I want to do something a little unusual at the outset and also thank the good people of the Commonwealth Treasury. What an extraordinary team of talented, committed, hard working people. It's been a real honour to work with them on this Budget.
As you know, about 16 or 17 hours have passed since we handed it down – the first of a new Government, and a new era. It's the inflation‑fighting, future‑investing Budget the nation needs.
By now, you're familiar with the initiatives, with the decisions we took, the important forecasts, and the like. I don't want to repeat all that today.
Instead I want to four main things:
- Focus on where this Budget fits into the Government's long term strategy;
- Talk about the substantial future investment represented by the three funds we announced last night;
- Give you a tour of the economic context; and
- Discuss how we went about striking the balances in the Budget.
But first I want to share with you two recent conversations that highlight some of the points I want to make today.
The first was with Craig Midgley, the man many of you will recall from that Community Cabinet meeting we held out at Penrith a few weeks ago. Craig was the one who talked about how he and his wife earned a decent income, but still couldn't find a way to pay for organised sport for the kids.
I rang him on Saturday, during a break from putting the finishing touches on the Budget papers, for a chat about the Budget. I said that we'd be doing a lot for working families but we'd always like to do even more.
I haven't stopped thinking about what he told me in response. He was grateful for what we were doing to make things a little easier for his family and millions like them. But he also said "mate I know you can't just keep chucking money around. Inflation will go to buggery".
This is the selfless suburban Australian, who understands we have an inflation problem in our economy.
There was selflessness in the second story I want to tell you too.
Not long after the community cabinet where we met Craig, I visited one of our major corporations. There was a businessman there who said something a Treasurer does not hear very often. He was someone who has probably gained most from the trebling of Australian household wealth in the last seventeen years. But like Craig, he is someone who cares about the country as well as about his own family.
During our discussion he asked me why his family was eligible for a baby bonus. They didn't need it, he told me, and he didn't think it was a good use of taxpayer's money to hand it out to people who didn't need it. Once we got talking about it, I found most people around the table felt the same. I didn't have a good answer to his question.
But these conversations are one of the reasons we decided that the Baby Bonus, Family Tax Benefit Part B and the Child Care Benefit should go to those families that need it, not those that don't.
Budget Strategy
Let me say this afternoon that I am proud of the way we handled four important requirements we established early as we framed this Budget.
The first requirement was that it be right for what we think will be the economic circumstances of the coming year. It is going to be quite a difficult year, as our forecasts show. This Budget will help us weather it.
It demonstrates our commitment to building a strong economy through responsible economic management. I'll say more about that a little later.
The second requirement the Prime Minister and I agreed right at the beginning, was that whatever we had to do in producing a Budget that was right for the Australian economy, we would protect working families, and we would faithfully implement the commitments we made prior to the election.
We insisted we would keep faith with Australia. That we would begin to rebuild public trust in national politics. So we also met that requirement last night.
Our third requirement was that we would deliver on our commitments to prepare Australia for the great challenges of the future - beginning in this Budget a modernisation of the Australian economy. We wanted to invest for the future – acting in areas of long term government neglect including education, health, climate change and infrastructure.
Our final requirement was that the Budget provides for our nation's long-term defence and security needs – and we certainly delivered on that commitment as well.
Future Investment
I believe investment for the future is the most far reaching and significant element of this Budget. We knew we would not be able to do in one Budget everything that needs doing in modernising the Australian economy.
We knew that in the year ahead we needed to put discipline and restraint back into spending. We knew we had to reimpose a duty of care in spending the taxpayers' money, after years of reckless handouts and giveaways which in the end embarrassed even the former Treasurer.
But we also wanted to earmark the financial resources we will require and set them aside for the job of transforming Australian education and skills training, Australia's ports, roads and bridges, our communications network, and hospitals and health care.
We are now well into the seventeenth year of an economic expansion which is straining our capacity.
The gaps, the bottlenecks, the shortages, have become increasingly apparent in recent years. Productivity growth has slowed. Our export performance has deteriorated. Price pressures have accumulated.
I am not satisfied with our productivity performance today, and I know that as the population ages, as the pressure from our global competitors increases, we will be ever more reliant on productivity increases to sustain the growth of our living standards and hold our place among the world's nations.
We are determined to provide the infrastructure, the skills, to ensure we have the means to permit the expansion to continue for many years to come.
To begin to repair the productivity deficit which has become so apparent in recent years, we have earmarked more than $40 billion in financial resources to help remake Australia over the coming decade. And that $40 billion is not the limit of the resources we are prepared to commit. As future surpluses become available, if the need is there, we will look to set more aside
What we now propose is nothing less than this: The greatest modernisation of the architecture of the Australian economy ever contemplated in our peacetime history.
This is what we mean by investing in our future – taking the proceeds of the mining boom, and investing them in building 21st century infrastructure and a modern economy. Investing in Australia's future productivity. Investing in our future prosperity. No longer squandering our opportunities, as the previous Government had done. Financial resources will be earmarked to modernise our infrastructure, our communications network, our education and skills training, and our health care system.
The Budget creates a long term framework for building a modern economy. It will help shape the future for our kids and future generations - our competitiveness, our place in the global economy, the kind of jobs our kids will have, and our nation's ability to realise its potential.
The Budget assumes the biggest transformation of the role and responsibilities of the federal government, in the pattern of our federation, for well over sixty years.
Of course, there's much to be done in determining priorities for key projects, the scope of public and private participation, and the timing of projects. We won't be overriding or substituting for investment by the States.
Through our modern federalism agenda, we're building new frameworks through which we can work with the States to rebuild the nation's infrastructure.
In determining the priorities in the construction and engineering projects needed to make good our shortcomings, we will expect Infrastructure Australia to provide advice based on a rigorous public policy framework. We won't be overriding or substituting investment by private enterprise.
And we won't be overriding or substituting competitive processes or market disciplines. On the contrary, we will ensure that market mechanisms are robust and strong.
We won't be overriding or replacing the disciplines of government decision making. On the contrary, every single dollar of spending will be considered within a Budget and Cabinet framework which compares that proposed spending to an alternative use.
We will be working in cooperation with the States and the private sector, on the basis of objective analysis, to build the infrastructure of the future. And we will ensure that projects are carefully scheduled so that they do not create greater inflationary pressures or worsen skills shortages. Nor will we be adding a dollar to the overall tax Australians pay as a share of GDP.
Our plan will not preclude us from running large fiscal surpluses when our economic circumstances require it, as they now do.
We have already developed substantial plans to modernise Australia. In last night's Budget we set aside the resources to implement those plans.
There are many important aspects to this Budget but I believe it will be remembered best for beginning to lay the foundations for the long-term future.
Macroeconomic Context
Today I also want to discuss our immediate economic challenges, and the Budget's role in getting the balance right between the different risks we face. About the way we went about making the Budget as a new government in what have turned out to be dramatically different circumstances for the Australian economy than those that have prevailed for most of the last sixteen years of expansion.
Once the requirements of the Budget were agreed and set at the end of last year, the making of this Budget has been about fighting inflation and getting the balances right. This was particularly true with respect to designing a fiscal policy appropriate for our economic circumstances.
There were three big economic trends which shaped the Budget strategy.
When the Government came to office, it was clear that we had been left with a formidable inflation problem in Australia.
A lack of past investment in infrastructure and skills meant our economy's supply capacity was simply unable to keep pace with strong demand.
The consequence was a gradual build up in inflationary pressures over recent years, which have become starkly evident in recent figures. As a result, the Reserve Bank has increased interest rates eight times in the last three years.
This first chart gives us an idea of how inflation has evolved.
We knew from the September quarter numbers which we saw during the election campaign last year that inflation was on the increase. By then underlying inflation had already moved up to 3.0%, the top of our target band.
In late December last year, in my first major speech as Treasurer, I announced that resisting higher inflation would be central to economic policy over the coming year.
The following month we saw the December quarter price numbers, and underlying inflation had increased to 3.6%.
Our detailed Budget discussions got underway around the same time, against the background of this rising trend in inflation which saw underlying inflation for the year to March reach 4.2%.
The previous month we had seen the December quarter national accounts, which showed that productivity growth through the final year of the Howard Government was zero. This productivity outcome was not a one off aberration, with annual productivity growth over the last five years running at its lowest in over 17 years.
Inflation over 4%, fading productivity growth - and we are still being told that we had been left with an economy in the best possible working order, that inflation was imaginary, or that if it existed at all it would be gone by the end of the year.
I'm sure Australian families were flabbergasted to hear the Leader of the Opposition and the Shadow Treasurer describe high inflation as a "fairy story", a "charade" and an "illusion".
The highest rate of underlying inflation in more than 16 years and we are accused of making it up. Those crazy pranksters at the ABS!
Sometimes I think the Shadow Treasurer is from a different world. Not the world of the Treasury or the Reserve Bank, both of which forecast that inflation will remain above the target band for some considerable time to come. Certainly not the world of working families under pressure.
I think by now the rest of us can all agree there is an inflation problem.
So that was one big trend we had to take into account as we framed the Budget.
The other was the global credit crisis, and the sharp slowdown in US growth, as the second chart shows.
By November of last year when we came to office it looked like the credit crisis was beginning to subside, but it came back in full force at the end of last year and into January – again, at around the same time as we began to frame the Budget.
The US numbers deteriorated. Employment started to fall, confidence plummeted, the housing industry in the US continued to decline. The IMF and most other forecasters sharply revised down the outlook for US and global growth. Slower growth in the US and turbulence in global financial markets are affecting many countries, including our own.
While we are not immune from these developments, I am glad to report that we have come through the credit crisis so far in a lot better shape than similarly exposed economies elsewhere.
While we may have seen the worst of the credit crisis, we have not yet felt the full impact of the slowdown of activity in the US, and in the UK and to some extent in Europe to which the credit crisis has contributed.
The credit crunch was the second big trend we had to take into account.
And the final trend that was relevant was the fact that Asian economies by and large have remained robust and so has global demand for our exports.
It became apparent to us as we worked on the Budget that the export prices for some of our major commodities such as iron ore and coal would again substantially increase.
In an economy already straining at the limits of its capacity, we are about to see the biggest increase in our terms of trade in a generation – an expected increase of some 20 per cent by the end of this year.
The third chart shows this really starkly.
This will boost domestic incomes and add to already heightened price pressures.
So that was influence number three, and like the other two influences it coincided with the development of the Budget.
Our forecasts arise from these conflicting trends in our economic circumstances. They are, as I freely acknowledge, sombre. Weaker global growth and higher interest rates are forecast to slow real GDP growth next financial year to a little below 3 per cent.
These impacts are also forecast to result in an easing in employment growth and a modest increase in unemployment. But reflecting strong rises in the terms of trade, nominal GDP growth is expected to accelerate in the year ahead, to 9¼ per cent – this would be the fastest rate of growth in 19 years.
Inflation is expected to ease only gradually to above 3 per cent in June next year.
Getting the Balances Right
The conflicting forces affecting the Australian economy made it imperative that in this Budget we get the balances right. Getting the balance right between the risk of a bigger than expected slowdown induced by the aftermath of the global credit crisis and a rapidly slowing US economy, and the risk that inflation in Australia will remain too high for too long.
But also getting the balance right between helping working families through the difficulties of higher interest rates and rising prices today, and investing to meet our needs for tomorrow. Between meeting the most urgent needs in our infrastructure of roads and bridges, ports and railways today. Between the most urgent needs in our schools and universities today. The most urgent needs in hospitals today. And planning to modernise and rebuild Australian infrastructure, education, healthcare – not just in this Budget but in many Budgets to come.
Getting the balance right meant we needed to sharply reduce the rate of growth of government spending - but not in a way that harms working families, and not to the extent that it adds to the risk of a sharper than expected slowdown in Australian growth should global conditions deteriorate further.
It meant we needed to adhere to our commitment to deliver substantial tax cuts, both to help working families through a tough time, and to encourage more people to join the workforce at a time of high demand for labour.
It meant we needed to put aside a considerable surplus, both to provide the means to invest in the future, and also to take some of the pressure off national demand by making a significant contribution to Australian saving.
Now, it's been wrongly claimed that this is a high spending budget that will do nothing to fight inflation. In reality this Budget delivers a strong surplus and reins in growth in spending to put downward on inflation and interest rates. The surplus of 1.8 per cent of GDP in 2008-09 is ½ a percentage point of GDP higher than the former government's 1.2 per cent of GDP surplus forecast at the time of the Pre-election Economic and Fiscal Outlook. We have achieved overall savings of $7 billion in 2008-09 and $33 billion over four years. And we have banked all tax revisions since the election – putting aside an additional $3 billion for future investment
It's been wrongly claimed that this is a high taxing budget. In reality, this Budget delivers $47 billion in tax cuts over four years, directed towards low and middle income families. And far from increasing, tax as a share of GDP falls substantially in this Budget.
Every single dollar of new spending in 2008-09 has been more than offset by spending cuts elsewhere in the Budget.
As my fourth chart demonstrates, this type of discipline hasn't been seen in over a decade. We have reined in growth in spending from 4 per cent over the past four years to a little over 1 per cent next financial year.
Spending as a share of GDP has been cut by 1 percentage point in 2008-09, the point my fifth chart makes. Spending in this Budget for 2008-09 as a share of GDP is the lowest for any Budget since 1989-90 – that's lower than any Howard Government Budget.
I think there have been some really confused comments made by the Opposition on all this, and I'm happy to deal with them in the question and answer session.
Conclusion
Let me finish by saying I think in last night's Budget we got the balances right. It's a Budget that helps working families, invests in our future and is right for our economic circumstances. It delivers $47 billion in tax cuts over four years, directed towards low and middle income families. It helps families buy their first home, afford good quality child care, and meet the cost of educating their children.
And while delivering for working families now, the first Rudd Government Budget delivers for the nation's future. It begins the task of modernising the Australian economy and setting it up for the challenges of the 21st century.
It helps working families, it invests in our future.
And it will also bear down on inflation in the year ahead.
Today I've given you some examples of the way we have designed a Budget which:
- equips us to meet the economic challenges ahead;
- which protects and rewards working families;
- which begins the task of modernising the Australian economy;
- and provides the means for this transformation to continue over the next decade.
Thanks again and I look forward to your questions.