Speech by Senator The Hon Penny Wong
Minister for Finance and Deregulation
PW 263/11
1 December 2011
UBS Auditorium, Sydney
**Check against delivery**
In this opening first few minutes that I have, I did want to emphasise the backdrop, emphasis the economic circumstances as we saw them in which this MYEFO was put together, and what that context means for fiscal policy, and in doing that I’ll touch on some of the things that Michael very properly mentioned.
I am sure no-one in this audience needs any reminder of the volatility and turbulence we’ve seen in the global economy, and that effect on growth and confidence.
And of course, the unpredictability and heightened risk globally occurs against a backdrop of longer term change as global economic power moves east.
In fact, present and future dynamics are tending in the same direction. And as we see in most recent global forecasts, in the MYEFO, you’ll see that about ¾ of total global that is predicted in the coming two years is driven by emerging economies.
The Australian economy is affected by these global circumstances. We see lower growth forecasts, although still at trend, we see more hesitance in hiring and less propensity for consumers to spend, which obviously has its own set of consequences. Put simply, the global outlook affects confidence here in Australia
But we also see increasing investment in the resources sector. Only this week in the economic forecast update we saw the pipeline of resources investment was revised upwards again to $450 billion.
Whilst differences in growth rates across sectors is expected, it is true that the scale of the current divergence is substantial. These trends and the consequent structural changes that they bring with them certainly bring significant challenges for all of us, particularly for sectors such as manufacturing and retail.
So what we’re seeing is a number of longer term dynamics operating with shorter term dynamics concurrently, with a sovereign debt crisis in Europe and weaker growth in the US. This is not an uncomplicated backdrop in which to put a Budget update together.
This set of circumstances brings with it consequences for fiscal policy.
Fiscal policy is always central to growth and jobs. It is also central to confidence.
A government’s fiscal policy is an important signal to the world of the way in which governments manage their finances and their economies.
Stable and disciplined budget finances are a part of what enables investors, businesses, and households to be confident in the Australian economy – whether it’s to fund new projects, to employ more workers, or to spend – confident that they’ll have a job in future.
And delivering stable fiscal policy is more important than ever at a time of heightened global instability and intense market scrutiny of sovereign debt levels.
You only have to look to Europe to see a very real example of what happens when governments fail to adhere to credible and sustainable fiscal policy.
That’s why it’s so important that we do maintain the world’s confidence in our public finances.
During the global financial crisis we knew we needed to act to support jobs and growth or face the very human and very economic consequences of recession.
But we also understood the importance of a clear plan to return the budget to surplus.
By embarking on spending restraint, and allowing revenues to recover naturally, we set out a plan for returning to surplus. And that’s what we are delivering.
We’re doing this faster than any of the major advanced economies.
There’s widespread acknowledgment of the importance of returning to surplus. We’ve seen it acknowledged in the comments of the Business Council this week, and Joe’s own comments, though I note from the discussion even as we were walking in, that some have a different view.
Returning to surplus has been made harder by the downgrade in global growth forecasts due to the European sovereign debt crisis.
This in turn has reduced our GDP growth forecast from 4 per cent to 3¼ in 2011-12.
The worse outlook relative to Budget has wiped $20 billion off revenues. This is on top of $130 billion in write downs since the GFC.
In this MYEFO, the Government had to strike a balance between the sort of uncertainty that was evident abroad and the imperative of supporting jobs and growth at home.
In mid-year review we’ve maintained fiscal discipline, offsetting all new spending just as we did during the election and just as we did at Budget.
In fact, this update delivers net savings of $6.8 billion to the bottom line, in the face of a $20 billion revenue downgrade.
And the tax to GDP ratio stands at 22.3% in the next financial year, 1.4 percentage points below that which we inherited.
Being on track for a surplus is appropriate when we’re still projecting the Australian economy to be growing around trend.
But we also recognize, and believe, it would not have been prudent to run an even tighter fiscal outcome in the short term given the longer term perspective and shorter term uncertainties.
Slashing spending even further would have been counterproductive given the heightened risks and lower growth forecasts I have described.
The savings measures we did determine come from a mix of spending cuts, deferrals of commitments and measures to improve the fairness and integrity of the tax system.
A mix we regarded as appropriate for our current economic circumstances, striking the right balance between the challenges from global uncertainty in the near term and Australia’s solid medium term prospects.
Some of these decisions also deliver enduring benefits to the budget. They build on successive decisions the Government’s made over a number of budget updates that improve the budget position over time.
I don’t need to tell you there’s a lot of complexity in the economic environment at this time. But just as we made the right judgments during the global financial crisis about budget settings, we believe we’re making the right judgments now.
Our intention has been to chart the right course, to deliver a mid-year update that is right for the circumstances – albeit very challenging ones – that Australia currently faces.
Thank you
