Budget Reply Address

Bob McMullan - Shadow Treasurer

Address - National Press Club, Canberra - 22 May 2002

Check Against Delivery

You would probably expect that as Shadow Treasurer, part of my message today is that this year's Budget was a major disappointment. Well I'm not going to disappoint you - this year's Budget was a major disappointment. And yesterday's Newspoll shows voters agree with our assessment that this is the worst Budget Peter Costello has delivered.

This may well be Mr Costello's last Budget, as he turns his attention to becoming Prime Minister. I remember his comment two years ago that he only had a couple more Budgets left in him. In the wake of this year's Budget, most pundits would agree he was too ambitious by one Budget.

Indeed, it's been a week since the Budget, and the only debates today are about Labor's plans - Labor's plan to cut superannuation taxes for all Australians; Labor's plan for a tax cut for working families; Labor's leadership on population policy, the environment and Kyoto, for paid maternity leave; and Labor's plan to protect 100 per cent of employee entitlements.

Peter Costello's Budget on the other hand has disappeared faster than any other in recent memory. Its weaknesses are clear, so let me spend some of my time here spelling out Labor's positive economic agenda, and explain how we would do things differently.

The Budget contained no vision of what Australia could be. It was a pedestrian, unimaginative Budget. It sought to exploit people's fears instead of building on their hopes. And that, I believe, is one of the key differences between Labor and the conservatives. The modern task of social democrats - perhaps it has always been our task - is to be the advocates of hope in the contest with the conservatives, who are ultimately the advocates of fear.

Our economic policy stems from our broader social goals.

For Labor, the goal of economic policy is to offer a responsible program that promotes our broader objectives. Simon Crean described this last week as seeking to create a strong economy for a fair society. More specifically, Labor's economic program has as its central theme a sustainable growth agenda.

The reforms of the previous Labor government laid the foundation for our current prosperity. Ironically, for a government that likes to boast of its economic credentials, the Coalition's own efforts at economic reform have been limited.

All politicians need to be aware that voters tend to remember only our mistakes. But there are equally important lessons for Labor in what the Hawke and Keating governments got right. The positive message from that era is that economic reform was a positive force. Improving not just our economic performance but also our well-being. Costello and Howard have done little to build on Hawke and Keating's reforms. And without further reform, the prosperity of recent years will peter out. My objective as Shadow Treasurer is to promote a reform agenda as a central aspect of achieving our economic goals. The core of the new reform agenda is to boost productivity through investing more in education and innovation, research and development.

Four foundations

That is a key goal, but our sustainable growth agenda rests on four foundations: sound macroeconomic policy; improvements to productivity; a fair distribution of the benefits of growth; and making sure that growth is environmentally sustainable.

• The first foundation is sound macroeconomic policy. It underpins all of our other policies. Reinforcing Labor as a party of low, stable inflation and low interest rates is a critical goal. As part of this, we will maintain our commitment to the golden rule of balancing the Budget over the cycle.

• The second foundation is improving productivity. Labor must build on the productivity boost delivered by the Hawke-Keating reforms by taking advantage of the new productivity revolution, based on innovation and technological change. This is a field given far too little attention by the Howard-Costello government. Improving productivity is the key to delivering sustained improvements in employment and living standards.

• The third foundation is ensuring a fair distribution of the benefits of growth. Obviously, as the Labor Party has always done, we believe economic growth should be inclusive. But there is also a need to recognise that fair distribution is also important to maintain support for future economic reforms.

• The fourth foundation is ensuring that growth is environmentally sustainable, to ensure a healthy economy in the medium to long term, and to ensure that environmental impacts are fully factored into economic costs.

By all these tests, the Budget is a classic case of missed opportunities, a sign of a tired government bereft of new ideas.

Missed opportunities

The Budget has destroyed Peter Costello's economic management credentials. Mr Costello's reputation has always had very weak foundations; but it has become clear that at the first sign of political pressure last year, his economic credentials collapsed totally.

Costello built his reputation on budget surpluses, not structural reform. This Budget has demolished that reputation. Apart from his first Budget in 1996, the early surpluses were all built on taxation growth, not any structural improvement in the Budget.

The simplest and most devastating failure of this Budget was that it showed a substantial deficit for 2001-02. For the purpose of this exercise, and to enable continuity of figures, I will accept the Treasurer's use of the cash measure of the surplus and deficit. I believe in future even the Treasurer will have to accept the logic of the move to accruals. But, for the moment, let us base the analysis on the terms which he appears suddenly to appreciate after years of advocating the alternative.

Let me make six points about the deficit:

• First, the budget balance has collapsed dramatically since the first year in which figures for the current budget year, 2001-02, were included in the forward estimates. In 1998-99 it was estimated that the Budget this year would have a surplus of $14.6 billion. Yet by the time the Budget was brought down last week, this figure had collapsed to a $1.2 billion deficit - a $16 billion deterioration. This deficit is entirely Peter Costello's own work. It is not the result of an unfavourable economic environment, but rather of an explosion of spending over several years.

• Second, the government has managed to deliver a deficit despite being awash with cash. This is the highest taxing government in Australian history. Taxpayers are paying more in income tax today than they were before the tax cuts two years ago that were meant to compensate for the GST.

• Third, the deficit cannot be explained by increased demands for defence and border protection. Even if no new funding requirements for defence and border protection had been required, the 2001-02 Budget would still have been in deficit by more than half a billion dollars.

• Fourth, the deficit is a gross breach of public trust. The government would now have us believe that they had always intended to run a deficit as a fiscal stimulus in the face of adverse international circumstances. The truth is, Howard and Costello panicked; they blew the Budget and they lied during the election about whether such a deficit was possible, let alone likely.

• Fifth, there would be no surplus in any of the forward estimates years at all were it not for the impact of bracket creep. The assessment published by Access Economics in its Budget Monitor established clearly that the surplus is entirely explained by bracket creep this year, next year, and for the two years after that.

• Finally, and perhaps most importantly, budget policy was so lax in 2001 that it has increased upward pressure on interest rates. This upward pressure is the biggest question mark over current optimistic economic forecasts. As Treasury Secretary Ken Henry said yesterday, 'there is uncertainty surrounding the extent of the downturn in the dwelling sector'. Higher interest rates can only reinforce this uncertainty. I also agree with Dr Henry that the extent that world oil prices are above the Budget's assumed price of $US23 per barrel could put some upward pressure on inflation. These concerns reinforce the case for fiscal rigour in future Budgets, and highlight Costello's failure over the past 12 months.

Equity

I want to address our case for voting against specific government measures associated with the Budget. The case comes down to these fundamental points.

The measures are inherently unfair. Drastic one-off changes like these are not necessary to resolve a 40-year problem. Furthermore, the action we are taking in blocking specific pieces of budget-associated legislation is far from unusual. Such action has in fact become commonplace. What we are proposing pales into insignificance compared with that which Peter Costello advocated as Shadow Minister for Finance in 1993. Let me deal with each aspect of that case in turn.

The evidence is clear that the initiatives on the Pharmaceutical Benefits Scheme and the Disability Support Pension are not designed to solve intergenerational problems.

This increase will take the hike in Pharmaceutical Benefits Scheme payments to 70 per cent since the government came to office. The government will also be able, with Opposition support and encouragement, to introduce long-term structural and administrative changes in this Budget. These include efforts to influence the ways doctors prescribe medicines, and the information provided to consumers and doctors. These are changes which we will support and there is potential for more, including proposals we made at the last election. Proposals such as improvements to the openness and accountability of the Pharmaceutical Benefits Advisory Committee, and requirements to report the full cost of medicines on their labels.

There is no need for a massive 28 per cent increase in one year to meet the intergenerational challenge.

With regard to the Disability Support Pension, while there is always a case for tightening up to prevent abuse, there is no case for punishing people who are actively seeking to participate in the workforce. Even the architect of the report supposedly driving the government's welfare changes, Patrick McClure, admitted last week: 'it doesn't have the balance and it's not the spirit of our report'.

In the context of such cuts, it is obscene for the government in the same Budget to be proposing to spend $370 million on tax cuts to the wealthiest 3 per cent of taxpayers by cutting the superannuation surcharge. Therefore, we will not be supporting this unfair measure either.

Regions

Another weakness in this Budget is the almost total absence of any initiatives for Regional Australia - whether outer suburban or rural and remote areas. Modern governments should also be addressing regional inequities. A recent report by the economic consultancy NATSEM, commissioned by AMP, shows a growing disparity in income between the richest and poorest regions of Australia. This report confirms what many Australians have already come to believe, that the benefits of economic growth have been captured disproportionately by a privileged few, concentrated in a few areas.

Before the election, the government would have had you believe that they couldn't do enough to assist the regions. Now it is clear that Peter Costello privately believes they have done too much. There is no other explanation for the euphemistically described 'reprofiling' of transport spending, which has led to deferral of important road transport initiatives announced with great fanfare in the lead-up to the election. This highlights the continuing weakness of the National Party within the Coalition and reinforces the continuing susceptibility of the National Party to alternative candidates. In some cases National MPs will be challenged by Labor candidates, in others by rurally based Independents. This will be an ongoing theme of this political term as it was of the last.

No wonder the National Party is so concerned about the idea of Peter Costello becoming Prime Minister.

The Intergenerational Report

The aspect of the Budget which was supposed to be new and exciting was the Intergenerational Report (IGR). The report has been cast as the centrepiece of the Budget, supposedly showing for the first time the impact of demographic change on the government's finances over a 40-year time horizon.

Such gazing into the future needs to be put into perspective. The IGR contains projections based on prevailing conditions and is underpinned by certain assumptions. As we all know the future can take many unpredictable turns.

Any attempt to predict the future is necessarily an immensely tricky business - as the Treasurer should know most of all, after running up $5 billion dollars in debts due to his currency gambling spree.

However, on a conceptual level, the idea of looking forward and attempting to anticipate future budgetary pressures under a variety of scenarios is undoubtedly a worthy idea.

Unfortunately, the IGR presented in the budget papers has been used as a cynical political exercise by a Treasurer more intent on generational change in the Liberal leadership than on meeting the challenges of serious economic management over future decades.

The information in the IGR is not new. There are no startling revelations. It is instead little more than a repeat of existing studies at a slightly more disaggregated level.

So why is it that the Treasurer has suddenly woken up to such research? If the government were serious about long-term fiscal sustainability then it would not have embarked on the massive vote-buying exercise prior to the election that has systematically eroded such sustainability.

Unfortunately the IGR is flawed as a planning tool because it takes far too narrow a perspective. It fails to adequately address environmental, regional, population policy or infrastructure related issues. I'm sure most of you would agree that these issues are critically important in considering intergenerational equity.

The IGR paints a bleak outlook for Australia, with a slowing in the growth of living standards and higher budget deficits.

Yet the IGR offers no solutions to address these problems. The government's predictable response has been to take the low road and cut living standards now to pay for costs that may or may not eventuate in the future.

However, there are clearly other options open to government. Indeed the answer is hinted at in the IGR itself. But the government has chosen to ignore it. The IGR notes that if productivity growth were higher then this would substantially alter the projections.

Productivity growth sustained at around levels experienced in the 1990s would mean both higher GDP growth and less pressure on the Budget. The IGR itself makes clear that the warnings of a $87 billion revenue shortfall are highly sensitive to the underlying economic assumptions. The report shows that with a relatively modest productivity improvement of 0.25 percentage points, on average over the next 40 years, economic output would be over $150 billion greater, measured in today's dollars.

The alternative, Labor, approach would be based on the idea that the solution to demographic changes lies in pursuing a high productivity growth agenda as I have outlined elsewhere in this speech.

Australia's destiny is in our hands, it is up to us to shape our future and determine where we want to be in 40 years rather than passively accept one bleak scenario as the pre-ordained outcome which must be feared and resisted.

It is even clearer that the IGR does not provide any justification for the government's plans, as revealed by Finance Minister Nick Minchin at the weekend, to abdicate responsibility for alleviating poverty. Taken with previous actions and comments by the Prime Minister and the Treasurer, Senator Minchin's remarks make it clear that the government has a deliberate long-term strategy to withdraw from significant areas of public policy where the Commonwealth should retain a central role. This Budget has made cuts in payments to the states for the environment, for disability support, for housing and for roads. The likelihood is that the next targets will be schools, hospitals and poverty alleviation, all key areas of Commonwealth initiative for at least 30 years.

It is no wonder, therefore, that the response to Transport Minister Anderson's proposal to change transport funding has been greeted with some apprehension. A more coordinated approach has been Labor policy for some time, and we therefore welcome Mr Anderson's belated recognition of the need for this approach. But you can't blame the states for wondering whether this is just another excuse to transfer responsibility from the Commonwealth Budget to the states.

Conclusion

All in all, the 2002 Costello Budget is designed to make up for the failures of the past rather than to meet the needs of the future.

It is a Budget driven by the fear of the future rather than an investment to meet the exciting challenges and opportunities that the future holds.

It is a Budget that was designed to establish the political credentials of a treasurer who aspires to be the next Prime Minister rather than to meet the economic and social needs of the nation.

It is a Budget that reinforces the emerging contrast in priorities between the Coalition and Labor.

There are already signs that the weaknesses of this Budget, and the positive response to Simon Crean's Budget reply speech last Thursday, have created a solid foundation on which Labor can build over the next three years.