PREVIEWING THE 2017 BUDGET
ADDRESS TO THE COMMITTEE FOR SYDNEY
WEDNESDAY, 5 APRIL 2017
***CHECK AGAINST DELIVERY***
Let me begin by acknowledging the elders and traditions of the Gadigal people of the Eora Nation, and by paying my respects to the first Australians. Can I thank Ray Wilson for the introduction and Tim Williams for the invitation, and this opportunity to preview the Budget with so many people who have an important stake in this City.
Despite our celebrated differences every Australian has a stake in Sydney’s success. You might not expect that from a Queenslander who represents the southern suburbs of Brisbane and Logan, raised – as we all are up there – on a healthy diet of parochialism fed partly, but not solely, by football.
But it’s self-evident. A quarter of national output comes from here. And yes, about 80 percent of the population doesn’t live in Sydney, but that means 20 percent does. That’s before you get to the 33 million visitors each year, including 5.5 million people who commute here regularly for work like I have been for more than a decade.
Your mission is to provide “thought leadership beyond the electoral cycle”. So I’ll try to finish with some longer term thoughts but first let’s talk about this coming Budget.
As always the economic context is crucial. What’s missing from the Government is a coherent framework that goes beyond slogans and actually crystallises the policy objectives. So let me be very helpful and suggest that this Budget should be about five things:
- Budget repair which is fair and which secures the AAA credit rating;
- Strong economic growth which is inclusive and people-powered;
- Hard work which is rewarded;
- A decent social safety net for those at risk of being left behind; and
- A comprehensive approach to the housing affordability crisis.
What troubles me isn’t just that the current agenda doesn’t support these objectives, it’s also that the hard numbers show we are heading in precisely the wrong direction.
Yes, there is some broad economic data we know will help buttress the Budget bottom line: terms of trade 15 percent higher than a year ago, for example, and company profits at record highs after December saw the biggest surge since 2001.
But these numbers and headline GDP growth mask big drops in business investment and a different reality in the people-facing parts of the economy, which is driving so much of the disillusionment we are seeing in our politics and society.
Wages growth is at a record low of 1.9 percent. Underemployment is at record highs, with 1.1 million Australians looking for more hours and unable to get them. Our unemployment rate just jumped to 5.9 percent which is, remarkably, the same rate at which it peaked during the global financial crisis. So while the United States, United Kingdom, Germany, and most of the OECD have unemployment rates substantially lower than during the worst of the GFC, ours is the same.
I know this is the national story, not the Sydney story, but we don’t frame budgets by city. Again, context is key, and when we look over the most recent mid-year outlook, the fiscal story is not a happy one.
From the Government’s first Budget to the December update, the deficit for this year has more than tripled, from $10.6 billion to $36.5 billion. Net debt has blown out by $133 billion since government changed hands in 2013, from $184 billion to $317 billion this year. Gross debt will be half a trillion dollars by June’s-end. And the wafer-thin surplus projected for 2020-21 relies on cuts that will never pass the parliament because they ask the most vulnerable people to pay the heaviest price for fixing the deterioration in the Budget.
What’s not generally understood is that the arguments we are having in Canberra are not between those who think we need to get back to sustainable balance and those who don’t. Both sides agree the Budget is on an unsustainable path, and that something has to change. Our disagreements are not over the ‘what’ but the ‘how’.
The ratings agencies are circling, and a downgrade to the coveted AAA rating that was first secured from all three agencies by Labor during the global recession, would push up mortgage costs and damage confidence.
So we support Budget repair – in many ways we are leading the conversation – but it has to be fair. Our approach is to agree with the Government when we can, and disagree when we must.
There hasn’t been for decades an Opposition more willing to offer alternative savings and tax reforms than this one. This is a point I’m pleased to see made by many commentators, typically when they write about our changes to negative gearing and capital gains for which Bill Shorten, Chris Bowen and Andy Leigh deserve considerable credit.
Of course, these reforms not only help the Budget, but they would also help address the housing affordability crisis that is impacting Sydney more than anywhere else.
That’s why any housing affordability package the Government puts up in the Budget or before must address these unsustainable tax breaks for property speculators. Otherwise it’ll be nothing more than a sham and won’t level the playing field for first-home buyers.
Our policy has been on the table for two years this month. Nothing would make us happier than if the Government picked it up and ran with it. That’s part of our constructive approach – making our ideas available to them to adopt.
It was the same with the first omnibus savings bill as well, helping the Government make bigger savings in a fairer way and delivering the votes to get it through. There are other examples too, of steps we have proposed to help them fix their Budget.
Consider the deficit levy, which will be abolished at the end of this financial year, and which will see someone earning a million dollars pay over $16,000 less in tax per year. If the Government was prepared to continue the levy – remember the deficit has tripled since it was introduced – it could raise three times more from a third as many people as its most recent cuts to Family Tax Benefits. Keeping the levy would raise $4.4 billion over the forward estimates from around 500,000 people, compared to the $1.4 billion raised by the family payments cuts to 1.5 million families.
Company Tax Cuts
The Budget politics of the past week or so have been dominated by the Government’s $50 billion company tax cut, and by the deal in the Senate which sees around half that committed, and then with the rest still on the books. It may now be in two parts but the total cost is the same.
It’s absurd to think that that is a better use of $50 billion dollars than repairing the bottom line; or investing in schools or quality infrastructure. That’s why for some time we have said that a $50 billion hit to the Budget for big businesses is unfair, unwise and unaffordable.
Unfair when the price is paid by middle- and low-income families or further cuts to hospitals or schools or infrastructure.
Unwise when the Treasury’s own figures show a negligible return on such a big investment, and only way down the track – not enough bang for 50 billion bucks.
Unaffordable, with all the other pressures on the Budget and with the AAA credit rating at serious risk of a downgrade.
We are in no rush to respond to the deal done in the Senate for the first $24 billion. Not when the Government is unable or unwilling to say how it will pay for it or what, if any, economic gains have been credibly modelled.
For days now the Treasurer has refused to provide any evidence that the Senate deal will see more growth or jobs in the economy, a point made with characteristic sting by Michelle Grattan in The Conversation yesterday. And a gap filled by the Grattan Institute in today’s papers, which identified a microscopic 0.2 percent growth dividend but only some years away when the package is fully implemented.
You don't match a slap dash, ill-considered last-minute process with a slap dash, ill-considered response on the run. We don’t feel particularly pressured by the Treasurer’s red-faced demands or by the absurdity of him blowing a $50 billion hole in the Budget then trying to blame us for it!
We will have more to say about company tax cuts as we assess the damage done to the Budget and how the Government fills the hole it has dug. Our response will be consistent with our usual, considered, collaborative policy making processes.
The same will apply to the spending side of the Budget. We have already suggested a range of initiatives covering training providers, health insurance and more. And the search for savings continues in the lead up to the Budget as we continue the constructive approach we’ve adopted to date.
The Longer Term
I mention our bona fides to reassure you that we recognise our task in Opposition is more than to just point out where the Turnbull Government has got the Budget wrong, and judged the economy badly, in each of its budgets and mid-year updates going back into the Abbott years as well. As the alternative government you expect that from us, but you expect more too.
Our thinking goes beyond the next five weeks.
For some time it has been clear to me that the Budget doesn’t incentivise the best kind of decision making. And that better, more transparent, more forward-looking budgeting will lead to better, more transparent and forward-looking policy decisions. As part of this, we’re open to ideas about more effective ways to attract and leverage investment in infrastructure and cities.
These are some of the central concerns of the discussion paper I released early in February this year. The paper sought input from experts on ways to improve how the Commonwealth Budget is put together and presented.
The aim is to improve the Budget by enhancing scrutiny over the 10-year impact of policy decisions, rather than the current four-year focus; clarifying and simplifying Budget papers; and increasing agencies’ accountability against their program objectives and outcomes. Not hot topics or the subject of front page news, but worthy questions for leading academics, economists, accountants and stakeholders.
The first consultation period ended on Friday. Some of you in this room have participated, or I hope will be involved down the track as we further discuss and refine some of the ideas, including at a roundtable later in the year.
A key reason I raise the discussion paper now is that some of the most interesting ideas involved infrastructure.
I’m conscious I’m among infrastructure experts and that you probably spend a lot of time here with Anthony Albanese who knows these issues front to back. You don’t need me to tell you how important infrastructure is to prosperity, and especially productivity, here and beyond. You don’t need to be reminded about traffic congestion which could cost the nation $53 billion a year in lost productivity by 2031, or the impact of unaffordable housing and poor public transport connections.
You’d be familiar with one of the proposals I’ve received which suggests splitting out infrastructure spending from recurrent expenditure in the Budget. Splitting it out like this, or at least presenting it next to the existing accounting treatment, could help Australians understand where the Government has borrowed for productivity enhancing infrastructure and where it has borrowed to cover other payments.
The proposal assumes Australians would tolerate borrowing for infrastructure but not ongoing spending. The ratings agencies may take a different view, and there are other considerations, but it’s worth considering as an idea.
There are also more fundamental issues of funding and financing infrastructure, which are often conflated. Financing refers to the upfront costs of a project, typically debt or equity, whereas funding is the source of revenue to pay for the asset over the course of its life via taxes or charges. Funding is the difficult part because of tight budgets and community resistance to charges. Both require a clearer and more reliable pipeline of projects beyond the useful IA priority list, and more needs to be done on planning, governance and project selection.
These were some of the points made by Infrastructure Partnerships Australia recently in criticism of a proposed Infrastructure Financing Unit within the PM’s Department. As reported in the Australian Financial Review, the IPA argued there were not enough “investable projects”, and there was “considerable confusion between infrastructure funding – which is totally inadequate – and project financing, where there is plenty of money available”. It may be that some of you share those concerns and let’s hear them in the discussion.
Our view is that the conventional process of Government directly funding projects still has a place, but it needs to be complemented with other measures. That could include asking the beneficiaries of the infrastructure to help pay for it, through mechanisms such as value capture – as long as it doesn’t make public infrastructure inaccessible for those who rely on it.
But it also means looking more keenly towards financing methods – the use of debt or equity. That could involve a “borrow-to-build” approach where the Government borrows more now – in a time of historically low interest rates and low government borrowing costs – to finance the upfront construction costs of projects.
Other Types of Investment
Infrastructure is just one of the areas where fiscal constraints encourage us to look for other innovative ways to address a magnitude of persistent social and economic challenges that threaten our way of life and our quality of life.
We are also attracted to impact investing as a way for Governments and businesses to generate not only a financial return, but a measurable social or environmental one as well. We welcome the Government’s impact investing discussion paper, so long as the concept is about supplementing Government investment, not substituting it.
We have also been monitoring the COAG process and working on our own ideas for a bond aggregator to supplement our housing affordability policies. This would give the community housing sector access to lower-cost financing on the back of Commonwealth support.
Getting the Budget into shape in a fair way requires working on transparent and innovative means to fund the priorities that matter to us while protecting the AAA credit rating. And it is central to our principles of strong and inclusive growth in a productive economy; well-paid jobs that reward hard work; and a decent social safety net and affordable housing for all who need it.
I look forward to working with you on these issues and to the discussion today.