Thanks for the introduction Paul and to all of you for the warm welcome - I'm delighted to be here again. I've been here in opposition and in government, and I've talked about workforce participation, tax reform, federalism - and last year about the role of government in a changing society. Tonight I want to talk to you about the global outlook, what it means for fiscal policy and what that means in terms of the two competing versions of the future. The timing for this conversation we're having could not be better. We've just put out the mid-year budget update and the Asian Century White Paper, and we've a G20 meeting and a presidential election in the next few days. Now, I think everybody here would understand that by the end of this decade, Asia is set to overtake the economic output of Europe and North America combined to become the world's largest economic power. And that average GDP per person in Asia is set to almost double by 2025 - a feat that took the United Kingdom over 50 years to achieve during the Industrial Revolution.
So with this vast opportunity before us I was particularly pleased with how well-understood the main thrust of the White Paper was and how much consensus we were able to achieve around a couple of key points: That lifting our productivity growth at home is vital for our prosperity in this century, irrespective of how the economic contours of Asia evolve. That education is fundamental to unlocking these gains, but it serves more than one purpose - it builds our capabilities at large, but also opens minds to the possibilities of our region. That the responsibility rests on all of us, to each do our bit to grasp opportunities across all sectors of our economy and all parts of our community. And that good fiscal policy forms the foundation of what we are doing, with Australia's public finances among the strongest in the world. It's also good timing because tomorrow morning I fly out for my 21st meeting with my G20 colleagues, this time in Mexico City. Attending the IMF and World Bank annual meetings in Tokyo recently gave me a good sense of how my international counterparts are viewing the world and the Mexico meetings will be another timely opportunity. There remains a deep sense of uncertainty.
My colleagues are particularly alert to the risk of policy inaction in Europe and the US putting even more pressure on an already rickety global recovery. But as the finance ministers responsible for almost 90 per cent of the world's GDP, we at the G20 this weekend have an obligation to focus not just on the risks, but on improving the central case scenario. In Mexico I'll be imploring my colleagues to support jobs and growth in the near term while ensuring their medium-term budgets are put on a more sustainable footing. One observation I've made over five years now at these meetings, is that this message carries more weight because of the success we've had here at home. If vulnerable economies get this wrong the consequences would be devastating. Because even when we get past the short-term hurdles - and Europe has certainly made some good progress recently thanks to Mario Draghi and others - we haven't yet set a pathway to a credible, sustainable global recovery. I, for one, don't think a global growth rate with a three in front of it is going to cut the mustard, and I know my colleagues don't either. That kind of growth is not enough to make inroads into reducing the stubbornly high rates of unemployment in much of the developed world, and so is not a sustainable path for our future.
Beyond jobs and growth my focus at this G20 meeting will be on credible medium to long-term fiscal plans - plans that set fiscal priorities in ways that improve productivity and competitiveness, and that restore market confidence. That brings us to the United States - a country buffeted by the worst of the GFC and now the worst of mother nature. We're not strangers to these kinds of challenges and so our thoughts go out to our friends in the US. After the G20 in Mexico, I'll be visiting Washington DC where the fiscal cliff looms as the biggest threat to their economy and to a fragile global recovery. The global economic consequences could be grave indeed if action is not taken after next week's election to address the looming fiscal cliff - that is, the catastrophic impact of the sudden unwinding of tax cuts and the ending of expenditure programs. The independent Congressional Budget Office estimates the fiscal cliff, left unattended, could see the US economy suffer a crushing annualised contraction of 2.9 per cent in the first half of next year. The CBO also estimates that without action to avert the fiscal cliff, the unemployment rate would shoot up to more than 9 per cent by the end of 2013 meaning almost 2 million fewer jobs in the US than would have otherwise existed. That's the same number as the total number of jobs added in the US over the past year. A reversal of job growth such as this would have enormous human and economic costs. This would not only drive the US economy back into recession, but would strike a savage blow to the recovery in the global economy.
I commend Christine Lagarde, for so clearly articulating the dangers to jobs, growth and the world economy of the fiscal cliff. This sentiment will no doubt feature in our conversations when I meet with her and with Federal Reserve Chair Ben Bernanke in Washington next week. These conversations, along with discussions with Doug Elmendorf, Director of the US Congressional Budget Office, will be an opportunity to get an on‑the‑ground sense of the US fiscal position. The threat of a sharp downturn resulting from the fiscal cliff is immediate, but just averting the impending crisis mustn't become an excuse for shying away from a sustainable longer-term fiscal strategy. Because trillion dollar deficits are not sustainable and quantitative easing is not a long-term solution. So whoever wins the presidential election in less than a week's time, and whoever controls the Congress, will have choices to urgently make, and from those choices will flow big consequences for their country and for the global economy.
So having run through the global outlook I now want to talk about fiscal choices tonight in the context of our own mid-year update. Because although there are some big differences in fiscal outlooks there are nonetheless some big similarities in the nature of our debates. Many of you would recall that a few weeks ago I described in colourful terms the risk posed to the American fiscal position by those who were pushing the most extreme points of view. I got a lot of support for that speech, largely from people who had also watched with great anxiety the negotiations over the debt ceiling. But some of my dependable critics misunderstood it as a political statement, when any economist or policy-maker following the fiscal cliff crisis knows all too well that this is all about the economic risks. It is about avoiding the worst fiscal choices, which don't just damage domestic or global economies, but decimate the most vulnerable people as well. I've been in this job for five years now and I've seen the worst global conditions in 80 years and I've been proud to be associated with one of the most successful pieces of fiscal policy in Australian history. I've also methodically and carefully worked in successive Budgets and each mid-year update to repair and improve our budget position. Meanwhile my opposition counterpart gives speeches about ending the entitlement mentality then votes against savings or compares a $3,000 payment for second and subsequent kids to China's one child policy. Unfortunately there's a great deal of hypocrisy around - from those who are just as likely to criticise the size of the surplus or the magnitude of our savings as they are likely to bag each individual save. Or those who bag 'middle class welfare' then attack the Government for sensible steps towards making it more sustainable. It's not good enough to beat the drum on better targeting payments then attack the dozens of saves that are doing exactly that. Or to simultaneously claim there are not enough savings while in the same pages of the same paper attack the individual saves. It's absurd to be in favour of strict fiscal rules yet attack those measures that make them real.
We have consistently improved the long-term position of the budget by making significant structural savings. Many people in this room have long argued for these sorts of reforms, to ensure that our budget position can improve and strengthen over time. Unfortunately, the appetite for structural reform in the column inches before the fact hasn't always been consistent with what we have seen in coverage after difficult decisions are made. The fact is through a series of good decisions we have a budget position that many of my G20 colleagues would love to replicate. This despite the fact that between 2007-08 and 2009-10 the tax-to-GDP ratio fell by 3.5 percentage points, the largest two-year fall in the tax-to-GDP ratio since the end of the Korean War boom. This meant that the global financial crisis led to write downs in tax receipts of almost $160 billion over the five years from 2008-09 to 2012-13. If the tax-to-GDP ratio was still 23.7 per cent - that is, what we inherited in 2007-08 - we would have a massive surplus of $24 billion in the current year. That means we're delivering a surplus by restraining spending. Real spending growth is estimated to average just 1.1 per cent per year across the forward estimates. And spending won't exceed 24 per cent of GDP across the forward estimates, the longest such run in 30 years. All this means Australia's public finances remain among the strongest in the developed world. There's been a lot of talk this week about the slim surplus we published in the mid-year update, but a lot of it misses the point. As important as the surplus is, it's also the pathway you're on that matters to markets and the international community, as well as our ability to adhere to the rules we set ourselves during the depths of the crisis.
Remember in Toronto in June 2010, advanced G20 economies committed to halving their deficits by 2013 - the year ours will be eliminated? While we're on track for surplus, the US and the UK won't be getting near to halving their deficits. Now, the facts about how we've improved the structural position of the budget are even more remarkable than the numbers in MYEFO. These structural saves put us in a better position to deal with any future volatility in commodity prices and the terms of trade, like we've seen in recent times. And there'll be more to come as we make the necessary room for bold new investments in disability insurance and schools. The story to now is an impressive one. Without some of our long-term savings, the underlying cash balance would be around $14 billion lower in 2012-13. This would grow over time, reaching around $51.4 billion or 2.0 per cent of GDP in a decade - a truly massive difference. These savings also have a profound impact on Australia's financial position in years to come. Without these savings, net debt would not return to zero in 2020‑21, instead it would be over $250 billion in that year. These are the facts and they tell an exceptional story. To put them in perspective, net government debt in the US is expected to reach more than $13 trillion, or over 80 per cent of GDP this year - and gross federal government debt is expected to reach its highest level since a brief period following World War Two.
Now, whether in Australia or in the United States, how we respond to fiscal challenges speaks directly to our priorities and values. Where we get the savings from and who we ask to bear the burden are the most important questions for anyone, anywhere, doing the hard yards of budget repair. That's why the post-election discussion in the United States will be so important, as they try and juggle one side wanting to cut deeper into entitlements and the other wanting to repair the revenue base. You get a really detailed sense of these negotiations in the Bob Woodward book, for anyone who is interested and hasn't seen it. And I'm told the David Corn book is pretty good on this front as well. Our own approach in the mid-year update was to continue the fiscal consolidation in a way that had the least damaging impact on the economy and the most vulnerable. And the way we went about that stands in pretty stark contrast to how some of the state governments have hacked away at frontline services and jobs, in a way that hurts their economies and their communities. We've shown that good fiscal policy, guided by the right values delivers both a stronger society and a stronger economy. As we were supporting jobs we put in place the strict fiscal frameworks that have us returning to surplus ahead of every major advanced economy. With it has come a rebalancing in monetary and fiscal policy, which has not been widely remarked upon.
Maintaining a strong economy and sound fiscal policy has seen increased appetite to invest in Australia. Where we were once seen as an optional investment destination, Australia is now seen as a necessary part of any portfolio, whether it be private or public investors - and these investment flows have propped up our sustained high dollar. This, combined with our fiscal consolidation and contained inflation, has all meant that our economy has more room to run lower rates than we have in the past. These are some of the economic dividends of good, solid policy. But there are dividends for our community as well that flow from the choices we make in response to budget constraints. This goes to how we encourage genuine social mobility and avoid an inequality that damages not just our society but also our economy. This is something I've been talking about my whole political life and I'm pleased to see it finally getting the attention it deserves in the academic community and now right across the financial press. I can certainly recommend Joseph Stiglitz's latest book, The Price of Inequality - and point you to a review I wrote of it recently. In the US, Stiglitz sees an inequality that is as inefficient as it is unfair. The most interesting perspective he provides is on the distinction between genuine wealth creation and wealth transfer. These wealth transfers involve the redistribution of wealth from the bottom to the top without any benefit to the vast majority. In fact, they destroy wealth in the process - as those at the top waste resources fighting to tilt the rules of the game in their favour. In contrast, real wealth creation contributes to economic growth and widespread prosperity. This is the wealth creation we seek, here and around the world - the sort that has seen our economy grow 11 per cent since before the crisis, and go from the 15th to the 12th largest economy.
Not all will agree with Stiglitz's precise diagnosis, let alone his solutions. Yet he provides a powerful framework for thinking about inequality and how it relates to the fiscal choices we make and who bears the burden of long-overdue budget repair. This reflects a growing trend in international economic thought. In recent weeks the International Monetary Fund and participants in the Davos summit have all given it well-deserved attention. But most notable of all has been the intervention of The Economist magazine, which devoted its mid-October issue to the dangers that rising inequality posed to the global economy. As it reported, while inequalities between countries have fallen in recent decades, inequalities within nations have risen alarmingly. Today, "more than two-thirds of the world's people live in countries where income disparities have risen since 1980, often to a startling degree". So I'm delighted that our country is finally talking about inequality. While obviously not everyone agrees with my views, I think most thoughtful contributors can agree that we need to avoid the damaging and divisive inequality seen in countries like the US. The danger of this, as The Economist recognised, lies in declining economic prosperity, because extreme inequality weakens demand, slows growth, wastes human talent and can sow the seeds for financial crises. The way forward, The Economist concludes, is to ensure a nation's growth path benefits every citizen by tackling rent seeking, better targeting welfare, creating a fairer tax system, and investing in education. This is part of a genuine wealth creation agenda. So my critics are not just criticising me with the class warfare tag, they are also criticising the IMF, the Davos summiteers, Joseph Stiglitz, and the editorial standard bearers of global capitalism for doing the same.
Let me finish by saying all governments have difficult choices to make and I'm proud of those we've made here in Australia. Every treasurer when faced with a shrinking tax base and ever-growing demands for new spending programs has to choose carefully their priorities and the people they most want to help. And the sum total of those decisions can chart one of two paths - towards a more equal or less equal society. I'm proud of the path we've chosen here in Australia. And we all watch with great interest the choices the Americans make in the months ahead. Thank you again and I look forward to a couple of questions.