Introduction
Thank you for the kind introduction and thank you to the Australian Institute of Company Directors for the invitation to talk today. The Institute has a long history in setting standards, providing director education and promoting good governance in the private and public sectors and I commend them for the work they have done.
As you know, I have recently taken over from Lindsay Tanner, a colleague and Minister who had a keen appreciation of the importance of good governance, as well as a deep interest in keeping the enthusiasms of spending ministers in check.
As you would expect, as the new Finance Minister, I have been doing quite a bit of thinking and reflecting about my role, and of the task ahead. There is a range of clear economic and fiscal imperatives before us. To meet these will require the Government and the Parliament to make sound choices in the national interest. It will require leadership by the Government, and from others, and a vision for the longer term prosperity of the nation. And it will require us to identify the key risks and opportunities facing Australia.
So the topics you are addressing today are of considerable relevance and interest to my portfolio. However this morning, I want to concentrate my remarks to you on the economy, including the recent turbulence and our future prospects, and most importantly for my role, about the fiscal challenges ahead.
The Global Financial Crisis and the need to act
I come to the position of Finance Minister in challenging times. Having just come through the Global Financial Crisis (GFC), Australians might be forgiven for believing that the trouble has passed. Unemployment is down and growth is strong.
These positives a testament to the fact that the Government made the right decisions at a time of unprecedented economic crisis have seen this nation avoid the destructive impacts that are still being felt elsewhere in advanced countries.
The relative performance of the Australian economy was, and remains, impressive. But the task is far from over. Shifting the focus of the budget from averting the financial crisis to a sustainable and long term footing that focuses more on the drivers of growth, presents its own set of challenges.
But before delving into the next set of challenges, there is merit in looking back on the road just travelled, and the context for government decision making.
The Governments response to the GFC
The speed with which the GFC unfolded, and the magnitude of its impact on Australias major trading partners and financial markets, required a quick and decisive response.
The Australian Government acted swiftly. Within a month of the Lehman Brothers collapse, the Government had announced the first stimulus package and helped stabilise local financial markets by guaranteeing bank deposits and wholesale funding.
From the beginning, the Governments objectives were clear: to provide fiscal stimulus that was designed to be timely, targeted and temporary.
Timely, to provide immediate support and confidence as the worst of the crisis unfolded. Targeted, to provide the most effective support to confidence and economic activity. This included payments to households who were more likely to spend the payments rather than save them, and an emphasis on shovel-ready projects.
The third T, the temporary nature of the stimulus, was arguably the most important design parameter. The Government was conscious to not lock in ongoing expenditure, or obligations. The stimulus was designed to support the economy when private sector activity faltered, and consumer confidence was dropping and scale back as the economy improved and private sector activity picked up. The stimulus packages were also designed with the future in mind. Investments in infrastructure in our roads and rail alongside measures to boost small business investment were to support jobs immediately, and to nourish the prospects of longer term growth.
And this is what we are seeing. Growth in Australia is strong as the planned withdrawal of stimulus is being met by private sector growth.
Even though our immediate priority was on supporting the economy through the worst of the GFC, the Government also articulated a clear strategy for returning the Budget to surplus and ensuring fiscal sustainability. One of the key planks of this strategy was a commitment to restrict annual real expenditure growth to 2 per cent once the economy was growing above trend. This will see the Budget return to surplus in 2012-13, three years early and ahead of all the major advanced economies.
The fiscal response averted recession
The findings of the OECD and IMF have been clear in their endorsement of the Governments fiscal stimulus and our strategy to return the Budget to surplus. This swift action is the primary reason why Australia emerged from the crisis in better shape than any other major advanced economy.
Averting a recession had obvious and immediate benefits. But it also saw Australia avoid increases in long-term unemployment that are invariably associated with recessions and costs such as an erosion of our skills base and a structural deterioration in the budget.
Compared to the international experiences in other advanced major economies, our performance is strong.
Since the start of the crisis, the US economy has seen the loss of 6.9 million jobs (or 5 per cent of total employment). In Europe and Japan, employment is down around 2 per cent (equivalent to the loss 3.7 million and 1.8 million jobs, respectively).
In contrast, Australia has gained 406,000 jobs (or nearly 4 per cent of total employment) since December 2008.
It is hardly surprising then, that international organisations such as the IMF and the OECD have endorsed the Governments response to the crisis. Importantly, they have also endorsed our commitment to return the Budget to surplus.
The international outlook is improving but economic uncertainty remains
This year the international outlook has improved and the IMF has now revised up its economic growth forecasts for 2010 on the back of stronger-than-expected outcomes in the first half of the year.
The world economy is now expected to grow by close to 5 per cent in 2010 and a little over 4 per cent in 2011.
In spite of the improved outlook, risks remain. Growth is patchy. The United States for example is expected to grow by 2.6% over 2010, whereas China is anticipating 10.5% growth. In addition, there are major concerns and uncertainties associated with sovereign debt issues in Europe, and fragile economic confidence in many advanced nations.
Held up for comparison beside other OECD nations, Australia is particularly well placed, with one of the strongest budget positions in the developed world.
However, we cannot afford to be complacent.
One of the key lessons of the GFC is how quickly economic and financial conditions can change. The need for discipline and rigour is patent. That is why the Government has made it clear that the return to surplus is not negotiable.
As a minority government, we must negotiate on many things, but the return to surplus is not amongst those.
Fiscal strategy
The Governments fiscal strategy provides a clear path to long term fiscal sustainability. By returning to surplus in 2012-13, we not only provide ourselves with the flexibility to respond to adverse international developments should the need arise, but also the platform to better deal with the medium and longer term challenges facing Australia. Australia will be returning to surplus in 2012-13, the same year advanced economies have committed to at least halve their deficits.
The relevance of our fiscal strategy becomes clearer as the economy grows. When designing our stimulus and fiscal rules we were acutely conscious both of the imperative of returning to surplus, and the need to ensure that Government spending wound down as private sector investment grew.
The withdrawal of government spending is substantial. Over 2010, the unwinding of stimulus will detract around 1 percentage point from GDP growth.
Australia is undergoing a rapid fiscal consolidation driven by the withdrawal of stimulus and adherence to the strict fiscal rules put in place. In fact, this Government will deliver the largest, fastest return to surplus since the 1960s. Over the three years to 2012-13, a fiscal consolidation of some 4.4% of GDP. To put this into international perspective, the USA and Japan need to consolidate by 6% of GDP to deliver a balanced budget by 2017.
The task we have set ourselves is substantial, driven in large part by the strict spending rules I have outlined annual real growth in expenditure being limited to 2 per cent. By way of comparison, the last five years of the Howard Government saw average real spending growth of over 3.6 per cent. That is substantially higher than the Governments self imposed cap.
Our fiscal strategy will ensure that Australia remains a country with very low levels of public debt. Our net debt peaks at 6% of GDP in 2011-12. The net debt of G7 economies will reach 90% of GDP in 2015.
Maintaining a strong balance sheet position in the immediate future and over the longer term will be an ongoing focus of this Government, ensuring that our liabilities are kept in check and our asset position remains strong.
Meeting our commitment on spending growth will require ongoing discipline for the Government and for the Parliament; hard choices that are not going to be easy, or necessarily popular.
There is no simple answer.
The task will be more difficult than saying yes or no to new proposals in the lead up to the May Budget, although prioritising will remain the key driver of Budget decision making.
It will also require re-framing the choices before Government. It can be easy to get caught up in the cut and thrust of the annual budget process but keeping an eye on future issues will be a key aspect of budgeting under this Government.
Using a longer term lens when scrutinising spending and savings proposals will be vital to locking in sustainable finances for this generation and coming generations. We have to think and we have to budget for the long term.
Managing growth
A key challenge in this term of the Parliament will be managing economic growth as the resource sector surges. In getting the macro and micro-economic policies and settings right so that productivity and investment continue to fuel Australias uninterrupted run of growth.
Now managing growth in the midst of a resource boom might seem a welcome task when compared to the challenges facing other developed economies.
But having come through the financial crisis in a position of strength, we need to move on to the next challenges - putting the Budget on a sustainable trajectory and ensuring that this period of very strong terms of trade is used well to build the surest foundations for long-term prosperity, with a high-productivity and high-participation economy.
The international circumstances should only serve to highlight how important it is for us to focus on building the capacity of our economy and responsibly managing growth.
The Government understands the importance of this.
That is why the Government is committed to getting a fair share of our natural resources for all Australians. The proceeds of the Minerals Resource Rent Tax (MRRT) announced prior to the election will be used fund an economy wide cut to the company tax rate, investment in critical infrastructure and to build the pool of domestic savings.
The imperative of the last term was to avert a recession and to support jobs. The challenge of this term is to manage growth for the long-term; to consolidate Australias fiscal position and to broaden and strengthen our productive capacity.
Getting the settings right
Long term growth for the Australian economy will require governments to make the right decisions. Just as Australia avoided the worst of the financial crisis because the Government made the right decisions, so too will future growth be underpinned by the right choices now.
As has been outlined today, the Government is undertaking the most rapid fiscal consolidation in over a generation. This is the right course of action and sees Australias public finances the envy of the world. But we cannot only rely on fiscal consolidation and favourable terms of trade shifts to sustain improvements in our national income.
We need to get the settings right.
In the long term, it is higher productivity growth and strong levels of workforce participation that deliver better living standards and give us the capacity to meet future fiscal challenges.
The Government is playing its part in reversing a declining trend in infrastructure investment, recognising past failures to adequately provision for the future. By its very nature, economic infrastructure, whether privately or publicly funded, is a long term investment; it is putting in place the building blocks for future growth. For this reason it is essential we get it right. This is why we established Infrastructure Australia to identify priority areas of investment and to provide rigorous evaluation of investment proposals. We have provided significant funding for crucial nation-building infrastructure, including the National Broadband Network.
The Governments productivity agenda also focuses heavily on building human capital. This involves an even longer time frame than infrastructure investments. As the Prime Minister has said, the generation of children who benefit from a better early childhood education in the next few years will still be in the workforce in the 2070s. By providing people with opportunities to make the most of their potential, we are building the skill base for the future. We are improving the outcomes of education across the board through investments and reforms in Australian schools, TAFEs and universities.
These significant investments in improving the productive capacity of the economy in the coming decades will be vital to securing future prosperity and expanding opportunity for all Australians.
Prioritising for the longer term
Setting the fiscal and budget policies to achieve these objectives is an important task. With fiscal consolidation taking place, the challenges of the resource boom and providing the right settings for improved productivity growth by their very nature require taking a longer term perspective.
This requires expanding the frame of decision making to take account of proposals that impact not only over the next few years, but also the next few decades. Naturally peoples minds turn to new spending in this context, but looking to restrain expenditure, and improving the efficiency and effectiveness of spending to get better results are just as important.
A worthy question to ask in decision making and to focus debate, is how do we want the countrys finances to look for the next generation and those that follow? Another is to ask whether what is proposed will add to the long-term prospects of the nation?
These are questions far easier to ask than answer, but they serve to focus our minds, and our decisions.
To do this, to make sure the Budget is sustainable in the long term, the Government and the Parliament will need to make hard decisions in the interest of Australias long term prosperity.
Part of this challenge will be continuing a mature dialogue with the public and the Parliament about the choices that governments have to make.
It will also bring to the fore the other aspects of my role. I have been told by many that the job of the Finance Minister is solely to say no. This is a large part of the job. But it is also to work for better decisions and reminding others that a spending decision today closes off another, possibly more worthy, decision tomorrow.
It is also to drive home the consequences of resiling from a tough savings decision. Continuing funding for a program that may not be performing today means a more worthy program may get ignored tomorrow. These are the mathematical and fiscal realities which must shape the priorities of the Government and the Parliament.
A new Parliament
The new Parliament presents another dimension to the fiscal landscape. It will be a challenging environment, but it will also provide new opportunities and responsibilities for the Parliament.
Minority government will see a premium on seeking consensus and building majorities, on establishing robust and principled cases for spending and savings, and negotiating passage through both houses of Parliament. While this is a necessity for governing, it also provides the opportunity for a mature and constructive debate around public finances, both inside the Parliament and out.
We welcome Australias business leaders participating in a public dialogue about lasting reform that reflects these economic priorities, and are in the national interest.
The onus will still be on the Government to lead the debate around Budget priorities and sustainability, but responsibility will ultimately sit with the entire Parliament. It is easy to make commitments or encourage demands for more money, but spending in one area inevitably has consequences in others. This is why constructive dialogue with the independents and Greens will be vital in delivering successful budgets and meeting our fiscal strategy.
The signs are already promising. During the negotiations to form Government, the approach taken by the Independent members Tony Windsor, Rob Oakeshott and Andrew Wilkie was highly responsible. In opting for more considered and prudent proposals, they showed a disposition for handling the types of decisions facing the Government in meeting both short term and long term challenges.
Concluding remarks
An underlying theme that Ive been addressing today has been around better decision making, particularly looking more to longer term challenges that face the Government and the nation as we come out of a period of great uncertainty.
Or taken another, slightly simpler way, it is recognising the opportunity costs of decision making. A simple idea, I know, but one that should be constantly in the forefronts of our minds. Not just between choices in each Budget, although important, but in choice across Budgets and judging impacts on a longer term horizon. With one eye on the immediate fiscal consolidation being undertaken and the other on ensuring the longer term prosperity of the country.
That will mean that good spending will have to be traded off for something better; and sometimes even a better area of spending will need to be sacrificed for what is best. These are the decisions that are made every day in private business and in
Australian households as choices are made between competing priorities. The same is true of government.
I believe this new decade is one of great opportunity for Australia. Getting our priorities right in our public finances will make a significant contribution to achieving sustainable economic growth.
Labor is often characterised as the party of the fair go. This is a core Labor value. So too is the knowledge that a fair go is grounded on a strong economy itself built by economic reform.
 
ENDS