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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

5 June 2011

NO.020

Treasurer's Economic Note

Last week began in Ipswich where I had the honour of officially opening Robelle Domain, a fantastic park that covers nearly 500 hectares and includes cycling paths, walking trails and play equipment. The opening of a park is a great event for any community, but it had a special significance for Ipswich after the devastation of the January floods. In many ways, the park reflects not only the town's courageous recovery, but also its confidence about the future. It's been inspiring to see the way communities like Ipswich have gotten back on their feet. From the emergency service personnel at the height of the disasters, the gumboot army in the aftermath, and now the hard work of hundreds of thousands of people during the rebuilding phase, it's been an amazing effort in communities across the country. Roads and railways are being restored, factories and shops are opening again, crops are being planted, and houses are getting new carpets, wiring and fresh coats of paint. Over the past week, we've seen economic data that clearly reflects the destruction as well as the recovery now underway. Like the people I met in Ipswich a week ago, all Australians have good reason to be optimistic. The summer's disasters haven't shaken the solid fundamentals of our economy, our strong prospects ahead – particularly when it comes to job creation, or the spirit and resilience in our communities.

Economic Snapshot

On Wednesday, we saw the economic impact of the most costly disasters in our history with the release of the National Accounts. It wasn't surprising the economy contracted by 1.2 per cent in the quarter, with the floods and cyclones estimated to have sliced 1.7 percentage points from growth. All up, Treasury now estimates that the disasters will cost the economy about $12 billion, up from the previous estimate of around $9 billion. The brunt of that is being felt in the resource and agricultural sectors. Lost commodity production is likely to be around $9 billion and damage to crops more than $2 billion. In addition to the terrible impact of the natural disasters, there are of course other soft spots in our economy. We're still seeing lingering effects from the global financial crisis and the impact of a high dollar on sectors like manufacturing, tourism and education. However, it was encouraging to see key components of GDP, such as consumption, dwelling investment and business investment, growing in the first three months of the year.

In this quarter, we're already seeing a strong rebound in the economy in the monthly figures. Trade data on Thursday showed coal exports are up almost 16 per cent over the past two months, and iron ore and metal shipments have gained 23 per cent. And we saw a solid gain in retail sales in April – in fact it was the biggest monthly increase in 17 months. Although there's short-term softness, Australians can be confident about our strong fundamentals – our economy is forecast to create about 500,000 jobs in the next couple of years, there's an unprecedented pipeline of mining investment, and the nation's finances are stronger than almost any of our peers. That's why it's so vital that we build a bigger workforce, that we invest in infrastructure, and that we give tax assistance to Australian businesses that aren't in the mining boom fast-lane.

The Asian Century

Certainly, our economy's strong outlook is helped by the unprecedented pipeline of business investment that ABARES estimates to be worth $430 billion. According to Treasury, in value terms, around two-thirds of major mining projects have received final investment approval, with the majority of these already under construction. But the opportunities presented by the Asian Century for our nation stretch well beyond the mining boom. What's often overlooked is that the rapid growth in China, India and other emerging economies in our region is creating millions of new consumers. By the end of this decade, Asia's middle-class is expected to be bigger than the rest of the world put together. So it's not just Australian minerals that are in demand. We'll see growing markets for our services too – like finance, tourism and education, and for higher-end manufactured goods.

In fact most of the jobs Australia will need to fill over the next decade won't be in coal or iron ore mines – they will be in supplying services. Treasury forecasts total employment in the construction and resource sector will increase by 280,000 workers between now and 2020. Over the same period, jobs in the services sector are expected to increase by more than 1.4 million workers. This means we need to make sure people have got the skills they need to make the most of the great opportunities in the years ahead. That's why apprenticeships, training and participation were at the centre of last month's Budget.

As well as building a bigger and better workforce, the other way to prepare our economy for the increased demand that will come as our Asian trading partners power ahead is through tight fiscal policy. We're committed to getting the Budget back in the black in 2012-13 so we're not chasing the same resources as the private sector as the investment boom gathers pace. That would only add to price pressures in the economy. That's why this year's Budget delivers the fastest fiscal consolidation on record – 3.8 per cent of GDP over the next two years. Our stated strategy was always to support the country during the global downturn but then to step back as the recovery took place.

Putting a Price on Carbon

Today is World Environment Day, and this afternoon I'll join a gathering in Brisbane as part of the national 'Say Yes' campaign to reduce carbon pollution. I'm not attending as a politician, but as a private citizen and someone who thinks taking action on climate change is critical for our economy and our children's future. Whether it be Cate Blanchett or former Liberal leader John Hewson, I think it's great for people to use their public profiles to speak out on something they believe in. Today is an opportunity for thousands of others to lend their voice to support this important cause.

In the past week, we've seen plenty of interesting contributions to why putting a price on carbon is such an important economic reform. On Wednesday, Professor Ross Garnaut released his final report on climate change. Like the vast bulk of responsible business leaders and respected economists, he supports the Government's position that pricing carbon – supported by investment in clean energy technologies – is the cheapest and fairest way to reduce emissions. He also makes the point that a reliance on regulation or 'direct action' to reduce our emissions would cost Australians much more than a carbon price scheme, and it wouldn't generate any revenue to help households manage the transition. Also last week, 13 of Australia's most prominent economists came out in support of a carbon price. The group, which included Grattan Institute director Saul Eslake, St George chief economist Besa Deda and Westpac chief economist Bill Evans, described a carbon price as "a necessary and desirable structural reform of the Australian economy."

Putting a price on carbon will allow the market to find the cheapest and most efficient ways to cut pollution, rather than having the Government tell individual companies or sectors what to do. This will drive innovation to find better, less polluting ways of producing power, goods and services. It will tilt the balance towards investment in renewable energy and forms of power generation that produce lower emissions. In fact, Treasury modelling shows a carbon price will see gas-fired electricity generation expand by between 150 and 300 per cent over the period to 2050. Treasury's modelling shows the renewable electricity sector (including hydro-electric power) is projected to be six times bigger than it is today. In short, dirty energy will become more expensive and clean energy cheaper under a carbon price, creating the jobs of the future and helping to protect our environment and our economy. On Tuesday, I'll have more to say at the National Press Club on our transition to a low-carbon future and why putting a price on carbon is the next step forward on Australia's economic reform road.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 5 June 2011

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