Sir William McKell is a significant figure in Labor history. NSW Premier from 1941 to 1947, and later Governor–General, he is known for many things.
Sir William was important in toning down populist rhetoric in favour of a more structured and considered view of public policy.
The Institute’s work in seeking to uphold that considered discussion of public policy is a noble tradition, and one that it does well.
Sir William was born in Pambula – a place which would have been in Victoria but for the manner in which the Black–Allan line was so egregiously drawn. The fact that he became a Premier of New South Wales and not Victoria, largely due to the arbitrary drawing of the line, was just the first in a long line of injustices inflicted upon the state of Victoria, otherwise known as the milking cow of the Federation. So it’s fortuitous that 90% of the nation’s dairy industry is based there.
Let me also add that I’m delighted to be back in NSW. Your Premier was suitably confused at the recent sold out State of Origin match at our MCG. I didn’t know if it was because I was wearing my Blues scarf as a born and bred New South Welshman, or because he hadn’t seen a capacity crowd for a while.
So, an overview of things south of the Murray, and that dodgy Black Allan line.
Today I’d like to share with you where I think Victoria’s economy is now; what our distinctive strengths are, and what this means for the future.
The Andrews Labor Government was elected in November on a platform of putting Victorians first.
We told the community what we were going to do, and the community backed us. When we said ‘no surprises’, we meant it.
McKell once said that he’d based his 1944 election victory on ‘the solid foundation of promises kept, and on the unchallenged record of three years of unremitting work.’
In Victoria, we promised more investment in services and we haven’t wasted a second of time getting on with it.
We spelled out our plan for building the jobs and industries of the future.
And we offered a different view of the State’s infrastructure priorities.
Whilst my colleagues in other jurisdictions may bemoan the depreciation of the Australian dollar – it has helped us in Victoria, and it has given a whole new geographical meaning to a two speed economy.
I echo my federal counterpart’s measured response to recent share market movements. Essentially, while there are always challenges, the fundamentals are strong and our economy is resilient.
Exports are up, manufacturing confidence is higher than it’s been in years, and we are regaining our status as the engine room of the Australian economy.
The state is producing jobs at a healthy rate, household spending is strong, the manufacturing index is positive and exports are growing.
National Accounts figures released in June show Victoria streaking ahead of the other states.
Growth in demand was up 1.3 per cent for the March quarter and 3.4 per cent for the year, underlining the strength of the Victorian economy. This is the strongest it has been since September 2010.
Our first budget, which I handed down in May, was about keeping our word and setting Victoria up for the future. It was about restoring trust and establishing a strong fiscal foundation.
While delivering 96 per cent of our promises in health, education, jobs and infrastructure, our first Budget kept the rate of spending growth over the forward estimates below that of revenue growth.
We projected an operating surplus in excess of $1 billion for every year of the forward estimates. We projected net debt to come down from 6% of GSP in 2013–14 to 4.4% in 2018–19.
We promised Victorians that jobs would be a focus. The unemployment rate in Victoria is already down from 6.9% to 6.4%. In the eight months of government we have created 55,600 jobs.
Yes, Victorians are getting their confidence back, wages are steady, consumer sentiment and spending is growing, but there is still plenty of work to do.
As a Government, we recognise that you can’t build the confidence needed to prosper if the community does not trust you.
I stated in my first Budget that longer–term thinking, and a larger public conversation, would be needed about how we position, prepare and plan for the future.
Having restored public trust, and having established strong fiscal foundations, we can do so from a position of strength.
- Our strength – our people–powered economy
Melbourne is the world’s most liveable city – for the fifth year in a row. In the same survey, Sydney (Harbour and all) got beat by Adelaide.
Victoria isn’t endowed with Sydney’s harbour, or Queensland’s sunshine and beaches, or the mineral riches of the north and west.
Our economy is people powered.
Compared with the national average, Victoria’s economy is:
- More labour (rather than capital) intensive;
- More services–based than goods–based; and
- More dominated by the ‘household’ economy.
Victoria’s fastest growing industries (including professional services, finance/insurance and health) have relatively low capital intensity.
Services account for about 77 per cent of Victoria’s economy, compared with 70 per cent nation–wide.
On the expenditure side, two thirds of Victoria’s demand is on household consumption and dwelling investment – more than any other state and well above the national average.
This has meant we have needed to look outwards and forwards. This led us to invest in our people – in their skills, their ideas and their energy
What does this mean for Government? It means that to grow a people–powered economy, policy needs to focus on the following:
- continuing to attract and support strong population growth;
- having a skilled labour force; and
- investing in the infrastructure to support them.
A giant of science and innovation in New Zealand, the late Sir Paul Callaghan had a vision for his homeland of becoming the place where talent wants to live.
It is a vision that Victoria has adopted, and in some respects, has made its own: investing in a great quality of life has created a platform from which we have attracted smart and creative people, and with it forged an innovative and dynamic economy.
Victoria now enjoys the highest share of tertiary qualified people of all states.
This is no accident.
Labor in Victoria has a long, proud tradition of investing heavily in education, one that we have continued in the 15–16 Budget.
We are committed to making Victoria the education state, because we understand the vital importance of an educated and highly skilled workforce in delivering a prosperous future for our state.
Our economy is diversifying from a strong industrial base to a balanced mix that includes services and a more modern knowledge–based economy. Increasing demand for skills highlights the importance of quality outcomes of the education and training system. All Victorian workers from manufacturing to professional services will benefit from a renewed focus on a strong, responsive and high quality training system.
We are also making sure that we focus on individual progress: our success will ultimately come down to the quality of each and every interaction between teachers, students, and the curriculum they’re engaging with.
It sounds simple, but given the complexity of how the human brain acquires and retains new knowledge, we know that it’s not – which is why work in this area is central to our development of the education state.
Melbourne also attracts more international students, and more migrating business entrepreneurs, than any other Australian city.
And Victoria attracts more and more people from other States. Those moving from New South Wales to Victoria have been – and remain – the largest element of Australia’s inter–regional migration.
Much like liveability, a people–powered economy doesn’t just happen – it requires active policy, active participation and active partnership.
That’s why our Government’s focus is on six industries poised for extraordinary growth and primed for Victorian expertise – medical technology and pharmaceuticals; new energy technology; food and fibre processing; transport, defence and construction technology; international education; and professional services.
These industries harness the diversity of metropolitan Melbourne and rural and regional Victoria. It continues Victoria’s economic evolution from a sheep station to a gold mine, to a factory, to today, a highly skilled labour market.
And through initiatives like the Premier’s Jobs and Investment Panel, the Future Industries Fund, the Regional Jobs and Infrastructure Fund, the ‘start up initiative’ and our commitment to make Victoria the education state, we will grow those sectors that offer the best prospects for future growth.
This growth needs to be underpinned by not only economic infrastructure, but social infrastructure, to ensure both economic productivity and a good quality of life.
Our first budget delivers significant investment in new capital projects for all Victorians with a total new investment of around $22 billion.
We are investing in a number of high priority areas that will make a difference to the day–to–day lives of Victorians.
More than $17 billion will be invested in road and public transport projects to ease congestion, stimulate the economy, create jobs and enable people and goods to move more freely in and around Melbourne and Victoria.
We are acting now to support investments in projects that will build economic capacity, and create the jobs needed to keep Victoria growing.
Furthermore, Infrastructure Victoria and Projects Victoria will be established this year to oversee long–term strategic planning, coordination and completion of large scale projects.
Infrastructure Victoria will be open and transparent – it will publish business cases that clearly highlight the value of particular infrastructure. Empowered to act independently, both bodies will ensure that Victorian governments of the day are held to account on the decisions they make.
The Bracks/Brumby Labor Governments of the 2000s were innovators in the use of public–private partnerships.
We put in place the Partnerships Victoria model and delivered major new infrastructure through PPPs, including Victoria’s first ever schools PPP, the Royal Children’s Hospital redevelopment, and Eastlink.
The model’s success was highlighted during the Global Financial Crisis, when our reputation and regard allowed us to attract competitive private finance and fund projects such as Peninsula Link and AgriBio.
PPPs have proven to be a valuable tool for harnessing innovation in the private sector and ensuring efficient project delivery of priority infrastructure projects.
This Labor Government has gone the next step.
The new Market Led Proposals process allows Government to benefit from the innovation and ideas, which the private sector can bring, to our priority areas.
The model allows private sector project proponents to present their ideas to government, and for government to deal exclusively with that party where there is unique intellectual property and public interest in doing so.
We know that Government is not the sole repository of good ideas. We are looking at other ways to work in partnership with the private sector.
This reflects a modern Labor approach, one that I’d like to think Sir William would have been proud of.
This reformist attitude is also reflective in our approach to asset recycling. It is not in Victorians’ best interests to have funds tied up in existing assets and idle balance sheets, while being unable to afford significant new public assets which can unlock productivity and improve living standards.
Any government that turns its back on its ability to take care of its most vulnerable citizens is just not doing its job.
When in Opposition, we were the first to propose a lease over the Port of Melbourne as a way to fund new, productivity–enhancing infrastructure – namely the removal of 50 level crossings.
As we foreshadowed, the Andrews Government, a modern Labor Government, will continue to look for opportunities to free up capital, where it is in the community’s interests to do so, by recycling existing government assets and investing the money into new infrastructure.
We also need to begin a serious and sensible conversation about the role of public debt in meeting our infrastructure needs.
If we can’t have this conversation now –with continued population pressures,with state debt trending down,
with the rate of recurrent spending growth below that of revenue growth, and
with the cost of borrowing at an all–time low– we never will.
At a low of just 2.28 per cent in February, the current Commonwealth Government’s 10–year borrowing of 2.65 per cent is close to the cheapest it has ever been.
Victoria is able to borrow at rates under 3 per cent – the lowest we have ever been able to borrow at.
Let me be clear. I will never advocate using debt to fund recurrent spending.
But I will also never take sensible options off the table today, to build the necessary infrastructure for tomorrow.
I won’t take options off the table that create jobs for Victorians.
That improves the liveability and amenity of Victoria.
That helps grow the Victorian economy and provide a better and brighter future for our children.
This infrastructure needs to be rigorously costed, have a positive benefit cost ratio and must be of state significance.
Underpinning this approach is the notion that prudent debt management goes hand in hand with the notion of ensuring public value.
The Government made an election commitment to deliver substantial operating surpluses and maintaining a Triple A rated economy.
And this commitment will be met.
But this shouldn’t prevent the State from using its balance sheet strategically to ensure the public gets value – value from strategically important infrastructure.
The former Victorian Coalition Government refused to entertain the idea of debt to fund infrastructure of state significance.
It was a conversation they refused to countenance, while they set about tripling the debt they inherited from Labor.
They significantly cut spending on essential services – health, education, police, and child protection – to fund those surpluses.
We manage the present as custodians of the future.
These surpluses were only achievable by restricting expenditure growth to just 2.5 per cent on average per year.
Taking into account inflation and population growth, 2.5 per cent is not sustainable – and it cannot deliver the services Victorians need and deserve.
I think everyone in this room would agree – that is not responsible financial management.
That is not responsible government.
Our more sustainable level of expenditure growth of 3.0 per cent remains under revenue growth (3.4 per cent). This includes our election commitments, new policy and ensures our forward estimates aren’t premised on a fictional level of expenditure growth that would never be achieved.
Labor’s four years of surpluses provides a buffer for the future, while delivering on our election commitments and ensuring that essential services are not compromised.
They are also greater than the average surplus of the last ten years [04/05–13/14].
Our surpluses are lower, but they are responsible, they are more resilient, and they are more credible.
I will not rely on illusory surpluses to fund infrastructure of state significance – I want all the options on the table for serious consideration, and debt is one of those.
We have a strong, people–powered economy growing faster than the national average.
But we cannot rest on our laurels; we must plan for the future.
As the Greek proverb states: a society grows great when old men plant trees whose shade they know they shall never sit in.
Investing in tomorrow’s infrastructure, today, is critical to maintaining Victoria’s world–leading quality of life, attracting the world’s best and brightest, and further strengthening our people–powered economy.
I am throwing out the political play book – the populist decrying of debt – and advocating for an honest conversation about how we build that infrastructure, how we make smart choices, and how we deliver it responsibly. The time for that conversation is now.
I look forward to progressing it over coming months, and I hope that at least some of you will be a part of it.
Josh Gordon for The Age
Victoria is considering ramping up borrowing to pay for future infrastructure, with Treasurer Tim Pallas promising to throw out the “populist” political rule book decrying debt.
In a speech to Sydney’s McKell Institute signalling departure from past practice, Mr Pallas also said the previous government’s efforts to limit spending growth to 2.5 per cent a year led to an “unsustainable” erosion of services when compared with population growth and inflation
Instead, Victoria will adopt a more expansionary target of 3 per cent spending growth – which is still below expected revenue growth.
Although Mr Pallas promised to maintain a buffer of budget surpluses and protect Victoria’s AAA credit rating, he said at a time of record-low interest rates it would be irresponsible not to consider increasing borrowing to boost the economy.
“I am throwing out the political play book – the populist decrying of debt – and advocating for an honest conversation about how we build that infrastructure, how we make smart choices, and how we deliver it responsibly,” he said.
The May budget predicted net debt would fall sharply from about 5.8 per cent of the economy this year to just 4.4 per cent in mid-2016 as cash from selling the Port of Melbourne hits the bottom line. This is still considerably more than NSW, which is predicting net debt of just 1.9 per cent this financial year and 2.2 per cent next year.
The state government has promised to plough the proceeds from the port sale – expected to be about $6 billion – into its plan to remove 50 level crossings over two terms.
But beyond that there are lingering questions about how it will pay for other road and rail proposals, including the $11 billion Melbourne Metro rail project, which Labor has promised to start building before 2018.
“We also need to begin a serious and sensible conversation about the role of public debt in meeting our infrastructure needs,” Mr Pallas said.
“If we can’t have this conversation now – with continued population pressures, with state debt trending down, with the rate of recurrent spending growth below that of revenue growth, and with the cost of borrowing at an all-time low – we never will.”
His comments follow calls by Reserve Bank governor Glenn Stevens for a carefully considered pipeline of national infrastructure projects to keep the economy healthy during slow patches.
Economist Saul Eslake also recently told a Senate committee the federal government could afford to borrow about $50 billion for infrastructure without jeopardising the AAA credit rating.
The business community has supported the notion of using state and federal debt for productive, rigorously tested projects.
Mr Pallas said the previous Coalition state government had refused to entertain the idea of debt to fund significant infrastructure. This thinking had necessitated cuts to spending on services.
“They significantly cut spending on essential services – health, education, police, child protection – to fund these services,” Mr Pallas said.
Shadow Treasurer Michael O’Brien accused Labor of breaking a promise to keep a lid on debt. “Having wasted so much money, the Andrews Government cannot justify hiking Victoria’s debt to pay for their unfunded promises,” Mr O’Brien said.
But Mr Pallas said the previous government’s attempts to limit spending increases to 2.5 per cent a year did not represent responsible economic management. Instead, Victoria will adopt a new target to keep spending growth at about 3 per cent a year, still less than the forecast revenue growth of 3.4 per cent.
That means future surpluses might be smaller than they otherwise would have been, which could make the already finely balanced task of keeping Victoria’s AAA credit rating even more difficult.
“I will not rely on illusory surpluses to fund infrastructure of state significance, I want all the options on the table for serious consideration and debt is one of those,” Mr Pallas said.