Joe Hockey Address to the House of Represenatives
16/08/11
The Hon JOE HOCKEY MP
SHADOW TREASURER
RESPONSE TO THE TREASURER’S
MINISTERIAL STATEMENT
16 August 2011
**CHECK AGAINST DELIVERY**
The Treasurer’s statement today appears to be an update on the global economy.
And I have no doubt parts of the global economy are facing volatile and challenging times.
But there is a subtext to the Treasurer’s words. In his statement the Treasurer is clearly preparing the ground to break his promise of delivering a budget surplus in 2012-13.
In his budget speech in May – only three short months ago – the Treasurer said, and I quote:
“We are on track for surplus in 2012-13, on time, as promised”.
He even devoted a whole section of the speech to this promise, “Getting the Budget back in the Black” with the core undertaking, and I quote::
“We’ll be back in the black by 2012-13, on time, as promised”.
The Treasurer has repeated that promise in this house on no less than 17 occasions and at least 47 different occasions in the media.
The government has led Australians to believe that good fiscal management in the form of a Budget surplus is so crucial that it has had to introduce a surprise $1.8 billion flood tax to make up for an unexpected expense.
The Treasurer then also gave guarantees that the Carbon Tax would be budget neutral.
Of course in the Treasurer’s shared opinion piece with a number of other finance ministers published today in the Financial Times the opening words are and I quote: “The world faces a crisis of confidence”.
To have Australia’s Treasurer utter those words does nothing to alleviate nervousness.
For a Treasurer who in recent days has effectively described a $4.2 billion hole in his Carbon Tax as “broadly Budget neutral” is hardly confidence inspiring.
And in relation to the much vaunted Budget surplus last week the Treasurer commented that this promise has now become an “objective”. And today that promise is a “determination”.
It is ironic the Treasurer is today laying the ground to break his core fiscal promise because it is just one year since he himself solemnly promised Australians that there would be no carbon tax under Labor describing our allegations as hysterical.
The promise on the carbon tax was broken and the promise on the budget surplus will, I expect, be broken.
This shows yet again that this is a government whose word cannot be trusted and whose solemn promises mean nothing.
So the best thing that can be said about the Treasurer’s opinion piece and his statement in this House today is thank goodness most people around the world don’t know him and for those that do know him, they won’t be listening.
Credibility and honesty builds trust. Consumers will only listen to the message if they trust you at your word.
Global Update
I agree with the view that the recovery for the world economy from the north atlantic financial crisis was never going to be smooth. I also agree that recent volatility has been linked to concerns about sovereign debt. And a third point of agreement is that substantial fiscal austerity will be required to bolster financial stability and to foster stronger economic growth.
Despite these points of agreement I don’t want anyone to think there has been a sudden outbreak of love.
The fiscal difficulties in many developed nations should be a wake up call that Governments cannot continue to spend more money than they collect in tax revenue. Sooner or later the credit card bill will be called in.
I doubt the Treasurer has heeded this warning.
The Treasurer identifies four core strengths of the Australian economy. I want to focus on two of these.
The first is the claim that our fiscal position is strong.
The Australian situation is far from comfortable. This year the budget had a forecast deficit of $22.6bn – the fourth consecutive year of deficit. It will be worse than that because of the $4.2 billion hole relating to the carbon tax.
So lets be very clear. The Budget deficit number was undermined at the Government’s own hand just 10 days into the financial year and a few weeks after the Budget was delivered.
This should not come as a surprise. Over the last four years of Labor government the deficits have totalled $154bn, which is the fastest accumulation of debt in Australia’s history. The government keeps blaming the financial crisis, but that argument is wearing a bit thin after 3 years.
On current projections Australia’s net debt is likely to total $110bn, including the net spending from the carbon tax, well above the $96bn the Coalition inherited from the Hawke and Keating governments. Note this excludes the $10bn debt for the Clean Energy Finance Corporation – the Gillard Bank and the full $36 billion for the original $4 billion national broadband scheme.
The Treasurer wants you to believe this is not of concern because it is lower than most other developed economies.
What he fails to mention though is that Australia pays a higher rate of interest on its debt than most other developed nations.
At the end of July the yield on Australian government 10 year bonds was 5.02%. This compared with 1% in Japan, 2.56% in Germany, 2.82% in the USA and 2.87% in the UK.
The interest on Australia’s debt is significant. This year the net interest on the Federal government debt will be $5.5bn. It will rise over the next four years to $7.5bn a year in 2014-15. This annual interest bill could build 5 major teaching hospitals every year. It could actually fund the National Disability Insurance Scheme.
A further concern relates to Australia’s very high reliance on offshore capital markets to fund this debt. In March, 73% of Australian Federal Government debt was held by non residents.
The Australian Government is not well prepared for the challenges today, as it was in 2008.
Labor inherited a Budget surplus of over $20bn which is now a deficit of over $20bn. The Coalition left net assets in the bank of around $45bn which as I have noted is now heading towards a net debt of approximately $110bn.
The global community recognises the urgent need for budget belt tightening. Labor has no track record of that.
Labor has not run a budget surplus since 1989/90. Their commitment to a surplus in 2012-13 is waning and not strengthening. Today’s statement by the Treasurer does not provide the comfort and confidence international investors and Australian households and businesses want and require.
The second point I want to address is the reference to our underlying economic strength.
I remain very confident about Australia’s medium term economic prospects. We are in the right place at the right time, geographically located near Asia, the world’s largest and fastest growing economic region, and blessed with the resources and the rural output that they want.
With the terms of trade at 140 year highs, it can be argued Australia has never been such a beneficiary of the moment as it should be now.
And yet confidence is low and activity in the non mining sectors of the economy has lost momentum.
This slowdown began about a year ago, I repeat, about a year ago, well before the US downgrade and the recent volatility in global markets.
Curiously the slowdown dates back to about the time of the election and the formation of this minority Labor government.
It is primarily a function of domestic factors rather than global influences.
I will give some examples.
Consumer confidence has been falling steadily for a year. The Westpac-Melbourne Institute index of consumer sentiment in August is now at its lowest level since May 2009.
Growth in retail sales began to slow around the middle of last year. Retail sales have been particularly soft in recent months, falling in three of the past four months.
Employment growth also began to slow about a year ago, easing from trend monthly increases of around 0.3% to just 0.03% in July. The number of people unemployed rose by 18,000 in July to the highest level since November 2010. The unemployment rate has increased to 5.1%, also the highest rate since November last year.
Turning to other data, demand for credit from households and businesses is very weak. Housing construction approvals are falling. Share prices are volatile and well below their recent highs. And house prices are soft.
Households are cocooning, with the household savings rate climbing to historical highs.
The government wants you to believe that it is all someone else’s fault. That is typical of Labor. They have tried blaming it all on global uncertainties, but that won’t wash because this data has been trending downwards for up to 12 months.
More recently the Government have said it’s all the oppositions’ fault. They claim the Coalition is talking down the economy through its attacks on the government’s own policies, such as an economy wide carbon tax which will increase the price of everything.
The truth is that the government’s own actions, its own policies and its lack of a mandate have destroyed consumer and business confidence.
Households are struggling under higher cost of living pressures. The headline consumer price index increased by 3.6% over the year to June, the highest rate in 2 ½ years.
The government claims it is all due to higher food prices stemming from the natural disasters earlier this year. But a look at the underlying measures of inflation show the price pressures are widespread.
On top of this households have suffered two additional imposts.
The first has been the added burden of the seven interest rates increases as well as those increases beyond the RBA cash rate.
The second has been an ever rising tax burden. This government has increased or introduced 19 taxes. The flood levy commenced on 1 July this year. And the mining tax and the carbon tax are yet to hit, taking effect from 1 July next year.
The impact of higher interest rates and higher taxes is not measured by the official inflation data. The cost of living for households and businesses is increasing much more quickly than the consumer price index.
The latest analytical cost of living indexes show that over the year to June the cost of living for employees rose by 4.5%, for pensioners it increased by 4.4%, for recipients of other government transfers it rose by 4.6%, and for self funded retirees it increased 4%.
All of these increases were well above the official headline inflation rate of 3.6%. And even these higher figures do not include the effect on household budgets of higher taxes.
The budgets of everyday Australians are groaning under the strain.
The government is also eroding business confidence by making it more difficult for business to go about its legitimate affairs with consistent policy positions. In the last 18 months the Government has had 5 positions on a carbon tax, 4 positions on a mining tax and at least 4 positions on live cattle exports.
What the Government Should Do
What we are seeing in Australia is a significant loss of confidence.
It is crucial the government does all it can to maintain investor and household confidence through credible and consistent economic management.
The Governments words must match their deeds.
The government must immediately repeal the flood levy and cancel the introduction of the mining tax and carbon tax.
A recent comment from Warwick McKibbon, arguably Australia’s most eminent economist, is worth noting
“Bad fiscal design always has an unexpected cost. Why is a flood tax being introduced just as the economy slows?”
Australian 10 August 2010
The government must cut wasteful spending and start to live within its means.
The government must cease its demands on capital markets.
If the current economic malaise continues there will inevitably be pressure for the government to engage in further spending. That will entail more government debt.
It should be clear now from the global experience that debt is the problem. It should also be crystal clear that more debt is not the answer.
The recent IMF report on Australia made two important points that the Treasurer failed to refer to.
The first is that the government should be running much larger surpluses from 2013-14.
The IMF says that a tighter fiscal policy would help ease upward pressure on interest rates.
“We recommend targeting a budget surplus of more than 1 percent of GDP, on average, for the period beyond 2013/14, while the mining boom continues to support growth.
And then they said:
“ a further strengthening of the Commonwealth government balance sheet should continue to contain economy-wide debt-servicing costs. “
The second is a related point that surpluses should be larger in the upswings and I quote:
“ This would imply running surpluses during upswings to avoid overheating, and these surpluses should be larger than in past upswings.”
The IMF is in agreement with the Coalition’s calls for Labor to be running much larger budget surpluses, in fact we just want Labor to deliver a surplus, and to be saving much more of the additional revenues being collected during the mining boom.
Conclusion
I believe that Australia’s destiny is prosperous.
The medium term outlook for Australia remains strong. We are much more closely linked to prospects in Asia – particularly China – rather than developments in the northern hemisphere “western” economies. And there is no doubt that Australia can continue to benefit from the realignment of global economic strength from “west” to “east”.
This should be our decade and it should be our century.
We can get through the current malaise in the global economy. But it will require this government to recognise that it is its own policies of wasteful debt fuelled spending, increased taxation, and interference in the running of business that is unnerving Australians and causing our collective loss of confidence in this government.