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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

25 October 2009

NO.032

Treasurer's Economic Note

Welcome to the latest edition of my economic note. In addition to relaying last week's economic news from the UK and China, today's instalment also discusses some of the big-ticket reforms being undertaken by the Rudd Government in areas like climate change and tax. We've made it a hallmark of our government to consult extensively with members of the public and relevant stakeholders on these types of major policies – a practice I'll be continuing on Wednesday when I co-host a North Queensland Renewable Energy Business Roundtable with Bob Katter, the Member for Kennedy, and Martin Ferguson, the Minister for Resources and Energy, and which will also include Jim Turnour, the Member for Leichhardt. Bob has helped bring together 50 of the region's key business and policy decision makers who all recognise the enormous economic and renewable energy potential of North West Queensland. Wednesday's roundtable will provide a great opportunity to listen and learn from these stakeholders, inject their views into the policy process, and ensure they know how the Government's policy settings are working to deliver real economic transformation in North West Queensland.

Climate Change

Climate change is one of the most significant economic challenges facing our nation. By introducing a price for carbon, our Carbon Pollution Reduction Scheme (CPRS) will trigger a transition to the low-pollution economy of the future and bring about the biggest economic reform since the opening up of Australia's economy under the Hawke and Keating Governments in the 1980s and 1990s. On Thursday, Greg Combet, the Minister Assisting the Minister for Climate Change, introduced the legislation for our CPRS into the House of Representatives. The Government has committed to a six week timetable for action on the CPRS Bill to ensure both the House of Representatives and the Senate have the time needed to consider and debate the bill before the end of the year. It's essential that we pass the CPRS by the end of the year, so we can provide the investment certainty that business needs to start making key investments in the low-pollution economy – investments that need to be made now to support the green jobs of the future. And as Greg said in his second reading speech to the Parliament, showing up at the negotiating table in Copenhagen with a plan to deliver our targets "will help build confidence that, even in one of the world's most resource-intensive economies, we can start to reduce our emissions while continuing to grow our economy."

Tax Reform

Tax reform is another one of the Rudd Government's top priorities. The Henry tax review is the biggest review of Australia's tax and transfer system in the last 50 years. It's consulted tirelessly over the past year and a half, receiving over 1300 formal submissions and holding almost 200 meetings with members of the public, stakeholders and other relevant organisations. Ken Henry will hand down his report to the Government at the end of this year, and we'll release it with an initial response in early 2010. I'm not going to pre-empt the review before then, but I've made it clear that my vision is for a tax system that is simpler, fairer and more competitive. As things currently stand, individual Australians don't see a tax system – they see a jungle. Almost three-quarters of Australians need professional assistance just to do their annual tax return, which is the highest rate of anywhere in the world. I think Australians have enough on their plate. They deserve a simpler tax system that saves time and is easier to use. The tax review is all about doing the hard yards on tax reform so we can deliver a better tax system for all Australians.

New Motor Vehicle Sales

Last week's ABS motor vehicle figures showed that new motor vehicle sales rose by 2.9 per cent in September. Total car sales still remain 2.0 per cent lower than a year ago, however this is in stark contrast to the significant falls in motor vehicle sales that have been seen in other comparable economies over the past year. The Government's Small Business and General Business Tax Break has been widely recognised as having provided a substantial boost to car sales. We designed this stimulus measure so that the General Business Tax Break for medium and large sized businesses would step down from 30 per cent to 10 per cent for assets bought after 30 June 2009, with both it and the 50 per cent Small Business Tax Break completely phasing out at the end of this year.

Reserve Bank Board Minutes

The minutes of the RBA Board's last monetary policy meeting noted that estimates by RBA staff "suggested that the impact of fiscal policy (including payments to households and other ongoing programs) on GDP growth was likely to have peaked in the June quarter and was now gradually declining." The gradual withdrawal of the fiscal stimulus as the economy recovers means fiscal and monetary policy will continue to work in the same direction during the recovery – just as they did during the downturn. As I've said on many occasions, the vast bulk of Australians understand that interest rates were cut very substantially due to the global recession, and that they cannot stay at emergency levels indefinitely.

UK and Chinese GDP

On Friday night we received news that UK GDP fell by 0.4 per cent in the September quarter. The UK economy has now contracted for six successive quarters, suffering a 5.9 per cent decrease in GDP since its recession started 18 months ago. As discussed in this BBC News article, this quarter's surprise contraction makes this the UK's longest recession since records began more than 50 years ago.

We also learned last week that China's GDP rose by 8.9 per cent through-the-year to the September quarter. This is the second quarter of strong GDP growth for China, following a record low growth rate of 6.1 per cent through-the-year to the March quarter. It still, however, remains lower than the ten-year average annual growth rate of around 10 per cent. With growth heavily reliant on government-directed investment, Chinese authorities reiterated the importance of maintaining "proactive fiscal policies and moderately lenient monetary policies". This will provide further support to Chinese demand for commodity and capital goods imports, with implications for exports here in Australia.

IMF Speeches

IMF Economist John Lipsky gave a speech last week on 'Asia, the Financial Crisis, and Global Economic Governance'. He noted that "the three fastest growing economies in the G-20 are all from Asia – China, India and Indonesia". He went on to say that "the resilience of Asian economies in this crisis, their substantial contributions to global growth in recent years and the region's importance in international capital flows are underpinning the transformation of international fora. … It should come as no surprise then that the G-20 – with six representatives from the Asia-Pacific region – has been designated as the premier leadership forum for international economic cooperation among the largest economies."

Despite good signs of recovery, Mr Lipsky urged governments throughout the region to maintain support for their economies. He stated that "the principal near-term risk is that the global recovery could stall. This could occur if private demand does not pick up and replace the policy stimulus and inventory re-stocking that have recently been the key drivers of growth. Policy support therefore should remain in place until a durable recovery is secured."

These statements were echoed in a speech by IMF Managing Director Dominique Strauss-Kahn. He said that "the crisis is by no means over, and many risks remain. Economic activity is still dependent on policy support, and a premature withdrawal of this support could kill the recovery. And even as growth recovers, it will take some time for jobs to follow suit."

Australian Outlook

Trade price figures released last week showed that export prices fell by 20.6 per cent over the year to the September quarter. This is by far the largest yearly fall in export prices since records began in 1974, and shows the full effects of this global recession are still washing through our economy. But I remain optimistic about the future. While there's no doubt we will continue to face challenges over the short-term, Australia's prospects are bright over the medium-term and the longer-term. In his speech in Brisbane on Thursday, Treasury Secretary Ken Henry talked about the long-run forces that will affect the Australian economy for decades to come, including climate change, population ageing, the information and communications technology revolution, and the impact on Australia's terms of trade of the re-emergence of China and India as global economic powers. As a resource rich nation on Asia's doorstep, Australia is uniquely placed to capitalise on this Asian century. But we have to do the hard yards now if we are to make the most of these opportunities ahead. And that means tackling the big challenges facing our nation by investing in forward-thinking reforms – like the Carbon Pollution Reduction Scheme, the tax review and the National Broadband Network.

Wayne Swan
Treasurer of Australia
Sunday 25 October 2009

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