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

4 September 2008

NO.033

The Australian Economy and Global Conditions

Statement to Parliament

Canberra

4 September 2008

Mr Speaker

There have been a lot of economic numbers in the last week or so, a lot of debate and commentary about our economic circumstances.

And I think it is appropriate now to give the House and the Australian people the Government’s detailed assessment of the Australian economy.

Where we have come from, where we are, where we are going.

I do so in the knowledge that this is a challenging time for the Australian economy and the global economy.

There is rightly a good deal of concern about the security of our prosperity, about global financial turbulence, about economic dislocation elsewhere.

These are indeed challenging times.

Our economic circumstances require careful consideration of policy, careful weighing of the evidence, discriminating judgement and a continuous openness to new information.

But I want to offer this message to the House and to Australian families:

The Australian Government’s assessment of the unfolding information about our economy suggests we also have reason to be encouraged.

And that if we engage and work on the challenges we face, we will come through this difficult time better placed to enjoy and secure the long term prosperity this Government is committed to delivering.

Through to the beginning of this year, Mr Speaker, the global economy experienced the five best years of global prosperity in recent memory.

This year, growth in the global economy is much slower and the global environment is much more uncertain.

The global financial turbulence which began in the US sub prime mortgage market over a year ago has spread throughout global financial markets.

Borrowing costs have been pushed higher around the world.

Global share markets have fallen by an average of about 20 per cent since the global turmoil began.

Business and consumer confidence has fallen across developed economies, with the OECD’s measure of consumer confidence for member economies at its lowest point in almost 30 years.

In the face of these global difficulties, the world’s largest developed economies are experiencing sharp slowdowns in output growth.

The UK, Japan, Germany, France and Italy all recorded negative or zero growth in the three months to June this year.

So what began as a crisis in the US sub prime mortgage market is now producing a significant slowing across developed economies.

Even if, as we hope, the worst of the financial turbulence is behind us, we are now dealing with the impact of higher interest rate spreads for borrowers, losses of financial capital, and diminished confidence, on growth and employment in major developed economies.

At the same time higher food and oil prices have driven up inflation worldwide, limiting the response of central banks to the downturn in output growth.

These are the global challenges confronting the Australian economy, and they are considerable.

From the beginning, we have been upfront about them.

We also face formidable domestic challenges.

In November last year we took responsibility for an economy in which the Reserve Bank had already been obliged to impose ten successive interest rate increases to combat the threat of rising inflation.

An economy in which underlying inflation was already well over the top of the central bank’s target band, and still increasing.

An economy in which the inflation threat was sufficiently serious that the central bank was compelled to tighten twice more within four months of this Government coming to office – in addition of course to the increases in the general level of interest rates that arose from the global financial crisis.

An economy not only constrained by high interest rates, but also by capacity constraints which had become tighter and tighter as a result of the negligence of our predecessors.

An economy in which export volume growth had slowed to a crawl despite the highest export prices in half a century.

An economy in which productivity growth had fallen to half the average rate of the previous three decades.

An economy which in the fourth quarter of last year, the last in which those opposite held office, had already slowed to well under the average quarterly growth of the past sixteen years.

These were economic circumstances, Mr Speaker, to which this Government had to make an immediate and decisive response.

Instead of celebrating an electoral victory Mr Speaker, we immediately sought the best advice from the Treasury and from the Reserve Bank on what we saw to be critical threats to the continuing prosperity of the Australian people.

We were determined to be up front and honest with the Australian community about the challenges we faced, both domestically and from abroad, and the impacts they were having on our economy.

First we identified the magnitude of the inflation challenge and dedicated ourselves to addressing it.

The Opposition said it was a fairy tale and charade.

But now inflation is over 4 per cent, and everyone understands it's a problem.

We also recognised that while Australia was not affected as acutely by the global financial crisis as many other economies, we needed to be in continuous and close contact with our regulators, with the central bank, with the commercial banks.

We recognised that as a Government we needed to put our weight behind the stabilisation of financial turbulence in Australia, while exerting ourselves to support actions to address the crisis internationally.

No issue Mr Speaker took more of my time in the early months of office than assessing and monitoring the financial crisis and reassuring all the relevant parties that the Australian Government understood the gravity of the issues, and stood ready to assist where necessary.

That’s why some months ago, in a ministerial statement to the House, I announced plans to increase government securities on issue as part of a prudent plan to maintain liquidity in critical government bonds, and underpin the proper functioning of the bond market.

Recognition of the inflation problem we inherited and of the gravity of the global financial crisis were our two priorities in the early weeks of office.

This was the difficult backdrop that we confronted when we sat down to prepare our first Budget.

In designing our Budget strategy we recognised that inflation would likely continue at an unacceptably high rate for some time to come.

And we recognised that the global financial crisis and tighter credit conditions would continue to affect the growth of developed economies as well as our own.

But we also recognised there were big differences between Australia’s circumstances and those of other developed economies.

We recognised that Australia’s financial sector is strong and did not face the same problems being experienced in the US housing and sub prime mortgage markets.

We recognised that the prices for many of our export commodities had risen to levels not seen in a generation and in some cases were rising further still.

This meant nominal export income would be rising rapidly and this would mitigate some of the contractionary impact of higher interest rates and tighter lending standards.

We knew that in these circumstances we had to get the balances right between bearing down on inflation, providing a buffer against the global uncertainty and providing the means to finance vital investments in nation building for the future.

All these considerations suggested to us that it was imperative to abruptly change Australia’s fiscal direction.

To move away from the profligacy of our predecessors in their last desperate years of office.

To change to a consistent and disciplined stance that would help rather than hinder the efforts of the Reserve Bank to bear down on inflation.

At the same time we judged that the household sector was under considerable strain, which is why we were determined not to compromise in any way on our election commitment to deliver tax cuts.

And finally Mr Speaker we recognised that with the Australian economy running close to full capacity and after years of neglect of the physical infrastructure of our economy, of education and training and of health, we needed to begin planning a nation building program that would put Australian prosperity on a more secure basis.

We needed to plan that modernisation, and we needed to begin to set aside the resources that would allow us to execute those plans.

That was the Budget strategy we put in place five months ago Mr Speaker and those were the circumstances it was designed to address.

It was a Budget that struck the right balance between relief for families and long term investment.

A Budget right for the times, and geared for the challenges of the future.

We anticipated, in our Budget, what is now occurring – we were prepared for the challenges now unfolding, and we got it right.

The Opposition told us we should have cut harder, despite having said before the Budget that there was no need to make spending cuts.

Others also told us we should have cut harder in the Budget.

But the Prime Minister and I had also been taking careful soundings on the international climate, and thought it wiser to strike a more careful balance.

I think today, people are very glad we did.

People told us the tax cuts would ruin the economy, and we should cancel, cut or divert them.

We insisted we could deliver them responsibly by making cuts elsewhere, and we did.

And I think today, people are glad we chose that path.

Whether you look at the inflation problem or turbulence in global financial markets, this has been a Government working hard to stay ahead of the game and make the right decisions – popular or not – in the national interest.

This brings me, Mr Speaker, to the core of my assessment today.

How is the economy evolving, particularly in light of our Budget strategy and forecasts, and in light of the June National Accounts, received yesterday?

In the last week or so we have seen new numbers on business investment, on exports, imports and the current account and now we have the National Accounts for the June quarter.

We have also seen the Reserve Bank cut the official interest rate by one quarter of a percentage point, which I am glad to say was promptly passed on to variable rate home loans by the major commercial banks.

We are in a position to outline a detailed assessment of the circumstances of the Australian economy.

The first point I would make is that domestic demand growth has certainly slowed, much as expected in the Budget forecasts.

In the June quarter domestic demand increased 0.9 per cent.

This is quite vigorous, but slower than the previous two quarters.

As we expected at Budget time, the biggest contribution to the slowdown in domestic demand growth came from household consumption.

The cumulative impact of rising interest rates, which had increased by 200 basis points since March 2005, combined with unofficial rate rises by commercial banks, have clearly taken their toll on household budgets.

On top of this the global oil price shock saw average petrol prices rise by 25 cents a litre in the space of three months.

These factors were the main contributors to the 0.1 per cent fall in household consumption in the June quarter.

That fall confirms the wisdom of proceeding with the tax cuts, which of course kicked in during the current quarter rather than the June quarter and will provide support to household budgets.

As will this week’s much welcomed interest rate cut.

We on this side of the House were certainly heartened to see that the Reserve Bank was sufficiently confident of the direction of inflation to be able to lower interest rates – for the first time in seven years.

Turning to other elements of demand, we begin to see how different the performance of this economy is from other developed economies.

Business investment for example was up 4.0 per cent in the June quarter alone, and contributed 0.7 percentage points to GDP growth in that quarter.

This strength is most welcome. It is enlarging our capacity, helping to sustain employment, and contributing to future productivity and growth.

Creating room for the continuing expansion of business investment was one of the major objectives of our May Budget.

Last week’s data on business investment intentions suggest that the strength we saw in the last quarter of last financial year will likely extend well into the current financial year.

It demonstrates that despite global turmoil, businesses have the confidence to invest in our economy and the confidence to plan for yet more investment into the future.

The June quarter accounts are pleasing in another respect, which is the expansion in export volumes.

In the June quarter alone export volumes increased 2.7 per cent – the biggest quarterly increase in almost five years.

We saw in the current account data earlier in the week that in the June quarter Australia achieved the first quarterly trade surplus in over six years – a very welcome development.

So while we are not immune from global difficulties we do have grounds for optimism.

We acknowledged in the Budget that given the global difficulties and the impacts of successive rate rises flowing through our economy, economic growth would slow, and that this would lead to a modest rise in unemployment.

But as recent events have demonstrated, Australia is well placed in comparison to other developed economies and the Rudd Government is determined to secure this advantage.

Mr Speaker

Because many of the global challenges we face are beyond Australia’s control, the Government is focused on those things we can influence.

We delivered a strong surplus to bear down on inflation, to buffer against international turbulence and to give us the flexibility to respond to today’s challenges.

We made room in the budget to deliver tax cuts for working families – $7 billion in tax cuts this year, half a billion each month.

And we have begun the process of modernising our economy and expanding our productive capacity for the long term.

We have laid the foundation for $40 billion of responsible investment in nation building and growth for the future.

Genuine nation building means lifting the productive capacity of the economy.

Road by road, port by port, cable by cable, university by university, trade school by trade school.

It means boosting productivity, lifting our international competitiveness and investing in our human capital.

These are the fundamentals of the modern competitive economy, where all our efforts are directed.

Building a new platform of growth with low inflation is going to take time and disciplined effort.

The business community is confidently investing in our economy’s future.

The Rudd Government will stand with them in this effort, helping provide the critical infrastructure and the skills they need.

Mr Speaker

We’re determined not to make the same mistake those opposite made – which was to celebrate prosperity but do so little to sustain it.

The House would have heard me say before that Australia is not immune from global difficulties which are slowing the world economy, but we are better placed than most other countries to withstand the fallout.

Given your pick of which developed country to be, in these circumstances, you would choose Australia, for reasons I’ve detailed above.

But we are far from complacent.

We are focused on delivering responsible economic management, so we can have strong growth with low inflation well into the future.

Our strategy, which combines a strong surplus, relief for families, and long term investment in nation building and growth, is the best way to respond to the global challenges Australia faces.

I thank the House.