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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

28 August 2011

NO.032

Treasurer's Economic Note

Our economy is always changing. Just as many of the jobs we do and the industries we work in are different to those of our grandparents, so too they will be different to those of our grandchildren. Even in the occupations that are constant, you'd be hard pressed to find many people doing a job in exactly the same way as it was done 50 years ago or even ten years ago. The extent of the change is highlighted by the fact that around half a million Australian workers switch industries in a typical year. One of the things that has made our economy so successful over the past three decades has been this ability to accept change, to adapt, to do things in different ways. Of course change is not always easy. It can require tough decisions. The role of government is to undertake the necessary reforms and put in place the right settings to help manage the change effectively.

A Changing of the Guard

We shouldn't kid ourselves about the extent of the shifts underway in the global economy and the effect that will have on our own economy. We are witnessing one of the greatest economic transformations in modern history as Asia's re-emergence lifts hundreds of millions of people out of poverty. The world's two most populous nations, China and India, accounted for less than a tenth of world gross domestic product 20 years ago. Today they account for a fifth and in another 20 years, they are projected to account for a third of the global economy. And it's not just a story about the awakening of these two giants. We're seeing a similar pattern repeated on a smaller scale in Indonesia, Vietnam and across Asia.

For Australia, this shift is increasing demand for our resources, evident in the high terms of trade and the gathering pace of investment in the mining sector, with $430 billion of investment on the drawing boards. Along with our strong economic fundamentals, that's pushing up the value of the Australian dollar. While this means cheaper goods for consumers and reduces input costs for many businesses, a high dollar also brings pressures to bear on our trade-exposed industries like manufacturers. We saw the harsh consequences of this, as well as the impact of high commodity prices and excess global steel supply, in BlueScope's announcement last week.

A Future for Manufacturing

The job losses in the Illawarra and the Mornington Peninsula are obviously a huge blow. It's important the Government help the affected workers, families and communities to adjust. That's why we're giving practical support to help workers find new jobs and strengthen local economies. The Government will provide $10 million in funding so redundant workers can get immediate access to job support, training and relocation services. We're also contributing $20 million to a $30 million Investment and Innovation Fund for the Illawarra to support new business ventures and create innovative, high-skilled jobs, predominantly in manufacturing and manufacturing services. We're also working with BlueScope to help it move to a more economically-sustainable model. As part of this, we're allowing the company to draw down up to $100 million in advance payments if required from the $300 million Steel Transformation Plan. Despite the job losses, several thousand more jobs in Australia's steel industry have been put on a more secure footing.

A retreat into protectionism is not the answer. Australia is a great trading nation. Having an open and competitive economy has brought huge benefits to our country, creating jobs, growing businesses and increasing prosperity. While we won't put up the barricades to the outside world, there is more that can be done to ensure Australian manufacturers have access to markets at home and abroad. The Government has a range of initiatives like the Buy Australian at Home and Abroad program and the Enterprise Connect network that help our companies compete as suppliers, particularly for major projects in the resources sector. But we shouldn't pretend that there's some silver bullet and that somehow the massive structural changes occurring can be stopped.

Although manufacturers are experiencing tough times, there's no doubt in my mind that Australia will remain a nation that makes things. Like all sectors, however, it will change. We will see a continued shift to more high-wage, high-value adding jobs in the years to come. And output will continue to grow, although at a slower rate than other sectors. Treasury forecasts manufacturing output will increase by around 5 per cent over the period to 2020. Unsurprisingly, given the current mining boom and record levels of investment, resources output is expected to increase by around 77 per cent by 2020, and construction output by roughly 50 per cent.

What's perhaps less widely appreciated is that the services sector is forecast to grow strongly this decade, up around 38 per cent. The reason for this is Asia's rapidly growing middle class. By the end of this decade, Asia is expected to have more consumers than the rest of the world put together, with China surpassing the United States as the world's single largest middle-class market. By 2030, with India following China's lead, the world is forecast to go from mostly poor to mostly middle class, with two-thirds of the world's wealthy living in the Asia-Pacific region. These ranks of new consumers on our doorstep will increase demand for our tourism operators, education providers, and other service industries. And these consumers will also provide new markets for Australia's manufacturers of high-end goods. This week I'll be discussing our diversified economy with regional investors and policy makers in Hong Kong and mainland China. It will be a good opportunity to discuss the challenges facing the global economy, and how Australia faces the current turbulence from a position of strength.

Patchwork Pressures

On the same day as BlueScope's announcement, we saw a major expansion announced by Australia's other major steelmaker, OneSteel, of its iron ore operations. It was a pretty stark example of the multi-speed or patchwork nature of the Australian economy that I've been talking about for several years now. Addressing the challenges posed by different parts of the economy growing at different speeds has been central to the past two budgets, and it's something we'll continue to focus on in the years ahead. It's why this Government is:

  • delivering a $3 billion skills and training package that puts industry and business at the heart of our national training system, and boosts apprenticeship completion;
  • investing in critical infrastructure like the National Broadband Network that will boost productivity across the economy and open up new business opportunities; and
  • introducing a Minerals Resource Rent Tax (MRRT) to maximise the gains flowing from the mining boom, by cutting tax for companies and small businesses to help businesses that aren't in the fast lane, increasing national savings, and investing in new infrastructure.

There will always be those who argue reforms like these aren't needed, and that somehow we can keep doing things the way we always have. It's easy for vested interests to whip up fear and uncertainty about the changes that are required. We saw that during the big reforms of the 1980s and early '90s, like the floating of the dollar, the tearing down of the tariff wall and the introduction of superannuation. Today, you would be hard pressed to find anyone to argue against these important changes that have underpinned the last two decades of uninterrupted growth. We've seen similar fierce resistance to current reforms, like the introduction of the MRRT. When we struck that deal about a year ago, we heard claims it would ruin the industry. Of course we've seen massive profits and massive mining investment since then, all in full knowledge of the MRRT being implemented next year. The doomsayers' claims are beginning to ring very hollow now as more people acknowledge the importance of reforms like the MRRT and our transition to a clean-energy future. What Australia needs now more than ever is a calm, responsible debate about the changes occurring in our economy and the policy settings that best position our country to benefit.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 28 August 2011

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