Lindsay Tanner (Melbourne, Australian Labor Party, Minister for Finance and Deregulation) Share this | Link to 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.

Ms Anna Burke (Chisholm, Deputy-Speaker) Share this | Link to this | Hansard source

While the minister waits for the time to be announced, I would like to welcome the high school students up in the gallery. I am hoping very much that it is Box Hill High School up in the gallery. Can you hear me up there? I was hoping it was the students from my high school, whom I have not been able to go and visit.

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

I ask leave of the House to move a motion to enable the member for North Sydney to speak for 14 minutes.

Leave granted.

I move:

That so much of the standing and sessional orders be suspended as would prevent Mr Hockey speaking in reply to the ministerial statement for a period not exceeding 14 minutes.

Question agreed to.

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

There are many factors which have helped Australia avoid recession, and I will deal with those in more detail in the not too distant future. But the coalition has consistently said that the government’s spending was too large and out of all proportion to the task at hand. Thus, the Prime Minister displayed excessive sensitivity with an answer to a question from his own side at the end of question time, when in fact he is now in the business of separating out fiscal stimuluses from overall government expenditure—and I will talk about that in a moment. The coalition has said there has been considerable waste and mismanagement in the Australian government’s spending, best evidenced by the amount of money that has been put into education and all the examples illustrated by the coalition in this House. There have been 51 questions in relation to examples of excessive spending, waste and mismanagement.

The Minister for Finance and Deregulation made a number of criticisms of the coalition’s record of economic management in office. I want to say that we are very proud of our economic record. We ran an underlying cash surplus for 10 years of the 12 years we were in office. When we came into office, the ratio of government expenditure to GDP was 25.6 per cent. This was reduced to 24 per cent when we left office, at the same time that the current Prime Minister said that the reckless spending had to end. When we came into office, we inherited net debt of $96 billion; when we left office there was no net debt, with $45 billion in the bank. The Australian economy doubled in size while the coalition were in office. In 1995-96 nominal GDP was $518 billion; in 2007-08 nominal GDP was $1.1 trillion.

The finance minister also asserts that from 2003 to 2007 there were virtually no savings measures in the budget. That is completely wrong, for a number of reasons. I was a member of ERC and attended ERC and I can promise him there were numerous savings in the budget. Let me give two very good examples—firstly, the coalition’s Welfare to Work initiative, which the Labor Party, who are now in government, actually opposed all the way. That initiative was saving billions of dollars over time, particularly with the reforms to the disability support pension in the 2005-06 budget which were designed to slow the growth in working age welfare payments. The second obvious reform was to the Pharmaceutical Benefits Scheme in 2006. It reversed the unsustainable growth of the PBS and saved $3 billion over 10 years. Oh, how they forget—probably because, as my memory serves me, they opposed both of those initiatives.

The finance minister further asserts that the budget in 2007-08, the final year of the coalition government, was in a structural deficit of around 1.2 per cent of GDP. This is untrue. I note that OECD and IMF data show that the budget was in a structural surplus at the end of the coalition government. Finally, I note the minister for finance’s claim that the government is continually running the ruler over spending. How interesting it is that the Prime Minister is now trying to separate the stimulus packages from overall government expenditure, as if they are totally unrelated. Before the 2007 election, the current minister for finance—he should listen to this—promised to cut consultancies by $395 million by 2009-10. What we now find is that this government has awarded $885 million of consultancy contracts since the 2007 election, including over half a billion dollars worth last year. These figures confirm this government is the highest spending government on consultancies in Australia’s history—No. 1, numero uno.

It is widely recognised that there are a number of factors that have contributed to the standout performance of the Australian economy. Indeed, the finance minister himself cites several, including the hard work of Australian workers and small business owners. Amen—we all agree. There were also the government’s early decisions to guarantee bank deposits and wholesale borrowing by the banks, which we recommended to the government. We think it is important. Amen—we all agree. Another reason was the aggressive easing in monetary policy by the Reserve Bank and the government’s fiscal stimuluses. We welcome the change in rhetoric from the Treasurer and the Prime Minister, compared with the minister for finance. The minister for finance recognises that there were other factors that may have saved us from recession, but of course the Prime Minister deems that only his actions as an emperor have delivered Australia from the aggressive teeth of a global financial crisis.

There was an interesting observation made by the Reserve Bank in its minutes of the 1 September board meeting. It said:

Members noted that it was hard to disentangle the contribution that Asian demand, fiscal stimulus and easier monetary policy had each made to the better-than-expected outcomes.

I have noted in this House before that there were five key reasons why Australia did not go into recession. Firstly, this government inherited the most unbelievably generous public finances of almost any government in the world at that particular point in time. There was no net debt. There was $45 billion in the bank. In addition, growth was above trend, at 4.2 per cent, and unemployment was around four per cent. So that is a fantastic springboard from which to go into an economic downturn. That is the first reason.

Secondly, the Australian financial system did not have the structural problems of the US financial system or others, because we introduced the Wallis reforms. We introduced the Financial Services Reform Act and passed it through this place. We gave APRA significant powers and significant resources to properly supervise all financial institutions. I said in this House yesterday that President Obama could only wish that he had the regulatory framework that the Australian government inherited when they came into office.

Thirdly, the Reserve Bank implemented massive cuts in interest rates. The RBA reduced the cash rate by 4.25 per cent, from 7½ per cent to three per cent—one of the largest cuts in the developed world. The cash rate is now the lowest in a generation, and that had a huge impact because of the transmission. A lot of Australians have variable interest rate home loans, so the transmission rate from the cash rate right through to the home was significant and fast.

Fourthly, Australia’s export sector continued to perform remarkably well during the economic downturn. Continued strong growth in China has led to export volumes from Australia being maintained at high levels, and this is almost a unique position for a developed country; most suffered very substantial declines in export volumes due to their high dependence on manufactured goods and their lower exposure to the fast-growing Asian region. I might add that the terms of trade even today are more generous to the government than they were to us in the last stage of the Howard government. Even the Minister for Finance and Deregulation may concede that. I also add, as I said yesterday in this place, that the variable exchange rate made a real, positive difference to Australia at a crucial period of time. I gave credit to Bob Hawke and Paul Keating for floating the Australian dollar with the support of the coalition. That floating exchange rate had a big impact; we went from near parity with the US dollar to 60c, and that continued to make our exports competitive.

Fifthly and finally was the government’s stimulus package. We recognise that if you throw enough money at an issue it will have some impact. Of course it is going to have an economic impact if you spend more than $16 billion on building school halls. If you throw more than $23 billion in cash at people, they go out and save or go out and spend—whatever the case, it is going to have some impact. Our argument has always been not just about the quantity of spending, which has been all out of proportion to the need of the Australian economy, but also about the poor quality of much of that spending.

The Building the Education Revolution program  is a case in point. I was surprised today that the government did not accept the censure motion on Julia Gillard, the Deputy Prime Minister. Normally, if there is a censure about something so significant, the government would accept the censure motion. But they refused to accept that censure motion today; in fact, there was a debate about the suspension of standing orders. The fact is, as I think the Leader of the Opposition and the Manager of Opposition Business in the House put to this place in a very comprehensive way, it is quite clear that the Building the Education Revolution program is out of control. I can see the minister for finance grimacing. We are asking if it is value for money. We are asking, essentially, if the minister for finance, who is the custodian of the taxpayers’ money, is satisfied that he is getting value for money out of this $16 billion program, and the minister for finance knows that it is a dud when it comes to value for money and he knows how wasteful it is.

There was a moment not long ago when a billion dollars was a lot of money. Two billion dollars was a lot of money. Three billion dollars, even for a National, was a lot of money! Four billion dollars was a lot of money. But I tell you what: $16 billion on one school program is a hell of a lot of money and is going to have an impact on people—and a real impact when it comes through in the form of higher taxes and higher interest rates.

On 19 May the Secretary of the Treasury, Dr Ken Henry, outlined the economic growth projections on which the budget was based. He said:

We have forecast zero growth in 2008-09, negative growth of ½ per cent in 2009-10 and growth of 2¼ per cent in 2010-11. We have then projected two years of growth of 4½ per cent, followed by four years of growth of just under 4 per cent, falling to 2¾ per cent in the next year, 2017-18.

On 27 May in this House, the Treasurer said:

The government’s strategy to return the budget to surplus is outlined in the budget papers. We stand by the strategy.

Yesterday in the Sydney Morning Herald, we had the Treasurer starting to move away from the budget forecast of economic growth. It is a subtle shift in the government’s language, but the government are now walking away from their ambitious budget forecast of above-trend growth for six years from 2011. They are walking away from it because it is essential to get those growth figures to pay back the government debt, and they know, as we said at the time, that the government’s debt repayment strategy was fundamentally flawed because the Australian economy would not grow at the ambitious rates that this government laid down in the budget. We knew that. We said at the time that the government’s debt repayment strategy was structurally flawed.

Now, under the cover of the last two days, the Treasurer and the Prime Minister are starting to walk away from their own budget. They are walking away from the growth figures in their own budget. The Treasurer, who is known to be a slippery creature at the best of times, in his slippery way actually started to walk away from the budget numbers only yesterday and now when MYEFO comes out will not release the proper 10-year outlook that he set the benchmark for in the budget, because he knows, as we know, that the government’s plan to repay the debt for all this wasteful spending was overly ambitious and that the debt will be lead in the saddlebags for a generation of Australians to come. (Time expired)