Inflation must be beaten
By Kevin Rudd, Prime Minister
Inflation is a cancer which eats away at the living standards of all Australians.
Date: 09 May 2008
Just yesterday, the Reserve Bank noted that there is “considerable uncertainty” about Australia’s economic outlook. In these uncertain economic times our objective is to put the Australian economy on its surest possible economic footing for the long term.
The first priority of building a strong economy is to tackle Australia’s inflation problem. Inflation is not just an abstract figure. It’s just not a number on a page. It is not just a bureaucratic statistic. It is a cancer which eats away at the living standards of all Australians.
Inflation hurts the working families struggling to put food on the table for the family. A litre of milk now costs 11.6 per cent more than it did a year ago. A loaf of bread is now 9 per cent more expensive than it was last year. Vegetables cost nearly 10 per cent more than they did last year. Health costs have risen 4.6 per cent over the past year.
Recently I received a letter from a young mother from Burpengary, a suburb of about 15,000 people 40 kilometres north of Brisbane. She wrote that she had a job as a sales assistant in a butcher’s shop in Brisbane earning $17 an hour.
She had to give up the job because the cost of child care for her three kids and the petrol for her drive to work was so high that she was only $50 a week better off after a whole day’s work in the shop. She wrote:
"How is anybody supposed to get ahead when the cost of living is so high. If you buy three litres of milk and a loaf of bread – you have just spent $8.00.”
I get letters every week from every corner of the country telling me about the financial pressures faced by many working families.
I have said before there is no silver bullet to provide instant financial relief to those families currently facing these sort of financial pressures. But where we can act, it is the Government’s responsibility to do so. That is why I believe we must do everything within our power to fight inflation because inflation is pushing up mortgage rates and pushing up the cost of living.
It is why I believe that inflation must be a key priority of this budget. Unfortunately not everyone is of this opinion. Mr Turnbull, for example has suggested that inflation is a “fairy-tale”. He said last month that inflation is “under control”. He said that it was at “manageable levels”. Dr Nelson said yesterday that the inflation challenge is a “charade”.
Well, I am here today to say that’s not my view. It is not the Government’s view. Nor is it the view of the International Monetary Fund which reported its World Economic Outlook last month that Australia’s “main short-term policy challenge is to keep inflation pressures in check.” Nor is it the view of working families who face higher prices and higher interest rates.
There may only be three people in Australia who don’t believe that inflation is hurting working families through rising prices and rising mortgages. Dr Nelson, Mr Turnbull, and the Tooth Fairy. And all three are out of touch on this question.
If we do nothing – if we sit on our hands like the alternative Government is suggesting – then the responsibility for reducing inflation will fall to the Reserve Bank’s blunt monetary policy instrument; and that means further hikes in interest rates. That’s not good for anybody.
We now face the scenario of the Liberal Party of today attacking the Federal Labor Government from the left on fiscal policy. At a time of high inflation the Liberal Party is urging us not to cut government spending, and presumably therefore, to increase government spending.
I regard this as gross economic irresponsibility in our current circumstances. And I believe it reflects short-term populism.
The Government is committed to reducing inflationary pressures on the economy through this Budget. That’s why we’ve got to cut government spending. The Budget will cut irresponsible spending because profligate spending has been one of the main reasons we are in this inflation predicament.
We need responsible fiscal policy to start heading in the right direction. That’s why a budget surplus based on cuts in government spending is necessary to reduce some of the pressure on working families from high interest rates.
In opposition, I committed to conservative economic management through achieving budget surpluses, on average, over the economic cycle. In government, we will honour that commitment. We will do so in large part by reducing government spending.
The surplus I set as a target for the Government in Perth, when I was here last, in January of 1.5 per cent of GDP was considerably higher than our predecessors were planning for the upcoming financial year.
We will have to make significant cuts to a number of existing government programs, to achieve that higher surplus and to reprioritise spending to reflect the nation’s greatest needs.
I can announce today that this Budget will achieve a one-off 2 per cent efficiency dividend across government. This efficiency dividend of itself, will yield a further $1.3 billion over the next four years - over and above what the previous government had planned.
Does Mr Turnbull, for example, believe – having said that there is no economic case for budget cuts, that the Government should not impose this $1.3 billion saving? What does the Liberal Party of today stand for if they have abandoned a commitment to fiscal conservatism? What does the Liberal Party of today stand for stand for if they no longer believe we should cut government spending? Or that we should eliminate government waste?
I notice also that the Liberals today have been returning to the question of inflation and the inflation challenge and it’s interrelationship with industrial relations. They released a piece of Treasury advice from the early part of last year on the impact of industrial relations on inflation.
This Treasury advice dealt with the impact of industrial relations settings on the overall inflation rate, together with a range of other factors.
Of course the Treasury advice in question was released before Labor released it’s industrial relations policy, before it released it’s industrial relations policy implementation plan and before I should add, the Liberals themselves introduced their own Fairness Test as part of the subsequent revision to industrial relations laws.
That Fairness Test, as businesses in this room will perhaps attest themselves, adding considerably to the administrative impost on the business.
I would say overall that when it comes to placing these things into proper context, it is important to put them into their chronological context. It is important also to clearly deduce from this engagement by the Liberal Party in this debate, in this fashion, that they are seeking to argue that the only effective tool for dealing with the inflation challenge, is industrial relations and Workchoices.
Our view is that when it comes to dealing with the challenge of inflation, what we need is a five part strategy, the core of which lies in producing a significant budget surplus, around the target that we announced when we were last here in Perth, and achieving that target through effective savings through an attack on unnecessary Government spending.
NOTE: This is an edited excerpt of a recent speech, which can be read in full here: http://www.pm.gov.au/media/Speech/2008/speech_0237.cfm
