Speech - Harnessing The Boom




"Harnessing The Boom"


MONDAY, 17 MAY 2010


Thanks James [Pearson, Chief Executive, CCI WA] for that introduction and for having me here today.

I'm really grateful for the opportunity to do a couple of things today.

First, I want to take you through the remarkable economic story contained within the pages of the Budget I handed down six days ago. They tell the story about responsible economic management and the implementation of a strict fiscal strategy that means we'll get back to surplus in three years, making room to invest in the health system and renewable energy, boost savings, and build skills and infrastructure.

I think Australia's on the cusp of a remarkable period of prosperity and I'm proud of the Budget and what it will do to maximise that opportunity. But I want to have a conversation today about more than our stellar economic performance, or the main features of last week's Budget.

So the second thing I want to touch on today is absolutely critical to prosperity here in the West – tax reform. I know the tax package I released a fortnight ago and fleshed out in the Budget has unleashed a fierce debate about the mining industry, and that Perth is really the epicentre of that debate.

Obviously the state Liberal Government has opposed aspects of that package and that's their right. Such is the unfortunate nature of partisan politics and commonwealth-state relations.

And unsurprisingly, some of the bigger mining companies are resisting our reforms which direct a fairer share of mining profits to enduring economic gains for business and families right around the state and right around the country.

I never expected we'd see eye to eye with the companies or Premier Barnett. But I welcome the debate because I think it is the most important debate we can be having about the future of the state and national economy.

I strongly believe that comprehensive tax reform proposals are good for Australians, including Western Australians. I strongly believe WA is a big beneficiary of the total package, focused as it is on infrastructure, cuts to business taxes, and less red tape for small business in particular.

I strongly believe that the challenges of a two-speed economy that bedevil our national economy are just as important here, if not more important. And I strongly believe we can boost exploration and investment in mining at the same time as we give other sectors here in WA a better chance to grow.

I know how crucial the success of WA and our harnessing of the resources boom are to the long‑term prosperity of Australia. As a Queenslander and a really frequent visitor here, I feel an affinity for the West.

And I'm always talking to Stephen Smith and Gary Gray and Chris Evans about the implications for the West for the economic decisions we take.

Like them, I fully understand how important it is to work together to build the capacity of this economy. And that we provide the capital and skills required and maximise the potential of a resource rich state like Western Australia.

Recovering Powerfully

So I welcome the opportunity to wrap our economic story and the key outcomes and forecasts published in the Budget into this really important debate about tax reform.

The Budget places Australia in an enviable position of economic and fiscal strength.

How have we done this? By cushioning the economy from the worst of the global financial crisis. And by delivering important economic reforms within the tight constraint of our strict fiscal rules.

All new policy in the Budget has been completely offset by savings. Real spending growth has been kept to 2 per cent, just as we had promised.

This is how we will get back to a budget surplus within three years, three years ahead of schedule and ahead of any major advanced economy.

This is how we have halved the projected peak in net debt in just 12 months, to now peak at levels less than one-tenth of the G7 average.

This consolidates our long-term financial security and protects our triple-A credit rating. It creates an environment for private businesses to thrive.

With our stimulus now winding back as planned, the private sector is now expected to drive the economy forward.

Think about where we have come from. In the midst of the global recession we expected the economy to contract by ½ per cent in 2009-10 and we predicted the unemployment rate would peak at 8½ per cent.

Instead, we avoided the loss of jobs and widespread business closures. And we avoided recession. A remarkable achievement when you think of the experience in many other parts of the world, particularly the US and Europe.

Fiscal stimulus, together with an easing in monetary policy by the RBA, the support provided to Australia's financial system and our close trade links with the robust economies of China and India – all helped to stave off recession. Of course at the coalface it was the resilience and cooperation of employers, employees and Australians in general that made such a big difference.

Our economy actually grew by 1.4 per cent in 2009 – without the stimulus provided by the Government it would have contracted by 0.7 per cent.

Our economy is forecast to grow by 3¼ per cent in 2010-11 and by 4 per cent the following year.

We created 235,000 jobs in the year to April and the unemployment rate is falling, having peaked at just 5.8 per cent.

We all know how important your state economy is to the economic health of the nation. And it's great that the Western Australian economy has remained relatively strong through the GFC.

Despite experiencing temporary weakness, the latest data show growth in State Final Demand of a little over 3 per cent in 2009. Stronger export growth and investment in resources projects are driving the recovery, especially in resources like iron ore or LNG.

Retail trade is growing faster in WA than the national average, buoyed by the relatively stronger labour market here compared to the rest of the country. And the state's unemployment rate of 4.7 per cent is already where we expect the national rate to be in the forecast period.

Two Sets of Challenges

The extraordinary success of the state and national economies throws up two main challenges, each addressed by policies I've announced recently.

Our first challenge, and clearly your key challenge, is avoiding the bottlenecks that held the pre-crisis economy back. With the economy returning to full capacity the challenge is to avoid running up against the skills shortages of previous boom times. We also need to avoid the infrastructure bottlenecks we saw emerge.

The second one is the closely-related challenge associated with what most people are calling the two-speed economy.

It's become easy for some commentators to suggest that the two-speed economy has the two main resources states in the fast lane and everyone else in the slow lane. I see it differently, and I encourage you to think of the two-speed economy in sectoral terms.

WA has some sectors that benefit from a high dollar and high terms or trade, while some others do not. In that way it's no different from the rest of the country.

Small businesses in WA need a tax cut and less red tape and I want to give it to them. The manufacturing and construction sector in WA needs a tax cut and I want to give them one. All industries need skilled workers and we want to train them.

The state economy needs more infrastructure and we want to build it. It needs more exploration and we want to encourage it. It needs more domestic investment funds – so we want to increase superannuation.

Tax Reform

Let me spend a bit of time on our plans for tax reform.

Resource tax reform is all about directing a fairer share of the proceeds of super profits into enduring economic gains.

Before the last mining boom, Australians got $1 in every $3 of mining profits through royalties and resource charges but by the end of that boom, that was down to just one in seven. The Government simply wants to take the Australian people's share of mining profits closer to where it was in the early 2000s – before the long slide.

If the taxpayer's share of resource rents had remained constant over the past decade or so, Australian governments would have collected $35 billion in additional revenue.

But we all know that collecting additional revenue from bad taxes is bad for everybody. It hurts enterprise and it hurts the economy. So we are cutting company tax which the review said inhibits investment, and replacing royalties, which ignore investment and operating costs.

I think that if we are to ask for a fairer share for our resources, we need to go about it in a way that recognises the large investments and hard work of miners – through a resource rent tax.

As I said upfront, we understand that Western Australia contributes a significant share of our nation's resource wealth and export income. I think our interests are aligned in terms of managing this wealth, to maximise the benefits we can draw from it, and to build long-lasting prosperity. And we recognise, as Western Australia clearly does, that it's necessary to plough back some of the wealth into our resource‑rich regions if we want the sector to continue humming along.

Royalties are obviously a highly significant source of own source revenue for the state. And our tax reform will let you keep this source of revenue.

But through tax reform we can neutralise the adverse effects that royalties have on investment and activity in the mining sector, and put a better system in place. A system that will actually improve the viability of investments in mining. A system that makes it more profitable and less risky for exploration, start-ups and mines that are past their prime.

It is about ensuring royalty regimes don't discourage investment. The Resource Super Profits Tax will encourage it.

Yes, we will see more revenue from those mining projects earning super profits, but it reduces the burden on the rest of the mining industry. It's a system that's not only good for smaller miners, but good for the whole economy, because it helps make us more competitive and rewards enterprise.

Some other events have been a bit lost this week, swamped by the large miners' very vocal critique. We've seen Mincor re-open one of WA's biggest nickel mines, which means hundreds of new jobs in WA. We've seen Gindalbie successfully raise $175 million for its Karara project. And we've seen Santos commit to a further $50 million investment in Queensland coal seam gas.

Now I am not saying that every project that is being considered this year will get the tick. As with any year, some will and some won't. What I am saying is that miners are getting on with it, and they are coming to talk to us in a calm and considered way.

We are prepared to talk further about how we make the RSPT work best. We're prepared to talk further with state governments who might have been making their own plans to capture a fairer share of resource wealth through lifting royalties. We'll talk further about how we turn some of the proceeds from the RSPT back into investment in the key resource states and regions.

We are taking this very seriously; as are the 80 or so companies that are engaging with us, very constructively, in a consultation process to ensure we get it right.

But let's be clear. The long-term national interest, and indeed your state's long-term interests, demand that we get this right.

We're a serious player on the global stage, and our tax reform is about keeping our economy more efficient and competitive than the rest.

We can find better ways to ensure a fair return for the community and reward risk taking and entrepreneurship. And in doing so, we can also do great things for the state and national economies.

That's why our resource tax reforms go hand in hand with our intention to cut the company tax rate, with a head start for 50,000 small businesses here in Western Australia.

This is on top of what we're doing to cut red tape for small business. Around 160,000 WA small businesses will benefit from the asset write-off arrangements we announced. Some of you here today run small businesses and I hope these measures help you grow and thrive.

A lower company tax rate is good for investment across the economy. The new company tax rate – 29 per cent in 2013-14 and 28 per cent from 2014-15 – will improve our international tax competitiveness.

Independent modelling of the effects of the RSPT and our company tax rate confirms that the economy will be 0.7 per cent larger in the long run. Investment will be 2.1 per cent stronger and real wages will be 1.1 per cent higher right across the economy.

Building Capacity

The second group of policies are all about increasing the capacity of the state and national economy so we can grow with low inflation into the future.

Of course tax reform is not the only reform we are implementing to broaden the economy and build capacity by investing in skills and infrastructure.

Growing the whole economy and building capacity have been enduring objectives of this Government. It is why investment in infrastructure and skills was a key feature of our stimulus packages.

A new infrastructure fund will also be established using proceeds from the RSPT, beginning with an investment of $700 million in 2012-13 and inflows of more than $5.6 billion over the next decade. This fund will be distributed in a way that recognises that the wealth needs to be reinvested in the resource-rich states that generate it, so they can continue to expand.

This Budget takes our commitment to infrastructure here in the West even further, with a further $799 million in road and rail infrastructure. In total we've committed over $3.5 billion to funding upgrades in WA's land transport infrastructure over six years from 2008-09. This includes $95 million in this year's Budget for the ARTC to upgrade capacity on the Koolyanobbing to Kalgoorlie line.

We are improving remote airstrips including in the Pilbara. We are preparing for the roll-out of the National Broadband Network that will offer substantial productivity benefits for businesses and improved services, competition and choice.

And because the resources boom will lead to strong growth in labour demand – which will have a more significant sectoral and regional impact in places such as Western Australia – we're also investing heavily in training.

At its peak the Gorgon LNG project will support about 10,000 direct and indirect jobs.

We want to secure skilled workers for these projects. That's why the Skills for Sustainable Growth strategy announced in the Budget will provide $661 million for up to 70,000 new training places and to support 22,500 new apprentices.

The strategy will meet immediate skills needs by encouraging industry partnerships with government to plan for and meet skills demands.

The strategy will also invest in traditional trades through apprenticeships. Small and medium enterprises will receive a bonus payment to take on eligible young apprentices and industry will be assisted to achieve competency based progression.

The Government will reform training systems to boost training quality, support participation and strengthen the nexus between training and business needs. To achieve these reforms, Commonwealth support will be provided to states and territories that commit to VET reforms.

The Budget invests in a suite of measures to provide more Australians with foundation skills – in literacy, language and numeracy.

Harnessing the Boom

Let me finish on an optimistic note. With the right policies we can harness the opportunities a renewed resources boom will bring.

We knew that tax reform would excite debate here in Western Australia. I'm not deterred by that because I believe we're doing the right thing with the RSPT. We are listening, we will talk and we will get the implementation right.

The Budget I handed down last Tuesday night details the tax reform and skills and infrastructure investment we need for the next wave of growth.

We are on the cusp of something special here. Our future is looking so much more promising than one year ago.

It is about maximising our opportunities – keeping Australia ahead of the pack, just as we were ahead of the pack in dealing with the global recession.

It is about managing our resource wealth sustainably, capturing a fairer share for all Australians and turning it into other forms of wealth that last.

It is about reinvesting the proceeds of the resources boom to strengthen the resources sector and to broaden the whole economy, invest in capacity and boost national savings.

Our economy will be stronger for it. Working families and businesses across Western Australia will benefit. And we'll build an even stronger, more secure future for all Australians.

Thanks and I look forward to your questions.