Ms Julie Bishop (Curtin, Liberal Party, Deputy Leader of the Opposition) Share this | Hansard source

In considering the bills comprising this stimulus package presented by the government of some $10.4 billion, the Social Security and Other Legislation Amendment (Economic Security Strategy) Bill 2008 and cognate bills, it is necessary to put them in the context of the global financial crisis which has been unfolding around the world for at least the last 12 months. Some have suggested that the global financial crisis has been caused by extreme capitalism—whatever that means—or corporate greed, but that is far too simplistic an analysis of the cause of the global financial crisis. It has come about because of a number of failures—policy failure, regulatory failure and management failure—and the combination has created what one could describe as a perfect storm which has led to a crisis in confidence and a situation where banks have become reluctant to lend to each other—in fact, banks do not trust each other—so the whole flow of credit throughout economies has been frozen.

As we all know, this began with the subprime crisis in the United States. This was a result of some policy decisions. Firstly, money was easy to obtain. Between 2000 and 2003 interest rates in the United States fell from 6.5 per cent to one per cent. Secondly, there were the policies from successive United States administrations for homeownership, particularly among the poorer demographics. When you combined this cheap and easy money with this push to ensure that more people got loans for homeownership the result was that many people whose creditworthiness would not have otherwise entitled them to obtain a loan from a bank were able to obtain credit. This was fine when the housing bubble was increasing and house prices were increasing, but when the bubble burst people were left with loans that were in fact greater in value than the value of their home. These were colloquially known as NINJA loans—no income, no job or no assets loans. People just could not repay the loans. In many states in the United States they were non-recourse loans, which meant that people could effectively walk away from their responsibilities.

The subprime crisis in itself was difficult enough but these subprime loans had been onsold by the lenders to investment banks, which had packaged them up into some of the most complex financial products and then onsold them to the world. Rather presciently Warren Buffett called these ‘financial weapons of mass destruction’. These financial products had at the heart of them subprime loans, toxic loans. Insurance companies insured these loans, investment banks sold these loans and credit-rating agencies rated these loans as being worthy of investment, as investment grade loans.

When this culminated in the collapse of the housing market, the fallout was spectacular. Mortgage brokers, investment banks and insurance companies have all either collapsed or been bailed out by governments not just in the United States but across the world. Governments have struggled to come to terms with how to put liquidity into the markets and get money flowing again while propping up failing institutions. Essentially governments have had three levers on which to draw: monetary policy, and that depended upon the state of monetary policy in each country; fiscal policy, and that depended upon in most instances the state of the budget in each country; and direct government intervention, which in a number of cases has meant governments providing guarantees to bank deposits to prevent flights of money from one institution to another.

Australia is better positioned than most other countries to meet the fallout of the global financial crisis. That is not because of luck but because of the strong economic management of the Howard-Costello government. Those conditions were inherited by the Rudd government on coming to office in November 2007. The Labor government inherited a debt-free economy in terms of net government debt. We had eliminated government debt. So, unlike virtually every other comparable country around the world, the Australian government has zero government debt. The Labor government also inherited successive budget surpluses. The economy was in a very strong position because of the surpluses that had been built up over a number of years, including about $70 billion in national savings in the Future Fund. That is why the Treasurer was able to announce on budget night that there would be $21 billion forecast for the next financial year. The Treasurer has not yet delivered a budget surplus. The only budget surplus that has occurred in the life of the Labor government was the previous government’s surplus, which was delivered at the end of June 2008. The Rudd government was able to forecast a budget surplus of some $21 billion for 2008-09.

The second reason that Australia has been able to and will weather the storm better than most countries is that our banking sector is strong, robust and well capitalised. Our major banks have been reporting and are still reporting record profits. We have not had any of the bailouts that we have seen in the United States where the five great investment banks, for example, have now been reduced to two and they have moved from being investment banks to being retail banks to come under the umbrella of the regulator. We have not seen the collapse of a savings and loans type bank like Washington Mutual, as we have seen in the United States, or Northern Rock in the United Kingdom and elsewhere throughout Europe. Our banking sector is and remains strong.

The third reason is that Australia has a very strong regulatory framework. Prudential regulation in this country is probably second to none. That is a result of decisions of the previous government. It separated the Reserve Bank from prudential responsibilities. The Reserve Bank is an independent authority charged with responsibility for monetary policy and the stability of financial markets. A separate entity—the Australian Prudential Regulation Authority—was set up in 1998 with the specific task of prudential regulation in this country. APRA has performed its task extremely well. So the Labor government inherited very strong economic conditions, a very strong banking sector and a very strong prudential framework.

Over the weekend of 11 and 12 October, there were meetings of a number of cabinet ministers and the Secretary of the Treasury. These meetings have been the subject of considerable discussion in the public domain, but what we know from those meetings is that the government made two decisions. The first was to provide an unlimited bank guarantee to deposits that were held in APRA regulated institutions, the authorised deposit-taking institutions regulated by APRA. There was no analysis provided or made public—certainly no analysis that the government has seen fit to make public. There was certainly no modelling in relation to this unlimited bank guarantee, and the government asked us essentially to take them on trust because, as the Prime Minister indicated, it was done on the specific and explicit advice of the Governor of the Reserve Bank. We now know that our trust was misplaced because, as it has turned out after excruciating questioning of the Prime Minister in question time, the Governor of the Reserve Bank was not even at the meetings over the weekend of 11 and 12 October with the various cabinet ministers. The Reserve Bank governor was not asked for, nor did he give, his direct and explicit advice to the government.

On 14 October the government announced a stimulus package, and it was presented in these terms. In a joint press release, the Prime Minister and the Treasurer stated:

The Rudd Government today announced a $10.4 billion Economic Security Strategy to strengthen the Australian economy in the face of the worst global financial crisis since the Great Depression.

This $10.4 billion strategy will strengthen the national economy and support Australian households, given the risk of a deep and prolonged global economic slowdown.

On that basis, one assumed that the Australian economy would be slowing, and that was the message that the Prime Minister and the Treasurer were trying to present to the Australian public—that, as a result of the global financial crisis, growth in the Australian economy would also slow. The press release went on to say:

The Rudd Government made tough decisions in the May budget to build up a large budget surplus to act as a buffer in tough economic times.

Today those tough economic times have arrived …

In other words, the Australian economy would slow to such an extent that the government believed it was necessary to use the forecast budget surplus to stimulate growth, so it would use the forecast budget surplus in a spending package to stimulate growth. That then raises the question: what was the forecast for growth that the government was relying upon in deciding to spend what has been calculated as about half of the forecast budget surplus in one hit—$10.4 billion in one package? The government had said on many occasions that the budget surplus was being built up as a buffer against the global financial crisis; now it is telling the Australian public it has had to spend half of the budget surplus in order for it to act as a buffer against the global financial crisis. I need not point out, because it is self-evident, that once the surplus is spent you cannot get it back—you cannot spend it again—so this is a significant decision of the government to spend, in one hit, half the forecast budget surplus, which represents about one per cent of GDP.

Quite naturally, the opposition asked questions of the government as to what would be the forecasts that the government was relying upon in order to make such a significant decision to spend half the budget surplus in one hit just weeks before Christmas. We—I would suggest quite appropriately, logically and reasonably—asked questions about the assumptions the government had made about growth in order to put together this package. Yet the government was extremely reluctant—in fact, bordering on outrage—that we would ask these questions on behalf of the Australian public. I think it not unreasonable for the opposition to say to the government, ‘If you’ve said you need to keep the surplus as a buffer against the global financial crisis on one hand, and you say you have to spend the surplus as a buffer against the financial crisis on the other hand, we should know what assumptions have changed.’ So we asked a series of questions on 15 October about the forecasts upon which the government relied in formulating the $10.4 billion package. Essentially, the Prime Minister said that he relied on the IMF forecast of 2.2 per cent and the Reserve Bank of Australia, which had a forecast for growth of 2.25 per cent to 30 June next year. The Prime Minister said:

… the most recent data available to the government was about growth with a ‘2’ in front of it …

That was the extent of the information that the Prime Minister was willing to give to the Australian public about the government’s own forecasts for growth to justify this package. He said:

… the most recent data available to the government was about growth with a ‘2’ in front of it …

We asked another question about the formulation of the stimulus package relying on growth estimates and asked if by any chance growth was lower than two per cent—was that a forecast? The Prime Minister replied:

The growth data for Australia is that which was outlined in my answer to the honourable gentleman’s first question—the budget projection for 2008-09 of 2.75, the RBA’s most recent statement of 2.25 and the figure of 2.2 in the IMF’s report. This is the data which is before the government.

We took the government at face value. It said that the growth had a ‘2’ in front of it, that the IMF said 2.2 and that the RBA estimate was 2.25. On that basis, we made an assumption about the government’s forecasts for growth, because the Prime Minister assured the public that it had a ‘2’ in front of it.

We also asked questions about what modelling or analysis had been done to come up with the figure of $10.4 billion—again, not unreasonable. After all, this is, as I have said, half the forecast budget surplus. In Senate estimates, Senator Joyce asked Treasury representatives:

I want to go back to the $10.4 billion package. Did you do any modelling on the effect of that package, or did anybody in your department do any modelling on the effect of that package?

Dr GruenNo formal modelling was done of that package. Certainly, analysis was done of that package, but it was not formal modelling.

Senator JOYCESo we have spent half of the nation’s surplus without a formal modelling of the package; is that correct? We have spent half of the nation’s surplus without a formal modelling of the effects of the package?

…            …            …

Dr GruenI can confirm that the package was $10.4 billion and that no formal modelling was done. I can confirm that no formal modelling was done.

Members will note that he did say earlier that analysis was done of the package, but I point out that that analysis has not been made public. So once more the government says: ‘Take us on trust. We’re not going to tell you anything more about the growth forecast, other than it has got a “2” in front of it. We’re not going to tell you anything about the analysis that was done; we won’t make that public. We haven’t done any modelling to show the effects of this package.’ In other words, will it work? If we spend $10.4 billion, will it in fact have the effect of stimulating the economy to avoid recession? We are not given any of that information.

The government said all would be revealed in the Mid-Year Economic and Fiscal Outlook. In fact, on a number of occasions in question time the Treasurer said, ‘That information will be contained in the Mid-Year Economic and Fiscal Outlook.’ I point out that in the past the Mid-Year Economic and Fiscal Outlook has always made some technical assumptions in its forecasts on growth. As an example, I will quote from the 2007-08 Mid-Year Economic and Fiscal Outlook. This is a paragraph that appears in previous versions as well. It says:

The domestic economy forecasts are based on several technical assumptions. The exchange rate is assumed to remain around its average level of recent months … Domestic interest rates are assumed to remain unchanged at current levels. World oil prices … are assumed to move in line with market expectations … The farm sector forecasts are based on an assumption of average seasonal conditions in the future …

In other words, there are four assumptions, but exchange rates and interest rates are always assumed to remain unchanged. That has been the experience of all previous Mid-Year Economic and Fiscal Outlooks. This year, the Treasurer called a press conference on what just happened to be the day of the US presidential election, a day when perhaps the public and the media’s attention was on other matters, namely, the likely election of the first African-American as President of the United States—a most historic occasion and a political event of enormous significance. On that day the Treasurer chose to release the 2008 Mid-Year Economic and Fiscal Outlook. I take it that because this document has on the front ‘Statement by the Honourable Wayne Swan MP, Treasurer of the Commonwealth of Australia, and the Honourable Lindsay Tanner MP, Minister for Finance and Deregulation of the Commonwealth of Australia’ they are the authors of this document, they in fact wrote it and this is their work. This is the government’s document. This is not Treasury’s; this is the government’s document. When we turn to the paragraph about the forecast for the Australian economy, we find a change for the first time in the Mid-Year Economic and Fiscal Outlook. It starts off:

The domestic economy forecasts are based on several technical assumptions. The exchange rate is assumed to remain around its average level  …

et cetera. Then it says—and this is a change, this is most unusual:

Interest rates are expected to decline broadly in line with market expectations. This is a departure from the usual assumption of unchanged interest rates, reflecting the fact that markets are forecasting a significant easing in the near term, and it would be unrealistic not to take this into account.

Who decided to change the assumptions that have always been used for forecasting growth? Who decided to take the step of, instead of assuming unchanged interest rates as has always been done, taking into account market expectations on interest rates? Imagine if, in 2007, Treasurer Costello had taken into account market expectations of an interest rate rise during the election and an interest rate rise earlier this year when the Treasurer was egging on the Reserve Bank to put up interest rates to fight public enemy No. 1—inflation.

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