Speech - The Story Behind The Budget Part One: Fiscal Foundations




"The Story Behind The Budget Part One: Fiscal Foundations"


FRIDAY, 13 MAY 2011


Thanks very much Simon [Penrose, President of the Brisbane North Chamber of Commerce].

It's great to be back in Brisbane. The last few months have involved back to back meetings of the ERC in a windowless room in Canberra. And during this time I have not spent as much time with the family or here in Queensland as I would have liked.

It's also great to be starting my series of post-Budget addresses here. In many ways, Queensland most typifies the competing challenges we faced as we put together our Budget. We have all lived through the natural disasters that hit this state over the summer. On top of the human tragedy, the floods and Cyclone Yasi have had a substantial short-term hit on our economy and this has flowed through to the Budget.

But these events have not knocked this state or the Australian economy off its path. Queensland is blessed with wonderful opportunities and unlimited potential - unique natural endowments and resources, and a hard-working, energetic and optimistic people - just as is the entire country.

But opportunities don't automatically lead to prosperity. They will impose challenges for the economy and require careful management if we are to reap the benefits and spread them to more Australians. So it was very much the challenges facing Queensland that were in mind as we worked through shaping our Budget.

Over the coming week I will deliver a series of five speeches on the Budget, as part of an ongoing conversation with the Australian people about the challenges and opportunities we face. And in doing so, I want to give a bit more detail on our thinking behind key aspects of our Budget.

This is what's called the post-Budget roadshow - a series of appearances that I usually begin in Melbourne or Sydney and finish in Brisbane via Adelaide and Perth. This year it isn't just the sequencing that's changed, it's my approach to these speeches. Instead of going to each city and running through the same set of business-related issues, I thought I'd try and have my speeches build on each other. So that the story in each city builds on the one before.

I know you are interested in the big issues that we are trying to grapple with, and how the Budget fits in to that story. So today I want to talk about getting our national books in order by getting back in the black.

On Monday, I will talk in Sydney about the importance of jobs, not just in the context of the mining boom, but for the whole economy. In Melbourne on Tuesday I will talk about spreading the benefits to all corners of our patchwork economy and to more Australians. In Adelaide on Wednesday I will focus on how the Budget helps deliver a more inclusive society. And finally in Perth on Thursday I will talk about the mining boom and beyond.

Today I want to start off by giving a bit more detail behind the economic circumstances we faced in framing this Budget. Then I want to talk about how that has translated into the fiscal settings that sit at the core of the Budget papers. As small and medium business owners and managers, I think you will understand the importance of getting the accounts in order, so I expect aspects of this story will be very familiar to you.

Natural Disasters

I know everybody in this room was touched by these extraordinary events - the floods and Cyclone Yasi. Communities were fractured, businesses were shut, production lines disrupted. And it makes me very proud to see just how resilient our state has been in the face of the natural disasters of this summer.

While the human costs of these disasters are still front and foremost in our minds, the economic and fiscal impacts presented an immediate challenge in putting together this year's Budget. The economic carnage left in the wake of these disasters was immense, and it really framed the short-term outlook - not just for Queensland, but the whole economy. Alone, the disasters at home knocked $9 billion out of our economy, and will detract ½ a percentage point from economic growth this year.

The rebuilding process will also be a long one - coal, sugarcane and cotton have a long road in front of them. It's been encouraging to see some great signs of progress in recent months:

  • About 99.5 per cent of homes and businesses of the nearly half a million to lose power have had power restored;
  • 6,156 kilometres of state road network recovered (two-thirds of what was damaged);
  • 4,298 kilometres of rail network returned to operation (90 per cent of what was damaged);
  • 65 of the 89 damaged bridges and culverts restored; and
  • All 11 ports that were closed returned to full operation.

But sadly we know that the tragic events of 2011 didn't stop once Yasi made landfall. We had the earthquake across the Tasman, and the extraordinary triple hit to Japan, our second largest trading partner - earthquake, tsunami and a nuclear crisis that is yet to be resolved. These events not only put a significant dent in our export earnings, but have added a new layer of uncertainty to what was, and what continues to be, a fragile global economy.

In the midst of our Budget preparations we watched these natural disasters hit our country and our neighbours in succession. And as we came to terms with the sheer scale of the impact, we realised this year's Budget was going to be much more difficult to what we had envisaged in our mid-year update last November.

We knew then that we were facing much softer growth prospects in the short term, and a drag on revenue that would flow from this. We have revised down our growth forecasts for 2010-11 by a full percentage point to 2¼ per cent, with ¾ of a percentage point of that downgrade reflecting the recent natural disasters.

The Government is working with state governments, business and communities on the rebuild. That's the right thing to do, but it comes at a cost which is outlined in the Budget with additional spending of $3.9 billion this year alone, $6.6 billion in total.

Recognising this significant impact, the Government has cut spending and introduced a modest, progressive levy to make room in the Budget for the cost of rebuilding. Through these actions the Government has fully funded the costs of its contribution to the recovery effort over five years.

In addition to the rebuild costs that we accounted for in the Budget, tax receipts were also reduced by $1¾ billion across the forward estimates, with the impact falling almost entirely in 2010-11 and 2011-12.

Australia is in many ways a harsh continent, and natural disasters are part of our national story. But when we sat down to develop the Budget late last year, we couldn't have known of the extraordinary chain of events that would soon unfold.

Fundamental Strength

While our hearts and minds continue to be with those affected, our economic backdrop will recover from these events.

One of the biggest reasons we are able to confront these challenges head-on is because we start from a position of genuine economic strength. Because of our tough decisions during the global financial crisis, Australia has emerged as one of the best performing economies in the developed world. We have avoided the stubbornly high unemployment rates, crippling debt and fiscal consolidation pressures that plague many of our peers.

The contrast really couldn't be more stark. While many advanced economies are still struggling to make up for lost ground, the Australian economy has forged ahead by 5.5 per cent on pre-GFC levels.

Around the world, nearly 30 million more people found themselves out of a job - that's more than the entire population of Australia and New Zealand combined. Back home, we have a record of strong job creation, with over 700,000 jobs created since we came to office.

Since March 2007, employment has increased by around 9 per cent in Australia, around 3 per cent in Canada, and around 2 per cent in New Zealand, while it has decreased well over 4 per cent in the United States. And while economies like the US and the euro area have an unemployment rate with a '9' in front of it, we've got one with a '4' in front of it.

We also have many reasons to be optimistic about our future, as the weight of the global economy gravitates towards our region. China and India are undergoing an historic transformation - an industrialisation and urbanisation process that is larger than any the world has ever witnessed.

Twenty years ago China and India together accounted for less than one-tenth of world production. Today that share has doubled, and by the end of this decade it is expected to be over a quarter of world production.

At home, we can see the evidence of this in the unprecedented investment boom that it gearing up, supported by the highest sustained level in our terms of trade in 140 years. As a share of GDP, new business investment is set to approach its highest level in 50 years, with a large part of this driven by the coal seam gas projects right here in Queensland.

The total pipeline of investment in Queensland is around $180 billion. And over the past year, the state's LNG industry has committed to more than $30 billion in investment, driven by the Queensland Curtis LNG and Gladstone LNG projects. Big projects like this are going to support rising incomes and export capacity, and strong economic growth in the years ahead.

But the Asian Century is not going to start and stop with the region's hunger for our rich natural resources. The untold story of the Asian Century is how we're set to benefit from the burgeoning growth in the global middle class, which is happening right on our doorstep. By 2020, there is expected to be more middle-class consumers in Asia than in the rest of the world combined.

The implications of this will stretch far beyond the mining boom. We will see a growing demand for more of our high-end services and other exports demanded by an increasingly wealthy group of consumers. We're already seeing some of these broader opportunities emerge, and as I mentioned in my speech to the National Press Club earlier this week, you can see it happening here in Brisbane.

There are already firms of Brisbane architects, planners and consultants who make their living designing buildings in China. There are accountants and lawyers for whom Asia is now an important and growing part of their business. There are mining services businesses which not only work in the Bowen or Galilee Basins, but also in Vietnam and China and India. Some of you here today are already doing this and know what I mean.

So when we look beyond the significant temporary hit of the recent natural disasters, the other challenge we needed to confront in this Budget in not one of weakness, but one of strength. This is partly reflected in the Budget's strong growth forecasts for the next couple of years, with the creation of around half a million jobs over the same period.

Faced with this strong outlook, the challenge for us is two-fold. First, we need to get back in the black so we don't compound the price and capacity pressures that will inevitably re-emerge. But we also need to boost our productive capacity and get the longer-term settings right, so we can maximise and spread the benefits that flow from the rise of Asia.

Enormous opportunities are unfolding on our doorstep, and successfully managing our transition into the Asian Century will be the key to lasting prosperity for our people.

Getting the Fiscal Settings Right

With an investment boom gearing up and unemployment falling further, we are also likely to see capacity pressures re-emerge. That's why the Government has done the hard yards to get the Budget back to surplus in 2012-13, on time, as promised. And we're achieving that despite the impact on the Budget in the early years from the recent natural disasters and softer revenues.

Returning the Budget to surplus is not easy, but it is worthwhile. We have put in place $22 billion in savings in this Budget, building on the savings we have made in previous Budgets. Over two-thirds of savings are reductions in payments.

It's this kind of discipline that has resulted in real spending growth averaging 1 per cent a year over five years. To put that into perspective, no government since the 1980s has budgeted for such tight constraint. In the ten years leading up to the GFC, real spending growth ran at 3.7 per cent - almost four times the rate that we are budgeting for.

When we put our 2 per cent spending cap into place, we knew it would be hard to achieve. Only two Budgets out of the ten preceding the crisis kept real spending growth to below 2 per cent. We are doing it for five years in a row! No government in our history has imposed this kind of restraint on itself, for the period we are doing so.

This means that the Budget is projected to return to surplus only three years after the deficit peaked during the GFC. This will be the fastest return to surplus in over 40 years. And it means we will be back in the black well ahead of the major advanced economies. Countries like the US, the UK and Japan will not even halve their deficits as a share of GDP by 2012.

We are planning a very significant fiscal consolidation of 3.8 per cent of GDP over the next two years. It was always our intention - to support the country during the crisis but then to step back as the recovery took place. We can see this balancing act in the figures. And as I have said before, if we're going to be Keynesians in the downturn, we have to be Keynesians in the recovery too.

So we're making room for the growing private sector activity, making sure we are not chasing the same resources as the private sector as the investment boom gathers pace. By sticking to our fiscal rules, by returning to surplus in 2012-13, and then building larger surpluses while economic conditions remain favourable, we'll have the best chance of dealing with whatever the future sends our way.


But this Budget isn't just about balancing the books, or taking some narrow approach to fiscal prudence. I will talk about this in more detail as I move around the country, but while keeping our fiscal settings on track, we have also remained focused on building our capacity and sharing the benefits of the boom.

The heart of our Budget is a skills and training package that takes the prosperity flowing from the mining boom and turns it into more, and better jobs for Australians. And infrastructure is critical to building capacity in our economy, including $434 million for six projects in Queensland.

We are making historic investments in our hospital system and to support those who suffer mental illness. And providing support for families. Making the saves to get us back in the black by 2012-13 and fund these key priorities.

The truth is this Budget has been just as tough as the three I've done before. It was a particular challenge in this one to get the balance right. The balance between the near-term hits to our economy, and the fundamental strength of our economy. The critical task is to get the fiscal settings right - that means staying on track to surplus, even as we deal with the effects of the disasters we've faced.

In many ways, this Budget is about rebuilding Queensland and putting it back on its path to prosperity. It's about sharing the benefits of the mining boom to all sectors of our patchwork economy.

In my next speech, in Sydney on Monday, I will speak further about the importance of investing in our capacity, and about how important it is that we invest in jobs. But before we could do that, we had to get the fiscal fundamentals right, and that is exactly what the Budget I delivered on Tuesday does.

So thanks for having me here on my home turf today.