The Government was elected 100 days ago with a mandate to build a modern Australia to meet the challenges of the future - to secure the future for the nation and for working families.
The foundation stone of this project is to prosecute a program of responsible economic management while building a modern Australian economy capable of dealing with the diverse challenges of the 21st century.
And always to do so fully mindful of the financial pressures facing Australian working families.
After three months in office, implementation of that program is underway.
We are acting on the immediate challenges.
We are preparing for the longer term.
And we are doing so in the face of economic challenges of a complexity that Australia has not seen in recent economic history.
Right now, we face conflicting economic currents:
* Internationally, downward revisions of global economic growth from the United States to Europe and to some extent, Japan; and
* At home, the serious threat of rising inflation.
And these cross-currents of international and domestic factors create significant and long-term challenges for our future economic policy settings.
Economic inheritance
The previous government would have the nation believe their economic policy performance was first class.
But as more and more data rolls in, a different reality emerges.
Consider the following five economic facts.
Fact one: When our government was elected, inflation was running at a 16-year high - and is now projected by the RBA to remain high until 2010.
Fact two: When our government was elected, interest rates had risen ten times in a row and were the second highest in the developed world.
Fact three: Productivity growth (a key factor in sustaining economic growth and keeping inflation low) is running at its lowest level in 15 years - having fallen from 3.3 per cent in the mid-1990s to 1.1 per cent in the current cycle.
Fact four: Since 2004-05 Commonwealth spending has grown on average at around 4 per cent per year in real terms - more rapid growth than in any another four year period in the past decade and a half.
Fact five: At the time of the election, despite the best terms of trade in 50 years, we had generated five and half years of monthly trade deficits - the longest sequence in Australia's recorded economic history, contributing to Australia's foreign debt tripling to a record $570 billion.
These facts are not political opinion - they are the cold, hard data produced by the ABS and the RBA.
And they are masked by the fact that the economy and the Budget have been awash with the cash produced by record global economic growth and a unique resources boom.
These, therefore, are the objective economic circumstances that the new government now confronts.
Inflation
By December 2007, underlying inflation had risen to 3.6 per cent on the Reserve Bank's preferred measure.
The Reserve Bank stated recently that it now expects inflation to remain above 3 per cent right through to June 2010, on both the underlying and CPI measures.
The previous Government had been warned on 20 separate occasions by the RBA about the increasing threat of inflationary pressures arising from supply constraints.
As the Reserve Bank noted in its monetary policy statement last month, “constraints on productive capacity have persisted for some time”.
Underlying inflation has been running at an average of 3%, the upper limit of the inflation target, for the past year and a half.
It did not arise overnight.
And it now puts into context the complacency of the previous Treasurer who state as late as mid 2007 that “inflation is right where we want it”.
Inflation is the enemy of business.
It is the enemy of working families.
And it is the enemy of the economy - because everybody is affected by the upwards pressure it places on interest rates.
Interest rates
We have already seen 11 consecutive increases to the RBA cash rate in the past six years, with three of them occurring since the middle of 2007.
Australians are paying the second highest mortgage interest rates in the developed world.
And all this from a government which promised before the 2004 election that it would keep interest rates at record lows.
Mortgage interest rates have now risen seven times since that promise was made - adding $276 every month to the cost of an average new mortgage.
And today we have a housing affordability crisis affecting working families right across Australia.
Productivity growth
Rising inflation has been paralleled by declining productivity growth over the past decade.
Productivity growth averaged 3.3 per cent per annum in the five years to 1998-99.
It fell to 2.1 per cent in the five years to 2003-04.
And it has fallen further to just 1.1 per cent in the first three years of the current cycle up to 2006-07.
That is just one third of the rate of productivity growth that the previous Government inherited in 1996.
The fact is productivity growth delivers inflation-free economic growth.
But the slump in productivity growth in Australia has been a major factor contributing to rising inflationary pressures.
And one of the core reasons for declining productivity growth has been a failure to invest in human capital, technology and infrastructure - at the time when we have had unprecedented budgetary opportunities through the explosion of rising revenue proceeds from the resources boom.
Investment in Productive Capacity
Australia's terms of trade have risen 40 per cent in the past five years.
The Reserve Bank has estimated that this has added 8 per cent to our real national income, equivalent to $80 billion per year.
The Chief Economist of ANZ Bank, Saul Eslake, estimated last year that the mining boom will drive a $398 billion improvement to the Budget bottom line between 2002-03 and 2010-11.
Certainly, spending had been rising rapidly under the previous Government - some 4.5 per cent in real terms in the current financial year alone.
But as research produced for the Business Council by Access Economics noted last week, spending simply wasn't being directed to our economy's supply constraints.
The BCA reported that the windfall from the mining boom has, and I quote:
“masked a deterioration in the structural, or underlying, integrity of the federal Budget...
Of the $87 billion per annum that economic prosperity has delivered as windfall revenue to Canberra since 2002, all but $2 billion has been spent on income tax cuts and new spending. As a result, the Budget is now at risk of a marked and quick deterioration if business conditions turn down."
(BCA Budget Submission 2008 - 09)
External accounts
At the same time, despite enjoying its best terms of trade in more than fifty years, Australia is now experiencing large imbalances on its external accounts, characterised by
* Export growth over the last decade falling to half the rate experienced during the decade before;
* A current account deficit reaching record levels and staying above 5 per cent since June 2003 - its longest period at those levels on record;
* And foreign debt reaching $570 billion, three times the level when the Howard Government had taken office.
The objective challenges we face on our external accounts have been masked by extraordinarily strong terms of trade.
And the truth is record terms of trade is not the product of good policy, but good fortune.
That's why we should be investing the proceeds of the boom into the future productive capacity of the economy.
Or as one American President has said “the time to fix the roof is while the sun is still shining”.
The 5 point plan to fight inflation
The Government's response to the immediate economic challenges we have inherited is a five point plan to address the inflationary pressures.
In January, I outlined the core elements of that plan:
* fiscal restraint, with a budget surplus target of at least 1.5 per cent of GDP this year;
* encouraging private savings;
* tackling the chronic skills shortages;
* providing national leadership to address infrastructure bottlenecks; and
* introducing measures to boost workforce participation.
In our first three months, we have made some initial progress on this agenda.
My purpose today is to outline how the Government plans to advance this agenda in the three months leading up to the Budget in May - as well as outline further measures to respond to the housing affordability crisis facing working families.
On fiscal restraint, the Government's razor gang is working intensively ahead of the Budget on 13 May.
The Expenditure Review Committee and the Strategic Budget Committee of Cabinet have been examining spending plans line by line. We identified $10 billion worth of savings before the election. And a further $643 million was announced by Lindsay Tanner last month.
We have set a fiscal target to guide budget policy with a surplus of at least 1.5 per cent of GDP in 2008-09, provided growth prospects remain as currently anticipated.
This contrasts with the 1.1 per cent projected by the previous government as late as the Mid Year Economic Forecast released by the previous government in October.
This will include hard decisions which may result in considerable political pain - but it is the only responsible course of economic action.
Boosting public savings is important to fighting inflation.
But this must be accompanied by new measures to boost private savings as well.
To help build a culture of savings, the Government has already released proposals for its new low-tax First Home Savers Accounts.
These superannuation-style accounts aim to boost private savings by helping first home buyers save for their first home.
This Wednesday is the closing date for interested parties to make submissions on the implementation design of First Home Saver Accounts.
We will be finalising the implementation details of those accounts after reviewing those submissions.
This is a major innovation for Australia - the first time such measures have been embraced to encourage home savings by any Australian Government.
To fight inflation we must also deal with the skills crisis.
The Parliament will soon pass legislation to establish Skills Australia, the body that will lead an integrated response to the skills crisis.
The Government is committed to delivering an additional 450,000 training places over the next four years.
That will start with the provision of 20,000 new training places in areas of skills shortage from April 2008.
The Government has called for Expressions of Interest for the provision of these places to start next month.
We will be moving ahead with the core elements of the education revolution.
We have already begun an audit of schools' existing computer facilities as part of the implementation of our $1 billion program for computers in secondary schools.
Within the next month, we will be releasing guidelines for schools to apply for the provision of computers.
In coming weeks, secondary schools will also be invited to begin applying for their share of our $2.5 billion fund for the construction of trades training centres.
And during the next three months membership of the National Curriculum Board will be finalised.
The fourth element in our five point plan to tackle inflation is addressing infrastructure constraints by providing national leadership on infrastructure development.
We recently announced the first Chair of Infrastructure Australia.
Within the next three months the full membership of Infrastructure Australia will be finalised, and to our plan is to have enabling legislation to passed through Parliament.
Within the next three months, an Expert Panel will assess private sector proposals for building the National Broadband Network, and we hope to commence construction by the end of the year.
This is the first time in Australia's history that the national government will assume a national leadership role in planning for our long-term infrastructure requirements.
The fifth element of the five point inflation plan is to lift workforce participation.
This requires a range of targeted initiatives including tax reform and improved access to affordable childcare.
We have already introduced into Parliament the Bill for tax cuts that, according to Treasury modelling, will increase workforce participation by an estimated 65,000 over the medium term.
We will be progressing consultations with interested parties on the construction of 260 new long day care centres on school and community sites.
We will also be finalising a Bill to increase the Child Care Tax Rebate from 30 per cent to 50 per cent of out of pocket costs, covering up to $7,500 in expenses per year, from July 1.
These initiatives will all help, in the immediate term and in the longer term, to address supply constraints and inflationary pressures.
We are nevertheless realistic about time lags and we take note of the Reserve Bank's warning that we face an extended period of elevated inflation.
Housing affordability
The economic challenges for the nation are significant.
But so are the challenges for working families - and the challenges they face in balancing the family budget.
Across Australia, there is no greater source of financial stress for working families than housing.
Australia has a real problem with housing affordability.
It is no exaggeration to say that in early 2008, housing affordability is the worst it has been in living memory.
Consider these faces.
In 1996, the average home cost four times the average annual wage.
A decade later, the average home cost seven times the average annual wage.
That means that while living standards were improving, it was actually getting more difficult to buy a house.
Second, in the past decade, the size of the average first home buyer mortgage has more than doubled - from $104,000 to $231,000 at the end of last year.
Third, when you look at actual mortgage repayments required to buy a home, the picture is even starker.
In 1996, the mortgage repayments on an average loan soaked up 17.9 per cent of average household income.
By the end of 2007, mortgage repayments on an average loan soaked up 32.3 per cent of average household income.
That is an increase from around one in six dollars going on the mortgage to almost one in three dollars.
By this measure, housing affordability has almost halved.
These are not Government or Labor Party statistics.
This is data from the Housing Affordability Report published by the Commonwealth Bank and Housing Industry Association.
Also published in that report is the Housing Affordability Index.
It 1996 that index was over 170.
At the end of last year it had fallen to less than 100.
Again, this suggests that buying is roughly twice as hard as it was a decade ago.
Many factors have contributed to the deterioration in housing affordability - but fundamentally there are simply not enough houses being built to meet the demand for housing.
According to ABS and Treasury analysis, whereas in 2004, new housing completions were roughly the same as underlying demand, a significant gap has emerged in recent years.
By 2007, completions had fallen to under 150,000 new houses per year while underlying demand for new houses increased to over 180,000.
That is a gap of over 30,000.
Australia cannot address housing affordability without building more houses.
And as the housing industry has argued, we can't build more houses without more skilled workers to build them.
Under the previous Government skills shortages in many industries - but especially residential construction - were neglected.
According to the Housing Industry Association, we will need an additional 20,000 skilled tradespeople over the next three years alone if we are going to build the houses that we need.
The Australian Government is acutely mindful of this shortfall - hence the decision to bring forward 20,000 training places to next month and focus these places on the construction sector as one of four primary sectors.
The HIA is also calling for a special visa program to increase the number of migrants working in the residential construction sector. The Government will also now consider the HIA's proposal.
The Government recognises a role for skilled migration in addressing skills shortages, having recently expanded the skilled migration program.
The impacts of construction shortfalls stretch beyond the first home buyer market.
As has become clear in recent years, having more people locked out of home ownership means more people stuck in the rental trap.
This means a tighter rental market.
That means fewer places to rent and higher rents.
There is certainly plenty of anecdotal evidence about how Saturday morning rental property inspections are beginning to resemble auctions, with dozens of people competing for every decent property and some offering to pay well above the advertised rate or to pay rent well in advance.
The Real Estate Institute of Australia reports that rental vacancy rates have now slipped below 3 per cent in every capital city.
It is no wonder that average rents for three bedroom homes have now risen by 82 per cent since 1996.
Forecasters are saying that the problem will worsen. BIS Shrapnel has predicted that if the rental market continues on current trends, rents across Australia will increase by an average of 28.5 per cent between now and the end of this decade.
The impact of such large increases in rent is a real problem for working families.
This morning, the Cabinet met and received fresh evidence of the housing affordability problem from the Federal Minister for Housing, Tanya Plibersek.
It is research commissioned by the Government from the National Centre for Economic and Social Modelling - NATSEM and is an analysis of ‘housing stress'.
Households are considered to be in housing stress when they pay more than 30 per cent of their gross - that is before tax - income on housing costs such as rent and mortgage repayments.
This new research looks at the impact of housing stress on low and middle income earners - that is, households whose incomes are in the bottom 40 per cent of households.
This analysis for the first time debunks the notion that housing affordability data is skewed because of the investments of high income earners.
It shows that middle and low income households are experiencing considerable housing stress - and the problem is growing over time.
Specifically, it looks at developments since 2004.
The research shows that there are now 1.1 million low to middle income households spending more than 30 per cent of their income on housing.
That has increased by a quarter - or 220,000 households since 2004. This is a stunning statistic. And it is a disturbing statistic.
And the data shows it is a problem affecting all generations:
* The number of low and middle income families and singles in housing stress that are headed by a person under 29 years old has increased to 350,000 - an estimated 55 per cent increase since 2004.
* The number of families with children in housing stress has more than doubled since 2004. There are now an estimated 575,000 low and middle income families with children in housing stress - around 300,000 more than in 2004.
* The number of older Australians in housing stress has doubled since 2004. There are now an estimated 112,000 low and middle income families and singles headed by a person aged over 70 years old that are in housing stress - compared to around 56,000 in 2004.
When you look at this data, it is clear that the housing affordability problem has been one that has emerged over time and is now at a critical point.
It's why we committed to a comprehensive plan of action that will be spearheaded by Tanya Plibersek, the first Commonwealth Housing Minister that Australia has had for twelve years.
We made four key policy commitments on housing affordability last year: First Home Saver Accounts, a Housing Affordability Fund, encouraging greater private sector provision of affordable rental properties and revamping the Commonwealth Properties Disposal Policy.
And last month, we outlined measures to help families get the best deal on their mortgage and to improve competitive pressures in retail banking by making it easier for customers to switch banks.
Today I have already made reference to our First Home Saver Accounts.
I now want to make two announcements on the provision of affordable rental properties and our Housing Affordability Fund.
National Rental Affordability Scheme
The Government has begun the implementation of our election commitment to create more affordable rental properties around Australia by encouraging private investment, especially from institutional investors who play very little role in the provision of rental stock.
The Government's will establish a National Rental Affordability Scheme under which the Commonwealth will provide private investors with tax credits of $6,000 per year for ten years, for building new properties that are rented out at 20 per cent below the prevailing market rate.
The scheme will be implemented in partnership with the State and Territory Governments.
The Government's initiative begins with encouraging the construction of 3,500 affordable rental properties in 2008-09 and add to the stock to reach 50,000 within five years.
Improving housing affordability, however, is a long term challenge for this country.
We do this because improving housing affordability is a long term challenge for this country.
Australia had a national annual housing deficit of 30,000 homes in 2007.
And, despite a forecast increase in residential construction in coming years, we will still leave the backlog of unmet demand from previous years.
Even by 2011, the deficiency will exceed 50,000 houses in NSW alone, according to BIS Shrapnel.
Nationally, it could be three times that figure.
That will mean that we will have to continue to expand the stock of affordable rental properties beyond 2011.
Today I am pleased to further announce that the Government intends for this to be a continuing program - beyond the five year time period announced during the election.
Depending on specific details relating to its success rate, and subject to market conditions, the Government envisages that this extension would double the target of new affordable rental properties from 50,000 to 100,000.
On current trends, with demand continuing to exceed supply, we will also need to calibrate the future issuing of tax credits to market demand.
That is exactly what the Government's Rental Scheme will do. The Government's incentive forms a new partnership with the private sector - a PPP in concept - to deliver on an important economic and social objective.
Since the election, the Government has been hard at work on the implementation of this initiative, including through the Council of Australian Governments.
Through this new partnership with the States and Territories, the States and Territories have indicated an in-principle agreement to participate in the National Rental Affordability Scheme.
The States and Territories will provide $2,000 per home either through cash payments or in kind.
The States and Territories have discussed a range of ways in which they can support this Scheme, including the provision of cut price land or concessions on stamp duty or other charges.
In some cases States may make direct cash contributions.
The National Rental Affordability Scheme will create an entirely new stream to our existing housing market.
The Government believes we can improve rental affordability which still produces good returns for investors.
While there is no short term solution to the housing affordability problem, we believe that over time we can make a real difference - to encourage people to save a deposit, to encourage more housing construction, and to encourage investors into the affordable rental market.
Housing Affordability Fund
In addition to the Rental Affordability Scheme, we are establishing a $500 million Housing Affordability Fund to help drive housing construction activity.
The Fund will be used to address two components of house costs: infrastructure charges and levies and ‘holding costs' caused by planning delays.
The Property Council of Australia estimates that housing linked infrastructure charges can add up to $68,000 on a new home in some parts of suburban Australia.
Those charges pay for all sorts of important infrastructure like water, sewerage, transport, and parklands.
But when these charges they are passed on to the homebuyer, it can push the dream of owning a new home out of reach.
The Housing Affordability Fund will form a partnership between the Commonwealth and local governments - to invest in this infrastructure to reduce the cost of new homes.
Another part of the equation is ‘holding costs' - costs associated with planning and approval delays such as interest, land taxes, council rates and staff costs.
These too can add tens of thousands to the cost of a home.
Our partnership with local government will also address the need to streamline planning and approvals processes - to help reduce the cost of homes.
Last year, the Property Council identified this as priority number one for dealing with housing affordability.
Today I am pleased to announce that as part of our Housing Affordability Fund, the Government will invest up to $30 million in a new system to address planning delays.
The use of Electronic Development Applications and an On-Line Tracking Service will allow home buyers to check the status of their approval at any time of the day.
The system will also reduce confusion about the causes of delays - such as whether the household has made mistakes in their submissions, or whether the consultant, local government or state government is taking too long.
It will save local councils time and money.
And ultimately it will help reduce development costs and improve housing affordability.
This system is already operational in some councils and the Government investment I announce today will see it rolled out across the country.
We will begin with fast growing regions and roll out the system nationwide by the end of next year.
Today I have focused the economic challenge, the inflation challenge and the challenge of housing affordability on working families.
Of course there are many other elements in our election mandate - including the withdrawal of our combat troops from Iraq, ratifying Kyoto and closing the gap between Indigenous and non-Indigenous Australia.
* Since the Government came to office, I have visited Baghdad and have spoken with the Iraqi Prime Minister and the US military command on the ground. We have negotiated the withdrawal arrangements for those combat forces, and that will be concluded in the middle of the year as we said.
* We signed the instruments of ratification for the Kyoto Protocol upon coming to office. As a result, Australia was able to play a significant role at the United Nations climate change conference in Bali.
* On February 13th the national parliament offered an apology to the Stolen Generations. We are now endeavouring to establish a new bipartisanship on the crucial challenge of remote indigenous housing, as part of our commitment to close the gap on infant mortality, educational achievement and life expectancy for indigenous Australians.
The hard work lies ahead - framing the Budget; designing an emissions trading regime; implementing major industrial relations changes; further education reforms; reforming the health care system; closing the gap for indigenous Australians; and the entirety of the COAG agenda, including business deregulation.
In the time since the Government came to office, I have learnt that the challenges Australia faces are as deep as we anticipated.
But I have seen also that the determination of the Australian people to confront these challenges is deeper than we could have ever thought - looking beyond the short-term to the long-term.
Yes, we have inherited some complex problems that have built up over many years.
But we are committed to dealing with those challenges - not avoiding them.
And we will not lose sight of why we've been entrusted with the great responsibility of public office - to seize the opportunity (not to squander it) to build a modern Australia to tackle the challenges of the future and to secure the future for working families.