Craig Emerson (Rankin, Australian Labor Party) Share this | Hansard source

My contribution to this appropriations debate is probably best organised by reference to the statement of monetary policy of the Reserve Bank of Australia that was released on 13 February—just yesterday. It gives a snapshot of where the economy is and, importantly, where it is likely to be headed. It also reveals some structural weaknesses in the economy, about which I have said quite a bit in the past and about which I will continue to say a lot in the future. But the backdrop is one of very strong global economic growth. The statement indicates that growth in world GDP is estimated to have been well above average in 2005. Remember that growth in world GDP has been very strong over the last few years. The Reserve Bank points out:

This has contributed to a substantial lift in Australia’s terms of trade, which have increased by around 30 per cent over the past three years, their largest cumulative increase since the 1970s.

We have been blessed with the good fortune of very high mineral prices, driven most particularly by the phenomenal growth of China and its voracious appetite for raw materials to produce the infrastructure and the housing so necessary to sustain Chinese growth of around nine per cent per annum.

In spite of that fantastic good fortune, the Reserve Bank points to a very unfortunate outlook for Australian exports. It says:

Australia’s export performance over recent years has been disappointing, despite the generally favourable international conditions.

The trade minister is in enough trouble as it is, but every couple of days in the parliament he makes statements about how fantastically strong our export performance is, personally taking credit for the very high mineral prices created by the very strong growth of China. These people will take credit for anything if they can get away with it.

I do not see how the Howard government can claim responsibility for high global mineral prices, but it can accept responsibility for the very poor response in terms of the growth in volumes of Australian exports. The Reserve Bank statement says:

While export earnings have picked up strongly, this has been mainly driven by rising prices, with only very limited increases to date in volumes.

There is a sense of deja vu about this because year after year, since 2000, Treasury has been forecasting a turnaround in Australia’s export volumes, and every year Treasury has gotten it wrong. Every year the Howard government has said, ‘The improvement in volumes is just around the corner—just you wait and see,’ and every year it is like a mirage disappearing on the horizon. As those volumes are supposed to come on board, there is another excuse, such as the bird flu virus or a global economic slowdown, despite economic growth that has been very strong over the last few years. Any number of excuses has been proffered as to why our export volume has failed to pick up. The statement goes on to say:

With substantial investment in the resources sector and in related infrastructure projects currently underway, it is likely that export volume growth will pick up, though the expected improvement has been slow to eventuate.

That is exactly the point that I have been making—that Treasury, the trade minister and the Prime Minister have gotten it wrong for the last five years and the improvement in our export volumes that is always forecast has not occurred. I will return to our appalling trade accounts in a little while.

The Reserve Bank statement goes on to say that there are various sources of upward pressure on inflation. It says:

At the current stage of the expansion there are a number of factors that could be expected to put upward pressure on inflation in the period ahead.

It refers to aggregate wages growth having picked up over the last year, reflecting the tight conditions in the labour market. Secondly, it identifies the fact that world commodity prices have resulted in some large increases in the raw materials costs of many business. Thirdly, the statement says:

... any acceleration in demand would more readily put pressure on the economy’s productive capacity than at earlier stages of the expansion.

That is, we now have a situation where demand for Australian goods and services is well and truly smashing up against capacity constraints. The government has done very little to anticipate and then ease those capacity constraints. I refer, of course, to skills shortages and the bottlenecks in infrastructure that are now very well known and identified by agencies such as the OECD, the International Monetary Fund and, of course, the Reserve Bank. These three influences together or acting alone could well and truly increase inflationary pressures. The Reserve Bank goes on to say:

Given the prevailing levels of capacity utilisation and labour market tightness, this outlook is consistent with a modest increase in underlying inflation.

This is a warning from the Reserve Bank that it is looking very carefully at the inflation numbers and the underlying forces acting upon the inflation outcome in Australia. It says:

... the Board recognises that policy would need to respond in the event that demand or inflation pressures prove stronger than currently expected.

That means that there is a tightening bias—that the Reserve Bank is disposed towards tightening rather than being neutral or easing interest rates.

You would think that the Australian government would have been able to manage such a great economic expansion, spurred so strongly by the phenomenal growth in China. China’s real GDP grew by almost 10 per cent last year, and the Reserve Bank says:

... China is now the world’s fourth-largest economy (at market exchange rates) ... and remains the second-largest when measured at purchasing power parity exchange rates.

There are very credible forecasts to suggest that, in purchasing power parity terms, China will indeed surpass the United States as the world’s largest economy by 2015, which is less than a decade from now, and India will become the third-largest economy, behind the United States. We have this incredible growth of China and India in our own region, in the Asian century, and Australia is standing on the doorstep of that incredible growth.

There are enormous opportunities for the Australian economy but, sadly, the Howard government has failed to invest in the future so that we can fully take advantage of those opportunities. The Reserve Bank indicates that the outlook for economic growth in Australia remains favourable but identifies:

The income gains from the strong terms of trade ... providing ongoing support to domestic spending, particularly in the regions most exposed to the resources sector.

The Reserve Bank is saying that the housing market has now come off a bit, but not nearly as much as some had anticipated. Some of the domestic demand has been eased but we still have this injection of national income from abroad—$40 billion over the last few years. The boom times are well and truly here as a result of the voracious appetite of China, in particular, for raw materials.

When you put it all together, this very strong injection of income into Australia as a result of China’s growth, the Reserve Bank finds:

Business conditions generally continue to be favourable, as evidenced by strong growth in profits and investment.

It goes on to say that profitability in the mining sector should remain strong in the near term.

What does that mean for the budget, given that we are speaking about appropriations? We know that the Treasurer has consistently underestimated the size of the budget surplus. There has been very strong criticism from the Business Council of Australia of the Treasurer’s record in that regard. That critique of the Treasurer has been along the lines that this consistent underestimation of the surplus has allowed the Treasurer to argue that there is not the capacity for genuine tax reform in this country because the surpluses would not sustain it. But when the surpluses turn out to be, in some cases, twice as big as those forecast by the Treasurer, there is a collective, ‘Oh, oh. We’ll get it right next time.’ They have not managed to do that in the last few years.

There are now economic forecasts, prepared by private forecasters, of a budget surplus in the coming financial year in the order of $15 billion. Everyone will know that in the Mid-Year Economic and Fiscal Outlook the budget surplus figures were revised upwards for the current year by almost $4 billion, proving again that the Treasurer has systematically underestimated the true size of surpluses. Now, these independent forecasters suggest that perhaps the surplus could be as large as $15 billion. But the government runs the grave risk of squandering the opportunity for tax reform, because we have a Reserve Bank statement that says there are fairly strong inflationary pressures and that it is looking very carefully at the numbers underlying the inflation figures and at wages growth.

As a result, the Reserve Bank is poised, watching to see what happens with this budget. If we get big surpluses and the government says, ‘We will now fund out of those surpluses very substantial tax reform,’ then the danger is that the Reserve Bank will say, ‘That is an injection of extra stimulus into the Australian economy, which will be inflationary, so we will increase interest rates.’

We have now got a situation where the Treasurer is saying, ‘Even if the surpluses are big, we may not be able to embark upon genuine tax reform.’ How could you get yourself in such a situation? We have predicted surpluses of $15 billion, but then we have the Treasurer warning, over the weekend and even more recently, that because resources booms do not last forever it may not be possible to implement tax reform. In fact, I am not sure that the Treasurer has ever—since the great tax adventure of 1998 to 2000—uttered the words ‘tax reform’ in a way that is empathetic.

The Treasurer is on the record as saying: ‘We might be able to provide tax cuts. People do want tax cuts but they do not want tax reform.’ That is untrue, because everyone knows that the tax system is crushing incentive. It is crushing incentive to move from welfare to work; it is crushing incentive for people to seek a promotion or to do overtime; it is crushing incentive for people in the income range, for example, where the 42c rate applies. It is crushing incentive up and down the income tax scale, and yet the Treasurer is saying, ‘Even if the budget surpluses are very large, we may not be able to implement tax reform, because it might be too stimulatory and the Reserve Bank would then be forced to increase interest rates.’ What a parlous situation for a Treasurer to get himself into when Australia is enjoying the good fortune of such high commodity prices—the best commodity prices since around 1974.

We will have to wait and see whether the Treasurer will get any sort of interest in the tax reform debate, apart from putting down discontent on the back bench and promoting the member for Wentworth as a parliamentary secretary—not for tax issues, not for financial issues, but for water. Perhaps he could make some observations about bottom-of-the-harbour schemes, which, I am sure everyone knows, are returning with force. Using his water portfolio would give him a segue into the tax reform debate, and we do know that many wealthy Australians are up to their snorkels in bottom-of-the-harbour type schemes. That might be a way in, but I suspect the member for Wentworth will be told to stick purely to water and not to tax.

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