Speech by The Hon Lindsay Tanner MP
Minister for Finance and Deregulation
American Chamber of Commerce – Business Briefing
Thursday 15 October, 1:15pm Sydney
Good afternoon, it is a pleasure to be able to join you here today and I thank the American Chamber of Commerce for the opportunity to speak.
I know many of you in this room have persevered through the difficult economic conditions that we have faced in the last year - continuing to conduct business between the United States and Australia in a period when global trade and foreign investment have fallen to levels not seen since the great depression - and I wanted to take the opportunity to recognise that work today.
Because despite the challenges that are, and may continue to be, present it is as important as ever that Australian businesses – and indeed businesses from countries around the world – don’t turn away from these opportunities.
Australia is a trading nation; we rely significantly on our relationship with countries around the world to support our economic growth and we cannot afford to retract from that.
Organisations such as the American Chamber of Commerce play an important role in this by promoting and facilitating trade and investment between Australia and the US.
Although the importance and strength of our relationship with Asia, and most notably China, has grown considerably in recent times, we should not underestimate the value to Australia that a strong relationship with the United States provides.
I am sure that I don’t need to tell anyone here today that relationship stretches far beyond our economic ties, but it is these ties I would like to discuss with you today.
I would like to take this opportunity today to speak about the Australian Government’s response to the global financial crisis and what we are doing to provide business here with the best opportunities possible to grow and prosper. I will also touch on what the United States has done in the same period and what our countries need to work together on into the future.
I do this not out of a sense of parochialism, based on the relatively strong performance of Australia during this global recession, but as you are all in this room today, you have a direct interest in the progress of both the Australian and American economies.
And while there have been positive economic signals emerge recently, particularly here in Australia, there is no doubt that the road ahead remains a bumpy one. For those of you involved in doing business internationally, I would suggest the road you are facing is even more challenging.
In the past week we have seen data confirming the relatively strong performance of the Australian economy during the global crisis.
The unemployment rate fell 0.1 per cent to 5.7 per cent during September.
Consumer and business confidence remain at above average levels.
In fact Australia has been the only one of the 33 advanced economies to have recorded positive growth over the past year. You can understand why governments, commentators and international bodies alike are looking at us and asking “How did they do that?”
I am not for one instant claiming that our response has been perfect or that the Government can claim all the credit. We are, like everybody else, learning as we go. Continued export growth, including to China, has been helpful.
However, I think it is clear that the actions of the Government in response to the crisis have assisted Australia to be where we are today. Indeed, Treasury modelling has shown that, without our stimulus packages, the Australian economy would have contracted by 1.3 per cent over the year to June 2009, rather than the 0.6 per cent expansion actually observed.
In October last year we took our first major step in combating the global storm that was bearing down on us by announcing that the Government would guarantee deposits and wholesale funding of Australian banks, building societies and credit unions.
This was a significant step as conditions in international wholesale funding markets had restricted the ability of Australian financial institutions to access funding, with potentially serious implications for liquidity and lending activity.
A year ago, a crisis of confidence that started in the US credit market was spreading to Australia despite the relative strength of Australia’s prudentially regulated financial institutions. The last year has shown that our regulatory framework has performed strongly and market conditions are reducing reliance on the wholesale guarantee – as intended.
Second, we provided substantial fiscal stimulus, through several packages, based around the principles that fiscal stimulus measures be timely, targeted and temporary.
The initial focus of the fiscal strategy was on payments targeted directly to households in order to increase household spending quickly. Those of you with businesses in retail and consumer industries would undoubtedly have noticed the impact of these payments in the lead up to Christmas last year and again in the early part of this year.
The latter parts of the strategy are focused on investment in infrastructure and skill development. Not only does this ensure that stimulus is phased down progressively once the initial boost from the payments to households abates, it importantly provides long-term benefits by building the infrastructure needed to improve the country’s productivity performance. Productivity improvements will ultimately drive the future economic growth of this country.
Throughout this period the Government has been mindful of the need for fiscal policy to complement the independent monetary policy settings of the Reserve Bank of Australia.
When we took office the cash rate was at 6.75 per cent and rising. From the peak of 7.25 per cent in March 2008, monetary policy eased to a low of 3.00 per cent in April 2009.
The Governor of the Reserve Bank, Mr Glenn Stevens, had commented publicly that a rate of 3 per cent was an “emergency level” and that they could not stay at ‘emergency levels’ indefinitely.
Last week we saw the Reserve Bank raise interest rates by 25 basis points. While the Government understands rate rises make it tougher for households and businesses, there remains a significant gap between the current rate of 3.25 per cent and the recent peak of 7.25 per cent.
The Australian approach has of course been calibrated to our specific circumstances. However, in the United States and elsewhere, we see broadly similar measures being adopted.
The US now has substantial stimulus measures in place, including the rollout of the US$787 billion fiscal stimulus package - equivalent to around 5.5 per cent of GDP – announced by President Obama in February 2009.
This package is expected to provide a significant boost to economic growth in the second half of 2009 and through 2010.
The United States Federal Reserve, like the Reserve Bank of Australia, has cut interest rates significantly. The Fed maintained interest rates at zero to a quarter of one per cent in September, again noting that ‘economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period’.
The Federal Reserve and the United States Government have also undertaken a number of extremely rare interventions in financial markets.
Investment bank Bear Stearns was bailed out by the Federal Reserve; Government-sponsored enterprises Fannie Mae and Freddie Mac were placed under conservatorship; and insurance giant AIG was effectively nationalised after losses associated with the subprime crisis threatened to trigger a systemic failure.
Furthermore, the Troubled Assets Relief Plan, introduced in October 2008, allowed the US Treasury to disburse up to US$700 billion to aid financial institutions in a bid to strengthen the financial sector.
Fortunately, Australia has not had to contemplate such bailouts due to the ongoing strength of our financial sector and the timely introduction of the bank guarantee and other stimulus plans.
As I said earlier there have been a number of positive economic indicators in Australia in recent times and while the signs in the United States have not been as strong there is still some cause to be optimistic no matter what side of the Pacific Ocean your interests are.
Australia’s real GDP grew by 0.6 per cent through the year to June 2009, significantly better than expected only a few months ago. This was supported by strong domestic demand in the latter part of the year.
By contrast US GDP fell by 3.8 per cent over the year but encouragingly recorded a relatively good result in the June quarter with a more modest 0.2 per cent decline. With a significant proportion of the US stimulus package still to reach the economy, growth is expected to return to the US economy in 2010.
The importance of maintaining economic growth through temporary stimulus was highlighted in last week’s employment figures. Australia’s unemployment rate is currently 5.7 per cent. In contrast, the US unemployment rate has reached 9.8 per cent, and the UK 7.9 per cent.
Australia’s position must be considered in context as unemployment here is still 1.5 percentage points above the rate observed in June last year and thousands more are out of work than prior to the global recession.
However, since the collapse of Lehman Brothers in September 2008, Australia has seen its employment level grow by 0.1 per cent, or around 11,000 persons. In comparison the employment figures have fallen by 4.2 per cent in the US, 2.1 per cent in Canada and 1.8 per cent in the Euro area.
These figures indicate two things to me. First, it reinforces the importance of our timely stimulus package in insulating Australia and Australians from the global crisis. Second, it highlights why recent calls by the opposition to cancel all stimulus at once are simply not supported by the data.
The global economic situation remains fragile and finely balanced. Confidence and expectations are key to sustaining the private demand and business investment required to underpin economic recovery. The consumer and business confidence figures from both the United States and Australia have been improving in the last couple of months and this gives me cause for optimism.
These signs are encouraging. I am confident that America, with its unique entrepreneurial spirit, will ultimately bounce back from the current economic difficulties it faces.
Domestically, while we are pleased with recent signs of recovery, no country can afford to fall back on a few pieces of promising data and conclude the job is done. While Americans and others may enjoy our laid-back Aussie lifestyle, I see complacency as a risk.
The Prime Minister and the Treasurer attended the Pittsburgh G20 Summit with this goal in mind. The Pittsburgh Summit reaffirmed the commitment of the world’s leading nations and institutions to secure the foundations for future economic growth in parallel with temporary recovery measures.
The economic and other ties between countries need to remain strong. We cannot afford to allow the productivity-sapping barriers of protectionism to rise again. Similarly, we need to increase productivity through balanced regulatory reform. This will complement the Government’s investment in infrastructure such as ports, rail, road and a national broadband network.
We will continue to invest in education, innovation and training to support the development of a skilled workforce and new industries for the future. And last, but not least, we need to work to address upcoming challenges such as the impact of climate change on both our environment and our economy.
In these goals I think there are again many similarities to the approach of the Australian and United States Governments. These links can only be strengthened by the activity you are undertaking within your own businesses and personal networks. I am an optimist, and while challenges will remain for us all, I am confident we will ultimately combat the GFC and secure a more prosperous future with the lessons learnt.
Thank you.
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