Speech

Sydney Institute

Senator The Hon Mathias Cormann
Minister for Finance

Tuesday, 19 August 2014

Australia Needs a Fiscal Reality Check

Australia needs a reality check on the state of the Budget.

We need a reality check about where we are at and why, where we are headed without serious corrective action and why, and what we need to do to protect our living standards and to build a stronger more prosperous economy, where everyone has the opportunity to get ahead.

So let’s start with the realities.

The reality is that Labor delivered $191 billion in cumulative deficits in its first five budgets and a further $123 billion in projected deficits in its last Budget.

The reality is that just in the few weeks between that Budget and Labor’s own pre-election budget update last August, the Budget position deteriorated by a further $33 billion – or $3 billion a week – and continued to deteriorate after that.

The reality is that by the time we came to Government, gross debt was heading for at least $667 billion within the decade, growing further beyond that period.

The reality is that when we came into Government in September last year, we inherited:

  • An economy growing below trend
  • Rising unemployment
  • Low consumer confidence
  • Business investment which had plateaued
  • A bad and rapidly deteriorating budget position, with a spending growth trajectory which was manifestly unsustainable – in particular in the period beyond the forward estimates at the time of the last election.

Contrast that with the situation the previous Government inherited in 2007.

A strong economy and a strong budget.

No government net debt.

A $20 billion surplus.

More than $50 billion in net Commonwealth assets.

The Australian Government at that time, was collecting more than $1 billion a year in net interest payments on the back of a positive net asset position.

After Australians did the hard yards, backing a Coalition Government at successive elections which was dealing with the serious and difficult fiscal challenges left behind by their Labor predecessors, the Coalition was able to pursue important economic, fiscal, taxation and social policy reforms.

That included successive income tax cuts further strengthening economic opportunity as well as improvements in Government benefits for families and older Australians across Australia.

Not only did Australians achieve real improvements in living standards, underpinned by stronger economic performance. That strong fiscal, economic and social policy foundation, with a Federal Government living within its means, stood Australia in very good stead when we faced the global economic headwinds in the context of the Global Financial Crisis.

Sadly the reality is that we are in a much weaker fiscal position today than we were in 2007.

We are more exposed and less resilient as a nation today than we could be, should be and can be again, to deal with any global economic challenges which may come our way in the years ahead.

We are not in as strong a position as we could be, should be and can be again, to take advantage of the opportunities which will come our way in the context of strengthening economic growth across the Asia Pacific.

Those are the realities we have to confront as a nation and address.

Incredibly, Labor appears to be in complete denial about the state of the Budget they left behind and about the unsustainable spending growth trajectory the Rudd and Gillard Labor governments put Australia on.

Like many Australians with family and friends in Europe, I know how painful fiscal crises are when they strike. How many jobs are lost, hopes shattered and plans reduced to rubble.

Like all of you, I have seen the human toll a fiscal crisis can impose and the political turmoil it creates, turmoil which can make problems even more intractable and the pain even more prolonged.

I say this because at times it seems as if for some, the current debate about the Budget is a bit like a spectator sport, with a focus on how the contending teams are scoring, when we are actually all in this together.

This is no game.

If we fail to address the fiscal mess Labor left behind, the crisis next time – and there will be a next time – will find us unable to support jobs, preserve vital services and protect the disadvantaged.

And the loss of confidence in Australia’s ability to get its house in order would deter investment, compounding the challenge our economy faces as our terms of trade return to more normal levels.

None of that is to suggest that addressing our fiscal challenges will be easy – it obviously won’t be.

The spending and debt growth trajectories we inherited from Labor were among the steepest in the world, taking us further and further down an unsustainable track.
In the last year of the Howard Government spending as a share of GDP was at 23.1 per cent.

We inherited Federal spending as a share of GDP in 2013/14 of 25.9 per cent and without corrective action we were heading for spending as a share of GDP of 26.5 per cent within the decade.

At the same time, tax revenue as a share of GDP sits below 22 per cent, compared to an average tax to GDP ratio over the past 20 years of 22.4 per cent, while overall Government revenue as a share of GDP is at 23.6 per cent, relative to a historic average of 24.1 per cent.

The result is a large fiscal gap, which translates into mounting public debt with that mounting debt translating into rising interest payments.

As I said earlier, in 2007, when Labor came to office, the Australian Government was collecting more than $1 billion a year in net interest payments on the back of a positive net asset position. Now, we are forced to pay $1 billion a month in interest payments just to service all the debt accumulated by the previous Labor government.

That is, every one of about 10 million working taxpayers across Australia has to pay about $100 in tax each and every month, or about $1,200 in tax a year, just to pay the interest on Labor’s debt.

And with the US recovery putting upward pressure on world interest rates, that cost will rise even further unless we close the gap between what we spend and what we earn. 
That gap needs to be closed by bringing down the level of federal spending growth moving forward.

To instead close it by driving up Government revenue beyond 26.5 per cent of GDP would hurt our economy and cost jobs, putting Australians under yet more pressure.
The Budget we have delivered is the first vital step in that process.

It establishes a credible, economically responsible, path for a return to surplus.

It sets out a trajectory for public expenditure that brings down spending as a share of GDP over the forward estimates and beyond, on the back of genuine structural savings and reforms.

And it shares the burden of the adjustments widely across the community, while protecting the most vulnerable.  

At the same time, we recognise that there is no better way to advance fiscal sustainability than by unleashing our economy’s growth potential.

After all, faster, more sustained growth not only benefits Australians directly, it also expands the tax base while reducing the pressure on social spending. 

Unfortunately, just as they were locking Australia into excessive spending, the Rudd and Gillard governments pursued policies which made it harder for the Australian economy to be successful, further hindering any efforts to bring the Budget back into surplus.

In the face of obviously challenging global economic conditions, instead of working to make Australia more competitive internationally and to strengthen economic growth opportunities into the future, the Rudd and Gillard governments kept adding more and more lead into our saddle bag.

The carbon tax, the mining tax, more than 21,000 pieces of new red and green tape, increased levels of union militancy on the back of such poor decisions as the abolition of the Australian Building and Construction Commission, were all cases in point.

Together, they contributed to the increasing cost of doing business in Australia, which in turn reduced growth and, ultimately, resulted in lower than expected revenue for Government.

In simple terms our fiscal and economic strategy is:

  • To live within our means, bringing spending growth under control while ensuring structural reforms allows us to deliver ‘more with less’; and
  • To remove the lead Labor put into our economy’s saddle bags, bringing down the cost of doing business, restoring our international competitiveness, boosting jobs and expanding the long-term revenue base for government in the process.

We never expected that strategy to be uncontentious.

But even hardened cynics must have been surprised by Labor’s reaction.

After all, Labor spent the best part of three years lecturing us about the importance of returning the Budget to surplus quickly.

Remember former Treasurer Wayne Swan in his Budget speech in May 2011, when he said:

“Meandering back to surplus would compound the pressures in our economy and push up the cost of living for pensioners and working people” (Wayne Swan, Budget Speech 10 May 2011)

A year later he said in a doorstop at Parliament House that:

“Coming back to surplus is about making sure we help those people sitting around the kitchen table when they’re figuring out how they will make ends meet” (Wayne Swan, Doorstop, Parliament House in Canberra on 8 May 2012)

All told, Wayne Swan promised to deliver a surplus on 366 occasions. It seems Wayne Swan promised a Budget surplus even more often than he bagged Kevin Rudd. Though probably not by much.

He never quite got to surplus. But at least, unlike Bill Shorten, Chris Bowen and Tony Burke, he understood that a return to surplus as soon as possible was important for our country, for working people, for pensioners and for people sitting around the kitchen table.
Now, brushing aside the fiscal realities I mentioned at the outset, Labor simply denies there is anything to worry about.

Instead of proposing any alternatives, Labor under Bill Shorten has just given up completely on putting Australia back on a stronger fiscal foundation for the future.

Intent on preventing us from achieving the return to surplus they so often promised but were never able to secure, Labor under Bill Shorten is now even opposing $5 billion in savings initiated and banked in Labor’s last Budget by Julia Gillard and Kevin Rudd.

Here are the questions Bill Shorten, Chris Bowen, Tony Burke and the whole Labor Party should be asked to answer –

  • Are you still committed to a Budget surplus?
  • If so, how would you achieve it?
  • Do you accept that a federal spending growth trajectory heading for federal spending of 26.5 per cent as a share of GDP by 2023/24 is unsustainable?
  • If you do, how would you reduce spending as a share of GDP to more affordable and sustainable levels?
  • If you do not, does that mean you would increase taxes to get there and if so, which ones?
  • Or would you just keep borrowing from our children and grandchildren to make up the difference between the revenue and expenditure trajectories over the medium to long term?

Time will tell whether Labor continues to put its short term political interests ahead of the national interest. Ultimately voters will judge them harshly if they do.

As far as the government is concerned we will continue to press ahead and do everything we can to repair the budget.

So where are we at in the Senate when it comes to passing the Budget?

There has been a lot of noise in the media about where things are at with the Budget.

The implied suggestion in much of the commentary seems to be that unless every last part of the Budget had gone through both Houses of Parliament in full by now, we were somehow running late.

That is of course not true.

A significant part of the Budget had gone through both Houses of Parliament by the end of June.

The Appropriation Bills were passed in full, including our single largest saving, the $7.6 billion reduction in previously budgeted federal funding growth for foreign aid over the forward estimates.

Our Budget Repair Levy has passed the Senate, with Labor’s support, after initial suggestions that they would oppose it.

Various other budget reforms and savings measures have been passed by both Houses of Parliament since.

The first two weeks of the new Senate were always going to be dominated by the Carbon Tax and Mining Tax Repeal Bill packages.

The Carbon Tax is gone as promised and the Mining Tax Repeal is a work in progress.

A number of the measures that are the subject of the most intensive post budget debate are not due to take effect for some time.

So there is still ample time to keep engaging with the Senate crossbenchers and to properly prioritise and deal with budget measures sequentially in an orderly and methodical fashion.

No government in recent political history had passed all of its budget measures through both Houses of Parliament by the end of August.

We are on track and will continue to work, with perhaps an adjustment here and an adjustment there, to fundamentally get all our budget measures through the Parliament.

In relation to our proposed $7 co-payment for access to medical services for example –

This proposal is not due to come into effect until 1 July 2015.

The key policy challenge in health care financing is how best to ensure that all Australians can have timely and affordable access to high quality health care in a way that is also affordable for taxpayers over the medium and long term.

How do we ensure that the limited resources of taxpayers are deployed to maximum effect, to service all the genuine needs of a growing number of patients in the context of an ageing population over the next few decades?

An appropriate price signal is a proven way to improve the efficiency of allocating limited resources to a growing demand for services.

Under our proposed co-payment there is a safeguard for pensioners, other concession cardholders and children under 16 years of age.

Under our proposal for a $7 co-payment, no pensioner would have to pay more than $70 a year for unlimited access to medical services.

Higher Education Reforms

We want our university sector to remain world class and internationally competitive, which is why my colleague Christopher Pyne is leading a comprehensive higher education reform agenda.

We want to foster excellence by deregulating the provision of higher education and directing public funding to where it is needed, so that the decisions of students, the needs of employers and the initiative of our academic leaders drives the future of our higher education system.

These reforms are not due to come into effect until 2016. So again, there is time to work through any issues.

And there is nothing unfair about these reforms.

In Australia, we have a very generous taxpayer funded support system for students in place. I don’t think that there is another example of a scheme like the HELP scheme anywhere around the world. It is a very egalitarian system, which facilitates access to higher education for everyone, irrespective of their social background. That’s because in Australia, anyone wanting to study at university is able to borrow 100 per cent of the cost of that course from the taxpayer through what used to be the HECS system and what is now the HELP system.

Students only have to pay back the cost of that degree once they earn above a certain income and at a discounted interest rate at that. So it is a pretty fair arrangement.

Re-Introducing indexation of the fuel excise

Since the indexation of the fuel excise was abolished in 2001, the excise as a proportion of the average pump price of fuel has fallen from about 42 per cent to about 25 per cent today.

Reintroducing the indexation of the excise on fuel, so that its real value does not keep falling with inflation is an important structural reform.

It will ensure that moving forward, the value of the fuel excise will again keep pace with inflation and will help underwrite our significant additional investment in productivity enhancing road infrastructure.

It will add just 1 cent a litre to the cost of fuel in year one.

And as we pursue all of those measures to repair the Budget, we will of course continue to pursue our comprehensive plan for a stronger more prosperous economy:

  • Repealing the carbon tax
  • Repealing the mining tax
  • Reducing red tape costs for business by about $1 billion a yea
  • Investing in productivity enhancing infrastructure right across Australia
  • Pursuing improved trade opportunities across the world
  • Generally improving our international competitiveness by reducing the cost of doing business and improving productivity
  • Restoring the Australian Building and Construction Commission, and
  • Introducing a fair dinkum paid parental leave scheme which will help lift female workforce participation.

In summary:

Labor and others argue that our Budget is unfair.

That is nonsense.

What is unfair is to promise what you cannot deliver. To hold out hopes you know will be dashed. To rob from tomorrow, to live it up today.  To keep borrowing from our children and grandchildren to fund our recurrent expenditure today, reducing opportunity for future generations by creating the need for either higher taxes or deeper cuts to pay for it with interest down the track.

That, for the last six years, has been Labor’s way;

It is not our way.

Rather, our Budget makes spending sustainable over the medium to long term.

That means our commitments can be delivered – to older Australians, who deserve a secure future; to our young people, who deserve great schools and world-class tertiary education; and to working families, who deserve stable, well-paid jobs and high quality public services.

And fiscal sustainability means we will be able to make good on those commitments without crippling tax burdens.  

Ultimately, that is the choice Australia faces.  

We can keep borrowing from our children and grandchildren to pay for our recurrent expenditure today. Or we can start the task of a credible return to surplus.

Faced with that choice, this government will not keep kicking Labor’s debt and deficit can down the road.

We know that the longer we wait before getting the budget back on track and back on a credible path to surplus, the harder it will be to get there and the greater the sacrifices will have to be.

We did not set out to put together a popular Budget.

We set out to put together the Budget Australia needs right now if we are to protect our living standards and build better opportunities for the future.

We always knew this was going to be a marathon and not a sprint.

We are committed to the marathon.

And in time, we are confident that people will come to accept that what we did in the Budget was right and needed to be done.