I would first like to acknowledge
- Grant Cassidy, Chairman of Capricorn Tourism and Economic Development;
- Mary Carroll, CEO of Capricorn Tourism and Economic Development; and
- Kirsten Livermore, Federal Member for Capricornia
As the Parliamentary Secretary to the Treasurer, I have responsibility for competition policy, consumer affairs, corporate law and financial literacy.
But I am here today to speak broadly about the Government's economic agenda to manage the challenges facing the Australian economy.
Successful economic management is about managing change.
It is about preparing the economy for future growth through investment in skills and infrastructure; and having an economic foundation that is flexible and nimble enough to take advantage of opportunities as they arise.
And it is about Government providing support to change. We do not want harsh outcomes or a costly dislodgement of resources within our economy.
And of course, in some cases, it is about putting in place policy settings to ensure that some changes do not occur. In the current policy debate, climate change is the most prominent example of this challenge.
Today, I want to give you an insight into some of the economic priorities that the Government is focussed on and talk to you about the changes, challenges and opportunities confronting the economy.
The impact of the natural disasters on the economy
The prospects for the Australian economy remain positive.
Over the next few years, we expect solid GDP growth, low unemployment, moderate inflation and a strong surge in business investment.
However, I know that the near-term economic prospects in central Queensland are more challenging, given the natural disasters experienced over summer.
This is a change to the economic outlook that could never have been predicted. In fact, few would have conceived it as even possible.
The floods are expected to be one of the most costly natural disasters in Australia's history – even surpassing the costs of tragedies such as the Victorian bushfires and Cyclone Tracey.
Treasury estimates that the floods and Cyclone Yasi will reduce Australia's real GDP growth by around ½ of a percentage point in 2010-11.
This is largely due to the interruption to coal production and exports, with the direct impact on coal production estimated to be around $5½ billion. Much of this production is concentrated not far from here in the Bowen Basin, where supply chains have been seriously affected by floodwaters.
There has also been a significant loss to agricultural production, worth around $2 billion. Cotton, vegetable and fruit production were particularly affected, accounting for around 45 per cent of flood-related losses, while Cyclone Yasi had a significant impact on sugar and tropical fruit production.
Tourism has also been significantly affected by the natural disasters. The direct cost of the floods and Cyclone Yasi on the tourism industry is estimated at around $400 million. This figure only estimates the loss from tourism businesses in the affected regions and says nothing of the impact on other parts of the country from flow on travel from overseas visitors.
The Gillard and Bligh Governments announced earlier this month a $10 million Tourism Industry Support Package to provide a vital boost to Queensland's tourism industry. This includes a marketing campaign to assure people that many of Queensland's most iconic destinations are largely unaffected by the floods.
I know that I will do my best to spread the word about what a great place Rockhampton has been to visit.
And I will also be doing my best to support the Treasurer in his economic management of the reconstruction effort.
We need to manage the change that the natural disasters have had on the economic outlook, particularly in Queensland.
The Government's response to the natural disasters
The Government is committed to responding to the need for immediate rebuilding in a way that is positive for Australia's economic fundamentals.
We will cover the cost of the rebuilding effort, which is currently estimated to be $5.6 billion, through a temporary levy and spending cuts.
The flood and cyclone reconstruction levy will apply only in the 2011-12 financial year and is estimated to raise $1.8 billion, which is around one-third of the total cost of rebuilding.
The levy is based on the principle that those who have the greater capacity to pay will contribute more.
Taxpayers with a taxable income between $50,001 and $100,000 will pay a levy of 0.5 per cent of their taxable income over $50,000. Taxpayers with a taxable income over $100,000 will pay 0.5 per cent of their taxable income between $50,001 and $100,000 and 1.0 per cent of their taxable income over $100,000.
Along with anyone with an income of $50,000 or less not having to pay the levy, people who were affected by the floods and Cyclone Yasi will not have to pay. Anyone who receives the Australian Government Disaster Recovery Payment for a disaster this financial year will be exempt.
Similarly, people who have been affected by a disaster declared under the National Disaster Recovery and Relief Arrangements and meet certain other criteria, but are ineligible for an Australian Government Disaster Recovery Payment, will be exempt.
Finally, New Zealand non‑protected special category visa holders who received an ex‑gratia payment from the Australian Government in relation to a disaster that occurred in 2010-11 will also be exempt.
At the time we announced the flood levy, we committed to spending cuts of around two dollars per dollar raised by the flood levy. Since that time, we've announced further assistance for communities affected by the floods and by Cyclone Yasi, and we've committed to funding these by finding savings in the upcoming Budget.
The importance of this strategy is that it takes into account both the costs of the natural disasters on the economy and the Federal Budget, and the capacity constraints that will re-emerge as the economy continues to grow.
The strategy is about re-prioritising, which we understand can be hard for some local areas. The Government has made the decision to delay some infrastructure projects, including six Queensland road projects.
The delay of infrastructure projects is not a decision that the Government takes lightly. We understand the importance of infrastructure investment.
Since coming to office in 2007 the Government has announced expenditure of around $37 billion over six years for road, rail and port infrastructure. In real terms, this Government has more than doubled expenditure on major transport infrastructure in the six years to 2013‑14, compared with the previous six years.
We have taken the decision to delay some infrastructure projects to ensure that we do not place significant price pressures on regional economies.
There is only so much equipment and so many workers capable of completing the necessary construction. If we do not offset infrastructure spending elsewhere, the additional demand for construction would simply result in project delays and drive up the cost of labour and materials, resulting in regional price pressures and reduced value for money.
The impact of the mining boom on the economy
While the recent natural disasters provide a near-term challenge for the economy and for economic management, the continuing mining boom offers a long-term challenge.
Australia is undergoing a substantial and sustained increase in commodity prices, with the terms of trade around its highest level on record.
The current boom is not unprecedented in terms of intensity, but it is unprecedented in terms of duration.
Previous terms of trade booms, such as those experienced during the mid 1920s and early 1950s, were characterised not just by the intensity and speed in which commodity prices rose, but also by the speed in which they fell. Typically, these booms lasted for one or two years.
The current mining boom is not following the same trend. Commodity prices have risen strongly in each year since 2004. Iron ore prices are currently over 500 per cent higher than they were at the beginning of 2004, while metallurgical coal prices are over 350 per cent higher and thermal coal prices are nearly 250 per cent higher.
The Government is currently in the process of updating its economic parameters, but in the most recent forecasts, the terms of trade were projected to remain elevated for a number of years.
This rise in demand for Australia's commodities has largely been driven by the rapid growth of key emerging economies such as China and India. Over the past decade, average annual growth in real GDP has been around 10 per cent in China and around 7 per cent in India. Crude steel production in China and India has increased by around 4‑fold and 2‑fold respectively.
The scale of industrialisation in these countries will be significant, and it is expected to be greater than the industrialisation that we have seen in other countries such as Korea and Japan.
China and India have a combined population in excess of 2.6 billion people, and they have a significant amount of economic 'catch-up' ahead of them. Real GDP per capita in both China and India is still less than a tenth of real GDP per capita in the United States and less than 15 per cent of real GDP per capita in Japan.
The strength of the current boom is having a significant structural effect on the Australian economy.
It is resulting in a shift of labour and capital towards the mining and construction sectors. People are moving to mining regions, which brings its own set of challenges.
It can mean higher housing prices in these regions, as the demand for housing increases, and can place pressure on infrastructure and amenities as regions grow quickly and need to adapt to having more people.
And it also means a significant shift in capital resources.
In 2010, the value of mining investment in the Australian economy was around $40 billion. The latest CAPEX figures indicate that the mining industry intends to invest around $76 billion in 2011‑12, while current resource projects in the pipeline exceed $380 billion. This is a massive amount of investment.
And these profound changes within the Australian economy are having a significant effect on the Australian dollar.
Last year, the Australian dollar reached parity with the US dollar for the first time since it was floated in 1983. While this places pressure on non-resource export competing industries, it is important to acknowledge that the economy would fare much worse without a floating exchange rate.
The previous terms of trade booms were more difficult economic events due to the attempt to maintain a fixed exchange rate. The fixed exchange rate resulted in significantly higher inflation and more disruptive price movements across the economy. In this regard, floating the exchange rate has acted as a shock absorber.
As the adjustment to the mining boom continues to take place, sound economic management is crucial.
We need to get the economic settings right for a flexible economy that is able to take advantage of productivity and economic growth opportunities. We need sound macroeconomic settings and microeconomic policies that promote the efficient allocation of resources across the whole economy.
The effects of economic change on local regions
An important element of getting these settings right is to ensure that resources are allocated efficiently across different local regions.
Economic management includes recognising that changes affect various local regions differently. While change can be positive for some regions, it can be negative for others.
We need to ensure that regions can capitalise on growth opportunities and that labour and capital resources in the economy are flexible and are able to move to places and regions where growth opportunities exist.
The Minister for Regional Australia, Simon Crean, recently announced details of the Regional Development Australia Fund that will boost economic development in the regions.
The Regional Development Australia Fund is a $1 billion five-year program that will boost economic and community development and is part of the Government's commitment to regional Australia.
The Government is committed to furthering economic development in the regions. How we do this is important. It is about investing in regional Australia with a focus on local solutions. It is about helping regions to focus on their own growth potential and their own growth opportunities.
Examples of projects that could be funded through the Regional Development Australia Fund include economic infrastructure projects and community infrastructure such as sporting facilities or childcare centres.
The projects should deliver concrete economic and social benefits, build capacity in local communities, and leverage additional funding across government and the private sector.
It is also important that the economy is structured to encourage flexibility and the movement of resources to regions that need them most.
For example, the Government's Connecting People with Jobs trial, which started on 1 January of this year, supports job seekers in areas of high unemployment to relocate to take up work and to better match labour supply with demand.
This trial provides eligible jobseekers with a reimbursement of up to $6,000 for singles and up to $9,000 for families to help with the costs associated with relocation – and to help support them to take up employment.
Employers participating in the trial also receive a wage subsidy of $2,500 to take on relocating job seekers, in recognition of the additional support individuals need in the early stages of their employment in a new location.
This trial is about encouraging labour mobility, and helping people move from regions where there are no jobs to regions that need workers. It is about supporting flexibility within the economy, and as part of our response to the natural disasters which have hit Queensland this summer; we announced we would double the number of places available in the program from 2,000 to 4,000, with the goal of helping more workers move to the regions that need them most.
The impacts of climate change on the economy
Flexibility is important because economies are always dealing with challenges that require them to shift and adjust.
A significant challenge that confronts Australia and the rest of the world is that of climate change.
The actions we take or do not take today, will have lasting repercussions for our economy and for Australia's future generations.
Professor Garnaut has released a series of update papers on his 2008 study into the economic consequences of climate change, including his most recent update, which was released yesterday.
Observations and research since 2008 have confirmed the position in mainstream science that the Earth is warming and that, with a high level of certainty, greenhouse gases generated by human activity are the primary cause.
It is an economic imperative that we address climate change and that we start to do so now.
The longer we delay action, the larger the uncertainty in the economy, the sharper the eventual adjustment and the greater the economic cost.
This is why the Government has announced its plans to introduce a fixed price for carbon from 1 July 2012 for three to five years before moving to an emissions trading scheme.
This is an essential economic reform.
The Government understands that this will not be easy nor will it necessarily be popular, but we believe that this is the right thing to do for the economy and for the country.
We are committed to this reform, because we believe that climate change is real and that human activity has contributed to it. But most of all, we are committed to this reform because we believe that we need to begin the process of transforming our economy into one that is less dependent upon fossil fuels.
Whilst there is much division within the Opposition on this issue, the official climate change policies of both sides of politics in this country involve a commitment to reducing our greenhouse gas emissions by 5 per cent by 2020 on 2000 levels.
The difference between these positions is that the Opposition's approach will be more costly and less effective. The Opposition believes that government should be picking winners and re-directing taxpayers dollars to the big polluters. The Gillard Government's approach will tax the big polluters and provide assistance to households and emissions-intensive trade-exposed industries as we move towards a low pollution future.
We believe in a market based mechanism. An emissions trading scheme is the most efficient and cost effective way to deal with climate change.
A carbon price is not aimed at households, but is a tax on carbon pollution, which will be focussed on some of our largest industries. The carbon price will make these companies responsible for the pollution they create and force them to pay a price for each tonne of pollution they produce.
As a former corporate lawyer, who specialised in taxation, I can tell you all that business will do everything within its power to minimise the amount of tax it pays.
By taxing pollution, the Government will provide industry with the most powerful incentive to move towards clean energy and greener ways of producing their goods and services.
Equally, the demands by consumers for cheaper goods and services that are produced by processes that do not attract this tax will drive more businesses to invest in clean energy and greener production processes.
Conclusion
I have spoken today about change, because sound economic management is about managing change.
We in Government are in some ways doing exactly what those of you are doing in business and what we are all generally trying to do in life.
We are looking ahead; preparing for the future; and adapting and responding to changes that are thrown at us in an unexpected way. We need steady hands and sharp minds.
The global financial crisis was a massive change that we did not expect, and the term 'change' is clearly a significant understatement!
But we dealt with it. The Government moved quickly to protect the economy and to ensure that capital and skills were not dislodged and lost across the economy due to the economic shock that was reverberating through financial markets and economies across the world.
Our actions have put the Australian economy in a strong position. Our unemployment rate stands at 5 per cent, while the unemployment rates in the United States and Europe remain high at around 10 per cent.
In fact, our unemployment rate continues to remain lower than every major advanced economy, except Japan. Over the year to February 2011, more than 300,000 jobs were created in Australia.
This provides us with a strong platform on which to continue to prepare for Australia's future economic prosperity.
We are preparing our economy for future changes.
We are investing in the National Broadband Network. We are investing in the rebuilding of Queensland following the natural disasters. We are investing in the infrastructure that regions need in order to capitalise on economic growth opportunities. We are investing in skills and innovation and we are determined to tackle climate change.
We understand that economic changes can be challenging. But they are not insurmountable and they need not be negative if they are managed well.
The Gillard Government is optimistic about Australia's future. We are optimistic about our economy and our prosperity.
Australia is able to deal with all challenges thrown at it, as we saw in your region during the floods. We will deal with the economic changes with the same spirit: we will be strong, we will be resilient, we will be fair, and we will do so with good humour.
I look forward to working with you all so that we deal with these challenges together.