Wayne Swan (Lilley, Australian Labor Party, Treasurer) Share this | Link to this | Hansard source

by leave—There have been a lot of economic numbers in the last week or so and a lot of debate and commentary about our economic circumstances. So I do think it is appropriate now to give the House and the Australian people the government’s detailed assessment of the Australian economy: where we have come from, where we are and where we are going. I do so in the knowledge that this is a challenging time for the Australian economy and the global economy. There is rightly a good deal of concern about the security of our prosperity, about global financial turbulence and about economic dislocation elsewhere. These are indeed challenging times.

Our economic circumstances require careful consideration of policy, careful weighing of the evidence, discriminating judgement and a continuous openness to new information. But I want to offer this message to the House and to Australian families: the Australian government’s assessment of the unfolding information about our economy suggests we do have reason for optimism, and if we engage and work on the challenges we face we will come through this difficult time better placed to enjoy and secure the long-term prosperity this government is committed to delivering.

Through to the beginning of this year the global economy experienced the five best years of global prosperity in recent history. This year, growth in the global economy is much slower and the global environment is much more uncertain. The global financial turbulence which began in the US subprime mortgage market over a year ago has spread throughout global financial markets. Borrowing costs have been pushed higher around the world. Global share markets have fallen by an average of about 20 per cent since the global turmoil began. Business and consumer confidence has fallen across developed economies, with the OECD’s measure of consumer confidence for member economies at its lowest point in almost 30 years. In the face of these global difficulties, the world’s largest developed economies are experiencing sharp slowdowns in output growth. The UK, Japan, Germany, France and Italy all recorded negative or zero growth in the three months to June this year. So what began as a crisis in the US subprime mortgage market is now producing a significant slowing across developed economies. Even if, as we hope, the worst of the financial turbulence is behind us, we are now dealing with the impact of higher interest rate spreads for borrowers, losses of financial capital and diminished confidence on growth and employment in major developed economies. At the same time, higher food and oil prices have driven up inflation worldwide, limiting the response of central banks to the downturn in output growth.

These are the global challenges confronting the Australian economy, and they are considerable. From the beginning, we have been upfront about them. We also face formidable domestic challenges. In November last year we took responsibility for an economy in which the Reserve Bank of Australia had already been obliged to impose 10 successive interest rate increases to combat the threat of rising inflation; an economy in which underlying inflation was already well over the top of the central bank’s target band and still increasing; an economy in which the inflation threat was sufficiently serious that the central bank was compelled to tighten rates twice more within four months of this government coming to office—in addition of course to the increases in the general level of interest rates that arose from the global financial crisis; an economy constrained not only by high interest rates but also by capacity constraints which had become tighter and tighter as a result of the negligence of our predecessors; an economy in which export volume growth had slowed to a crawl despite the highest export prices in half a century; an economy in which productivity growth had fallen to half the average rate of the previous three decades; an economy which in the fourth quarter of last year, the last quarter in which those opposite held office, had already slowed to well under the average quarterly growth of the past 16 years. These were economic circumstances to which this government had to make an immediate and decisive response.

Instead of celebrating an electoral victory, we immediately sought the best advice from the Treasury and from the Reserve Bank on what we saw to be critical threats to the continuing prosperity of the Australian people. We were determined to be upfront and honest with the Australian community about the challenges we faced, both domestically and from abroad, and the impacts they were having on our economy.

First, we identified the magnitude of the inflation challenge and dedicated ourselves to addressing it. At that time the opposition said it was a fairytale and a charade. But now inflation is over four per cent and everyone understands it is a problem. We also recognised that, while Australia was not affected as acutely by the global financial crisis as many other economies, we needed to be in continuous and close contact with our regulators, with the central bank and also with the commercial banks. We recognised that as a government we needed to put our weight behind the stabilisation of financial turbulence in Australia, while exerting ourselves to support actions to address the crisis internationally.

No issue took more of my time in the early months of office than assessing and monitoring the financial crisis and reassuring all the relevant parties that the Australian government understood the gravity of the issues and stood ready to assist where necessary. That is why, some months ago, in a ministerial statement to the House, I announced plans to increase government securities on issue as part of a prudent plan to maintain liquidity in critical government bonds and to underpin the proper functioning of the bond market.

Recognition of the inflation problem we inherited and recognition of the gravity of the global financial crisis was our priority in the early weeks of office. This was the difficult backdrop that we confronted when we sat down to prepare our first budget. In designing our budget strategy we recognised that inflation would likely continue at an unacceptably high rate for some time to come. And we recognised that the global financial crisis and tighter credit conditions would continue to affect the growth of developed economies as well as our own.

But we also recognised there were big differences between Australia’s circumstances and those of other developed economies. We recognised that Australia’s financial sector is strong and did not face the same problems being experienced in the US housing and subprime mortgage markets. We recognised that the prices for many of our export commodities had risen to levels not seen in a generation and, in some cases, were still rising. This meant nominal export income would be rising rapidly and this would mitigate some of the contractionary impact of higher interest rates and tighter lending standards. We knew that in these circumstances we had to get the balance right between bearing down on inflation, providing a buffer against global uncertainty and providing the means to finance vital investments in nation building for the future. All these considerations suggested to us that it was imperative that we abruptly change Australia’s fiscal direction, move away from the reckless spending of our predecessors in their last desperate years of office and change to a consistent and disciplined stance that would help rather than hinder the efforts of the Reserve Bank to bear down on inflation. At the same time we judged that the household sector was under considerable strain, which is why we were determined not to compromise in any way on our election commitment to deliver tax cuts.

Finally, we recognised that, with the Australian economy running close to full capacity after years of neglect of the physical infrastructure of our economy, education and training and health, we needed to begin planning a nation-building program that would put Australian prosperity on a more secure basis. We needed to plan that modernisation and we needed to begin to set aside the resources that would allow us to execute those plans.

That was the budget strategy we put in place five months ago and those were the circumstances it was designed to address. It was a budget that struck the right balance between relief for families and long-term investment, a budget right for the times and geared for the challenges of the future. We anticipated in our budget what is now occurring, we were prepared for the challenges now unfolding and we got it right.

The opposition told us we should have cut harder, despite having said before the budget that there was no need to make spending cuts. Others also told us we should have cut harder in the budget. But the Prime Minister and I had been taking careful soundings on the international climate and thought it wiser to strike a more careful balance. I think, today, people are very glad that we did. People told us the tax cuts would ruin the economy and we should cancel, cut or divert them. We insisted we could deliver them responsibly by making cuts elsewhere and we did. And I think, today, people are glad that we chose that path.

Whether you look at the inflation problem or the turbulence in global financial markets, this has been a government working hard to stay ahead of the game and make the right decisions, popular or not, in the national interest. This brings me to the core of my assessment today. How is the economy evolving, particularly in the light of our budget strategy and forecasts and in the light of the June national accounts received yesterday? In the last week or so we have seen new numbers on business investment, exports, imports and the current account and now we have the national accounts for the June quarter. We have also seen the Reserve Bank cut the official interest rate by one quarter of a percentage point which, I am glad to say, was promptly passed on to variable rate home loans by the major commercial banks.

We are in a position to outline a detailed assessment of the circumstances of the Australian economy. The first point I would make is that domestic demand growth has certainly slowed, much as expected in the budget forecasts. In the June quarter, domestic demand increased by 0.9 per cent. This is quite vigorous but slower than in the previous two quarters. As we expected at budget time, the biggest contribution to the slowdown in domestic demand growth came from household consumption.

The cumulative impact of rising interest rates, which had increased by 200 basis points since March 2005, combined with unofficial rate rises by the commercial banks, has clearly taken its toll on household budgets. On top of this, the global oil price shock saw average petrol prices rise by 25c a litre in the space of three months. These factors were the main contributors to the 0.1 per cent fall in household consumption in the June quarter.

That fall confirms the wisdom of proceeding with the tax cuts, which of course kicked in during the current quarter rather than the June quarter and will provide support to household budgets, as will this week’s much welcomed interest rate cut. We on this side of the House were certainly heartened to see that the Reserve Bank was sufficiently confident of the direction of inflation to be able to lower interest rates—for the first time in seven years.

Turning to other elements of demand, we begin to see how different the performance of this economy is from other developed economies. Business investment for example was up 4.0 per cent in the June quarter alone and contributed 0.7 percentage points to GDP growth in that quarter. This strength is most welcome. It is enlarging our capacity, helping to sustain employment and contributing to future productivity and growth.

Creating room for the continuing expansion of business investment was one of the major objectives of our May budget. Last week’s data on business investment intentions suggest that the strength we saw in the last quarter of last financial year will likely extend well into the current financial year. It demonstrates that, despite global turmoil, businesses have the confidence to invest in the economy and the confidence to plan for yet more investment into the future.

The June quarter accounts are pleasing in another respect as well, which is the expansion of export volumes. In the June quarter alone export volumes increased 2.7 per cent—the biggest quarterly increase in almost five years. We saw in the current account data earlier in the week that in the June quarter Australia achieved the first quarterly trade surplus in over six years—another very welcome development. So while we are not immune from global difficulties we do have grounds for optimism.

We acknowledged in the budget that, given the global difficulties and the impacts of successive rate rises flowing through our economy, economic growth would slow and that this would lead to a modest rise in unemployment. But, as recent events have demonstrated, Australia is well placed in comparison to other developed economies and the Rudd government is determined to secure this advantage. Because many of the global challenges we face are beyond Australia’s control, the government is focused on those things that we can control—that we can influence.

We delivered a strong surplus to bear down on inflation, to buffer against international turbulence and to give us the flexibility to respond to today’s challenges. We made room in the budget to deliver tax cuts for working families—$7 billion in tax cuts this year; half a billion each month. And we have begun the process of modernising our economy and expanding our productive capacity for the long term. We have laid the foundation of $40 billion of responsible investment in our nation-building funds and, all up, $76 billion in total infrastructure investment.

Genuine nation building means lifting the productive capacity of the economy road by road, port by port, cable by cable, university by university and trade school by trade school. It means boosting productivity, lifting our international competitiveness and investing in human capital. These are the fundamentals of a modern competitive economy, where all our efforts are directed.

Building a new platform of growth with low inflation is going to take time and disciplined effort. The business community are confidently investing in our economy’s future. The Rudd government will stand with them in this effort, helping provide the critical infrastructure and the skills they need. We are determined not to make the same mistake those opposite made. The mistake that was made by those opposite was to celebrate prosperity but do so little to sustain it.

The House would have heard me say before that Australia is not immune from global difficulties which are slowing the world economy, but we are better placed than most countries to withstand the fallout. Given your pick of developed country to be, in these circumstances, you would choose Australia, for all of the reasons I have outlined above.

But of course we are far from complacent. We are focused on delivering responsible economic management so we can have strong growth with low inflation well into the future. Our strategy, which combines a strong surplus, relief for families, and long-term investment in nation building and growth, is the best way to respond to the global challenges Australia faces.

I thank the House. I ask leave of the House to move a motion to enable the member for Wentworth to speak for 17 minutes.

Leave granted.

I move:

That so much of the standing and sessional orders be suspended as would prevent Mr Turnbull speaking for a period not exceeding 17 minutes.

Question agreed to.

Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

I thank the Treasurer for what is not so much an economic statement as a confession of incompetence. It is welcome nonetheless, although the Treasurer should recall what Mark Twain said, ‘A confession is good for the soul and bad for the reputation.’ We have seen today a new approach from the Treasurer—a first. He has spoken well of the Australian economy. He has been right to speak well of our economy. As I have been saying all year—whereas he has not—our economy is stronger than those of comparable developed economies, our financial system is more secure, our mortgage lending practices are more prudent and our rates of default are relatively low.

The Treasurer should have been shouting that from the rooftops all year, but he was not. He says that he identified the magnitude of the inflation challenge shortly after the election and he implies that the remarks that he made about inflation were made with the advice of the Reserve Bank and the Treasury. I cannot accept that either the Reserve Bank or the Treasury advised him to say ‘the inflation genie is out of the bottle’.

The Treasurer and the Prime Minister have been an economic tag team—recklessness leaning on the shoulder of irresponsibility, the Treasurer talking about an inflation genie out of the bottle and the Prime Minister talking about an inflation monster stalking the land, wreaking havoc on working families.

Debate interrupted; adjournment proposed and negatived.

At the House of Representatives Standing Committee on Economics hearing in April, the member for Aston put the Treasurer’s remarks—those disgraceful remarks about the inflation genie being out of the bottle—to the Governor of the Reserve Bank, Mr Glenn Stevens. Remember that it was on the day before the Reserve Bank met in February that the Treasurer chose to say that the inflation genie was out of the bottle. It was the day before the Reserve Bank met to consider how it should respond to inflationary pressures in Australia that the Treasurer said inflation was out of control. Mr Stevens gave his commentary on the Treasurer in April. He replied to the member for Aston with every syllable dripping with distaste for the Treasurer’s recklessness. The governor said:

I do not want to comment on colourful things that are said in public debate, but what we have said is inflation has risen and that is a problem. It has to be dealt with and we are dealing with it. We will contain it and it will come down. Is it out of control? No, I have never said that. I have tried, if you like, to make balanced comments that one cannot say that there is not a problem. There is a problem, but I do not think it is out of control. I think it will be controlled, and that is why we are doing what we are doing. So, there is a problem, a response is needed, it is being made and it will work.

That was the Governor of the Reserve Bank. Consider the measured language from the Governor of the Reserve Bank compared to what we had from the Treasurer. We have had a Treasurer all year who in pursuit of a simple political objective—to blacken the economic reputation of the Howard government—has talked up inflation and talked down our economy. And we have paid a very heavy price for it.

The Treasurer has talked today about a number of other developed countries in which economic activity is slower and which either have zero growth or are going backwards. He has pointed out that our economy is stronger than those other developed countries, and he is right to do so. He should have been doing so all year. But that begs the question: if our economy is stronger than those of other developed countries, why is it that confidence is so low? Since the election of the Rudd government, Australia has experienced the largest drop in consumer confidence in the OECD, according to the OECD’s standardised consumer confidence indicator. That indicator for Australia has dropped 13.7 per cent since November, whereas the overall indicator for the OECD has dropped by only 4.6 per cent. The drop in Australia was by far the largest in the entire OECD. As I pointed out in a question that the Prime Minister chose not to answer—he does not answer any questions in this House anymore—Australia currently has the second lowest level of consumer confidence in the OECD after Spain.

So what has made the difference? Why can an economy that is so relatively strong have a business community and consumers that are so relatively lacking in confidence?

Jim Turnour (Leichhardt, Australian Labor Party) Share this | Link to this | Hansard source

Twelve interest rate rises!

Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

It is an indictment of the spin and deception of the Rudd government. The Rudd government has misrepresented every significant economic issue that we have dealt with—

Jim Turnour (Leichhardt, Australian Labor Party) Share this | Link to this | Hansard source

Mr Turnour interjecting

Steve Irons (Swan, Liberal Party) Share this | Link to this | Hansard source

Mr Irons interjecting

Stuart Robert (Fadden, Liberal Party) Share this | Link to this | Hansard source

Mr Robert interjecting

Jim Turnour (Leichhardt, Australian Labor Party) Share this | Link to this | Hansard source

Mr Turnour interjecting

Sid Sidebottom (Braddon, Australian Labor Party) Share this | Link to this | Hansard source

I interrupt the shadow Treasurer. The exchange is ridiculous and unparliamentary. Stop it. Member for Wentworth, please continue.

Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

Thank you, Mr Deputy Speaker. We have been told that the government is proud that it is levying a lower percentage of GDP in tax revenues this current year than in the last year of the Howard government. That is true, but it is true for one reason only: the Rudd government has implemented almost all of the tax cuts proposed by the Howard government which were set out in the pre-election financial outlook. When you look at the Treasurer’s own Budget Paper No. 1, you see over the forward estimates that there is $19.7 billion of additional taxes. In other words, were it not for the policy changes of the Rudd government, tax as a percentage of GDP would be lower over the forward estimates than is set out in the Rudd government’s first budget papers. So that claim to some sort of fiscal rectitude is completely bogus. It is no wonder that when that was raised with the Prime Minister today he was unable or unwilling to answer the question.

We have been told that if the $6 billion worth of unmandated, unwarranted and unnecessary tax increases are blocked by the Senate—if the Senate does not pass them—that will cause interest rates to rise. We have been told that this $6 billion will punch a hole in the $22 billion surplus. The $22 billion surplus is for one year only and the $6 billion is over four years, so that statement too is completely false. The $1.5 billion, approximately, of Commonwealth revenues that would be reduced by reason of those tax bills not being passed by the Senate could not have any conceivable impact on inflation whatsoever other than to put a slight upward pressure on prices, because all of those taxes would increase prices—be it for cars, alcohol or gas. But $1.5 billion a year in a $1.1-plus trillion economy obviously can have no material effect on aggregate demand and, hence, no material effect on inflation—again, another economic proposition that is nonsense.

And then we have the extraordinary falsehood told to us about Fuelwatch. We are told that Fuelwatch is there to protect independent retailers, to protect competition and to bring down fuel prices. Yet we know that every expert department in this city told the government that it would put prices up. And we know from Michael Luscombe, the Chief Executive of Woolworths—a big oil retailer—that, based on his experience with Fuelwatch in Western Australia, it delivers his giant corporation its best margins. So much for the question of who is on the side of big oil. Fuelwatch is on the side of big oil.

Then we come to another great economic issue that the government made so much of, and where it has again shown its complete incompetence, its complete impotence, and that is grocery prices. For all of last year the Prime Minister was going around supermarkets feeling sorry for shoppers—sharing their pain, so he said—and then he comes up with a website called GROCERYchoice. It provides averages of the cost of shopping baskets a month ago, averaged over a very large number of stores, in some cases over gigantic geographic areas, and sets them out as ‘Coles’, ‘Woolworths’, ‘Aldi’—if Aldi is present—and then ‘independents’. Because ‘independents’ includes everything from 24-hour grocery stores, which quite reasonably charge higher prices for greater convenience, and larger stores that are competing on price with Woolworths and Coles, it makes the independents appear more expensive than they are. It defames and misrepresents the independent grocery sector. It is nothing more than an advertisement for Coles and Woolies. It is as though the government wants to look after Michael Luscombe—not just big oil, but big retailers as well. So $14 million for GROCERYchoice and no useful information other than an advertisement for Coles and Woolies.

We were told in the Treasurer’s address that capacity constraints in Australia are tighter because of the neglect by the previous government. Really? Almost all productive capacity in Australia is in the hands of the private sector. When growth is strong, capacity utilisation is high. When capacity limits are beginning to be stretched, business invests in new capacity—new premises are required, new equipment is ordered, more staff is hired. High levels of capacity utilisation are signs of a strong economy. High levels of spare capacity and low levels of capacity utilisation are signs of a weak economy. Empty factories and equipment that is not running are signs of a weak economy. When everything is working at full tilt, that is the sign of a strong economy. But high levels of capacity utilisation are not enough in themselves to promote investment. That is the ideal. As capacity is getting close to full utilisation, owners of businesses invest in more capacity. That is what we want to see, and we were seeing that under the previous government. But that requires confidence as well. So it is not just high utilisation of your capacity; you have got to have confidence and faith that better times are ahead, that the nation’s economic destiny is being steered by people who know what they are doing.

That is why this collapse in confidence in Australia has been so dangerous. Without that confidence, there will be no improvement in capacity, because there will be no confidence to invest. Confidence is at the core of everything in our economy. We talk about a global credit squeeze, a global credit crisis. It is a crisis in confidence. And the melancholy fact is that the international financial markets appear to have no more confidence in our economy than they do in those that are travelling much worse than ours. Why is that? It is because for all of this year the Treasurer and his colleague the Prime Minister—irresponsibility and recklessness together—have been talking down the economy and talking up inflation. They have done that for a political purpose and we have all paid a price.

There was a clear difference between the Treasurer and me at the beginning of this year. He was egging on the Reserve Bank to raise interest rates, saying that inflation was out of control—not the moderate language he uses today, where he says that it is a problem, with which we can all agree; not the moderate language of Glenn Stevens. When he was using that dramatic language, talking up inflation, I urged the Reserve Bank to stay its hand. I expressed the view that the global credit squeeze would be very tough on Australia, that we would get more than enough monetary tightening from the international financial markets, that the global credit squeeze would achieve all of the interest rate pressure that the Reserve Bank could want without it having to raise rates. These are all questions of judgement, and it is hard to say who was right and who was wrong. But I staked my position on the side of prudence, of caution, of looking after the Australian economy, of speaking of its strengths and seeking to protect it against a global credit crisis. The Treasurer exposed us to the credit crisis. He did nothing to speak of the strength of Australia. He did everything to make us appear worse.

He said that there have been abrupt changes in the government’s economic policy since the election. Well, there have been abrupt changes. We have had a government who have talked the economy down. We had a Treasurer who, in the lead-up to the budget, said that it would be a harsh one—cutting spending, inflicting pain. An anxious nation awaited the axe, and what did we get? We got a budget whose impact was at best neutral; in truth, slightly inflationary. They had the audacity to stand up in the House and quote from an economic report from Goldman Sachs JBWere, my old firm, but they did not even have the time to read through it, because what it said—in the faintest of faint praise—was that the best thing that could be said about the budget was that it did not make inflation any worse.

We do have a strong economy. We do have a resilient economy. We do have a prudent and well-managed financial sector. But what we do not have is leadership with vision, with courage and with the preparedness to stand up for this nation. (Time expired)