I acknowledge the First Australians on whose land we meet, and whose cultures we celebrate as among the oldest continuing cultures in human history.
Thank you to ACCI for your assistance in organising this event. The Government enjoys a strong relationship with ACCI. We appreciate your robust contribution to the national economic debate and we've taken some good ideas from you - not least of which was the Investment Allowance for Business which helped support Australian businesses to grow and invest through the global recession.
Today we stand on the eve of two significant economic policy events. In three days time the Government will release the Independent Tax Review conducted by Ken Henry and his team and the Government's response to that review. In 12 days' time the Government will release its third budget, the last budget before we face the Australian people at an election.
Today, my purpose is not to pre-empt the government's tax and budget policies, but to provide some context around:
* The economic challenges that motivate our policy agenda;
* The economic opportunities we are reaching towards; and
* The principles that have guided the Government as we have worked to develop our tax policy and budget package.
Over the last 18 months, Australians have faced one of the toughest global economic challenges in our lifetime. As we look back, I am proud of the success of Australia in navigating the global recession. It is a testament to the ability of the whole community - businesses, unions, workers and government - to pull together, and the strong and decisive leadership from government economic policy.
I am proud of the Government's economic stimulus strategy and the results it has produced. I am proud of the more than 200,000 jobs that Treasury estimates were saved by the stimulus. In fact, had we generated the same unemployment rate as America through this global recession, another half a million Australians would be out of work.
I am proud that so many Australian businesses kept running while so many millions shut up shop overseas. I am proud that Australia had the shallowest slowdown of all the advanced economies. I am proud of the fact that Australia was one of only two of the advanced economies not to go into recession, and I am proud that we emerged from this global recession with the lowest debt and deficit of all the major advanced economies and our AAA rating intact.
Australia has emerged from the global recession with one of the strongest economies in the developed world. This should be a reason to be confident. It should not be a cause for complacency.
Just as we worked hard to ensure our economy was the envy of the world during the downturn, we now must work hard to capitalise on this position as we move through the economic recovery phase and a return to economic growth.
That is the context for the Henry Review and the Budget. If we get these decisions right; take bold action to capitalise on our strong position, then I believe we can set Australia up for the next generation of prosperity.
First let me begin by describing the economic principles that have guided this Government's economic strategy over the last two and a half years. Since the government came to office, we have sought to build a strong economy, protect the jobs of working families and keep Australia out of recession. Through changing global economic conditions, the Government has applied two consistent principles of economic management:
* Countercyclical macro-economic policy to maintain stability; and
* Long-term microeconomic reform and investment to boost productivity and deliver sustainable growth for the future.
These are the two arms of the government's economic strategy, both for the past two years and for the future.
This Government's first two years have seen significant swings in global economic conditions from the inflationary boom of 2007, through the global slump of 2008, and towards the emerging dawn of a new era of growth following the worst global recession since the Great Depression. Through these cycles, the Government has maintained a conservative countercyclical fiscal policy: restraining public expenditure growth when the private economy is strong, and stepping in to protect jobs and businesses when the private economy is weak.
This policy approach guided our response to the boom conditions this government inherited two years ago. In 2007, the Australian economy was suffering from capacity constraints, inflation was rising to 16-year highs, and the Reserve Bank had delivered 12 consecutive interest rate rises.
The Government responded with fiscal discipline including savings of $33 billion over four years in our first budget and we invested in capacity building infrastructure and skills and enhanced the independence and transparency of monetary policy.
Global economic conditions changed rapidly and dramatically towards the end of 2008. Major developed economies fell one by one into recession. Global merchandise trade fell by around 40 per cent. Again, the government applied countercyclical fiscal policy to protect Australia from the global recession.
It took strong and decisive action to guarantee the banks and provide immediate support to the economy, including cash payments to support consumption, the trebling of the first-home owners' boost and an increased business tax break for private investment. As we implemented our economic stimulus plan, we were focussed on the urgent need to support the economy rapidly, and also kept one eye on the future needs of sustainable economic growth. That is why about 65 per cent of total direct investment under the nation-building for recovery strategy is investment in infrastructure.
As the IMF concluded: "The increase in public investment will continue to support activity in the near term, while addressing infrastructure shortfalls."
Australia has the fastest growth, the second-lowest unemployment, the lowest debt and deficit when compared to the major advanced economies. As we emerge from the global recession, the government will continue to apply the same core economic principles.
Amid various short-term economic challenges, we have never lost sight of our core long-term economic strategy: to reform Australia's economy and build a platform for future growth. This strategy is based on our objective of improving Australia's long term productivity growth and participation rate. This long-term strategy is designed to address Australia's long term global and domestic economic challenges.
The recent fiscal troubles in Greece underline the ongoing legacy of the global recession. The downgrade yesterday of Greece's sovereign debt has sent shockwaves through the global financial system, reminding us once again that global financial markets are increasingly interconnected.
While Greece's fiscal position has attracted significant international attention, fiscal sustainability has become a significant risk in several advanced economies:
* In the United States, the budget deficit in 2009 was 12.5 per cent of GDP.
* In the United Kingdom, the budget deficit last year was nearly 11 per cent of GDP.
* In Japan it was more than 10 per cent of GDP.
* By contrast, MYEFO forecast Australia's deficit to peak at 4.5 per cent of GDP in 2009-10.
The IMF forecasts that as a result of persistent deficits, government debt in advanced G20 countries could rise to an average of 117 per cent of GDP in 2015. Across the IMF advanced economies the global recession has caused an increase in average debt to GDP ratios of 39 percentage points since 2007. The IMF forecasts that:
* 10 per cent of this increase is due to the impact of the global recession on revenue and expenses from automatic stabilisers
* 12.5 per cent is due to the impact of financial sector support, bail outs and lower revenue associated with falling asset prices and financial profits.
* And 3.5 per cent is due to fiscal stimulus.
Unsustainable fiscal positions are a threat to global growth because they:
* Sap confidence from financial markets.
* Reduce fiscal flexibility and narrow the policy space for governments to support their economy through ongoing periods of weakness.
* Push up global interest rates. The IMF forecasts that the expected 35% rise in debt could increase global interest rates by 2 percentage points and reduce advanced G20 country growth by at least 1 percentage point.
To avoid these consequences major economies must implement credible deficit reduction plans. This will not be easy. The recent IMF World Economic Outlook forecast that to bring the average debt-to-GDP of the advanced economies back to their pre-crisis levels of below 60 percent, will require average improvements in the structural balance of 8 per cent of GDP by 2020.
The scale of this adjustment will require a fundamental reshaping of government finances in many major economies. Fortunately, Australia is in a much stronger fiscal position coming out of the global recession.
Australia already has the lowest debt and deficit of any major advanced economy. In the 2009/2010 Budget, the Government implemented a series of fiscal rules that will return the budget to surplus in the coming years and reduce net debt to virtually zero by 2020.
First, the Government's 'expenditure rule' will cap the real growth in government expenditure to 2% once the economy returns to above trend growth - and this will apply until the budget returns to surplus.
Second, in order to meet the 2 per cent cap, the Government has set itself an "offset target" which requires the impact of new spending across the forward estimates to be fully offset in the budget.
Third, the Government has committed to saving the revenue improvement associated with a stronger economy, while ensuring that the level of taxation remains lower on average than the level we inherited in 2007-08.
These Australian fiscal rules are among the strongest and most credible in the world. As the IMF commented last year: "Few other advanced countries have adopted such a clear commitment" to return to surplus.
These rules represent the continued embodiment of the Government's core commitment to fiscal conservatism - as the private sector rebounds, the Government's direct support to the economy will contract. These rules have guided our fiscal policy this year and the results will be reflected in the Budget the Government brings down on 11 May.
The Australian Government is also working with our partners in the G20 to improve global fiscal sustainability. At the forthcoming Toronto meeting of G20 Leaders, we will work towards establishing robust and credible fiscal rules and targets. These rules will help us maintain confidence that government debt is being stabilised, if not reduced, over the coming decade.
Emerging markets have performed remarkably well through the global recession and are now rebounding strongly. While advanced economies are expected to grow by 2.25 percent in 2010, growth in emerging and developing economies will be double that rate at over 6.25 percent.
The resilience of developing economies is contributing to a surge in global commodity prices. Demand from China and other Asian economies contributed to a 40 percent rise in the IMF commodity index between February and December 2009, and over the medium term, commodity prices are expected to remain at high levels as demand in the emerging markets rub ups against sluggish capacity growth.
Australia has been and will continue to be a key beneficiary of the global commodity boom. Australia is already the world's biggest exporter of coal and iron ore, the second biggest exporter of uranium and soon to be one of the largest exporters of LNG.
After a dip in commodity prices last year, the RBA is now forecasting that Australia's terms of trade will rebound to 50-year highs this year. Already, spot prices for iron ore have increased by around 95%, metallurgical coal prices are up 55%, and thermal coal prices are up by around 40%.
Last month saw the biggest LNG contract signing in Australia's history. This agreement will see at least $10 billion invested in Queensland's new coal seam methane-based LNG industry. China will receive 70 million tonnes of LNG, making Australia a pioneer in LNG exports from coal seam gas.
The return of boom conditions in the mining sector can bring significant opportunities for our economy, our nation and our people, but we must also recognise the parallel challenge to ensure that our nation seizes these opportunities in full.
The first challenge is to ensure that Australia takes advantage of rising commodity prices to develop our resources to their full potential. Higher commodity prices create opportunities for some of our smaller mining operations and more marginal mining deposits. By supporting these parts of the industry the Government can help to broaden and deepen the mining sector in Australia.
The second challenge is to ensure that our mining success doesn't excessively impede other sectors of the economy. A growing resources sector will draw capital and workers to the mining states - increasing pressure on other industries and regions as they compete for employees and investment.
Third, the high demand for our resource exports is also likely to continue to support a strong Australian dollar. While this means continued downward price pressure on imports, it also means a more difficult economic environment for other exporters and import competing businesses. These businesses could find themselves stuck in the 'slow lane' of a two-speed economy.
Unless we recognise these challenges, Australia risks becoming a 'two-speed economy' as the resources sector absorbs more capital and labour, while manufacturing and other industries suffer a relative decline in competitiveness.
One of the challenges facing Government is how we can help to address the emergence of a two speed economy in a way that supports growth of all sectors and improves Australia's productivity growth over time.
Improving the productive capacity of the economy through greater investment in infrastructure is one response to the emergence of a two-speed economy. With the right infrastructure to support the resource industry and other industries, we will be in a position to take full advantage of the returns from our mining sector, and investing in major infrastructure - for example in high speed broadband - will help improve our capacity to grow the economy beyond the resources sector, ensuring that Australia continues to be an attractive place to set up a business, creating new jobs for now and the future.
Infrastructure is a critical ingredient of our future productivity growth and a critical support for the mining states as they struggle to support increased investment and production. We've been working to ensure that Australian businesses aren't held back by inadequate and poor quality infrastructure. We've established Infrastructure Australia and have embarked on the biggest nation-building infrastructure program in Australia's history, including a $36 billion transport plan to double investment in roads, quadruple investment in rail and invest in the nation's ports for the first time.
We're investing in a $43 billion national broadband network the infrastructure of the 21st century that will deliver super-fast broadband, turbo-charging businesses and transforming our classrooms and hospitals - but the challenge to provide Australia with the infrastructure we need for the coming growth phase is ongoing.
The Government will not rest on our achievements. We will continue to support nation-building infrastructure investment for Australia's future.
Another flow-on consequence of the mining boom is pressure on Australia's skilled workforce. That is why the Government has made investment in skills and education a key element of our productivity agenda.
The Government is investing in an education revolution that will prepare our kids for jobs in both the traditional trades and in industries of the future. We want to give Australian children the skills and tools to compete with the rest of the world for the high-skill and high-wage jobs of the future.
That is why we are establishing a single national school curriculum, providing parents with transparent information on school performance, delivering computer access to all year 9 to 12 students by 2011, making trades training facilities available to every secondary school, and delivering the largest school-building modernisation program in Australia's history, including state of the art libraries, science centres and language centres for many schools which have never had such basic facilities in the past.
Australia also faces a significant challenge to boost workforce participation. Boosting Australia's participation rate will assist with the challenge of the ageing of the population. It will also ensure that the growth of some sectors of the economy can bring more people into work, rather than taking resources from other sectors in a zero sum game.
To boost workforce participation, the Government has established Australia's first-ever system of paid parental leave, coming into effect from January 2011, increased the childcare rebate from 30 per cent to 50 per cent to support parents' return to work, and introduced a "learning or earning" compact with young Australians to make sure our kids are in either work or study.
A further consequence of the mining boom is a likely continuation of Australia's long history of current account deficits. The benign view of Australia's CAD is that it reflects a surplus of investment. The alternative is that it reflects a deficit of saving.
Certainly, growing foreign investment into the mining sector will perpetuate the debate about Australia's national savings.
The strongest element of Australia's savings is the $1 trillion pool of superannuation savings, the fourth-largest national pool in the world. Australia's superannuation system has created a tremendous source of national wealth. Australian Treasury estimates that, 25 years from now, this savings pool will have grown to $5 trillion, which will equate to 120% of Australia's forecast GDP of $4.2 trillion. This pool of savings has been a buffer for the Australian economy through difficult times and is a lasting tribute to the deep reforms engendered by the Keating Government.
In the 2009 Australian financial year, at a time when liquidity was being rapidly withdrawn from markets around the world, Australia remained an attractive place to raise capital. Australian-listed companies supported themselves through the crisis by raising $90 billion of capital - partly from Australia's domestic superannuation pool.
Improving Australia's pool of national savings remains a long term challenge for the nation.
The Government's health reforms will deliver important economic and financial benefits.
First, beginning 1 July this year, the Government will make direct investments in the health system to deal with fundamental imbalances between the supply and demand of health services across the country which can lead to poor health outcomes and reduced economic activity. This include training more than 6,000 doctors, funding 1,300 new hospital beds, and providing capital and recurrent funding to ensure reduced waiting times.
Second, the Government's reforms introduce long-term structural changes to the way that health services are delivered in Australia. These reforms will include increasing the efficiency of public hospitals through the introduction of activity-based funding. This will drive increased operational efficiency across the hospital system by explicitly linking funding to the provision of services. The National Health and Hospital Reform Commission estimated that the introduction of activity-based funding could lead to savings of between $500 million and $1.3 billion each year.
The Government will also establish an independent umpire to determine the efficient price of the full range of hospital services. The Independent Hospital Pricing Authority will determine the real cost of health services and therefore the real rate of growth in health costs. Its determinations will be the basis on which the Commonwealth pays its fixed dominant share of every hospital service that is provided.
For the first time, this means that tax-payers' contributions to public hospitals will bear a clear relationship to actual health service demand and costs. At present, hospital funding often ends up being spent on bureaucracies, and there is little transparency in how Commonwealth and State funding is actually spent.
Following last week's historic agreement, for the first time, all public moneys allocated to hospitals will flow directly to hospitals. Both Commonwealth and State funding will be warehoused in a fund at arm's length from State treasuries and health departments. From this fund, Local Hospital Networks will be paid directly for each activity they undertake, based on the fair and efficient price set by the independent umpire.
Together, these micro-economic reforms - the introduction of activity-based funding, the establishment of an independent pricing authority and the direct funding of local hospital networks - will drive efficiency across the hospital system through increased transparency and greater accountability.
Third, the Government's reforms will drive improvements in the allocation of health resources. By increasing investments in primary care and preventative health, the reforms will ensure that fewer people present at hospitals, freeing up beds for those who need them most and taking pressure of the health budget. As part of the funding reforms, the Commonwealth will not only become the dominant funder of public hospitals, it will also take full responsibility for all primary and aged care services.
The Commonwealth will have a strong incentive to ensure that patients have appropriate access to the full array of primary health care services in the community, because otherwise it will foot the bill for far more expensive acute care services delivered in public hospitals. That's why the Government is training more GPs and investing 436 million dollars to ensure people with long-term illnesses such as diabetes receive more sustained and integrated care and why the Government will continue to make important investments in preventative health, recognising that potentially avoidable conditions account for around 70 per cent of total health care expenditure.
If Australia meets these and related challenges, we will set ourselves up for a generation. If we make the right choices, we have the opportunity to deliver a period of strong prosperity which will improve the lives of not just this generation but future generations of Australians.
That is the motive we are taking into the forthcoming budget and response to Henry.
The Government has approached tax reform with the objective of ensuring Australia is well placed to meet future challenges and make the most of the global opportunities that present themselves.
Our purpose is to build a stronger, simpler and fairer tax system. A stronger tax system is one that makes Australia more productive and competitive in an increasingly globalised world. A fairer tax system ensures that builds opportunity, rewards effort and ensures no Australian is left behind. A simpler tax system means people spending less time complying with their tax obligations and reduces distortions.
Incremental reforms of the past half century have left a legacy of complexity; a system that can be unfair; and a system that unnecessarily impedes economic growth. Without reform to the tax system, an ageing population would make the structure of the existing system increasingly costly to society. Higher tax rates on workers would be borne by a decreasing proportion of society as workforce participation falls with the ageing of the population.
That is why in May 2008 the Government commissioned the most comprehensive review of Australia's tax and transfer system ever undertaken. The review was an opportunity to consider the tax and transfer system as a whole.
Over the last two years, the Government has already made significant reforms to the tax system including:
* Lower taxes for individuals. From 1 July 2010, we will have cut tax for workers on $30,000 by $750, for workers on $50,000 by $1,750, and for workers on $80,000 by $1,550.
* Support to working families through the 50 per cent Education Tax Rebate, which provides up to $390 per primary school child and $779 per high school child to help with the costs of education.
* Low-tax First Home Saver Accounts - to offer a tax-effective way of saving for your first home through a combination of government contributions and concessional tax rates.
* Reducing the withholding tax rate on distributions of income by Australian managed funds from 30 per cent to 15 per cent. A final withholding tax of 7.5 per cent will apply from 2010-11 and later income years.
* And, of course, there was the $3.7 billion Small Business and General Business Tax Break as a key element of our stimulus plan. The temporary tax break was designed to help Australian businesses boost business investment, bolster economic activity and support Australian jobs.
In our response to the Henry Review, the Government will make the tax system stronger, fairer and simple.
A strong tax system should raise revenue in the most efficient and simplest way possible. Many of our existing taxes reduce productivity and detract from the overall efficiency of the system.
Incremental policy change has eroded the bases of even potentially efficient taxes.
Australia needs to respond to remain an attractive place to invest and do business. For that reason the Government's aspiration is to reduce the level of tax faced by the vast majority of Australian businesses.
The Government also understands the importance of a having a fair tax system. The Government has made some significant changes to the taxation and transfer systems in recent years to increase the fairness of our tax and transfer system.
By delivering permanent increases in pension payments the Government has strengthened the financial security of Australia's age, carer, disability and service pensioners. Payments have also been restructured to ensure that households relying on the pension are not disadvantaged by price increases.
The Paid Parental Leave for primary carers, to be introduced from 1 January 2011, is an important step towards ensuring our transfer system supports people when they need it most. Over time it will also increase workforce participation, particularly for women.
The Government will continue to ensure that Australia's tax system remains fair - particularly for small business and working families and seniors.
A simple tax and transfer system means people have to spend less time complying with their tax obligations and transfer entitlements. Time spent interacting with the tax and transfer system is a deadweight cost on society. In particular, time and resources wasted on tax compliance and administration could better be spent by businesses in producing goods or services that are of value to the community and most people can always find better things to do than fill out tax returns. Smaller businesses tend to bear a higher proportion of the burden of complexity and red tape.
Some complexity in the tax and transfer system is unavoidable, but the Government is committed to reducing complexity where we can to give taxpayers more time with their families and cut red tape for business.
Let me finish where I began - in the next two weeks the Government will release its tax policy and budget package. These events are an opportunity to capitalise on Australia's success through the global recession.
If we make the right decisions we will convert our strong economic position into a new generation of prosperity. These decisions are being made in the context of the significant domestic and global economic challenges facing Australia, including:
* The challenge to return the budget to surplus following the global; recession through prudent conservative fiscal rules to govern expenditure and tax receipts;
* The challenge to ensure all Australians benefit from the global commodities boom;
* The challenge to boost investment in infrastructure;
* The challenge to increase investment in skills and boost workforce participation;
* The challenge to reform our health and hospitals system and provide sustainable finance for the future.
As Prime Minister I am deeply optimistic about Australia's future. I believe that if we capitalise on our strong position today we can create extraordinary opportunities for the future.