2 May 2014

The Government’s Budget Strategy, Address To The Australia-Israel Chamber Of Commerce


Grand Hyatt, Melbourne

Check against delivery

This speech was given by the Hon Joe Hockey, Treasurer, to the Australia-Israel Chamber of Commerce. The topic was the Government’s Budget Strategy.

Well thank you so much Mark. You gave me a whole new angle on the low value threshold I must say and I hear you about workplace relations. There is only so many mountains you can climb at any one moment, so I look forward to you helping me to climb the mountain that I have before me in the next few days and after that, we will get on with further work to make the economy stronger and more efficient.

Can I also particularly thank Leon who is without doubt, the pre-eminent, the pre-eminent function organiser in Australia and there is no-one in his (inaudible). To my colleagues, Michael Ronaldson who is here, Mitch Fifield who is doing the hard yards making sure that the NDIS is deliverable, Senator Scott Ryan who is here as well, Tony Smith, who is doing a great job with me and also Kelly O’Dwyer who is also doing a terrific job and is also an excellent writer as I have noticed in the Financial Review. To all of you friends thank you so much for inviting me here. I'm very pleased to be here.

Over the past few days, believe it or not, I have thought a lot about what I am going to say today.

One reason is because it's my final major speech before government's first Budget. That's not the only reason, nor is it the main reason.

I wanted to be here today because I want to express my immense admiration for the Jewish community in Australia. In general terms I can think of no other single community that has a greater love and affection for its children and no other community that has a greater devotion to its future, no matter how great the sacrifices of the past.

Your love and protection of family and your focus on legacy and prosperity, are what I strive for daily with my own family and they are firmly among the principles that brought me into public life. So I really wanted to properly, for the first time, at a public forum like this, acknowledge and thank you for your leadership in the community.

It is also rather poignant to be giving my final pre-Budget speech here in Victoria. Of course, your State has suffered many ups and downs over the last 150 years in particular. Victorians have seen, both the very best of times and the very worst. From the wealth surges of the Industrial Revolution and the prosperity of the gold rush to the depths of the depression, the failure of the State Bank, which we witnessed from New South Wales but thankfully never experienced and the massive shifts in manufacturing that you're still seeing today. Victorians have time and time again overcome adversity and prospered.

Through sensible reform in recent years, in my view initiated by the Kennett Government, and continued by others, Victoria's economy has proven more robust and flexible than almost all other States. And don’t forget, the Napthine Government is now the only Australian Government forecasting consistent Budget surpluses over the next four years; the only government in Australia. It's a great achievement. Victorians know how to live within their means and like so many in the Jewish community here, Victorians generally have proved the argument that you must earn prosperity.

In just 11 says I will deliver the first Budget of the Abbott Government. It will be the Budget we were elected to deliver. It will represent the first words of our economic action strategy to repair the damage of the previous government and to get the nation’s finances back onto a sustainable footing. It will be a Budget that facilitates stronger economic growth and therefore helps to deliver greater job security. This Government understands that our quality of life in Australia cannot be taken for granted.

As my dad always says to me, prosperity is not a gift, it has to be earned. The Budget will be a down payment on our future. It will be a Budget that underpins and strengthens the productive potential of our economy and this Budget will not leave our children with a legacy of debt that they can never repay. We will not ask future Australians to pay for the government entitlements we receive and they will never get.

Some of you may recall that two years ago I gave an address in London, titled, The End of The Age of Entitlement. This Budget will seek to replace the culture of entitlement with a culture of enterprise. It means that a government should only do for people what they cannot do for themselves and no more.

Payments must be sustainable and fair and targeted only to those who really need them. Where appropriate, that support should be temporary until people can once again take charge of their own destiny. The end of the age of entitlement will facilitate greater personal responsibility, where individuals with their own financial capacity can no longer expect other Australians to be responsible for all the bills. This means redefining the role of government in society.

For instance, companies cannot expect to rely on taxpayer handouts as a substitute for making hard commercial decisions in a competitive market. Our decisions on SPC Ardmona, Qantas and the automotive industry illustrate our approach to industry assistance. We believe that private enterprise is usually the most efficient mechanism for providing goods and services.

We also believe that a government should only provide services where the private sector can't provide enough of them at an affordable price. In the private sector, no-one questions the concept of user pays - you get what you pay for. And yet over the years, we seem to have developed an attitude that this principle should not apply to government services. Government services are somehow deemed to be magically free but of course they're not free. They are paid for by the taxpayer. And so asking those who use government services to at least make some contribution to their delivery, seems a logical and equitable step.

There is no such thing as a free visit to a doctor.

There's no such thing as free welfare.

Sooner or later, everyone that receives a benefit or a payment pays a price through the tax system.

Every Australian is, in one form or another, a taxpayer.

Therefore, where appropriate, we need to send price signals to the users and beneficiaries of those services, so that everyone understands that everything we use in our community comes at a cost.

The Commission of Audit report released yesterday highlights the Budget challenges we face. It makes major recommendations for spending reform by the government.

Without action, the Budget outlook is deficits and rising debt for at least another 10 years, but in reality, as far as you can see. After five years of deficits, many of them are the largest recorded ever in Australia. Further consecutive deficits totalling $123 billion are expected over the next four years and Budget deficits are projected in each and every year out to 2024. If we got to that point, Australia would've been in deficit for 16 consecutive years, the longest period on record.

My 8-year-old son would be asking to borrow the keys to my car by the time he saw his first surplus. He would be facing a massive government debt burden of $667 billion and the problem at the heart of Labor's legacy was excessive spending. Real spending growth over the last five years was around 3.5 per cent per year, so that's an increase of 3.5 per cent above the rate of inflation.

That's more than twice the speed of the economy. So government's getting bigger and bigger and bigger compared to the economy, but the worst part of it was, it kept going. It kept increasing. And government expenditure is currently on track to continue to grow much faster than the growth in the economy which means the government gets bigger and all of you and your families get smaller and smaller as a part of the general economy.

And the previous government booby-trapped much of the spending beyond the four years published in the Budget, so they locked in programs that had a massive growth potential in expenditure. Beyond the four years, we see spending growth in 2017 of nearly 8 per cent - an annual average growth in spending of around 4 per cent per year after that.

As well as rebuilding the balance sheet, the Commission of Audit also identified a need to rebuild the institutions and infrastructure of government. Programs like the $4.5 billion National Rental Affordability Scheme - poorly designed and poorly implemented and led to a massive waste of taxpayers' money. Now some of us always suspected that many government bodies are established simply to create the appearance of action. Well, turns out we were right. In fact the biggest surprise of coming into government is it's as bad as I thought it was going to be.

The Commission of Audit found that of the nearly 700 government bodies in existence at a federal level, 93 non-principal bodies exist to provide advice to 194 principal bodies. 238 bodies exist to facilitate discussions between the State and the Commonwealth and a further 314 bodies exist to provide government to us, to government. In other words 45 per cent of government bodies exist to do what departments should be doing on a day-to-day basis.

The Commission of Audit laid out 86 recommendations. Its recommendations, not all government policy, in fact, they're not government policy. It was a report to the government, not from the government. But its ideas have been considered by us in a methodical manner. Some things we can do now, some things may not be actioned at all and some recommendations will be assessed in light of our reviews in key policy areas such as, the Taxation White Paper, the Intergenerational Report at the end of this year, and the Financial System Inquiry and so on.

Major structural reform is a long-term and challenging process. That's why any changes in these areas would only be made after careful deliberation. Let me spend a little bit of time talking about our strategy both for this Budget and more broadly.

First of all, the Budget strategy will be realistic for the medium term and will have achievable Budget rules. In the longer term, it will lay down a path to deliver our election commitment of achieving a Budget surplus of at least 1 per cent of GDP by 2024.

So you will see some solid, realistic economic assumptions in the Budget.

You're not going to see any accounting tricks. All commitments will be fully funded over both the next four years and the medium term. We are going to keep our promises; we are going to keep our promises. I can tell you now, it will take time to restore the Budget to sound health.

In the 1980s, Budget consolidation was supported by high inflation pushing up incomes and tax collections. So the government got the revenue in because there was high inflation, people earnt more, paid more tax.

In the 1990s, the proceeds of large-scale asset sales were used to pay down debt and the cost of servicing that debt and in both the 1980s and 1990s, strong economic growth also assisted Budget repair.

This time around, we have inherited a bad Budget with lower inflation and slower economic growth. This time around, most assets suitable for sale like Telstra and the Commonwealth Bank have already been sold.

Clearly, we can’t hope for Budget consolidation to just happen, merely through good fortune or by relying on stronger economic growth. The bottom line is, the line ‘she’ll be right’ is just no answer, no answer for the modern Budget.

If we are going to put it back on to a sustainable path to surplus, we have to act now.

We will maintain discipline to reduce the Government’s share of the economy over time, to free up resources for the private sector to drive jobs and economic growth. I have given instructions to my colleagues; any new proposals to spend money must be more than funded through offsetting savings. Don’t come to me with a spending proposal, unless you have bigger saving proposal and we will bank rather than spend any variations the Budget might deliver though higher revenue or lower spending. That means that windfall gains will be directed towards a Budget surplus and paying down debt.

While returning the Budget to a sustainable surplus will be achieved progressively over time, because we want the economy to continue to improve its growth trajectory. I want to stress that I am not committing to achieve a surplus in the near term as the benchmark of my Budget strategy.

Stabilising and then repaying the massive government debt will be central to our strategy.

It is critical for the long-term sustainability of the Budget and it is critical to ensure our children are not left with the burden of servicing and repaying the debt that supported our standard of living. Just think about that, we are borrowing from our children to sustain our standard of living. I don’t think there is a person in the room that would accept that as something that is sustainable.

Servicing the interest on debt, interest on debt alone is already a significant drain.

The last Budget update projected that gross debt for every Australian will increase from $13,000 per person to $25,000 per person by June of 2024. So that means, for mum, dad and two children, $100 000 of debt, from the Federal Government alone.

The interest costs on this debt by 2024 will be $34 billion; greater than our annual spending on aged care, or the pharmaceutical benefits scheme, or income support for carers, or child care.

There is much work to do to and our goal won’t be achieved overnight. This is not going to be an austerity Budget but it is going to be a prudent Budget.

The Budget is preparing us for some of the demographic challenges that lay before us including the ageing of the population of Australia. Don’t get me wrong, we should celebrate that we are all living longer; I think that’s a good thing, I encourage it, as I say to my parents. And effectively of every little child born today, one in three are going to live to 100. What we have got to do is make sure that they have a good quality of life. Just to have the same quality of life that we have today is, under the current framework, a huge achievement and it shouldn’t be. We should hope that our children have a better quality of life than we do, that’s what we should all hope for but there is so much to be done to rebuild the economy, including some of the suggestions that Mark talked about earlier.

Every aspect of the economy is going to have to undertake some of the heavy lifting and that in turn will deliver us enough budgetary space to ensure what we do today is sustainable into the future. It’s hugely important. So the Budget will be careful and considered and we are not going to be in the business of shocking people.

We are focused on what is deliverable and achievable over the medium and long term and one area that needs to be properly addressed is the eligibility for the Age Pension. If you are 65 today you are not going to lose your pension.

What we are going to do is to deliver a fairer system for the Age pension that is going to focus on the sustainability of the system with a reasonable quality of life. The age pension expenditure today is currently more than what we spend on defence. We spend $39 billion a year on the Age Pension. It’s rising to $72 billion rapidly and that’s faster growth, over 6 per cent growth and one of the reasons why is because we are ageing as a demographic. But the pension kicks in at 65, when Labor increased it to 67 by 2023, we gave them bi-partisan support. So when we introduce legislation to increase it to 70 by July 2035, 2035 that’s when it will go to 70, we expect that there will be bi-partisan support. I want you to understand - and some of you won’t be around then, probably me, but I want you to understand this is what long-term planning is about. This about the long term sustainability of our system and by the way, qualifying for the pension at 65, 67 or 70 is not the end of your working life, can we move away from that language? We actually want people and want to encourage people to work longer.

We want them to participate for as long as possible. But there’s going to have to be heavy lifting and heavy lifting form the business community.

I know there are many business leaders here today, and I’m going to say to you and repeatedly say to you, over the months and years ahead, we’ve got to embrace senior Australians participating in work. We’ve got to work to be flexible, to ensure that they can participate in work and we’ve got to change the culture of business to encourage them to work and if we do that, we lift the tide for all Australians. The participation agenda that I will announce on Budget night is about improving the productivity of the nation, ensuring that as a nation we are rich enough to be able to do what needs to be done. Our Budget is not just about fixing some of the problems we inherited, it also about ensuring that so much of what we do is sustainable. There will be a significant growth package associated with the Budget. The growth package is not just about the abolition of the Carbon Tax or the Mining tax, as well our continued winding back of excessive regulation, it will be about proper investment in infrastructure and also about providing incentives for major new infrastructure.

Now just a couple of hours ago the Prime Minister signed with the Premiers and historic National Partnership Agreement in relation to asset recycling. I negotiated with the State Treasurers the pool of money that the Federal Government will make available to make to them and if they recycle asset values, make their capital work for them, taking it from existing infrastructure. Be it ports, which is quite topical here in Victoria, or railways, or be it in electricity, or any other area. Sell it to the private sector and recycle the capital back into new, productive infrastructure. And for the first time, the Commonwealth Government is going to put on the table a pool of money, billions of dollars, that is going to be incentive for the State Governments to move on that significant reform, and start building the new infrastructure that is essential to build the new economy for the 21st century. We want cranes over our cities – we must have cranes over our cities – and we are putting money on the table with our State colleagues to make that happen.

And I applaud the efforts of the Government here in Victoria, in working with us to deliver the East-West link. How important that is for Melbourne; but how important that business activity is going to be for Victoria over the next few months and years.

And in other areas, our colleagues are working damn hard, and particularly I want to praise Andrew Robb for the work he has done in landing Free Trade Agreements with South Korea and Japan. It’s not just about being at our best, we’ve got to find new markets. We’ve got to expand the marketplace, and these new Free Trade Agreements with South Korea and Japan, are going to expand our capacity to become more involved in the Asian region. They are a signal that Australian is open for business.

So I say to you, ladies and gentleman, the Budget that I will deliver in a few days’ time is just the start of the process. It’s not the final work; it’s the beginning. It’s not aimed at cooking-up some sort of particular outcome for the Budget bottom-line. Rather, it’s designed to make long-lasting, structural improvements to the nation’s finances. It’s about improving our quality of life. It’s about helping to facilitate the creation of jobs. There will be heavy lifting. All of us; all of us have to contribute to that heavy lifting in one form or another, because everyone will benefit from the effort. Everyone will benefit from the effort we all put in. We’re building a new Australia. That’s incredibly exciting. This nation is blessed with incredible resources, and incredible people. But we all need to earn prosperity, and that great journey will start on Budget night. Thank you very much.


Minister I want to thank you so much and I want to say that the Minister has agreed to answer questions. We have microphones strategically placed, so can you give us your name and the company you represent. Any questions at all.


First of all, welcome Minister. Peter (inaudible) we’re an investor. We manufacture small goods in Victoria and nationally. And wouldn’t it be a good idea that wouldn’t cause any pain to anybody, to increase growth by increasing cash flows in companies whereby we don’t have to pay provisional tax and re-invest that money back into the economy from a capital expenditure and so forth. What would you say to that Sir?


It’s a great idea. We’re not seeking to fix the Tax System in this Budget. In fact the head of the Tax Policy Division of Treasury said to me in confidence, and I’m just sharing it with you, that it’s been the most boring Budget he’s been involved in for years. So that’s probably a good sign because we’re not engaging in a whole lot of restructuring of Tax Policy because we are going to have a proper process – a Tax White Paper – and what comes out of that we will take to the Australian people at the next election.


I’ll ask the next question. How different is it coming to government when you’ve already been in government prior to 2007? A lot more experience, and you just actually know how everything works. Has it made your job a lot easier with the amount of experience you have in the Cabinet and in the broader Government?


It’s made a massive difference. I sat on the Expenditure Review Committee of Cabinet in the last year of the Howard Government as a Minister for 9 years. It means that you can hit the ground running and particularly given that we are chairing the G20, and that has been an enormous work load which I didn’t fully appreciate when I was made Treasurer. So delivering a first Budget in these sorts of circumstances and chairing the G20 is quite a work load and having an experienced team, a Prime Minister who is deeply engaged in the Budget process, which we really wanted and we agreed was absolutely necessary and having members of the Expenditure Review Committee, Warren Truss, Peter Dutton, who have both been Ministers previously, has made a big difference. What has stunned me is that the infrastructure of Government is broken and Centrelink and Medicare have structural problems. Their infrastructure, their mainframes are under enormous pressure. Even just the call centre at Centrelink. When I was there the waiting time was about 6.5 minutes, bear in mind they had millions of customers, now it is funded under the previous Government at 17.5 minutes. Neil Mitchell told me the other day that he had to wait 82 minutes to get through. Now, if you’re going to have structural reform you have got to take the community with you and if you take 82 minutes to respond to a telephone call it makes reform incredibly hard, let alone the structure of the mainframe. So, we’re looking at ways to totally change and improve the delivery of Government services as well.


One area you talked about was services but you also spoke about infrastructure and it is interesting that the Prime Minister wants to be remembered as the Prime Minister who delivered infrastructure to Australia. Can you expand a little bit more about how big he is talking?


He’s talking big. I’ve just had to find the money, that’s all, but he’s talking big. Why? Because, and Andrew MacKenzie,I hope I’m wrong here sir from a BHP perspective, but the fact is that we have had a massive investment in mining and resources construction over the last few years and that has helped to deliver some economic growth. But now we are going into a production phase in mining and resources. So the resources in that industry are coming off. What we’ve got to do is strengthen the other side of the economy, to lift the services sector in the cities. We have got to lift that side of the economy, and driving productive infrastructure quickly is going to help to lift that other side of the economy. Combine that with the re-allocation of lazy Government capital into new greenfields infrastructure, like the East-West program and a few others that are coming and you’re going to start to get some momentum in the cities that more than compensates for a change in the profile in the mining and resources sector.


Question in respect to education, you have acknowledged the commitment to family and education sacrifices that our community of [inaudible] may continue to provide an education for their kids. Respect to Gonski or what remains of it, it appears to the press that the ongoing independent education funding is either at risk or is going to be changed. [inaudible] our community independent sector some comfort that the level of funding that the schools receive will not be diminished in any way?


I’m not going to get into a guessing game about the Budget. But we committed to the four years of Gonski and we’re remaining committed to the four year funding profile of Gonski. In fact, we ended up putting in more than $1 billion more into Gonski. Poor David Gonski, his name’s used in vein everywhere. But, the previous Government, on the eve of the election, ripped out money from Western Australia, Queensland and the Northern Territory. Immediately after the election I had to go and find more than $1 billion to put in, to make up for the short fall in those states. So if you like, we are doing ‘Gonski plus’ over the four years. But fundamentally, schools have to be run by the states. The Commonwealth Government does not run one school. It does not employ one teacher. And as such we have got to come to a proper agreement with the states and we will be doing that.


Thank you for a very informative speech, Mr Treasurer. Whenever I travel around the world I am always very proud to say that I am from Australia, from Melbourne, from the world’s most liveable city. We get voted that every second year or first year, it is fantastic. What is your Budget doing, or going to do, to keep our reputation up as a great country to live and Melbourne being the world’s most liveable city, keep it where it is? Specifically, I suppose, what I’m asking is, I’m proud of the fact that people who need to see a doctor can see one and afford to see one, people who need to go to a hospital can do that and afford to do that if they haven’t got any money. Education is affordable to people who don’t have any money. So what is the Government doing to keep us as a liveable and the world’s most liveable city?


Well, we are going to build the infrastructure that is going to make us an even more liveable place. And we are going to build the infrastructure that, in fact, delivers a sustainable quality of life and, gee I hope, a better quality of life. But it is not going to be easy. Now, Chairing the G20 gives me the opportunity, I Chair the G20 Finance Ministers and the Central Bank Governors, five times this year. My opening thought was in relation to all these people, the head of the Federal Reserve in the US or the Chancellor of the Exchequer was, how are you going to treat these people? I thought, ‘you’ve just got to be yourself, a straight talking Australian’ and their relief at the straight talk is palpable. It is the fact that when we say that we can’t regulate our way to prosperity, that we have got to get away from the concept of more regulation and more taxes, they actually give a cheer. They give a cheer and that is seen as the Australian way, to let people get on with their lives. So, the perception now, in the G20, where I was at first warned that you might not get these leaders of the global economy to come to Australia for the meetings, it’s so far to go, they are all coming and they are coming three times this year, because they now recognise that we do as we say and we are prepared to be at the forefront of the argument for freedom and enterprise. And the first phone call I received after election night, the first phone call, 6am in the morning, was from George Osborne the Chancellor of the Exchequer. And he said to me, ‘thank God I’ve got a fellow traveller, Joe’, you know, around the table. I said, we need to prosecute the values we prosecute in our own countries, we need to take to the world and that will be the very best advertisement for my country and that is what we are doing. Now I have got to deliver and Budget night is the start of the delivery.


Hello, thankyou for your speech, given the Audit Commission’s recommendations for the closure of the commercialisation of Australia [inaudible] wants to know what you view the role of Government in encouraging companies and innovation, given its importance in providing jobs in a high cost economy and the structural issues that that is to address going forward for Australia.


Well of course we want to facilitate innovation. Governments don’t particularly innovate. Individuals and businesses do and what we have got to do is facilitate that. Now, when we say that the end of the age of entitlement applies in Australia we mean as much to business as it does to individuals. So we’re prepared to help to lay down a road map for businesses to be successful. We are going to have an innovation statement in the middle of the year, and work has already started on that. There is no Government subsidy that is going to get a subsidy from the basement to the thirtieth floor. You’ve got to do it.


Treasurer, you’ve talked so much about the Budget emergency, you’ve talked about the pension issue in particular in recent weeks. I’m interested in why you have decided to wait until 2035 to lift the pension age to 70 and why you haven’t decided to do it earlier?


Well, because you need to have a trajectory that is linked to retirements. Now it was the early 20th century when the Government first introduced a pension for people aged 65 - men, they didn’t worry about women, they just did it for men aged 65. Life expectancy was 55. So you didn’t have a lot of takers. That Budget methodology hasn’t lasted too well over such a long period of time. The previous Government said, look, we recognise people are living longer. Some actuaries will tell you that life expectancy now, in Australia, is well into the 90s. But we have got to allow people to have certainty that allows them to start saving and planning for retirement and if you start dealing with issues now, that affect people’s lives 2035-2050, then they can start to save and plan for that framework. That’s what we’re focussed on. The Age Pension needs to be a safety net by 2035, not a cargo net. It needs to be something that is going to ensure that no one is left behind and of course it will be ongoing increases in costs associated with aged care and health care and we have got to have the money to meet those challenges.


Mr Hockey, learning our situation with the United Nations and our position in the Australian Government in the area of the United Nations on the Security Council, what sort of support is the Australian Government going to give Israel in issues related to Iran, and those types of things.


Did you organise the questions Leon? Australia’s support for Israel has been very strong. You might have noticed there has been a strengthening of support for Israel since the change of Government. There is nothing that will diminish that, nothing at all that will diminish that. So, unless you see something I don’t we will continue to provide support for Israel, the UN and in other places, in other jurisdictions and I think that will be well reflected if Benjamin Netanyahu- actually does come to Australia, I hope he does, in the middle of this year. We will see how it goes, because the ball’s in his court, but I think you’ll see the closeness of the relationship reflected in that visit in the middle of this year.

Thank you very much.