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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

26 August 2012

Treasurer's economic note

This is a time of great nation building. Every day thousands and thousands of Australians go to work, constructing new and better infrastructure. They are building roads, bridges and ports. They are laying pipelines, assembling plants and digging mines. And they are rolling out optic fibre cable to link our homes, businesses, schools and hospitals with each other and the world. Today, engineering construction is at record high levels. Obviously, all this activity is supporting economic growth and employment. What's often overlooked, however, is that the benefits will endure long after the concrete has set and dried. A new road can not only improve quality of life, but also allow work to be done more efficiently. Better infrastructure  boosts the productive capacity of our economy, leading to greater output and greater exports. That means the investment we see today will continue to deliver dividends, underpinning increases in the living standards of all Australians for many years to come.

Building a stronger Australia

During the week I was pleased to see a lot of discussion in the media, in the Parliament and in the wider community about the level of investment in our economy. It was a good opportunity to talk more about the facts as well as counter a few of the falsehoods that have been peddled in some quarters. As I mentioned in last week's economic note, there has been $919 billion of private investment in Australia since late 2007 – equivalent to almost two-thirds of our annual gross domestic product. And there's still plenty more to come with half a trillion dollars  worth of resource projects either underway or on the drawing boards.

It's true that overall investment figures can be lumpy quarter on quarter due to the large scale of individual projects. It's also true that not every project goes ahead or proceeds as quickly as originally planned. But there's no doubt companies are continuing to invest confidently in the future. Behaving as if the investment pipeline has suddenly run dry is not only false, it's irresponsible. It has the potential to damage consumer and business confidence, and prevents us from having a considered debate about the benefits of investment and the policies needed to ensure all Australians share in the gains.

The mining boom is perhaps better understood as a series of booms – a boom in prices, a boom in investment and a boom in exports. Certainly, the prices of many commodities that Australia sells to the world have declined in recent times. Our terms of trade – the ratio of the prices of what we export to the prices of what we import – peaked around a year ago at 150-year highs. And I've been saying for some time now – and the budget papers make clear – that the terms of trade will decline over the medium term as global supplies of coal, iron ore and other commodities increase.

While the price boom has passed its peak, the investment boom still has some way to run. As Reserve Bank Governor Glenn Stevens  noted on Friday to the House Economics Committee, investment in the resources sector as a proportion of GDP is likely to reach its highest level in at least a century within the next couple of years. This is reflected in the fact that more than half the investment pipeline is at an advanced stage, with the value of projects totalling more than $260 billion. This is up by around $200 billion – or 350 per cent – since the Government came to office and by nearly $90 billion in the past year alone. Projects at this advanced stage are largely locked in with funds committed, contracts signed or construction already underway.

Certainly, things can always change, especially for those projects at a very early stage of planning. We saw that during the week when BHP said it would delay the expansion of Olympic Dam and investigate alternatives for the project. The company's decision  was based on market conditions, including lower commodity prices and higher capital costs. Unfortunately, some tried to misrepresent the news to further their own agendas, claiming the Minerals Resource Rent Tax was somehow responsible. Chief Executive Marius Kloppers was clear this was not the case:

"… the tax environment for this particular project has not changed at all since we started working on it six or seven years ago. The MRRT only covers coal and iron ore, not copper, not gold and not uranium – so the tax situation for this project has not changed."

Like BHP, I'm confident the tremendous potential of Olympic Dam will eventually be realised. And while this one project has been delayed, it's important not to lose sight of the bigger picture. HSBC economist Paul Bloxham noted that "while there has been much discussion about the recent mothballing of some projects, the pipeline of commenced and committed projects is large enough to see that mining investment is a significant contributor to growth in 2012 and 2013." Indeed less than a day after the BHP announcement, Queensland's Alpha Coal project  received environmental approval. This development could see well over 3,500 jobs in the construction phase of the project and around 2,000 ongoing jobs during operation.

As the investment phase eventually winds down, the mining export boom should be ramping up – a point that I have been making for some time, and something Governor Stevens highlighted again on Friday. We're already seeing the benefits of greater investment begin to flow through to greater exports. Despite lower commodity prices, the Bureau of Resources and Energy Economics forecasts commodity export earnings  to reach a record $209 billion this financial year because of larger export volumes.

Spreading the benefits

It's important to encourage investment not just in the resources sector but right across our economy. That's why – along with higher family payments, vital infrastructure and a more secure retirement for Australian workers – the MRRT is helping fund two important reforms to help businesses that aren't in the fast lane of the mining boom. One is the instant asset write-off that allows the nation's 2.7 million small businesses to immediately write off each and every asset they buy that is worth less than $6,500, as well as the first $5,000 of a car, ute or van. The other measure is loss carry-back. This will encourage companies to invest and adapt and help them ride out difficult times. Under draft legislation released during the week, companies that report a loss from this financial year will be able to carry back up to $1 million worth of losses to offset them against previous tax paid in 2011-12. And from next financial year, they will be able to carry back up to $1 million worth of losses against tax paid up to two years earlier. That means companies will be eligible for a tax refund worth up to $300,000. Both loss carry-back and the instant asset write-off are about encouraging businesses to invest, adapt and innovate. Whether a small start-up or a multi-billion dollar resource giant, investment remains the best way to take advantage of the opportunities of tomorrow.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia