House debates

Monday, 18 October 2010

Ministerial Statements


3:27 pm

Photo of Wayne SwanWayne Swan (Lilley, Australian Labor Party, Treasurer) Share this | | Hansard source

by leave—I make this ministerial statement relating to the global and domestic economies.

International Update

Two years ago this government participated in a historic crisis meeting of the G20 group of leading economies in Washington DC. That meeting agreed to unprecedented measures of international cooperation to try to avert what then seemed almost inevitable: a collapse of the global economy so deep and so prolonged as to rival the Great Depression. Through unprecedented collective action the global community stared down the most severe, widespread and threatening financial collapse in 75 years. That G20 meeting brought the global economy back from the brink. Many at that crisis meeting would have found it difficult to believe that two years on we could have regained as much ground as we have.

Last week I was again attending a G20 meeting, which coincided with the IMF Spring meetings in Washington. I can report to the House that the resounding message from those key international economy meetings is that, while we have seen a global economic recovery, it is still uncertain and uneven. Certainly, the developing world is doing well. But unemployment remains very high in the United States and Europe, their capacity for further policy stimulus is limited, and the contribution of the inventory rebuild to output growth is ending. The risks of prolonged slow growth in Europe and the US or even another downturn in those economies was a central theme at both the G20 and the IMF meetings.

Fortunately, Australia remains in a far better position than major advanced economies. Our economy is strong. Job creation is strong. Our fiscal position is strong. We have a large volume of both current and planned business investment that reflects confidence in the policies of this government and the future of Australia. Australians can take great pride in the stark difference between our economy’s performance and that of most other developed economies. While the advanced economies of the world are still trying to claw back the output lost during the crisis, Australia’s output is already substantially higher than it was before the global recession. Consider for a moment that 3½ years ago Australia and the US both had the same low unemployment rate. Today, Australia’s unemployment rate stands at 5.1 per cent, compared to 9.6 per cent in the United States.

The unprecedented speed and scale of our policy response, combined with our location in the fastest growing region in the world, were critical for the strong recovery in the private sector economy we are now all seeing. Together, the bank guarantees and the stimulus packages we put in place were bold decisions that reinforced the strength of our financial system while supporting spending, production and confidence.

Domestic Challenges

But our success during the global financial crisis should not be seen as an end in itself—it should be seen as the foundation upon which we build prosperity and tackle some very familiar economic challenges. Chief amongst those challenges is addressing the capacity constraints that were left unattended during the earlier mining boom.

As we move into mining boom mark 2, we give this undertaking: this government will not squander its benefits. That is why capacity building has been and remains central to our economic agenda. We will take some time to address the capacity constraints and skill shortages in some areas of industry, but we are making steady progress. At the same time, we are having to deal with a strong currency. Some of that strength is of course a reflection of the weakness of the United States dollar against all currencies, including our own. But it also reflects the relative strength of the Australian economy, very high world commodity prices and the dynamics of international currency markets.

I well understand the impact that the high dollar is having on some parts of economy. Our trade exposed industries such as tourism, manufacturing, agriculture and education are finding it tougher to compete in global markets. That is one of the reasons we have introduced a package of reforms to make our business more competitive across all sectors, including cutting the company tax rate and giving a tax cut to small business.

Some in the opposition have suggested we should take action to artificially lower the value of the Australian dollar. The consequence of this would be, of course, higher inflation and then higher interest rates, and with it a global collapse of confidence in the management of the Australian economy. That would hurt our manufacturing, agricultural and tourism industries, as well as homeowners right around the country.

So it is not surprising that the Sydney Morning Herald’s respected columnist, Ian Verrender, described this argument as an ‘outburst’ that ‘defies logic’. But I think it is more serious than that. I think it is dangerous, because it risks fracturing the long-held bipartisan consensus on the floating exchange rate.

The floating of the dollar was one of the big changes which made our 20-year record expansion possible. It has helped us to manage both positive and negative shocks and to sustain the momentum of our expansion. Any action to artificially lower the value of our currency would also encourage retaliation from our trading partners, and that is not something that is in the interests of our export industries. One of the great strengths of the coordinated response to the global recession was that we avoided a repeat of the protectionist policies that so exacerbated the Great Depression. That is why Australia will continue to support reform of global currencies as part of a broader package of reforms to lift global growth, not just shift it.

The opposition has also suggested that the government’s fiscal policy is feeding the rising dollar. But if this logic were true, with larger fiscal deficits in the United States, we would see the US dollar appreciating against the Australian dollar, not depreciating. The fact is Australia has one of the strongest fiscal positions in the developed world. Along with our strong economy, low unemployment and strong fundamentals, this is part of what is helping to attract further investment in our economy.

Domestic Reform Agenda

Of course, the Australian success story does not mean we are immune from continuing instability in the global economy. Considered, intelligent policymaking is just as important now as it was to our success during the global crisis. That is why we are so passionate about our economic plan:

  • a plan to cut business taxes, invest in the infrastructure this nation needs and keep building our pool of retirement savings;
  • a plan to build a stronger, broader, more competitive economy that will create even more jobs and keep us ahead of the pack; and
  • a plan to meet the challenges of mining boom mark 2.

Far from resting on our laurels, we will keep the wheels of economic reform turning here at home and at important discussions abroad. That is why this weekend’s meeting of the G20 finance ministers will also be important. Together, we are focused on structural reforms needed to achieve a stronger, more sustainable global recovery. We are also determined to avoid a return to the protectionist policies of the past because we understand that such a step would have a devastating impact on the global economy as well as on our own.

I ask leave of the House to move a motion to enable the member for North Sydney to speak for 7½ minutes.

Leave granted.

I move:

That so much of the standing orders be suspended as would prevent Mr Hockey speaking for a period not exceeding 7½ minutes.

Question agreed to.

3:35 pm

Photo of Joe HockeyJoe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | | Hansard source

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.

Leave granted.

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.