| *check against delivery* Ladies and gentleman, as a student back in February of 1987, I recall attending a rather packed lecture theatre to hear the pithy and profound views of that doyen of economists John Kenneth Galbraith.
He was an imposing figure, and not just with his towering 6 foot 9 physical presence. As an economist, he had a rare clarity of thought and consistency of message that was, as I recall, hugely impressive. Galbraith was a classic American liberal who railed against big business and modern excess. He was forthright and entirely consistent throughout his lifetime. I wouldn’t necessarily agree with a number of his views but he provided a clear sense of direction and he had little tolerance for spin. The other day I was reading one of his last works, titled ‘The World Economy Since the Wars’ and came across some useful reflections….
He talks about the history of world economic downturns and he said: In the 1800s “such episodes were called ‘crises’ or ‘panics’. These terms were thought to create fear and have an adverse affect on business morale, and there was recourse to the much milder term ‘depression’. ‘Depression’ then acquired the deeply adverse connotation…and from the search for a less disturbing term, the word ‘recession’ came into use. “As ‘recession’ then established its own unpleasant meaning, there was an effort to substitute ‘growth adjustment’”…and so on. You see, Kevin Rudd and Wayne Swan are not the first to try to spin their way out of an economic ‘episode of devastation’.
It is absolutely true that this global recession is the most severe global economic downturn since the 1930s. It does not logically follow however, as relentless government spin suggests, that this is the worst economic downturn for Australia since the 1930s.
Government spin wants the economic challenge to be greater than what it really is! They want everyone to believe that only the Rudd Government can save Australia from the devastation of the downturn affecting other countries. And last Tuesday’s Budget, with its overblown and overcooked rhetoric, raised expectations that it failed to meet. How else could the Treasurer justify omitting both the $58 billion deficit and $188 billion of net debt in his speech, as well as $18 billion of income tax cuts that are delivered in the next fourteen months. If mentioned, neither announcement suited the political spin. It was a Budget with a confused message. In spending - It was meant to be disciplined, yet it contains a plethora (over 300 pages worth) of new initiatives that fail to deliver a sustained economic bang for the taxpayers’ buck. In savings - It was meant to be tough, but the total Budget savings only represent around 1.5% of total expenditure. And indeed many of these cuts are puzzling and peculiar choices: the national illicit drug strategy cut by $25 million; support for diabetes is cut by $32 million; mental health reform is cut by $20 million; and Indigenous access to health care services is cut by $10 million. In infrastructure - It was meant to be nation building….yet the government spent the same amount of money in six months on cash splashes as they intend to spend on infrastructure over the next six years. And in deficit and debt - it was meant to lay down a plan for the recovery yet the Budget has optimistic assumptions based on a recovery weighed down with a massive debt burden. The government is always keen to compare us with other nations. So let’s compare apples with apples from the beginning of the economic downturn. The Rudd government inherited an economy in first class shape.
1. The government inherited a budget surplus of $20 billion; the US, Japan, UK and all the major European nations had budget deficits at the same time.
2. Secondly, the government inherited no net debt; again, the US, Japan, UK and all the major European nations had large, and growing, national debt. On the contrary, our government inherited money in the bank of more than $70 billion.
3. Thirdly, the Australian government inherited unemployment at 4.3%, compared with Germany, France and Spain at over 8%, the UK at 5.4%, Canada at 6% and the US at 4.6%.
4. And finally, the government inherited GDP growth of 3.6% compared with the US at 2%, the UK at 3%, the Euro area at 2.7%, Japan at 2.4% and Canada at 2.7%. This remarkable fiscal and economic position was delivered to Mr Rudd at the last election. But remember, it took the Coalition 11 years of hard work, tough decisions and steadfast discipline to deliver surplus after surplus to pay off Labor’s last debt of $96 billion. From this blessed starting point, in our view the government immediately got off on the wrong track. It began by ‘fighting the inflation genie’ at a time when the sub-prime meltdown was in full swing in the US. It encouraged the Reserve Bank to raise interest rates and it talked down economic growth. In 2008 Budget forecasts, surpluses were as far as the eye could see, even in the midst of the sub-prime meltdown. And as the global financial crisis worsened the government saw a political opportunity and decided to throw all fiscal restraint to the winds. This year the government will spend $58 billion more than it is collecting. The government has decided to continue to spend more money than it collects right through to 2017. The sad truth is that the Budget has deficits totalling nearly $220 billion to 2013. Further deficits – and this is the black hole – further deficits are projected until 2017. The government has committed to $124 billion of new, additional spending since the last federal election. That’s about $10 million an hour in new spending decisions for every hour since Mr Rudd was elected. Mr Rudd and Mr Swan said that their Budget will leave Australians with $188 billion in net debt by 2012, that’s $9000 for every man, for every woman and for every child in Australia, but the peak debt will be significantly larger. Two-thirds of that $188 billion in projected net debt is due to new spending decisions of the government and not declines in revenue. Maybe that’s why Mr Rudd refers to ‘300’ and forgets the ‘billion’. It is important to repeat this point – two-thirds of the Budget’s net debt by 2012 is accounted for in new spending decisions of the Rudd government announced since they were elected. The interest bill on the massive spending spree will be $8 billion a year. This will be on-going until the debt is paid off. To put that on-going interest bill into perspective: it is about twice the amount of money spent on housing this year. Two and half times the amount spent on sport, recreation and culture. The interest for one year will be twice the amount spent on agriculture, forestry and fishing. It’s twice the amount spent on public order and justice. And the interest bill is $1 billion more a year than we spend on transport and communications. Interest on the public debt will be a growing millstone on future Budgets. And the reason why the debt is so significant is reflected, in my opinion, and in the reality that around 95% of expenditure in each budget is politically non-discretionary for the government. Funding for pensions, unemployment benefits, defence, Medicare, schools and so on, is effectively locked in unless – and this is very important - the government is prepared to accept the risk of substantial electoral pain. Governments would deliver radical change if they were to tinker with 95% of the Budget. Generally, that means that each year there is probably only around $20 billion for structural challenges such as climate change, economic stimulation or broadband investment. New, unexpected challenges such as war and natural disasters also eat into that discretionary spend. With new government debt, interest payments must be funded by that discretionary component of the Budget. Debt removes Budget flexibility. It also creates an unreal world where community expectations of government are not lowered to affordable levels. This Budget has left the government with no margin for error. If the world economy does not recover later this year, Mr Rudd will have shot all the ammunition in the locker and he will have few options remaining. At this point in relation to Budget forecasts, I want to go back to John Kenneth Galbraith and he said.... “The only function of economic forecasting is to make astrology look respectable.” The Budget projections indicate the debt will be paid off at a date somewhere off the graph – far, far away (as my little boy says) ¬– past 2020-something. I assure you of this –Labor will not deliver under Kevin Rudd a budget surplus and Labor will not be able to pay off Kevin Rudd’s debt. Even the government’s own figures, which Wayne Swan was amazingly describing as conservative in the last few days, assume that we will have at least six consecutive years of uninterrupted real growth of 4% or higher immediately following the predicted end of the recession next year. I want to discuss this in detail. There has been considerable disquiet about the Budget’s growth assumptions. Normally, the Budget would use an average ‘trend’ growth of around 3% to project future revenues and expenditures, and thus the deficit or the surplus. In this Budget the government decided to use growth of 4.5% from 2011 to 2013 and then 4% through to 2017. Those six years of ‘above trend’ growth are the basis of the government’s strategy to eliminate the deficit and take the Budget into surplus. This would be the longest continuous period of real growth above 4% anyone can remember and certainly since ABS data was recorded in 1959. And while there are historical precedents for the economy to experience a few years of above-trend growth after a recession, the key uncertainty is whether there will be sufficient demand, both domestic and external, to absorb the excess supply capacity in the economy which will be created by the current recession. For example, China achieved double digit growth between 2002 and 2008, but even Chinese authorities acknowledge that such high growth was not sustainable. If China continues with its plan to get growth back to 8% per annum this might not be enough to drive demand to satisfy Australian budget assumptions for growth. If Australia is looking for domestic demand to drive growth then the implications for the current account deficit could be significant. Treasury expects the current account deficit to widen from 3% of GDP this year to 5.75% of GDP in 2010 when growth is forecast to be 2.25%. Now, what will happen to the current account deficit when growth reaches the 4.5% levels forecast? How will we finance our economy in a world where capital flows may be badly bruised by this recession for a long period of time? Moreover, seeking to finance a large current account deficit could have a profound impact on the exchange rate and interest rates. Market economists have been less than impressed with the government’s proposed ‘deficit exit strategy’. The Commonwealth Bank’s Budget analysis, in an understated way, says that, “The longer-term framework, especially the exit strategy from the deficit phase, is a little disappointing.” Westpac warned: “…the international backdrop poses a risk to this rosy scenario, since the world economy is likely to be going through a process of deleveraging for many years.” ANZ also cast doubt on the Rudd government forecasts: “The optimism around these economic forecasts suggests there is considerable scope for ‘slippage’….” And just not to forget our sponsors, NAB believes that the whole deficit exit strategy is flawed: “Our real concern is that the Budget does not lay out a credible medium term policy to return the Budget to a more sustainable footing.” And if we haven’t heard enough, Deloittes predicts that: “Unless optimistic GDP growth of the latter years of the forecast period is achieved, substantial further changes to the structure of the budget will be needed.” Finally, from an international perspective, J. P. Morgan was also critical of the government’s approach: “Crucially, the Treasurer’s ‘cross your fingers’ strategy for returning the Budget to surplus relies principally (and optimistically) on a return to strong, above trend economic growth, rather than the ‘hard decisions’ he promised. Having softened voters up for a ‘horror’ Budget, the Treasurer effectively pulled his punches.” They are not Joe Hockey’s words, that’s the consensus market view. And importantly, the IMF and the Reserve Bank of Australia have previously predicted that the world will have a slow recovery after 2010. In fact in the week prior to the Budget, the Reserve Bank’s Statement on Monetary Policy said that, “The recovery, however, is likely to be gradual at first, largely reflecting developments abroad, where growth is forecast to be below trend for some time.” So the independent economic experts find that the government’s recovery plan is rubbery – at best. A plan for recovery that leaves no margin for error undermines confidence.
Former Treasury deputy secretary, Des Moore, said “the Rudd Government’s budget paints an unbelievable picture”.
In its own Budget papers, the government notes that recovery is slower from “recessions associated with financial crises or those that are highly synchronised across the world”. And this is exactly the situation now. The government claims the recession is different yet it uses data from previous recessions to justify its flawed recovery plan. We must not forget that this recession started as a financial crisis – a credit crisis. And one of the likely results of a financial crisis of this depth is that investors will come out of the recession expecting a higher return on investment for the level of risk that they are prepared to take. Put another way, as the crisis recedes, the cost of capital is likely to be higher than it was and as a result, investment is likely to be subdued for some years to come. In particular, riskier, but potentially higher return investments, may not go ahead at all. It’s all about the new price of risk. If this scenario happens, then the rebound from recession in Australia may be more gradual than we hope for. There are of course other pressures on the growth forecasts. In 2007 the Coalition government released the Intergenerational Report. The report makes some sobering predictions on the long run spending pressures on the Budget from an aging population and the impact in areas such as health, aged care and pensions. The intergenerational report, prepared by Treasury, projects that real GDP growth will fall to 2.6% in the 2010s, which is when the government says GDP growth will increase to 4.5%. And again, that’s not all. There is also the effect of major government policies on economic growth. In particular, I want to refer to the stimulus packages that have involved a cost of around $70 billion to date.
The government has now admitted that its Budget papers are wrong – that the stimulus packages will not deliver the growth and job expectations outlined in Budget Paper No. 1 which are in conflict with the RBA’s own forecasts. I wonder what other omissions and errors are in the Treasurer’s Budget papers? This error, revealed yesterday, is further justification for the Coalition’s proposed Parliamentary Budget Office, which will provide independent advice and analysis to the Parliament and therefore the Australian people. Moreover, whilst the stimulus had an arguably small positive impact on GDP at the time, it also has a negative impact on GDP as the government repays the debt. This occurs because the government borrows money in competition with the private sector during the economic recovery thereby increasing the cost of funds to the private sector for private investment. The issuing of government securities itself redirects funds from alternative private investments. And spending, this government’s approach is to spend and borrow like there’s no tomorrow.
This government is the biggest peacetime spending Australian Government – ever, without peer. At 29% of GDP they lead the pack in terms of the size of government spending. They have no spending restraint. The government promise to hold real growth in spending to 2% a year until the Budget returns to surplus is ridiculously ambitious. To suggest that Labor will be capable of living within this spending straightjacket for six years is absurd and it ignores Labor’s record in government. And of course the government has already broken that commitment. For example, the government has announced that its defence budget will grow by 3.9% per year in real terms over the forward estimates and 3% per year until 2018 above their own 2% limit. Of course the government failed to clearly state the real cost to the Budget of the national broadband network and the Ruddbank proposals. These both suggest much more spending is to come. Very simply, I do not believe it is credible that the government’s promise of spending restraint will be achieved andI outlined that, I might remind you, in a speech I gave to the Business Council a few weeks ago. In relation to debt, as I mentioned earlier the government’s debt burden will leave each Australian with at least $9,000 in extra debt. As one of my Facebook friends said to me, “This is the Budget that buried Generation Y.” Although the net debt position by 2012 will be over $188 billion that will not be the final figure. The final figure will be significantly higher. The Budget is predicting deficits until at least 2016, so that will add tens of billions of dollars to the national debt. Maybe that’s why Mr Rudd was so circumspect on adding ‘billions’ to ‘300’. It won’t take long until the nation’s net debt, the government’s net debt hits $300 billion. Even if the government is successful in getting the Budget back into the black, it will take 20 years of solid and consistent surpluses to fully eliminate a debt of this staggering magnitude. So, who is buying all this debt? It’s a good question. In the first instance the government will be selling Australian Government notes and bonds on the open market at the rate of about $3 billion a week, as it is today.
The Treasurer assured the House last week that 66% of the debt is being purchased by foreign interests, which is a creep up on previous levels. This raises further elements of risk – economic risk for the growing current account deficit and political risk if major purchasers of bonds are foreign government-controlled entities. So who is going to pay for this debt in the end? Over the long term, of course, it will be the Australian taxpayer. Australians know that they have been spun a magic pudding story. The government handed out $900 in cash splashes, but taxpayers will be paying $500 a year in interest on the debt that will remain. I think it is true to say that Australians support government spending when their money is used for purposes that will strengthen the nation’s future economic prospects.
There were a number of policy decisions taken in the Budget that the Coalition agrees with. For example, we agree with the allocation of funds for infrastructure - productivity-enhancing national infrastructure. We supported in government significant infrastructure spending. In fact, contrary to poorly researched beliefs, under the Coalition, government infrastructure spending more than doubled from 1996 to 2007. Total infrastructure spending increased from 3% of GDP in 1996 to 5.4% in 2007 – and, at the same time, GDP doubled in Australia. We cannot agree however with the changes to the private health insurance rebate. This policy change is a clear, unambiguous broken promise by Kevin Rudd.
Labor has been ideologically opposed to Australia’s private health care for decades. Labor is opposed to consumer choice in health. Malcolm Turnbull offered a number of positive suggestions for the recovery last Thursday night. Small business will be the engine room of Australia’s economic recovery. Small business is about innovation, risk and jobs. It rewards hard work. Mr Turnbull offered practical initiatives such as a tax loss carry-back to business. This would allow business to book current losses, of up to $100,000, against previous years’ taxes paid. Business cash flows would be improved and the cost to the overall Budget would be negligible. We proposed changes to the insolvency laws to allow for the reconstruction and rehabilitation of businesses that have hit hard times. We commit to cutting red tape by joining with state and local governments to deliver a one-stop online portal for all regulatory filings. We will pay small businesses that employ new apprentices, such plumbers, electricians and hairdressers, more in the first two years of the apprenticeship in order to help the cash flow needs of the business overall. Mr Turnbull also stated that the Coalition will be prepared to make hard and difficult decisions to pay for policy priorities and we have done so. In conclusion, the Coalition wants Australia to succeed even though this Budget is a lost opportunity. Australia is a nation of hope and opportunity, but it cannot allow itself to be weighed down by massive debt and a burden of ongoing deficits We must emerge from this recession with our public finances in good shape so that we can take advantage of the new opportunities in the fastest-growing economic region in the world. Only the Coalition has the track-record to deliver this outcome for Australia. Thank you.
ENDS
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