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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

24 April 2011

NO.014

Treasurer's Economic Note

Today I'm writing to you from Cairns, where I've been meeting with community leaders, small business operators and local residents over the past few days. As a Queenslander, the Far North has always been a very special place to me and one where I've spent a lot of time over the years. It's fair to say this part of Australia has had a pretty tough time of it lately. On top of the impact on tourism of the global financial crisis and higher Australian dollar, the region has had to cope with Cyclone Yasi and its aftermath. Of course there's still rebuilding work to be done, but for a tourist, the Far North is just as appealing as ever. The sun is still shining, and the combination of the rainforest and reef makes this one of the most spectacular places on the planet to visit. Whenever I speak to people around Australia or overseas, I always make the point that the Far North, as well as the rest of Queensland, remains open for business, ready to welcome visitors and is as beautiful as ever.

A Tale of Two Booms

I've set up a temporary office in Cairns where I'm carrying out my duties as Acting Prime Minister and Treasurer. Yesterday I received a briefing from Chief Superintendent Mike Keating about the progress of the reconstruction efforts in North Queensland in the wake of Yasi. Beyond the terrible impact on families and individuals across the region, the economic cost has been substantial. The cyclone and floods are estimated to have inflicted a damages bill of $9 billion on our economy, with the brunt of that being felt by our mining and farming sectors. The rebuilding and recovery costs will weigh on the budget estimates in the early years, and slower growth will reduce government revenue in the short term. Added to this, the disasters in Japan, our second biggest trading partner, are forecast to reduce commodity export revenue by about $2 billion. And of course there are other soft spots in our economy caused by factors such as the high Australian dollar and a cautious consumer.

But, as I explained in my major pre-Budget speech at the Queensland Media Club on Wednesday, these near-term challenges are only part of the story. The outlook for our economy over the years ahead is much more positive, and this brings with it a different set of challenges. An unprecedented investment pipeline will stretch our economy's capacity in the years ahead, putting pressure on prices and wages. The right thing to do in these circumstances is to restrain spending and budget for surpluses in the years ahead so we don't compound these pressures on our economy. This means taking difficult budget decisions now to keep ahead of the challenges, rather than playing catch up down the track when the consequences of inaction could be much more severe.

For a number of reasons, Mining Boom Mark II won't be accompanied by the same surge in government revenues that flowed during the mining boom last decade. The hangover from the global financial crisis and the subdued recovery in household wealth means consumers are being much more cautious with their spending despite the strong jobs market and income growth. On top of this, tighter financial conditions are also impacting on growth prospects for businesses. The strength of the exchange rate means sectors like tourism, education and manufacturing are all being affected by international competition more acutely than they were during Mining Boom Mark I. This has produced a divergence between the mining and non-mining sectors. A stark example of this patchwork economy can be seen in earnings reports: profits in the mining sector surged 59 percent over 2010, while elsewhere they actually fell slightly. And because of the huge investments the mining companies are making, there'll be entitled to very large tax deductions. Finally, the current boom starts at a time when our terms of trade are already at very high levels. As greater supplies of global commodities come on line, our terms of trade will gradually fall. That means government revenues will not grow at the sorts of rates we saw during the previous boom.

All up, this means we shouldn't expect to see a repeat of the rivers of gold that flowed into the government coffers in the last mining boom. The revenues will still be there, but we shouldn't expect to see a repeat of the massive $334 billion upward revision to tax revenues that occurred between 2004 and 2007.

The Potential of Seniors

One of the most important policy challenges ahead of us is harnessing the economic and social opportunities presented by our growing population of seniors. Today with Mark Butler, Minister for Mental Health and Ageing, I'll be announcing the membership of a new panel to advise the Government on how our nation can take advantage of the experience and wisdom of older Australians. The Advisory Panel on the Economic Potential of Senior Australians will be chaired by Everald Compton, who recently retired from National Seniors Australia, and will also include Gill Lewin, president of the Australian Association of Gerontology, and Brian Howe, former deputy prime minister. In all areas of contemporary policy making, we need to ask ourselves "What opportunities will arise in the future with a larger and more active community of seniors?" The Panel will help us answer these questions. 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 volunteer work. The panel, which will hold its first meeting next month, will seek input from the public and produce a series of reports in the second half of the year.

Putting a Price on Carbon

We continued making steady progress last week on climate policy with the Multi-Party Climate Change Committee holding its sixth meeting on Tuesday. These meetings bring together a number of different perspectives, but we are all united in our determination to introduce this tough economic reform that's so important for Australia's future. Patricia Faulkner, one of the committee's expert advisers, spoke about the factors that should be considered in designing the household assistance package. As the Government has made clear, more than half of the revenue raised under a carbon price will go to assisting households. Millions of households will be better off, and the assistance will be permanent.

The Industry Transitional Assistance Working Group also met on Tuesday to discuss the best way to support business in making the transition to a low pollution economy. As Climate Change Minister Greg Combet explained, there is a broad consensus that the best way to do this is by putting a price on carbon through a market mechanism. Business now has the opportunity to work with Government to design effective transitional assistance measures. Research released by the Climate Institute on Thursday showed why this is so important. The report states that Australia's power sector ranks among the world's most polluting. The Climate Institute argues that without a price on pollution, the Australian economy will remain overly dependent on polluting energy sources and that Australian companies will struggle to remain competitive as the world increasingly moves to cleaner energy sources.

Coming Up

Tonight, I'll head home to Brisbane in time to attend ANZAC Day services early tomorrow morning. It's been great to see more and more people getting out each year to honour the sacrifice and service of previous generations as well as pay tribute to the many young Australians that continue to serve around the globe. A lot of the ANZAC qualities we admire so much, like sticking together when times are tough, have been on full display this summer in the way Australians responded to the floods and cyclone.

On Wednesday, the impact of the natural disasters will be seen in the release of official inflation data for the March quarter. It's obvious to anyone buying fruit and vegetables that the destruction to crops in some of our most important farming regions has had a big impact on prices. While this has been tough on family budgets, these price rises should unwind as crops re-grow and production comes back on line.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 24 April 2011

www.treasurer.gov.au