A Debt to Common Sense
the Liberal Party’s eternal challenge is to Convince Australians that government expenditure cuts benefit everyone. The alternatives – debt and taxes – betray our principles, says Peter Costello.
Edited transcript of a speech to a Menzies Research Centre breakfast function in Sydney in September, 2016, by former Treasurer Peter Costello.
I don’t actually do a lot of political speeches these days, but very happy to come to the Menzies Research Centre whenever I am invited. It’s great to be here and thank you for coming out. I know it’s a pain in the neck to come out early in the morning and to listen to further political speeches so I appreciate the fact that you’re here and my old colleagues are here, wonderful to see you and catch up on all of the gossip.
I thought I might just give you a snapshot of the Australian economy and fiscal position in five minutes. I was inspired to do this because I recently saw Geoffrey Blainey and I said, “Geoffrey what are you writing?”
He said, “I’m writing a history of the world in 200 pages.”
So if he can do the world in 200 pages, I can do the economy in five minutes.
We go back to 2007. Nick (Cater) said (in his introduction) we had no net debt. Actually, that’s not quite true, Nick. We had negative net debt. I remember when I was doing, I think, the 2006 budget and a Treasury officer came in and said, “Oh Treasurer, do you realise this year we are going to have negative net debt?”
I said, “Negative net debt? What’s another name for negative net debt?”
“It’s when your debt goes negative. It’s negative net debt,” he said.
“Well, try and think of another name for negative net debt,” I said. Then I said, “I’ve got an idea. What about this: an asset?”
“Oh, we’ve never used that word in a Budget, Treasurer!” he said.
So we not only didn’t have any debt because we were able to live with the surplus from the 2006/07 Budget into the Future Fund and If I’m allowed to make one little commercial here: the Future Fund has only ever had one capital injection once. No Treasurer after me ever put any money in there because we had no balanced Budget. So it’s essentially still there with the 2006/07 surplus and we have just managed to grow it to $120 billion. It’s an asset, it’s a viable asset, it’s something that I always thought would be a gift to the nation.
It’s still there and we’ve kept [away] sticky little fingers – Sticky little Swan’s fingers, stickly little Rudd’s fingers – off it over those years, and it is still there and it’s still managed to be an asset. So that was the state of the finances in 2007. We had no debt, we had money in the Future Fund. Our budget was still in surplus. I think I said at the time, it was the best set of books ever given to an incoming government. It was nothing like what I’d inherited, or what Joe Hockey inherited, what Scott Morrison or indeed anybody else in the history of Federation.
In 2008, as you know, Lehman Brothers collapsed in the United States, there was a lot of financial instability worldwide. Interestingly enough, no significant systemically important financial institution in Australia was in trouble. Our financial system was strong, it was well regulated. If we needed to give a guarantee in wholesale markets, which we did, we had a triple A Credit rating, we were able to do it.
But Labor decided it was necessary to engage in economic stimulation. I won’t go through the pros and cons of that. It was a difficult time, I acknowledge that, but I don’t think it was a quality fiscal stimulation. Anyway the effect of it was that spending as a proportion of the economy, which is the only real way to look at it, went from 23% to 26%. We increased spending by 3% of the economy. Every 1% of the economy is about $17 million dollars, 3% is about 50 million. And that was to be a temporary stimulus to get us through the period of 2008 and Labor always said after the markets should drop back to normal and were functioning properly, the stimulus would be withdrawn.
And indeed Wayne Swan stood up in 2012, and said the stimulus has been withdrawn, he announced four budget surpluses. You might have forgotten that budget night 2012, when Wayne Swan began his budget by saying, “The four surpluses I announce tonight.” As I said, the greatest on- line stand-up comedy act the parliament has ever seen. “The four surpluses I announce tonight…”
It was supposed to be temporary response to the financial crisis of 2008. Now, fast forward, nine years later, remember the temporary stimulus took spending from 23% to 26%. Nine years later, You know what the spending the GDP is? 25.8%. This was the temporary stimulus that’s now into its ninth year.
And you will never balance a Budget. Nobody ever has balanced a Budget with spending at 25.8% of GDP. There have only been 13 balanced Budgets in the last 40 years and I did ten of them. You can’t balance a Budget when you are spending 25.8 % of GDP. It just can’t be done. Now what worries me at the moment is this argument which is now creeping in that says well because we are now in the ninth year of deficit, because spending is 25.8 % of GDP. If we can’t deal with our spending what we’ll have to do is we’ll have to raise taxes.
That’s the argument that’s been debated at the moment and frankly, you know, I would love to see the Menzies Research Centre go out and smash what I call the high-tax cheer squad which is coming out of the Australia Institute and the Grattan Institute, you know cheerleading for higher taxes. Here’s the argument: Because we had a temporary increase in spending, it would be unfair to wind any of it back unless we have a permanent increase in tax. That’s the argument. Because we had that 3% increase in spending and it’s still there, nine years after the event, if any of that goes away, if you cut in any part of the budget, it’s only fair to raise taxes at the same time. Hey guys, this was supposed to be a temporary stimulus.
Now if we fall for that argument, the long-term effect is going to be that we will entrench the spending and entrench higher taxes with it, our taxes will start to chase our spending.
Australia would become a higher tax, high spend economy and that will affect our growth and our prospects. I don’t want the Liberal Party to fall for that. Because one thing we do know is that if the Liberal Party can’t get expenditure reduction through the parliament, it can get taxes rises through the parliament.
You can always rely on Labor to vote for tax rises. You remember when Tony Abbott said, “Oh well, in order to cut back spending in the 2014 budget, we’ll have to increase the top marginal rate of income tax to 49%.” The Senate waved through the 49% tax rate and then voted down every expenditure cut.
We can always get tax rises through the Senate. That’s not a problem. Greens and Labor are going to line up, the more the merrier. If we become the party that wants to increase taxes, they’ll say give us double, but that’s not the problem, that never was the problem. The problem is on the spending side. And I want to say to you there is a big intellectual argument raging in this country at the moment on this very issue.
Is our problem a spending problem? If so, we need to do something about that. Or is our problem a tax problem? Labor says it’s a tax problem, Labor will always say it’s a tax problem. Higher taxes, higher spending. But that’s not what the Liberal Party stands for.
The Liberal Party is supposed to be the custodian of small government, low taxes. That’s what it’s there for and if the Liberal Party decides to give up that traditional ground there won’t be anybody arguing for it. It won’t be the Greens, it won’t be the Labor Party, it won’t be the Australia Institute. I don’t want to see us lose that policy debate, and I don’t want to see us sort of get psychologically bludgeoned into this idea that it’s Australia’s future. It’s not.
That is the European road. That’s the way you get yourself into trouble. You gradually increase spending and then you increase tax, you’re always chasing your spending, your spending moves further and further in front.
Australia will become a European-style economy without all of the historic buildings to offset the depression. We’re in that part of the world, the Asian part of the world, which is much leaner and where we’ve got to be competitive. That’s why I don’t want to see us miss this opportunity. We’ve got to explain the case, we’ve got to explain it intellectually.
We’ve got to win the battle in the parliament and I hope that the Menzies Research Centre is at the forefront of that. I don’t see a future for Australia in this part of the world as a big-spending, big-tax country. That’s not our prospects and we shouldn’t fall for it and indeed I hope we don’t. Now we call all sit around, we can say to ourselves, you know, it’s very bad we’ve had nine budget deficits, we’ve had $300 billion of net debt.
I think Malcolm Turnbull very rightly tried to shift the argument to say actually this is becoming a moral issue now. Why do we need to fix our budget? Because we owe it to future generations. A very strong argument properly explained and well understood.
You know, I used to say deficits and debts are a kind of financial child abuse. It’s just putting millstones of debts around the opportunities and the prospects of future Australians. Now of course, I got into trouble for saying that, because you’re not allowed to say anything like that these days, but it’s graphic language and it’s true.
If you were the generation of 2007, you had opportunity because you had no accumulated debt, but if you’re the generation of 2017 your opportunities are less. If we continue along this path, the opportunities for 2027 will be a little bit less again. Is this what we want in this country? I don’t think we do.
The debt, although we’ve accumulated it faster than any other G20 country, is not yet at breaking point because we had such a strong starting position. I always explain to people that you have to understand with debt that there’s the starting point and there’s the journey. Our journey has been very bad but our starting point was very good. Because we had such a good starting point, we had a shocking journey, but we’re still not that lost. We started from a strong position, so it can be turned around.
And our expectation is that it will be and we hope that the government will be able to do that over the course of this term. But I do think it’s got to be done over the course of this term, because we have now, as I said, nine deficits, if we have another three, that’s twelve.
And in 2020, not only do we have big expenditure programs coming down the line such as the National Disability Insurance Scheme, but of course we’re starting to get into the ageing of the population and this is what we are provisioning for with the Future Fund, we knew it was coming. None of this was a surprise, we knew it was coming. I just hope we’ll be in a better position in 2020 when we got there.
So there are challenges. Government is not easy, never has been easy, but there are precedents in the past where we’ve managed to turn things around. There is no reason why we can’t turn things around again and we should be hoping to turn things around again.
That is the historical mission, I think, of the Liberal Party to be able to do that and what we need are these people, these thinkers like Nick and his team that are out there arguing the case, leading the charge making sure that you win it on a policy front first.
You always win on a policy front first, then the practice follows in behind. If you can’t win it on a policy front then nobody is going to follow you. So you have got to win it on a policy front first, explain it to the public and try and take them into your confidence and follow them.
I thank you all very much for having me here today.