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Speech to Parliament: Appropriation Bill (No. 1) 2010-2011
This budget is a debt and deficit budget. It is a window-dressing budget which is presented in a deeply misleading way. It is a budget from a government which has misdiagnosed the economic challenges facing Australia and is consequently following the wrong strategy. And it is a budget of missed opportunities.
It is, first of all, a debt and deficit budget. It continues the tawdry pattern of deficit that we have seen for the last three years: a $27 billion deficit in 2008-09, a $57 billion deficit in 2009-10, and now $41 billion in 2010-11. It is the second biggest in dollar terms ever. We are borrowing $700 million a week, $100 million a day, just to keep the doors of the operation opened, just to engage in business as usual. And, of course, it stands in very stark contrast to the pattern of surplus after surplus after surplus that we saw under the Howard government. Even worse, it is a budget which maintains the debt until 2018. Net public debt will peak at $94 billion in 2012-13—$9,000 for each of Australia’s 10 million households, and that is before the $26 billion which is to be borrowed to fund the National Broadband Network. That debt burden will of itself generate an interest expenditure at its peak of around $7 billion a year.
This is a budget which shows absolutely no spending discipline. We have seen increase after increase after increase from this government. In four years we have gone from an expenditure of $253 billion to an expenditure of $352 billion. That is an increase of almost $100 billion in just four years. And it is not about to stop. In fact, over the next four years spending will increase by another $51 billion.
The spending increases are actually getting worse. On a quick calculation, this year’s budget is a 1.8 per cent increase on last year’s; the following year it is expected to be a 2.9 per cent increase; and the year after that, a 5.3 per cent increase. So the growth is actually increasing. We are not seeing the kind of discipline that Australians have the right to expect from a government facing the challenges that Australia presently faces.
What is more, we have heard an enormous amount about returning to surplus within three years. But, frankly, this is a window-dressing budget, because to talk about what will happen in three years is a complete red herring. ‘What is happening this year?’ is the question we need to ask. If you turn up at home one day and say to your wife, ‘I know it’s our anniversary but I’m not getting you a present this year; I’m giving you a present in three years time,’ you will get very short shrift. Equally, the Australian people ought to give very short shrift to a government that says, ‘Don’t worry about this year because we will be back in balance in three years time.’ What is more, that forecast about being in balance in three years time is essentially meaningless, as Ross Gittins argued in the Sydney Morning Herald. He points out quite correctly that Treasury has great difficulty forecasting what will happen in a month, let alone in three years. That is no criticism of them; it is simply a recognition of the state of economic science. So to forecast that in three years you will have a surplus of $1 billion against a total forecast expenditure of $378 billion is essentially meaningless. It erroneously claims a degree of precision in forecasting which is 10 times or 100 times greater than can actually be achieved.
There is, I am sorry to say, another reason why this is a window-dressing budget. There is a highly misleading chart on page 2-23 of Budget Paper No. 1 which purports to show that countries with big stimuluses, including Australia, had much larger variations on the budget outcome which the IMF forecast for them than countries which did not have big stimuluses—in other words, attempting to substantiate this argument that the stimulus spending is what has delivered the goods over the past few years. Treasury comments, in its narrative on this chart:
The relationship shown is highly statistically significant, with a t-statistic on the slope coefficient of 3.3.
The independent work which has been done to assess this chart makes the point that it purports to compare countries in the OECD but in fact it does not take the full sample of 19 observations, the 19 countries excluding the EU which are included. When you rerun the work with all 19, you find out that the statistical relationship is essentially non-existent. The t-statistic is only 0.5. For those of you who did not fritter away their university years studying economics, that is, as Professor Sinclair Davidson, who did this work, has commented:
… well below the generally accepted levels for a t-stat to indicate statistical significance.
So the statistical work in the charts which Treasury is trying to use to argue that there is some statistical support for the purported relationship between the size of the stimulus and the result in terms of growth, unfortunately, on close analysis, simply does not stand up.
The other point about this being a window-dressing budget is a very fundamental one. Even the claimed return to surplus in three years is to be achieved in a very disappointing way. It is to be achieved by gaining extra revenue through imposing new taxes rather than by taking tough, necessary decisions. This Labor government has taken the easy way out by introducing new taxes rather than by getting control of spending and introducing discipline.
This budget is one framed by a government which has misdiagnosed the economic challenge facing Australia and which is consequently responding in the wrong way. There was a financial crisis in the North Atlantic and the Rudd Labor government panicked and overreacted. Certainly the coalition agreed that some response was necessary and we supported the first stimulus package of around $10 billion. But it was quite clear early on that Australia was going to be significantly quarantined from what was occurring in the North Atlantic and, even so, the Labor government could not resist splashing the cash around and going for a $42 billion stimulus in February 2009. I just note parenthetically that there seems to be something about numbers in the $40 billion range which particularly attracts the most irresponsible instincts of this government. This year we have got a deficit of $41 billion; we had a stimulus of $42 billion early last year; and of course we have got the National Broadband Network, which is $43 billion. There is something about that magic range of $40 billion which really gets those native spending instincts fired up.
Who could forget the analysis written by our Prime Minister, Kevin Rudd, about 18 months ago, in which he said:
From time to time in human history there occur events of a truly seismic significance, events that mark a turning point between one epoch and the next, when one orthodoxy is overthrown and another takes its place.
Even by his standards it is remarkably hyperbolic language. But it is an insight into why this government has misdiagnosed the present economic situation of Australia. Anybody who sees what is occurring as a massive turning point in history is naturally going to be tempted to spend furiously. But when you engage in even the briefest analysis of the thesis that was put forward in that article you quickly see that it is riddled with logical errors and inconsistencies.
It is unclear, for example, whether Mr Rudd thinks that expansionary monetary policy is a good thing or a bad thing. At one point in this article he criticises the Reagan administration and its response to the stagflation of the seventies. That response, of course, was centred on the tight monetary policies of Federal Reserve Chairman Volcker. Later on in his piece he criticises the loose monetary policies of a subsequent Federal Reserve Chairman, Alan Greenspan, and later on again he lauds his own government’s monetary stimulus, saying:
To encourage liquidity, the government legislated to increase by $25 billion the maximum value of government bonds that can be issued at any one time.
In other words, he presents a fundamental premise which is confused and incorrect, a fundamental premise which seeks to force-feed Australian history into a framework which asserts that there has been a neoliberal consensus around the world, a thesis which attempts to argue, for example, that Australian banking regulation is identical to that in other advanced nations when, as we well know, thanks to the prescient work of Treasurer Costello and Prime Minister Howard, Australian banking regulation stood this country in very good stead in responding to the financial crisis.
The relevance of all of this for the present budget is that today we have the wrong settings in this budget. The budget papers themselves say that we are approaching full employment and the implication of that quite clearly is that we are potentially facing inflationary pressures. Yet we have a highly stimulatory budget spending without restraint.
An even more significant consequence of this spending without restraint is that we have a government which is continuing to wantonly pile on debt when the biggest challenge facing advanced economies around the world is the sovereign debt crisis. Budget Paper No. 1 makes this very point on pages 2-12 and 2-14. It is very instructive to have a look at what another Labour government did in a jurisdiction that we often look to, the UK. In 1997, at the time that the Blair government took office, the debt to GDP ratio in the UK was 43 per cent. Today it is 62 per cent. Over a decade of Labour has seen spending discipline go out the window, deficit year after year and, as a consequence, a country which has its strategic economic options severely limited. This year, in fact, the deficit to GDP ratio in the UK is 13 per cent, worse even than Greece, the country which is on the brink of a financial precipice.
The important point for Australia is that it is clearly accepted that, as your debt to GDP ratio rises, you constrain your national economic options and you expose yourself to very serious threat. Studies by the IMF and by the US economist Kenneth Rogoff, amongst others, show that once a country’s debt to GDP ratio reaches the range above 60 per cent there is a tipping point. You are paying so much interest on your debt and taxes are so high that it is virtually impossible to get out of that black hole.
The Labor government would no doubt make the point that our debt to GDP ratio is well below these levels. We are very fortunate that it is, because of the wise stewardship of the Howard government for over 10 years. But the only way you get your debt to GDP ratio under control is by year after year of discipline, year after year of hard work. Let me read the deficit to GDP ratios in Australia from 1997 to 2007. In 1997 there was deficit of minus 0.7 per cent. Following that it was 1.6 per cent, two per cent and 0.9 per cent. There was a slight dip in 2001 to minus 0.1 per cent, but then it was 1.3 per cent, 1.8 per cent, 1.1 per cent, 1.5 per cent, 1.5 per cent and 1.6 per cent—every one of those positive. That is a roll of honour, a decade of fiscal discipline. It is because of that decade that we are as well positioned as we are today.
But that discipline has been shredded under the Rudd government. We are now in their third year of exceptionally high deficits, and the debt is starting to mount. The debt train has left the station. It is now projected to peak at $94 billion, and that is only if the government show discipline after this year. We have been told, ‘We’re not quite ready to be disciplined this year, but believe us—after this year it is going to get better.’ I do not believe them. The opposition does not believe them. The Australian people do not believe them. There is one thing we know from painful experience about Labor: they love spending money and they just cannot exercise fiscal discipline. Time after time one thing has to happen—that is, the coalition, the Liberal and National parties, need to get back in power so that we can get the economy back on track, we can get the spending discipline in place and we can get out of the mess of debt that Labor inevitably run up.
The final point I wish to make about this budget is that it is a budget of tragically missed opportunities. It is a complacent budget which fails to take hard decisions. It is a budget which assumes that ‘she’ll be right’. It is a budget which continues to rack up deficit and debt. It is a missed opportunity to reduce the stimulus spending much more quickly than the Labor government has chosen to do. The only responsible party here is the coalition. We have put forward a series of spending cuts. That takes political courage. It takes discipline. It takes determination. We have been prepared to do that because we know that is the responsible course. The government is asleep at the wheel, not prepared to take any responsible decisions.
This budget is a missed opportunity to wind back taxation levels. Instead we have seen new taxes: the cigarette excise and a new tax on the mining industry, the so-called resource super profits tax. We hear constantly this argument that, because the company tax rate is going to be reduced somewhat, that more than compensates for the increased taxes from the resource super profits tax and the cigarettes tax excise. That is just a ludicrously innumerate claim, as the quickest look at the budget papers reveals. The total amount that will be raised from those two taxes, once they are in full swing, is around $10 billion a year. What is being given back under the company tax reduction is $4 billion a year, once in full swing. So the claim that one makes up for the other just makes no sense at all. And, of course, it just means more complexity and going in the direction opposite to that of simplicity and tax reduction, which is what we ought to see.
This budget is also a failed opportunity for reform. There was so much promise about the Henry tax review. It was going to be the root and branch reform. And then, of the 138 recommendations, we saw just two. We have a government that loves to talk about spending and loves to increase taxes. Here on this side of the House, we stand for discipline and responsibility and we know that everything that is spent has to be paid for.
In my electorate of Bradfield, tax office statistics show that we make up 0.8 per cent of the population but we pay 1.8 per cent of personal income tax. So, in my electorate of Bradfield and in electorates around the country, Australians are rightly concerned about their tax burden and they are rightly concerned about the amount of money this government is spending. They know that the only way to get the tax they pay under control is to get government spending under control. They also know that the only way to get government spending under control is to get a government in place which has a track record of, and a commitment to, fiscal discipline and which does not measure its success based upon being able to quote massive expenditure dollars. They know we need a government which measures its success based upon a responsible and measured approach to expenditure and government revenue and which seeks to achieve budget settings which make the structural and strategic changes that Australia needs to be competitive, efficient and productive in this very large and not necessarily friendly world that we live in.
This budget is, at base, a debt and deficit budget. It is a window-dressing budget which does not do what it claims. It is a budget from a government which has misdiagnosed Australia’s economic challenges and it is a budget of tragically missed opportunities. All Australians will be the poorer for the decisions this government has failed to take.