The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

3 April 2011

NO.011

Treasurer's Economic Note

Last week we got a clearer sense of the economic damage from the recent disasters at home and abroad. We released the first Treasury estimates of the likely impact on our exports from the Japanese earthquake and tsunami. And today I can provide an update on the expected cost of the floods and Cyclone Yasi on a number of our most important industries. With the hit to government revenue and business activity, these tragic events have certainly heightened the challenges facing our economy and made the difficult task of compiling next month's Budget even more difficult.

Impact of the Natural Disasters

No one was ever under any doubt that the financial toll of the devastation we've seen in Queensland and elsewhere in Australia this summer was going to be substantial. The latest figures back that up, and indicate the cost is likely to be even larger than we initially thought. Treasury estimates the cost to our economy will be around $9 billion, with the vast majority of that being felt in the resources and agricultural sectors. Lost coal production could total $6 billion, which is $1 billion more than previously estimated. This largely reflects the fact that some of our big mines are still affected, and the impact on production is likely to extend into the June quarter. Damage to crops will be close to $2 billion, and the loss of activity to the tourism industry is expected to amount to $400 million. The release yesterday of the Economic Roundup, a quarterly Treasury report, indicates the revised forecasts are still conservative compared to the estimates of some businesses. The report shows some firms expect lost coal production could be between 20 and 30 million tonnes this year. The top end of this range is much higher than Treasury's estimate of 22 million tonnes, and would amount to a hit of about $8 billion.

As our second-biggest trading partner, the events in Japan will also flow through to impact on our economy. Preliminary Treasury estimates show that the earthquake and tsunami will cut demand for our bulk commodity exports in the short term and likely slash around $2 billion from export earnings in 2010-11. This could subtract less than ¼ of a percentage point from GDP growth this financial year, and comes on top of the ½ a percentage point impact from the floods and cyclone at home. Japan's nuclear situation and power shortages continue to weigh on international financial markets and may prolong the impact of this crisis on the global economy.

These events all have significant implications for our Budget as well as our economy. Weaker growth will clearly mean that revenues take a substantial hit in the near-term, and this comes on top of the rebuilding and recovery costs in Queensland. As the Prime Minister said last week, there'll need to be some tough decisions in the Budget as we stick to our strict fiscal rules.

Reserve Bank Appointments

Alongside the right fiscal settings, the right monetary policy is crucial to maintaining sustainable economic growth. This was seen during the global financial crisis when the Government worked hand-in-hand with the Reserve Bank to secure the stability of our financial system, shore up demand and support jobs. On Tuesday, I appointed two outstanding individuals to the board of this key economic institution. Catherine Tanna and John Edwards have a unique combination of business and academic experience, and will help make sure the board continues to reflect the values and interests of the broader community. Ms Tanna, a Queenslander educated in Gladstone, brings a wealth of experience from the resources sector and has a strong connection to many of our mining and regional communities. Dr Edwards, who was Chief Economist at HSBC Australia for 12 years, has a deep knowledge of domestic and international economic policy, along with broad experience in the financial sector. I'm confident that Ms Tanna and Dr Edwards will be valuable additions to the RBA Board, and help continue this country's proud tradition of responsible and independent monetary policy.

Review of GST Distribution

Another important economic announcement last week was the review into the distribution of GST revenue between the States and Territories. The Prime Minister and I appointed former premiers Nick Greiner and John Brumby, along with South Australian businessman Bruce Carter to see if they can find a simpler, fairer, and more predictable way to determine GST payments. Central to the way the Commonwealth funds the States is the concept of "horizontal fiscal equalisation." This is a fancy term for the core Australian principle of the fair go. It ensures all States and Territories have enough funding to deliver similar levels of health, education and other services to all Australians. This is a principle we won't turn our back on. Under any changes that might be considered, we will make sure that everyone continues to receive a fair share of GST revenue, and that States aren't unfairly penalised for introducing successful economic reforms.

Carbon Price

One of the most important economic reforms the Federal Government is pursuing is putting a price on carbon. Documents released by the Treasury on Friday showed this is the cheapest and most effective way to deal with climate change, and that a broad-based, cap-and-trade scheme with a fixed-price transition period represents the best approach. As we've said, it's far too early to speculate about the potential price impacts before final decisions are made on the design of the scheme. What I can say is that every cent raised by a carbon price, which will be paid by the biggest polluters, will go to supporting households and jobs, and tackling climate change.

Professor Ross Garnaut released a paper last week supporting the key role of a carbon price in transforming electricity generation in Australia. This sector currently accounts for 36 per cent of our carbon pollution. Putting a price on carbon would drive a shift from generators powered by high-emission coal to those powered by low-emission gas and renewable energy. Professor Garnaut concluded that this transformation would not threaten the reliability of the electricity supply, which is fundamental to our economy. The Government recently established the Energy Sector Working Group to provide industry feedback on the introduction of a carbon price and the appropriate transitional arrangements.

Senior Australians

On Wednesday, in a speech to business leaders I discussed one of the most important policy challenges ahead of us – seizing the economic and social opportunities presented by our growing population of senior Australians. There's a lot we can do to provide greater support older members of our community who want to stay on in the workplace through better training, more flexible workplaces, and improving choices in the transition to retirement. Of course, senior Australians contribute to our society in many more ways than simply through paid employment. What really worries me is that too often the ageing of the population is seen as a problem that needs to be fixed, rather than an opportunity. In all areas of contemporary policy making, we need to ask ourselves "What new opportunities will arise in the future with a larger and more active cohort of senior Australians?" That's why we're setting up an Advisory Panel on the Economic Potential of Senior Australians, to be chaired by Everald Compton. It will look at a broad range of issues for senior Australians such as the opportunities created by the National Broadband Network, improving recreational activities, and avenues for increasing voluntary service. The Panel will play an important role in advising government on cross-cutting policies to better realise the benefits of an older population.

Coming Up

Finding more workers is one of the many challenges we face in the years ahead and in putting together next month's Budget. It's really important that we have the right incentives in place to reward and encourage participation in the workforce to ensure our economy – already stretched by the mining boom and now the reconstruction effort in Queensland – can get the people it needs. On Thursday, we'll get an update of how our labour market is tracking with the release of employment figures for March. Whatever the result, nothing will change the fact that the situation in Australia stands in stark contrast to that in the U.S. and Europe where jobless rates are much higher.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 3 April 2011

www.treasurer.gov.au