Introduction
Thanks very much for your kind welcome, Mark. Thank you also to Leon.
It’s really good to be back after having spent the last week in detailed discussions with Finance Ministers and Central Bank Governors at the Spring Meetings of the IMF and G20 in Washington.
There is a growing sense of optimism about the global economy, which bodes well for Australia.
So, ladies and gentlemen, today I want to update you with those latest views about the global economy and what it means for Australia’s economic future.
In particular I would like to discuss the impact of the latest economic news on our preparations for this year’s Commonwealth Budget in May.
Background
Since coming to office, the global economy has presented the Coalition Government with some unexpected challenges.
When the previous Government delivered its last Budget in 2013 demand for our commodities was continuing to strengthen and the global growth trajectory was constantly improving.
Since then, the Commonwealth Government has written off over $100 billion of expected revenue as a result of falling commodity prices and lower than expected wage growth.
As an example, our biggest export, iron ore, has fallen from around US$129 a tonne at Labor’s last Budget to its current price of US$46 a tonne.
Belatedly, the fall in the Australian dollar from 99 US cents to its current level of around 77 US cents has cushioned the blow. But I recognise that this significant fall in our currency has been challenging for importers, whilst proving a welcome help for exporters.
The underlying strength and flexibility in the Australian economy, which is now in its 24th consecutive year of growth, has also cushioned the blows of volatility.
Barring any unexpected events, there was a view in Washington and New York that the global economy is in better shape now than it was twelve months ago. Importantly, the consensus view was that the official IMF forecasts did not reflect that optimism.
The broad message from the leaders of the world’s biggest economies was simple: things are getting better.
Global Outlook
The United States, the world’s single largest economy, continues to lead the recovery.
Consumer spending in the US is robust, on the back of strong job creation.
In fact, over 3 million additional jobs were created in the United States in the past year. Unemployment at 5.5 per cent is a remarkable turnaround from a high of 10 per cent just 6 years ago.
The United States is now approaching full employment. As a result, cashed up American consumers - benefiting from lower petrol prices and higher wages - will help to drive a broad and deep improvement in the economy.
The rapid strengthening in the US dollar is potentially problematic; however US exporters have reduced their costs of business during the recession and there is an expectation that they will be able to cope.
Europe has also improved beyond expectations.
In October last year, the IMF assessed that there was a 40 per cent chance that Europe would go into recession. Thankfully, that didn’t come to pass.
Europe’s growth through the year to December was more than double the previous year (0.9 per cent in through the year terms to December 2014).
A combination of action by the European Central Bank, low oil prices and a weaker euro has strengthened growth.
The lesson from Europe is that structural reform is necessary in order to improve. Spain is the proverbial pin up boy but the Greek government is, to say the least, difficult to deal with.
Despite the uncertainty around Greece, there is an expectation that European growth will continue to improve.
Closer to home, structural reform on the back of strong political determination is also delivering better than expected economic performance.
“Abenomics” in Japan is working.
Growth on the back of balanced reform and easier monetary policy sees the Japanese economy continuing to pick up pace.
While structural changes are ongoing, a weaker currency and lower oil and commodity prices are all benefitting Japan in the short term.
Most importantly, they have seen some pickup in inflation expectations – a significant achievement after a prolonged period of deflation.
Given that Japan is our second biggest trading partner this is good news for Australia.
China, our largest trading partner, is expected to continue to be a significant contributor to global growth over the next two years and beyond.
One of the things that astounds me is that so many economic analysts continue to either wilfully or negligently misrepresent the China growth story.
Whilst their growth has started to moderate from over 7 per cent to a slightly lower level, China remains the second-fastest growing major economy in the world.
This is significant, because in the last eight years, their economy has doubled in size. So, their 7 per cent growth target is off a much larger base than higher growth numbers a decade ago.
We all know China’s growth matters for Australia. Its demand for our resources helped us get through the Global Financial Crisis relatively unscathed.
As the Chinese people grow wealthier, we have a new opportunity to broaden the range of goods and services we provide.
Each year, we sell 550 million tonnes of iron ore to China. That’s the equivalent of building 5,000 new Golden Gate Bridges every year! That number is expected to grow.
But we can do much more in the export of other resources such as gas and coal. There is also much opportunity for our agriculture and aquaculture exports.
Moreover, our new Free Trade Agreement with China opens the door for a massive increase in our services exports from aged care and health services to financial services and education.
At the same time as Chinese demand broadens, India is rapidly changing its economy.
India is not even on our list of top ten trading partners, yet its potential as a major source of income for Australia will, over time, match that of China.
India already has the fastest growing economy in the world at 7½ per cent.
Arun Jaitley, the new Finance Minister, has set an annual growth target of closer to 10 per cent in order to deliver the jobs necessary for new entrants to the workforce each year.
To facilitate that level of growth, India needs to build the equivalent of a new city the size of Mumbai every year.
For anyone who has been to Mumbai, a city with 21 million people, that is a confronting thought. So in order to actually get things moving rather than just retrofitting existing congested Indian cities, the Indian Government has set a goal of building 100 new smart cities within seven years.
And, as an illustration of their determination to deliver change, the reforms necessary to get India moving are actually being passed by their Parliament as we speak.
As the people of Melbourne know, following the visit of Prime Minister Modi here late last year, there is a real energy around India’s growth that provides exceptional opportunities for Australian businesses.
That’s why Andrew Robb is devoting so much energy to a new Free Trade Agreement between Australia and India.
In the next 15 years China and India together will be home to over 2 billion new middle class consumers.
What an exciting prospect for Australia.
This new class of affluent consumers will want better quality health and education services.
They will want bigger homes with better quality personal services, from architectural advice to interior design.
As they get closer to retirement they will also want better financial services and better financial security.
In short, they will want all the things that we can provide.
This is our new age of economic opportunity.
The statistics are staggering right across our Asian region.
For example, according to the Asian Development Bank, there is more than $8 trillion of unmet demand for infrastructure in Asia over the next decade alone.
So not only can we help build that infrastructure with our iron ore and construction services, but, through our huge reserves of capital, we can help fund and earn income from that infrastructure.
And the growth of Asia means that there will continue to be an almost insatiable demand for energy. Australia can continue to be a significant and reliable regional supplier.
Due to significant investment in the LNG sector in recent years, we will soon be the biggest exporter of LNG in the world.
Whilst this investment has had a hugely positive impact on job creation in Australia we are now moving into the production phase of the cycle. For the moment construction has slowed but over time it has the capacity to return. We have the reserves to support new export growth.
Commodities and markets always move in cycles. At the moment conditions are, on balance, favouring Australian growth.
Australian Economy
There are also plenty of reasons to be optimistic about growth here in Australia.
Housing construction is at record levels, and there is more in the pipeline.
Interest rates are at record lows, saving mortgage-paying households across the country thousands of dollars each year.
Petrol prices and electricity bills are down, putting more money back in the pockets of Australian consumers.
And, as a result, consumer spending is growing at its fastest rate in nearly three years. This is reflected in the retail trade numbers and sales of new motor vehicles.
The Australian dollar is lower, which is good news for tourism, farmers and manufacturers.
And all of this is leading to more jobs.
In the last month alone nearly 38,000 new jobs were created in Australia, most of them full time.
In the eighteen months since we were elected nearly quarter of a million new jobs have been created. This is almost 70 per cent more than the last eighteen months of the former Government.
Importantly, unemployment has started to fall, dropping to 6.1 per cent last month.
But we cannot be complacent.
We need to do even better.
Future prospects
We need to take advantage of our growing region and expand our reach to markets.
Finalising Free Trade Agreements with China, Japan and Korea are key steps the Government has taken in this regard.
This is great news for consumers. Toyota has already dropped the price of its Corolla by $1,000 for some models.
But it is also great news for business.
Recently I visited an Australian company that manufactures professional microphones – called RODE Microphones.
This business now exports 97 per cent of what it makes - half a million units a year overseas. In fact in a live cross from Washington last weekend I was using a Rode Microphone.
No surprise this Australian company exports to over 100 countries.
As a part of our Free Trade Agreement, China will lower the tariffs on microphones from 10 per cent to zero. China is set to become Rode’s largest export market within five years.
Of course it’s not just microphone tariffs that are being abolished.
Tariffs of up to 30 per cent will be abolished on a range of agriculture, food, and resource and energy products.
Whilst removing the tariffs on imported goods are a significant cost to the Budget, the trade-off is that other countries abolish their taxes on our goods. As a result we grow our businesses and, over time, they employ more Australians and pay taxes.
In this year’s Budget we have decided that even though we lose that revenue from tariffs, increasing taxes on Australians to make up for the shortfall is counterproductive.
This is the sort of structural reform we are undertaking at a bottom line cost to the Budget. But the long term benefits of these agreements through job creation and wealth creation massively outweigh the short term costs.
Budget
These are the types of decisions we have been making in the lead up to this year’s Budget.
Our spending must deliver long term benefits for the community whether it be through investment in infrastructure, investment in child care or revenue sacrifices for trade agreements or to help small and micro businesses.
For a start we should not be replacing falling taxes with new taxes if we want to build the foundations for a more sustainable recovery in the future.
If our predecessors were re-elected, Australians would be paying more tax than they are today.
Moreover taxes such as the failed Mining Tax and the job destroying carbon tax would still be hurting the economy.
The truth is you can never tax your way to prosperity.
As we indicated previously, if existing taxes can be improved with integrity initiatives to ensure that the tax base is not eroded we will undertake that change. But new taxes are often piecemeal solutions and that is why we have released a proper discussion paper about the future of the taxation system for community engagement. This must be a longer-term debate.
Getting the right balance between tax collection and government spending is essential for Australia’s growth. We must get the balance right.
We currently have a Budget that was built on the presumption of much higher taxes.
Taxation revenue in 2007 was 23.6 per cent of GDP.
Today taxation revenue is 22.0 per cent - or the equivalent of around $25 billion a year less.
Even with that increase in revenue we still wouldn’t be back in surplus.
The problem was that previous governments locked in expenditure that did not foresee a fall in revenue.
Nothing illustrates that better than the Rudd Government locking in tens of billions of dollars in spending on welfare, infrastructure and handouts against a mining tax that did not raise any money.
It presumed the iron ore boom would last forever. Well here’s a newsflash…it didn’t!
That’s why I am so pleased to see Wayne Swan has decided to stay in Parliament. He is a living, breathing cautionary tale. The Labor Party have just put him in charge of developing their re-election policies.
Over the medium term, the Budget challenge is not insufficient revenue, it is too much government spending.
We need to better control our spending.
We have a social services system that accounts for over a third of all government spending and is growing at over 5 per cent per year.
We have a health and aged care system that is not financially prepared for our changing demographics.
The structural savings we made in last year’s Budget were focussed on Australia being able to afford its future.
Whilst we have reduced the spending trajectory over the next forty years to half the growth level we inherited, there is still much structural Budget repair work to be done.
In the interim, without giving up on spending reform, we need to get the Budget balance right.
As the Governor of the Reserve Bank Glenn Stevens said in New York yesterday, when it comes to Budget repair ‘the government has little choice but to accept a slower path of deficit reduction over the near term’.
Whilst short term economic factors prevent a faster approach to Budget repair, our structural savings in education, health and welfare remain necessary.
The Intergenerational Report I released in March clearly demonstrates that our future prosperity relies on us taking action now.
Today is just under three weeks from the 2015 Budget.
The Budget will include policies that will take another step towards building jobs, growth and opportunity for all Australians.
It will be responsible, measured and fair.
It will endeavour to do more for economic growth without compromising the balanced recovery occurring in the Australian economy.
It will endeavour to get the balance right between the economic accelerator of lower interest rates and the pace of Budget improvement.
As a result, we will continue to get back to surplus as soon as possible but we will do so without hurting families or the broader Australian economy.
That’s why our savings measures are structural and phased in rather than dramatic and immediate.
It is no use having the Reserve Bank lowering interest rates and putting its foot on the accelerator if, at the same time, the Government is slamming its foot down on the brake by immediately and dramatically cutting spending.
Whilst it is impossible to avoid new spending in areas such as defence and national security, the government must also seek to redeploy spending to areas that help lift growth and prepare us for the opportunities in the global economy that lie ahead.
As the Prime Minister has said repeatedly, our focus in this year’s Budget will be growth and jobs.
One of the main groups of beneficiaries will be innovative small businesses.
In that regard we have learnt a few lessons from Israel.
As you know, Israel is home to more start-ups per capita than anywhere else in the world. It is regarded as the home of the ‘second Silicon Valley’.
The Israeli government put in place a good range of policies to support innovation and reward risk.
For example, through the Office of the Chief Scientist, the Israeli Government makes targeted investment through an ‘incubators’ programme that focusses on commercialisation of new, but yet to be developed, concepts.
The Chief Scientist also runs a seed funding programme. The program is based on the government matching an investment in a start-up company in exchange for equity in the company. If the company is successful the investor has the option to buy out the Government at any point in its first seven years at a fair price.
To bring all this together, the country’s progress in the area of innovation is benchmarked against an annual innovation report, produced by the Chief Scientist.
The Australian Government has different ways of supporting innovation such as through our new Industry Growth Centres and Research and Development Tax Concessions. These initiatives help new businesses and ideas get off the ground in Australia.
We are also mindful that with risk must come the potential for reward. That is why we have recently changed Employee Share Schemes to make it easier for employers to offer their employees some 'skin in the game'. And we are actively engaged in developing a sustainable model for crowd sourced funding so that start-ups can raise the funds they need in a competitive global environment.
In every business meeting I attend, it becomes more and more obvious that commerce is a truly global business.
For example, whilst Google Maps was invented in Australia, Google Autocomplete was invented in Israel.
Same company with different services and different innovators!
I believe that the economic conditions in Australia are right for us to accelerate, and do more. There are already many great Australian firms who have started out with an idea and grown into successful businesses.
Earlier this month, I met with a truly inspirational bunch of entrepreneurs in the offices of a company called Atlassian. Two former university students started Atlassian with a $10,000 credit card loan in 2001.
They now sell software to more than 30,000 customers world-wide. Atlassian has offices in Australia, the United States and Europe, employs more than 6,000 people and is valued at over $3 billion.
Now the founders of Atlassian are helping to mentor and finance the development of other Australian small business start-ups.
Many of us know that a thriving small business sector is at the heart of Australia’s economy. Those small businesses employ 4.5 million people and contribute a third of Australia’s output.
This contribution is only set to grow.
Last year, we saw a record number of 223,000 new small business registrations – a full 10 per cent higher than in the previous year.
The Budget’s Small Business and Jobs Package will provide a further boost to energise small business growth and employment, and will help ensure that Australia’s unemployed have the skills and support they need to move into future careers
Conclusion
Ladies and gentlemen there are many countries in the world that we can learn from and Israel is one of them.
Israel has a rich and eventful history but it never stops thinking about the future.
Israel has many, many immediate challenges but it never stops planning for tomorrow.
We are also planning for tomorrow, and we are doing it now.
That’s why we have embraced our region’s growth agenda through Free Trade Agreements.
That’s why we are deregulating our economy and we have abolished 53,000 pages in Government regulation.
That’s why we are rolling out the biggest infrastructure program in our nation’s history.
That’s why we have been so focussed on structural reform from taxation to the future of the Federation, from responsible environmental management to the challenge of change associated with living longer.
That’s why, when it comes to our Budget, we understand the imperative of doing more with less and living within our means.
There is no finishing line for economic change. But Australia is endeavouring to lead the field.
I have said it before and I will continue saying it – I have never been more positive about the future of this country.
With hard work and a deep resolve to do our best our economic future will deliver greater prosperity for all.
Thank you.