CEDA- 2016 Economic and Political Overview in Melbourne
Can I begin by acknowledging the traditional owners of the land on which we are gathered – the Wurundjuri people – and pay my respects to their elders, past and present.
Can I thank Fabienne representing the sponsors, Standard and Poor’s, and for her warm introduction.
Can I also acknowledge
- Kelly O’Dwyer – Federal Assistant Treasurer and Minister for Small Business.
- My West Australian counterpart, the Treasurer of Western Australia, Dr Mike Nahan
- Peter Reith, Former Deputy Leader of the Liberal Party of Australia
- And the former Premier and Treasurer of our State, John Brumby.
Thank you also to Professor, the Hon Stephen Martin, Chief Executive of CEDA for inviting me here today, to provide an update on the Andrews Government’s thinking as we approach our second budget.
Today is also a great opportunity to talk a bit about the way we’re undertaking the task of running the State’s economic strategy in a modern Labor way.
That is, how we’re setting about developing a sound and responsible budget…..
But more importantly why we’re focused on reform and delivering economic opportunity to those across the community who need it most.
Now, in setting the scene I think it’s worth acknowledging the journey the Victorian economy has been on over the course of the past few years.
If I had been standing up here making this speech as little as 3 years ago, I would have been talking to you about the significant challenges facing the Victorian economy.
It would have been a speech made at a time when respected economic commentators like Tim Colebatch were publishing articles with titles like “Victoria slides into recession along with South Australia and Tasmania”.
It would have been a speech made against a back drop of a high Australian dollar putting pressure on Victorian exports, falling business investment and the highest unemployment rate on the mainland.
It is true that our economy was feeling the effects of the mining boom and the spill overs associated with record levels of capital investment into the mining states.
It is also true however, that these effects were exacerbated by unnecessary cuts to government investment both in services and vital infrastructure.
But in just 3 short years, the game has changed considerably.
As I stand here today, the economic environment is much different.
Many challenges remain but the opportunities are increasingly more abundant.
The effects felt here in Victoria of what became known as the “two speed economy” have dissipated, and in many respects have inverted.
As global demand for Australian resources has eased, the Australian dollar has come off to a level that has delivered a more competitive edge for our exporters.
What we have now is a Victorian economy that’s growing faster and stronger than any other in the country.
Population growth at 1.7% a year is the strongest in the country.
Business investment is improving – up 10.5% over the last year.
And most importantly, jobs are being created.
To put the jobs story into perspective, during the full four year period of the previous Coalition government – running from the end of 2010 through to the end of 2014 – a little over 96,000 jobs were created.
By contrast, in only the 15 months since we were elected, over 68,000 jobs have been created.
Now it is a bold Treasurer that stands up and takes full credit for singlehandedly reversing the fortunes of an economy worth around 360 billion dollars – and I’m certainly not proposing to do that today.
I will however make the point that this government has – from day one – taken the view that we must play an active role in driving economic growth.
The first budget I handed down pursued a clear fiscal strategy focused on three principal objectives:
First, delivering on our election commitments;
Second, keeping our expenditure comfortably below our revenue forecasts;
And third, maintaining strong operating surpluses while keeping net debt below what we inherited.
As we move toward our second budget we’re building on this strategy.
We’re focusing on the new challenges and opportunities that are being created.
Now I’d like to briefly unpack some of the key drivers of current economic conditions here in Victoria.
As I’ve just mentioned, what we’re seeing is strong population growth combined with increased competitiveness from a weakened dollar emerging as two of the prime forces driving the State’s economy.
The charts I’m going to show outline the relationship between these two factors.
Firstly, population growth.
As you can see from the graph on the left, the last two-to-three years have seen Victoria pull well ahead of the national numbers.
You can see the effect of this in the chart on the right which shows that our interstate migration numbers – after dipping below 2000 people during 2012 – moved up to around 10,000 toward the end of last year.
So, this really gives you a good sense of the rate and scale of the population increase we’re experiencing.
The next chart overlays business conditions here in Victoria – as measured by the NAB in their regular survey – with the exchange rate.
As you can clearly see, the closer we get to 70 U.S cents, the better things become in the business environment.
So it’s clear we’re experiencing an increase in the competitiveness of the Victorian economy as the mining boom dissipates.
This recent statement from Moody’s ratings agency emphasises the point stating that, quote:
“the rebalancing of the country’s economy – in the wake of the fall-off in mining investment nationally, towards consumption and other forms of investment strengthens Victoria’s economic prospects, given its more diverse base and absence of mining activities”.
The net effect of this is that we’re seeing people move here for the lifestyle and the job prospects.
They’re investing in property and services which is creating opportunity for business; businesses in turn are employing more people and expanding.
In addition, companies engaged in exports – particularly in manufacturing, food and fibre and international education are enjoying a stronger position due to the currency shift.
But while this delivers jobs and opportunity, it also presents considerable challenges for governments.
And in meeting these challenges, all tiers of government have an obligation to come to the party.
Come to the party and deliver the services and infrastructure required to maintain high living standards – and drive a productive growing economy.
It’s part of the deal when you get elected.
What’s worrying me more and more however is the increasingly likely prospect that as a State government, we’re going to be alone in this effort – as the Turnbull Government shows little sign of holding up its end of the Federation bargain.
Our budget position is strong, but the reality is, roughly half of the State’s revenue comes in the form of grants from the Commonwealth Government.
For a range of reasons I’m growing increasingly concerned about the random, and ultimately unequal way in which scarce Commonwealth resources are being carved up.
The first example is the GST.
Earlier this year, I was forced to reverse out over a billion dollars in expected GST receipts across the forward estimate – all as a result of the massive revenue write down under taken by the Western Australian government in the end of year budget update.
Let’s take infrastructure funding as an even starker example:
Victoria currently receives just 9% of Commonwealth infrastructure funding – despite being home to roughly one quarter of the population.
Compare this to the 36% share that NSW currently receives and it’s not hard to conclude that things are seriously out of balance.
I might add however that despite such asymmetry in the level of financial support we receive compared to our Northern friends, we continue to outperform them.
In fact the latest economic growth figures showed Victoria up by 4.2% over the year to September, ahead of NSW which was the next best performing state on 2.6%.
Underpinning this strong aggregate growth figure are a number of very positive indicators including:
Building approvals up 20.2%
Household consumption up 2.6%
Consumer sentiment running strongly which has seen Retail trade figures up 5.8%
And importantly, as a government we’ve ensured that the State’s strong economic performance is backed by an equally strong budget position.
The most recently published figures in our 2015-16 Budget Update show our operating surplus has increased to $1.7 billion, revised up from the previous estimate of $1.2 billion.
Across the budget and forward estimates, surpluses are set to total $6.7 billion.
Net debt within the General Government sector is projected to fall to 4.4% in 2018-19 from a peak of 6.2% in 2014-15.
Expenditure growth is comfortably below revenue growth with total revenue expected to grow by 3.2 per cent a year on average over the budget and forward estimates.
And this prudent approach will be maintained through the next budget round.
As we set about the task of devising our economic plan for the 16-17 year, I’ll be making use of each and every tool in the fiscal kit bag.
This is particularly the case when it comes to infrastructure investment.
This next slide gives you a sense of what the infrastructure investment mix looks like over time:
What we can see here is that under the current settings, the budget will support considerable infrastructure investment going forward.
There will be continued investment allocated year on year to deliver growth to the State’s core capital stock (marked in blue).
There is also considerable capacity factored in for major projects going forward (marked in grey).
The white blocks I’ve included here represent the additional borrowing capacity – or headroom – available to government in future years, while under normal economic conditions remaining safely within the limits required to maintain our prized AAA credit rating.
Because it is true that when it comes to the State’s borrowing program we need hard limits.
And while I’ve included this chart to illustrate a point, I reaffirm two solid commitments with regard to this government’s approach to borrowings and fiscal strategy:
One, net debt to GSP will remain below the level inherited from the previous government; and two — it will remain consistent with levels required to maintain our AAA credit rating.
The credit rating is vitally important.
It sends a message to the business world that we are a government capable of running a responsible budget.
But we will use our balance sheet.
We have demonstrated that we are a government willing to make the hard fiscal decisions required to deliver the infrastructure ingredients this State needs to maintain its rise on the growth curve.
Recycling the State’s equity in the Port of Melbourne to eliminate suburban level crossings – and in doing so transforming the capacity of the urban rail network – is a case in point.
Now I do concede that the political noise around the Port lease transaction has been distracting, but decisions of this magnitude are never uncontroversial.
But it cannot be denied that the level crossing removal project is vital and would not be possible without strategic use of the equity held on the State’s balance sheet.
This policy decision – developed with Premier Daniel Andrews – was driven by a determination to present to the people of Victoria as a modern Labor government.
A modern Labor Government equipped with the ingenuity and wherewithal to pursue reform with a genuinely open mind.
And this mindset has been carried through our first year in government.
As we organise and assemble our fiscal tool kit in preparation for the next budget, we’re taking the same approach.
These tools include traditional revenue lines, recycled equity, and an increasing number of funding and financing innovations like value capture, social impact bonds and Public Private Partnerships.
And we must also take a constructive, forward thinking and rational approach to our borrowing program.
And we will.
Addressing the debt myth
Now I can tell you, as sure as night follows day, my political opponents – and perhaps some members of the media – will take the comments I’ve just made and run around like Henny Penny, linking Labor Governments, increased debt and falling skies.
But this next slide reveals the truth of the matter.
It reveals 2 telling points:
One – government debt bottomed-out and was maintained at its lowest levels in the State’s post-war history under the Bracks and Brumby governments (governments in which both the Premier and I proudly served as ministers); and two…
In the period since the last wave of privatisations in the 1990’s, government debt peaked under the last Coalition government.
So let’s not have this nonsense about which side of politics is somehow innately more capable of managing State debt levels.
The fact is that economic conditions, the needs of the community and a firm commitment to fiscal responsibility should determine the government’s budget strategy, and under this government they will.
Historic low rates
In fact our strong budget position has this week seen Moody’s join with Standard & Poor’s in reaffirming the State’s AAA rating.
This rating status – awarded to less that 12 sub-sovereign jurisdictions in the world – combined with unprecedented levels of supply in international capital markets – means the cost of funds to the Victorian Government is at its lowest ever levels.
This next chart demonstrates the dramatic fall in the Victorian 10 year bond rate, which has dropped well below the sharp dip experienced during the GFC, down to just 2.9%.
So this begs the question – how best to utilise this unique position in the face of such strong increase in demand on the one hand, but such uncertainly from our Federal colleagues on the other.
Now the Henny Penny fable I referenced earlier is worthy of another mention here.
Worthy in the sense that I fully expect that simply posing this question will prompt a noisy and predictable response from the aforementioned minority of partisan fiscal alarmists.
Any talk of utilising this access to such low cost funds is sure to be met with apocryphal claims that the AAA rating will be lost, the State’s interest bill will blow out and the sky will surely fall.
To give you some context on our interest obligations – the Commonwealth’s interest expense on debt averages 4.3% of total expenses – while ours here in Victoria averages just 3.8%.
So it’s high time that this kind of lazy contribution to the public debate is called out for what it is. Complete rubbish.
The fact is, the credit rating agencies themselves – along with just about every respected economic opinion leader who has been asked – share the view that a rational use of borrowings for the right projects is critical to driving growth and productivity.
In fact, in a recent submission to a Senate select committee enquiry, Standard and Poor’s noted that:
“the cost of maintaining a ‘AAA’ credit rating may change over time, reflecting factors such as the potential multiplier effect of additional infrastructure investment on GDP….. and productivity effects of high quality infrastructure delivery.”
In other words, government investment in high quality projects has a direct and positive impact on GDP.
Stronger GDP means an increased ability of the economy to support public borrowing, which reinforces the credit rating.
What is a credit rating after all, other than a measure of our capacity to maintain debt
In rounding out these comments I’d like to return to where I began.
Things have, and will continue to, move quickly in the Victorian economy.
And we will continue to be presented with challenges and opportunities in equal measure.
If the last few years have shown us anything, it is that the combination of a diverse national economy and an increasingly volatile financial climate internationally will continue to test us.
In response, our obligation as a modern Labor government is to lead and to deploy our resources responsibly — and always in the interests of present and future generations of Victorians.
In the words of this Nation’s greatest economic reformer, Paul Keating:
“leadership has always been about two main things:
imagination and courage”.