Speech

Speech to the Sydney Institute

Address by Senator The Hon Mathias Cormann 
Minister for Finance
Deputy Leader of the Government in the Senate

Monday, 28 September 2015
Heading in the Right Direction 
Much More Work to Do

 

The Liberal-National Party Coalition has been in government now for just over two years.

Looking back, there is no doubt that we have made significant progress in putting Australia on a stronger more resilient economic and fiscal foundation for the future.

There is equally no doubt that there is much, much more work to be done.

It is a matter of historical record, not political interpretation, that when we came into government, we inherited a weakening economy, rising unemployment and a budget position that was rapidly deteriorating.

Our economy had started to go through a transition on the back of falling prices for our key commodities, but was being burdened, at the worst possible time, with bad policy decisions by the previous Labor government, putting more lead into our saddle bag.

Bad new taxes like the carbon tax and the mining tax, combined with significant increases in the regulatory burden and unaffordable spending growth were making Australia less competitive internationally, when what we obviously needed was the exact opposite.

Our budget position was rapidly deteriorating – by $3 billion a week between Labor's last Budget in May 2013 and their pre-election economic statement just 11 weeks later – a deterioration which did not just stop magically on Election Day.

It was caused by both Labor's overly optimistic and wildly inaccurate revenue forecasts not coming to fruition, as well as their decisions to lock in excessive, unaffordable, unfunded and unsustainable growth in federal government expenditure.

Deceitfully, much of that structural, permanent and legislated ramp up in federal government expenditure had been locked in for the period beyond the published budget forward estimates without the necessary measures to pay for it.

That is, unsustainable and unfunded spending promises were locked in by the previous Labor government for a period well beyond their period in office and at a time when it was entirely predictable – and indeed predicted by many – that revenue would not be as high as anticipated by Labor as a result of an expected fall in our terms of trade back to more normal levels.

We have worked hard over the past two years to turn that situation around – to strengthen growth, facilitate stronger job creation in the economy and to repair the Budget.

Our economic and fiscal reforms over the past two years have contributed to the resilience our economy has demonstrated as the boom in mining investment winds down.

Faced with similar headwinds, Canada's GDP is shrinking, even though the steep decline in the value of the Canadian dollar and the strong US recovery are boosting its manufacturing exports.

In contrast, our GDP continues to rise, not least thanks to the resources sector, which has continued to grow on the back of rising production and export volumes.

And more than 310,000 new jobs have been created in the economy since we came into government, against the backdrop of welcome increases in workforce participation.

With the number of job advertisements – a leading indicator of labour market conditions -- now 16.2 per cent higher than in 2013, there are good reasons to believe the rise in the unemployment rate – to a lower level than previously anticipated – reflects not just the inevitable transition from major mining projects to other industries, but also an increase in the numbers of previously discouraged workers actively looking for work.

Indeed, to protect our economy from the fate experienced by those other commodity based economies like Canada and Brazil, and to facilitate stronger jobs growth, we removed inappropriate burdens on our economy like the carbon tax and the mining tax.

We reduced red tape costs for business and the community by more than $2 billion a year – a program of cost reductions which is ongoing.

We also decided not to proceed with Labor's bank deposit tax.

As part of our positive economic growth agenda -

We delivered a tax cut for small business – deliberately targeted at encouraging profitable small businesses to invest in their future success and employ more Australians.

We pursued an ambitious free trade agenda designed to give our exporters better access to key markets in our region, helping them be more successful in those markets and employ more Australians.

We pursued a record infrastructure investment program, seeking to leverage additional infrastructure investment by the States and Territories and by the private sector through measures like the Asset Recycling initiative.

And we worked to ensure that important government expenditure on social services, health, education and national security was better targeted, more efficient and more effective.

I would like to take this opportunity to thank both our former Prime Minister Tony Abbott and my good friend the former Treasurer Joe Hockey for their political courage and for their absolute determination to give it their best for such a long time to build a stronger Australia. It has been a real privilege to have been part of this journey for Australia with them over the past two years.

*****

Two weeks ago the Liberal Party elected Malcolm Turnbull as our new Leader and as such as our new Prime Minister.

I am grateful and honoured that our new Prime Minister has chosen to put his trust in me to continue in my role as the Minister for Finance.

I take this responsibility very seriously and will continue to give it my absolute best, supporting our new Treasurer Scott Morrison in his important role to the best of my ability.

Our new Treasurer and I have hit the ground running.

One of our most immediate priorities is the 2015-16 Half-Yearly Budget update, which we will deliver in December this year as planned.

As a team our mission remains – stronger growth, more jobs and a sustainable budget position.

Building on the economic and fiscal foundation established over the past two years, the Turnbull Government will work to ensure that as an open economy and as a trading nation we are in the best, most resilient position possible, to take advantage of the exciting opportunities in front of us and to deal with the inevitable global economic headwinds coming our way from time to time.

To achieve this, our focus will continue to be on making our economy more competitive, more productive and more innovative.

Under Prime Minister Turnbull's leadership, innovation in particular will be one of the key drivers of our future economic success.

We will of course continue the important task of budget repair.

Ongoing Budget repair clearly remains important.

Firstly, to ensure the important benefits and services provided by Government remain affordable in our economy over the long term. Our social safety net, our world class health and education system, our national security all need a strong and sustainable fiscal foundation. This is particularly important given the structural challenges we are facing as a nation, associated with the ageing of our population on both the expenditure and the revenue side of the Budget.

Secondly, to reduce and over time eliminate the risks associated with increasing public debt. Rising indebtedness reduces the Government's ability to ride out severe adverse shocks. It reduces the room we have to use fiscal policy to cushion those shocks while still keeping debt to prudent levels. With our terms of trade more than twice as volatile as the average for developed economies – meaning we are more exposed to external shocks than other advanced economies – Australia needs a stronger balance sheet if we are to weather the inevitable future storms safely.

Thirdly, because it is plain wrong to pay for our public consumption today, with billions of dollars borrowed from our children and grandchildren every year. To keep doing this, forces our children and grandchildren to pay higher taxes or accept deeper cuts in government expenditure down the track to pay back the debt accumulated on the back of deficit funded recurrent expenditure today. This would lead to lower living standards for them than they could have otherwise expected, had they not have to pay for too large a chunk of ours. Today's debts are tomorrow's taxes. Restoring fiscal sustainability is every bit as important as ensuring we respect the environment future generations will inherit.

Finally, budget repair is also important to give ourselves a solid foundation from which to strengthen growth and create more opportunity for Australians to get ahead – by helping us make our tax system more efficient and internationally more competitive.

The stronger our fiscal position, the better our capacity to pursue important tax reform into the future, encouraging all Australians – as the Treasurer puts it – to work more, save more and invest more.

The tax reform conversation will continue with the aim of taking a set of policy proposals to the next election.

But as the Treasurer has again made very clear – Australia has a spending problem not a revenue problem.

When it comes to tax, the conversation should be about how we can raise the necessary revenue for government in a better way, indeed in the best possible, least distorting way in the economy – not about how much more we can raise and spend with a plethora of new taxes, increasing the overall tax burden in the economy by ever more.

When it comes to budget repair, our focus will remain on reducing the deficit, getting back into surplus as soon as possible and on paying off debt over time.

Strengthening economic growth will help with budget repair.

But we will need to continue working:

  • To get the unsustainable spending growth trajectory we inherited from Labor under control;
  • To reduce, over time, Government expenditure as a share of the economy; and
  • To reduce the size of Government, ensuring government services and administration are as efficient, as effective and as responsive to community needs as possible.

We are optimistic about what lies ahead for Australia and we are optimistic about our fiscal trajectory moving forward.

But we will remain focused on doing the hard yards to get ourselves into the best and most resilient position possible, to take advantage of our opportunities and to deal with any challenges coming our way.

There is no easy way to repair the Budget, as suggested by some, just by slashing the public service.

The public service wage bill represents less than 5 per cent of federal government expenditure. Most of our federal government expenditure goes into programs – the age pension, the disability pension, the NDIS, unemployment benefits, medical benefits, pharmaceutical benefits, payments to the States and Territories to support their schools and hospitals, our border security, our defence forces and more.

Of course we will continue to pursue our Smaller Government Agenda – seeking to ensure that public spending on government administration and services is as efficient and as effective as possible.

Over the past two years the efficiency dividend imposed on government departments and relevant agencies has remained in place. We have reduced the number of federal public servants back down to 2006/07 levels. We have reduced the number of government bodies by nearly 300 and we are continuing to roll out our program of functional and efficiency reviews of government departments.

But we will not be able to achieve a sustainable budget position without continuing structural reform of government program spending.

Having inherited a strong economy and a strong budget with no government net debt, a strong surplus and a positive net asset position, Labor in just six budgets delivered $240 billion in accumulated deficits, with further projected deficits and rising debt on the back of unsustainable spending growth as far as the eye could see.

Labor in government had increased expenditure by about 3.6 per cent on average per year in real terms and had locked Australia into further future expenditure growth of about 3.7 per cent above inflation on average per annum over the medium to long term.

This makes Labor's attempt to blame the Coalition for continuing deficits and growing levels of debt so laughable.

The spending growth and debt growth trajectories are both lower today than they would have been if instead of improving fiscal policy settings over the past two years we had kept Labor's policy settings at the time of the last election in place.

To reduce real growth in government expenditure from 3.6 per cent on average per annum under Labor down to 1.5 per cent on average per annum over the 2015/16 forward estimates and from 3.7 per cent to 2.7 per cent over the medium to long term was hard work and politically challenging.

Under Labor's policy settings, the Commission of Audit estimated Commonwealth expenditure on schools would grow at an average rate of over 9 per cent per year over the next decade; on hospitals by 170 per cent from 2013-14 to 2023-24 (or at an annual growth rate of 10.4 per cent); and outlays on the National Disability Insurance Scheme, which amounted to only $0.3 billion in 2013-14 – Labor's last year in office – were projected to reach $11.3 billion by 2023-24 (and $22 billion a year once fully implemented).

Nor was other spending standing still.

Indeed if we had done nothing, government expenditure in just one year – from 2016/17 to 2017/18 – conveniently the first year after Labor's last published budget estimates period – would have increased by a staggering 6 per cent above inflation.

According to the Commission of Audit, total government expenditure as a share of GDP was on track to reach 26.5 per cent within the decade to 2023.

Government spending this year is expected to come in at around 26 per cent as a share of GDP. Clearly too high, but manifestly lower than it would have been under Labor under its policy settings. It is now projected to come down to 25.3 per cent by 2018/19 instead of continuing to go up and up.

Under our Government so far, to fund higher policy priorities and to repair the budget, a total of 332 budget measures out of a total of 402 with a positive impact on our budget bottom line have been implemented.

29 out of the 70 remaining measures to be implemented are from this year's Budget.

Together, those measures have improved the budget bottom line over the relevant forward estimates period by more than $85 billion.

They include:

  • 312 measures to reduce spending, which together contribute $64.3 billion to that improvement over the relevant budget estimates period; and
  • 20 measures to increase revenue, with those measures improving the budget outcome by $20.8 billion over the relevant budget estimates period.

It is because of those measures that:

  • Government expenditure as a share of GDP is projected to reduce to about 25.3 per cent over the forward estimates;
  • The deficit is projected to decline year on year as a share of GDP and in dollar terms over the forward estimates; and
  • Net debt is projected to peak at 18 per cent of GDP next year and from then on to decline.

This is progress, which has been secured despite the terms of trade now being some 30 per cent lower than they were at their peak and despite the obvious challenges we have faced in the Senate.

But more can, must and will be done.

There are, to begin with, the budget improvements which we have proposed, but which are still to be legislated – more than 40 per cent of those from our most recent budget.

Our next priority will be to secure our families package through the Senate, which our Treasurer has been negotiating with the Senate crossbench in recent months.

All up, including the 2013/14 and the 2014/15 MYEFO and our two Budgets, there are 56 measures to reduce spending, and 14 measures to increase revenue, which remain to be implemented.

Implementing these measures would yield an additional $24 billion improvement to the budget bottom line, with about 80 per cent of that gain coming from efficiencies on the spending side.

Then there are about $3.6 billion in budget repair measures, initiated and banked by Labor in their last Budget, which under Bill Shorten's more reckless and less responsible leadership than that displayed by previous Labor Leaders, they now oppose.

As a result, the total value of budget measures to improve the budget bottom line implemented by our government will be around $110 billion over the relevant forward estimates period, with many of these savings structural and building over time.

Even after all this is done, there is no room for complacency.

In the last year of the Howard Government, government, expenditure as a share of GDP was at 23.1 per cent. Over the whole period of the Howard government expenditure averaged at about 24 per cent.

The projected 25.3 per cent by the end of the current forward estimates is lower than the spending trajectory Labor had put Australia on before losing office, but to ensure federal government expenditure is affordable in our economy and doesn't force us into higher taxes overall, over time we need to get back to an average level of government expenditure of about 24 per cent as a share of GDP at the most and stabilise it at that level.

*****

While complaining that not enough progress is being made fast enough on repairing the unsustainable budget position they left behind, Labor continues to oppose key budget repair measures (even their own). They want to reverse expensive budget repair measures we have already implemented and continue to make more unfunded promises.

Despite their unsubstantiated protestations again today, under Labor, our Budget position would be at least $57 billion worse off given the budget repair measures they continue to oppose, given the budget repair measures we have already implemented and which Bill Shorten or his Shadow Ministers have indicated they want to reverse and given the new promises they have made in recent months.

We have released a detailed list breaking down that $57 billion on several occasions now.

We have updated it from time to time as new information becomes available and as more of our budget measures have passed the Senate, or Labor has made more new promises.

We are still waiting for Labor to tell us which part of our list is wrong.

If Labor has changed its mind on any of those measures on our list – which we would of course welcome – they should share this with the community.

Right now – Labor continues to block $3.6 billion in budget repair measures they themselves initiated and banked in their last Budget – namely:

  • The $2.1 billion saving from changing Labor's Student Start Up Scholarships, provided as a grant, to a loan repayable through HECS;
  • Their efficiency dividend which they applied to university funding; and
  • Ending the discount for paying HECS fees upfront.

Labor continues to block about $13.6 billion in budget repair measures which we have put forward.

We will continue to negotiate their passage through the Senate. No policy measure will be taken off the table unless and until it is replaced with an alternative policy which achieves the same improvement in our budget position in another way.

There is about $33.5 billion worth of spending and other measures Labor says must be restored. Again – if Labor has changed their mind on any of them and now accepts the budget repair measures implemented by the Government, they should just say so and we take them off the list.

There is also:

  • Another $1.1 billion in Budget savings in our 2015/16 Budget, Labor says they do not support; and
  • About $10.3 billion in promises Labor has made since the 2015/16 Budget

All of this taken together would worsen our budget position by over $62 billion.

However, Labor has announced a proposal to increase taxes on people's retirement savings, and a multi-national tax measure which Treasury says will cost jobs, which together would raise about $3.8 billion over the forward estimates.

Labor has also made a dubious claim of savings from the abolition of the Government's Emissions Reduction Fund, which has been successful in delivering cost effective emissions reductions.

Given the commitments that have already been made in the context of the last Emissions Reduction Fund auction, and the commitments which are likely to be made between now and the next election, it is highly unlikely that any money will be available for an actual spending reduction over the forward estimates period after the next election.

All up, and in the absence of a credible and specific public explanation from Labor that they have changed their mind on any of the measures which form part of the above, we maintain our claim that under Labor the budget position would be at least $57 billion worse off than it is under the Coalition.

*****

In conclusion – Australia is now heading in the right economic and fiscal policy direction.

Yes there is more work to be done, but we are making progress heading in the right direction.

Between now and the next election, the Turnbull Government will work as a team, providing good and effective government, preparing our second term economic and fiscal policy reform agenda, while doing what needs to be done to ensure the alternative government is held to account.

Our commitment is to be positive and forward looking, working to seize all the economic opportunities in front of us as a nation.

If any country should be able to put its fiscal position on a solid foundation it is Australia – blessed as we are with abundant natural resources, a well-educated, hard-working and creative population and a deep commitment to the rule of law. On top of all that, we can and should be well-placed to take advantage of continued economic development and growth in the Asia-Pacific, which – whatever the short-term fluctuations – will remain an engine of global economic growth.

By the same token, we can't allow any alternative Labor contender to try and sneak into the highest office of the land without properly explaining their plan for the economy and the budget and without properly explaining where the money for all their promises is meant to be coming from. That is why it will continue to form part of presentations like this one.

Our hope is that in the months and years ahead, Labor will join with us in our national interest, to help us implement our plan for stronger growth, more jobs and to repair the Budget.

The next big test for the Parliament will be the vote on our Free Trade Agreement with China – it will be a key driver of our economic success over the years and indeed decades ahead – and it deserves our Parliament's support.

Thank you.