Federal Treasurer Joe Hockey gave a speech, titled “The Case for Change”, at a function for The Spectator Magazine in Sydney last night.
Here’s an edited version of what he said.
I have recently returned from Washington where I attended the Annual Spring Meetings of the IMF and World Bank and chaired my second G20 Finance Ministers’ Meeting.
In Washington we continued our efforts to strengthen the international financial framework and to boost global economic activity and create jobs.
However there is much more to do, particularly in committing to concrete measures to increase the growth rates of both developed and developing economies, to improve the rate of infrastructure development, to increase job opportunities and to lift people out of poverty.
I also delivered an address to the Reinventing Bretton Woods Committee Conference titled “The Global Age of Responsibility”, which stressed the need for greater self-reliance and a preparedness for all players including individuals, businesses, governments and supranational organisations to share the burden of budget and economic reform.
There is a universal recognition that neither accommodative monetary policy nor lax fiscal policy can drive future growth.
From now on we must earn economic growth through structural reforms within and across our economies.
Monetary policy will inevitably tighten as central banks return interest rates to normal levels.
And few, if any, governments have any fiscal capacity to buy growth whilst they undertake essential budgetary repair.
One sobering observation is that Australia is not doing as well on the task of repairing its budget as many other developed countries.
The IMF’s most recent assessment of Australia showed that for the six years from 2012 to 2018, Australia is forecast to have the third largest increase in net debt (in per cent of GDP) among 17 advanced economies. That means our debt is growing more quickly than the likes of the United States and Canada.
Over half of the 17 advanced economies forecast a reduction in net debt over the same period. Countries which are reducing net debt include France, New Zealand, Germany, and Korea.
So Australia’s debt is actually increasing at the same time as many other country’s debt is decreasing.
The IMF also observed that Australia has the highest projected expenditure growth between 2012 and 2018 among 17 advanced economies, including the United States, Korea, Canada, Germany, France and Japan.
As further food for thought, I note that according to the IMF Fiscal Monitor, Germany posted a balanced budget in 2013 and Canada is on track for a balanced budget by 2015. Even France is set to reduce annual spending growth to ¼ of a per cent between 2014 and 2016.
Australia’s most recent Budget update – the final report card of the former Labor Government – forecasts a deficit of $47 billion this year, our third largest on record, with deficits to continue for at least the next ten years.
The structural legacy we have inherited means that unless we take action, by 2024 there will have been 16 unbroken years of Commonwealth Government deficits – the longest stretch of deficits in the underlying cash balance since the Second World War.
To put it in the simplest terms, we are spending money we don’t have.
For as long as deficits continue, government debt will continue to rise, reaching $667 billion within a decade. It is an extraordinary number that will have a profound impact on the living standards of all Australians.
Within a decade, total debt will be equivalent to almost $25,000 for every man, woman and child in Australia, close to double that of today. That is unacceptable. We have an economic and social imperative to turn the budget around.
And this imperative is supported by the IMF.
In its April World Economic Outlook, the IMF highlights the need for credible medium-term fiscal plans in advanced economies. It notes that the main risk factors are large public debts, along with the absence of medium-term adjustment plans that include specific measures and strong entitlement reforms.
The message is clear. We must learn to live within our means.
I want to assure you that this Government is committed to budget repair and putting the nation’s finances back on to a sustainable path. It will not be easy. Our first Budget on the 13th of May will mark the beginning of our budget repair job.
A strong budget is a key element of our strategy to build a strong and sustainable economy for the future.
The Commission of Audit
In the meantime we have laid out a methodical programme for fiscal reform and the first step was the tasking of a Commission of Audit.
I announced the Commission of Audit with my close colleague the Minister for Finance on 22 October last year, a bare six weeks after the Federal election.
The Commission’s aims were to examine the scope for efficiency and productivity improvements across all areas of Commonwealth expenditure, and to make recommendations to achieve savings sufficient to deliver a surplus of one per cent of GDP prior to 2024.
The final report of the Commission has now been received.
I have promised on a number of occasions that the report would be released before my first Budget and I can advise you today that it will be released by the Commission to the public next week.
The Report provides a very thorough analysis of the functions and roles of the Commonwealth Government. It also provides a clear look at the challenges ahead in restoring budget sustainability. Finally, it makes 86 recommendations for improving the efficiency of the government sector in Australia and for restoring budget integrity.
I want to stress that the Commission is an independent body and its report is to the Government, not by the Government.
The report has provided an important perspective for the framing of the May Budget but it has not been the only consideration.
We do not automatically accept all of its recommendations. Some can be actioned in the short term, others will require further consideration, and some will be rejected outright.
The Report should not be considered a “quick fix” but rather a useful framework for the development of policies that will benefit Australians over the longer term. It will help build a stronger and more sustainable budget.
Although the Report will be released in full next week I will today provide you with some of its key observations on the state of the Commonwealth’s finances.
The State of the Commonwealth’s Finances
The Report makes it clear that Australia has a serious spending problem.
The size and scope of government has increased significantly over time. Over the last 40 years, adjusted for inflation, government spending has almost tripled, from around $6,000 per person to over $15,000 per person today.
Commonwealth Real Spending Per Person (2012-13 dollars)
But the problem does not just lie in the past.
The Commission expects real growth in payments to increase materially from 2017 to 2024 to an average rate of 3¾ per cent a year. On this trajectory annual spending would grow as a share of GDP to 26½ per cent.
In its analysis of spending over the medium term the Report focusses on the 15 largest and fastest growing programmes predominately across welfare, health, education and defence. They are, in almost all cases, projected to grow faster than average growth in total government expenditure. Most are also expected to grow considerably faster than the economy.
To put it simply – our biggest costs are also our fastest growing.
Projected Commonwealth Spending
Let’s think about the implications of that. If the biggest programmes are growing more quickly than the economy then how will we find the money to pay for them?
Over time, more and more of the economy’s resources would need to be poured into these existing programmes if they retain their current structure.
This goes to the heart of the spending problem. Clearly this is unsustainable.
Of the 15 programmes, the Report observes that the Age Pension is the largest by a fair margin. The $40 billion we spend on income support through the Age Pension is much more than we spend on defence, or hospitals, or schools each year. It is our single biggest spending programme.
Spending on the Age Pension already takes up 10 per cent of all Commonwealth spending. And demand for the Age Pension will continue to increase as the population ages.
In Australia, between 2010 and 2050 the number of people aged 65 to 84 is expected to double, and the number of people 85 and older is expected to quadruple. Of course living longer is a good thing if we have the health to enjoy it and the wealth to support it. And it would not be an issue if those entering their post-work years had the resources to support themselves. But increasingly the burden of our ageing is being borne by other people.
Of Australians over the age of 65, four out of five receive a full or part pension. If we also take into account the concessionary health card then only 14 per cent of older Australians receive no government payments.
At least for the Age Pension, this situation is unlikely to be much different in 2050. Despite spending billions of dollars in taxation benefits for superannuation, by 2050 the ratio of Australians receiving a full or part pension will still be around four out of five.
On top of this, aged care is now the eighth largest category of spending. We spend more on aged care than we do on higher education or child care.
And the Pharmaceutical Benefits Scheme is the tenth largest category of spending. Nearly 80 per cent of the Scheme’s expenditure is attributable to concessional recipients.
Large and Fast Growing Programmes
The problem we have is that the volume of demand for these programmes is outstripping the capacity of taxpayers to fund them. Between 2010 and 2050 the percentage of people of working age supporting those over the age of 65 in Australia will almost halve.
So the policies must be changed, either now or more dramatically in the future.
The Report provides another perspective on these issues through its analysis of the Commonwealth’s medium-term outlook. If we continue with the “business as usual” scenario, Commonwealth spending follows the same path as outlined in our most recent Budget statement. Spending as a share of GDP is projected to reach 26½ per cent by 2024.
The Commission’s Report assumes tax receipts are capped at 24 per cent of GDP with “bracket creep” being returned to taxpayers through periodic income tax cuts. It warns that failure to do so is likely to have a serious impact on Australia’s economic growth prospects.
Under these assumptions, the Budget would remain in deficit throughout the next decade, with the deficit still around 1½ per cent of GDP by 2024.
To be clear, under this “business as usual” scenario the Government would never begin to pay down debt let alone be able to achieve its target of a surplus of 1 per cent of GDP within 10 years.
It is a recipe for disaster to never even get to surplus despite having a foundation of 32 years of continuous economic growth, which would arguably be the longest continuous period of growth anywhere in the world since the Second World War.
‘Business as Usual’ Scenario Receipts and Payments
Underlying Cash Balance
Source: Commission of Audit
Thankfully, the Report presents some options for reform.
This requires substantial spending restraint, with real annual increases in spending of only 1¾ per cent over the next decade, obviously less than the projected level of growth in the economy.
It is somewhat ironic that putting the budget back into the black requires the new Government to meet Labor’s rule of constraining real growth in spending to no more than 2 per cent – even though the Labor government itself never met this budget rule!
‘Reform’ Scenario Receipts and Payments
Underlying Cash Balance
Source: Commission of Audit
The Case for Change
The bottom line in all of this is that the Coalition inherited an unsustainable budget position from the previous Government.
When we were last in office our legacy was record surpluses and cash in the bank.
But the legacy we face is record deficits and a huge and growing debt, despite the highest sustained terms of trade in a century, and a continuation of the record run of uninterrupted economic growth.
There is a strong economic and moral imperative to change course and to put the budget back onto a secure and sustainable footing. Only by getting back to surplus can we stop borrowing money and begin the process of paying back our debt.
This year alone we will pay $12 billion in interest charges on our Government debt, about the same as we will spend on higher education.
By 2024, without action, our interest payments are projected to reach around $34 billion. This is larger than the projected spending on Aged Care of $26 billion.
Budget repair is about restoring our capacity to cope with adversity. It grants us the freedom to shape our destiny and to respond quickly and effectively to unexpected events.
Budget repair will give us the option to support growth in the event of economic or financial turbulence abroad.
The Global Financial Crisis may be over but we can be sure it will not be the last shock that Australia will need to negotiate.
Budget repair is also about ensuring that future generations do not pay for a standard of living for today’s generation that they themselves will never enjoy.
Continued deficit and debt is borrowing from tomorrow to fund our lifestyle today. We owe it to our children not to leave them with a mortgage that paid for our lifestyle.
So if Australians ask themselves of the Budget in May, “what’s in it for me?” my response will be a better future.
I ask Australians not to judge this Budget on what they get or lose today. This Budget is about our quality of life for the years ahead. We must build prosperity now. This Budget delivers for the future.
This intergenerational aspect to the budget repair challenge has an inescapable moral dimension.
This is seen most clearly in Southern Europe where the most significant victims of the deep recessions have been young people, with youth unemployment in Greece and Spain close to 60 per cent. It is a hard truth that in many developed countries past and current generations have squandered their childrens’ future.
We cannot allow our nation to fall into this trap.
We must heed the modern lessons that highlight the risk to countries which live far beyond their means – and lose control of their economic destiny.
The need for change is clear.
The Coalition has a strategy to achieve it.
Part of the solution is to grow the economy more quickly.
This is not based on short term sugar hits to provide a temporary boost to growth.
What we are putting in place are measures that remove the roadblocks to growth, that lower the drag on the private sector by abolishing the carbon and mining taxes and reducing regulation, that boost workforce participation, and that build the infrastructure for a 21st century economy.
All of this is designed to lift the long-run sustainable growth rate of the economy.
I just want to comment on a couple of key elements of our Economic Action Strategy. Improving workforce participation is an essential driver for productivity growth.
Delivering on the Government’s Paid Parental Leave scheme will help women to remain engaged with their employer, lift female workforce participation, and it will provide a boost to their retirement savings.
It is obvious that we are running out of workers over the medium term and we need all hands on deck!
This scheme is also a huge benefit for many small and medium businesses which for the first time will be able to offer female workers a paid parental leave scheme that is as good as that enjoyed by employees of larger corporations or the public service.
I also want to emphasise that the Government will not fall into the trap of cutting back on infrastructure spending as the United States and many European countries have been forced to do as their fiscal positions have deteriorated.
Instead, the Government will boost infrastructure spending, including through my work with State and Territory counterparts on an asset recycling initiative.
This ground-breaking policy will see the Commonwealth provide financial incentives to States and Territories that sell assets and recycle the proceeds of these sales into new productive infrastructure.
It is a time-limited, first come, first served programme that will generate enormous structural reform across the economy. The resulting new projects will drive real productivity gains in the economy when it is most needed, as investment in the resources sector declines, and will increase Australia’s productive capacity and growth prospects through the next decade and beyond.
Despite this, the reality is that faster economic growth by itself will not be enough to put the budget back into the black. In the absence of any other policy change, to get back to surplus within 5 years would require real economic growth of 5¼ per cent each year. This is far beyond the current potential growth rate of our economy of around 3¼ per cent. It is nearly double our current budget forecast for the next two years. It is a rate which hasn’t been sustained since the 1960s. And even if we were to achieve such a growth rate, it would be a dangerous path leading to higher inflation and higher interest rates.
The inescapable truth is that we need budget reform. But another reality check is that we cannot solve the problem just through increasing taxes.
As the Commission warns, in the absence of personal income tax cuts, over time Australians will face an increasing tax burden as inflation gradually pulls them into higher tax brackets.
On a no-policy-change basis, in only a decade from now, an extra 3 million taxpayers will have taxable income that falls above the $80,000 threshold that sees additional earnings taxed at the highest or second highest rate of 45 or 37 cents in the dollar.
Those who may oppose the hard savings measures necessary to deliver genuine fiscal repair would do well to recognise the highly regressive nature of fiscal drag. The 3 million taxpayers impacted will not be High Street executives on the top marginal rate but hard working wage and salary earners on Main Street.
The only sustainable solution is to wind back the excessive levels of spending.
To meet the challenge will require difficult decisions at the individual programme and payment level. Budget repair is about government living within its means and ensuring the sustainability of government services.
Our approach to budget repair is a principled one. Every sector of the community — households, corporates and the public sector alike — will be expected to contribute.
The Government will continue to support the most vulnerable. It will do for people what they cannot do for themselves, but no more.
The Government will be active only where it is needed and where the private sector cannot adequately fulfil the function.
And the Government will show respect to taxpayers by being careful in the expenditure of every dollar of revenue.
Budget repair is going to require some difficult decisions, including winding back some spending that people have come to take for granted. Means testing must become an even more important part of Australia’s transfer system to ensure the sustainability of our income support payments. Support must be targeted to those in most need.
More use of co-payments should be made to encourage some moderation in demand for government-provided goods and services. Nothing is free. Someone always pays.
It is appropriate that those who use government services should contribute towards their cost.
On unemployment benefits, government should provide assistance that helps the jobless move into employment, rather than a system that traps them.
As the Prime Minister has said: “The best form of welfare is work”. And we have already improved the financial incentives for young people to find and stay in employment through our programmes of the Job Commitment Bonus and the Relocation Assistance to Take Up a Job scheme. We are also increasing personal responsibility by restoring Work for the Dole for people on unemployment benefits.
This is a start, but more has to be done. The difficult decisions that will underpin our movement to a new age of responsibility must also include the corporate sector.
Too many taxpayers’ dollars have been spent on corporate welfare and too often previous governments have been drawn into areas that are better left to the private sector.
Not only are these policies an unsustainable use of taxpayers’ funds, they also undermine economic incentives, productivity, and ultimately our national prosperity. It is unsustainable for the Commonwealth to keep devoting significant resources to industry assistance.
According to the Productivity Commission, the former Labor Government provided $10.5 billion of net assistance through tariffs and budgetary measures to industry in 2012, including just over $5 billion of direct budgetary outlays.’
Our decisions on the auto industry, Qantas and SPC Ardmona have not been easy but the truth is no country has ever subsidised its way to prosperity.
The Coalition Government has inherited a complex set of fiscal and economic policy challenges.
The task of getting the Budget back on track is a national priority and will require every sector of the community to make a contribution.
There will be difficult decisions, but all Australians must help to do the heavy lifting.
It will not be acceptable for a few to make the major sacrifices on behalf of the rest of us.
The fiscal consolidation programme that we reveal in the Budget will establish a clear path back to a surplus of 1 per cent of GDP by 2024.
But I want to emphasise that the May Budget will not be the end of our efforts, it will only be the start. There will be numerous cases where our policy principles can only be implemented over time. Not every decision crucial for budget repair will be made on Budget night. However, we will make a significant start.
Looking beyond the Budget, an ongoing and relentless focus on fiscal discipline and economic reform will be required to ensure Australia can sustain a high standard of living with affordable government services and a social safety net that we can remain proud of.
This is what we were elected to do and this is our commitment to the Australian people.
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