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

11 December 2011

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Treasurer's Economic Note

Our economy is growing solidly, unemployment is low, businesses are making record investments to expand, households are spending at healthy rates, incomes are rising, inflation is contained, and our budget is in great nick and returning quickly to surplus. On top of all this, the second straight month of cuts to interest rates has made for a great finish to the year for many families. All Australians have a right to be proud of the contribution they've made to keeping our economy strong in what have been some tough times - whether that be the communities rebuilding from natural disasters, businesses battling a high dollar, or households under everyday pressure to pay the bills. As we head towards Christmas and the New Year, Australians have every reason to be confident about the nation's strong finances and economic fundamentals.

A Win for Families

The cut in interest rates during the week was welcome relief for Australian families at a time when budgets are stretched. After a pretty robust but important community debate, the country's biggest banks agreed to pass on the rate cut in full. Combined with last month's cut, this means an extra $100 a month in the hands of a family with a $300,000 mortgage. The decline in interest rates since the Labor Government came to office brings that saving to around $3,000 a year. In fact, Australian households are now spending around half a billion dollars a month less on mortgage repayments than they otherwise would have been, because of the decline in interest rates over the past four years, according to Treasury estimates. That's half a billion dollars more in the pockets of Australian families each month, which means more money being spent in Australian businesses and which in turn supports jobs.

The decision by the banks to pass through last week's rate cut in full is also a good example of the benefits of the reforms we've put in place to boost competition in the banking sector. One measure that's not widely known is our investments of nearly $15 billion in residential mortgage-backed securities, which helped keep smaller lenders going through the global financial crisis and allowed them to continue offering some really good deals to keep competitive pressure on the big banks.

The Pathway to Greater Prosperity

Central to the Government's agenda of building a stronger, more secure economy is lifting productivity. It's the best way to ensure our long-term prosperity and to increase the incomes and living standards of all Australians. We saw a rise in productivity in the National Accounts during the week, but as I've argued, you can't read too much into productivity figures for a single quarter or even over a couple of quarters. A decade of neglect of investment in critical infrastructure and skills has meant Australia has suffered an extended decline in productivity growth. Since this Government came to office we've been focused on reversing this. You don't improve productivity overnight by flicking a switch. It's a long-term project that requires long-term investment and reform. At the core of our policy agenda is a broad-based plan to boost the productive capacity of our economy. This includes things like:

  • A doubling of the investment in roads, rail and ports over the six years from 2008-09;
  • Building the National Broadband Network, which will help drive down costs of doing business;
  • A greater focus on skills, training and apprenticeships, including the $3 billion investment in the Budget;
  • Putting a price on carbon pollution, which will help shift our economy to clean energy and low-pollution technologies in a way that provides maximum support to productivity growth;
  • Promoting innovation through better targeting of tax incentives, and $9.4 billion in spending on science and research;
  • Reducing regulatory barriers and business red tape by working with the states on consistent rules and processes, such as uniform occupational health and safety laws and a national occupational licensing system;
  • Building on our tax reform agenda, such as cutting the company tax rate to boost competitiveness, and tripling the tax-free threshold to provide workforce incentives; and
  • A Fair Work Act built on enterprise bargaining that supports firms' efforts to be more productive, and balances fairness and flexibility.

We know from history that measures like these take time to implement, and time to see the productivity pay-off. Reforms of the 1980s - such as reducing tariffs, deregulating the financial sector and floating the dollar - were behind the productivity surge in the 1990s. There's a lag between putting reforms in place, and seeing the benefits in the economy.

The recent boom in business investment has played a role in weaker productivity growth because it takes time for that investment to deliver the extra output. Capital expenditure is forecast to rise 32 per cent to a record $158 billion this financial year. That spending, although a drag on productivity now, will increase our economy's capacity down the track. For example, a lot of time, effort and money is going into building new mines that aren't yet producing a single lump of coal or iron ore. When the mines get up and running and start shipping the resources, we'll also see the benefits to productivity flow through.

Boosting productivity doesn't mean making Australians work harder and longer, or removing their working conditions. It's about helping people to work smarter by providing the skills and resources to do their jobs more efficiently. This is the best way to keep businesses profitable and ensure real increases in workers' wages for the long term. That's why this Government is focused on education, skills and training, ensuring our growing economy can get the workers it needs. Australia has a fantastic opportunity in the years ahead to get more people into work and to train them for more rewarding jobs. That's something this Government remains absolutely focused on.

Encouraging Investment

Tax reform is central to efforts to raise productivity. One of the outcomes of this year's Tax Forum was the setting up of a Business Tax Working Group to look at further improvements to our tax system to help businesses respond to the pressures of a changing economy. Today, I've released the Working Group's interim report on the tax treatment of losses for public comment. Changing the treatment of losses could encourage investment in businesses that are struggling or that are just starting up. Investment not only allows the purchase of tools and equipment - it also supports new ideas and innovations. By removing barriers to sensible risk taking, the tax system can help provide struggling businesses with a new lease of life. No decisions have been made on the way forward. The independent Working Group won't deliver their final report to Government until March after listening to what businesses and the wider community thinks. There are a lot of potential options for improving the taxation of investment and the Working Group is yet to make any recommendations.

A Position of Strength

Despite our strong economic fundamentals, we're not immune from the continued fallout from global economic turmoil. European leaders made progress during the week on addressing the sovereign debt crisis, but clearly the world now wants to see the talk turned into action. The global community and international financial markets need to see the full details and swift implementation of Europe's plans. The road ahead for Europe remains a difficult one and we shouldn't be surprised to see further volatility along the way. Clear, consistent and determined action will be required. There's no doubt the global instability is hitting our economy and our budget. But as the National Accounts showed, we face these challenges from a position of strength. We have a strong financial system, sturdy public finances and a proven track record of dealing with global instability. We are in the best position of just about any developed economy to respond should events take an unexpected turn.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 11 December 2011