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Tuesday, 10 February 2009
Page: 672

Senator XENOPHON (6:50 PM) —I rise to support this second reading of this package of the Appropriation (Nation Building and Jobs) Bill (No. 1) 2008-2009 and related bills, but reserve my position in relation to the third reading. We are living in extraordinary times both globally and locally. Already nearly half the nations of the world are in recession, with seven of our top 10 trading partners expected to be in recession by the end of 2009. The forecast for global growth next year has fallen by 3.5 per cent in the past few months. Americans are losing their jobs in unprecedented numbers and losing their homes at unprecedented levels. One of the largest buyers of Australia’s bulk export commodities, China, is seeing its economic growth slowing dramatically. Another major trading partner, India, is set to see its growth halved over the next 12 months. Japan’s economy will contract by 2.6 per cent, while the United Kingdom’s economy will decline by 2.8 per cent.

The OECD’s most recent official forecast is for unemployment to rise over the next 18 months in the OECD countries to a peak of 7.3 per cent in the second quarter of 2010. The World Bank predicts that in 2009 growth will fall below five per cent in developing countries for the first time since the downturn of the early 1990s. The World Bank also predicts that world trade will decline by 2.1 per cent during 2009, the first such fall-off since 1982. Put simply, the world economy is in uncharted, turbulent waters. While in Australia we are faring better than most other nations, we cannot afford to be complacent. Our nation faces enormous challenges.

By the 2009-10 financial year, unemployment in Australia is projected to grow to seven per cent—another 300,000 Australians whose lives will be turned upside down by the spectre of unemployment. Business investment will fall by 15.5 per cent. GDP will flatline, while gross national expenditure will fall by 0.25 per cent. Growth in exports will fall from 4.3 per cent last year to 0.25 per cent in the next financial year. The terms of trade will plunge by 20 per cent this year, cutting 9.75 per cent off corporate profits and driving business down by 15.5 per cent in the next financial year. And these Treasury based estimates are considered optimistic by many economists. The truth is we do not know how bad things are going to get. So, given these dire domestic forecasts, the question before us is how best to respond.

Some economists argue that we should let the market do what the market does and these difficulties are just a natural correction for the excesses of the last decade. I disagree. Why should we rely solely on market forces? After all, unbridled, under-regulated market forces got us into this mess in the first place. I believe governments must intervene to protect their citizens. What is needed is to seriously consider a careful, balanced and effective intervention to provide economic stimulus. This is why it was so important to have a Senate committee inquiry process into these bills. But we also have to ask the question: do you want a quick plan or do you want a plan that actually works? I supported the Senate finance and public administration and community affairs committees’ inquiries into these bills because the best decisions are evidence based; but such decisions are hard to make if there are less than 48 hours to work through six bills, as the government would have liked us to do last week.

To say the situation we face is uncertain is an understatement. I had hoped the committee process would add some degree of certainty. It has and it has not. It felt like the more questions were answered the more questions I had—questions such as, ‘How could debit cards with restrictions on cash withdrawals or poker machine use encourage a swifter and stronger cash stimulus?’ I note that there are different views on this from behavioural economists, but I am grateful for the response given by Treasury officials last night in the committee process. That referred to US studies in relation to this, as well as a new study, by Jonathan Parker from the Kellogg School of Management and Christian Broda from the University of Chicago, which tracked the spending of bonuses in the United States. That study seems to indicate that cash bonuses, depending on how they are categorised—as bonuses rather than rebates—could actually have a positive effect in the context of additional spending.

But what I am critical of is that there are simply has not been sufficient analysis here domestically by Treasury in relation to previous cash handouts, nor adequate household expenditure surveys of that type—that sort of research and those sorts of surveys—to indicate how such packages could best be targeted. We need these independent surveys to work out how cash handouts, how bonus payments, can best stimulate the economy. I think it is important that we give consideration to the views of behavioural economists as to which approach would work best.

These are just a few of the questions I raised, and the answers I received were far from conclusive. There are all sorts of jokes about economists—and I respect that profession—but some say that, if you get 100 economists in a room, you can end up with 200 answers. I think we also need to reflect on the issue of debt, which is something that has troubled me, and I think the Senate committee inquiry process has been useful. I am worried about debt and I will refer to that in more detail later.

I think it is important to make reference to Saul Eslake, the chief economist of the Australia and New Zealand Banking Group, and his submission to the committee inquiry last night, which he emphasised was in a private capacity. Mr Eslake commented on the budget deficits envisaged in the Updated Economic and Fiscal Outlook, saying that the UEFO forecasts the budget deficit will peak at 2.9 per cent of GDP in 2009-10, compared with peaks during previous recessions of 4.1 per cent in 1992-93 and 3.3 per cent in 1984-85, while the OECD’s most recent forecast is for OECD budget deficits to peak at 4.1 per cent of GDP in 2010—a forecast which does not include the stimulus that is now being proposed in the United States. Mr Eslake also made the point that ‘the UEFO forecasts that net public debt will reach 5.2 per cent of GDP’ by the end of June 2012 and said:

Again, it could easily be more than that, especially if the $200 billion borrowing limit envisaged in the legislation—

presented to the parliament—

is fully utilised.

But the UEFO projection, he continued:

… compares with a previous peak of 18.5 per cent of GDP in 1995-96 and with OECD forecasts of net government debt of 48 per cent of GDP for the OECD area as a whole, a forecast which is also likely to be an underestimate.

I think it is important to put that in perspective in the context of this current package.

I seek leave to continue my remarks later.

Leave granted; debate adjourned.

Ordered that the resumption of the debate be made an order of the day for a later hour.

Sitting suspended from 6.58 pm to 7.30 pm