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

18 January 2013

Australia's Economy: Challenges & Opportunities

G'day USA Financial Services Luncheon
Harvard Club, New York

***Check against delivery***

Thanks, it's really great to be with you here in New York.  I'd hazard a guess that most of you have probably come along today because you've already got a pretty good sense of the many reasons why Australia is such a great place to do business. I know we've got here with us today some of New York's most respected and influential leaders across the business and investment communities.  So I was having a bit of a think on the flight over about what I could say that might give you a slightly different perspective on Australia's abundant opportunities, but also on the challenges we're fronting up to.  You'd all be aware that despite being buffeted by the very worst the global financial crisis had to throw at us, Australia stood almost alone in the developed world in avoiding recession.  I'm really proud that we got the big economic calls right in those dark days and stayed the course while the shrapnel whizzed past our ears.  I know there's a school of thought out there that puts a lot of our success down to the enormous mining boom we've got in Australia, and of course that's an important part of our story.  But our success is about a lot more than that and our future will be too.  We know that our fiscal stimulus alone saved something like 200,000 Australian jobs.  That's equivalent to saving over 2 million jobs if our economy was the same size as yours here in the United States. Over the last 5 years, we've kept our nerve and continued to put in place some really big economic reforms in a very tough political environment. And I think the results speak for themselves. Our economy is now 13 per cent bigger than it was 5 years ago, and we've achieved that through a very turbulent time in the global economy.  Unlike many other countries, we've got solid growth, low unemployment, healthy consumption and a huge pipeline of business investment at the same time we have contained inflation and low interest rates. But we know that our future is not assured.

Just as we have a huge set of opportunities ahead of us, we also have some significant challenges that we have to face head on.  Getting the big economic calls right over the last 5 years has set us up for the challenges of the next 5 years.  But we've got a lot more heavy lifting to do to lock in the gains we've made and position ourselves for the future.  And that's what I thought I'd talk a bit about today.  Our forward-looking plan for Australia's economy, which goes beyond mining, to make the most of our opportunities in the Asian Century.

Let me start by quickly mapping out our tremendous strengths.  We are a young, inclusive and optimistic country. Our economy has notched up 21 consecutive years of growth, a record unmatched by any other advanced economy over this period. We recently became the 12th largest economy in the world – jumping three places in the last five years – and with only the 51st largest population in the world, so we continue to punch above our weight. Over the past five years, growth in Australia's real GDP per capita has outperformed all of the major advanced economies, and we've moved up four places in the world rankings of GDP per person.  The IMF expects our economy to outperform every major advanced economy this year and next.  We've created over 800,000 jobs since November 2007 while something like 30 million people have lost their livelihoods around the world. We've got a high level of productivity and a highly skilled labour force. We are a capital hungry country and we've built on our strong reputation as one of the most attractive investment destinations in the world.  At 4.3 per cent of GDP in 2011, Australia's foreign direct investment inflows are more than double that of the OECD average. We've seen more than $1 trillion dollars of new business investment in our economy since this Government came to office. And we've got a massive pipeline of mining investment still to come, with the export phase of our mining boom still ramping up.  We've got strong public finances with net debt only around a tenth the level of the major advanced economies. Which means Australia is now one of only eight countries in the world with the gold-plated, AAA rating with a stable outlook from all three global ratings agencies – a coveted trifecta. As a country, we are now paying our way more than ever before.

Since the GFC, Australia's current account deficit has narrowed as a percentage of GDP, reflecting our higher national savings rate. Australia's CAD also reflects the fact that we are an attractive destination for private investment, even with national saving rates above the average of advanced economies. We've also got one of the strongest financial systems in the world, with an increasingly international character, and our banks are among only a handful in the world rated in the AA-band or above.  They are well funded for a long period ahead and don't have any material exposures to troubled European nations or lenders.  Then there's our geography. An advantage for the first time in 200 years. No longer beset by the tyranny of distance, we're in the right place at the right time as Asia drives more and more of the world's economic growth.  So the opportunities for Australia are huge if we get our settings right. But there are also significant challenges in front of us.

Let's start with the global economy.  I want to say upfront that I think 2013 could be a better year for the global recovery, but only if policymakers around the world do the right thing for growth and jobs.  I think there's a lot of evidence that China's economy is stabilising. I've always been an optimist about China – and I think the data we've seen should give us confidence that they've still got the policy capacity to manage their economy and they've been getting it pretty right. We also need to keep China's recent growth performance in perspective. China is now 40 per cent larger than it was in 2008. So its growth rate can be 20 per cent lower – say 8 per cent now versus 10 per cent back then – for China to make the same contribution to global growth. Yes there are risks –  China will have to keep addressing its big structural challenges like the huge amount of unregulated lending in its financial system and its transition to more consumption-led growth.

But so far, China seems to have managed its transition pretty well.  So it turns out the facts are in stark contrast to much of the commentary we saw late last year which had essentially written China off. It just goes to show that you can't have a mature debate about long-term economic performance based on monthly data. There's also an important distinction between caution and pessimism.  There are good reasons to be cautious about the global outlook, and I'll spend a bit of time on these now, but I'm cautiously optimistic.  While risks remain, I think leaders, governments and commentators around the world have a responsibility to ensure that sensible realism doesn't morph into undue pessimism which itself hurts confidence.  Endless pessimism is in itself a risk to the global recovery, just as it weighs on business and consumer sentiment in Australia's economy.  I am determined to have a positive debate in Australia in 2013 about how we lock in the gains we've made in the last 5 years, and set our economy and our community up for the next 5 years.  The future of our region is remarkably bright. Yes, there are challenges and our future is not assured, but I'm confident that we will keep getting the big economic calls right to support growth and jobs and make the most of the Asian Century.

Turning to Europe, I'm really encouraged that Mario Draghi's pledge to do 'whatever it takes' has seen the risks of a financial meltdown recede.  I think we should also recognise that Europe's political leaders have shown a pretty strong determination to keep the euro together.  And there's been at least some progress on politically tough reforms in some of Europe's most troubled nations, despite profound resentment and deep dissatisfaction in their communities. But deep-seated challenges remain. Europe's half-built economic project will take a decade to fix, as they grind towards a political, fiscal and shared-liability banking union to reinforce their monetary union.  There will be lots of volatility along the way, and a lot more pain to come as they implement the tough structural reforms they need to boost the competitiveness of their economies. Draghi has bought them some time, and they must use it wisely. In the short term, I'm deeply concerned that Europe is still trying to fight recession with one arm tied behind its back by ripping growth out of its economy precisely when it needs it most. The IMF has rightly underscored the needless damage to growth from single-minded fiscal consolidation.  We've seen the IMF gradually move over on this issue and I think that's been really helpful for the global discussion. It was a good step forward when the IMF recently warned that many governments have systematically underestimated the negative multipliers – or the cost to economic growth – from fiscal consolidation.

Of course, governments must ensure their finances are on a sustainable path, but they must do so in a responsible, growth-friendly way. You don't need to slash and burn now in order to deliver sound fiscal outcomes in the medium term. IMF Managing Director Christine Lagarde spoke of the importance of letting automatic stabilisers operate to support growth, in Europe and in economies right around the world. Which brings us to the United States. President Obama should be congratulated for his constructive efforts to reach a compromise to reduce economic harm to lower and middle-class Americans from the scheduled tax increases and cuts to entitlements. He has done a commendable job of protecting those who would have been hit hardest and who could have least afforded it, in the face of a determined political campaign to instead protect the very wealthy.  But I agree with Christine Lagarde and Ben Bernanke when they say that nothing short of a comprehensive deal on US fiscal policy will do.  The US economy – and therefore the global economy – needs to see a comprehensive deal beyond avoiding the fiscal cliff, which includes agreement on the debt ceiling and on a sustainable budget trajectory. For as long as the can is kicked down the road, we'll see a huge amount of uncertainty weigh on the decisions of businesses, investors and consumers – both in the US and around the world.  A true resolution of America's debt and deficit issues - forged under President Obama's continued leadership in 2013 - is the single most important thing America could do for the global recovery. Like many of you, I'm deeply concerned about the next flashpoint on the horizon - the looming US debt ceiling debate.  We all remember only too well the chaos and confusion in the global economy last time the debt ceiling was used by some elements of Congress to hold the nation to ransom. I think it was all pretty well summed up by US economist Paul Krugman, who said:

'. . .the GOP retains the power to destroy, in particular by refusing to raise the debt limit which could cause a financial crisis. And Republicans have made it clear they plan to use their destructive power to extract major policy concessions. The president has said he won't negotiate on that basis, and rightly so. Threatening to hurt tens of millions of innocent victims unless you get your way which is what the GOP strategy boils down to shouldn't be treated as a legitimate political tactic'.

I'm hopeful we'll see a more mature debate this time around – and both sides of Congress need to play their part - but this remains a big risk to the global recovery. So with politicians squabbling and dragging the chain, we've entered the era of the central bank. In the same way that Draghi has bought the Europeans some time, Ben Bernanke is helping nudge the US economy along while Congress continues to bicker. Bernanke argued at Jackson Hole last year that the first two rounds of Fed quantitative easing had helped support jobs and growth. While I know some of you won't agree, I think the Fed is right that with the recovery not yet self-sustaining, and with so much spare capacity in the labour market, you're a long way from an inflation problem. So with rates at the zero bound, and with Congress in gridlock on fiscal policy, I think Bernanke is doing the only responsible thing he can.  I think he is dead right to be concerned about the huge destruction of skills and livelihoods that flows from long-term unemployment, and the big damage this inflicts on an economy.  There are of course, as senior fellow at Yale Stephen Roach says, limits on what exceptionally low interest rates and unconventional monetary policy can achieve in the face of structural deleveraging.  While Bernanke believes – as I do – that the Fed's policy is playing an important role, he's also been at pains to highlight the limitations on what the Fed can do to support growth when fiscal policy isn't playing its part. Whether it's the Fed, the ECB or the Bank of England – all unconventional monetary policy can really do is buy time for their politicians to get it right. And all of these central banks recognise that the longer they are forced to keep the pump primed with unconventional measures, the more the policy risks increase.  So it's up to governments around the world to act responsibly to support growth and jobs and to keep the global recovery on track.

There is nothing more important to the global economy than to lift growth in the world's major advanced economies. This is where the G20 has a key role to play.  Even if we get past the risks that I've been talking about and get global growth with a '3' in front of it, that still won't cut the mustard if we want to significantly reduce unemployment in the developed world. I know Russia is committed to a G20 agenda that supports jobs and growth in 2013, and that's something we'll continue to focus on when Australia hosts the G20 in 2014.  As leaders responsible for some 85 per cent of the global economy, all of us at the G20 table need to put in place reforms to address the underlying structural problems that are holding back global growth.  That's on top of the risks in the U.S. and Europe that I've talked about. But as I said before, if we can get past these risks and really start focusing on global growth and job creation, then the world economy may be in for a much better year. I remain an optimist, but the hurdles are high. In fact, we've already seen real and lasting damage done to the global economy which now cannot be undone.

Which brings me to some of the challenges facing Australia. As you'd expect, despite the resilience of our economy, Australia has not been immune from continued turbulence in the global economy. In fact, we've seen a very substantial impact on our revenue base as global uncertainty weighs on business and consumer confidence, and from the big hit to commodity prices in the third quarter of last year. Together with the lingering effects of the GFC and a sustained high Australian dollar driven partly by safe-haven investment, we've had $160 billion ripped from our budget bottom line over the past 5 years. What this shows is that for a country like Australia, you can use every defence in your policy arsenal at home, but when it comes to the global economy some things are simply out of your hands. We've taken some politically tough fiscal decisions during our time in government to ensure our budget is one of the strongest in the world. We stepped in during the global financial crisis to stimulate economic demand as the private sector retreated. Our actions back then and the resilience of the Australian people mean that unlike many other developed economies our economy has grown nearly 13 per cent in the last five years. As our economy has grown and created jobs we've been doing the responsible thing by progressively making savings in our budget. Over the last five years, we've successfully managed a big hit to revenues at the same time as we've stimulated the economy to protect jobs and then consolidated during the recovery. Further turbulence in the global economy in the second half of last year has meant we've had to write down in just four months the revenue loss we expected over a full year. We are still delivering one of the biggest fiscal consolidations in our nation's history, and we'll continue our fiscal discipline despite the big revenue write downs which have made a surplus unlikely this year. But in these circumstances, it would not be responsible for any government to make deep spending cuts to try and fill a hole in tax revenue when that would put growth and jobs at risk. Allowing the automatic stabilisers to work on the revenue side of our budget is consistent with the views of the IMF and the OECD.

We'll keep doing what's right for our economy, protecting the jobs and livelihoods of the most vulnerable in our community, while making room for our priorities and investing for the nation's future. We will be making a thorough assessment of our budget early this year, methodically working through the facts to ensure we continue to manage the economy responsibly and support employment. But one thing is certain. Savage cuts would be the wrong thing for our economy.  They would be the wrong thing for our community. Just like President Obama here in the United States, the overwhelming priority of our Labor Government in Australia is to sensibly support the jobs and livelihoods of working people and growth for our economy. That's never been a priority of our opponents or their far right counterparts around the world whose instinct is to cut hard and deep with no concern for jobs and with no plan to invest for the future. By contrast, our focus from day one has been on carving out a pathway of consolidation, but in a way that's appropriate for our economy. We've taken important steps to ensure our long-term fiscal sustainability by taking savings which compound over time, avoiding a much harsher adjustment down the line. We have a proven track record of making substantial structural savings which permanently improve our budget bottom line, like means testing the PHI rebate, or reforming FBT and superannuation concessions.  The structural savings we've made will deliver cumulative savings to the budget of over a quarter of a trillion dollars by 2020-21 and have created room for big reforms in areas like health, dental and paid parental leave. And on this point, let me be crystal clear.  The budget outcome for 2012-13 has no bearing at all on our determination to make room for our medium-term priorities like the Gonski education reforms and the National Disability Insurance Scheme. That's in sharp contrast to the previous government which failed to take advantage of mining boom revenues to save and invest for the future, with a recent IMF paper making the point that they presided over a period of wasteful 'fiscal profligacy'.

What our government has done over the last 5 years is show that good fiscal policy, guided by the right values, delivers both a stronger society and a stronger economy. Our responsible budget management has also allowed a rebalancing in fiscal and monetary policy, helping to keep inflation contained while we've had record investment in our mining sector. This has given the Reserve Bank more room to run lower rates than we have in the past. So not only has our spending restraint enabled the transition from public to private-led growth in the four years since the global financial crisis. It is also helping support growth in non-mining sectors of our economy. Lower interest rates are supporting sectors like housing and retail, as well as industries like manufacturing, tourism and education which are struggling under the weight of the higher dollar. Lower rates also mean a family with a $300,000 mortgage is paying around $5,000 a year less in repayments than they were 5 years ago, which will continue to support healthy consumption as a driver of growth. And it's encouraging to see some tentative signs of recovery in dwelling investment as the benefit of lower rates flow through. But let me also be very clear that Australia's mining boom still has a long way to run, because I know a lot of you have been hearing the claptrap getting around about it being over. The mining boom is best described as having three overlapping phases. A boom in prices, then investment, and then in production. We passed the peak in prices a bit over a year ago as we'd expected, but we also see our terms of trade remaining at historically high levels. And the second and third phases of the boom still have a way to run.

In the September quarter, business investment as a percentage of the economy reached a 50-year high - surging ahead to reach 18.5 per cent of GDP - and we expect it to rise further over the next year or so. In fact mining firms are planning to spend more than twice as much this year as they did two years ago.  While not all projects go ahead as scheduled, we've got $650 billion worth of resource projects either underway or on the drawing boards – massive in the context of our $1.5 trillion economy. A record $268 billion of resources projects are largely locked in, and this will drive investment and lift our export volumes in coming years. That's the third phase - we know that the upswing in actual mining production, output and export volumes is still ramping up and that this will be a driver of Australia's economic growth in future years. That's also when we get the real pay-off in terms of productivity from the mining boom – the output from those huge investments we're seeing. And the fact is that we've already started to convert the prices boom into more enduring economic capacity, and this is in stark contrast to resources booms of the past. But that doesn't mean we can be complacent. We've got an economy in transition. We must look beyond the mining boom and plan for the next stage of our two decade long economic growth story. There have been a variety of different drivers of Australian growth over the last two decades and that will continue to be the case.

But we know that the key to sustaining our growth over the long term will be keeping the current productivity growth upswing going. Of course, progressively higher living standards and wages in developing economies like China will narrow their labour cost competitiveness over time. But we cannot be complacent – we've got a high level of labour productivity, but we've still got a lot of work to do to boost productivity growthwhich has been in structural decline for the past decade or so. We're investing in our five pillars of productivity— skills and education, innovation, infrastructure, tax reform and regulatory reform. We're making massive investments to boost our productivity, and to future-proof our economy for the decades ahead. Big, politically tough reforms we've had to fight for every step of the way. We're building the superfast National Broadband Network to turbocharge our economy and transform the way we do business. We've put a price on carbon pollution to secure our competitiveness as countries around the world move to tackle dangerous climate change.  We're building up our highly-skilled and productive workforce for the future through our investment in the Gonski Education Reforms.

We've got a detailed plan for Australia's future which we set out in our recent Australia in the Asian Century White Paper – as a blueprint for future economic prosperity through deeper engagement in our region. We're sitting on the doorstep of Asia, with the weight of global growth shifting from West to East. Like all of you here in the United States, we know in Australia that there is so much to be gained from deepening our engagement with Asia. It goes without saying that the US will always be one of Australia's key economic partners and principal sources of foreign investment. But we all know the prize is enormous for both our countries from broadening our links with Asia, at the dawn of the Asian Century. As you know, some of the numbers are staggering. In just over a decade from now, we expect that half of all global economic output will be located within 10,000km of Australia's shores. This creates an extraordinary set of opportunities for our country.

But success won't fall into our laps. Our future is not assured. We have to make sure we have the right policies in place; that we remain flexible, adaptable and responsive to global dynamics. To ensure that every Australian is equipped to succeed with the right education and skills, with the promise of social and economic mobility, and with the resilience and openness that characterise our economy. We're focussed on the reforms we need for the future. If we get our settings right, the payoff will be huge. And we want every Australian to have a stake in our prosperity. Thanks for having me here today.