Tony Zappia (Makin, Australian Labor Party) Share this | Link to this | Hansard source

My question is to the Prime Minister. Will the Prime Minister update the House on the latest developments in global financial markets and the consequences for Australia?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

I thank the honourable member for his question. The parliament would be aware that financial markets in the United States and around the world are going through a period of great turbulence and severe uncertainty. This instability began last August, when we saw the collapse of the subprime mortgage market. The losses as a result of the subprime market now are estimated to be in excess of some $140 billion, and it is expected that the final losses will be substantially higher. As a consequence, financial institutions have become more reluctant to lend money to one another, and this in turn has led to a general tightening of credit markets. Credit has become less available and, as a result, credit has become more expensive.

The United States Federal Reserve has taken action in two areas to deal with the challenges currently confronting their own financial markets. Firstly, it is making more liquidity available to a wider range of financial institutions. Over the weekend, the Fed provided capital through an intermediary to Bear Stearns, a major US financial institution exposed to significant subprime related losses. Secondly, the Fed is reducing interest rates. This morning the Fed cut the discount rate on the funds it lends directly to financial institutions from 3.5 per cent to 3.25 per cent. In the six months since September last year, the Fed’s key interest rate has been reduced from 5.25 per cent to three per cent. This tightening of liquidity in financial markets has had a significant impact on US equity markets as well, causing steep falls in share prices—and not just in the United States. Now we see an impact on the real economy in the United States; more than 85,000 jobs have been lost since the beginning of the year.

Working families in Australia—and the Australian economy more generally—are not immune to developments in global financial markets. Turbulence in global financial markets is putting upward pressure on interest rates through rising credit spreads, at a time when Australian interest rates are already rising as a consequence of domestic inflationary conditions in our domestic economy. This is a double whammy when it comes to the impact on working families dealing with their mortgages. The government will take hard decisions to help Australia achieve long-term low inflationary growth, and that means taking the measures necessary to boost productivity growth on the one hand while on the other hand taking some of the pressure off inflation by ensuring that public demand is kept under control.

Of course, there are some voices in the Australian parliament and in the public debate now who do not believe that inflation is a problem. The member for Higgins contributed last year, saying that inflation was just about right in terms of the level it had reached then. We have had the member for Wentworth describing inflation as something of a fairytale. But the bottom line is this: we have to deal with inflation because higher rates of inflation, fuelled by higher rates of government spending—which we saw in times past—in turn push interest rates up. When the Liberal Party was in government, on the question of expenditure, on the question therefore of contributing to inflationary pressures, it directly contributed to overall upward pressure on interest rates, and the people paying that price today are working families. Of course, on the question of overall inflation and the causes of it, the Reserve Bank of Australia Governor, Glenn Stevens, said last week:

... aggregate demand in the Australian economy rose strongly through 2007 … at a pace well above the economy’s likely growth of potential supply.

On the supply side, our response, as the Leader of the Opposition would be aware, is to act on skills and infrastructure. On the demand side, what we are dealing with—through the finance minister, the Treasurer and others—is a record of profligate government spending which we inherited from our predecessors. If those opposite do not believe that, read carefully the biography on the former Prime Minister and the record it contains of the member for Higgins’s views about the profligate spending habits of the former Prime Minister—not out of our mouths but out of the Liberals’ own mouths.

These things require a concrete course of action, pursuing prudent fiscal policy to moderate demand, and that is the sort of budget we will be delivering when we get to May. This is our response—a five-point attack to deal with inflation, the core of which is to make sure that we restrain overall demand by producing a conservative budget outcome.

Global financial markets are in a state of turmoil. As a consequence, Australia cannot be made immune from the wash-over effect of those financial markets. We, through the government, through the Treasury, are maintaining close contact with the regulators of Australia’s financial institutions. But, when it comes to the impact of fiscal policy on the overall economic wellbeing of this country, we will be pursuing a rigorous, robust and conservative approach to the management of this country’s public finances when it comes to the upcoming budget, unlike the government which preceded us.

Kevin Andrews (Menzies, Liberal Party) Share this | Link to this | Hansard source

Mr Speaker, I ask the Prime Minister to table the document he read word for word.

Harry Jenkins (Speaker) Share this | Link to this | Hansard source

Was the Prime Minister reading from a document?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

Yes.

Harry Jenkins (Speaker) Share this | Link to this | Hansard source

Was the document confidential?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

Yes.