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

23 January 2009

NO.002

The Global Recession And Australia's Future Economy

Address to The New York Investment Community

New York

23 January 2009

Thank you.

It's quite a daunting task now, to come and give a speech in the United States - when it comes to speeches, President Obama really has lifted the bar!

And what an exciting time to be here, as a young and engaging new President is sworn in with an agenda to provide the nation and the world with a renewed sense of hope and optimism.

Never before has an American President come to power with so much goodwill and expectation for change from the people of the world.

It's a sense of goodwill and expectation that I personally share.

And at this time there's no more important American city to be in than New York - the epicentre of the world financial crisis that hit us all in 2008.

Because of the power of the US economy and the reach of the US financial system, the decisions made here and in Washington will have an enormous impact on the lives of people right across the world, including in Australia.

And as in the past, countries like mine look to yours to be an engine room of growth and prosperity, along with the key emerging economies of our region.

And we've been impressed by the President's start - in the form of early details of the American Recovery and Reinvestment Plan.

It is striking that this Plan mirrors many of the policy approaches we have been implementing in Australia since the crisis befell us.

As you know, the new President is a man of uncommon eloquence.

But I was particularly struck by one thing he said when launching that Plan - that when it comes to planning the American economic recovery, people should be asking not "What's good for me?" but "What's good for the country my children will inherit?"

I couldn't agree more - this is the guiding principle of our nation, and our Government, as well.

Because, as I want to argue today, rebuilding after the global financial crisis isn't just a question of stimulating immediate growth - it is an opportunity to genuinely rededicate ourselves to the task of building the sort of future economy that nations, their citizens, and their environment really need.

So today I want to discuss perhaps the most important economic question facing Australia at present: the policy implications of the global financial crisis.

I want to outline the policies the Government is implementing to maintain economic activity and support jobs, and I want to give you a picture of what we believe the post-crisis Australian economy will look like.

Most importantly of all, I want to show how the Government's response to this recession in the developed world will help create an economy that is stronger because it will be more attuned to emerging global trends and priorities.

In the Government's view, the post-crisis economy does not require an abandonment of the forward-looking goals we were elected to implement - like tax reform, infrastructure modernisation, educational opportunity, social inclusion and building a low-pollution economy.

On the contrary, we believe the best response to the immediate and future economic challenges we face is to create an education system that spreads opportunity, a tax system that's more competitive, infrastructure that builds capacity, and an economy that capitalises on and contributes towards the fight against climate change.

THIS GLOBAL CRISIS AND AUSTRALIA'S STANDING

Everyone here knows how destructive this global recession is.

Confidence has been shattered and stock markets around the world have suffered significant losses.

Major financial institutions, some of which withstood world wars and the Great Depression, have either collapsed or been bailed out.

Unemployment is on the rise around the world, with the OECD predicting that the number of unemployed in the OECD area could rise by 8million over the next couple of years.

It's not easy to predict just how long a full global recovery will take.

There are important signs that Australia's economy is in better shape than most.

This is a key message I bring with me to you here, the investment community of New York.

While Australia has not completely resisted the pull of international economic forces, we have demonstrated some characteristic Aussie resilience.

According to the OECD, our growth prospects for the current year are more favourable than any of the G7 economies.

Our banking sector is amongst the most stable in the world, with our four largest banks amongst only 11 of the world's major banks with a double-A rating or above.

The Australian Government has a strong balance sheet and a positive net worth position.

Australia's level of net financial liabilities is amongst the lowest in the world.

There has been more room to adjust fiscal and monetary policies than in most other countries.

And both have been deployed swiftly to strengthen domestic growth and limit the impacts of this global recession on local jobs.

This, along with the depreciation of the Australian dollar, is helping to provide

a substantial stimulus to the domestic economy.

Australia's housing market also has positive characteristics.

For some time, supply has been relatively scarce and 'non-conforming' or 'sub-prime' loans represent less than 2 per cent of the total market.

In these trying times, this set of factors, together with other long-standing structural factors make Australia a great place to invest.

The Australian economy is well integrated into global financial markets and functions on the frontier of global technology.

At the same time, it is resource rich and deeply engaged in the real economies of the dynamic Asian region.

Australia also benefits from flexible product and labour markets which are the result of many decades of economic reform.

Finally - and bringing us back to Australia's resilience in the current economic climate - Australia's financial sector is mature and well regulated, and our public finances are in excellent shape.

I am proud to say that these underlying strengths were acknowledged by Standard and Poor's just last week when it reaffirmed Australia's AAA sovereign rating.

DECISIVE ACTION

But notwithstanding our underlying strengths, the Australian Government will continue to take decisive government action in the current climate.

It is absolutely crucial that all governments continue to act to soften the impact of the recession and speed up the recovery - as President Obama, Prime Minister Gordon Brown and other leaders have signaled.

The Australian Government moved swiftly to strengthen our financial system, restore confidence and bolster growth in our economy.

When it became necessary following the intensification of the crisis in September and October last year, we provided a guarantee for bank deposit accounts and for the wholesale term funding of our banking institutions.

Those actions have helped to maintain confidence and stability in our financial system and enhanced access to money markets.

We have also taken decisive action to limit the impact of this global financial crisis and global recession on the real economy, on growth and on jobs.

We implemented a $10.4 billion Economic Security Strategy designed to support low and middle income families, pensioners and first home buyers.

This fiscal stimulus, equivalent to around 1 per cent of domestic GDP, was targeted to support those in our community and those parts of our economy that needed it most.

More recently, we invested a further $5 billion in nation-building, local government infrastructure and assistance to businesses, to encourage investment.

And we have made it clear that we will not hesitate to take whatever further action is necessary to support growth and jobs in the face of this global financial crisis and global recession.

ROLE OF GOVERNMENT

There is now a wide consensus for the need for a coordinated global response to support the world economy.

More than 25 nations around the world have already implemented economic stimulus packages of around 3 per cent of global GDP.

But I'm proud to say that Australia has responded swiftly and decisively - a fact I put down to our realistic understanding of the role of government in the contemporary market economy.

It's here that I want to turn to my view about the role of the state - a view which was recently echoed by the UK Secretary of State for Business Enterprise and Regulatory Reform, Peter Mandelson, in his Hugo Young Memorial Lecture in December.

Mandelson reminded us that ideologically driven economic policy makers and commentators have been telling us for the past few decades that the only economic role for the state in a free market economy is to remove itself.

They have predicted that when it comes to economics, the state is bound to wither away.

But recent events have exposed such thinkers as false prophets.

The global financial crisis - and our response to it - has shown that our best tool for assessing the need for public intervention to address market failure is not ideological certainty but pragmatism.

Our best approach is not to dismiss government but to develop a coherent and modern view of the role of the state in an open economy.

And in this regard most nations now agree the modern state has an important role to play in helping people to face up to the consequences of globalisation.

The state must provide a strategic framework for the market to cope with serious market failures through intelligent regulation and market design; it must provide a safety net to remove the fear of change; and it must provide the education and training opportunities that enable individuals and communities to adapt.

The market remains the most powerful tool to allocate resources and create wealth, but the state must respond when the market fails.

LESSONS LEARNED

The immediate measures I've already outlined are just the beginning of the Rudd Government's response to the global financial crisis.

The global financial crisis occurred at a time when our economies were already under pressure to change in profound ways.

Globalisation is necessitating new reform to make our taxation and investment arrangements more competitive.

Combined with technological advancements, it is also feeding the demand for well developed human capital.

Even more profoundly climate change is making it imperative that our economies become more carbon efficient.

The global financial crisis was not caused by these pressures - among other things, it was caused by spectacular regulatory failure.

But in the same way that natural disasters (like Hurricane Katrina) can expose serious underlying weaknesses in key government institutions, unexpected economic shocks like the global financial crisis can draw attention to underlying challenges in the economy.

Obviously for millions of hard working people the world over it would be better if the global financial crisis never happened.

But its shockwave has served to alert us to the need for serious economic reform - the need to think about what kind of economy we want to have built when the dust settles and we bounce back from this global crisis.

This is what we must take from the crisis as we set about building a stronger economic future for our nations.

History provides many examples of where economic failure has led to new policy understandings and a stronger long-term recovery.

The great crash of 1929 led to dramatic improvements in economic policy, financial regulation and the creation of a welfare state that provided the developed world with the base on which it built decades of economic stability.

The economic crises of the 1970s - like the British Winter of Discontent and the US oil shocks, stagflation and unemployment - were the catalyst for reforms to unclog the arteries of a sclerotic capitalism, freeing up economies and contributing hugely to rising living standards in the ensuing decades.

In some places in the 1980s those reforms were introduced without sufficient attention to the immediate social consequences, but in Australia, a better balance was achieved, and we have never looked back.

That's evidenced by the fact Australia's living standards are two-thirds higher than they were in 1980.

THE POST-CRISIS ECONOMY

We must display that same sort of openness to change and pragmatic policy making once again.

Like the global financial crisis, previous financial and economic ruptures were difficult and in some cases calamitous, but out of them came stronger economies.

What I'm saying is that the global financial crisis - unfortunate and unwelcome as it is for so many people - represents an opportunity for reform that must be grasped.

The enormous losses in output, in life-opportunities, in welfare throughout the world have alerted us to the need for serious reform both to lower the chances of new crises, and to help build a more productive and sustainable global economy.

We must make the best of a bad situation.

We must be forward-looking.

And we must be responsible and diligent and disciplined, as we go about building the next generation of prosperity.

I see four major components of a post-crisis economy for Australia.

The first is creating high-skill, high-wage jobs for our kids.

Over the past few decades, there has been a profound change in the supply of, and demand for, human capital.

Against this backdrop - and with domestic labour and product markets around the world in flux - Australia must position itself to seize more than its fair share of the world's high-skill, high-wage jobs.

That's why the Rudd Government is so serious about its Education Revolution - investing in early childhood education and care, lifting teacher quality, and improving access to higher education.

The second agenda item is laying the foundations of a more productive and competitive economy.

By this I mean investing in nation building and creating a more modern, flexible and internationally competitive tax system.

Building new roads and ports will not only strengthen the Australian economy for the next few years - it will leave it in a stronger position once the global economic tide turns.

The same is true of tax reform.

It will stamp out inefficiencies we can ill-afford right now, while also helping to generate future waves of economic prosperity.

The third area of reform is getting a head start in creating a low-pollution, carbon-efficient economy.

Now is the time to prepare our economy for a carbon-constrained world.

Taking decisive and early action to reduce emissions will help stimulate new economic activity, and create hundreds of thousands of green collar jobs.

It will also put Australia ahead of the game in a world where carbon productivity will be a key driver of economic success.

The final piece of the agenda is capitalising on a renewed interest in global cooperation - in effect, a new globalisation.

As I mentioned earlier, the answer to the challenge posed by the crisis is not to roll back current levels of global integration, but to take a pragmatic, non-ideological approach to managing the system collectively.

And as a member of the Group of 20 perched on Asia's doorstep, with an economy faring better than most, Australia is particularly well placed to help shape the emerging global economic order.

We are working with our G-20 counterparts to improve global financial regulation, enhance international cooperation, and strengthen key institutions such as the IMF and World Bank.

We are also working with other nations to implement the measures necessary to stabilise the global financial system and lay the foundations for a global economic recovery.

This integrated agenda will infuse the economic policies of the Australian Government as we plot our economic future and start building a new economy for the 21st Century.

THE FUTURE

Let me finish by renewing the Australian Government's commitment to stay ahead of the curve, engage internationally, and do all we can to support growth throughout this global crisis.

We will continue to steer the economy through the current global difficulties, while making sure that we don't waste the opportunities for economic renewal they present.

I do look forward to working with the new administration, and with you as potential investors and friends of Australia.

We all have an interest in weathering this global recession, and in building a new era of economic growth based on the high-skill, low-pollution, competitive and prosperous economies our citizens deserve for the future.

Thank you.