John Forrest (Mallee, National Party, Shadow Parliamentary Secretary for Trade) Share this | Link to this | Hansard source

My question is addressed to the Prime Minister and it asks why inflation in Australia has increased by 1.5 percentage points since the election of the Rudd government.

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

Again the government has sought to be transparent with the Australian community—which we have been—through the budget papers by indicating that, when it comes to our CPI projections, those projections would increase over time before coming back into correction in 2009-10. Let me explain to the honourable member why CPI goes up. There are supply-side factors and there are demand-side factors.

On the supply side, it is like this: problems with infrastructure bottlenecks and skills shortages produce a supply-side constraint in the economy, which produces an inflationary effect. That is economics 101. But that economics 101 was the subject of 20 separate warnings to those opposite through the Reserve Bank, each of which they comprehensively ignored. The impact over time of ignoring each of those warnings, year in, year out, is that spread over many years those inflationary pressures build, and that is precisely what has occurred. It is not just on infrastructure, but it is also on skills. I read through these warnings from the Reserve Bank again this morning; they make for quite stark reading. Time after time, year after year, the Reserve Bank was warning those opposite about the need to act on the skills shortages in the economy and to act also on other capacity constraints.

If the honourable member wants to understand, therefore, why the government is so wedded to its strategy of a nation-building plan and an education revolution, it is because it goes to the heart of the inflation question which the honourable member has just posed. That is, if you are going to effectively deal with infrastructure bottlenecks, you do not just wave a hand and say ‘not my problem’; you do not just wave a hand over there and say ‘it’s a matter for the states’—or for the pixies at the bottom of the garden. No, it is something that you have to invest in and have a plan for doing.

That is why the government stands behind its $76 billion national infrastructure plan, which I spoke about in answer to an earlier question. We do not believe that you can just be silent and idle on these questions; you need a plan of action and you need the funds to back it, which is what we have outlined in the most recent budget.

Similarly, on the skills agenda, we have created Skills Australia in addition to Infrastructure Australia. We have created an $11 billion Education Investment Fund. We have radically increased the number of training places in the economy, in our eight to nine short months in office. The reason for doing so is that we have sought to act on these skills shortages, which form the other part of the inflation equation which the honourable member has spoken of. All of that is on the supply side.

Then there is the demand side. As the honourable member for Melbourne, the Minister for Finance, has pointed out time after time at the dispatch box, the real rate at which public demand was increasing under the previous government was four to five per cent a year. This is a huge impact. In fact, if you look at where those numbers would go over time had we sustained expenditure increases of the order of magnitude which the government was running in 2007-08, it would have cost taxpayers an extra $23 billion. There was 5.2 per cent growth in outlays in the 2007-08 period, and we have brought that down to one per cent.

Why is all this important? Had we been following the same reckless course of action of those opposite, we would have created a set of circumstances which would have made it much more difficult for the Reserve Bank to bring about a revision to the upwards movements in interest rates that we have seen in recent years. So my answer to the honourable member’s question is: here are two sets of supply-side factors which have helped to fuel inflation over a long period of time. One is infrastructure and one is skills shortages. We, the government, are acting on those. In our nine months in office, we have sought through concrete plans to begin to turn back 12 years of inaction on the part of those opposite.

On the demand side of the economy, we have also sought to act not simply to fuel the fires, which those opposite did through their five per cent real increase in outlays last year, but to provide policy space for the Reserve Bank to act and also, therefore, to bring about downwards pressure on interest rates. That has driven the government’s overall economic agenda. That is how we have sought to tackle the inflation challenge. It is a challenge which will take some time to implement and to properly effect over time. But I say to the honourable member: it is far better to have a coherent strategy for dealing with a problem than to have 12 years of sweeping aside 20 successive warnings of the Reserve Bank that there was a problem.