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

10 April 2013

Interview with Matt Winkler

Q&A Bloomberg Economic Summit

SUBJECTS: Renminbi deal; Global Financial Crisis; Budget 2013; High dollar; Gonski School Improvement Plan

WINKLER:

(inaudible)

TREASURER:

I made that very clear that I think our investment in our RMBS has been critical, but we always said that the programme would have a finite life.

We think it has achieved its objectives. We don't intervene for the sake of intervention. I mean what we want to see is a healthy, competitive, secure operating market. That is what we have got. When I was introduced there was reference to just how low rates are in this country. Our economy is making the transition from mining growth to non- mining growth. Part and parcel to that has been a fairly substantial fiscal consolidation which we have put in place to give the Reserve Bank the room to adjust rates downwards should it decide to do so independently. We are in a fortunate position in having contained inflation, and what we are seeing is a move over from fiscal policy to monetary policy. And that monetary policy is playing and will begin to play a critical role… (inaudible)

…growth which flows from mining and investment and increasingly production is important as there as the hand over towards non-mining activities. We are beginning to see the fruits of that now in some of the early data that is coming out in terms of construction. But it's not just that. I am really pleased with what I see and what I hear in the sort of investment we see here in Australia. It doesn't get a lot of attention in the press, actually doesn't get the attention that it deserves. The whole objective of the Asian Century White Paper was for us to more effectively tap into growth in the Asia region not just in resources, not just in agriculture, but more broadly. What we are now seeing is a growing degree of involvement of Asian investors in this country, not just in agriculture, not just in resource, but more broadly moving into the non-mining sectors as well. And that is a very good thing. Because the whole point of the Asian White Century Paper is to ensure that we make the most of the opportunities that will flow from a growing middle class in Asia who will demand a whole range of services and products which we are well placed to supply.

WINKLER:

Treasurer if we look at where you are from the rest of the world, Australia's benchmark, interest rates as you noted is at a record low, jobless is down half a point since 2009, inflation is contained, so why does the polls show the public has greater trust in the opposition than you in economic management?

TREASURER:

We could go on for a while about this. I always welcome the public opportunity to talk about because it goes to the core of a number of challenges we as a country face. And I think it is important that we have an informed debate about the economy and how it impacts on the daily lives of ordinary people.

First and foremost I believe the Government is in power because of what we did during the Global Financial Crisis, and the reason that we were re-elected in 2010 is precisely because of what we did during that period, much of which I have spoken about this morning. That is relevant because we got the big economic decisions right over the past five years and our focus now is to get the big economic decisions right for the next five years. And when indeed we took many of decisions that I spoke about this morning they were not received well, they were opposed trenchantly by our political opposition and there was a hell of a lot of public discussion and negativity directed towards those policies. But the runs are on the board.

Over the last couple of years we have been concentrating on putting in place the big reforms for the next five years. Some of those are difficult long term reforms. Long-term reform is hard and you lose political paint on the way through. And the very best example I can give on that is what's happened with the carbon pricing. The sort of negative fear campaign, fear mongering, the exaggeration, the hyperbole that went into the public campaign, not just by our political opponents but more generally about carbon pricing, was exposed for the fraud that was after carbon pricing came in on the 1st of July last year. A really important long-term reform where the Government lost political paint but was determined to put in place a regime because our fundamental belief is you can't be a first world economy in the 21st century unless you are energy efficient and you are much more powered by sources renewable energy.

Secondly many of the things I spoke about today are not high profile matters. Getting this RMB deal done with our counterparts in China has involved an enormous amount of work behind the scenes. I remember when I first went to Hong Kong in the second half of last year and spoke about our ambitions in this area it didn't receive a good press, to put it mildly. And much of the discussion about what may or may not have happened since then has all be sensational and a lot of it has been wrong. That deal is on the board. Much of what I do as Treasurer particularly during those events that I was talking about in my speech today are not public. But the runs are on the board.

So we do a lot of things behind the scenes that are part in parcel of outcomes I have spoken about today. But they are not ones that are necessarily part of intense public scrutiny and certainly are not out there in the public domain like they ought to be. Having said that I don't focus on polls. I tell you what I can do, I can look my kids in the eye, I can look my grandkids in the eye in a few years' time and say back there in 2008, back there in 2009, back there in 2010, back there in 2013 we did the right thing by the country. And I believe that what will be what counts when we get to the polling booth later this year and I don't pay one jot of attention to daily, weekly, monthly, six monthly opinion polls.

WINKLER:

There is an issue that has come up repeatedly. Given how low the nation's debt ratio is at this point, less than 30% of GDP, is there really any problem with indefinitely running a modest budget deficit of less than 3% of GDP?

TREASURER:

Well we have a fundamental commitment to our medium-term fiscal policy, which is running surpluses on average over the cycle. That is our long term commitment. And since we moved to stimulate the economy at the height of the global financial crisis and the global recession we have been implementing a pretty substantial fiscal consolidation. And indeed much of the press commentary over the last couple of years is it has been too tough.

So we set ourselves the goal of returning to surplus in 2012-13 but there were really significant events towards the end of last year which occurred, and I would like to run through, which led me to indicate at the end of last year that it would unlikely that we would return to surplus at the end of 2012/13. And those were a very substantial revenue write-down in the second part of last year and the early part of this year. Since our midyear budget update at the end of October our revenue were down seven and a half billion dollars. So I indicated at the end of last year that it would be deeply irresponsible to make up for that revenue loss through imposing harsh cuts on the budget. I am a real critic of what is going on in Europe at the moment, where I believe the pace of fiscal consolidation there is now too harsh, and austerity there is begetting more austerity. And you are seeing the type of economic outcomes which I believe ought to be tempered in terms of the consolidation. You can have your settings which put in place the long-term consolidations that are necessary, make the structural changes that are necessary for the long term, but you can't defy the economic cycle in the short term. And if your problems are caused, like they are in Europe, by a lack of demand they need to take that in to account in terms of the pace of fiscal consolidation there.

But here we have a different problem. For the last three quarters, for the first time in Australian economic history, our nominal GDP growth has fallen below our real GDP growth. This is the story behind our revenue loss. It's not one necessarily of demand it is one that has a dramatic impact on government revenues. Whilst we operate in a nominal economy, it's the prices that people pay, it's the profits that they make, and it's the income that they receive that is important for Government revenue. So whilst we've got healthy GDP growth around trend, around three, we saw a huge crash in nominal growth at the end of last year caused by a culmination of two factors.

First of all a big crash in commodity prices at the end of last year that had a huge impact on our overall level of GDP which won't be recovered and also the remains of the high dollar. Terms of trade coming down, and the dollar staying up; never happened in our history. So what we are actually witnessing in our economy at the moment which is demonstrated by the figure that I gave you about three quarters of nominal growth being below real growth is the dollar defying gravity and essentially not moving as the terms of trade come down. That has put enormous pressure not just on profits of mining companies, not just on profits of exporters but across the whole economy so all of our profits-based taxes have been down substantially. That is why in this budget we will prepare a new set of forecasts as we always do and I will announce them on budget night. But it is every clear that these events, the high dollar, crash in commodity prices at the end of last year, the impact upon profitability and prices as whole across our economy means our revenues are much lower than we anticipated and that is impacting not just in 2012-13 but across our forward estimates. But within that we will still work within our medium-term fiscal strategy, always making sure that our settings are for growth and jobs.

WINKLER:

Treasurer you mentioned the currency just now. South Korea is calling for the G20 to address Japans policies driving down the yen ahead of next week's meeting in Washington. With sale of Japanese cars surging about 18% in Australia over last year, do you share their concern?

TREASURER:

I am a great believer in market-based exchange rates. You know expansionary monetary policy can bring about a depreciation of a currency but that doesn't mean that that is manipulation. What our global economy desperately requires is new sources of growth. And we can't get to good solid global growth if Europe is in recession, and large parts of it are, and if the US isn't growing. Now there was a lot of talk at the end of last year about China and a lot of it was rubbish and proved to be wrong. The Chinese economy is still chugging along at a reasonably healthy pace, and is forty per cent larger than it was at the end of 2007. Think about that. But the fact is but unless we get the growth in the US economy, unless we get some growth in an economy like Japan, we are not going to go back to the levels of global growth that are required to drive employment creation across so many developed economies and to lift people in developing economies out of poverty.

So everyone has got an interest in lifting global growth. We all have an interest in the structural reforms that will drive that, not just the expansionary policies that will be required in the short term. But your opportunity to bring in the sort of structural reforms that are required is completely run over if unemployment is going through the roof across a whole host of countries. So I am a big defender of what has gone on in the United States through the policies of Ben Bernanke. It's the only game in town, if the Congress is going to be crippled thank god for the Fed in the US. So I am not excessively critical of the attempt by the Japanese to try and reflate their economy, to try to get it going again, because the beneficiaries of growth in the US, the beneficiaries of growth in Japan are all those other countries out there that has been carrying the weight and can't continue to carry it on their own. If it wasn't for Asia in the last four to five years, the global growth would have been very, very weak. But they can't continue to do it on their own.

So the global economy requires the big economic engines to grow, so we all grow together. And if that requires expansionary monetary policy because fiscal policy has reached its limits, or can't be implemented, then so be it. But in saying that, that is not saying that in any way I would I ever endorse policies which are aimed at pegging exchange rates for deliberately competitive advantage because that is a beggar-thy-neighbour approach. I don't see that in what is going on at the moment, I understand why some may, but that is not my perspective on it.

WINKLER:

Treasurer you referenced the Governor of the Reserve Bank, whom you reappointed earlier this month. He describes the decline of Australian manufacturing as a long-standing trend that predates the surge in the Aussie, leaving the central bank without much real option to address it. Do you agree?

TREASURER:

I don't think that is quiet an accurate characterisation of what the Governor has said so I'll put that to one side. What has been remarkable given where the dollar has been has been, is the resilience in the manufacturing industry actually in Australia over the last couple of years. Yes, our car manufactures are under enormous pressure for all the reasons I have talked about in the remarks this morning, and the high dollar, and that part of the manufacturing industry is the classic example of what is happening in parts of our economy at moment and why profitability is down and so on.

But there are still success stories even in this environment for Australia. For example, take tourism. There is a huge surge of tourists in Australia at the moment despite the level of the dollar. The point I am trying to make is there are parts of the manufacturing industry that despite the dollar are managing to get the job done, and in some ways defying the gravity of the high dollar. But in the case of the car industry that has made it very, very hard for the manufacturing industry. And it reinforces the point that we need be acutely aware of all the potential opportunities that can arise coming out of growth in Asia for a whole different set of manufactured goods and services that we can provide. You know the car industry feels the full weight of the dollar probably more than any other industry.

WINKLER:

With some districts in your home city of Brisbane enduring jobless rates exceeding 27 % what can you do to alleviate the pain of the strong Aussie on local employers?

TREASURER:

Well I am not sure that there is anywhere in my district that's got an unemployment rate of that level, but I'll put that one to one side.

The fact is there are still parts of Australia where not everybody is a beneficiary of our economic progress over the last five years. And the Government has a whole range of policies targeted from education and training through to a whole host of policies what you would broadly call the industry area from investment and R&D and so on. We just have do the most we can do to make sure that we are as productive and competitive as we can be in an environment with a high dollar. And that is pretty hard. So it puts a lot more weight on what we do in areas of comparative advantage particularly in education and training and so on. And other forms of sectoral assistance where they are required to help people get over the hump.

When I discuss this with people as I go around, another way to think about this, and the economic purists probably wouldn't like me saying this, but if you look at Australia at the moment, and you look at where are dollar was, and if you look at the countries to our north and you look at how their economies are developing and how they are starting to going up the value-added chain, you could probably say that Australia is probably at its maximum point of un-competitiveness with these countries at the moment. As they go up the value-added chain, as their middle classes grow, as their governments invest in social safety nets, as their wages go up as indeed they are in China, many of these countries are not going to enjoy the same comparative advantage as they have got now as they indeed become wealthy and further developed.

So I am an optimist about where we are in the middle of all of this. I think we are really well placed. It is very uncomfortable at the moment as we can see in our car industry, and this is hurting people and people are losing their jobs. And that is terrible for them, and their families and their communities. But it is a transition we are going through which is part of the change in the evolution of the global economy, but for us the opportunities in all of this far outweigh the downsides. That is why when you look at the Australian economy the glass is more than half full not half empty.

WINKLER:

Following up on that point you probably more than anyone have had the biggest role shaping the vision of this Government over the last three years. I am just wondering how do you perpetuate the plan that you put in place beyond September 14? What are you going to do?

TREASURER:

By continuing to put in place good policy. You know I was talking this morning about what we have done with RMB. There is a whole range of things this Government is working on. At the moment we are working on what I think is the most important long-term reform after carbon pricing. And that is the implementation of the school improvement programme which is recommended by Mr Gonski. It isn't just about a funding model. It is actually about lifting the quality and the opportunity of educational across all of our schools where too many people in area of high unemployment in particular people have been left behind our greatest advantage as always is not the minerals in the ground, it is our people. And we are ready, really ready to maximise the advantages that come from the Asian Century. If there is one lesson to come out of Australia in the last 25-30 years, is that we have become much more open to the world, the world has become much more open to us. And in that engagement, particularly in the region, given our multicultural population, given our capacity to deliver quality education, given we are seen as a beacon of fairness amongst developed economies, we are in a unique position to harvest the benefits of growth and the opportunities that will flow from the growth of the Asian middle classes actors the region, and not just in China but more broadly. And the key for that is education.

WINKLER:

Treasurer, I am very sorry, we will have to leave it there. Thank you very much.

TREASURER:

Thank you.