The platform I put forward to the Australian people was for a Government that anticipates the challenges of the future - and a government that has a plan to tackle these challenges head on.
The future of the national economy is core business for the new Government of Australia.
A Government committed to responsible economic management.
A Government equally committed to investing in Australia's long term economic future.
And a Government prepared to take hard decisions on the way.
And the purpose: to improve the lives and livelihoods of Australian working families.
I am an unapologetic optimist about our long term future
But the truth is the challenges we face are formidable.
There is absolutely nothing guaranteed about our economic future.
We can't rely on luck.
In this country we must make our own luck.
And to do that we must plan hard for it and work hard for it.
Over the last six months, the global economy has entered into uncertain times.
On the domestic front, we face the underlying challenge of how long we can expect Australia to enjoy the best terms of trade this country has had since the early 1950s.
Nonetheless, despite more than five years of unprecedented global economic growth, and a record terms of trade, we have experienced three years of net exports detracting or making no contribution to our growth.
We have also faced declining productivity which of itself impairs our international competitiveness.
And for the last couple of years, slowly but steadily inflation has once again let loose in the Australian economy - resulting in inflation numbers for Australia that are significantly above most OECD economies.
And overarching all these challenges are the mega changes represented by the rise of China, the rise of India and the unfolding economic and environmental reality of climate change.
Therefore the national government faces a very full economic policy agenda indeed.
Reinforcing the need for responsible economic management combined with a clear cut strategy for investing in Australia's long term economic future:
* Where the macroeconomic fundamentals are strong;
* Where we build world class education, innovation and infrastructure to drive long term productivity growth;
* Where we intelligently invest in the industries of the future.
And driving all of these concerns are the underlying needs of Australian working families, both now and into the future.
Today, I would like to talk about the global economic environment, the nature and causes of the inflation challenge that we face, and to outline the Government's five point plan to fight inflation.
It goes without saying that Australia's economic performance is directly shaped by the state of the global economy.
In economic policy there are factors within our control.
Just as there are factors beyond our control - factors to which we must remain alert and vigilant in terms of our own economic policy settings.
We are experiencing uncertain times in the global economy.
The US economy is weakening as a result of a severe downturn in its housing market and associated troubles in financial markets.
The Chairman of the US Federal Reserve recently noted that:
“the baseline outlook for real activity in 2008 has worsened and that the downside risks to growth have become more pronounced”
Just two days ago, the Governor of the Reserve Bank, Glenn Stevens delivered a speech noting:
“the US now faces a period of below-average performance as the problems in the housing market are digested”.
There's no doubt that developments in the US housing market pose risks to the global economy, as well as our own.
Already higher financing costs in global financial markets are having real impacts on Australian families through increased mortgage rates imposed by Australia's commercial banks.
Families and businesses who have endured ten official interest rate rises in the last five years certainly won't welcome these rate rises, and neither do I.
The government and the economy's regulatory authorities will continue to monitor these developments carefully.
Consensus forecasts have stated that, in part due to developments in the US economy, economic growth is expected to slow in Japan and Europe.
These developments pose significant challenges for the global growth outlook and for the Australian economy.
But they come at a time where strong economic growth in the Asia-Pacific region is continuing to drive global demand for our mineral and energy resources.
In 2007, emerging economies including China, India, Russia and Brazil, drove two-thirds of the growth in the global economy.
The G3 economies of the US, Japan and the Euro area contributed less than a quarter of global growth.
The World Bank in its Global Economic Prospects publications noted that:
“Resilience in developing economies is cushioning the current slowdown in the United States”.
China is expected to continue to grow at double-digit rates over the next two years.
And China's growth momentum is being increasingly sustained by domestic forces.
Over coming years, developments in China will increasingly shape both global and Australian economic conditions.
The Indian economy has become one of our fastest growing export markets and is expected to continue to post impressive rates of economic growth.
Combined, China and India accounted for around 40 per cent of Australia's export value growth in 2006-07.
Emerging economies such as Russia and Brazil are also expected to continue to contribute to global growth.
The economic expansion within our region has only heightened the need for careful management of our domestic economy.
And the most pressing economic challenge domestically is inflation.
Australia therefore faces conflicting economic currents:
* A global economy (led by the United States) which appears to be slowing.
* An ongoing terms of trade boom driven by Asia Pacific economies.
* And significant domestic inflationary pressures at home.
The inflation problem we currently face has not emerged overnight.
The truth is it has been building for some time.
It cannot be solved overnight.
But we can start immediately.
And we have.
For one and a half years, measures of underlying inflation have been running at towards the upper end of the Reserve Bank's 2 to 3 per cent inflation target band.
This has made the task of monetary policy much, much harder.
Official interest rates have increased ten times since May 2002, of which six of these increases occurred in the last three years.
The minutes of the most recent Reserve Bank Board meeting show that the Board remains concerned about the outlook for inflation, despite recent monetary tightening.
Just this past Friday, in London, Governor Stevens reiterated his concern about inflationary pressures, noting that inflation “is likely to be uncomfortably high in the near term”.
The inflation challenge we face today is a direct consequence of policy neglect in the past, compounded by the terms of trade boom.
Strong global demand for our commodity exports has seen our terms of trade rise to 50 year highs.
This has provided a significant stimulus to our economy - boosting employment, company profits and incomes.
The Reserve Bank has estimated that it has boosted real national income by around 8 per cent - or the equivalent of around $80 billion in the last year alone.
But at the same time it has brought our economy close to its limits of capacity.
With a highly employed economy, demand created by strong growth in income has generated inflationary pressures.
Put simply, demand growth has outstripped increases in the supply capacity of the economy.
This situation was not helped by lax fiscal policy.
Past fiscal policy settings applied insufficient restraint on unproductive spending.
Since 2004-05 Commonwealth spending has grown on average at over 4 per cent per year in real terms.
This is the fastest growth rate for any four year period in the past decade and a half.
We have the right institutional framework to deal with pressures on monetary policy - an independent central bank with an inflation target.
Shortly after taking office, the Governor and the Government announced a number of measures to enhance the independence and transparency of the Reserve Bank, through a new Joint Statement on the Conduct of Monetary Policy.
The new Statement re-affirmed the Government's commitment to the Reserve Bank's 2 to 3 per cent inflation target.
It strengthened the Reserve Bank by enhancing the statutory independence of the Governor and Deputy Governor.
It also incorporated new transparency measures in the Board appointments process, the publication of Board minutes, and a statement following each monthly meeting, irrespective of whether the cash rate was changed.
We recognise the importance of monetary policy for managing demand, but fiscal policy also has a role to play.
It should not be making the job of the Reserve Bank harder.
At a time when the economy is pushing up against the limits of its capacity, we need to be more alert to the impacts of fiscal policy on demand.
Capacity constraints are holding back our economy.
The labour market is the tightest it has been in a generation with unemployment at around 33-year lows.
And while overall participation is at record highs, Australia ranks in the bottom half of OECD economies for prime aged men and women.
Coupled with acute skills shortages in many industries, labour shortages are pushing up the cost of labour.
A lack of investment in skills has also seen weak productivity growth in recent years. Strong growth in wages, without offsetting improvements in labour productivity, adds to price pressures.
A lack of past infrastructure investment has also constrained our ability to boost supply.
With record levels of capacity utilisation businesses have been unable to maximise the opportunities and respond fully to strong demand.
A range of specific factors have also been pushing inflation higher.
Oil prices are being pushed to record highs by ongoing geopolitical tensions, strong demand and supply concerns.
And here at home, the ongoing effects of our devastating drought are leading to higher food prices.
These, of course, are factors over which we have little control.
But with China and India likely to continue to grow strongly, demand side pressures are likely to continue to influence the Australian economy, despite a weakening in the US economy.
This emphasises the need to direct all arms of economic policy towards the things we can influence - to take the pressure off demand, reduce costs in the economy through regulatory reform, and further boost the supply side capacity of the Australian economy to alleviate inflationary pressures.
That's why our Government in its earliest days has declared war on inflation.
This will be a tough fight, but unless we engage this fight, the consequences for businesses, employees and families will be very negative indeed.
We recognise that with an economy operating at close to full capacity the only way we will be able to achieve sustained improvements in incomes is to direct our policy efforts towards expanding the productive capacity of the economy.
While they presided over unprecedented boom times off the back of record terms of trade, the Howard/Costello Government failed to make critical investments in skills and infrastructure.
Over the last three years the Reserve Bank of Australia warned on more than 20 separate occasions that skill shortages and capacity constraints were threatening growth and contributing to inflation.
The Howard/Costello Government's failure to heed these warnings allowed inflationary pressures to build.
Today, measures of underlying inflation have been running at around 3 per cent - the top of the Reserve Bank's 2 to 3 per cent inflation target band.
The Howard/Costello Government failed to act on their inflation problem.
Instead, they ignored it.
Not only did they ignore it, through their inaction they compounded the problem.
Thereby creating risks to our long term economic competitiveness.
Following the release of the of June quarter inflation figures in July 2007, the former Treasurer declared that:
“...inflation is right where we want it”
This came at a time when measures of underlying inflation were running at 2.8 per cent - at the upper end of the Reserve Bank's 2-3 per cent target band.
But one month later the Reserve Bank was forced to tighten monetary policy because of a heightened inflationary environment.
The inflation challenge we face today is very much the Liberals parting gift to the Australian economy.
A decade of neglect of the twin investment deficits in infrastructure and skills - has meant our economy has been ill prepared to deal with the demand surge flowing from the terms of trade boom.
For over a decade, the past Government did not put forward a strategic vision for the tax system.
For over a decade, Government spending was not directed to the challenges on the horizon or to boosting the productive capacity of our economy.
A surge in revenues year after year, and handouts before every election.
This has left us with an extended period of elevated inflation.
Businesses that I speak to right across the country - small, medium and large - consider finding suitably qualified employees to be one of their biggest difficulties.
The former Department of Employment and Workplace Relations identified persistent skills shortages in trades and the professions over much of the past ten years.
Our economy has also been held back as bulk commodity ships queue off our ports, urban congestion clogs up our major cities and both rural and urban areas experience chronic water shortages.
CEDA estimates that Australia's infrastructure backlog is costing us around 0.8 per cent of GDP a year in lost production - that is the equivalent of $8 billion a year.
There are few other states that have felt the impact of these deficits more than Western Australia.
Unemployment in Western Australia is the lowest of any state - at 3.1 per cent.
The growth in job vacancies in Western Australia is far higher than in any other State, with vacancies growing by 36.3 per cent over the last year, reflecting the difficulties that employers have in filling jobs.
Iron ore miners in Western Australia report that rail and port infrastructure facilities are stretched to their limits.
The consequence of this failure to address the skills crisis, to lift workforce participation and plan for the demands on critical infrastructure, has created a set of deep underlying drivers of Australia's current inflation problem.
Yet these pressures were aggravated even further by an increasingly indisciplined approach to fiscal policy on the part of our predecessors.
A Five Point Plan to Fight Inflation
The government is not in the business attributing all of Australia's inflationary pressures to the policy failures of our predecessors.
As I have already noted, a number of these pressures have been created by external factors.
But equally, responsibility must be accepted for domestic policy complacency and failure where it has occurred.
Policy failure on skills, workforce participation, infrastructure and fiscal policy are clear cut cases of neglect.
There is however absolutely no point in decrying our predecessors culpability on this unless we at the same are pointing the way forward.
That's why today, I would like to chart the way forward, and set out a broad five point plan to fight the fight against inflation.
A plan that addresses both demand side and supply side pressures on inflation.
A plan that uses all the tools available to us - both macroeconomic and microeconomic levers.
First, we will ensure the Government takes the pressure off demand by running a strong budget surplus.
This will help make the task of the Reserve Bank easier.
Second, in the period ahead we will examine all options to provide real incentive to encourage private savings.
Third, we will be unfolding our plan for tackling chronic skills shortages in the economy.
Fourth, we will provide national leadership to tackle infrastructure bottlenecks.
And fifth, we will provide practical ways of helping people re-enter the workforce and remove disincentives to working hard, to lift workforce participation.
By exercising restraint - our plan aims to do everything it can to ease the pressure on inflation and interest rates.
And for the longer term, we have a plan to deal with the chronic investment deficits in the capacity side of the economy - in skills and infrastructure.
1. Fiscal Restraint
The first part of our plan is a hardline attitude to fiscal restraint.
Prior to the election, we ran as fiscal conservatives.
With the election behind us, we now intend to govern as fiscal conservatives.
The sensible thing for government to do is not contribute to demand through excessive government spending.
For an economy that is now enjoying its 17th year of economic growth, it is prudent for the Government to be running a sizeable budget surplus.
Fiscal policy should not complicate the task of monetary policy.
It should make the job of the Reserve Bank easier, not harder.
That is why the Government is committed to strengthening the budget position as well as improving the quality of public spending.
At the time of the 2007-08 Budget, the budget surplus for 2008-09 was 1.1 per cent of GDP.
At the time of the Mid-Year Economic and Fiscal Outlook and the Pre-Election Fiscal and Economic Outlook, the budget surplus for 2008-09 was revised to 1.2 per cent of GDP.
We need to do better than that, and so long as economic conditions hold up we will do better than that.
Today I announce a fiscal target that will guide our budgetary process and decision making.
The Government aims to deliver a budget surplus of at least 1.5 per cent of GDP in 2008-09, provided growth prospects remain as currently anticipated.
This will require a determined, disciplined approach to spending and a hardline approach to savings.
Our ‘razor gang' is currently working to cut wasteful spending, and find additional savings over and above the $10 billion across the forward estimates that we have already identified.
This is a comprehensive review of spending.
Department by department, program by program, line by line.
It is essential that we spend public money wisely.
We understand that it is not just the overall budget position that matters.
The quality of government spending is equally important.
Added to this is adopting the discipline of allowing automatic stabilisers that are built into the budget to do their job.
In the current environment, this means banking upward revisions to revenue, should they occur.
It is appropriate the budget position is allowed to vary with economic conditions.
Allowing automatic stabilisers that are built into the budget to do their job will help alleviate inflationary pressures.
But getting our fiscal house in order is only a first step.
2. Private demand and saving for the future
The second component of our five point plan is Government action to foster a culture of savings.
Providing attractive incentives to save can help take the pressure off inflation, help people save for their future, and help lift national savings.
This is particularly important at a time when we face elevated inflationary pressures.
We have already proposed First Home Saver Accounts, to help young homebuyers save for the future.
The Government believes there is more to be done in the area of building a national savings culture - and we will have more to say about this in the months ahead.
3. Tackling chronic skills shortages
To support these measures - we need to deal with the critical supply side constraints of today.
The third point of our plan is to start addressing the economy's skills deficit.
Targeted investments in training will help provide labour resources to sectors experiencing chronic shortages.
At the election we put forward our Skilling Australia for the Future policy, to help fund the delivery of 450,000 training places over the next 4 years, including 65,000 extra apprenticeships.
And we have already gotten to work.
Last week, I announced that the first 20,000 of the additional training places will be available by April this year.
I have also asked the Deputy Prime Minister to consult with relevant state and territory organisations and Industry Skills Councils to seek their urgent cooperation in allocating the first tranche of training places to industries experiencing the most acute shortages.
The mining and construction sectors - so pivotal to West Australian economy - are likely to be prime candidates.
The mining industry is currently experiencing the highest vacancy to employment ratio, with around 3.7 vacancies for every 100 people employed in the industry.
Wages growth is strongest in the mining industry, at 5.4 per cent through the year to the September quarter 2007.
The construction industry is also experiencing labour constraints.
Wages growth in construction is at 4.8 per cent through the year to September 2007. The industry also has the highest proportion of employees with a certificate as their highest qualification, at 45.7 per cent.
Meaning that it will benefit greatly from additional training places at certificate level.
The government also announced before the election that it will establish Skills Australia as an independent statutory body to advise the government on skills shortage issues.
Given the urgency of the challenge, new legislation to establish Skills Australia will be fast-tracked and brought before Parliament as a priority.
The government will also shortly consider draft guidelines for the Trades Training Centre in Schools program, with schools able to apply for funding from March 2008.
The Program will give all students the best chance of finishing school and moving into the workforce.
The nation also needs to deal with real economic challenges represented by current skills shortages through the relevant skills categories of the Australian migration program.
We will also deliver further measures in higher education to address skills shortages in maths, science, nursing and early childhood education.
4. National leadership to tackle infrastructure bottlenecks
The fourth point of our plan is to tackle infrastructure bottlenecks.
Infrastructure is the other major area where our economy is facing a deficit that has not been addressed.
Bottlenecks in our supply chains and urban congestion slow our economy down - and are in large part the product of poor leadership, planning and coordination of critical national infrastructure.
Almost immediately, the Government will move to establish Infrastructure Australia.
Infrastructure Australia will undertake an audit of national infrastructure in the areas of transport, energy, communications and water.
It will develop national infrastructure priorities.
And it will provide advice on policy and regulatory reforms to improve the efficient use of infrastructure networks.
In keeping with this, the Government will also work closely with its state and territory counterparts to develop appropriate national frameworks for infrastructure delivery.
An Infrastructure Working Group has been established by COAG with the dual objectives of better coordination of infrastructure planning and investment across the nation; and identifying and removing blockages to productive investment in infrastructure.
Well targeted, integrated, efficient infrastructure will help boost our productivity - ensuring that goods and services get to market as quickly as possible, and people get to and from work with minimal delay.
5. Lifting workforce participation
The fifth element of our plan to fight inflation is to put in place practical measures to help people re-enter the workforce and remove disincentives to working hard.
The Government recognises the importance of participation in lifting the productive capacity of the economy - this means knocking down the barriers which prevent people who would like to, from entering the workforce.
Ensuring that parents have access to affordable, high quality child care is one vital way my Government will support the workforce participation of parents with children.
From 1 July 2008 the Government will increase the Child Care Tax Rebate from 30 per cent to 50 per cent of out of pocket child care costs, covering up to $7,500 per child per annum.
This is in addition to providing support to families through the Child Care Benefit.
The Child Care Tax Rebate will also be paid quarterly rather than annually so that families can receive this assistance closer to the time they pay their child care fees.
The Government will also improve access to child care, including for working families, through the establishment of up to 260 new long day care centres on school, TAFE, university and community sites.
Almost 100,000 Australian parents indicate that they are out of the workforce due to problems with formal child care.
The Government's child care policies will help thousands of this group get straight back into work, helping to lift the productive output of the economy.
The Government's skills and training policies will also lift workforce participation.
The 20,000 skills training places which will become available in April will all be directed towards people marginally attached to the labour force.
By ensuring more young Australians stay in school for longer, Trades Training Centres in schools will also increase the likelihood that thousands of school levers are able to move straight into work.
Ensuring that hard working individuals are rewarded for the effort is also critical to enhancing workforce participation.
The Government's tax relief for working families is specifically designed to encourage people into the work force, boosting participation and productivity, and ultimately helping to fight inflation.
We recognise that people have worked hard to make the economy strong, and they need to be rewarded.
The Government believes that the best way to encourage more people into work is to provide better incentives that reward their effort.
Lifting the Low Income Tax Offset, increasing the threshold of the 30 cent rate, reducing effective marginal tax rates and genuine tax reforms (as we articulated during the election campaign) will encourage more people into the workforce in the medium-term.
Initiatives that provide better incentives to bring people into the workforce and remove disincentives to working hard are critical if we are to address the capacity constraints hampering our economy and take the heat out of inflation.
Fighting inflation is the central challenge facing our economy today.
It is the central challenge facing the Government I lead.
The truth is we have inherited a significant inflation problem from our predecessors.
We recognise that inflationary pressures have taken a long time to build and they will take a long time to turn around.
But we have begun work immediately.
Today I've announced a comprehensive five point strategy to fight inflation by:
* Embarking on a hardline approach to fiscal discipline - delivering a budget surplus of at least 1.5 per cent of GDP in 2008-09, provided growth prospects remain as currently anticipated.
* Examining all options to provide real incentive to encourage private savings.
* Tackling chronic skill shortages in the economy.
* Providing national leadership to tackle infrastructure bottlenecks.
* Providing practical ways of helping people re-enter the workforce and removing disincentives to working hard - to lift workforce participation.
Fighting the fight against inflation is a core part of the Government's economic strategy.
Building world class education, innovation and infrastructure to meet the needs of the 21st century and to deliver long term productivity growth represents a further pillar of our strategy.
Together with investing in the new industries of the future.
Our government looks forward to meeting many of these challenges in year ahead.