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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

21 November 2010

NO.038

Treasurer's Economic Note

Welcome to this week's note, which comes to you mid-way through the final parliamentary fortnight of a massive year for our economy. I've come back to Brisbane for the weekend to attend some important events in the area, including attending the Welcome Home Parade yesterday to mark the conclusion of 7th Brigade's contributions to Afghanistan, the Middle East and Timor-Leste, before I head south again. This past week saw the release of important economic reports from the OECD and the Australian Bureau of Agricultural and Resource Economics. Both brought welcome news for the Australian economy as we head towards 2011.

OECD Economic Outlook

The OECD's Economic Outlook, released on Thursday, reminded us again that Australia's economic prospects are very strong, especially when compared with other developed economies. The growth forecast for Australia is one of the best in the OECD, with GDP projected to increase 3.3 per cent in 2010 and 3.6 per cent in 2011. This is well above that of the OECD as a whole, with rates of 2.8 and 2.3 per cent respectively. The OECD backed the Government's responsible management of the budget, finding that the "budgetary situation is well under control", with very low public debt. This comes off the back of previous strong endorsement by the OECD of our fiscal strategy in its Economic Survey of Australia released a week ago.

But it's still true that the global recovery remains fragile, with patchy growth and unemployment stubbornly high. Unemployment for the OECD as a whole is projected to be 8.1 per cent in 2011, significantly above the 4.9 per cent the OECD projects for Australia. Of course, we know that challenges come with these difficult global conditions. That's why the Government has outlined our plan to secure growth, with low inflation, and to build a stronger, broader and more competitive economy that benefits all Australians.

Resources Boom

Part of that is ensuring we have the right settings to accommodate and encourage the very big pipeline of investment we expect in the coming months and years. On Thursday, we also saw more evidence of what lies ahead in the pipeline, with the release of ABARE's report on major development projects in the minerals and energy sector. The report showed that at the end of October 2010, there were 72 projects either committed or under construction, with a record capital expenditure of $132.9 billion. This represents a remarkable 21 per cent increase from the April report. This big jump partly reflects BG's decision to develop the Queensland Curtis LNG project – which I announced with Martin Ferguson and BG a few weeks back. The data confirms that we are genuinely going through a second mining boom with unprecedented demand for our minerals.

Australia is in a strong position to benefit from the strength of our resources sector. This was highlighted on Thursday by Deputy Governor of the Reserve Bank, Ric Battellino, who argued "the increase in the terms of trade over the past year has added around $25 billion to the Australian economy". He indicated that continued strength in the demand for commodities by China and India "would be a very favourable environment for the Australian economy". Despite this positive outlook, we need to manage the challenges that come with Mining Boom Mark II. I agree with Ric's point that "[w]ith a large amount of money continuing to flow into the country over the next couple of years as a result of the resources boom, the challenge will be to manage the economy in a way that keeps economic growth on a sustainable path...".

Banking Competition

Another important policy area I have always been focused on is competition in the banking sector. We have been working to build up more competition in the banking sector since we first came to office. Even during the crisis, we made a solid start on injecting more competition into the mortgage market, even while we were taking decisive action to secure our financial system. We are working hard to support the smaller lenders by investing $16 billion in Triple-A rated RMBS, which is helping to make this a more competitive source of funding again. The RMBS market was one of the key drivers of banking competition in the decade before the crisis, helping smaller lenders to drive a significant reduction in the net interest margins of the major banks, which you can see in this Reserve Bank chart.

Recent analysis from the Australian Office of Financial Management showed our support is encouraging private investors back into the market, with the private sector investing, on average, ‘over $2 for every $1 of public money invested', in the third quarter of this year. This means the Government's investment is successfully leveraging the private sector to help this critical funding market recover. So it was great to hear the CEO of smaller lender Bendigo Bank, Mike Hirst, acknowledge the Government's efforts to stimulate competition among banks. Mr Hirst said the Government's ‘…support in buying high quality mortgage securities from smaller lenders has provided Bendigo Bank with affordable wholesale funding and…has meant we can continue to support our home and business customers with competitively priced loans'.

We're also cracking down on unfair mortgage exit fees so banking customers can walk down the road and get a better deal. ASIC has now released rules which explain exactly how it will enforce the Government's tough new laws. In an opinion piece in the Herald Sun this week, Tony D'Aloisio, Chairman of ASIC, made it clear that ‘...exit fees can't be used to discourage consumers from switching from one lender to another, or as a means of punishing them for doing so', and that ‘...a lender cannot try to recover profits they might have made if the loan had run full-term'. We've already seen two of the big banks, both ANZ and NAB, respond directly to these rules by abolishing their exit fees – a real win for Australian families.

I'm also a really big believer in the capacity of our mutual credit unions and building societies to be a strong competitive force in the banking sector. In a report released this week on the mutual sector, KPMG found that if you are ‘…looking for competition for the majors, then the mutual ‘building society and credit union sector is a viable competitor'. We know there is more work to be done to build up competition, and we are determined to do that. By delivering a carefully considered package, we will implement reform that is lasting and effective, to give Australian families a fighting chance in our banking system.

Climate Change Business Roundtable

I am really looking forward to the first meeting of the Business Roundtable on Climate Change on Friday morning. The Roundtable brings together nineteen key business leaders from across our economy, providing perspectives from a wide range of industries – from mining, energy and manufacturing through to finance, retail and transport, to name a few. The first meeting will explain how the process will support policy making, including through the Multi-Party Climate Change Committee process; how carbon pricing relates to the broader reform agenda and the current economic environment; and start to shape a future work plan.

We saw again last week how important it is to the business community that we provide investment confidence through a carbon price. On Wednesday, major investors, with assets worth over US$15 trillion dollars, issued a statement calling for domestic governments and international institutions to implement policies to drive growth in the low-carbon economy. They argued that countries that do not put a price on carbon, and thus end investment uncertainty, risk losing out on a share of the hundreds of billions of dollars that flow annually to clean energy and low carbon investment. This confirms one of the key messages from Treasury modelling in 2008, which showed action on a carbon price would attract international investment.

Thanks again for your interest in the note and I look forward to updating you again next week, on the outcomes of the Climate Change Roundtable and any reactions to my Labor values speech on Wednesday.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 21 November 2010
www.treasurer.gov.au