00:00Look, it's really important always to have a discussion about spending, the level of
00:07spending and is it effective, and also on the other side, around the efficiency and effectiveness
00:13of our tax system. But right now, contrary to a lot of economic commentary, government
00:19spending is not the main culprit driving up inflation. What is in fact the main culprit
00:26is a lack of capacity of our economy to keep producing goods and services without running
00:32into constraints that drive up inflation. And if you look at the inflation figures that
00:37came out recently, we can see a few things in there. If you look at something like housing,
00:42which is driving up inflation at the moment, yes, there is demand driving housing, particularly
00:48as policy makers keep giving a boost to first home buyers, but that's running up against
00:53the constraint that we can't build houses fast enough. And of course, in the construction
00:59sector, they're facing a lot of skills shortages. If you look at another area that's driving
01:05up inflation, insurance and food. Well, this is a function of natural disasters and changing
01:12weather patterns. So all of a sudden, a changing climate is now pushing up the cost of living.
01:17And the third thing that came out in the inflation figures the other week was the fact that state
01:23and federal governments are actually spending less on things like energy rebates, and that's
01:28impacting on the inflation numbers. When you put all these things together, what it tells
01:33us is fundamentally in our economy, we have a supply problem. You might remember, Gemma,
01:40it wasn't long ago, we used to be able to run our economy at about 3.2%, 3.3% a year comfortably.
01:48But now, the economy is growing at just over 2% and it's breaking out in inflation sweats.
01:54So the question is, is this as good as it gets? And the answer to that is, we need a more
01:59strategic approach. And this is the task for the government and the budget, a strategic
02:04approach that lifts the productive capacity of our economy and allows this economy to run
02:10at a faster rate. This is really important, particularly given geopolitical shifts that
02:16are taking place, and also because rampant technology is staring us in the face, and because we've
02:22got a changing climate. So these three things demand that we have a more strategic view, and the
02:28focus of this budget really should be on how we lift investment, particularly private sector
02:33investment, to drive productivity. Because what you get out of that, Gemma, is you'd be
02:38able to grow the economy faster without breaking out in inflation.
02:44We'll get more on that in a moment. But just to address that, you've outlined the supply-side
02:47constraints, the demand pressures there. If we look at spending by the federal government,
02:52though, it is at its highest level in 40 years if we exclude those pandemic years. 26.9% of
02:58GDP in 25, 26. You're saying that that is not a concern?
03:03Look, I think it's always important to make sure we are looking at what we spend money on
03:09and make sure governments are spending it effectively. And you know, there are programs that aren't
03:13working effectively. They should be junked. There are programs that we know need to be
03:18tweaked to make them more effective. They should be tweaked. But if we look at government spending,
03:23why has government spending gone up in recent times? Well, take one area, the largest area,
03:28or one of the largest areas of increase in expenditure for the energy transition. Well,
03:32that's because business and policy makers across the political spectrum decided to get rid of
03:37a carbon price, which was actually a mechanism to drive private sector investment to deal
03:42with the energy transition. And that was junked in favour of government spending. If we look
03:48at another area of high growth, it's aged care. Well, it's not surprising. We have an ageing
03:53population. And so you expect, if you want people to age with dignity, that we're going
03:57to see an increase in aged care expenditure. Another area that the government spent more
04:02money on is childcare. Now, what we have learnt over the last 20, 30 years is that good quality
04:08childcare can be really important for a child's cognitive and social development. And of course,
04:14there is this other thing. We know that for most of our history, women have been the main
04:19child-rearers. Now, if you cut childcare and access to childcare, what it means, it puts pressure
04:25on women to drop out of the workforce. And we don't want that to happen. So, look, it's really
04:30important to get a handle on expenditure and is it effective. But the real question we've got here is
04:38something more fundamental about the capacity of our economy to grow and run at a faster rate.
04:44And that goes beyond just this rate rise. It's a more fundamental challenge that this country faces,
04:50our economy faces and our business community faces. And so, to that point that we need more investment
04:55without adding to inflationary pressures, how do we achieve that? Look, a couple of things. You know,
05:01the government is spending a lot of money through its Future Made in Australia program. And it's got these
05:06great investment vehicles that are out there that are trying to spend money. Now, greater alignment
05:12for those investment vehicles around the energy transition, making our supply chain in the economy
05:20more resilient, particularly in the face of geopolitical tensions, and third, driving innovation,
05:25would be a really, really good use of that government expenditure. Another is, you see, the government's got
05:31the Robin Denholm review that's sitting with it that they're considering at the moment. This is about
05:36innovation. And innovation is really important if we are to be more productive in the future.
05:42Because, see, if we can lift our innovation effort in Australia, then that means we can become more
05:47competitive. If we can boost innovation, it'll mean that, for example, through adoption of AI,
05:52we can drive more efficiency in our economy. If we boost innovation, it means business will invest in
05:58re-capitalising the capital equipment in our economy. So, these things are really important,
06:04because a boost in innovation is a bit of a rallying call for how we think about investment.
06:10And if you can boost investment, you will get productivity following. And why, again, is that
06:15important? Because if you can boost investment and productivity, what we will do is lift the capacity of
06:22our economy to grow faster without inflationary pressures. Because what we're seeing right now
06:28is actually a constrained economy. The supply side of economy doesn't allow us to produce goods and
06:33services well enough and fast enough without an outbreak of inflation. And that's the thing we've got to solve.
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