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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

22 April 2012

Treasurer's economic note

During the week, the IMF's chief economist Olivier Blanchard described the world economy as having been on a rollercoaster for the past six months. Certainly it has been a wild ride, in fact for the last four years. Having just wrapped up a series of meetings in Washington DC and New York with my international counterparts as well as business leaders and major investors, the big take-home message has been that global economic conditions have stabilised somewhat in recent months, but the outlook remains uncertain. In the United States, economic activity and labour market conditions have picked up, following a soft patch in mid-2011, and in Europe, policymakers have taken further steps towards addressing the region's sovereign debt crisis. On Wednesday, the IMF slightly revised up its growth forecasts for this year and next reflecting these encouraging signs. But, as Mr Blanchard noted, an uneasy calm remains. Many advanced economies, particularly those in Europe, still have much work to do to minimise the risk of the debt contagion spreading, while also getting their budgets back on a sustainable footing and implementing structural reforms to promote growth. These challenges loom large, so we shouldn't be surprised to see bouts of instability in the global economy continue for some time to come.

A Position of Strength

It's easy for Australians to forget how different our recent economic story has been to much of the developed world. Many of my G20 counterparts that sat around the table in Washington represent economies where output is still lower than it was before the GFC. Some come from countries where hundreds of thousands, or even millions, of people have lost their jobs. In Australia, by stepping in to support demand when the global financial crisis first struck, we avoided recession, protected jobs and kept the doors of business open. That means today Australia faces any future challenges from a position of almost unparalleled strength.

  • Our economy is around 7.4 per cent larger than it was before the GFC, while economies such as the U.K., Italy and Japan aren't even back at the starting line. In fact, our cumulative growth since the beginning of 2008 outranks every single advanced G20 economy with the exception of South Korea.
  • We have seen nearly 790,000 jobs created in Australia since Labor came to office, while 27 million jobs have been lost elsewhere in the world over the same period. Our unemployment rate of 5.2 per cent is less than half the 10.8 per cent rate of the Euro area.
  • We have very low debt and our public finances are in great shape – reflected in Australia being awarded the coveted AAA credit rating from all three global ratings agencies for the first time in our history.
  • The value of resource sector projects underway or on the drawing board is a staggering $455 billion.

The IMF confirmed we're in a league of our own in its latest World Economic Outlook. It forecasts Australia will outperform every major advanced economy over the next two years, with growth of 3 per cent this year, accelerating to 3.5 per cent next year. This is broadly consistent with the economic outlook presented in the Government's mid-year update, which importantly already factored in the return to surplus.

The Path to Surplus

Given Australia's strong fundamentals, returning the budget to surplus in 2012-13 is the responsible thing to do – as the IMF has acknowledged. It's our best defence at a time when many countries that have failed to show sound fiscal discipline have faced huge economic and social problems. Just as it was right to step in and support demand when we were in the grips of the GFC, it is right to step back as the private sector strengthens. This has been our fiscal strategy all along – when we outlined our stimulus package that prevented recession, we also put in place a plan to get the budget back to surplus. As regular readers of this Economic Note would know, I've been pointing out for around two years now that this involves putting in place the fastest fiscal consolidation on record. We reiterated our commitment to a surplus in the mid-year budget last November because, as I said clearly at that time, this ensures we're not adding to price pressures in the economy, giving the Reserve Bank the maximum flexibility to cut interest rates if it thinks that's necessary. This is obviously important for households and businesses under financial pressure. After back-to-back rate cuts at the end of last year, a family with a $300,000 variable mortgage is now paying around $3,000 a year less in repayments since Labor came to office. That's proof of the benefits of sound budget management. As the Prime Minister noted during the week, those calling for further interest rate cuts should also be calling for a surplus, not opposing one.

Of course, the path to surplus has been made tougher by the fact that the GFC and global turbulence have ripped at least $140 billion from government revenues. But this doesn't change the fact that getting back in the black is the right course of action for an economy moving towards trend growth with low unemployment and a record pipeline of investment.

Supporting a Strong Global Economy

Despite Australia's strong fundamentals, we know very clearly that we are not immune from global developments. That's why yesterday's commitment of G20 finance ministers to boost IMF resources was so important. As I've said for some time, first and foremost Europe needs to get its own house in order, but it's also critical that the IMF has the capability to address any potential vulnerability facing the global economy, whether that be in Europe or elsewhere in the world, including our own region. The IMF works like a bank for struggling economies, providing loans on strict conditions that borrowers undertake necessary structural reforms. Like all the 187 IMF member countries, Australia contributes a share of the funds that are loaned – a little over 1 per cent, in line with the relative size of our economy. Any funds we provide are repaid in full with interest so they actually provide a cash return to Australian taxpayers. Our contributions don't affect the budget bottom line or our ability to fund hospitals, schools or any other services or programs. Australian governments of both political persuasions have a long and proud history of supporting the IMF. It's clearly in our interests to support global stability – that's good for the Australian economy and good for Australian jobs.

Preparing for Future Challenges

One of the great lessons from the turmoil in Europe is the importance of governments not delaying necessary reform. Now more than ever, policymakers need to take the tough decisions required to prepare their economies for future challenges. During the week, Australia took some important steps to position our nation to benefit from two of the biggest structural changes that are underway: the ageing of our population and the transition to cleaner energy. On Wednesday, together with Mark Butler, the Minister for Ageing, I announced a package of measures to help ensure our nation does more to tap the wealth of life experience, knowledge and skills of older Australians. This includes a new $1,000 job bonus to tackle age discrimination and encourage businesses to employ older Australians who want to stay in the workforce. Separately, the Prime Minister and Minister Butler announced critical reforms to the aged care sector that will allow tens of thousands more older Australians to stay in their homes and receive care, and ensure no one will be forced to sell their property in a fire sale to access aged care. Also during the week, the Government announced it would accept all the independent recommendations about how to set up the new Clean Energy Finance Corporation, an important new fund that will help drive investment in renewable and low-emission energy as well as energy efficiency technologies. Reforms like these show how the Gillard Government is getting on with the long-term reforms to lock in our nation's future prosperity.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia