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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

5 December 2010

NO.040

Treasurer's Economic Note

Welcome to another edition of the note. We had the final parliamentary sitting day of 2010 this week, at which an historic Telecommunications Bill was passed. This week also saw the release of National Accounts figures that showed the Australian economy remains in a good position, despite an uncertain global environment. But one of the highlights for me was attending Community Cabinet with the Prime Minister and many of my cabinet colleagues, at Clontarf Beach High School in Queensland, not far from where I live. Community members got the chance to ask the PM and Ministers about a range of local and national issues, like health services, distribution of wealth and development aid. Some challenging issues for sure, but it certainly sparked some healthy debate within the community.

National Accounts

The National Accounts showed that GDP grew by 0.2 per cent in the September quarter, to be 2.7 per cent higher through the year. While this is a touch softer than in the first half of the year, we can take confidence in our economy's strong fundamentals at a time when parts of the global economy are on a shaky footing. I was particularly encouraged to see both private consumption and business investment making solid contributions to growth in the quarter, as our infrastructure stimulus winds down. Our infrastructure investment has provided important support to those parts of the economy that were impacted most by the global crisis, like the construction sector. Activity in this sector is still more than 21 per cent lower than its pre-crisis levels, and would have been even lower without the support provided by the BER.

Despite recent headwinds from a volatile global economy, the unwinding of stimulus and a high dollar, we still have really strong economic fundamentals and bright growth prospects, which give me good reasons to be optimistic about the future. We have an economy with strong job creation, a record high terms of trade which is boosting incomes, and a massive pipeline of business investment. That's not to say there won't be bumps along the way; adverse weather conditions impacted on our coal supply chains in the September quarter and recent floods are also making it tougher for our farmers, but overall our strong fundamentals mean we're well placed to ride out these challenges.

As I've been saying for some time now, and as Reserve Bank Governor Glenn Stevens highlighted in his speech last week, while Mining Boom Mark II has great potential to raise livings standards across the board, it will also stretch the economy's capacity, and result in some big, structural changes to our economy. That's exactly why our Government has laid out clear plans to build capacity and boost national savings, so that we can accommodate a structurally higher terms of trade and the investment boom that will flow from it. It will also be important to ensure we have a sustainable way of financing the boom – which means supporting domestic savings and keeping the economy in top shape so we continue to attract foreign investment. The Government is contributing to this through our rapid fiscal consolidation plans, and also through building private savings with our superannuation reforms.

But we're also seeing the household sector play an important role. The national accounts showed that the household savings ratio rose from 8.9 per cent in June to 10.2 per cent in September. These savings ratios are substantially higher than those in previous years, especially when you compare them to the 2 per cent household savings ratio recorded in 2007-08. It's not surprising we're seeing more cautious spending behaviour given what the global economy has been through in the past couple of years. It seems families are taking the opportunity, with rising incomes, to save a bit more out of their income and pay down debt. And that also means we're saving more of our income boost from the high terms of trade.

Banking Competition

Banking competition was another topical issue this week in the economic space. I'm a really big believer in the competitive power of our smaller lenders – including all of our regional banks, credit unions, building societies and wholesale lenders. That's why I've been working for years to support their ability to fund cheaper loans through our $16 billion investment in residential mortgage-backed securities so they can really give the big banks a run for their money. But I also firmly believe that competition from smaller lenders in the banking sector has to be activated by empowering consumers to shop around, or walk down the road and get a better deal if their bank isn't giving them the most competitive offer. That's why we've cracked down on unfair mortgage exit fees which has already led two of the major banks to remove theirs in direct response, and it's why we brought in an account switching package to help consumers more easily move their deposit account.

It's also great to see leading consumer group, Choice, will unveil its Compare, Switch and Ditch campaign tomorrow, to demonstrate the substantial savings Australians can make by switching their mortgage, credit card and other accounts. As part of its broader Better Banking campaign, Choice will encourage Australians to compare products, choose a new provider and switch banks with the help of Choice's new, no-cost, independent online price comparison tool. I've been working closely with Choice since I came to office to keep exploring new ways of getting the best deal for consumers, both in the banking sector and across the broader economy – and I'll keep working hard to empower consumers so they can always walk up the street and get the most competitive deal on offer. Many Australians may not be aware that they can access a wide range of financial services from around 60 credit union and building societies, through their local Australia Post branch. I'd encourage every Australian family to check out the range of products on offer and compare them to the big banks.

National Broadband Network

We're not just keen to pursue competition in the banking sector; the Government is also reforming the Telecommunications sector to improve competition for consumers. Last week an important bill was passed that will transform this sector. Currently, Telstra owns the only ubiquitous, fixed-line access network over which it provides services to its own retail customers as well as providing wholesale access to its competitors. This structure creates an obvious incentive for Telstra to favour its own retail businesses over its competitors. This has hindered the growth of competition in the sector and resulted in Australia having the 5th most expensive internet services in the OECD.

So the reforms we are putting in place will correct these structural problems, pave the way for the voluntary structural separation of Telstra, and set up the NBN as a wholesale-only network. As a wholesale-only provider, the NBN will have the incentive to maximise the number of retail providers on its high speed network. This will increase quality, choice and competiveness so that consumers benefit and new entrants don't face high barriers to entry. 

Climate Change

This week has seen the start of the United Nations climate change negotiations in Cancun, Mexico.  These negotiations are an important part of progressing the global response to climate change, but they also put an annual spotlight on our domestic situation.  As the Minister for Climate Change and Energy Efficiency, Greg Combet, outlined this week, our challenge in Australia is to build a consensus on carbon pricing that is not only in the national interest, but grounded in economic reality.  A carbon price is a fundamental economic reform necessary to protect our global competitiveness, and it is in Australia's national interest.  But we must not underestimate the challenges ahead. 

Achieving our 5 per cent unconditional emissions reduction target will require a substantial reduction in our emissions from business-as-usual, and delivering reductions on this scale will require a significant restructuring of the economy. This doesn't mean we should shy away from the task. We are committed to achieving our target in the most efficient, cost-effective and equitable way through introducing a price on carbon.

Coming Up

This week will be another important week for the economy with the Reserve Bank Board's interest rate decision on Tuesday, followed by Labor Force figures on Thursday. Australia's strong job creation sets us apart from most other developed countries that are still struggling with stubbornly high rates of unemployment. Last week we saw unemployment in the US rise further to 9.8 per cent, while in Europe it rose to 10.1 per cent – almost double the rate here at home. Before signing off for the week, I just want to say a big thank you to all the readers of the economic note who contributed to Movember fundraising efforts, not just for helping the blokes in my office raise more than $21,000, but for the contribution made right across the country. This is a fantastic contribution to the men's health campaign and raising awareness in the community.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 5 December 2010
www.treasurer.gov.au