20 July 2017
Speech - #2017018, 2017

‘Living within our means’, Address to the Melbourne Institute Economic and Social Outlook Conference, Melbourne

Check against delivery

Thank you for the invitation to once again to speak at this important forum.

The Turnbull Government is governing for everyone. Not for any special or sectional interest, whether they be big business or unions, nor to any particular section of the crowd.

It is our job to govern for every single Australian, ‘for all of us’ as John Howard rightly said many years ago.

That is our mandate, that is our responsibility and that is what we are doing.

This year’s conference theme acknowledges the new political environment in which we must govern.

In recent years conventional politics has been turned on its head.

As I observed in this year’s Budget, frustration with their own economic circumstances in a post-GFC world has led many Australians to feel disconnected.

To them, politics as usual means business as usual and they are looking for something different from politics and preferably better.

This has convinced many that Canberra is simply not relevant to them, nor impacts on their day-to-day lives.

They rightly want action. But more than that, they want to know that the Government gets it and is on their side, is attuned to the issues that matter to them, is fighting in their corner as they confront the many challenges they face each day, in their homes, in their families, in their businesses, in their workplaces and in their communities.

Populism is the great temptation in this new political environment.

One that the Turnbull Government has and will continue to resist.

Our response as a Government not to chase votes through superficial populism or ideological grandstanding, but seek to earn support by getting results.

Our agenda is to practically address the problems that Australians are facing, responsibly work out the solutions and get on with it.

Keeping Australians safe, growing the economy to support more and better paid jobs, the cost of energy, the cost of housing, the cost of doing business, the cost of child care, guaranteeing the essential services that Australians rely on like Medicare and schools, and ensuring that the Government lives within its means.

And we are doing this consistent with our values and principles as Liberals and Nationals.

In this new political environment, a responsible Government, and political Party for that matter, doesn't chase votes, it earns them. This takes longer, but it also lasts longer.

As I said in this year’s Budget, we will therefore continue to make the right choices. To promote fairness, to strengthen our security and deliver opportunity for all Australians, and thereby secure the better days we know are ahead.

There is clear momentum starting to build again within our economy; a sign that confidence is rising within boardrooms, on shop floors and around kitchen tables across the country.

The pick up in positive data we are beginning to see, combined with the measured optimism echoed from both official organisations like the Reserve Bank and the IMF, reinforces our belief that better days are ahead for Australians.

This is not some pipe dream or mirage on the horizon, but an emerging picture that can give us confidence.

I have always maintained that for our economy to return to trend growth, as this Government and the Reserve Bank have forecast, we need to see businesses doing better than they have been.

While it is true that in the past two quarters of national accounts data -  company profits have lifted in aggregate, principally on the back of improved commodity prices - for the prior three years company profits declined on average by 0.8 per cent per year. That compares to 11.8 per cent growth ten years prior.

Greater confidence, greater profits, greater investment - are the prerequisite for more and better paying jobs.

That is why it is encouraging that business conditions are at their highest level in almost a decade, back to pre-GFC levels, with the NAB Monthly Business Survey for June giving a very strong assessment of the mood within a broad section of the economy.

And according to the NAB quarterly data released today, business conditions are now running at +13 points for the June quarter, well above the long-run average of +2 points.

These results show businesses were enjoying a marked increase in demand for their stock, which has pushed sales and profits higher and allowed them to invest in more staff.

Their confidence in where the economy is heading will in time allow businesses to release the handbrake on their own capital spending.

Capex expectations in the NAB survey remained strong.

Like NAB’s Alan Oster, I agree that “we continue to be pleasantly surprised by just how upbeat the business sector is’ and that “we are now starting to see positive spillovers from the business sector to the broader economy.’’

Thankfully, this renewed optimism is particularly evident in the retail sector. In May, we saw retail trade rise 0.6 per cent to be up 3.8 per cent over the year - with April’s result the strongest in two and a half years.

But perhaps there is no greater indicator of the underlying strength in the the economy than the jobs market.

Last month, 62,000 Australians went out to find a full-time job, and found one. This is a tremendous result, and now pushes the total number of jobs created in the 2016-17 financial year to over 240,000.

This was the largest increase in jobs in a financial year since before the GFC, taking the Coalition Government’s track record on job creation - to over 700,000 jobs since we came to office.

These positive signs are being increasingly recognised. The Reserve Bank Board meeting minutes released this week reflected the positivity. In fact, they even used the word ‘positive’ eight times!

The board welcomed the recent improvements in labour market data, noting the pick-up should support a rise in household income growth. They also noted that indications for the June quarter have been positive, despite the impact of Tropical Cyclone Debbie.

But it is not just the domestic economy that gives us confidence. Global economic activity is also on a firmer footing.

The improvement in world industrial production has been led by the US, Japan and emerging Asia. The same is true for world trade, where the recovery has been a little broader.

Chinese GDP growth has remained strong through the first half of 2017, with through the year growth standing at 6.9 per cent over the year to June 2017.

As always, this is not to say that there are not risks.

The impact of the unwinding of the extraordinary monetary policy accommodation we have seen in several major economies will have to be closely monitored, but the fact that it is occurring at all is a testament to a stronger global economy.

One should also be cautious in making assumptions about what this may mean for rates here in Australia. Our Bank was far more conservative on the way down. Economies like the US, UK and Europe have a fair bit of catching up to do, before they return to the levels where we have now rested for the past 11 months.

Recent temperance in some of our more overheated housing markets, in line with measures introduced by the regulators, also give reason for confidence in what has been a period of prolonged stability on rates.

Despite the improvement in the data we cannot take the prospect of better days ahead for granted.

These better days must be secured.

In the twelve months since the last election the list of our legislative achievements mean the Turnbull Government has a pretty good story to tell.

Remember, this was meant to be the impossible Senate, the one that would give our Government nightmares, denying any progress we might dare to accomplish.

The prophets of doom said we would struggle to govern with a one-seat majority in the house and a particularly parlous Senate. It would be chaos. Calamity. And most importantly, it would leave us treading water.

We have passed 126 separate pieces of legislation in the year since the election, including tax cuts for small and medium sized businesses, personal income tax cuts, more affordable child care to help Australian families, reigning in union thugs by restoring the ABCC and making multinationals pay their fair share of tax.

That is almost two pieces of legislation passed for every single sitting day in the past 12 months.

And since early May, we have passed 17 bills to implement our budget. This Budget is passing the Senate.

That means record spending of $23.5 billion into public and private schools to deliver genuine need-based funding for all students.

It means guaranteeing Medicare for the millions of Australians that rely on essential health services.

It means further backing our 3.2 million small businesses, who have already received the biggest tax relief for small business in decades, by allowing them to depreciate their assets instantly.

It means a comprehensive housing affordability package that is already bearing fruit, supporting first-home buyers and renters alike, increasing housing supply and taking care of the homeless.

It means a $75 billion investment in building Australia’s economic infrastructure, and putting downward pressure on energy prices by keeping our gas at home, investigating retail pricing behaviour, investing in energy production like Snowy 2.0 and new energy technologies and making our regulation more efficient.

Action is what truly matters. And that is what the Turnbull Government is delivering - with outcomes that directly benefit Australians.

Our beliefs and our values are being demonstrated by our actions - cutting taxes, building infrastructure, guaranteeing essential services, respecting both today’s and tomorrow's taxpayers and moving ever closer to restoring the budget to balance.

None of this is being achieved at the expense of the Government living within its means.

It is true that we have copped some flack based on the false notion that the budget I delivered in May was excessive in its spending and missing the budget repair measures required to rein in debt.

Let me bust that myth in three definitive ways.

Firstly, since the election a little over a year ago, we have implemented $34 billion of budget repair measures that is making a real difference.

Signed, sealed and delivered - $34 billion of legislated budget repair measures that will help propel the budget back to a projected balance in 2020-21.

These are not paper savings ora wish list, but legislated budget repair measures.

An important principle of living within your means is that everyday expenditure, such as pensions and welfare should be met by everyday revenue, such as taxes.

Our budget repair achievements mean that growth in gross debt has fallen by two thirds since we came to Government. It is true that gross debt has now passed the $500 billion mark, you cannot turn this debt tanker around quickly or painlessly.

However, it is also true that had we kept spending and borrowing at the rate Labor was, we would have passed that mark eighteen months ago, and would now be approaching $1 trillion.

Under Labor gross debt increased by 474 per cent, and more than 70 per cent of that debt was for everyday spending on welfare, schools and health funding.

From 2018-19, for the first time in a decade we will no longer as a government be borrowing to meet everyday expenses like welfare, education and health.

Net debt is budgeted to peak in 2018-19 at 19.8 per cent of GDP or $375 billion and thereafter fall to 8.5 per cent or $256 billion over the medium term. In other words, debt falling over the course of the budget and forward estimates.

Secondly, we tried to push through a further $14.7 billion worth of budget repair measures still remaining from the 2014-15 and 2015-16 budgets, but were blocked at every turn by a Senate that does not share the Government’s commitment to budget repair. 

We were faced with a clear choice - accept the reality and find another way to deal with the budget repair task - or deny the reality, whinge about the Senate and lose our AAA credit rating.

We chose the responsible path.

We hit the reset button on the budget and worked with the Senate to produce budget improvement measures, including revenue measures, that are now passing the Senate.

As a result we continue to retain our AAA credit rating from all three major agencies.

Thirdly, and more importantly, spending growth under this Government is the lowest of any Government in at least the past fifty years.

Since we were first elected and over the budget and forward estimates, our annual average spending growth is less than two per cent.

Under Rudd-Gillard-Rudd, real spending growth ran at an average of 4 per cent. This was despite having a two percent spending growth cap.

Kevin Rudd said when he inherited a spending to GDP ratio of 23.1 per cent in 2007 that ‘this reckless spending had to stop’. When he left office the ratio was 25.6 per cent, well above the long-term average. We have managed to claw that back down to 25.2 per cent in the current budget, despite the baked in legislative spending introduced in the Rudd-Gillard -Rudd years.

This reckless spending is now being stopped.

Even under the Howard Government, real spending growth ran at an average 3.3 per cent, with general public service growth broadly flat.

I note though for those who think we are big spending Government by comparison, that we have reduced general public service spending by more than 7 per cent on average per annum in real terms.

However, the pre-GFC environment faced by the Howard Government was very different. They exercised spending restraint in a comparatively revenue rich environment. Real revenue growth under the Howard-Costello Government ran at an average of 4.8 per cent, enabling them to bring the budget into surplus and pay off the debt.

The average receipts to GDP ratio for the Howard Government was 25 per cent.

It is hard to say no when you are delivering surpluses and the debt has been paid off. But the Howard-Costello Government did.

Our challenge has been to restrain expenditure in a revenue weak environment, to flatten our cost curve below our revenue curve.

Over the past three years real revenue growth has averaged 2.4 per cent and this is projected to increase to 4.4 per cent on average over the forward estimates.  This brings the average receipts to GDP including budget and forward estimates period to 24.1 per cent.

As a result, like the Howard-Costello Government, we have been able to ensure that expenditure growth has been less than our revenue growth.

Over the last fifty years only two Governments have achieved this - that is called living within your means.

Lower growth in spending from a smaller percentage of tax revenue to GDP: That is not a tax and spend Government. That is not a Labor Government. That is a Liberal-National Government doing what we always do - in whatever the economic circumstances we face - living within our means.

That is why we remain on track to get the budget back into balance in a sensible timeframe, projected for 2020-21.

That is why have worked to find a practical way through to getting a balanced budget and protecting our AAA credit rating.

Another practical factor we have taken into account in our fiscal policy settings is to ensure we maintain a responsible pace back to a balanced budget.

You don’t want the medicine or the treatment to kill the patient.

With an economy coming off a once in a lifetime mining investment boom, a thirty per cent fall in our terms of trade, flat wages growth, weak global growth, a fragile labour market, and a halving in the share of mining investment in our economy, context matters when framing fiscal policy.

Our fiscal policy must also ensure the Government addresses the needs of a growing population, that we are investing in our economic infrastructure, that we maintain essential services and income supports, rebuild our national security and defence capabilities in a dangerous world after six years of neglect, and give businesses access to the resources required to expand and operate in globally competitive markets.

We have adopted a pace of fiscal consolidation that the OECD has classed as ‘appropriate’ and the IMF has supported and deemed ‘appropriately prudent under the current circumstances’.

A sensible, balanced fiscal policy is one that helps support the economy through good times and bad. One of the key reasons that the Australian economy survived the global financial crisis so well was because of the hard work the Howard-Costello Government had done in balancing the books.

Because that is one of the main ways that good fiscal policy supports the wider economy. It is about ensuring that when shocks hit the economy or when the difficult days come, you have what RBA Governor Philip Lowe refers to as ‘buffers’ in place to absorb the shocks and help you through.

Finally, I wanted to note that in addition to getting our fiscal settings  right that it is important we continue to ensure that our banking and financial system is unquestionably strong, unquestionably fair and unquestionably competitive.

And on this issue, we have been getting on with the job as well.

Yesterday APRA announced new measures implementing the Government’s response to the Murray Inquiry, on new capital requirements.

I note that all the major Banks have indicated that they are well placed to meet the new requirements.

This puts the regulatory framework for our banking and financial system at the leading edge when it comes to ‘unquestionably strong’, supporting our banks to be amongst the most stable and resilient in the world. This is where we want to be.

This will be followed up by the introduction of our crisis  management tool-kit legislation when we return to Parliament after the winter break.

This week we released further draft legislation to give all licensed lenders the opportunity to classify themselves as a bank, by removing the strict requirement for them to have $50 million in capital.

There are around 58 lenders in Australia that would be entitled to be called a bank under these changes. But more importantly, the door is suddenly open to a raft of online lenders who could enter the market.

We are also in the process of reviewing the 15 per cent ownership restrictions for new entrants to the banking sector, which we believe will facilitate the entry of innovative new players.

When the UK opened its doors to new banking entrants through changes in regulations, 56 new “Challenger” banks were created, with that rapid increase in competition forcing home loan rates down, and deposit rates up.

The big banks simply had to follow their lead, or risk being overpriced in a very competitive market.

In this year’s budget, we announced the introduction of an open banking regime in Australia that will give customers ownership of their financial data and reduce the costs of banking products.

It will empower customers to seek out products better suited to their needs - saving them money and allowing them to better achieve their financial goals. It will also create further opportunities for innovative business models, helping challenger banks drive greater competition and contributing to overall productivity.

Tonight I announce the appointment of Scott Farrell to lead the Open Banking Independent Review. Mr Farrell is a partner at King & Wood Mallesons and has over 20 years’ experience in financial systems law. He knows the FinTech sector and is a member of my FinTech Advisory Group.

I am also releasing Terms of Reference for Scott’s review, which set out that Scott is to provide the Government with a timeline and implementation model by the end of the year, including outlining the data sets to be disclosed.

To drive greater competition in lending products, the Turnbull Government will also legislate a mandatory comprehensive credit reporting regime if credit providers are not reporting at least 40 per cent of their data by the end of 2017.

There will also new protections for consumers on credit cards. Outlawing unsolicited offers, requiring offers to be based on full repayment not minimum repayment and making it easier for consumers to cancel their cards.

In the Budget we also announced our new Banking Executive Accountability Regime, giving APRA the power to monitor and act swiftly against executives who act inappropriately.

In the most serious cases, banks will be hit with a $200 million fine if they fail to rein in reckless behaviour.

This backs up the additional powers and resources we gave to ASIC last year, to deal with malfeasance in the banking and financial sector

In addition, I have tasked the ACCC to establish a dedicated unit to undertake regular inquiries into specific financial system competition issues, to bring much needed scrutiny to the economy’s largest sector; the first of which will be a one-year price inquiry into residential mortgage products.

This is in addition to the Productivity Commission’s review of the state of competition in the financial system.

Consumers will also have access to new one-stop shop Financial Complaints authority that will enable them to have their cases heard and for binding resolutions to be reached, without having to engage in a lawyers’ picnic. This will be followed up by our response to the Ramsay review expected to be received next month.

Looking further ahead, we are looking at streamlining Know Your Customer requirements, to make it easier for Australians to shift between accounts and create more efficient and secure ways to develop digital identities.

And we will continue to hone our regulator sandbox to allow FinTechs to test a wider range of products and services in a safe environment, without the need for licensing.

Conclusion

The Turnbull Government I am a part is unapologetic in our pursuit of economic growth. Everything we do is working to achieve this goal.

We are also practical about how we must work to get results and earn support in this new political environment.

We are determined to not waste a day.

The budget I delivered in May, that is passing the Senate, is implementing our national economic plan.

The outcomes we seek for the Australian people have been clearly set out.

More and better paying jobs. Guaranteeing the essential services you rely on. Putting downward pressure on rising costs of living. Ensuring the Government is living within its means.

Thank you.