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Treasury head warns of second shock -

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Treasury head warns of second shock

Lyndal Curtis reported this story on Monday, August 17, 2009 12:10:00

ELEANOR HALL: We begin today with a warning from Australia's treasury secretary. Dr Ken Henry says
that despite the signs of recovery in the global economy, we should be prepared for a second
financial shockwave.

Dr Henry says he is optimistic about the Australian, saying it's resilient and better placed than
most of the rest of the world. But he says it is too early to call the end of the global crisis.

Chief political correspondent, Lyndal Curtis, reports.

LYNDAL CURTIS: Ken Henry has told a forum run by the Australian Industry Group the economy appears
to be behaving better than people thought it would earlier this year. The Opposition leader,
Malcolm Turnbull, appearing before him at the same forum thinks he knows why.

MALCOLM TURNBULL: First the strength of Australia's financial system which has weathered the storm
better than almost any of its peers. Of course, this is largely a legacy of the robust supervisory
framework left by the Coalition government.

Secondly, the strength of Australia's public finances. Let's remember that this largely reflects
Australia's superior starting point from 2007.

LYNDAL CURTIS: But Dr Henry believes it's too early to rush to judgement saying no one fully
understands the reasons behind the better performance, but he's had a little swipe at those who
don't give credit to the Government's actions.

KEN HENRY: And some of those who have been talking about the prospect of this slowdown being
shallower than anticipated tend to lose sight of the probability that that could have something to
do with the policy response.

LYNDAL CURTIS: He says the treasury is looking at why things are improving faster than expected.

KEN HENRY: We are spending this present period analysing in some depth the reasons for the somewhat
better performance.

LYNDAL CURTIS: The two men also have differences of opinions on the bank deposit and wholesale
funding guarantees offered by the Federal Government. Mr Turnbull says it's the only difference the
Government has made to the financial system left by the Coalition and he is not a fan.

MALCOLM TURNBULL: The only material way in which the Rudd Government has altered this has been
through what has turned out to be an inept meddling with bank deposit guarantees.

LYNDAL CURTIS: But Dr Henry says the exceptional measure has worked.

KEN HENRY: They are reassured Australian depositors and they have assisted Australian
deposit-taking institutions to continue to access funding in domestic and international credit
markets.

LYNDAL CURTIS: While he's talking optimistically about Australia's economy, there's a heavy note of
caution.

KEN HENRY: It is possible that there will be a second shockwave. I have no reason to believe it
will be anything like the first shockwave in size and intensity. It won't. But there could be a
second shockwave to hit us. I think we should be a little cautious to rush to declare victory just
yet.

LYNDAL CURTIS: He says while many believe a rebalancing in world capital which would see more go to
developing economies and capital become more expensive for the industrialised countries, will mean
slower growth for advanced economies, he's not sure that that equation will apply to Australia.

KEN HENRY: It seems quite likely, to me at least, that the Australian economy might attract an even
greater share of global capital flows and quite possibly even a larger capital flows in aggregate.

The Australian economy will be seen as possessing the best of the qualities of governance and
flexibility of the developed world while also offering an abundance of real investment
opportunities usually found only in the developing world. That is to say the Australian economy may
well be seen as offering the best of both worlds.

LYNDAL CURTIS: Both Dr Henry and Mr Turnbull believe the task of economic reform is far from over.
Mr Turnbull wants to see further tax and regulation reform - areas Dr Henry is already working on.

Dr Henry is heading a root and branch tax review due out at the end of this year. He says it's a
once in a generation opportunity to look at the tax system in a fundamental way, and says some of
the recommendations will be very long term indeed - going out over 10 to 20 years and covering
technology not yet in existence.

KEN HENRY: Our report will probably, well actually certainly, contain recommendations which could
not possibly be implemented in a very short or even medium timeframe. Some of them no doubt will be
politically contentious and that is OK. It's fine. Some things should be politically contentious.

LYNDAL CURTIS: He has knocked on the head one very politically contentious proposal that was
claimed to be in the review - a capital gains tax on homes worth over $2 million.

KEN HENRY: There is a lot of stuff that is appearing in the newspapers at the moment and I firmly
predict between now and when the final report comes out, there will be a lot more of it. That is,
simply has no basis in fact whatsoever. I don't know where these stories come from but it was pure
fiction.

LYNDAL CURTIS: He believes the federal, state and territory governments are going full steam ahead
on microeconomic reform.

KEN HENRY: I've never seen such a wave of economic reform on the table. Now whether it is all
delivered, um, who can say?

LYNDAL CURTIS: Part of the answer to that question lies in the capacity of the public services -
state and federal - to deliver and Dr Henry has questions about that as well.

KEN HENRY: I wouldn't want to pretend to you that there is no issue there. There is an issue there
and it is an issue which governments, I know they are thinking about and they need to give
attention to.

LYNDAL CURTIS: Just one more thing to reform.

ELEANOR HALL: Lyndal Curtis in Canberra with that report.