Monday, 18 October 2010
The coalition shares the Treasurer’s pride in the strong performance of the Australian economy. We do so because we were instrumental in helping to make our economy robust, a point lost on the Treasurer because he and his colleagues opposed so much of what we did, from tax reform to privatisation, from waterfront reform to fiscal consolidation.
Economic growth is back to trend and the unemployment rate is approaching the treasury department’s definition of full employment, at around five per cent. This is good news. In addition, demand for Australia’s resources continues to swell and prices are high. Australia’s terms of trade are at their highest level for half a century, which will deliver very significant income gains to Australia over coming years. Our economic future is tied to the world’s largest and fastest growing economic bloc in Asia. That future at this moment is bright.
There has been much debate about the reasons for Australia’s economic success. I do not wish to go over old ground today but I do want to emphasise the role played by reform over a long period of time by governments of both political persuasions. A key and critical reform was the floating of the Australian dollar in December 1983. The floating of the dollar was the culmination of a long period of gradual liberalisation of the currency markets, moving from a regime where the Australian dollar was fixed to the pound sterling, then to the US dollar, then to a ‘managed float’ after that, where the value of the currency was set against a basket of currencies and allowed to change gradually over time.
There were two key reasons why the Australian dollar was finally floated. The first was pragmatic: managing a currency requires the central bank to actively buy or sell the currency in the market; it is obliged to meet all comers at the specified exchange rate. The problem for a small, open economy such as Australia’s is that the central bank does not have sufficient firepower to take on the markets where there is substantial pressure for the currency to move away from the set value. And, if it does try to take on the market, there can be big impacts on domestic liquidity—that is, the supply of money. Ultimately the Reserve Bank and the government can sacrifice economic management on the altar of trying to achieve a particular value for the currency. This can be illustrated utilising recently published data.
A Reserve Bank press release of 1 September 2010 shows that, globally, the Australian dollar is now the fifth most traded currency and the Australian dollar and the US dollar remain the fourth most traded currency pair. The only currencies which are more actively traded than the Australian dollar are the US dollar, the euro, the yen and the British pound. Recent BIS data shows global daily turnover where the Australian dollar was one-half of the currency pair totalled around $300 billion in April this year. This includes spot transactions, forward swaps and options. I seek leave to table that document.
This turnover is enormous compared with the size of our economy, which is $1.3 trillion. It is also large compared with Australia’s reserves of gold and foreign exchange held by the Reserve Bank, which totalled $42.1 billion as of the end of August, of which $32.1 billion was foreign currency reserves. So, in reality, the actions of the Reserve Bank in trying to manipulate the Australian dollar through intervention in foreign currency markets would be temporary and minor. It is often futile, as we have recently witnessed with central bank interventions in the Japanese yen and the Swiss franc. Both interventions delivered a short-term movement but ultimately they failed.
The second reason for a floating dollar is more important: a floating currency helps to insulate the domestic economy from shocks which originate offshore. For example, during the global financial crisis there was a short-lived dip in commodity prices. In response the Australian dollar fell sharply, from close to parity with the US dollar down to just above US60c. This also reflected a more generalised risk aversion and a more pessimistic view on growth. The sharp fall helped to insulate Australia from the shock by boosting the Australian value of foreign currency export receipts, and this helped maintain the international competitiveness of Australia’s exports. The fall in the Australian dollar also made imported goods and services more expensive, thereby reducing demand. Together, these impacts on exports and imports helped to insulate Australian production and Australian jobs from the severe downturn in other countries.
The coalition believe in market pricing. We share the anxiety of many that enormous gyrations in the Australian dollar against the US dollar are creating uncertainty. This is, however, overwhelmingly linked to the devaluation of the US dollar and the quantitative easing by the Federal Reserve. It does, of course, raise an issue that has far greater implications for Australia and the world—that is, the gradual decline in the power and influence of the United States economy, a process that is being sped up by the growing protectionist influence in US politics.
In his statement the Treasurer said that some in the opposition have suggested that the government should take action to artificially lower the value of the dollar. This is simply not the case. The coalition have not suggested that the government or the Reserve Bank should intervene in currency markets to target the value of the Australian dollar. I was there, as financial services minister, in 2001 when the Australian dollar was being hammered, in part because of the US led tech boom and subsequent bust. We held our nerve when the dollar fell below US50c; we expect the government to hold its nerve now.
What we have said through this is that the government’s own actions in continuing to run very large budget deficits and pump prime the Australian economy are forcing interest rates to be higher than they would otherwise be—and consequently the Australian dollar is higher than it needs to be. The government should not be running a $41 billion deficit at a time when the economy is running close to capacity and the labour market is approaching full employment. The Treasurer tries to counter this argument by pointing to larger fiscal deficits in the US and observes that the US dollar is depreciating. The point he fails to understand is that government spending puts upward pressure on interest rates, and the exchange rate, when the economy is already operating at full capacity. The situation in the US is quite different, with a weak economy operating below capacity and with high unemployment. In that situation it is understandable that the government would wish to keep boosting demand. It can do so with no danger of putting upward pressure on interest rates or its currency.
For Australia, the role of excessive government spending in placing upward pressure on interest rates is now widely accepted. It is not ‘Hockeynomics’; it is real. Now is the time when we as a nation should take advantage of this period and start paying off our debt, not increasing our borrowings by $100 million a day.