Belinda Neal (Robertson, 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 state of the global economy and the government’s response?

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

Members will be aware that US monetary authorities have recently been acting in relation to the challenges which now present themselves on global and US financial markets. This presents real challenges for US monetary authorities and for monetary authorities around the world as financial institutions are encountering various ranges of liquidity shortfalls. In the last week, the US Federal Reserve has taken a series of important actions to reassure financial markets. First, over the weekend the Fed approved a $30 billion loan to assist JP Morgan to help finance the acquisition of Bear Stearns; second, it has expanded its role as an emergency lender to include investment banks as well as commercial banks; and, third, it has cut the discount rate—the rate at which banks borrow money from the Fed—to 3.25 per cent from 3.5 per cent. In the six months since September last year, the Federal Reserve’s key interest rate has been reduced from 5.25 per cent to three per cent, and today the Federal Open Market Committee will meet in Washington to consider further monetary policy adjustments.

The Australian government welcome the Fed’s efforts to stabilise markets and, through our own monetary authorities and other authorities, we are closely monitoring the situation as it unfolds. Australia must, as a consequence of developments in the global economy, continue to pursue a prudent economic strategy in the face of these challenges abroad but also in the face of the domestic economic challenges we face at home. That includes, of course, the inflation challenge.

The Reserve Bank has repeatedly warned that Australia faces inflationary challenges. Inflation is elevated because Australia’s productive capacity has not kept pace with growing demand. The lessons for all of us on these questions are very clear. First, it is impossible for any responsible government dealing with responsible economic management to ignore the inflation challenge. You need to deal with the inflation challenge. Second, it is impossible for any responsible government dealing with the challenges which now present themselves across the economy to continue to support policies of profligate spending, contributing to unsustainable growth in demand. Third, it is not responsible, particularly given the last 20 sets of warnings which emerged from the Reserve Bank, not to invest on the supply side of the economy in skills and infrastructure. These are the lessons which we take to heart, and they underpin the approach we take in the overall management of the economy.

On the question of dealing with the inflation challenge that we are presented with, it is important that the House be seized of the fact that, when this government took over, inflation was running at a 16-year high. As a consequence of that, and the inattention to it by those who preceded us, we have the second highest interest rates in the advanced world. So the challenge that we face in framing the upcoming budget is to make sure that we are attending to these emerging pressures across the global economy—which are real, significant and substantial and should not occasion laughter on the part of those opposite—and that we are dealing simultaneously with the challenges of domestic inflation.

High inflation, if left unaddressed, is an enemy of working families because of the roll-through effect of interest rates on disposable family income, not the least of which is people’s ability to pay their mortgages. That is why, in our overall approach to the economy, acting on inflation remains key. That is why, from January this year, within six weeks of taking office, we embraced a five-point strategy for dealing with the threat of inflation, hinging on, firstly, what we do by way of producing a responsible budget which maintains a responsible surplus, given the circumstances that we now face; secondly, dealing with the challenge of boosting private savings; thirdly, dealing with the challenge of skills; fourthly, infrastructure; and, fifthly, enhancing productivity and dealing with the challenges of workforce participation. What now unfolds in the global economy is of real moment to the nation and every working family in the nation. I would strongly recommend to all members of the House, including those who regard this as a matter of rolling humour and interjection, that these are serious matters, requiring the serious attention of Australia’s monetary policy authorities and other economic authorities as we seek to ensure that this economy has a robust future. That means being attentive to the inflation challenge. That means pursuing a policy of prudent economic management. That means ensuring that we do not sustain the profligate levels of spending inherited from those who preceded us.