The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

30 September 2012

Treasurer's economic note

Four years ago today the shockwaves from the collapse of Wall Street investment bank Lehman Brothers were reverberating around the world. Trust in the global financial system was evaporating. Credit markets were seizing up. The world's banks were unwilling to lend to each other or pretty much anyone. While Australia's credit unions, building societies and banks hadn't engaged in the risky lending practices seen elsewhere, no one was immune from the collapse of confidence.

The Government acted quickly to secure the flow of credit through our economy. We introduced a wholesale funding guarantee that allowed our financial institutions to access offshore debt markets on competitive terms. We accelerated the introduction of the Financial Claims Scheme  to give Australian depositors confidence their money was safe. And we invested in residential mortgage-backed securities to support competition in the banking sector and help fund tens of thousands of home loans. These actions maintained confidence and stability in our financial system through the darkest days of the global financial crisis. Households continued to save and borrow, and businesses secured the funds they needed to survive, invest and grow.

As well as our successes in avoiding recession, saving jobs and protecting businesses, it's worth remembering Australia's banking system came through the global financial crisis in very good health. No Australian bank had to be bailed out by taxpayers. No Australian depositor had their savings put at risk. And no investor in a rated Australian mortgage-backed security ever lost a cent of principal.

A strong, secure and competitive banking system

The resilience of Australia's financial system was highlighted in a number of reports during the week. On Tuesday, the Reserve Bank confirmed in its semi-annual Financial Stability Review  that Australia's banks are well capitalised and well funded for the period ahead, with very little direct exposure to the troubled euro area. The RBA noted that our banking system is well placed to cope with shocks from abroad. Since the GFC, Australia's banks have reduced their use of short-term wholesale funding sources, increased the average maturities of their borrowings and substantially boosted their deposit funding. The RBA's assessment was confirmed later that day by the International Monetary Fund which said in its Global Financial Stability Review that Australia's financial sector had sound risk management and world-class regulation.

In a speech during the week, Reserve Bank Assistant Governor Guy Debelle  highlighted the importance of Australia's quick and decisive response to secure our financial system during the GFC:

The global financial system has been in a state of turmoil for more than five years now. The repercussions of this have been widespread, although thankfully Australia has been spared the worst of the impact. In other parts of the world, most obviously Europe, the United States and the United Kingdom, the fall-out from the financial crisis has seen millions lose their jobs, many for a number of years. This is most stark in Greece and Spain where around one quarter of the workforce is unemployed. Young people entering the workforce in those two countries have little prospect of finding meaningful employment any time soon; an experience that can scar their income prospects over their whole working lives and runs the risk of leading to a dangerous breakdown in social cohesion.

Of course as well as keeping the banking system strong and secure, it also needs to deliver for consumers. That's why the Government has also put in place a comprehensive banking package  to increase competition and choice. The reforms include a ban on mortgage exit fees on new home loans, tick'n'flick deposit switching, our significant RMBS investment and the introduction of covered bonds to provide lenders with access to cheaper funding, and the requirement for lenders to provide one-page mortgage fact sheets so consumers can more easily figure out who is offering the best deal. It's really encouraging to see measures like these are helping turn up the heat on competition in the banking sector. New Treasury analysis shows that over the last year smaller Australian banks have captured another $13.4 billion of the mortgage market from the big banks.

A critical defence

Along with our strong banking system, Australia's sturdy public finances are a critical defence in uncertain times for the global economy. The release on Monday of the Final Budget Outcome  for last financial year highlighted the fact that our budget position is amongst the strongest in the developed world. The underlying cash deficit of 3 per cent of GDP was less than half the average budget deficit recorded for the major advanced economies in 2011, and our net debt position of 10 per cent of GDP is a fraction of that of our peers. These strengths have been recognised in recent weeks by the IMF and credit rating agency Standard and Poor's, which reaffirmed Australia's gold-plated AAA rating.

Budget balance 2011-2017

Chart of the Budget balance 2011-2017

Net debt 2011-2017

Chart of the Net debt 2011-2017

The budget outcome did, however, show the ongoing impact of the global downturn. Tax receipts were down by $26 billion in 2011-12 on the pre-crisis estimate, and further write-downs are likely for 2012-13. Although the resource investment boom still has a way to run, the recent decline in commodity prices coupled with the sustained high dollar has impacted on some investment decisions - particularly for early stage projects - and will also have an impact on government revenues. That means we'll need to find additional budget savings to deliver a surplus this financial year.

The Government's strict budget discipline has already helped make room for the equivalent of five interest rate cuts since late last year. The official cash rate  - the main benchmark from which most interest rates in our economy are set - is now at 3.5 per cent, down from 6.75 per cent when the previous government left office. A family with a $300,000 variable mortgage is now paying around $4,000 a year less in repayments than when we came to office. That's obviously very real relief for the budget of an average family.

When you look at it on a wider scale, you also see the benefits that lower interest rates deliver for the entire economy. For instance, the decline in interest rates under this Government has reduced the total mortgage repayment bill for Australian households by around $650 million a month, according to a new Treasury estimate. That's an extra $650 million more in the pockets of Australians each month, which supports business activity and jobs across the economy. Lower interest rates are one of the dividends of this Government's continued disciplined approach to budget management.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia