Lindsay Tanner (Melbourne, Australian Labor Party, Minister for Finance and Deregulation) Share this | Hansard source

by leave—The role and scope of government spending has once again become central to the national economic debate. Commentators, the opposition and members of the community have all expressed strong views on the fiscal policy settings the government should adopt in the midst of the worst economic downturn since the Great Depression. In this environment, it is appropriate for the government to clearly articulate its approach to government spending, the reasons for current fiscal policy settings and its plan for fiscal policy into the future.

Yesterday marked the anniversary of the collapse of Lehman Brothers—an event which catapulted the global economy into its worst economic downturn since the Great Depression. At an unprecedented speed advanced economy after advanced economy entered recession. Millions of people lost their jobs, small businesses or homes. Eight of Australia’s top 10 major trading economies have experienced recessions. The economies of the OECD member countries contracted on average 4.6 per cent through the year to June 2009.

Thankfully, in Australia we were in a position to act early and decisively and to date we have managed to steer clear of the worst of the global downturn. This is in no small part due to the hard work of Australian workers and small business owners. But the challenges remain, with growth unlikely to return to trend for some time and loss of full-time employment from the economy to continue, as seen in last week’s unemployment figures where the number of full-time jobs fell by 30,800. There remain clear and present dangers to the Australian economy.

The combination of the government’s early decisions to guarantee wholesale borrowing by the banks and bank deposits; the aggressive easing of monetary policy by the Reserve Bank of Australia; and the government’s stimulus packages have worked in tandem with hard work by Australians to protect our economy from the worst of the downturn.

Those opposite like to believe that the aversion of recession in Australia is somehow down to good luck. Those opposite argue that the stimulus was not necessary, that the Australian economy would have avoided recession without the substantial injection of money into the economy in the form of pensioner and personal income tax bonuses. Those opposite protest that planned spending on infrastructure over the next 12 to 18 months should be withdrawn now and that it is no longer necessary because the crisis is over.

But the facts speak for themselves. The Australian economy contracted 0.7 per cent in the December quarter last year, before the effects of the stimulus had moved through the economy. In the subsequent two quarters, the Australian economy grew 0.4 per cent and 0.6 per cent, giving an annual growth rate of 0.6 per cent over the year to June. Treasury estimates that if it were not for the government’s fiscal stimulus, the Australian economy would have contracted by 1.3 per cent over the past year. Growth is still well below trend and below the level necessary to avoid rising unemployment. There will continue to be significant spare capacity in the economy over the next 12 to 18 months. Continued stimulus, in the form of infrastructure spending, will support jobs as the economy returns to trend growth. Without this government spending, more jobs would be lost and we would risk stalling the recovery. The government’s fiscal stimulus has been carefully designed to diminish as the economy strengthens. Its impact on growth will diminish over the coming quarters. As stimulus is increasingly withdrawn through 2010 we expect a recovery in private activity to gather pace.

The government is firmly committed to countercyclical fiscal policy. In good times, when the economy is booming this means not adding excessively to demand through new government spending. This helps stop the economy from overheating and helps keep pressure off interest rates. In bad times this means not increasing taxes to cover lost revenue and increasing government spending to support jobs and growth.

The Commonwealth budget has been hit hard by the global downturn. The end of the mining boom and plunging company profits have contributed to a projected $210 billion loss in revenue over five years. Facing such a large drop in revenue, the government had two choices—allow the automatic fiscal stabilisers to work, or work actively against the stabilisers, cutting back savagely on government spending.

At times the opposition have argued for the government to make pro-cyclical cuts to the budget. They have not proposed any savings, and have opposed a number of government savings in the Senate, but they do argue for cuts and criticise the government for running temporary deficits during an economic slowdown.

In the 2007-08 budget and pre-election period, the previous government committed to $117 billion in new policy over five years. This pro-cyclical spending put upward pressure on inflation and interest rates. At the height of the boom, with the economy growing at around four per cent annually, the previous government was projecting growth in government spending of 4.5 per cent in real terms in 2007-08. This level of spending meant that despite there being an underlying cash surplus in 2007-08 of 1.7 per cent of GDP, the budget was actually in structural deficit of around 1.2 per cent of GDP or roughly $12 billion. Record company tax receipts stemming from the mining boom created a temporary revenue surge that delivered large surpluses.

Spending in real terms grew at a historically strong rate from 2003-04 at an average of 3.7 per cent per annum over the five years to 2007-08. This figure does not include the massive election spend that took place in the 2000-01 budget where real spending grew by 9.1 per cent. In dollar terms the increase in spending is just as extraordinary. Over the four years to 1999-2000 it grew by $18 billion, from 2000 to 2004 it grew by $57 billion and it grew by a further $62 billion in the final four years of the Howard government.

This was all funded by extraordinary growth in tax receipts. Over the six years to 2007-08 growth in tax receipts averaged 8.1 per cent per annum. In the election budget of 2000-01 tax receipts grew by 12.6 per cent. Yet from 2003 to 2007 there were virtually no significant savings measures in the budget.

The Rudd government is continually running the ruler over spending and its own operations, delivering $55 billion in savings over the government’s first two budgets. These savings have included:

• introducing a means test on the private health insurance rebate, delivering $1.9 billion over four years;
• reducing the cap on the amount of concessionally-taxed money individuals can tip into superannuation, delivering savings of $2.8 billion over four years;
• introducing a means test on the baby bonus to better target family assistance, delivering savings of $354 million over four years.

The razor gang 1 and razor gang 2 processes, within the Department of Finance and Deregulation, have helped identify savings in the government’s operations of approximately $5 billion over five years. These savings are about improving the way the government does its business, for example:

• information and communication technology—improving the efficiency of ICT business-as-usual activities has, in the first year of the reforms, resulted in savings of close to $100 million. Over four years the savings will be around $1 billion.
• government advertising—in 2007 government agencies spent $254 million on campaign advertising; in 2008 that was slashed to $86.6 million, saving close to $170 million.
• imposing an additional two per cent efficiency dividend on the public service—yielding $1.8 billion over five years.

The federal budget deficit is currently forecast to be 4.9 per cent of GDP in 2009-10. This has been necessary to insulate the Australian economy from the global recession. The alternative would have been to cut back on government spending, all but guaranteeing a recession in Australia. This deficit is significantly less than most other advanced economies. For example, the UK is forecasting a deficit of 12.4 per cent of GDP this year.

Australia has lower debt and lower deficits than any of the major advanced economies. International rating agencies have reaffirmed our AAA credit rating. Net debt in Australia is projected to peak at 13.8 per cent of GDP in 2013-14. This compares to an estimated 80 per cent of GDP for advanced economies collectively by 2014. In the United States and the United Kingdom net debt is projected to increase to 83 per cent of GDP, and in Japan it is projected to peak at 136 per cent of GDP.

While it is appropriate to run temporary deficits during an economic downturn, it is critical that there is a clear path back to surplus once trend growth resumes. Revenue will not return as fast as it has disappeared over the past 12 months. Tax receipts as a percentage of GDP have dropped from 24.6 per cent of GDP in 2007-08 to 22 per cent of GDP today and will only recover to 23.2 per cent by 2012-13. The government has a plan to bring the budget back to surplus as the economy recovers by:

• allowing tax revenues to recover naturally as the economy improves, while maintaining our commitment to keep tax as a share of the economy below the 2007-08 level on average;
• holding real spending growth to two per cent a year, once economic growth is above trend—until the budget returns to surplus; and
• requiring new spending to be offset by savings.

We are taking the responsible decisions to deliver on this strategy. In the budget, we:

• delivered $22.6 billion in savings over the forward estimates, to meet the cost of key reforms; and
• held real spending growth to under two per cent in the years the economy is projected to grow above trend (2011-12 and 2012-13).

Delivering a sustainable fiscal strategy requires an ongoing commitment to finding savings and improving value for money. This is why the government has decided to keep the razor gang operating in my department and find savings and efficiencies through a series of strategic reviews covering various areas of government operations. For example, the razor gang is currently undertaking a review of duplication and overlap in a range of grants and other programs. This review aims to consolidate programs across government and deliver administrative savings.

Spending on grants soared over the last five years of the Howard government, from $494 million in 2003 to over $4.5 billion in 2007. The number of individual grants also increased substantially, from 7,500 to 49,000 over the same period, leading to greater administration costs and fragmentation of effort. The razor gang review now underway is aimed at streamlining grant delivery to maximise value delivered to the community.

The government is seeking to instil in the bureaucracy and its ministers a culture of driving out waste and reprioritising spending. Driving efficiency and delivering value for money are now core business of government. The savings process for the 2010-11 budget has already commenced, with all portfolio ministers receiving a letter from me asking for savings options ahead of their formal budget bids. The government have brought forward this process because it is a crucial part of our strategy to return the budget to surplus. This will be the third budget in a row that ministers have been asked to identify savings.

Since coming to government we have also developed coordinated procurement standards and practices which will progressively save the government millions of dollars in coming years. These are part of practical reforms which are delivering better value for money for taxpayers. Recently released centralised tenders for government travel services will drive efficiencies and economies of scale in the $500 million a year the government currently spends on travel services. Through smarter purchasing we will be able to save taxpayers millions of dollars every year. The government are also developing coordinated procurement strategies for telecommunications, property services and office equipment. We are saving around $15 million per year through a volume-sourcing arrangement with Microsoft.

The Rudd government’s fiscal strategy is anticipated to return the budget to surplus by 2015-16. This strategy assumes that savings initiatives will be passed by the Senate. The opposition has blocked a number of such measures, including reform of the private health insurance rebate which will save $9.5 billion over 10 years. The government’s fiscal policy has been and will continue to be responsible, countercyclical and sustainable. Through allowing temporary deficits, the government has protected the Australian economy and Australian families from the worst of the international recession.

The challenge of returning the budget to surplus is a good deal tougher than it looks. The cyclical factors that masked a structural deficit in 2007 are unlikely to return soon. The impact of population ageing is looming. While it is crucial that spending discipline is imposed as the economy returns to normal growth trends, that will not be enough to return the budget to surplus by itself. The challenge is bigger.

The Rudd government are committed to returning the budget to surplus and keeping a tight rein on government spending. That means tough decisions on programs and entitlements, and continuous improvement in the efficiency of government processes. We intend to set Australia on a path to long-term prosperity and sustainability. Our country cannot afford the complacency of recent times. Our economic challenges have become a lot tougher.

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