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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

8 November 2009


Treasurer's Economic Note

Welcome to this week's note. I've got a lot to report in today's instalment with quite a few economic developments on both the international and domestic fronts, and a number of speeches of interest.

On Thursday morning I talked to small- and medium-sized businesses at an Australian Industry Group working breakfast in Melbourne. I explained in my speech that Treasury has estimated nominal private business investment will be around $42 billion lower through the downturn as a consequence of the global recession, and that the Government's infrastructure spending is helping to maintain total investment in the economy by offsetting the weakness in private investment. I also congratulated business for helping to cushion the impact of the downturn by reducing hours instead of laying-off staff. This is a great example of Australian employers and employees pitching in to meet a national challenge, and without a doubt kept a dire economic situation from being far worse.

Later on Thursday I talked about tax reform in my speech to the 2009 Economic and Social Outlook Conference hosted by the Melbourne Institute and The Australian. I explained that my three highest priorities for the tax system are to make it fairer, simpler and more competitive. We need to ensure that we are not unfairly locking people out of work, we are not spending excessive time and resources doing our tax instead of doing something of value, and we are maximising the investment we can bring to Australia. However, reforms will take time – the Australia's Future Tax System Review will provide a ten-year plan for tax reform. Tax reform will be difficult and at times controversial, but it is essential if we're to tackle the challenges facing our nation and take advantage of our opportunities.

Mid-Year Economic and Fiscal Outlook

On Monday I released the Mid-Year Economic and Fiscal Outlook (MYEFO) for 2009-10. It forecasts lower unemployment, higher growth, lower deficits and lower debt than expected at May's Budget, and underscores Australia's position as the strongest performing advanced economy in the world. This week's Fact of the Week is that the Australian economy is now expected to grow by 1½ per cent in 2009-10 and 2¾ per cent in 2010-11, with the unemployment rate forecast to peak at 6¾ per cent in the June quarter 2010. The improved economic outlook reflects the effectiveness of monetary and fiscal stimulus in Australia, and the stronger global recovery. If not for the direct impact of our fiscal stimulus, Australia would have experienced a technical recession and the economy would have gone without growth for two consecutive years, in both 2008-09 and 2009-10.

Despite the improved outlook, the global recession has still had a marked effect on the Australian economy and challenges remain. The economy is still expected to continue to operate below capacity for some time and unemployment is still expected to rise; the decline in the terms of trade and reduced hours worked is expected to drag on domestic incomes; business investment and private demand are forecast to contract this financial year; and even with the increased tax revenues across the forward estimates resulting from the stronger economic outlook, forecast tax receipts still remain $170 billion lower than expected at the time of the 2008-09 Budget. We received a reminder of these challenges just last week, with the RBA Commodity Price Index reporting a 44.9 per cent decrease in commodity prices over the past year.

An IMF report released last week confirmed that Australia's debt and deficits are amongst the very lowest in the developed world, and that Australian government finances remain strong. A similar view was expressed by the Governor of the Reserve Bank in a speech last week, where he stated that "public finances remain in good shape, with a medium-term path for the Budget back towards balance, and without the large debt burdens that will inevitably narrow the options available to governments in other countries."

Reserve Bank

On Tuesday the Reserve Bank Board took the decision to raise the official interest rate by 0.25 of a percentage point to 3.50 per cent. I certainly understand this is a tough decision for many families, but also another indication that rates at 50-year emergency lows couldn't go on forever. For a family on a $300,000 mortgage, Tuesday's increase will cost an extra $46 a month, but it will still leave that family $662 better off compared to August last year.

RBA Governor Glenn Stevens' statement announcing the Board's decision stated that "with the risk of serious economic contraction in Australia now having passed, the Board's view is that it is prudent to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker." The Reserve Bank's Statement on Monetary Policy, also released last week, expressed a similar sentiment looking forward. It said that "the cash rate remains at a low level, and a further gradual lessening of monetary stimulus is likely to be required over time if the economy evolves broadly as expected."

Just as the Reserve Bank is gradually lessening the degree of monetary stimulus in the economy, so too is the fiscal stimulus being gradually phased down. In fact the RBA's Statement on Monetary Policy said that the peak effect on growth of the Government's fiscal stimulus measures "is estimated to have been in the June quarter 2009 – at almost 1 percentage point in that quarter. Thereafter, the estimated effect of fiscal policy is expected to fall back as these measures run their course". This means fiscal and monetary policy will continue to work in the same direction during the recovery – just as they did during the downturn. The Statement on Monetary Policy went on to say that "the stimulus measures in aggregate are expected to subtract from quarterly growth in 2010, although they would still be boosting the level of GDP." Governor Stevens also pointed to the fact that fiscal stimulus will be a moderating influence on growth as it is scaled back, stating that "some spending has probably been brought forward by the various policy initiatives. With those effects now diminishing, these areas of demand may soften somewhat."

Retail Trade

The softening in demand referred to by Governor Stevens could be seen in last week's retail trade figures. They showed that retail trade values fell by 0.2 per cent in September – the third monthly fall in the past four months. Following our cash stimulus payments to households in December 2008 and March and April 2009, retail trade values rose by 6.4 per cent from their pre-stimulus level of November to their peak in May. Last week's result means that retail trade values have now fallen by 1.1 per cent since peaking in May.

Climate Change

The Prime Minister gave a comprehensive speech to the Lowy Institute last week on the global response to climate change. The PM noted that as one of the hottest and driest continents on earth, Australia's environment and economy will be among the hardest and fastest hit by climate change if we do not act now. He stated that "when you strip away all the political rhetoric, all the political excuses, there are two stark choices – action or inaction. The resolve of the Australian Government is clear – we choose action, and we do so because Australia's fundamental economic and environmental interests lie in action. Action now. Not action delayed." As the PM made clear in his speech, we are determined to pass our Carbon Pollution Reduction Scheme, so we can deliver investment certainty for business in Australia and play our part abroad in any global agreement to bring greenhouse gases down.

G20 Finance Ministers' Meeting

Climate change was one of the issues I discussed yesterday with my international counterparts in St Andrews, Scotland, during one of our regular G20 Finance Ministers' meetings. With the Copenhagen Summit just one month away, we committed in our communiqué "to take action to tackle the threat of climate change and work towards an ambitious outcome in Copenhagen". We discussed climate change financing options, recognising "the need to increase significantly and urgently the scale and predictability of finance to implement an ambitious international agreement."

Turning to the economic recovery, we noted that "economic and financial conditions have improved following our coordinated response to the crisis. However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern. To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured."

US Unemployment

This is particularly important given the news on early Saturday morning that the US unemployment rate hit double-digits in October, increasing by 0.4 of a percentage point to 10.2 per cent. This is the highest US unemployment rate since 1983, having risen by 5.3 percentage points since the start of the US recession in December 2007. US President Barack Obama described the unemployment result as "a sobering number that underscores the economic challenges that lie ahead." He said that while the US economy grew last quarter for the first time in a year, "history tells us that job growth always lags behind economic growth, which is why we have to continue to pursue measures that will create new jobs." You can read more about the US unemployment figures and economic outlook in this Associated Press article.

Coming Up

This week we will receive the Euro area's GDP outcome for the September quarter, the UK's unemployment figures for August, and our own labour force figures for October.

On Tuesday I'll be in Jakarta for bilateral talks with my Indonesian counterpart, Finance Minister Sri Mulyani Indrawati, as well as other key economic ministers. I'll also speak to the Indonesia Australia Business Council about the opportunities of the Asian century and Australia's strong economic relationship with Indonesia. I'll be in Singapore on Thursday for the 16th APEC Finance Ministers' meeting, to discuss how APEC can help deliver the G20 agenda.

On a lighter note, the boys in my office have decided to participate in Movember to help raise awareness and funds for prostate cancer – a really important cause that I've passionately supported ever since my own battle with the disease in 2001. Anyone that wants to track their progress over the coming weeks or make a donation can do so on the Movember website.

Wayne Swan
Treasurer of Australia
Sunday 8 November 2009