to set Australia up for the long term.
The Rudd Government's first Budget was about fighting inflation now and putting in place a long term plan for the future.
The first Budget of a new government sets the tone of a government. Ours is economic responsibility.
And it wasn't easy. It had been a long time since rigour had been applied to government spending. But getting spending back under control when people are used to increases on average of about 4 per cent every year presents its own challenges.
The Government needed to make responsible spending cuts to put downward pressure on inflation and therefore interest rates.
Spending cuts that took many hours in the ERC process to find.
They took many hours because the Government had set itself a commitment to a Budget surplus of 1.5 per cent of GDP. A commitment that we exceeded in reaching 1.8 per cent but a commitment that was nowhere near as easy to reach as some commentators around town seemed to think in the lead up to Budget night.
The need for increased rigour when it came to government spending is underlined by Treasury analysis which shows that towards the end of the Howard government only 1.5 per cent of budget measures were savings measures, compared to around 30 per cent when the Howard government first came to office.
This stands in stark contrast to Treasurer Swan's first budget where every single dollar of new spending in 2008-09 has been more than offset by spending cuts elsewhere in the Budget.
This Budget reduces Government spending by a full percentage point as a proportion of GDP – making it the lowest since 1989/90.
We have reined in spending growth from 4 per cent over the past 4 years to a little over 1 per cent next financial year.
For the first time, fiscal policy and monetary policy are working in the same direction. We believe that fiscal policy should help, not hinder in the fight against inflation. We are not prepared to leave all of the heavy lifting on inflation to interest rates. For the first time in a long time, fiscal policy is pulling its weight.
But these cuts have another purpose – they are aimed at ensuring public money is only spent on worthwhile projects that are going to deliver real value to the Australian economy.
And savings of $33 billion have been delivered by cutting back inefficient and wasteful programs; targeting Government benefits to those who most need them; improving integrity and fairness of the tax system; and making government more efficient.
We will build on these savings in the second stage of our review of government expenditure, carried out over the remainder of this year.
The Budget was also designed to help working families at the lower and middle parts of the income spectrum to deal with the cost of living pressures facing them. The tax cuts, the introduction of the education tax rebate and the increase in the child care tax rebate are all important in this regard.
The tax cuts at the low and middle parts of the spectrum also make a contribution to dealing with one of the biggest problems with the Australian tax system – punishingly high effective marginal tax rates. Tax rates for those transitioning from welfare to work. There will be more to do on this and it will be a key focus of the Henry review.
These are the hallmarks of a Budget designed to meet the inflation challenge head on while having regard to the countervailing forces impacting on our economy.
But just as important as meeting the short term challenge of inflation and global turbulence so too the government's economic agenda is looking towards the future - is looking to meet the significant structural challenges that our nation faces.
Challenges that in some cases have been ignored for decades.
The challenge of addressing Australia's flagging productivity growth
The challenge of acute labor shortages.
The challenge of infrastructure bottlenecks.
The challenge of reducing red tape for business and revitalising the competition agenda.
And the challenge of investing in Australia's future productivity to prepare for the day when the mining boom ends.
One thing I constantly hear as Assistant Treasurer and as the member for Prospect with the biggest industrial estate in the southern hemisphere in my electorate is the fact that the biggest constraint on business expansion is no longer access to capital it is access to labour.
These capacity constraints in the labour market, need to be addressed if the economy is to continue to grow.
We know that businesses are finding themselves competing for skilled employees in an ever-shrinking talent pool. This is of particular concern now, given that Australia's population is ageing.
With this in mind, we have made a significant commitment, starting with this year's Budget, to enhance the skills of Australia's workforce by investing in quality education. Australia deserves a first class education system, from primary school right through to higher education and life long learning.
And to help meet current and future skill needs of the economy we are delivering 630,000 new high level training places over the next five years.
And while what we have dubbed the "Education Revolution" will assist in addressing Australia's medium to longer term skill needs, we will be using the immigration program to provide a more immediate response.
In 2008-09 the Government will increase the skilled migration intake by 31,000 places. The Government will also be spending $20 million over the next four years to improve the responsiveness and integrity of the system of 457 temporary working visas.
We are also using the tax system as a means of boosting the participation rate.
These reforms have been a great start. Looking forward, we have a goal over the next six years to reduce the number of marginal tax rates from four to three; and to reduce the top tax rate, currently 45 per cent, to 40 per cent; and to reduce the current 40 per cent rate to 30 per cent. We are also planning to increase the low income tax offset to create an effective tax-free threshold of $20,000.
And as I say, EMTRs will no doubt be something the Henry review will spend a good deal of time looking at.
All these changes are designed with a view to encouraging people to enter the workforce or increase their hours worked.
Of course, business productivity depends not only on human capital – it also requires significant physical capital.
In a country like Australia, with a population dispersed over a large geographical area, and separated from some of our key trading partners by vast distances, infrastructure can be thought of as the lifeblood of the economy.
We must remove the bottlenecks that threaten to strangle that lifeblood.
A lack of critical infrastructure pushes up the cost of doing business, and contributes to inflationary pressures. It also hampers our international competitiveness.
Taking the proceeds of the mining boom, and investing them in building 21st century infrastructure and a modern economy is vital for our future economic prosperity.
That is why we have allocated around $40 billion to establishing three new 'nation building' funds. These are the $20 billion Building Australia Fund; the $11 billion Education Investment Fund; and the $10 billion Health and Hospitals Fund.
We have also established Infrastructure Australia, a new advisory body that will work with all levels of Government to prioritise infrastructure projects.
We are investing up to $4.7 billion to roll out a National Broadband Network in partnership with the private sector.
And we are providing $12.9 billion for the new ten-year national water policy framework, Water for the Future. This includes $1 billion to attract up to $10 billion of investment in desalination, water recycling and major stormwater capturing projects.
Building an environment for expanding Australia's physical infrastructure is important. But we also need to ensure it is used efficiently. We are therefore pursuing national market and pricing reforms to enhance efficiency in the development and use of infrastructure – particularly in relation to electricity and gas markets.
Business is not just impeded by the lack of infrastructure and labour, Australia's lack of regulatory consistency provides a major roadblock to business growth.
A recent OECD report found that Australia ranks last among 30 OECD countries in the harmonisation of regulations affecting service industries.
We will be working closely with the states and territories to modernise Australia's economy, and eliminate unnecessary regulatory burden and wasteful duplication.
This is something which requires Commonwealth leadership. It simply won't happen without leadership at the national level.
Many of the crucial areas we are targeting are areas of shared responsibility with the States and Territories. Which is why we need to seize the opportunity to revitalise Commonwealth-state relations and breathe new life into COAG. We are working through the 27 regulatory hotspots for reform agreed by COAG at its March 2008 meeting.
We well and truly have our work cut out for us but progress is already being made.
For instance in my portfolio, the Government has delivered on COAG's commitment to develop an enhanced national approach to product safety regulation which will provide significant cost savings for business and provide greater protection for consumers by streamlining the responsibilities of the Commonwealth and the States and Territories.
Not only does the Government need to set Australia up to meet the productivity challenges of labour, infrastructure and regulation, but we need to prepare ourselves for the future when the mining boom may end.
Currently our terms of trade are strong and are expected to increase by 16 per cent in 2008-09, the largest single year increase since the mining boom began.
However it would be extremely foolish and short sighted not to prepare ourselves for the day when this boom may end. It may not happen for 5 years, it may not happen for ten, it may not happen for a number of decades but we should not be prepared to rest on our laurels.
The key to successfully delivering continued economic growth is to use this period of relative economic prosperity to continue to diversify.
That's why, Australia needs to make the most of the areas in which we have a competitive advantage and are world leaders. One of the most obvious industries that fits into this category is the financial services industry. An area that I have specific ministerial responsibility for and one that is close to my heart.
Australia has a number of natural advantages in funds management including the fourth largest onshore managed fund market in the world, (in December 2007, Australia had $1.36 trillion in consolidated funds under management which included around $128 billion in Australian property trusts), a skilled workforce, strategically placed in the Asian time zone, a stable economic environment and a well respected regulatory regime.
However, we export little of these services denying Australia export earnings and young people good rewarding jobs in the financial sector as they are forced to go offshore for career opportunities. In fact, less than 3 per cent of the fees derived by Australian managed funds are attributable to foreign investment.
While the sheer size of Australia's financial services industry is impressive, it is clear to this Government that the financial services sector has an immense untapped potential for growth — both in terms of adding more value to the Australian community, and in terms of its export potential particularly within the Asian region.
In particular, there is considerable scope to improve on our exports of financial services within the region. For example, Australia's exports of financial services to China barely register at all.
The current high 30 per cent headline withholding tax rate is one of the reasons Australian managed funds struggle to attract foreign investment. The Government slashed the withholding tax rate for distributions from managed funds to non-resident investors from 30 per cent to an eventual rate of 7.5 per cent as stated in the Budget.
We will go from having the highest withholding tax rate in the world to effectively the lowest.
This will provide a significant boost to the competitiveness of Australia's funds management industry. Delivering Australia one of the lowest withholding tax rates in the world will set Australia on the path to become a funds management hub in the Asia Pacific region and improve export earnings.
The Government is determined to ensure that uncompetitive tax rates and complex tax and regulatory barriers that hold our financial services industry back are removed to improve.
The Government is currently consulting on reforms to the antiquated trading trust rules that apply to real estate investment trusts and has commissioned the Board of Tax to develop options for a simplified and modern specific tax regime for managed funds.
Australia will never be a London or New York but we can be an Asian financial hub if we make the most of our advantages and get serious about reforming uncompetitive and complex tax and regulatory rules to ensure that Australia becomes a world leader in financial services into the future.
This is not about picking winners it is about creating a platform from which our industries can compete. We'll level the playing field and, then it's up to those industries to compete on their merits.
And enhancing competition and creating competitive markets are a fundamental pillar of the Rudd Government's economic agenda.
That's why we are concentrating on revitalising competition policy.
Competition policy has simply not received enough attention in Australia over the last ten years.
The Rudd Government signalled this focus upon entering Government by the appointment of the first Federal Minister for Competition Policy since Federation, and the first Consumer Affairs Minister since 1998.
The ALP has a strong legacy of pushing through important competition policy reforms – we introduced the Trade Practices Act in 1974, the revisions to the Act in 1986 and instigated National Competition Policy.
The Rudd government will build on this tradition.
We have identified several areas in which further reform is necessary to enhance the welfare of Australians, through the promotion of competition.
Competition laws not only benefit consumers, they also benefit businesses doing the right thing.
Firstly, we are moving to strengthen section 46 of the TPA.
We will remove the judicially imposed requirement that recoupment needs to be proved when alleging predatory pricing and we will amend section 46 to clarify the definition of 'take advantage' for the courts in determining whether a corporation has taken advantage of its market power under the TPA.
We will remove the uncertainty that has arisen under the dual track process for alleging predatory pricing developed under the previous government.
The Government will also give small business a prominent and permanent representation on the ACCC by legislating to require that one of the deputy chair positions at the ACCC has a small business focus.
Together, these changes will substantially strengthen the operation of section 46 of the Act and again allow the ACCC and others to begin anti-competitive cases with some prospect of success, thereby cracking down on anti-competitive behaviour by powerful businesses.
This has not been the case for some time.
Additionally, I have made it clear that the Government believes we should add mergers and acquisition powers of the TPA to creeping acquisitions.
Creeping acquisitions refer to the practice of buying a number of individual assets or businesses in a chain of transactions over time. These transactions may not individually raise competition concerns, but when considered collectively they may amount to a substantial lessening of competition in a market.
As you would all be aware, I have announced the Government's intention to criminalize certain cartel offences. Offenders ought not to be in a position to write off a penalty for cartel conduct as a mere cost of doing business. There must be an effective deterrent.
The threat of a gaol term focuses the mind like no other penalty.
Cartels are unfair to other businesses, disadvantage consumers and drive prices artificially high.
Criminalising cartel behaviour in Australia is long overdue, and implementing this commitment will bring us into line with our major trading partners, and equivalent economies around the world. The increasingly multi‑national flavour of many cartels makes it doubly important that we bring ourselves up to world's best practice in this area.
We have achieved a lot in our first Budget, and will continue to build on those successes in the coming years. However, responsible economic management is not just about framing economic policy with a view to the next poll or the next election. It is about making investments in long-term prosperity. It is about anticipating long-term challenges and positioning ourselves to overcome them.
One of the most important tasks we will undertake in the next two years is the comprehensive review of the Australian taxation system.
To ensure that Australian businesses can compete in domestic and international markets, we need to reward employees for working hard, and taking steps to increase their skills and enhance their productivity.
The tax system is not just a mechanism for collecting revenue – it is also a critical component of Australia's economic architecture.
As I flagged earlier today, we have recently announced a review of the tax system – the most comprehensive review since the second world war.
I have already mentioned the tax measures, announced in the Budget, that are aimed to increase workplace participation, help ease labour supply constraints and improve the fairness and integrity of the tax system.
But this review is more far-reaching than that. It will provide a foundation on which to build a modern tax system for the 21st century.
This review will be comprehensive in that it will examine almost all aspects of the tax system and how they relate to each other. It will examine state taxes and the regulatory burden they place on businesses operating in more than one jurisdiction.
It will also examine ways of enhancing the taxation of savings, assets and investments, including the role and structure of company taxation.
An initial Treasury discussion paper will be released by the end of the July and I would encourage you all to take the opportunity to have a say in how Australia's future tax system should work.
We are facing an increasingly uncertain global economic outlook. On the one hand we have the US economic slowdown, which is impacting other economies. And on the other hand, we have the rise of China and India, which is driving demand for Australia's resources and significantly increasing our terms of trade.
Domestic inflationary pressures are building, due in part to capacity constraints in labour supply and critical infrastructure.
And finally, there is the challenge of transitioning to a less carbon-intensive economy.
These are all significant challenges – but not insurmountable. Part of the solution lies in responsible economic management – by eliminating wasteful government spending, budgeting for surpluses when necessary, and allowing the automatic stabilisers in the economy to do their work.
It will also require a structured and disciplined approach to Government investment – investment in Australian workers; investment in key infrastructure; and investment in the design of a globally competitive tax system.
We are doing all this with an eye to the longer term environmental challenges we face. In particular, we are committed to helping Australian businesses and households make the transition to a less carbon-intensive economy.
We know that, as the Federal Government, we cannot do this in isolation. This is why we are committed to engaging with the states and territories; and with the private sector. And it is also the reason why I am confident that, going forward, we have put in place a strong foundation for Australia to meet these challenges, now and into the future.