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18 March 2022

Address to the Australian Chamber of Commerce & Industry, Canberra

Note

The fiscal dividend of a stronger economy, Canberra

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I would like to acknowledge the Traditional Owners of the Land and pay my respects to their elders past and present.

I would also like to thank Andrew Mckellar and ACCI for hosting us here today.

ACCI with its 300,000 strong business membership is acutely aware of how severely impacted SMEs have been during this pandemic.

But as always, Australia's SME sector has shown remarkable resilience and now are at the heart of our economic recovery.

In 11 days’ time I will deliver my fourth Budget as Treasurer.

Budgets that have been delivered in the midst of drought, fires, floods, a global pandemic, and now war in Europe.

Extraordinary events that have tested Australians but also brought out their very best.

Our thoughts today are with families affected by the devastating floods.

The Morrison Government will continue to stand with these communities and help them rebuild.

In my pre‑Budget speech today, I will address two key points.

First, the Australian economy has recovered strongly and now has real momentum. The initial phase of our fiscal strategy has delivered on its objective, with full employment in sight. The Budget I hand down on the 29th of March will show the fiscal dividend of this strong recovery.

Second, with our recovery well underway it is now time to move to the next phase of our fiscal strategy. This will see a focus on stabilising and then reducing debt as a share of the economy. Rebuilding our fiscal buffers without risking growth.

A Stronger Economy

In early 2020, Australia faced its biggest economic shock since the Great Depression.

Around 1.4 million people, or a little over 10 per cent of the workforce, lost their jobs or were stood down on zero hours in April 2020.

Our economy shrank by an unprecedented 6.8 per cent in the June quarter. To put this in context, prior to this the largest ever quarterly fall in GDP was 2 per cent in the June quarter 1974.

People were confined to their homes, the economy was put into hibernation, and our lives were put on hold.

In the face of this crisis, it was clear we had to recalibrate our fiscal strategy, a strategy that had delivered the first balanced Budget in 11 years and put us in a position where we were able to respond on the scale that was necessary.

Our sole focus was on saving lives and livelihoods and preventing the economy falling into the economic abyss.

To achieve this, the first phase of our updated fiscal strategy supported employment, growth, business and consumer confidence with temporary, targeted and proportionate measures like JobKeeper, the CashFlow Boost and the Coronavirus Supplement, which doubled the safety net.

This has seen $314 billion of direct economic support from the Morrison Government alone.

Unlike during the GFC, when a 425‑basis point reduction in the cash rate provided the equivalent of $100 billion fiscal boost, this time, monetary policy had little room to move.

Fiscal policy was relied upon to do the bulk of the heavy lifting.

We were clear in our October 2020‑21 Budget, this first phase of the fiscal strategy would remain in place until the economic recovery was secure and the unemployment rate was comfortably below 6 per cent.

This was not forecast by Treasury to occur until at least the end of 2023.

When I spoke to you ahead of the Budget last year, there were promising signs of an economic recovery underway, but it was not yet secure.

While the unemployment rate had by then fallen to 5.7 per cent – well ahead of expectations ‑ it was still important to reassure households and businesses that fiscal support would not be prematurely withdrawn from the economy.

The strength of our recovery had also created an historic opportunity to drive the unemployment rate to not just pre‑pandemic levels, but even lower.

It was an opportunity we needed to seize.

We adjusted our fiscal strategy accordingly.

Today we can see our fiscal strategy has worked.

Australia’s unemployment rate is at 4 per cent ‑ the equal lowest in 48 years.

There are 377,000 more Australians in work than at the start of the pandemic.

The unemployment rate is now on track to have a three in front of it for the first time in half a century, a long way from the 15 per cent unemployment rate Treasury feared in the early days of the pandemic.

Australia has avoided the labour market scarring experienced after the 1980s and 1990s recessions when it took around a decade for the unemployment rate to recover.

This was not only a test we set for ourselves, but also one set by Shadow Treasurer Jim Chalmers who said, “what happens to jobs” is “the biggest test for this Government’s management of the recession and its aftermath.”

Beyond the unemployment rate, there are broader signs of economic growth.

Growth in the December quarter was its equal strongest in 46 years.

Businesses are investing with capital expenditure expected to grow by more than 12 per cent this financial year.

Job advertisements are more than 45 per cent higher than pre‑COVID levels.

And in MYEFO wages were upgraded in each year of the forward estimates with the latest National Accounts showing average earnings up 3.4 per cent through the year.

Omicron may have temporarily interrupted the recovery, but it did not derail it.

Spending data for January and February was actually up on the year prior.

To the credit of 26 million Australians our economy has outperformed all major advanced economies since the pandemic began in both employment and output terms.

Our recovery has been stronger than that seen in the United States, United Kingdom, Canada, France, Germany, Italy and Japan. In many of those nations, employment and the size of their economy has yet to fully recover to pre‑pandemic levels.

Second Phase

It is this underlying strength and resilience of Australia’s economy that now enables us to transition to the second phase of our fiscal strategy.

The time for large scale economy‑wide emergency support is over.

Fiscal settings need to be normalised.

We have already drawn some clear lines.

We ended JobKeeper in March last year. At the time it was costing the taxpayer more than $2 billion a month.

The Leader of the Opposition called for it to be extended and expanded, saying JobKeeper was, “the only support that was keeping the economic roof from crashing down.”

A false prophecy.

Three months after JobKeeper ended, 120,000 more Australians were in work.

We also ended the COVID disaster payment last October as restrictions eased after the Delta outbreak.

Again, Labor opposed us with Shadow Finance Minister, Katy Gallagher then saying, “support should not be pulled.”

The following month saw 373,000 new jobs created, the strongest monthly increase on record.

And earlier this year, we took another hard decision, turning down state requests for more broad‑based economic support during Omicron, noting the underlying resilience of the economy and other measures already in place.

Labor again called for the spending taps to stay on.

A month later, the unemployment rate fell to a 13‑year low.

Labor has made $80 billion of additional spending commitments during COVID.

Once Labor starts spending, they never know how to stop.

Crisis level economic support must not become entrenched.

With our tight labour market and our strong economic recovery, continued support at those levels would do more harm than good. It would risk putting further pressure on inflation, interest rates and cost of living.

International factors, including rising global oil prices and shipping costs have seen our inflation rate rise to 3.5 per cent.

While inflation in Australia is less than half of the 7.9 per cent seen in the United States and well below that of the United Kingdom, Canada, Germany and New Zealand, cost of living pressures are real.

What Australians cannot afford at this time is a Labor government who when last in office mismanaged the economy, seeing unemployment rise from 4.2 to 5.7 per cent, electricity prices double and taxes increase.

Our plan to reduce cost of living pressures has focused on a number of measures including, driving electricity prices down by 8 per cent in the last two years, record investments in childcare of over $10 billion a year, and around $30 billion of tax relief since the pandemic began that has supported low and middle income earners.

In the Budget in less than two weeks’ time, there will be further measures to support families to meet the cost of living pressures, in a targeted and proportionate way.

Stabilising and Reducing Debt

In the second phase of our fiscal strategy, we will target a budget position that allows us to stabilise and then reduce debt as a share of the economy.

This year’s Budget will confirm that this is the trajectory we are now on.

It will show a substantial improvement to the budget bottom line ‑ the product of more Australians in work and fewer Australians on welfare.

Gross debt as a proportion of GDP will peak lower and earlier than forecast at MYEFO.

Gross debt will not only stabilise but will decline over the medium term.

This is the fiscal dividend of a strong economy.

We have already seen the benefits this approach can deliver to the overall budget position.

With the Final Budget Outcome for 2020‑21 around $80 billion better than was forecast when I delivered the Budget in October the previous year, the primary driver of which was a strengthening labour market.

As I have said before, provided nominal economic growth exceeds the nominal interest rate, economic growth will more than cover the cost of servicing our debt interest payments.

As a result, by growing our economy we can maintain a steady and declining ratio of debt to GDP even without running surpluses.

In this Budget, our revenue forecasts continue to be based on a conservative set of commodity price assumptions which return to their long run anchors, notwithstanding their current elevated levels which sees iron ore at over $130 a tonne, thermal coal at a record $385 a tonne and metallurgical coal at a record $660 a tonne.

These prices for thermal and metallurgical coal are more than 50 per cent and 60 per cent higher than previous record highs seen at the end of last year.

This is a responsible approach that protects the structural integrity of the Budget.

It prevents new structural spending being baked in off the back of temporary revenue increases.

When Labor was last in government, they adopted the opposite approach, recklessly locking in over their four‑year forward estimates extraordinarily high iron ore spot prices which at the time were around $180 a tonne.

Our tax‑to‑GDP cap of 23.9 per cent remains a key element of our fiscal strategy.

This imposes a discipline on the expenditure side of the Budget and is consistent with the Coalition's values of cutting taxes, not increasing them, enabling Australians to keep more of what they earn.

If Labor had won government at the last election, their $387 billion of higher taxes would have seen the tax‑to‑GDP ratio increase to a record high of 25.9 per cent.

In this second phase of our fiscal strategy, we will also continue to control expenditure growth, maintain our focus on the efficiency and quality of government spending, while guaranteeing the delivery of essential services.

We will also continue to support productivity enhancing investments and structural reforms that build a stronger economy, support private investment and create more jobs.

This year’s Budget will see a continuation of our economic plan with further investments in infrastructure, skills, digital transformation, energy, our regions and Australia’s sovereign manufacturing capability.

While Australians can be confident about their economic future and the underlying resilience of our economy, what recent years have shown, is that we live in very uncertain times.

It’s a reminder that we must take the opportunity, while the economy is strong, to strengthen our Budget and rebuild our fiscal buffers: so that in the future, we have the fiscal firepower to respond.

The pandemic is still with us and new variants may yet emerge.

There is war in Europe, which has heightened geopolitical risk and threatens global growth.

Together, the pandemic and events in Ukraine are straining supply chains and driving up energy prices and inflation.

As we saw entering this crisis, a strong Budget and a strong economy put us in the best position to respond.

That is why it is important to move to the next phase of our fiscal strategy, which will stabilise and reduce debt as a share of the economy.

Australia has sustainably reduced Commonwealth gross debt as a share of the economy six times in the past century – following the two World Wars, the Great Depression, and again following the recessions in the 1970s, 1980s and 1990s.

The consistent lesson from these successful fiscal consolidations is that they are almost always achieved gradually and are underpinned by a strong economy and genuine fiscal discipline.

A gradual and measured pace of consolidation ensures that the economy can continue to adjust and grow, even as fiscal policy normalises.

It’s about striking the right balance.

A sharp and sudden tightening in the fiscal settings would likely be counter‑productive, undermining the economic recovery and ultimately hurting the Budget.

We do not want to put at risk the hard‑fought gains we have made.

The Government is in a position to take this measured approach because of our strong fiscal starting position.

Our debt to GDP levels, even when they peak, are still low by international standards, below the OECD average and around half that in the United States and the United Kingdom.

Even as interest rates gradually rise, our debt servicing costs remain manageable with the AOFM having been able to take advantage of historically low interest rates to borrow at the longer end of the yield curve.

This makes our debt repayments less sensitive to future increases of interest rates.

The weighted average term to maturity of Treasury Bonds is now over seven years, compared to with less than five years a decade ago.

Despite the size of the economic shock, Australia has also retained its AAA credit rating from the three leading agencies, one of only nine countries in the world to do so.

The recovery will also continue to be supported by significant fiscal support already in the system, household and business balance sheets are substantially stronger than before the pandemic.

There is now an additional $251 billion accumulated on household balance sheets and a further $182 billion on business balance sheets that was not there at the start of the pandemic.

This will continue to provide confidence for people to spend and invest to the benefit of the broader economy.

Conclusion

To conclude, our Economic and Fiscal Strategy has served us well throughout the pandemic.

A strong economic recovery is now underway, and unemployment is heading for a near 50‑year low.

Given this strong outlook and emerging inflationary pressures, we have drawn some clear lines.

The time for large‑scale economic stimulus is behind us.

We are sensibly transitioning to the next stage of our fiscal strategy, beginning to rebuild our fiscal buffers.

We are at the same time, sticking to our economic plan, investing in our future, creating more jobs and guaranteeing the essential services that Australians rely on.

Thank you.