Shadow Treasurer, Angus Taylor, Keynote Address to the Centre for Independent Studies

Tuesday, 27 September 2022


The CIS has been fond of pointing out that recent years have been a tough time for fiscal conservatives across the globe.

My side of politics has long believed that a strong economy demands lower tax rates, balanced budgets, spending growth restraint and containment of inflation and interest rates.

There is no greater killer of aspiration, enterprise and personal responsibility than permanently higher taxing and spending with governments crowding out individuals and businesses.

So nothing could have prepared us for the onslaught of global spending made necessary by strong and often lengthy COVID restrictions. But despite the measures taken during the pandemic, the strength of the recovery has been striking, to say the least.

The economy Labor has inherited is extraordinarily strong, and I will demonstrate how the Coalition left a remarkably robust budget position.

This is entirely at odds with the grim narrative of the Treasurer who is only too happy to talk down the economy and the budget.

But the economic and political context is changing rapidly – as rapidly as any time I remember as we emerge from the pandemic and from the election with sharp increases in inflation and interest rates. It’s timely to look at the new challenges we now face through the traditional lens of Liberal and National Party values.

For the Coalition, this need not be a debate about whether we should move to the left or to the right. It is not a contest between conservatives and moderates. It is a reassertion of what we believe in as Liberals and Nationals.

The real contest here is between our core beliefs and the alternatives offered by our political competitors. A belief that the private sector drives opportunity and prosperity, not government.

A belief that a dynamic, resilient small businesses are the backbone of a strong economy, not bureaucracies.

A belief that hard-working families know what is best for them, not public servants or politicians.

A belief that the vision of each Australian should be the vision of our nation, not a vision conjured up at conferences in Canberra.

A belief that big business also has a crucial role to play, providing competitive goods and services to their customers: Hard working Australian families and small businesses.

In recent decades a consensus emerged (which only some dared to challenge!) that economic shocks could always be ‘fixed’ with more government spending. But you can’t just throw money at rising inflation and interest rates hoping to solve the problem.

Moreover, Australians’ demands for quality public services will need to be met but can’t just be met by throwing more money at those services. The philosophies of Thatcher and Reagan emerged the last time we faced this kind of environment. They recognised, and voters recognised, that centre right values offered solutions to the problems their countries faced.

Many will say the situation we now face is not as bad as then. But even if inflation hasn’t reached the giddy heights of the 70s and 80s, the fastest way to get there is to deny the problem and adopt the wrong solutions. This morning I will argue it is time to refocus on four imperatives which together form a back-to-basics economic agenda: 1. Containing inflation and interest rates 2. Balancing the budget and reducing debt 3. Reducing taxes to empower aspiration and enterprise 4. Reasserting the role productivity to drive growth and real wages

On the back of these imperatives, I’ll outline the tests that Labor will face in its upcoming budget.

Let me start with containing inflation and interest rates.

1. Containing inflation and interest rates

Despite the great strength of the economy, and perhaps because of it, nothing is set to cause more pain for many Australian households and businesses than rising inflation and interest rates. Interest rates hit borrowers on flexible mortgages and those costs are escalating fast. A typical NSW mortgage holder of $750,000 will be paying an additional $900 a month compared with the beginning of the year.

The recent cash rate increases are passed through with a 2-to-3-month lag. By Christmas this year, the impact of cash rate changes will be four times what consumers have recently experienced.

Now, it is the natural instinct of Liberals to contain interest rates and inflation, because they are an insidious tax on the work and savings Australians. Inflation raises income tax rates through bracket creep, confuses consumers and saps the incentive to have ‘have a crack’. Until recently some commentators and economists were arguing that a bit of inflation would be a good thing. Perhaps, but what we’re seeing now is not a bit – it’s a lot.

We have seen this before, in the seventies, when ultimately governments and central banks lost control and the pain was extreme. I was nine in late 1975, and alongside the dismissal, inflation and rising interest rates was the biggest topic around. Growing up on a farm, my dad – a farmer – explained in agricultural terms: Inflation is more money but the same number of cows. The price of a cow goes up, along with the price of everything else. And the money in your piggy bank is worth less. I got it straight away, and I’ve never forgotten.

Of course, Malcolm Fraser won the election in December that year in a landslide and inflationary pains were central to that victory.

Not surprisingly, managing government spending was a central focus in the subsequent years – it was an under appreciated strength of that government.

Throughout the 80s and 90s the impact of high interest rates in inflation continued, with farmers and small businesses actively campaigning and rallying for solutions.

As the problem intensified, a shift to strong independent central banks gained momentum, and played a crucial role in delivering a solution. But the success of those reforms has created a complacency about expansionary monetary and fiscal policy across the world, particularly among progressive governments.

Avoiding this complacency is now crucial, with four parts. First, we need to ensure the Reserve Bank is recommitted to strong inflation targets. It’s timely for the RBA review to consider how the bank can improve its forecast, guidance and bond trading strategy. We need to reaffirm the importance of an independent, credible, capable Reserve Bank with an undistracted focus on a 2-3% inflation target.

While ESG issues excite many, they should never distract a central bank from its primary role. We won’t support new distractions for the RBA outside of its core task, but we will support a back-to-basics agenda.

The second opportunity to reduce inflationary pressures is to reduce supply constraints. Australia’s job vacancy rate is in uncharted territory, approaching 500,000 having barely breached 200,000 before the pandemic. Every business person will tell you how challenging the situation is. The first port of call should be every Australian who wants to work, but is held back by the tax and welfare system. That’s why we proposed a doubling of the job bonus for aged pensioners and veterans, allowing them to work more without losing their pensions. It was extremely disappointing that Labor has only adopted a half-baked, temporary version of this policy. Effective marginal tax rates are too high for many Australians, and we should be looking to reduce them – encouraging work as a pathway to a better life.

Targeted immigration also needs to be part of the answer to fill the remaining gap. Longer terms skill investment is crucial, but it must be effective and responsive to what the market needs. During the pandemic we provided low or fee-free training in areas with skill shortages such as aged care. That initiative has paid off with 220,000 trade apprentices currently in training – the most since 1963.

The third imperative is to avoid a price-wage spiral. We all want to see higher real wages, but if there is a race between wages and prices, real wages will lose. We saw that in the 70s and 80s and we will see it again if Labor gives into the extreme demands for industry wide bargaining we are seeing from the union movement. If this union push is successful, it will end in tears.

Finally, we need to reaffirm the crucial role of fiscal policy on inflation and interest rates.

Keynesian economists have recognised this case for a long time, even if they tend to underestimate the costs. More recently John Cochrane from the Hoover Institution has shown that sustained deficits can cause ongoing inflation as markets lose faith in the ability of governments to repay debts. These are hardly radical ideas. One of the secrets to Australia’s pandemic success was that monetary policy and fiscal policy were aligned. They need to align again. We have heard this plea from central bankers around the world. If governments can’t contain spending then central banks will hit the brakes harder. Australia’s economy is in a strong position, but there is a serious test for the Government in containing interest rates and inflation.

Which takes me to balanced budgets and debt reduction.

2. Balancing the budget and reducing debt

Inflation busting fiscal policy means a balanced budget and a pathway to reduce debt. The truth is that in a period of low interest rates and strong economic growth, balanced budgets were less fashionable across the world, despite the fact that we balanced the budget in here in Australia in 2019.

While we hear a lot less of it today, fashionable theories emerged in recent years that the direct costs debt and deficit aren’t worth worrying about. However, history tells us everything that’s wrong with this argument. We know economies hit speed bumps that require shock absorbers. So where does Australia stand? We handed over an economy and a budget in far better shape than most could have imagined. Economic growth is remarkably robust, labour markets are seeing unprecedented strength and Australian commodity exports are surprising on the upside as they so often do.

Our final budget in March drove a fiscal turnaround of over $100 billion, but even that understated the strength of the budget position Labor inherited. The Government’s monthly accounts show that when the Coalition left office, Australia had seen a cumulative surplus over the seven months since November.

We see this in Chart 1 – where the overall underlying cash balance from November until May equalling more than $10 billion, and the fiscal balance $18.6 billion. And while we don’t yet have June numbers Labor has told us they are expected to be Strong. Now it’s important to note that Sydney was only released from lockdowns on October 11 and Melbourne on October 21.

So from the moment the country opened up, the budget position improved dramatically with the net operating balance, the fiscal balance and the underlying cash balance all running a cumulative surplus between November and May. It just required getting out of lockdown!

As we emerged from the pandemic we saw a sharp reduction in health and welfare costs and the strength of the economy drove a resumption of pre-pandemic tax receipts. Much has been made of high commodity prices, and the impact on company tax revenues, but much of the improvement came from income tax revenues returning, as unemployment fell sharply as you can see in Chart 2.

The biggest threat to the sustainability of the budget isn’t commodity prices, but Labor’s predisposition to spend. It is also true that the pandemic led to higher gross debt and net debt, and there will be reasonable debates for years to come about the breadth and length of restrictions.

But again, a sober examination of the facts is important. When Labor left government in 2013, MYEFO showed that the gross debt was expected to reach $667 billion next year and keep growing.

That means around 60% of the gross debt in 2023/24 was from Labor’s time in Government. That debt was Labor’s, but we took responsibility for bringing it down and managing the costs, as good governments must.

Since 2013 we extended the maturity of the debt from 5.2 years to 7.2 years, locking in low rates. For instance the average yield of Treasury Bonds issued through the pandemic was 1%. As interest rates have risen, this long dated low-cost portfolio is paying off. But there is another important reason why criticism from the Government about debt levels does not hold water. We know the Labor Party wanted to spend more. $81 billion more!

 Labor constantly advocated bigger spending programmes during the pandemic including:

• $6 billion in hand outs to Australians who were already vaccinated.

• Extensions of JobKeeper that weren’t needed.

• And construction of quarantine facilities that would now be sitting empty.

Labor went to the last election promising to make the budget bottom line worse. Too many Ministers are looking to reward stakeholders who supported them at the election. It remains to seen whether the Treasurer has the experience and strength to say no to his colleagues. So the test for the new Government is whether it improves on the strong budget position it inherited, or makes excuses to spend more and tax more. My fear is that in future years we will look back on the strength of the current budget position as a lost opportunity.

3. Reducing taxes to encourage aspiration and enterprise If a government cannot manage its budgets, it can’t deliver lower taxes. Indeed it will inevitably have to find a way to raise taxes.

Higher taxes kill aspiration, enterprise and opportunity. Some are arguing that lower taxes are not what we need in an inflationary environment. But longer-term tax reforms strengthen the capacity and growth of the economy. Lower taxes encourage people to invest, to work hard, to innovate, to build businesses and to build careers. That’s why over recent years, of course, we delivered tax cuts to small businesses and households. It’s why we got rid of the mining tax and carbon tax. It’s why we reduced company tax for small businesses and personal income tax for all Australians. It’s why we one of our first acts in Opposition is to argue for lower effective marginal tax rates for pensioners. It’s why we have committed to a tax cap of 23.9% of GDP.

The Liberals and Nationals have always stood for lower taxes, and in Opposition we do not plan to walk away from this. Labor struggles to support lower taxes because their instinct is always to spend more. Their support for the stage 3 three tax cuts is half-hearted, and it remains to be seen whether they will see them through.

The Treasurer has said they were “unaffordable and unwise” and that Labor didn’t “think it’s responsible to sign up to stage three of the tax cuts.” I have little doubt he is considering tax increases for future budgets – reviving their taxes on superannuation, incomes, franking credits and capital gains.

The Treasurer and Finance Minister have refused to rule out tax increases both in the parliament and in the media despite persistent, direct questions. But we already know three areas where the impact is already coming – three sneaky taxes that aren't recorded in the budget papers, but will be felt acutely in the real world by Australian families and businesses. The first is bracket creep which, in an inflationary environment, will be very strong. Bracket creep is an insidious increase in tax rates when there is a progressive tax system, as we have for income and now also company tax. It saps incomes without being obvious, other than when households and small businesses can’t make ends meet.

The second hidden tax is the higher inflation I outlined earlier, whittling away hardworking Australians’ purchasing power and savings, punishing thrift. It means that going forward, one of the most efficient way to deliver real wage increases will be to reduce inflation. The third sneaky tax is on energy intensive industry, through the overbuild of transmission lines and tightening of the safeguard mechanism. Increased transmission spending is passed through to consumers. Yet Labor proposes to spend up to $80 billion on it, including $20 billion of taxpayers’ money, on many projects not recommended by the market operator. One thing is clear: it will drive up prices. And while the details and Labor’s changes to the safeguard mechanism are still unclear, what is clear is that many energy intensive companies in agribusiness, transport and mining will be hit. Already, pressure is building on Labor to remove protections for energy intensive, trade exposed industries like our manufacturers, our miners and our transport companies. We have seen in Europe the impact of putting virtue above common sense when it comes to these sectors.

So the test for Labor is will they adopt our 23.9% tax cap, or will they allow sneaky or even explicit tax increases to sap the rewards to Australians from enterprise, effort and thrift?

4. Reasserting the role of productivity to drive wages and prosperity Over the longer term a stronger economy, balanced budgets, lower taxes, robust real wage growth and quality public services are only achievable through strong productivity growth.

Of course, in politics productivity has often been considered to be a dirty word. It is seen as proxy for job losses. But nothing could be further from the truth. Genuine productivity is the only pathway to prosperity. But we shouldn’t pretend that the productivity achievements of past decades are the right ones for now. The much-celebrated reforms of the 80s and 90s – focused on private sector gains, particularly in industry, mining and agriculture – have reached diminishing returns. The composition of the economy has changed dramatically and so the productivity focus needs to change with it. Increasingly, this depends on productivity in services, particularly non-market services, as the Productivity Commission has recently told us2 .

As ‘non-market’ or public services like health, aged care, disability, childcare and social assistance have become a bigger part of the economy, productivity in those sectors drives overall productivity. Healthcare, social assistance, disability and education are now a larger and more important part of the economy than ever before making up almost 25% of employment and pushing 30% of economic activity. Managing the growth in costs of public services, while delivering strong customer outcomes, is exactly what the Coalition achieved prior to the pandemic. But these sort of outcomes will need to be replicated for many years to come. The new government has downgraded the expected productivity gains from 1.5% to 1.2% per annum in their most recent outlook. We can only assume that they believe that their own policies will slow economic growth and deteriorate the budget over the medium term. 

Meanwhile, it is crucial to challenge vested interests unaligned with the national interest if productivity is to be strong. Whether it is the big data platforms or the unions, we will continue to challenge vested interests where it’s appropriate. For Labor, the productivity and competition necessary to drive opportunity and realise aspirations for so many Australians has been and is likely to remain a blind spot.

The challenge for the new Government is that many of the unions who backed them at the election are making demands that are often diametrically opposed to strong productivity gains. So the test for the Government is this: Is it willing to challenge vested interests – particularly unions – to drive strong productivity as we recover from the pandemic? Conclusion Some might say that the four principles I have outlined today should have been more evident during the pandemic.

I would argue that prior to the pandemic they were very much on display, and the recovery has been stunningly fast and effective. But as the next wave of challenges hits us – inflation and interest rates bucking decades of downward trends – core Liberal National values are more important than ever. Productivity is more urgent than ever as we look to a longer-term pathway for balanced budgets, higher real wages and quality public services. Just as the pandemic itself required constant adaptation and response, so does the current environment. We will work closely with Labor if it stays true to these common-sense principles, in the national interest. We will hold them to account if they don’t. We will hope for the best, but plan for the worst.

And whether Labor has a plan or not, we will continue to form our own plans and policies in the coming months and years based on the principles I have laid out today. Australia deserves no less.