Introduction
Can I begin by acknowledging the traditional custodians of these lands, their culture and customs –
And by thanking Professor Maskell (Duncan, VC University of Melbourne) for the kind introduction, and The Australian and The Melbourne Institute for the invitation.
A lot’s happened in those sixty years since the Institute was formed.
And for precisely one‑third of that, this conference has become a bit of an institution in its own right for policy makers, thinkers and commentators – great to see so many of you here.
And this year it comes at an especially useful time – a touch over a week since we handed down our first Budget.
This is my fourth state in three days, with another still to come – I woke up in Hobart this morning and I’ll be finishing up in Perth tonight.
So it’s a frenetic time but also a good time to take stock.
Especially given the circumstances the global economy is in, given the growing challenges facing our country as a consequence, and given the complex terrain we’re traversing.
The journalists call this the Budget ‘sell’ but I see things a bit differently.
It’s more of an honest assessment of our economy and our Budget –
About the good things we have going for us and the big things confronting us –
About where we are and where we need to get to –
The choices, policies and plans central to the first Budget, which make a good start –
And the choices we need to make into the future.
So it’s a good opportunity.
And ‘opportunity’ is why we’re here.
Not just why we’re here today, but the reason I’m here at all.
“Opening the doors of opportunity” – as the Prime Minister said on election night.
Five words that sum up our objective and set out our direction as policy makers and shapers.
This morning I’d like to position the Budget in that context – but to talk primarily talk about the biggest challenge we have right now, which is the inflation challenge.
The inflation challenge
Of the many ways of framing and reframing what we presented last week –
Of all the policies and plans –
All the commitments funded –
I really hope that one thing sticks:
That this was a responsible Budget defined by the times, and designed for the times.
It was about investing in the care economy, dealing with widespread skills and labour shortages, investing in the drivers of growth.
It was influenced primarily by inflation, and fundamentally a response to it –
And any responsible Budget had to focus on this, first and foremost – because of what persistent, pervasive, unchecked inflation can mean for our economy and our people.
We know that inflation limits aspiration –
Erodes the purchasing power of take‑home pay –
And reduces the value of hard‑earned savings.
It also corrodes the real return on investment –
It threatens the growth prospects of countries like ours –
And eats away at the foundations of opportunity.
There are plenty of economists here –
And I’m sure you don’t need reminding that at the end of last year, annual inflation was predicted to hit just 2 ¾ per cent by the middle of this year.
Instead, it was 6.1 per cent.
Now, Treasury forecasts it to peak around 7 ¾ per cent by year’s end –
And the RBA has just yesterday upgraded their predicted peak to eight per cent.
The forces and factors shaping inflation have a different emphasis in different parts of the world.
It’s more of a demand driven problem in the United States than in Europe –
It’s more of an energy problem in Europe than the United States –
And it’s a combination of both in the United Kingdom.
But pretty much everywhere –
The supply‑side issues that began with the pandemic are still causing problems –
And Putin’s war is upending energy markets and sending prices skyrocketing.
In Australia, we’re dealing with a mix of these, as well the effects of repeated flooding in parts of our country – human tragedies first and foremost, with impacts that are also felt through prices.
And inflation here will increasingly reflect the impacts of the war in Ukraine.
Currently, energy prices are adding 0.8 percentage points to Australia’s headline inflation, compared to 4.2 in the Euro area and 3.1 in the UK.
But energy’s contribution to domestic inflation will grow as retailers begin to renew wholesale contracts at a time when prices remain more than double their pre‑war average.
This is expected to lead to the significant price hikes that were included in the Budget forecasts last week –
And more persistent inflation than was previously projected – higher for longer.
As I’ve said recently and repeatedly, we know that very high gas and electricity prices have and will put extreme pressure on Australians and on local industries.
The longer‑term solution to this is cheaper and cleaner energy –
Energy that’s renewable and reliable and more affordable.
In the shorter‑term, we’re considering all available options before us to help shield Australians from the worst of these price impacts –
Including options that may not have seemed palatable even in the recent past.
It is this supply‑side, energy driven inflation that has captured most of our attention recently – but it doesn’t encompass the whole problem.
Demand has contributed to price rises too – and that’s what the Reserve Bank has been responding to, including again yesterday with their decision.
The Budget’s response to inflation
Last week’s Budget responded to the inflation challenge from both sides – supply and demand.
Inflation was the primary consideration influencing our approach to cost‑of‑living relief, to investing in the supply‑side drivers of growth, and to Budget repair.
Letting the substantial and welcome boost to revenues from higher commodity prices flow through to the Budget was all about ensuring we didn’t add to demand.
That’s how we lined up our fiscal policy with the Bank’s monetary policy, how we avoided the situation we saw in the United Kingdom in recent weeks.
And that approach marked a complete step‑change from the March Budget, and from recent Budgets before it.
Where 2.6 per cent real spending growth was the previous government’s average before the pandemic.
Where returning only 40 per cent of improved tax receipts to the bottom line was the historical norm.
And where the fiscal impact of new policies stretched into the tens of billions – $30.4 billion in the March ‘22 Budget alone – with zero dollars in savings on the expenditure side.
Taking that same approach to the October Budget would have been wrong and risky – counterproductive and costly.
It would have compounded inflation, compelled the RBA to go harder, and sent the cost of living even higher.
Treasury analysis shows that’s exactly what would have happened if we had spent the tax receipt windfall in payments to households, instead of returning it to the Budget.
Their work indicates that inflation would have increased by up to an additional 0.5 percentage points over the next year, and interest rates would have been higher still, if we had gone down that path.
So our responsible Budget – defined by its fiscal restraint – avoided adding to inflation, and addressed cost‑of‑living pressure in targeted ways.
By returning 92 per cent of improved tax receipts to the Budget over the forward estimates – including 99 per cent over the next two years when inflation is most problematic.
By restricting real spending growth to an average of only 0.3 per cent a year over the forwards – nearly 10 times lower than the pre‑pandemic average under our predecessors.
By finding $22 billion in new savings –
And through policy decisions which limited the net Budget impact to less than $10 billion over four years – with 85 per cent of this for unavoidable or legacy spending left over from the previous government.
It would have been easier – and no doubt more popular – to splash borrowed cash on an expansionary cost‑of‑living response.
But in the long run, that would have delivered a deeply damaging outcome for Australians and for their economy.
So we made the responsible decisions, not the easy ones.
We did what is right and necessary for the challenges we confront.
Rebuilding our fiscal buffers in uncertain times
The responsible approach to inflation also informed our approach to rebuilding our fiscal buffers and beginning the long road of budget repair.
And in an environment where all the risk for the global economic outlook is on the downside, and uncertainty is elevated, this is more important than ever.
By returning the windfall, we’ll have more space to withstand future shocks.
There are two big numbers that I wanted to share with you today that highlight this pretty well.
The first is $50 billion. That’s how much lower debt is for this financial year than if the extra money coming in had been spent on new decisions.
The second is $47 billion. That’s how much the Budget saves in interest payments over the medium term as a consequence of not spending that windfall over the forward estimates.
And this is no temporary commitment. Our determination to rebuild these buffers will stretch beyond this first Budget.
That’s clear from our fiscal strategy – which builds in discipline as a core principle now and for the future:
Through a commitment to return the majority of any future tax revenue windfalls to the Budget –
And to limit spending growth, until government debt as a share of the economy is on a clear downward trajectory –
Making the Budget and economy more resilient at the same time.
Delivering support and expanding opportunity
The broadly neutral fiscal stance we achieved through banking revenue windfalls and working hard to limit spending growth deals with two core elements of the inflation problem –
By not contributing to further demand, and by preparing us for future shocks that may come at us from overseas.
The Budget also provided cost‑of‑living relief that was effective without being inflationary –
And it took up the task of building a more resilient and more modern economy.
That’s why all of our core cost‑of‑living measures also come with an economic dividend.
Cheaper child care is the biggest on‑Budget measure – helping more people, especially women, back into work – adding the equivalent of up to 37,000 full‑time workers into the economy a year.
Paid parental leave helps boost productivity and participation.
Our agenda for housing is designed to expand supply in a sector crying out for it, but also to make it easier to live closer to where the jobs and opportunities are being created.
And to get wages moving, we’re training our workforce for the better, more productive jobs of the future labour market.
All this has been delivered while ensuring that people most at risk aren’t falling further and further behind.
While the inflationary environment helped deliver a revenue windfall – it also heaped pressure on the payments side of the Budget.
Changes in forecast economic parameters are responsible for around half of the payment variations in the Budget.
And a big part of this is the rise in payments driven by our social safety net and our indexation system.
Indexation is working exactly as it should, as it needs to – providing cost‑of‑living relief by ensuring that the real value of government payments remains steady over time.
The impact of higher prices and wages on indexation is expected to lift government payments by $11.2 billion just over the next two years.
Of that, about $3.1 billion over two years reflects the direct impact of electricity and gas prices on the CPI –
Helping our most vulnerable to cope a little better with rising power bills.
While this is necessary and it’s right, these parameter variations are costly.
They make up a third of the upwards revision in payments for this financial year and next.
This is just one of the compounding spending pressures we face.
Higher interest rates, higher spending across the NDIS, defence, aged care and hospitals will leave total government payments 67 per cent higher in 2032‑33 than they are now.
But nominal GDP is projected to only grow by 55 per cent over the same period.
Rebuilding the evidence base for policy making
So even after we’ve dealt with the inflation challenge, we will have to manage a Budget weighed down by persistent structural spending pressures –
All while finding ways to help expand the capabilities of our people and capacity of our economy.
Doing this requires new thinking – and it requires deeper thinking.
It requires us rebuilding the evidence base for forward‑looking policies.
Because to getter better, more forward‑looking economic policies we need better, more forward‑looking policy foundations. And I feel like in this room, I’m perhaps preaching to the converted.
But I wanted to tell you that in my patch, I’m going to try and build these in at least six main ways.
First, by making the Tax Expenditures Statement a more accessible, more useful analysis of what tax concessions are costing the Budget, and their distributional impact.
Second, by working with Andrew Leigh on putting in place an effective and rigorous Evaluator‑General so we have a better sense of what works, and what doesn’t.
Third, by Measuring What Matters in Australia’s first national wellbeing statement, next year – a hard‑headed way to gauge progress by recognising a robust and resilient economy relies on robust and resilient people and communities.
Fourth, by depoliticising the Intergenerational Report and releasing it more regularly, in the middle year of each parliamentary term.
Fifth, by working with Katy Gallagher to ensure gender considerations are at the core of our work, building on the good start we made with gender‑responsive budgeting this year.
And lastly, by putting Treasury back at the centre of climate modelling again, building on the new approach to climate risks, costs and opportunities included in last week’s documents.
Conclusion
Every single decision in every single Budget involves a series of difficult judgement calls.
And the toughest calls aren’t always about what you should do – but sometimes they’re about what you shouldn’t as well.
Last week’s Budget was carefully calibrated to respond to the challenging economic environment we’re in.
It wasn’t a cash splash, because it couldn’t afford to be.
It helps the RBA on the demand side –
It strengthens our buffers amid an uncertain global outlook –
It delivers responsible cost‑of‑living relief –
And it starts lifting the speed limit on our economy.
This hasn’t necessarily been a fancy or flashy task.
But our job is to get the economics right, before the politics.
Doing what we must do now to confront inflation and, eventually, to conquer it.
It’ll get a little bit harder before it gets easier – but it will get easier
This inflation fight won’t end as soon as we want it to – but it will end.
And while we’re doing that, we’re laying the foundations for a better future.
And that’s why I’m genuinely proud of the Budget we handed down.
Because while it’s an inflation‑focused Budget above all else –
It’s a future building Budget as well.
So that when we get through this tough period as a country, and we will – there will be more open doors of opportunity for more people in more parts of our country.
Thanks very much.