Our budget’s centrepiece is balance sheet repair.
It addresses our accumulated deficit in public assets. Years of obsession with public debt have taken governments’ eyes off our neglected public assets. Over the last five years public infrastructure investment has fallen by 37%.
We have severe deficits in transport infrastructure — public transport, railroads and national highways. We lack the infrastructure we need for a smart and competitive economy: as the Minister for Communications has warned, Australia now holds the world’s 40th place in internet connection speeds. Our energy infrastructure belongs to an era when people believed coal to be good for humanity. If we are to meet 2030 target of 100% renewable energy we need new transmission and distribution systems to allow entrepreneurs to develop our untapped solar, wind and geothermal resources.
The overwhelming majority of Australians think that the nation needs a better plan for its long-term future. We have listened. The productive infrastructure, research and education investments in this budget are at the heart of a long-term plan for Australia to adapt and thrive through an era of rapid and challenging economic change.
We have a timely reminder of the weakness of our public balance sheet – our common wealth – in the recently published work Governomics: can we afford small government? As its name suggests, we have paid dearly for the “small government” obsession. Its authors point out not only our deficits in hard infrastructure, but also in other assets that do not so show up on our balance sheets, particularly education and research and development.
In preparing this budget we have been mindful of the risk that the economy could be plunged into recession. But for population growth, Australia would already be in recession. The Reserve Bank clearly understands this risk — as a former treasurer once said, when the Reserve Bank has to keep cutting interest rates, “it is because the economy is struggling”.
Some say we should rely on monetary policy to stimulate the economy, but it is slow to act, and loose monetary settings lead to share and real estate speculation. Our government rejects the irresponsible suggestion that consumers should go on a spending spree and that tax-subsidised investors should push up house prices even further. We already have an alarmingly high level of household debt and a chronic deficit on current account.
But, just as the government of the day responded to a looming recession in 2008, we are now responding responsibly and decisively. Our balance sheet repair is based on a two-pronged economic strategy: to restore our public balance sheet and to stimulate the economy. As the chief economist of JP Morgan says, “in a world where private saving rates are very high, interest rates are very low … this is a world in which governments can make a really big contribution, because it can borrow at very generous terms, and it can do so in a co-ordinated, well-organized way”.
We plan to make this big contribution. Across all three tiers of government our debt is a little below 25% of GDP; we could safely double that provided we invest the proceeds wisely and have an assured plan for repayment. Germany, another of the few countries enjoying a AAA credit rating, has government debt of 49% of GDP.
Our initial capital for balance sheet repair, at $150 billion, is a modest 9% of GDP. It will be raised as a set of infrastructure bonds, with interest rates at 1% above the government’s long-term bond rate, or 3.99% on today’s figures. Those bonds should prove attractive for those who want a secure asset in their portfolios, and who seek to have a personal financial stake in our common wealth. Unlike stimulus based on quantitative easing or loose monetary policy, it ensures funds are brought into circulation in real investment, with an initial priority of making use of spare construction and engineering capacity that could otherwise go to waste as the mining boom winds down.
Servicing that debt will add $6 billion to our interest bill, which will easily be covered in Operation Revenue Repair, details of which are in a separate statement. It is has three planks — a modest start so as to sustain a stimulus in the short term and to give people time to adjust, a move towards a fairer and more efficient tax system, and the assurance to the financial community that future revenue is secured in legislation. That’s quite apart from our confidence that this productive infrastructure will generate sufficient taxation revenue to service the its debt.
As an example of the approach in Operation Revenue Repair: over 10 years the real rate of fuel excise will rise from the present 39 to 100 cents, bringing Australia’s fuel prices up to the levels of other developed countries, while allowing people time to renew their vehicle fleet. That measure will eventually boost annual revenue by $30 billion. But the main contribution to Operation Revenue Repair will come from alleviating the burden to public revenue of tax expenditures and related concessions — superannuation tax exemptions, subsidies to private health insurance, favoured treatment of short-term capital gains and highly geared investments, capital gains, etc.