18/03/2024
Thanks, Aunty Maxine for welcoming us to Gadigal country and for sharing culture with us;
To Andrew for the introduction;
To the Commonwealth Bank and Allens for supporting the event;
To Melinda and her wonderful team for this welcome opportunity to speak with you today at the Sydney Cricket Ground;
I always wanted to play here – this might be the closest I get!
And to all of you for coming.
For as long as I can remember CEDA has been an indispensable part of the national economic policy landscape.
And I’ve appreciated all the times you’ve given me a platform, in opposition and in government, in regional Queensland and around Australia, to explain our policies and points of view to an informed and engaged audience like this one.
Last time I spoke with you in Brisbane about the productivity challenge, our plans to reform the Productivity Commission, and how we turn headwinds into tailwinds in the pursuit of a stronger economy.
This time I want to talk with you about our progress to here, and our plans from here.
What better time to do it.
Today marks precisely two months until Katy and I hand down our third budget, on May 14.
That budget will be handed down one week shy of our two‑year anniversary as a government.
So it’s the perfect opportunity to give you a sense of our thinking, as we finalise the remaining key decisions and tie them all together.
We have about six or seven weeks to do this before the printers start to get nervous!
So the familiar rhythms of budget‑time are gathering pace.
My main job today is to give you an insight into the pressures and priorities we are grappling with.
I want to leave you with a sense of how our economic strategy will change a little but not a lot –
As we fight inflation, build our defences against global uncertainty, and adapt to slowing growth in our economy.
Our overarching objectives are clear, consistent and continuing:
To modernise our economy and maximise our opportunities to benefit middle Australia;
To ensure our people and industries are the major beneficiaries of the big changes underway in our society and our economy;
And to deliver the best combination of near‑term relief, necessary repair, and longer‑term reform.
To understand how we are going about this, it helps to go back to the beginning of this parliamentary term.
It’s too‑easily forgotten that when we came to office there were:
Huge deficits as far as the eye could see;
More than a trillion dollars in debt, and a big and ballooning interest bill;
High real spending growth;
Expiring cost of living help;
Unavoidable spending pressures which hadn’t been budgeted for;
Inflation which was already galloping;
Wages which had been stagnant for the best part of a decade;
Real wages which were falling sharply;
And interest rates which had already started rising.
This was our inheritance and our challenge.
We also inherited the Treasury Secretary, Steven Kennedy.
I thank and pay tribute to my Liberal predecessor for appointing someone of Steven’s calibre, someone who has served both sides of politics with diligence and distinction.
I raise Steven here for a couple of reasons.
First of all, because I’m really pleased to let you know that I’ve asked the Prime Minister to recommend to the Governor‑General that Steven be reappointed for another five years, when his current term expires in September.
This is the PM’s call, he recommends departmental secretary appointments to the Governor‑General, and I’m grateful he’s sought my view and agreed to get the ball rolling on this very important reappointment.
I really enjoy working with Steven.
Ours is a very effective partnership.
He represents the very best traditions of the Treasury and the Australian Public Service more broadly.
And I look forward to the opportunity to work with him for longer.
We want to provide some certainty and stability here, we have a lot of important work on the go, so we are starting the process now.
This is not the most important news for Steven this week though, it must be said.
I congratulate his daughter Amelia and partner Nick on the safe and joyous arrival of little Poppy Jean on Saturday, which makes Steven a grandpa for the first time.
‘Pop’ and ‘Secretary’ – are two very auspicious titles.
The second reason I start with Steven and his reappointment is because I want to take you back to the meeting I had with him in my kitchen in Logan City, the day after the election.
Obviously it wasn’t the first time we’d met, we’ve known and worked with each other for almost two decades now.
He got a little glimpse of his future grandparenting opportunities that day –
When he arrived I was cleaning big arcs of purple crayon off the white walls of our living room, some welcoming art courtesy of our youngest son, Jack.
Steven brought with him big swathes of briefing, and it was exciting after a long campaign and even longer in opposition to be getting amongst the real work not even a full day since the polls closed.
But there was trepidation too, we knew things were not going to be easy.
Thinking back now and recalling that discussion, it’s quite remarkable how much progress has been made on the issues we discussed that day – while I mainlined black coffee and him black tea.
We talked about flat incomes and how we’d try and get them growing again.
We talked about weak productivity and how we’d try and turn that around.
We talked about markets, and whether we could make them more effective.
We talked about institutions, and how we’d renew and refocus them to better inform our work.
And we talked at great length about the budget position and how we could repair it.
I haven’t said this publicly before, but it was back then that we first talked about shooting for a surplus in the first term –
With some genuine restraint we believed we could get there.
To help in the fight against inflation, to rebuild our fiscal buffers if the global economy turned down, to establish then cement our fiscal credentials – we thought this was imperative.
And don’t forget when we were having this discussion the deficit was $78 billion, for the year after it was $57 billion, and there were big deficits every year after that.
So what seemed perhaps a little presumptuous at the time, turned out to be prescient.
We knew then that if we saw an opportunity to get the budget back into the black at some stage in our first three years, we should go for it.
That’s why instead of only banking around 40 per cent of revenue upgrades like our predecessors averaged, we banked 88 per cent.
Instead of average real spending growth of 4.1 per cent in the years prior to our election, we got it down to 0.8 per cent.
After no savings in the March 2022 Budget before the election, we found $50 billion in savings in our first three budget updates.
Our efforts on the bottom line were perhaps the most notable way that first kitchen chat was formative, but it wasn’t the only way.
So much of the policy progress we’ve made can be traced back to those areas we identified in opposition, and discussed with Steven the day before the new government was even sworn in.
Getting incomes growing again as inflation comes down, by backing increases to the minimum wage, pay rises in the aged care sector and new laws to support secure jobs and better pay, and ensuring people earn more and keep more of what they earn.
Rolling out billions in cost of living relief across rent assistance, energy rebates, cheaper medicines, income support, Medicare bulk billing incentives, and much more.
Investing in the drivers of productivity growth including renewable energy, digital adoption, a more effective care economy and a bigger, better skills base.
Putting in place the foundations of more effective markets, with a sustainable finance agenda to get capital flowing, a more efficient payments system and ASX reforms, and competition policy to make our economy more dynamic.
Reforming and rejuvenating our key economic institutions like the Reserve Bank and the Productivity Commission, appointing more women to senior roles –
And better informing and centring the national economic debate with a wellbeing framework, the Intergenerational Report, and the White Paper on Jobs and Opportunities.
Because of our efforts across two budgets and across all of those policy areas, we’ve made some really important progress.
Instead of a deficit of $78 billion in our first year we delivered a $22 billion surplus.
Instead of a $57 billion deficit in our second year, the deficit is $1 billion, so a second surplus is in reach.
Instead of gross debt peaking at 45 per cent it will peak closer to 35 per cent.
This will reduce about $450 billion in debt at the end of the medium term and save about $145 billion in interest costs.
Our budget turnaround has been world leading;
It’s a bigger improvement in budget balance than anyone else in the G20, comparing the year before we were elected to the year after.
And in the economy too, progress has been welcome and encouraging.
Quarterly inflation is now around a third of the 2.1 per cent we inherited.
Monthly inflation is almost half the 6.1 per cent we saw in May 2022.
And the ABS makes it very clear our policies are helping.
In the year to December we directly reduced inflation by half a percentage point, by their estimation.
And our inflation fighting efforts, especially our spending restraint, have been recognised by the IMF, OECD and the major ratings agencies.
Instead of stagnant wages growth, it’s now almost double the average we saw under our predecessors.
Instead of real wages going backwards by 3.4 per cent around election time, they’re now growing for the first time in nearly three years and ahead of schedule.
Instead of productivity going backwards by 2.8 per cent, it’s now grown for two consecutive quarters.
And average unemployment under our government is at 3.6 per cent compared to 5.6 per cent under the Coalition – and at 4.1 per cent it’s still lower than pre‑pandemic.
All of this puts us in good stead for the challenges ahead.
So does the ongoing strength of the US economy, the fact that last year’s concerning developments in the banking system were well‑contained, and the moderation in inflation around the world even as it has zigged and zagged on the way down.
These are decent foundations.
But we know the global economy is full of downside risk.
We know people are under pressure.
We know we can’t yet ring the bell in the fight against inflation.
And we know our economy is slowing, quite substantially, as a consequence of higher interest rates.
We are confident but not complacent, optimistic but realistic, about the year ahead and the decade beyond.
The three biggest drivers of our thinking about this third budget are global uncertainty, persistent cost of living pressures, and slowing growth.
Today I’m keen to explain to you what this means for our strategy.
Because these pressures necessitate an approach to the third budget which is a little bit different, but not a lot different, to the first two.
The similarities are simple.
There will still be a premium on what’s responsible, affordable, meaningful and methodical.
There will still be a primary focus, but not a sole focus, on inflation.
There’ll be revenue upgrades and we’ll bank what we can from them.
We are still shooting for a second surplus.
But you might be more interested today in what will change.
Let me tell you five things which come to mind in that regard:
First, the revenue upgrades will be smaller.
In each of our first two budgets we benefited from more than $100 billion in revenue upgrades.
This year, we won’t see anything like that.
In fact we are even looking at much less than the $69 billion we booked in the latest mid‑year budget update.
There are important reasons for this.
For instance, the price of iron ore has been falling – in the last week alone it has fallen by almost 10 per cent due to concerns about the demand for steel in China.
And its current price is around 20 per cent lower than it was this far out from last year’s budget.
When I last looked on Tuesday morning it was trading at less than $94 a tonne.
Thermal coal has been more or less tracking along the path Treasury assumed in December, no better or worse.
But its current price is about a third lower than it was this time last year.
While the labour market is still pretty resilient, it’s now softening, so we won’t get the very substantial revenue upgrades we’ve seen from outperforming expectations here.
At the end of last year, there were 14.2 million Australians in work – this is around 500,000 more than Treasury was forecasting at the time of the election.
We welcome this, but we don’t expect to get such upside forecast surprises this time around.
So smaller revenue upgrades is the first difference.
The second is that means banking a substantial amount of the upward revision, but not all of it – in all likelihood not as much as we did in the first two budgets.
In our first two budgets we banked 92 and 82 per cent of upgrades.
Twice our predecessors banked none of their upgrades, even when one was bigger than we are expecting this time around.
We are still committed to banking as much as we can.
And the average amount we will bank since coming to government, will still be much higher than our predecessors.
Because we will still be more responsible and still demonstrate more restraint.
The third different element in this budget is we have already announced more than the usual amount of initiatives ahead of time, and for good reason.
A big increase in defence spending, responding to the Defence Strategic Review.
Paying the super guarantee on paid parental leave, as part of Katy’s gender equality strategy.
Substantial investments in remote housing as part of Closing the Gap.
The next steps in our Southeast Asia Economic Strategy, timed for announcement at ASEAN.
Reducing compliance costs for business by abolishing almost 500 nuisance tariffs.
And most substantial of all, our cost‑of‑living tax cuts announced in January to give us time to legislate them and bed them down as soon as we could.
Even apart from the $107 billion in tax cuts, there are billions of dollars of budget initiatives out there already.
This is much more than usual.
These are the sorts of things you’d usually hear about on Budget night.
I’m proud of each initiative and pleased they are already out there.
But it means more in the lead‑up to Budget and less on Budget night, and it means we have to find room for it all at the same time as we seek to land a second surplus.
The fourth related point I wanted to make is that there will likely be additional cost of living help in the Budget but it won’t be anywhere near the magnitude of the tax cuts.
We are already providing a tax cut to every taxpayer, and a bigger tax cut to more workers, we need to be upfront and say that any additional help will only be a fraction of that.
Any extra help will be targeted, responsible and affordable.
There will not be big cash splashes in the Budget, simple as that.
We believe budgets should be shaped by the economic cycle not the electoral cycle.
We don’t see cost of living help as stimulus.
At least not in the way we thought of it in the GFC or the pandemic.
We see it as a way of taking the pressure off inflation not adding to it.
Anything that’s too costly, too splashy, risks undoing the good progress we’ve made together on inflation.
This brings me to the fifth point I want to make today about the Budget.
When we say we will go for growth we mean it.
But we also mean sustainable growth.
Think of it as protein, not carbs.
By this I mean a bigger emphasis on foundations and drivers.
That’s why the Budget will be all about:
A future made in Australia;
The energy transformation;
A human capital base capable of adapting and adopting technology and catching up and keeping up with changing workplace needs;
A bigger emphasis on women, wages, and workers in the care economy;
And perhaps most of all a big new focus on investment.
We’re pleased that business investment has grown every quarter of our government after it fell around two‑thirds of the time under our predecessors.
It grew 8.3 per cent last year, and we remained a very attractive destination for investment from around the world.
The future is a little less certain, and a little less predictable.
We can attract investment but we need to be able to absorb it too.
If we attract it better, and absorb it better, this will help drive growth in our economy in a world of churn and change.
That’s why I’m working with my colleagues on a whole‑of‑government investment strategy, with the Budget in mind.
You can expect from us a bigger focus on the enablers of that investment:
Focussing on approvals, access to energy, better‑trained workforces, more resilient supply chains and more effective screening of foreign investment.
As we work through other ways to invest in emerging industries and the broadening and deepening and modernising of Australia’s industrial base.
This will require different parts of government to work better together.
It will need a more obvious front door for investors, regardless of whether you first talk to government through AusTrade or the National Reconstruction Fund.
It will need a more coherent approach to co‑investment with industry, including better assistance for priority projects navigating approval processes.
And it will need better partnerships with the regions, bringing together states, businesses and investors around key opportunities for economic development, like we have been starting to do through the Net Zero Authority.
I know there’s some Q&A shortly and I’m looking forward to that, so let me make a few concluding points.
You’ve all done the maths – you know that being two years down in a term means there’s one to go.
And a group like this knows the economics are more important than the politics, which is why I’ve come to politics last.
You also probably know that the last year of a term goes quick.
For those of us who prefer governing to campaigning this is not the most enjoyable thought.
But in the last year the focus inevitably sharpens on what has been achieved and what is to come.
In our case moderating inflation, growing real wages, tax cuts for every taxpayer, and the hard and methodical work we are doing to lay the foundations for growth into the future.
There’s been progress on each priority we identified in the earliest days of the government, but we understand and acknowledge and act on the fact that people are still under pressure and the inflation fight is not yet won.
But something else happens in the final year of a term as well, and that’s a greater focus on alternatives.
That’s the good news. The bad news is there aren’t any.
I don’t want to dwell on it, but my point here is that it’s two years into the term and our opponents haven’t even begun to do any of the necessary work.
They think they can substitute nasty negativity for economic credibility – but the good people of Dunkley have now reminded them they can’t.
We will stay focused on the main game.
We will continue to put good economics before electoral politics.
This is what’s behind the good progress we’ve made in our first two years – but we know there’s much more work to do.
The third budget will be central to that.
I hope I’ve given you a good sense today of what it will grapple with, what it will look like and why, and what it means for our future in this defining decade.
Thanks and I look forward to the discussion.