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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

20 March 2011

NO.009

Treasurer's Economic Note

Over the past week we have all watched the horrific events unfold in Japan and our thoughts have been with the Japanese people and their Government. The focus of the Prime Minister and every member of the National Security Committee of Cabinet has been on assessing the situation and helping Australians in Japan. Over 130 Australian-based and locally-engaged staff are currently providing consular support, and an Australian C-17 heavy airlift support aircraft continues to help transport supplies and essential equipment. The 72-person Australian search-and-rescue team is scheduled to return home today after a tough week helping out. The events of the last week have tested the human spirit, but it has been inspiring to see the way the international community has come together to help our Japanese friends at this time.

Japanese Earthquake and Tsunami

The safety of the people in the affected area is rightly the focus of our thoughts at the moment, but at some stage attention will turn to the economic implications of the horrifying earthquake and tsunami. Australia has a very close relationship with Japan, the third largest economy in the world, our second biggest trading partner, and our third largest source of foreign investment.

It is too early to predict with any certainty the economic consequences, but the initial expectation is that there should not be significant long-term implications for Australia's economy. There is likely to be a short-term impact on some of our exports in coming quarters. For instance, Japanese demand for steel-making inputs could fall in the near term following the closure of several large steel-making plants and the disruption to Japanese manufacturing. But Japanese demand for energy products such as LNG and thermal coal could increase as other forms of energy production are more heavily used in the recovery and in response to the nuclear crisis.

It is important to realise that significant risks surround this initial assessment, including the situation with the Fukushima nuclear reactors and, perhaps most importantly, the impact these events will have on global confidence. As time progresses and the situation becomes clearer, so too will the economic impacts.

Tax Forum

As we deal with natural disasters here and around the world, the work of government continues and the reform wheels keep turning. In that context, I'm announcing today that I have agreed with the crossbenchers to hold the Tax Forum on October 4-5 at Parliament House. The Tax Forum will bring together around 150 representatives of community groups, businesses, unions and governments, as well as academics and tax practitioners, to discuss ways to build on our already substantial tax reform agenda. It will cover a broad sweep of topics, with sessions to discuss personal tax, transfer payments, business tax, state taxes, environmental and social taxes, and tax system governance. To help foster debate in the lead-up to the forum, I'll release a discussion paper in the middle of the year, and we'll also explore ways for people to make submissions and comments which can be uploaded onto a dedicated website before the forum.

Tax reform is a really important part of our strategy to strengthen and broaden the economy. The Tax Forum will continue the big national conversation we started with the release of our initial reforms to cut business taxes, simplify personal and small business tax, boost super and savings, and build more regional infrastructure. These are significant reforms, but in the years ahead we'll continue to face important decisions about how to maximise the opportunities of mining boom mark II. I'm really looking forward to engaging with the community and hearing what people have to say about the priorities and challenges for our tax and transfer system going forward.

Carbon Price

Another important long-term reform we're focused on is putting a price on carbon. On Thursday, Professor Ross Garnaut released an important paper titled Carbon Pricing and Reducing Australia's Emissions. The paper reiterates Professor Garnaut's view that Australia needs to play its part in reducing global emissions, and that the lowest cost way to do this is by putting a price on carbon through a market mechanism. The paper explores the economic debate between the use of market-based responses to policy problems and 'central planning' approaches, saying:

"The contest of ideas was won decisively by the market economy. It was not won in theory. It was won by observing the results of predominantly market-based decisions and predominantly regulatory interventions … [I]t has left a presumption in favour of market-based decisions unless there is clear evidence that regulation would give better results in a specific case."

Professor Garnaut concludes that direct measures would not assure least-cost abatement, and are therefore likely to lead to a bigger 'tax' on households.

The paper explores the up-front economic impacts of introducing a carbon price, and concludes the impacts will be modest. The paper cites Treasury modelling, which showed that an emissions trading scheme that reduced emissions by 5 per cent by 2020 would involve a one-off impact on prices (CPI) of around 1 per cent. This is only about one-third of the size of the one-off rise in CPI of 2.8 per cent brought about by the introduction of the GST in Australia. The paper also finds that the economic impact of a carbon price is likely to be moderate compared to the effect of rises and fluctuations regularly seen in exchange rates, petrol prices and interest rates.

Professor Garnaut recommends that the best model for a carbon price in Australia is an emissions trading scheme, but with an initial fixed price period. The paper finds that an initial fixed price can provide steadiness, whereas a floating price would be volatile while the scheme remains the subject of political debate. The model would allow the big polluters to become familiar with compliance under the scheme, and allow Australia to move towards a full emissions trading scheme (where the price is determined by the market) as knowledge of the scheme and confidence in its stability expanded. After considering a range of factors – including Australia's contribution to global goals, our existing commitments, domestic credibility, and climate change action taken by other countries – Professor Garnaut recommends a starting carbon price in the region of $20 to $30 per tonne.

Professor Garnaut notes that a carbon price will generate considerable revenue, which can be used to assist households and businesses with the transition to a low-carbon economy, and also to fund research and innovation in areas like energy efficiency and renewable energy. He recommends delivering household assistance in the form of productivity-enhancing reform of the tax system. He also endorses assistance for emissions-intensive trade-exposed businesses, based on the model designed for the former Carbon Pollution Reduction Scheme, for the first three years of the scheme. After this period, he recommends a scheme administered by an independent regulator.

I had the opportunity to discuss the findings of the review with Professor Garnaut on Friday when the Multi-Party Climate Change Committee held its fifth meeting in Canberra. The Committee discussed a number of issues related to the carbon price framework that was released in February. I look forward to discussing these issues further with the Business Roundtable on Climate Change and the Multi-Party Climate Change Committee at the upcoming meetings in April.

Two-Year Anniversary, Facebook + Twitter

Today's edition of my economic note marks the two-year anniversary since it was first launched way back on 22 March 2009. That first economic note was released during the height of the global recession, and I wrote then that "with the right decisions, we can ensure Australians are not only cushioned from the worst effects, but that Australia comes through in a position to prosper in the future." Two years on, few people could have imagined just how successfully our economy would come through the global recession with the help of stimulus, and just how focused the Government would remain on long-term economic reform. Since that first economic note, readership has gone from strength to strength, and now over 15,000 people read the economic note each week whether via email, the www.treasurer.gov.au website or the www.alp.org.au website.

People can now also read my economic note on my recently launched Facebook page. For some time now my children have been encouraging me to get onboard with Facebook and I'm glad I have. It's such an important communication tool which I'm keen to use to connect with as many Australians as possible. Today I've taken the plunge and launched my Twitter account – SwannyDPM. What motivated me to start writing the economic note two years ago was the opportunity to connect directly with people other than via the mainstream media. It's this same sentiment which has again prompted me to embrace social media to engage in new and different ways with Australians.

Coming Up

The preparations are well underway and over the coming weeks I'll be devoting most of my attention to putting together my fourth Budget as Treasurer. I've said some tough choices will have to be made, and the events of the past few months mean what was already going to be a difficult task will be made even more difficult. The early years of the budget estimates will bear the brunt of the rebuilding and recovery costs from the floods and Cyclone Yasi, and government revenue will also be hit because of weaker growth. We need to do a lot of things in this Budget that won't be popular, but they'll be the right thing to do. Our strict fiscal rules have us on track to get the budget back to surplus in 2012-13, and that's the right economic strategy for an economy that will be operating close to its full capacity.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 20 March 2011

www.treasurer.gov.au