Australia's economy punches well above its weight – although we have only the 51st largest population in the world, we have the 13th biggest economy. This has never been more the case than over the past few years. The value of our economy is now more than $1.4 trillion, up from just $1.1 trillion when Labor came to office. This is an extraordinary achievement given it has come during the most destructive period in the global economy since the Great Depression. Our economy's solid growth has meant our nation has created jobs – more than three-quarters of a million since late 2007 – while around 27 million people have joined unemployment queues elsewhere in the world. By contrast, major advanced economies like the U.K., Italy and Japan are actually smaller today than they were before the global financial crisis struck. In fact, during the week we saw the U.K. economy contracted further, slipping back into recession last quarter. Although there's a tough road ahead for many developed economies, we have good reason to be optimistic about our region and our economy. We have solid growth, low unemployment, strong public finances, a huge pipeline of investment, and – as figures released on Tuesday showed – underlying inflation at the bottom of the Reserve Bank's target band. Our strong economic fundamentals were this month recognised again by the IMF, which expects the Australian economy will outperform every major advanced economy over the next two years. A growing economy is obviously good news for Australian workers, pensioners, families and businesses.
Getting the budget back in the black in 2012-13 is the responsible path for an economy returning to trend growth. This is something I've spoken about a lot over the past few weeks and indeed over the past few years. It's good to see a really diverse and growing range of commentators and organisations, supporting a budget surplus. Commonwealth Bank economist James McIntyre this month said the "return to surplus now, whilst we have got a major mining construction and investment boom, is probably the right way to go." Business groups, such as the Australian Chamber of Commerce and Industry, have noted that a surplus is appropriate given our economy's strong fundamentals and is an important buffer given the continuing global uncertainty:
While the outlook for growth remains positive, it is appropriate to continue to work toward the pledged return to surplus in the 2012-13 financial year. Having objectives for fiscal policy is important, as is the credibility that comes with meeting those goals. A key lesson of the European sovereign debt crisis is that market confidence rests heavily on demonstrated fiscal discipline and a loss of credibility can severely impact the price at which capital markets are willing to finance a budget deficit or even obliterate a country's capacity to finance its deficits.
ACCI Pre-Budget Submission, February 2012
But it's not just business groups and economists; it's the voices from many other parts of the community who want to make sure we do everything we can to ensure the Reserve Bank has maximum flexibility to cut interest rates if it feels that is necessary. The National Farmers' Federation said in its annual budget submission: "We are supportive of tough measures by the Government to consolidate Australia's fiscal position, reinforce our reputation as strong and responsible economic managers and relieve some of the pressure on interest rates."
While a surplus is the right strategy for Australia, delivering it has been made a lot harder because government revenues have taken a huge battering since the global financial crisis. As I told Meet the Press this morning, weaker-than-expected collections over the last six months means there will be a further revenue downgrade in the Budget next week. Revenue collections will be down by a further $5 billion in both 2012-13 and 2013‑14 compared to the last forecasts in the mid-year budget update in November. This obviously makes the task of returning to surplus that much harder and takes the total write-down in tax collections since the 2008-09 Budget to almost $150 billion over five years.
The lower revenue reflects the impact of the GFC and the continuing global turbulence. But as I explained in a speech to the Australian Business Economists last month, the changing structure of our economy also means tax revenue as a share of GDP is likely to remain lower than recent historical standards for some time to come. The most recently published figures show the tax-to-GDP ratio is expected to average 22.8 per cent over the two years from 2013-14, far short of the record 24.2 per cent set in the middle of last decade under the previous government. It's worth noting that if the ratio had remained at the same level that we inherited from the previous government, tax collections would be over $21 billion higher next year. That would put the surplus at over $23 billion based on the outcome of last November's mid-year budget update.
Because of the lower-than-estimated tax revenue, we need to find substantial savings in the Budget. As a Labor Government, we will always do everything we possibly can to look after low- and middle-income individuals and families as well as protect the most vulnerable in our community. Our savings will be targeted and responsible, charting a middle course between those who say take a chainsaw to government spending and those who say we shouldn't cut at all.
Our return to surplus sends a strong message of confidence to investors across the world in these uncertain times – demonstrated in our AAA credit rating from all three major international ratings agencies, something never before achieved in our nation's history. But it's much more than that. A surplus provides more flexibility for the Reserve Bank to cut interest rates if the independent Board thinks that's required. The Government's responsible fiscal consolidation has meant the RBA had room to cut rates in November and December last year, putting around $100 a month back into the pockets of an average homeowner. In fact, the fall in standard variable mortgage rates since Labor came to office means a family with a $300,000 mortgage is now paying around $3,000 a year less in repayments. That's the most obvious dividend of budget discipline for Australian families. An extra $3,000 a year is a lifeline for families struggling to pay the bills.
Of course critical to ensuring families can get a better deal on their home loan is healthy competition in the banking sector. That's why this Government has been so focused on delivering reforms like banning mortgage exit fees on new loans, making it easier for customers to walk down the road to another lender if their existing bank doesn't do the right thing by them. The Government has also helped smaller lenders provide over 200,000 home loans since 2008 through investments in the residential mortgage-backed securities market. Measures like these have helped smaller banks grow their home lending by 15.4 per cent in the year to February, more than twice the rate of the major banks. Regardless of the outcome of Tuesday's RBA meeting, I'd encourage you to make sure your lender is offering competitive rates and services on your home loan. Shopping around is the best way to make your bank work harder for you, particularly now that our reforms make it easier to follow through and take your business elsewhere if another financial institution is offering better value and service.
Deputy Prime Minister and Treasurer of Australia