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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

6 March 2011

NO.007

Treasurer's Economic Note

In the same week that we received another solid set of National Account figures during our 20th year of uninterrupted growth, the person who has been at the helm of Treasury for ten of those years stood down, with Friday marking Dr Ken Henry's last day as Secretary to the Treasury. Dr Henry has served our country and its people with unparalleled distinction, having played a role in crucial economic reform over the past three decades. Dr Martin Parkinson will take over tomorrow, and I know from my work with him in his role as Secretary of the Department of Climate Change and Energy Efficiency that he is well placed to fill these big shoes and lead the policy powerhouse of the federal bureaucracy. The Government has kept our economy strong by getting the big economic calls right over the past three years, and we have the right strategy for the future. I know Dr Parkinson and the Treasury will continue to provide first-class policy advice as we implement our significant economic reform agenda in areas like tax reform and putting a price on carbon.

National Accounts

The National Accounts showed that GDP grew by 0.7 per cent in the December quarter, to be 2.7 per cent higher through the year. This is a solid result, and confirms that the fundamentals of our economy are strong despite some soft spots and the impact of natural disasters. I was particularly encouraged to see exports make a strong contribution to growth, despite the wild weather in December making it harder for production to be shipped overseas. We also saw a rebuilding of inventories and a healthy recovery in some components of business investment – such as machinery and equipment – at a time when our fiscal stimulus is detracting from growth.

Despite this good outcome, we are still experiencing mixed conditions across the economy. We continue to see evidence of consumer caution, with the household savings ratio remaining high at 9.7 per cent. This shows that consumers are still choosing to take advantage of rising incomes to save a bit more or pay down debt. We're also yet to see a pick-up in the non-residential construction sector, which is still around 30 per cent lower than its pre-crisis levels, and would have been even lower without the support and confidence provided by the Building the Education Revolution (BER) program.

When you consider what else the economy was up against this quarter – a patchy global recovery, the withdrawal of stimulus and the impact of natural disasters – the December growth figures are impressive. But it's important to remember that the recent natural disasters – the worst in Australia's history – will hit the economy hardest in the first quarter of this year. While heavy December rains sliced 0.4 percentage points off growth in the last quarter of 2010, Treasury estimates that these events will take off around 1 percentage point from growth in the first quarter of 2011. We saw the first signs of this last week, with the trade and building approvals data clearly pointing to the significant impact of the floods on our economy in January. The trade figures showed that while Australia still recorded a trade surplus in January, the value of coal exports fell by around 30 per cent – largely reflecting disruptions from the floods. Total residential building approvals also fell by around 30 per cent in Queensland – nearly double the decline seen at the national level. This was the largest monthly fall in over eight years, for both the Queensland and Australian economies. The impact of the Queensland floods was most clearly seen in private sector house approvals, where the 2.4 per cent national decline was almost entirely due to the 20.0 per cent decline in Queensland.

While there's no doubt that the next set of National Account figures will show that our economy has taken a hit, I can't think of another country in the world that would have emerged from recent natural disasters with such bright economic prospects. We have strong jobs growth, rising national income and a massive pipeline of business investment. While some countries are still struggling to return their output to levels seen before the GFC, our economy has grown by 5.5 per cent, which means we've avoided the destruction of skills and the double-digit rates of unemployment seen around the globe. This says a lot about the strength and spirit of the Australian people, and should give us confidence to rebuild and bounce back strongly.

Mining Boom Mark II

Other data released last week provided further evidence of our huge investment pipeline and strength of commodity prices which continue to support export earnings. We saw this in the RBA commodity price index, which rose by 2.2 per cent in February to be 48 per cent higher through the year. The largest contributors to the rise were prices for iron ore and coal, reflecting higher contract prices in the first quarter of 2011. The ABARES Australian Commodities report showed that export earnings from mineral resources are forecast to reach a staggering $215 billion in 2011-12 – a 16 per cent increase on 2010-11. ABARES expects the outlook for our commodity export earnings to remain strong over the medium term, noting that "prices for most commodities are projected to remain high in historical terms".

The strength of commodity prices shows why it is so important that Australia get a fair return for our non-renewable resources, through the Minerals Resource Rent Tax (MRRT) and the expanded Petroleum Resource Rent Tax (PRRT). Getting a fair return for our resources that can only be dug up once is an important part of our tax reform agenda – but it is not the only part. Last week, Assistant Treasurer and Superannuation Minister Bill Shorten released discussion papers on the detailed design of two of our other tax reform measures. The standard personal tax deduction will commence in 2012-13, and be fully phased-in for 2013-14. About 6.4 million Australians will save time and pay less tax by throwing away their shoebox of receipts and just ticking the box to claim a $1,000 deduction for the 2013-14 income year. The other discussion paper covered the expanded concessional super contributions cap of $50,000 that will apply from 1 July 2012 for over 50s with up to $500,000 in super. This doubles the $25,000 cap that would have otherwise applied. This important measure will help older Australians build their retirement savings. It will benefit almost 300,000 Australians over 50, including those who have had interrupted work patterns or entered the workforce at a later stage.

Carbon Price

There was a lot of discussion last week about the need to put a price tag on carbon through a market mechanism. This is an important economic reform that will not only provide a strong incentive to cut pollution, but will also drive investment in cleaner energy technologies. A new report released by the Climate Institute on Monday highlighted the enormous opportunities that a clean energy future offers us. The research pointed to the fact that global clean energy investments hit record levels of US$243 billion in 2010, and this is expected to accelerate in coming years. The report cautioned that "delays and half measures to tackle pollution and climate change will risk these new job and investment opportunities for Australia's states and regions."

Of course, there is no cost-free way to transform our economy and reduce emissions. But economic institutions like the Treasury, the Productivity Commission and the OECD all agree that putting a price on carbon through a market mechanism is the least-cost and most-effective policy option. This was confirmed by new analysis released by Climate Change Minister Greg Combet on Wednesday, which highlighted the budget cost of a subsidy-based approach.

Coming Up

At the end of the third week of parliamentary sittings for the year, I'm even more optimistic about working with the crossbenchers in the period ahead. Over the past few weeks we've seen crossbenchers of all complexions work constructively with the Government to do the right thing by the country and support the rebuilding of public infrastructure in disaster-hit areas, and on Thursday Senator Xenophon announced that he will support the flood and cyclone levy legislation when it is voted on in the Senate.

The crossbenchers have shown a real willingness to make decisions based on what they think is in the national interest, rather than being beholden to vested interests. We saw vested interests run a scare campaign after we announced our new MRRT and expanded PRRT, claiming that mining jobs would be destroyed and mining investment would dry up. The facts since then speak for themselves. Since May 2010, mining employment has grown by 10.3 per cent – an increase of 18,690 mining jobs – compared to 2.1 per cent jobs growth for the economy as a whole, and billions of dollars worth of new investment has been announced in iron ore, coal, and coal seam gas projects around the country. The latest capital expenditure figures showed that all up, mining investment increased from $35 billion in 2009-10 to an expected $56 billion in 2010-11, and will increase even further to an expected $76 billion in 2011-12. It's important that people remember these facts as we see vested interests run the same sort of scare campaign in relation to our plans to put a price on carbon.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 6 March 2011

www.treasurer.gov.au