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Banking | Finance

WONG: Budget balance must be long term project

Balancing the Federal Budget with an austerity regime would have reduced jobs and growth on a scale seen in Europe after the Global Financial Crisis, Minister for Finance and Deregulation, Penny Wong has told a CEDA audience in Melbourne.

Balancing the Federal Budget with an austerity regime would have reduced jobs and growth on a scale seen in Europe after the Global Financial Crisis, Minister for Finance and Deregulation, Penny Wong has told a CEDA audience in Melbourne.

"This year's budget includes the second biggest write down in tax revenue since the Great Depression," she said.

"We now expect as a government to receive $60 billion less than anticipated just six months ago."

Ms Wong said although the Australian economy was strong compared to other developed economies, and had its triple A credit rating renewed by the three international ratings agencies after the budget, the government had faced "pretty unusual and testing circumstances" in framing the budget.

Falling revenues due to the high Australian dollar and falling terms of trade had reduced tax receipts to 21.5 per cent of GDP, lower than the 22.2 per cent expected just six months ago - well below the 24 per cent of GDP enjoyed by the Howard Government, she said.

"In light of these changing circumstances, the government faced a clear choice - we could have chased revenue down and pursued a surplus in the coming year 2014-15, we could have made the savage cuts required to bring the budget back to surplus next year…but we made the choice not to go down this path because of its consequences for Australians," she said.

In Europe for example, fiscal austerity had left every second young Spaniard and every third young Irish person out of work, and had depleted capital as businesses closed, she said.

In contrast, the Federal Government had deferred a return to surplus to fund the Smarter Schools project, the National Disability Insurance Scheme and productivity-enhancing infrastructure such as the Cross River Rail in Brisbane, the Sydney Motorways Project and the Melbourne Metro, she said.

"The budget handed down this week is a responsible economic plan that gets the big calls right - it maps the pathways to surplus and fully funds critical reforms to deliver a smarter, fairer future," she said.

The government had made $43 billion of targeted savings with a net improvement in the budget and, after new spending, the savings would deliver a net improvement in the budget bottom line of $28.4 billion, she said.

Ms Wong told the forum:

  • Investment in schools was critical as: the average 15-year old student was two years behind their Shanghai counterpart in mathematics; one  in 12 Australian children were not meeting minimum standards in reading, writing and mathematics; and children from less affluent backgrounds were up to three years behind their peers.
  • More than 950,000 jobs had been created since 2007 and more Australians than ever were in work.
  • Despite this job creation, nominal GDP growth had fallen below real GDP growth in the past three quarters - unprecedented in the history of the national accounts, due to the sustained high dollar in the face of lower terms of trade.
  • Suppliers in the non-tradeables sector had to reduce prices to remain competitive with cheaper imports - containing prices and pushing down profits across the economy.
  • The National Accounts measure of corporate profits had fallen for a record five consecutive quarters and, outside of mining, profits grew less than one per cent in 2012 - well below the average of 14 per cent in the 10 years before the global financial crisis.
  • The impact of falling corporate profits on the Government's budget, combined with a slower recovery in capital gains tax and lower revenue from resource rent taxes, had been "savage".
  • The Australian economy was experiencing two big transitions with the mining sector shifting from unprecedented investment growth to rapid growth in exports as production ramped up, and the broader economy shifting towards non-mining sources of economic growth.
     

A budget that made deep spending cuts to return the budget to an early surplus would have precluded critical reforms in education and disability funding, she said.

"We don't get to choose the economic circumstances but we do get to make choices about how we respond.

"This year's budget is driven by the imperative to ensure the nation's prosperity today and tomorrow - it's about the jobs we want for our families today and the opportunities for our children," she said.