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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

17 February 2013

Treasurer's economic note

This weekend I'm sending my economic note from sub-zero Moscow where I've just finished meeting with my G20 finance minister colleagues. Even though I've been to plenty of these G20 meetings over my five years as Treasurer, I always look forward to the great opportunity these meetings provide to take the temperature of the global economy and work with my international colleagues on the big challenges we all share. Everything I heard here suggests that 2013 could be a better year for the global recovery, but only if policymakers in the major advanced economies make the right decisions to support growth and jobs.

Global economy

The global economy is off to a better start this year, but there are some serious threats to the still-fragile global recovery. This year our Russian hosts laid out an agenda which focuses heavily on improving job creation and growth across G20 member economies – a theme which Australia will continue when we host the G20 in 2014. When I met with President Vladimir Putin and my G20 colleagues at the Kremlin on Friday, I was impressed to hear that unemployment in Russia is around its lowest rate in 20 years, an important achievement for the Russian people who have been through some very tough times.

But a lot of advanced economies are still facing very subdued conditions and too many people around the world still find themselves without a job. This week's State of the Union address by President Obama resonated deeply with me given his focus on getting Americans back into work. President Obama is committed to helping the US economy kick-start a sustainable recovery by fostering conditions for businesses to thrive and generate stronger jobs growth.

Of course, jobs and growth have been at the heart of our economic agenda since we came to office, and remain at the top of our priorities every single day. Not only have we put in place responsible and sustainable fiscal settings that support the economy and jobs, but we've ensured that our productivity-enhancing reforms – including our substantial investments in skills, education and infrastructure – have not come at the expense of fiscal discipline. The fact that we've offset all new spending with savings measures since mid-2009 is testament to this.

President Obama shares our Labor Government's passion and commitment to creating more and better jobs in a fiscally-sustainable way. Of course the US still has a long and difficult road ahead, and the next few months will be critical in resolving some of the uncertainties that still loom large – such as the sequester and the debt ceiling. It will be critical for the US to resolve these challenges in a growth-friendly way, while also taking steps to put its medium-term fiscal trajectory on a more sustainable footing.

Almost every major advanced economy contracted in the last quarter of 2012. The euro area experienced its deepest quarterly contraction since the depths of the global financial crisis with GDP down 0.6 per cent in the December quarter, including greater than expected hits to 'core' countries Germany and France. Europe's deepening recession should serve as a warning that strict austerity programs without proper consideration to economic conditions can do huge damage to already weak economies. Not only can these types of action exacerbate economic problems, they can also cause profound social dislocation.

As I've said to my G20 colleagues, I think the debate we've heard in the last few weeks about so-called 'currency wars' has unhelpfully reduced the focus on the overriding importance of boosting global growth and creating jobs. As part of the G20's agenda to achieve strong, sustainable and balanced growth, I joined with my colleagues from France, Germany and Britain in calling for global action to boost tax transparency to tackle profit shifting and base erosion. This problem increasingly represents a spiralling risk to the tax revenues of some of the world's largest economies. Across the world, a small number of profitable multinational companies are exploiting differences in taxation regimes to effectively pay no tax. Some unscrupulous multinational businesses are able to shift the taxation of their profits away from the jurisdictions where they are being generated. In doing so, they leave all the heavy lifting to the companies and individuals who do the right thing. These companies benefit from public infrastructure and educated workers, and yet make little or no contribution to the critical revenues in countries where they generate profits.

In Moscow, G20 colleagues agreed to step up our efforts to combat the unfair practices of these companies. The G20 agreed to develop measures to address base erosion and profit shifting, take necessary collective actions and review a comprehensive action plan from the OECD in July.

Economic resilience in an uncertain global economy

Here in Australia, we have an enviable combination of economic fundamentals including strong public finances, very low debt, solid growth, contained inflation, low unemployment and low interest rates. We're also starting to see growing optimism breakthrough in the first few months of 2013. The share market has reached a four-year high with the ASX200 above 5,000, and this week we also saw a solid improvement in consumer confidence as measured by the Westpac-Melbourne Institute survey – the best reading in a couple of years. It's also pleasing to see the confidence index has risen by more than 13 per cent since the carbon price was introduced, which repudiates the irresponsible doomsday predictions that consumed the public debate.

While it's encouraging to see a lift in sentiment this month, global headwinds have weighed on confidence for some time now, and shoppers have been more discerning in their approach to spending and borrowing in the wake of the GFC. These trends have been putting pressure on parts of the retail sector, which has also been hurt by the high dollar and other structural changes. But there's also a tendency to forget retail spending only makes up around a third of household consumption, and we've seen solid growth in the other parts of consumption. In fact overall consumption has been growing around its trend rate since mid-2010. As you can see in the chart, overall consumption, which includes services and overseas spending, has been outpacing growth in the retail sector since late 2009. For example, car sales are one area of consumption outside of retail which has recently seen very strong growth, with sales of new motor vehicles up a robust 17.9 per cent in 2012.

Overall consumption (final household expenditure) compared to retail consumption (retail volumes)

Overall consumption (final household expenditure) compared to retail consumption (retail volumes)

Despite our economic resilience, we continue to face challenges. One of these is the sustained higher dollar, which has maintained its strength in the face of lower interest rates and a lower terms of trade. This unusual combination has put pressure on many of our trade-exposed industries, and has also contributed to significantly weaker government revenues. While the Government can't control global weakness or movements in the dollar, we can do our bit by ensuring we create a policy environment where businesses can innovate and stay competitive with the rest of the world and workers can retrain and reskill where necessary.

A Plan for Australian Jobs

Jobs have always been at the centre of the Gillard Government's plans for the future. This morning, the Government announced A Plan for Australian Jobs, which contains wide-ranging measures to improve the quality and number of jobs for Australians now and into the future.

A key measure is the Venture Australia package, which includes a new $350 million round of equity funding through the Innovation Investment Fund. This will turn the bright ideas of our innovators into new products, services, firms and, ultimately, jobs by attracting more private sector investment into the high-risk venture capital market to support the growth of competitive start-up firms. We're also making changes to venture capital tax arrangements to provide clarity and certainty for investors and improve incentives for 'angel' investing (where individuals provide capital for business start-ups).

These are just some of the measures the Government is putting in place to build on the 850,000 jobs that have been added in Australia since we were elected, compared to tens of millions that have been lost elsewhere in the developed world.

Sitting around the G20 table, it's clear just how different the Australian economy is. It's sometimes very easy to get caught up in the predictable doom and gloom about the challenges facing our economy. Of course, we have to be realistic about the challenges we are facing, but there is a distinction between realism and pessimism. Whilst it is true that some sectors of our economy face persistent pressures as a result of acute and enduring global challenges, we must never lose sight of our nation's remarkable resilience. By practically any yard-stick, our economy is very healthy. But our future is not assured, which is why we have to keep doing the hard yards for the future and keep getting the big economic calls right. For this Government, growth and jobs will be always front of mind in making these calls.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia