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Reform Agenda Series:
Towards a Budget Surplus, 27 April 2012

Thank you to everyone who attended our Pre-Budget Forum in Sydney.

The Minister outlined the Government’s case for returning the budget surplus, arguing that it is more than just an accounting exercise, but ensures the economy can continue to provide services not only now, but into the future. A surplus can provide a buffer against future uncertainties should the global economy worsen.

The Minister then spoke of the dynamics in the global economy that
are transforming the Australian economy and posing challenges to the Federal Budget – lingering uncertainty from the GFC; the shift in economic power from Europe and the US to Asia; the fragilily of the US economic recovery; and the concern that some sectors are booming while others are under pressure.

The speech also highlighted the importance of intergenerational equity, ensuring our economy is not just sustainable now, but into the future. In particular, the Minister used her own lifetime as a guage for the way demographics will effect our economy. When the Minister was born, there were 7.5 working age Australians for every person over 65. Now, at age 43, there are 5 working Australians. When the Minister is 80, there will be just 2.7 working Australians to every person over 65. This will mean that, in the future, we can expect health ecosts to grow faster than the economy. The Minister highlighted this as an issue that needs to be addressed now to ensure our economy is sustainable, and that future generations do not bear the full cost of this demographic transformation.

This is why, said the Minister, fiscal sustainability is ultimately a social responsibility.

The Minister's speech was followed by a panel discussion withe Ticky Fullerton, Presenter of Business Lateline on ABC TV, and Professor John Buchanan, Director of the Workplace Research Centre at Sydney University, facilitated by Per Capita's Executive Director, David Hetherington.

The full text of the Minister's speech is below.

Pre-Budget Forum with Senator Penny Wong, Minister for Finance

When I attended the PerCapita Pre-Budget Forum last year, I spoke about the values underpinning the Budget and the economic circumstances in which it was being put together.

In preparing this year’s Budget, which will be handed down in less than two weeks, those same principles still apply. Our belief is that a strong economy is the foundation of prosperity and fairness. That prosperity must be created to be shared. That opportunity and fairness go hand in hand. And that today's decisions are best measured by their contribution to the future.

That is why fiscal sustainability is ultimately a social responsibility. Because our responsibility is not only to provide social services today, but to work to ensure the economy and the budget will sustain them into the future.

For Labor, returning to surplus is not simply an accounting exercise. It is a choice that balances the longer term fiscal imperatives, and Australia's contemporary economic circumstances. Put simply, we believe that returning the budget to surplus is good economic management. And that good economic management underpins good progressive government. It is the right fiscal policy for the times.

This policy choice does not disregard the challenges and pressures that both the Australian and global economy face. Rather, it is the policy choice we believe best responds to those changes. A surplus will create a buffer against future uncertainties should the global economy worsen. A surplus will give the RBA the flexibility to move on interest rates should it wish – which is good for firms and households under pressure in this time of change. A surplus will send a signal of strength to investors both here and abroad. Importantly, a surplus is the right call in an economy that is on track to return to around trend growth.

Consider our current circumstances. Australia is an economy in transition. A nation changing as global forces and domestic trends make their mark. Global uncertainty lingers after the worst financial crisis since the Great Depression. Economic power is shifting from Europe and the United States to Asia. And some sectors are booming while others are under pressure.

Around the world, sovereign funding problems are less acute but some governments remain under pressure. There are encouraging signs that the US economic recovery may be more enduring, but unemployment remains unacceptably high and the economic data patchy. The global recovery remains fragile and substantial risks remain as countries rebuild. In contrast, Asia continues to be the powerhouse of global growth.

All of these dynamics are reshaping Australia’s economy. But, while change can be confronting, Australia faces the challenges ahead from a position of strength. And as a nation, we have always seen opportunity in change.

Just last week, the IMF in its World Economic Outlook Update confirmed that the Australian economy is expected to outperform every major advanced economy over the next two years. We are on track to return to around trend growth.

Since 2007, over 750,000 jobs have been created and unemployment remains low at 5.2 per cent. This compares to 10.8 per cent unemployment in the Euro zone, and 8.2 per cent in the United States. We have a strong investment pipeline of some $450 billion. We have a AAA credit rating from all three ratings agencies for the first time in our history. And, as a percentage of GDP, our net debt is expected to peak at a fraction of the average of the major advanced economies in 2016.

Whereas many advanced economies have not fully recovered from the effects of the GFC, with GDP levels below their pre-crisis output, the Australian economy is now 7.4 percent larger than before the crisis. And the same dynamics of change that bring challenges today, herald opportunities for tomorrow.

Australia’s main trading partners are estimated to grow by 1 percentage point more than global GDP, as forecast by the IMF, in 2012 and 2013.

There are approximately 500 million people in the Asia-Pacific, excluding North America, who would currently be categorised as “middle-class”, and this is forecast to rise to around 1.7 billion by 2020 and 3.2 billion by 2030. That’s 3.2 billion people who will be looking to purchase increasingly sophisticated goods and services.

This represents real opportunities for Australia; opportunities to continue to grow our economy, to create jobs, to secure our future prosperity. Indeed, our proximity, our existing relationships and our export potential, puts us in a unique position to further benefit from the advancement of Asian economies.

But opportunities only yield success if we are prepared to turn change to our advantage. That is why this government has placed so great a priority on skills and education. For Labor, these have always been the drivers of opportunity. In a time of change, they are also the foundations of security.

In the last Budget, we announced a $3.5 billion investment in skills, and at COAG just two weeks ago, the Prime Minister secured agreement with the States and Territories to enhance access to qualifications and training, including for 375,000 additional students over five years. We have doubled the amount spent on schools – nearly $65 billion over four years – and an additional 100,000 students are now attending university, with places uncapped from this year forward. These are the tools that equip our people for change. The tools that enable opportunity and security.

The imperative of turning change to the nation's advantage is what motivates our investments in infrastructure, such as in the NBN, our implementation of the MRRT to spread the benefits of the mining boom, and tax reform to improve the rewards for work. And it is the same motivation that lies behind our commitment to return to surplus in 2012/13 and to build on this in the years ahead.

Of course, this will not be an easy task. We have seen $140 billion in revenue write downs over five years and we expect there will be further substantial revenue downgrades in this Budget. Compared to previous decades, revenue flows have structurally changed.

The Commonwealth tax-to-GDP ratio fell four percentage points to 20 per cent during the GFC, and, although it’s expected to return to around 22.8 per cent over the next few years, it’s still one percentage point lower than the average in the pre-crisis commodity boom. That represents about $17 billion a year in revenue that will no longer be received. This structural change in receipts means there is an added imperative to be disciplined with the use of Commonwealth resources.

Australia faces greater demands for services and fewer taxpayers to fund them in the years ahead with an ageing population. Today, there are approximately three million Australians aged over 65 years. By 2050, there will be 8.1 million. However the proportion of Australians of working age will fall dramatically.

Think of it this way: when I was born, there were 7.5 working age Australians for every person over 65. Now I'm 43 years old and there are 5 working Australians for every person over 65. And, when I'm 80 and looking for aged care, there will be just 2.7 working Australians to every person over 65. What this shows is that there will be significantly fewer people of working age to support an increasing number of older Australians. These same statistics drive challenges across the social policy spectrum, but most pointedly in health.

Into the future, health expenditure is projected to grow faster than the economy and faster than the Federal Budget. This is problematic today, and it will become even more difficult for our children if we don’t start to address it now. This is why I speak of fiscal responsibility ultimately being a social responsibility. Because simply expecting future generations to bear the costs is neither progressive, nor responsible.

As Finance Minister – as Finance Minister in a Labor Government – it is my job to look to the long-term. At how we will fund increases in health and education, as we have, not just for next year, but for the years to come. Because Labor’s priority is to make savings that will make policies more sustainable, so we can keep delivering to those who need it into the future. And there can be no question that in the last four Budgets, we've made a lot of difficult savings decisions. But they have all been made in recognition of the need for fairness, for example, means-testing the private health insurance rebate.

In contrast, you have a Coalition which puts inequity first. Less than two weeks ago, the Shadow Treasurer made a speech in which he said that the ‘age of entitlement’ had to end. He believes that millionaires should be given tax breaks on their private health insurance, but Government should go harder on pensioners. The saving measures a political party chooses says as much about its priorities and philosophy as its spending measures.

By this test, the Coalition’s priorities are clear. Millionaires first. Pensioners last.

In preparing for today I reflected on my first speech in the Senate in 2002 in which I said that:

“The shape of our country in the decades to come will be largely determined by how we deal with the changes brought by globalisation. We must ensure that the benefits are shared. We must equip Australians better for this new world.”

Today we speak in terms of the Asian century rather than globalisation, but the priorities remain apposite. How we respond to change influences not only our economic success but the resilience of our society. Anyone who fails to understand how these are interlinked need only look at the social consequences of the levels of youth unemployment that some of the European nations face.

As I have outlined, our focus on skills and education reflects this insight. There will always be legitimate public policy debates. There will always be arguments about priorities and strategies. But the one thing we cannot do is avoid the truth. That change is always with us. Any pretence that there is an option to avoid it isn't only false, it is irresponsible. And we should remember that economic reform in the face of change is not new.

Australia's success has been built on our willingness and capacity to reform. Labor Governments made the hard decisions to deregulate the markets, lower tariffs and float the dollar – reforms that have seen Australia prosper. And, as any reading of our history confirms, the best way to manage change is to prepare the country to succeed.

This will be a Budget that recognises the importance of getting the fiscal settings right so that we can best manage the transitioning economy and prepare for the future. There will be savings measures and they will be targeted and responsible. It will be a Budget that reflects Labor priorities.

Just as the Labor Government stepped in to protect jobs and prevent a recession during the GFC, we will respond to today’s changing economy. We will deliver a budget surplus because it is the right thing to do in these economic circumstances. Because a sound budget position provides us with the means to deliver on our social policy priorities; to build a world-class education system, to deliver quality health care and to support and create jobs. And a strong economy remains the foundation of fairness.


To see our 2011 Pre-Budget Event Click here to see video, speech and other details of our previous Pre-Budget Public Forum.