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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

4 October 2009

NO.029

Treasurer's Economic Note

Welcome to another extended edition of my economic note. I've got a lot to report in today's note, following last week's release of several international reports, the Final Budget Outcome, and more figures confirming the success of our stimulus. I also want to take you through the evidence given by the RBA Governor and several business groups at last week's Senate Committee analysing our stimulus measures. I explained in last week's instalment that our stimulus program has been carefully designed to start to withdraw over the coming months, and a few days ago marked the step down in the Government's successful First Home Owners Boost program. For the next three months, the Boost will be worth $7,000 for new homes and $3,500 for existing homes – half the original amount – before ending on 31 December 2009. And that's on top of the $7,000 that first home buyers receive from the original Grant. Over 150,000 people had taken advantage of the First Home Owners Boost as at the end of August, with the number of finance commitments for the construction and purchase of new dwellings increasing by 52.7 per cent since its introduction in October last year.

IMF Reports

Last week the International Monetary Fund (IMF) released its latest World Economic Outlook. This report upgraded the IMF's global growth forecasts from -1.4 per cent to -1.1 per cent for 2009, and from 2.5 per cent to 3.1 per cent for 2010. Despite these improved forecasts the recovery in the global economy is far from assured. The IMF has warned the global recovery is likely to be slow and has cautioned against premature withdrawal of economic stimulus. The IMF believes "the main short-term risk is that the recovery will stall. Premature exit from accommodative monetary and fiscal policies seems a significant risk because the policy-induced rebound might be mistaken for the beginning of a strong recovery in private demand. In general, the fragile global economy still seems vulnerable to a range of shocks". IMF Chief Economist Olivier Blanchard warned that "complacency must be avoided" and that "fiscal stimulus needs to be sustained until the recovery is on a firmer footing."

The IMF has also upgraded its forecasts for Australian growth, with Australia now forecast to record modest growth of 0.7 per cent in 2009 and 2.0 per cent in 2010. This would see Australia continue to be the best performing advanced economy in the world, and the only one to record positive growth in 2009. Importantly, the IMF now expects Australia's unemployment rate will peak at 7 per cent in 2010 – considerably lower than the 9.4 per cent unemployment rate forecast for major advanced economies as a whole but still too many jobs lost as unemployment continues to rise.

The IMF also released its Global Financial Stability Report last week, which showed that the global financial system had stabilised following the turmoil of the past year. It highlighted that financial systems still face major risks themselves and pose major risks to real economies. The IMF report estimates that global bank write-downs could reach US$2.8 trillion, of which US$1.5 trillion – over half – has yet to be recognised.

Final Budget Outcome

On Tuesday I released the Final Budget Outcome for 2008-09. It showed our general government sector recorded an underlying cash deficit of $27.1 billion for 2008-09 – or 2.3 per cent of GDP. This outcome was $5.0 billion better than expected at the time of the May Budget, largely reflecting some one-off factors but also the effects of the economic stimulus which contributed to stronger economic outcomes.

The level of Australian Government net debt at the end of 2008-09 was $11.5 billion better than expected. At -1.3 per cent of GDP, this level of government net debt is dramatically better than the 59 per cent of GDP reported for the major advanced economies in 2008.

These stronger than expected budget outcomes do not substantially diminish the fiscal challenge imposed on Australia by the global recession, which resulted in the biggest fall in budget revenues compared with its comparable budget year forecast since 1930-31. But our plan to return the Budget to surplus as the global economy recovers will ensure our net debt remains lower than any major advanced economy.

Figures released just last week by the Reserve Bank are an important reminder that the global recession will have a significant impact on government revenue going forward. The RBA commodity price index showed that prices have fallen by a massive 34.7 per cent over the past 12 months. That's a really big hit to national income with flow-through consequences for the Budget.

Retail Trade and Building Approvals

Last week's retail trade figures showed the value of retail sales rose by 0.9 per cent in August. The value of retail sales is now 5.8 per cent higher than its level in November 2008, before the first of the cash stimulus payments were made to households in December. This comes at a time of significant weakness in this sector in comparable economies, with retail sales for the major advanced economies falling by 1.4 per cent since November 2008. The first phase of our economic stimulus has provided vital support to the retail sector which employs over 1 million Australians.

The Government's economic stimulus has now moved into the infrastructure phase, which was reflected in building approvals data released last week. The value of total building approvals rose by 32.6 per cent in August. This week's Fact of the Week is that this result was driven by a staggering 68.7 per cent increase in the value of non-residential building approvals, on the back of our Building the Education Revolution program. The $5.3 billion in non-residential building approvals was a clear monthly record. You can read more about these figures and other data showing the important role being played by our stimulus measures in this article.

Economic Stimulus

On Monday, the Senate Economics References Committee questioned a number of independent authorities and business group representatives on our economic stimulus initiatives.

Reserve Bank Governor Glenn Stevens' view was that "it is reasonable to conclude against the benchmarks of historical experience of our own and in comparison with experiences abroad that Australia has done quite well on this occasion", and that "a straightforward reading of the economic outcomes would, I think, suggest that the various policy measures have been effective in supporting demand." When questioned whether the built-in withdrawal of fiscal stimulus should be accelerated, he said "I think it is a bit hard to claim that as of this moment there is too much growth in the economy." In terms of Australia's forecast level of debt, Governor Stevens said "I would be pretty sure that most governments in the world would be very, very happy to have a picture like that ahead of them rather than the one they have actually got in their own country."

Greg Evans, ACCI's Director of Economics and Industry Policy, said that ACCI supported the extent and nature of the Government's response to the global crisis. His view was that the "fiscal stimulus package not only addresses the short-term in terms of promoting domestic economic activity with respect to building infrastructure, but also delivers those long-term productivity advantages associated with better infrastructure provision." Mr Evans cautioned that "despite improving economic news and improving consumer and business confidence levels, the fundamentals of the economy remain fragile. … We expect the labour market to continue to worsen and note the shift from full-time to part-time employment has to some extent masked the severity of the slowdown." He made it clear that ACCI "do not believe these are the circumstances where fiscal stimulus should be withdrawn, noting that in any case the design of these arrangements sees a phased wind-down."

Dr Peter Burn, Associate Director of Public Policy at the Australian Industry Group, said that the Ai Group has unambiguously supported and continues to support the Government's economic stimulus initiatives. He went on to say that "while we see the measures as having made a very positive contribution, we do not think we can say that the economy is out of the woods yet. … We expect further rises in unemployment and further falls in hours worked, both of which will flow through the economy more broadly, and we remain conscious of the lagged impacts of the falling commodity export prices on company profits, investments and dividends and the impacts that that will also have as they flow through the economy." Dr Burn said that for these reasons, the Ai Group "are very wary of calls for the fiscal measures to be wound back ahead of the in-built schedule for their withdrawal. We think that this could undermine the recovery that appears to be taking hold."

Coming Up

This week we will receive data on housing finance and international trade in goods and services for August, as well as the D&B National Business Expectations Survey for September. We will also learn the Reserve Bank's decision on official interest rates on Tuesday.

On Thursday we will receive Australia's labour force figures for September. Even with the IMF last week downgrading its forecast for peak unemployment in Australia, the unemployment rate is expected to continue to rise as the impacts of the global recession continue to wash through our economy. It's been heartening to see Australians pull together throughout this crisis, with employers and employees all doing their bit to save as many jobs as possible. Their willingness to work together has prevented a much bigger increase in Australia's unemployment rate, as has been seen in countries around the world. Just a couple of days ago we received news that a further 263,000 jobs were lost last month in the US, taking its unemployment rate to a 26 year high of 9.8 per cent. Their unemployment rate has now doubled since the start of the US recession in December 2007 and a total of 7.2 million jobs have been lost.

The significant fall in the number of hours worked in Australia shows the sacrifice being made by many thousands of Australians to save those jobs. Though they remain in work, those breadwinners and their families will be doing it tough while they work reduced hours. And that's in addition to the thousands of breadwinners who have lost their jobs to the ravages of the global recession. So while Australia has outperformed every advanced economy throughout this global recession, now is not the time for victory laps or for ripping out the stimulus. Now is the time to keep supporting the economy, so we can build the sustainable economic recovery all Australians need and deserve.

Wayne Swan
Treasurer of Australia
Sunday 4 October 2009

www.treasurer.gov.au
www.economicstimulusplan.gov.au