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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

28 October 2012

Treasurer's economic note

I was 18 years old in 1972, the year that Prime Minister Gough Whitlam established Australia's diplomatic ties with China and helped orientate our nation towards an Asian future. At that time, Asia didn't feature prominently in the way Australians viewed the world or themselves. Like many 18 years olds in Australia, one of my ambitions back then was to buy a car and eventually my own home. For a young person in China in 1972, those aspirations were beyond the wildest of dreams. Their concerns were likely to have been much more immediate: things like having enough food for the next meal or enough clothing to keep warm through the next winter. As a young adult, our futures seemed to be very different. Even as I went on to study some Chinese politics at university, I could never have imagined the transformation that was to take place. Over the four decades since then, Australia's ties with Asia have flourished and economic growth across the region has lifted hundreds of millions of people out of poverty. Today, the ambitions of an average Australian 18-year old are likely to be much more similar to those of their contemporaries across Asia. And their futures are more closely entwined than ever. The Australia in the Asian Century White Paper , which the Prime Minister has released today, is all about preparing for this future and making sure all Australians share in the benefits and take advantage of the enormous opportunities that will flow from our region's continuing transformation.

Australia in the Asian Century

Treasury analysis prepared as part of the White Paper paints a fascinating picture of the changes underway in our region. According to Treasury's modelling:

  • By the end of this decade, Asia will overtake the economic output of Europe and North America combined to become the world's largest economic power;
  • By early next decade, the combined output of China and India will exceed that of the whole Group of Seven major economies;
  • Average GDP per person in Asia is set to almost double by 2025 - a feat that took the United Kingdom over 50 years to achieve during the Industrial Revolution;
  • By 2025, four of the ten largest economies in the world will be in the Asian region; and
  • Productivity gains will underpin rapid growth in Asia into the next decade, with output per person in China currently only 20 per cent of that in the United States, while India and Indonesia have barely reached 10 per cent.

Many view the implications for Australia of these changes simply through the prism of the mining boom. That's understandable given the hundreds of billions of dollars being invested in resource projects across Australia. But Asia's transformation is generating demand for more than just our coal, iron ore and LNG. As economies grow in the region, so too will average wealth. By 2030, the ranks of Asia's middle class are expected to increase by more than 2.5 billion people. That means hot on the heels of the mining boom, a consumer boom is fast gathering momentum. This will increase demand for a diverse range of goods and services, like health, aged care, education, tourism and financial services, as well as high‑quality food products and household goods. Australia is in a prime position to supply these growing markets that are right on our doorstep.

Lifting prosperity

But the opportunities won't just fall into our laps. Australia's economic success has been built on the back of hard work, ingenuity, good decisions and forward-looking reforms over the past 30 years. We must continue building on our strengths to take full advantage of the opportunities that are unfolding in our region. Central to this will be lifting our productivity growth. While we are already a highly productive economy by world standards, we must continue work in this area. Lifting productivity is the best way to deliver sustainable increases in living standards.

The Government has today set the goal of lifting Australia into the world's top 10 in GDP per person by 2025. This would mean lifting real income per person from $62,000 to around $73,000. It's an ambitious target, but we already have the momentum. Under this Government, Australia has moved up four places in the rankings from 17 to 13, reflecting the hard work, creativity and determination of our workers and businesses as well as our successful policy response to the global financial crisis. To break into the top 10 will not only require greater engagement and integration with the region, but also further lifting our productivity at home - irrespective of how exactly the Asian Century evolves. The White Paper outlines the Government's agenda to keep investing more in education and skills, to promote innovation, to keep improving our infrastructure, and to continue our work on tax and regulatory reform. Of course, this ambitious productivity goal cannot be achieved by the Government alone - it will require a concerted and coordinated effort by the whole community over many years.

Making responsible savings

While Asia's long-term future is bright, it won't all be smooth sailing from month to month or year to year. The mid-year budget update  released on Monday showed how the current recession in Europe and the sluggish recovery in the U.S. are impacting on our region and on our economy. Lower-than-expected tax revenues meant we had to find $16.4 billion in new savings in the budget. These build on the $138 billion in savings this Government has already identified over our five budgets. With each budget and mid-year update, the savings task gets more and more difficult. We've done our utmost to make sure our savings decisions minimise the impact on the economy and the community's most vulnerable. An example of one of the savings announced during the week was the reform to the Private Health Insurance Rebate. The cost of the rebate is around $5 billion a year and is growing on average at 6.3 per cent annually. If this growth rate continued it would obviously put a significant strain on government finances in the years to come. That's why the Government has decided to link increases in the rebate with the inflation rate from April 2014. This means the government's contribution to private health insurance premiums will continue to increase, but at a much more sustainable rate.

It's worth noting that savings measures like this don't just help return the budget to surplus over the forward estimates, they also improve the structural position of government finances over time. Treasury analysis shows the underlying cash balance would be around $14 billion lower this year (0.9 per cent of GDP) without the long-term savings, blowing out to a $51.4 billion shortfall (2 per cent of GDP) in a decade's time. As the chart below shows, rather than getting back to surplus this year and staying in surplus, the budget would be in deficit and stay in deficit.

Underlying Cash Balance as a Proportion of the Economy

Underlying Cash Balance as a Proportion of the Economy

Note: The baseline scenario is the same as the medium-term scenario published in MYEFO, except that the fiscal rules are not applied to allow an accurate assessment of the contribution of long-term savings only to the budget position.

This kind of responsible budget management is why Fitch Ratings reaffirmed our AAA credit rating on Friday, ensuring we remain as one of only 7 countries with a AAA rating and stable outlook from the three global ratings agencies. It's also providing room should the Reserve Bank decide to further reduce interest rates as they have done repeatedly over the past year. That has meant a family with a $300,000 mortgage is now paying around $4500 a year less than they were under the previous government.

Finding responsible savings puts our finances on a strong footing as we look to make room for further reforms, such as a new national school funding model . As the White Paper makes clear, investing in skills and education is one of the best ways to ensure we make the most of the opportunities of the Asian Century. Certainly improving our knowledge of Asia as well as our language skills will be critical, but at a wider level we must also create a more educated and skilled workforce. This will be necessary to build our nation's productivity and promote innovation so that our workers and businesses can respond to opportunities as they emerge. Businesses, unions, communities and all levels of government will need to work together to make the most of the opportunities that arise from Asia's continuing transformation over the coming decades. We all have a role to play in making the most of what will be a remarkable journey.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia