An economist's look at Budget 2015 - NATSEM Post-Budget Forum

Remarks to the 2015 NATSEM Post-Budget Forum

Parliament House, Canberra

It's a real pleasure to be here with some of my favourite economics thinkers – Michelle Grattan, Saul Eslake, Ben Phillips and Arthur Sinodinos - and at an event organised by NATSEM at the University of Canberra. Some of you may know that last year, perhaps due to an unfortunate printing error, the Family Impact Statement was left out of the Budget. That meant that we couldn't observe some of the analysis that had been possible going back to Peter Costello’s era. Fortunately, Australia had NATSEM and they were able to conduct some vital analysis on the distributional impacts of last year's budget which made up for the accidental printing error, and helped spark a national debate around fairness.

I wanted to speak firstly today about the things I like in the Budget. Given that there's no person I like more on the Coalition side than Arthur Sinodinos, it seems churlish to start a conversation about the Budget without talking about the things that I think are good in the package. There is the National Disability Insurance Scheme IT upgrade. There’s investment in the Australian Bureau of Statistics which will be going towards an IT upgrade there as well. So long as that isn't accompanied with cuts to the bureau's surveys, that will be important too. I also like the instant asset write-off. It's a policy that aims to encourage investment, recognising that what you want to do with tax cut that change behaviour is to work on the margin. We had an instant asset write-off under the previous government which was scrapped for by this government. My only concern about the new one is that it's only there for two years. What will happen when it suddenly finishes?

So, to the tests for the budget. The test that the Prime Minister set for economic management over his period as Opposition Leader was not the test that most economists would apply. Most economists wouldn't regard the hallmark of economic management to be your ability to run razor-thin surpluses rather than deficits. But that was the test that Tony Abbott clearly laid down when he was Opposition Leader.

Mr Abbott said that as a volunteer firefighter, he knew that as soon as you got the fire brigade to the scene of a fire things started to get better. But my dad was a volunteer firefighter when we lived in Waterfall, in southern Sydney, and I remember him telling me stories about how sometimes the volunteer firefighters would just get a bit overexcited. Occasionally they would start back-burning operations that completely got out of control. He said that it wasn't unknown for volunteer firefighting brigades to actually make the problem worse, which meant that eventually the experts would have to come in.

Unfortunately that's what we've seen in the case of deficits. We've seen the deficit - compared to where it was projected to be in the Pre-election Economic and Fiscal Outlook - now considerably higher. We've even seen the current year deficit at double what it was projected to be in Joe Hockey's last budget. That's a comparison where you don't have to compare the Treasury and Finance numbers to Joe Hockey's numbers; you can simply compare Joe Hockey's Budget no.1 and Budget no.2. The deficit has doubled. He said that tax and spending would be under control but both the revenue projections for the forward estimates and the expenditure projections for the forwards are higher than under any other previous government. So if you think that good economic management is about lower debt, lower taxes and lower spending, then this Budget would fail those tests.

But most economists would say that you need to set some more ambitious goals. They'd say that you need to focus on getting down unemployment; on dealing with inequality; on boosting innovation. Unemployment is a scourge on Australian communities, not only because it leads to lower incomes but also because we know that so much of people's self-esteem is tied up in having a job. When I was at a community forum in the north of Tasmania last year, it was deeply dispiriting to speak to young people there who feel that they have no chance of finding a job in their own community. Smart policies to boost employment and continue new business creation to help with that transition out of the mining boom aren't strongly enough present in this document.

We also don't have enough in this document about inequality. Inequality in Australia is now at a 75-year high. It didn't rise under the period 2007 to 2013, but if you look back a generation, you see a situation where the top 1 per cent's share has doubled and the top 0.01 per cent's share has tripled. Earnings have gone up three times as fast for the top as the bottom, and the wealthiest three Australians now own more than the poorest one million Australians. In that environment, we need to start thinking about policies that will boost egalitarianism. I don't see much in the budget about reducing inequality.

The third big challenge is around innovation. Arthur Sinodinos and I both had the honour of attending a roundtable at Government House in August 2012, organised by Brian Schmidt after he won the Nobel Prize. It was a conversation about how to deal with the fact that there aren't as many innovators and entrepreneurs in Australia as we would hope for. That, I think, is a vital challenge for the future. In some sense, the writings of Ed Glaeser worry me the most. He says you know when a city is on the skids when it doesn't have new businesses around. You could tell Detroit was heading for a disaster as early as 1960 from the lack of new businesses. 

So out of the Budget, Labor will support a range of savings. Chris Bowen said at the Press Club yesterday that we will support $2.4 billion worth of savings measures, including ones that we wouldn't have put up in the form that they've been pitched - such as the higher tax rate for working holidaymakers and the scrapping of the Large Family Supplement. That's in addition to more than $20 billion of saves the government has already put forward that Labor has supported, and the multinational tax and superannuation packages that we've put forward separately, which together amount to more than $20 billion over the course of the next decade. We're willing to work with the government on those things, and we're also working through the pension package that Arthur mentioned before.   

But we do also think that other things need to be entertained. If you look at the growth of pension expenditures, it's extremely slow. Allianz has looked around the world at pension sustainability and concluded that the Australian pension is the most sustainable in the world. It's around 3½ per cent of the economy now, and projected to be about the same by mid-century. By contrast, superannuation tax expenditures are the fastest-growing area in the budget. We'll be spending more on them than on the pension within a couple of years. So Labor believes that measures to tighten the growth of high-end superannuation tax concessions are appropriate in the current environment.

We also think we need to do more around boosting innovation. That's why Bill Shorten's Budget Reply focused so strongly on getting more people studying science, technology, engineering and maths. I was in Wollongong yesterday at an innovation accelerator that the University of Wollongong has on campus - it's a really clever way of tapping into the skills of the local community. There's still plenty of engineers and people with manufacturing expertise in Wollongong. But now a steel town is evolving towards a town which will be at the forefront of new business creation. That's a vital part of building Australia's future prosperity, as is giving our kids the chance to learn coding at school. Clever apps such as Daisy the Dinosaur make coding accessible to children as young as five. As one of the few people in the Parliament who codes, I can certainly attest to the fun that can be had from it, but also how it can help you think logically through problems.

Thanks for coming along today. I look forward to the conversation.  

ENDS

MEDIA CONTACT: JENNIFER RAYNER 0428 214 856


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