Kelly O'Dwyer (Higgins, Liberal Party) Share this | Link to this | Hansard source

Over the weekend the Treasurer was in South Korea for the G20 finance ministers meeting. As he swanned around the world economic stage taking credit for the past reforms of the coalition government, there was increasing concern back home that Labor’s budget was heading for serious trouble.

Labor based its forecasts for a budget surplus by 2012-13 on the assumption that the rest of the world would grow strongly in the wake of the global financial crisis. This assumption was imprudent given the degree of uncertainty in the world economy. The main concern at the G20 is that the global economy is not recovering as well as many expected, and that the path back to surplus for the Australian budget will be much more difficult than Labor likes to believe.

Achieving a surplus will require a reduction in the budget deficit of 4.5 per cent of gross domestic product over three years. This will be a very difficult task in light of the reckless spending and borrowing that the government has embarked on over those past three years. During the latest round of Senate estimates it was none other than Dr Ken Henry, Secretary of the Department of the Treasury, who warned the government that the government’s spending would put upward pressure on interest rates. He said:

In an economy close to full capacity, a tightening of fiscal policy would mean that there is less work left to be done by monetary policy, and that would mean, other things being equal, that interest rates would be somewhat lower.

He also warned that there are always spending programs before government which are very difficult not to make some upward adjustment to, for a variety of reasons. The government needs to explain what this means for their current fiscal policy settings and what it means for the economy.

With the budget on a permanent stimulus footing, monetary policy is working in the other direction. Reserve Bank Governor Glenn Stevens, in his statement on monetary policy on 5 October, referred to the current monetary policy setting as being ready to combat signs of overheating the economy. He said:

The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade.

He added:

If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target.

Interest rates have now reached a steady average, with future interest rate rises likely if inflation persists. With rates returned to normal levels, the government risks forcing them up even further if it does not take real action to address the state of the budget. This was a point made in the Red Book recently prepared by the Department of the Treasury and the Department of Finance and Deregulation for the incoming Labor minority government. Treasury and Finance made explicit warnings to the current government, saying:

Tighter fiscal policy, and measures to boost labour force participation and productivity, could play a useful role in complementing monetary policy, reducing the size of the required increases in interest rates and the exchange rate.

Treasury and Finance also made clear warnings against Labor’s waste, saying:

… there is also scope for the government to improve the quality of its own spending programs in a way that takes pressure of interest rates and the exchange rate.

We have had six interest rate rises in the past year under this government, implemented in order to prevent an outbreak of inflation. Meanwhile the government continues to roll out more stimulus, despite the clear indication from Treasury and the Reserve Bank that such stimulus is no longer required and is in fact having a deleterious effect on the economy.

Labor will now be forced to deliver a minibudget, but do not expect Labor to make the tough decisions. The Minister for Finance and Deregulation, Senator the Hon. Penny Wong, told Senate estimates last week:

… the devolved arrangements under the financial framework mean that agencies are responsible for implementing government policy.

So if the government fails in its attempts to rein in spending, then it is the fault of individual government agencies—not the fault of the Treasurer or the Prime Minister. Of course, if Labor is able to retain some of its election promises, I am sure it will be the government that gets all the praise.

Labor cannot have it both ways. It must face up to the hard decisions and take action in the national interest. Labor has over promised once again, but its refusal to face up to this fact is having a real impact on the state of the budget and the wider community. Labor must heed the warnings of Treasury and the Reserve Bank. It cannot put off action any longer.