Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Hansard source

On behalf of the opposition I would like to respond to the Treasurer’s statement. We are pleased to acknowledge the better news which has recently been released on the performance of the Australian economy. It now looks as if this downturn, thankfully, may not be as severe as was forecast in the May budget papers. In fact, this downturn may not be as deep as the recession of 1990-91 under Treasurer Paul Keating. This will place Australia as one of the best performing economies in the developed world, an outcome which all Australians should justifiably be proud of.

The one area of economic performance which remains of significant concern to the coalition is the state of the labour market. Although recent data suggest that employment is holding up well, the pool of unemployed potential workers continues to swell. Unfortunately the situation in the labour market is forecast to get worse before it gets any better. We need to have policies that create full-time jobs for all Australians who want them.

The Treasurer has made much of the government’s stimulus packages helping to insulate Australia against the global financial and economic downturn. The Treasurer wants to claim all the credit for himself, but we believe his emphasis on the importance of the government’s measures is ambitious and misplaced. The Reserve Bank, in its recent monetary policy statement, identified five factors that have helped to maintain Australia’s economic activity through the crisis. These include, firstly, the strong state of the Australian financial system. I would argue that this is in no small part due to the regulatory reforms introduced by the former coalition government, which provided for separate and stringent regulatory supervision of deposit-taking institutions. That included, when I was the Minister for Financial Services and Regulation, the establishment of ASIC and APRA. This was a contentious issue at the time because different financial systems had different types of supervision. It was rather contentious to take prudential supervision away from the Reserve Bank, but it was exactly the right thing to do, particularly in the face of a global financial crisis.

The second factor is the significant monetary stimulus arising from a 4¼ per cent reduction in the cash rate since September last year. I note that that is the second largest reduction in the cash rate of any major Western economy. It is second only, I think, to that of New Zealand. But even though that flowed through significantly to home borrowers because of the large number of Australians who have variable home loan rates, the IMF stated that only 150 basis points flowed through to business lending. Under those circumstances it certainly has not had the same impact.

The third factor is the fiscal stimulus. It was a massive fiscal stimulus. The combined packages represent, as a percentage of GDP, one of the largest fiscal stimulus packages in the developed world. The opposition was concerned about the scale of those stimulus packages, particularly when aligned with the massive reduction in interest rates and what the Reserve Bank calls the ‘transmission factor’ of that money flowing through into households because so many Australians have variable rate home loans.

The fourth factor is the depreciation of the exchange rate last year, which provided a massive stimulus to domestic activity and helped to deliver real benefits in the terms of trade, which flowed through in the national accounts.

Finally, the fifth factor is the strong recovery in China, which has boosted commodity prices and demand for Australia’s exports. As the Treasurer knows, the terms of trade since the election of this government have become more favourable for the government than they were under the previous coalition government. Having said that, they have come off reasonably significantly in the last few months. But, even so, commodity prices remained relatively strong in particular areas because of the massive fiscal stimulus in China and their consumption of, in particular, iron ore.

On the fiscal stimulus, while the Reserve Bank does give some credit to the government’s spending, I want to make two observations. The first is this: if you throw enough money at a problem then of course it must have some impact. Our concern with the government’s spending is that, in part, there is enormous waste and mismanagement in their reckless level of spending—building school halls where a school hall is not needed, building facilities in schools that are about to be closed and using centralised contracting where local suppliers could have done it sooner and for much less. The government’s so-called Building the Education Revolution has delivered too little for too much money—and it is all borrowed money.

The second point is that this government was able to engage in the massive fiscal stimulus because the opposition left the Labor Party with a very strong budget. We did so after having paid off $96 billion of the previous Labor government’s debt, leaving in excess of $60 billion in net assets in the Future Fund. Significantly, we left a surplus, not the suggested fiscal deficit that some have been running with—particularly the odd media commentator. We left the government with a significant amount of money. So the government inherited fiscal strength that was pretty much unmatched anywhere in the developed world. This provided the government with enormous capacity to use fiscal policy to offset the cyclic downturn in the economy without jeopardising the structural integrity of budget policy over the longer term. This government seems reluctant to acknowledge the hard work and fiscal discipline exercised by the coalition in government.

The Reserve Bank seems to recognise that the specific stimulus measures put in place by itself and the government were only intended to provide support during the time of crisis. Now that crisis appears, thankfully, to be passing, although I do note a word of caution. There is continuing evidence that some western European banks have to deal with major credit risk over the next two months. That is one of the areas where this crisis may well reappear in a dramatic fashion, which we and everyone else need to be very mindful of.

In preparing its growth and inflation forecast out to the end of 2011, the Reserve Bank has done something quite extraordinary. Instead of assuming the cash rate will remain unchanged over the forecast horizon, as is its usual practice, the bank has explicitly assumed ‘a return to a more normal setting of monetary policy over the forecast horizon’. It says:

… it is not particularly realistic to assume that the cash rate remains at the historically low level of three per cent out to the end of 2011.

It is very interesting the Reserve Bank should say that. We ask ourselves: why would the Reserve Bank have felt the need to explicitly signal that it will unwind its very stimulatory monetary policy settings over the forecast period? The answer may be that it believes the economy no longer requires that degree of support. Well, terrific; it is saying the economy is going to perform better than it was expecting. Moreover, it may feel, I think, that the dangers in continuing to run such an expansionary policy stance—which was conceived and implemented when the outlook was far darker and uncertain—are of concern.

The government is not heeding the Reserve Bank’s warnings. Even in the Treasurer’s statement which he just concluded, he insisted he would implement his stimulus package in full. He said:

… the positive signs we have seen in our economy … are predicated on our temporary stimulus being fully implemented.

The Treasurer intends to continue with what we believe to be his irresponsible deficit and debt strategy, despite the Treasurer himself acknowledging that there are signs of economic recovery underway. In the May budget papers, the Australian economy was forecast to remain below trend for only three years. The Treasurer indicated in his statement today that the outlook is likely to be revised in MYEFO to account for the better economic news in recent months, and yet the Treasurer plans to continue to run significant budget deficits and to progressively increase government debt for seven consecutive years—seven consecutive years of deficits for what may be three years of below trend growth. The accumulated debt load will be higher by Australian standards. Gross debt is still expected to peak at around $315 billion, and the interest on that is somewhere in the order of $17 billion a year.

There are several risks in continuing to run expansionary policies when the economy no longer needs them. The first is that it can lead to higher inflation and higher interest rates. Using a motoring analogy, both the Reserve Bank and the government have the pedal to the metal. This was done to accelerate the car out of a slow spot. But now the economy is accelerating nicely again it is sensible to ease off the accelerator; otherwise there is a danger of overshooting, of breaking the speed limit, of approaching the next curve far too rapidly.

Underlying inflation in Australia is still at levels which are high relative to history. Over the year to the June quarter, the Reserve Bank’s preferred measures of core inflation increased by 3.9 per cent, down from the peak of 4.7 per cent in the September quarter 2008 but still well above the target band of two to three per cent. The Reserve Bank forecasts that core inflation will return to the bottom of the target band by the end of next year but on the proviso that the bank itself returns monetary policy to what it calls a more normal stance—that is, an increase in interest rates.

Higher interest rates make it more difficult for the private sector to service and repay debt. They make it more difficult for households to purchase their own homes. They make it more difficult for business to invest and create jobs. And higher interest rates are to the detriment of ordinary households and businesses in this environment, particularly as unemployment continues to rise. I want to emphasise this: we are facing a period of rising interest rates while unemployment continues to rise. So unemployment continues to rise and interest rates are rising at the same time, which is quite a cocktail for the average Australian family.

The second concern with the government’s deficit and debt addiction is the danger of what is called crowding out the private sector from the capital markets. The Minister for Finance and Deregulation scoffed at me and said crowding out does not exist. It is well recognised that Australia is in fact capital deficient. We do not save enough money as a nation to finance all our investment needs. The pool of domestic savings is actually small, so to make up the shortfall we are a large importer of capital from offshore. This has been the case since white settlement began in Australia. We have always imported money, particularly for investment in mining and infrastructure, and our access to offshore markets is not unlimited. It depends on the willingness of offshore investors to provide the funds. This is particularly important to recognise at a time when most major Western economies are running large fiscal deficits and, to fund these deficits, they are tapping the same global capital markets as Australia is for funds.

We saw the dangers inherent in Australia’s reliance on overseas funding as the global financial crisis unfolded in 2007 and particularly in 2008. Access to offshore capital markets for some corporates and institutions became very difficult and, as a consequence, there were some business failures. Other businesses had to rely on their traditional domestic banking relationships to replace the lost funding. Access to funding for the economy as a whole became much tighter. I believe it is unrealistic for government to assume that its borrowings will never compete with or displace private sector borrowings. It is extraordinary that this government believes that its unprecedented borrowings will not crowd out the private sector’s own demands for capital, particularly as the Australian economy begins to grow again.

Let me illustrate the point by examining the government’s proposed borrowings against the expected availability of capital from offshore. The budget forecast that Australia will run a current account deficit of 5¼ per cent of GDP this year and 5¾ per cent of GDP in 2010-11. This is estimated to equate to around $62 billion this year and $70 billion next year. In 2009-10 the government proposes to borrow $57.6 billion and in 2010-11 it proposes to borrow $57.1 billion. So if the federal government were to finance itself entirely from offshore borrowings, it would vacuum up 93 per cent and 82 per cent of the expected available offshore funds. Overwhelmingly the government would be borrowing from offshore to fund what would be its budget deficits. On top of that we will have capital hungry state governments borrowing in the markets for their own significant infrastructure programs, state government and utility borrowings that will rise to a conservatively estimated $230 billion by June 2013. That will give a total public sector debt of around half a trillion dollars.

My point is that the federal government and the state governments will be placing enormous significant additional demands on global capital markets at a time when the outlook for the Australian economy is improving. So when Australian small businesses, Australian farmers and large Australian corporates are desperately trying to raise money to buy the machinery, to invest the money that is going to create jobs and to take advantage of the growing economy, the cost of funds—the cost of borrowings for those small businesses, those farmers and those manufacturers—will be incredibly high, unnecessarily high. The 800-pound gorilla in the market, which is the Commonwealth government with its AAA guarantee, and so many other organisations enjoying the AAA guarantee, will be competing directly with those small businesses, those farmers and those larger businesses for desperately needed capital.

That does not take into account the massive borrowings of the United States, which are of increasing concern to me and I think are of increasing concern globally. The sovereign debt of the United States is reaching extraordinary levels, in excess of 80 per cent of GDP. That of the United Kingdom is heading towards 100 per cent of GDP, and obviously Japan and a number of other countries are in excess of that. The net impact is that Australia is competing for scarce money and the biggest player in Australia, being the government, is competing with the smallest businesses to borrow money. Who is going to win? Obviously the government does, and business pays a heavy price.

Private sector businesses will want to take advantage of a more optimistic environment as the economy recovers. They will want to increase their borrowings to finance the investment that will underpin growth today and tomorrow and they will want to increase borrowings to create the jobs that Australia so desperately needs. I know that those businesses have been turning full-time jobs into part-time jobs at a rapid rate over the last few months. But if they cannot get the investment to seize the opportunity of a growing Australian economy then those part-time workers will become unemployed people. There is not much room the government is leaving for the opportunities at hand.

I have outlined the dangers of continuing with an irresponsible program of deficit and debt. It runs the risk of driving up inflation and certainly driving up interest rates. It runs the risk of denying much-needed capital to private businesses and, because of the reckless commitment of the government to run deficit and debt, it runs the risk of choking off the economic recovery just as we start to see some benefits flow through. I note that the Treasurer in his address talked about improving productivity. We look forward to the tax and welfare reform initiative of the Henry review. We look forward to seeing that. But I ask the Treasurer: what is the productivity benefit of building school halls, $14 billion in school halls, in what the government has called an education revolution? The government says it has got a surge in nation-building infrastructure investment. Well, the government has in fact handed out more in cash to individuals than it is spending on infrastructure that it says is going to improve productivity in the economy.

On a national broadband network, Senator Conroy does not know whether he is Arthur or Martha in relation to the National Broadband Network, when anyone who takes a cursory glance at it will know that his ambitions of it being completed in a short period of time are simply that, unachievable ambition. On fixing the health system, there is a grab list of initiatives in relation to health, but, similar to the Obama plan, no plan to pay for it. How is it going to be paid for? There is mention of working through COAG to create a seamless national economy. I thought the economy was actually performing pretty well. I thought it was in pretty good shape and that one of the reasons why we have come through this is that it is in good shape. But I do not think having the states simply thrust their hands into the till is going to improve the performance of the economy without actually getting some real outcomes from the states.

On a tireless regional and global engagement, I say to the Treasurer this: there is a very real risk of capital protectionism, and we are at one with the government in being opposed to that capital protectionism which is emerging. That is exactly one of the reasons why you have to try not to spend as much money as it may be tempting to do when you have an unlimited credit card thanks to the hard work of the coalition. The danger for the government is that, at the time when money will become most scarce, the time when so-called quantitative easing—that is, the printing of money—comes to a dramatic end because of rising inflation and rising interest rates, it will be too late, because the money will not be in the bank. Then you will not be able to spend the money so necessary to build the infrastructure, to build the economy, to build the enterprise that is going to create and protect jobs for generations of Australians.

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