Address to 2016 ADC Canberra Connection
18 Oct 2016
PREVIEWING THE MID-YEAR ECONOMIC AND FISCAL OUTLOOK
ADDRESS TO 2016 ADC CANBERRA CONNECTION, PARLIAMENT HOUSE
TUESDAY, 18 OCTOBER 2016
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Thanks Anton [Roux, CEO ADC Forum] for the introduction and for the opportunity to spend time with so many senior leaders from the business community and from higher education. Some new friends and some I’ve known for a while – it’s great to be here with all of you, as part of your Canberra Connections program.
I’m representing Bill – he sends his apologies, and his regards – but I’m going to be a bit of an opportunist and talk specifically about my Finance portfolio. Partly because underlying all of the very interesting parliamentary developments of the last week is the ever-present challenge of repairing the Budget the right way. And, specifically, because the mid-year Budget update (MYEFO) is coming out in the middle of December – not that far away.
So I want to preview that by discussing the macro influences on the Budget bottom line, good and bad. Every update relies on a combination of external circumstances and policy decisions. Sometimes governments get lucky, sometimes they don’t, and the commentary over the last few days about improving commodity prices is a timely reminder of this. But my theme today is we shouldn’t rely on luck alone. We can leave any broader political discussion or questions for later on.
I begin with the recollection that the last time I spent time with this ADC Forum was in the absolute depths of the Global Financial Crisis, in 2009, on Hayman Island. Some of you were probably there too. I was there with Wayne Swan and Kevin Rudd – and Joseph Stiglitz was there, come to think of it – discussing the global economic mess and the steps we were taking here to protect Australia from the worst of it. Those initiatives were ultimately successful and we should be proud of them.
Not every developed nation came out of it as well as we did – arguably none did – and that’s for a combination of reasons I won’t go into today. My point is that while the global economy might have edged back from the precipice, there’s still a lot about the post-crisis economy to be troubled by. Growth’s not what it needs to be; inequality is growing; there’s insufficient demand because wages have been strangled; monetary policy’s insufficient; there’s an investment problem – all of this is driving a deeper disillusionment in politics and society of which Donald Trump is just one symbol.
This perspective would be familiar to anyone here who follows the writings about so-called secular stagnation. Not everybody signs up to that school of thought; I was at a private forum on Friday in Sydney which disagreed pretty vehemently that the pressures were secular and not cyclical. But the three characteristics underlying the debate – an excess of savings over investment; unequal distribution of wealth; and insufficient demand – are observable and real.
That Australia was exceptional during the Crisis; that we have just had some good quarters of headline GDP growth; that we’ve just racked up a quarter century of continuous expansion, doesn’t mean we are immune from these sorts of pressures stalking the global economy.
Our most recent GDP growth number of 3.3 per cent masks a very different reality for many Australians. Wages growth is the slowest on record and more than one million Australians can’t participate in the economy properly, because they can’t get enough hours at work. There is actually a greater proportion of people who are unemployed or underemployed now than during the depths of the GFC. This suppresses nominal GDP, wages and inflation – the key drivers of tax receipts. The Government wants to boast about its “growth” record, but growth isn’t being accompanied by good and well-paying jobs. Living standards, measured by Real Net Disposable Income Per Capita, are almost two per cent lower than they were at the 2013 election and business investment is down more than 17 per cent over the past year.
Our global advantage on unemployment is slipping too. The rate itself has remained relatively steady over the past three years, but our rank among OECD nations has fallen from 9th lowest in June 2013 to 14th in June this year. We will get another monthly reading on Thursday.
This is some of the economic context for the Budget position in the lead up to the release of the mid-year update in December. But most of the recent discussion has focussed on the improvement in commodity prices which could significantly boost the numbers at MYEFO.
Iron ore has kept pace with Treasury’s forecast of US$55 a tonne, while metallurgical, or coking, coal has soared above US$200 a tonne – more than double Treasury’s forecast at the Budget. The Australian Financial Review has already suggested Scott Morrison will be the “luckiest Treasurer in at least half a decade” should this commodity uptick bear fiscal fruit.
These are certainly welcome developments, but Budget repair shouldn’t depend on luck, just like Budget deterioration shouldn’t necessarily be blamed on a lack of it. When it comes to improving the Budget bottom line – or managing the economy – Governments need to make their own luck.
External forces are part of the story, but not the whole story. This Government has been part of the problem, not part of the solution, when it comes to the Budget deterioration of the past three years.
Before you point out – not without justification – that there was deterioration in the years prior to the change of government I’d say: of course there was. Show me a developed-world Budget that wasn’t pummelled by the sharpest synchronized downturn in the global economy since the Great Depression eight decades earlier, and the necessary policy responses.
What we are seeing now is quite different. Yes, the macro conditions are impacting, but Government decisions are taking their toll as well. Foregoing carbon price revenue; the $8.8 billion grant to the RBA; and more, all hurt the Budget bottom line. Added up, this Government’s policy decisions caused more than $5 billion worth of deterioration last year alone.
Partly for these reasons, we’ve seen the deficit triple since the Government’s first budget in 2014 and net debt blow out by more than $100 billion in just over one parliamentary term. More recently, the 2015-16 Final Budget Outcome showed the deficit for last financial year was eight times higher than estimated the day the Coalition took office. Eight times!
Global comparisons bring this problem into much sharper relief. Since 2013, net debt in Australia has increased by about 8 per cent of GDP, while the advanced economies’ average increase over the same period has been 3 per cent of GDP. During this time, the very modest improvement to Australia’s structural budget balance was just half the advanced economy average, according to the IMF.
This brings me to the Government’s $50 billion company tax cut. Now, I appreciate some or even most of you would support the tax cut. In a perfect world taxes would be lower, but these are not the perfect circumstances we find ourselves in.
I oppose that tax cut. Not for ideological reasons, but for fiscal reasons: the country simply can’t pay for it. There are good things we can’t afford; especially when they conflict with good things we can’t afford to lose. In the current conditions we’d be mad to hollow out investment in human capital to give to companies. We’d get more growth out of investment in schools or infrastructure in any case.
TRIPLE A CREDIT RATING
Now, with a deterioration in the Budget of this magnitude since the change of government three years ago, and the impact of that tax cut, it’s little wonder the coveted AAA credit rating, which was first attained from all three agencies by Labor, is under pressure. Standard & Poor’s warned the Government in July there was a one-in-three chance our rating would be downgraded if the trajectory wasn’t addressed, while Fitch and Moody’s have also expressed concerns.
There are a range of views out there about the impact any downgrade would have on the Australian economy, but I think two are of particular concern. One, business and consumer confidence would drop at a time when investment is already down, people are spending less, company profits are flat across the year and retail turnover is growing at about half the rate it was a year ago.
Two, borrowing costs will likely increase because a drop in our sovereign rating will see a corresponding downgrade to the banks. NAB’s Alan Oster estimated a downgrade for the banks would likely see wholesale funding costs increase by 10 to 20 basis points. That means mortgages will go up. How much remains to be seen, but as a rule of thumb a 20 basis point increase on an average home loan of about $360,000 would see interest costs rise by about $720 a year.
LABOR’S APPROACH TO THE BUDGET
In this context, I assure you that no Opposition in at least two decades has taken the task of Budget repair more seriously. Our savings measures announced during the election campaign would have seen more than $130 billion in bottom line improvements over the medium term.
And we demonstrated our bona fides on the so-called omnibus savings bill. We negotiated with the Government to secure $6.3 billion in Budget savings and, in doing so, protected vulnerable people being targeted by cuts and saved the Australian Renewable Energy Agency.
Commentators focused on what the deal said about the possibilities of bipartisanship in a finely-balanced parliament. OK, but I think they missed the main lesson: that Budget repair can be done fairly and in a way that doesn’t ask the most vulnerable to carry the heaviest burden.
And it shouldn’t be about carrying around rabbit feet and four-leaf clovers hoping to get lucky on the macro side of things. It’s about considered, targeted and deliberate policy responses based on a clear set of values. Let me suggest five, from Labor’s point of view:
First, fiscal policy has to suit the times – and times change. We don’t cut the Budget just for the sake of it, but when fair structural reforms are needed to get us back to balance we will responsibly identify them. We will make good decisions even if they’re difficult.
Second, we know Australians will cop big changes, like to negative gearing, but they have to be explained properly and implemented slowly. The best savings deliver more over time.
Third, we’re up for a conversation about better budgeting and forecasting, more transparency, longer timeframes and forward-looking ways to borrow cheaply to build vital infrastructure.
Fourth, the transformative possibilities of big data, targeted service delivery and technological progress should be all about improving lives, not just improving the bottom line.
Finally, and above all else, Budgets must underpin the right kind of economic growth which is inclusive, creates jobs and attacks inequality and social immobility.
I hope this gives you a sense of how we approach the important task of Budget repair – not by hoping for good fortune, but by making smart, well-motivated decisions. In the process, relying on you and the business community to ensure we can repeat and exceed the economic policy successes of Labor’s last stint in Government, in our next term, in these uncertain and challenging times.
Thank you, I look forward to the discussion today, and in the months ahead.