Senator the Hon. Mathias Cormann
Minister for Finance
Australia is a great country. As a migrant I appreciate every single day the many opportunities on offer for people like me who have come here from all the different corners of the world, to call Australia home and make a contribution to our future success.
Australia has been very successful throughout our history. Over the past few decades we have benefited from an unprecedented period of uninterrupted growth driving significant improvements in our living standards on the back of important structural economic and fiscal reforms throughout the 1980s and 1990s. Those reforms made us stronger, more resilient and better able to seize the opportunities that came our way.
We have the opportunity to keep growing, to keep improving our living standards and the opportunities on offer for our children and grandchildren.
Our natural endowments, our enterprising spirit and can do attitude, the political stability of our free and democratic nation, our geographic location in the Indo-Pacific, where most of the global economic growth will be generated for decades to come, all help ensure that with the right public policy settings the sky is the limit.
But we can't take our future success for granted just because of what has been achieved in the past. Because there are also downside risks. We need to continue to deal with some of the legacy issues that undermined our international competitiveness in more recent years and we must face up to some of our structural economic and fiscal challenges - the ageing of our population, our exposure to falling terms of trade and our current unsustainable federal government spending and debt growth trajectory.
Our objective must be to ensure we are in the strongest, most resilient position possible to deal with any global economic headwinds coming our way in the future and in the best possible position to take advantage of future opportunities.
To strengthen growth in our trade exposed economy we need to ensure we are as competitive as possible. That means bringing down the cost of doing business in Australia. That is why we removed the carbon tax and the mining tax, reduced red tape costs for business, removed costly trade barriers into key markets in China, Japan and South Korea and why we are rolling out massive investment in productivity enhancing infrastructure.
We are exposed to what happens in the global economy, in particular in terms of our commodity prices. Our terms of trade are more than twice as volatile as the average for OECD countries, which makes us especially vulnerable to global economic forces over which we have no control. Right now we are experiencing the largest fall in our terms of trade since records began in 1959.
Like many other countries, Australia is facing an ageing population. Living longer healthier is a great thing, but overall it does have implications both in terms of our future growth as well as for government expenditure. Over coming decades the number of traditional working age Australians (15-64 years) relative to each person aged 65 and over will continue to decline. Currently there are around 4.5 people of traditional working age for every person aged 65 and over. This will nearly halve to 2.7 people by 2054-55. This will increase pressure on taxpayers and contribute to a fall in our workforce participation rate.
Falling workforce participation rates are a drag on economic growth, which is why we need to convince more older Australians to work longer and why we need to convince more women to join, stay or come back into the workforce after having children.
To strengthen growth we also must get our federal government spending growth under control.
It is easy for some to look at Australia relative to other economies in the world and assert there is nothing wrong. Australia’s government net debt is low compared to many other developed countries. So what is the problem?
Right now Australia’s government net debt to GDP ratio sits at 15.2 per cent. That's because we did start from a much stronger position than others pre-GFC, namely from a plus 6 per cent positive net asset position as a share of GDP.
Our current debt to GDP ratio is already around five percentage points higher than Ireland’s in 2007, just before the GFC. Unable to weather the GFC, the Irish economy fell into deep recession. The net debt to GDP ratio exploded. Ireland did not have sufficient depth in its budget to meet all its obligations and just six years later net debt as a percentage of GDP is well over 90 per cent and is projected to remain above 90 per cent for the foreseeable future.
We are not prepared to leave Australia exposed to those same risks.
Under the policy settings we inherited from the previous government, Australia was headed for continuous deficits over the next 40 years.
Without reform we were on track for a growing deficit over time reaching nearly 12 per cent as a share of GDP by 2054-55.
Based on our reforms which have already been implemented we have been able to halve that to 6 per cent.
All other things being equal, if all our reforms passed Parliament we would be in continuous surplus from 2019-20 all the way to 2054-55.
Without policy change our debt to GDP ratio was on track for 122 percent as a share of GDP by 2054-55 towards the current debt levels of Greece and Japan.
Australia is an importer of capital, much of our debt is foreign debt - at these debt levels and given the inherently more risky nature of our trade exposed economy comparatively higher debt interest rates will make us less competitive.
These elevated levels of public debt would also increasingly crowd out private investment and as such hamper future growth.
Again, if all our reforms were passed, net debt would be paid off in full by 2031.
In the last year of the Howard government, spending was at 23.1 per cent as a share of GDP. The policy settings put in place by our predecessors in government put us on a trajectory towards a staggering 37 per cent of government spending as a share of GDP.
This is significant because the highest ever recorded level of government receipts as a share of GDP was 26.2 per cent in 1986.
We can't responsibly chase such massive increases in spending with ever increasing taxes. A tax to GDP ratio of 37 per cent would undoubtedly damage our economy, make us uncompetitive internationally and cause massive increases in unemployment.
That is why we need to get spending growth under control.
As a result of decisions implemented so far, instead of 37 percent we are now heading for 31 per cent of spending as a share of GDP. If all our budget measures were implemented we would be able to stabilise spending at current levels as a share of the economy over the next 40 years.
The good news is that as a result of the progress we have made so far, our Budget is now structurally in a much stronger position than when we started with Budget repair back in September 2013. But yes, there still remains more work to be done. What is important for our future success is that we keep heading in the right direction with our reform effort and that we keep making progress.
This is an opinion piece published in The Weekend West on 7 March 2015.