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The global outlook, fiscal policy, and two versions of the future: address to the 2012 Economic and Social Outlook Conference, Melbourne



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THE HON WAYNE SWAN MP Deputy Prime Minister Treasurer 2012 Economic and Social Outlook Conference

Melbourne 1 November 2012

The Global Outlook, Fiscal Policy, and Two Versions of The Future

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Thanks for the introduction Paul and to all of you for the warm welcome - I’m delighted to

be here again. I’ve been here in opposition and in government, and I’ve talked about

workforce participation, tax reform, federalism - and last year about the role of government

in a changing society. Tonight I want to talk to you about the global outlook, what it means

for fiscal policy and what that means in terms of the two competing versions of the future.

The timing for this conversation we’re having could not be better. We’ve just put out the

mid-year budget update and the Asian Century White Paper, and we’ve a G20 meeting and a

presidential election in the next few days. Now, I think everybody here would understand that

by the end of this decade, Asia is set to overtake the economic output of Europe and North

America combined to become the world’s largest economic power. And that average GDP

per person in Asia is set to almost double by 2025 - a feat that took the United Kingdom over

50 years to achieve during the Industrial Revolution.

So with this vast opportunity before us I was particularly pleased with how well-understood

the main thrust of the White Paper was and how much consensus we were able to achieve

around a couple of key points: That lifting our productivity growth at home is vital for our

prosperity in this century, irrespective of how the economic contours of Asia evolve. That

education is fundamental to unlocking these gains, but it serves more than one purpose - it

builds our capabilities at large, but also opens minds to the possibilities of our region. That

the responsibility rests on all of us, to each do our bit to grasp opportunities across all sectors

of our economy and all parts of our community. And that good fiscal policy forms the

foundation of what we are doing, with Australia’s public finances among the strongest in the

world. It’s also good timing because tomorrow morning I fly out for my 21st meeting with my

G20 colleagues, this time in Mexico City. Attending the IMF and World Bank annual

meetings in Tokyo recently gave me a good sense of how my international counterparts are

viewing the world and the Mexico meetings will be another timely opportunity. There

remains a deep sense of uncertainty.

My colleagues are particularly alert to the risk of policy inaction in Europe and the US

putting even more pressure on an already rickety global recovery. But as the finance

ministers responsible for almost 90 per cent of the world’s GDP, we at the G20 this weekend

have an obligation to focus not just on the risks, but on improving the central case scenario.

In Mexico I’ll be imploring my colleagues to support jobs and growth in the near term while

ensuring their medium-term budgets are put on a more sustainable footing. One observation

I’ve made over five years now at these meetings, is that this message carries more weight

because of the success we’ve had here at home. If vulnerable economies get this wrong the

consequences would be devastating. Because even when we get past the short-term hurdles -

and Europe has certainly made some good progress recently thanks to Mario Draghi and

others - we haven’t yet set a pathway to a credible, sustainable global recovery. I, for one,

don’t think a global growth rate with a three in front of it is going to cut the mustard, and I

know my colleagues don’t either. That kind of growth is not enough to make inroads into

reducing the stubbornly high rates of unemployment in much of the developed world, and so

is not a sustainable path for our future.

Beyond jobs and growth my focus at this G20 meeting will be on credible medium to long-term fiscal plans - plans that set fiscal priorities in ways that improve productivity and

competitiveness, and that restore market confidence. That brings us to the United States - a

country buffeted by the worst of the GFC and now the worst of mother nature. We’re not

strangers to these kinds of challenges and so our thoughts go out to our friends in the US.

After the G20 in Mexico, I’ll be visiting Washington DC where the fiscal cliff looms as the

biggest threat to their economy and to a fragile global recovery. The global economic

consequences could be grave indeed if action is not taken after next week’s election to

address the looming fiscal cliff - that is, the catastrophic impact of the sudden unwinding of

tax cuts and the ending of expenditure programs. The independent Congressional Budget

Office estimates the fiscal cliff, left unattended, could see the US economy suffer a crushing

annualised contraction of 2.9 per cent in the first half of next year. The CBO also estimates

that without action to avert the fiscal cliff, the unemployment rate would shoot up to more

than 9 per cent by the end of 2013 meaning almost 2 million fewer jobs in the US than would

have otherwise existed. That’s the same number as the total number of jobs added in the US

over the past year. A reversal of job growth such as this would have enormous human and

economic costs. This would not only drive the US economy back into recession, but would

strike a savage blow to the recovery in the global economy.

I commend Christine Lagarde, for so clearly articulating the dangers to jobs, growth and the

world economy of the fiscal cliff. This sentiment will no doubt feature in our conversations

when I meet with her and with Federal Reserve Chair Ben Bernanke in Washington next

week. These conversations, along with discussions with Doug Elmendorf, Director of the US

Congressional Budget Office, will be an opportunity to get an on-the-ground sense of the US

fiscal position. The threat of a sharp downturn resulting from the fiscal cliff is immediate, but

just averting the impending crisis mustn’t become an excuse for shying away from a

sustainable longer-term fiscal strategy. Because trillion dollar deficits are not sustainable and

quantitative easing is not a long-term solution. So whoever wins the presidential election in

less than a week’s time, and whoever controls the Congress, will have choices to urgently

make, and from those choices will flow big consequences for their country and for the global

economy.

So having run through the global outlook I now want to talk about fiscal choices tonight in

the context of our own mid-year update. Because although there are some big differences in

fiscal outlooks there are nonetheless some big similarities in the nature of our debates. Many

of you would recall that a few weeks ago I described in colourful terms the risk posed to the

American fiscal position by those who were pushing the most extreme points of view. I got a

lot of support for that speech, largely from people who had also watched with great anxiety

the negotiations over the debt ceiling. But some of my dependable critics misunderstood it as

a political statement, when any economist or policy-maker following the fiscal cliff crisis

knows all too well that this is all about the economic risks. It is about avoiding the worst

fiscal choices, which don’t just damage domestic or global economies, but decimate the most

vulnerable people as well. I’ve been in this job for five years now and I’ve seen the worst

global conditions in 80 years and I’ve been proud to be associated with one of the most

successful pieces of fiscal policy in Australian history. I’ve also methodically and carefully

worked in successive Budgets and each mid-year update to repair and improve our budget

position. Meanwhile my opposition counterpart gives speeches about ending the entitlement

mentality then votes against savings or compares a $3,000 payment for second and

subsequent kids to China’s one child policy. Unfortunately there’s a great deal of hypocrisy

around - from those who are just as likely to criticise the size of the surplus or the magnitude

of our savings as they are likely to bag each individual save. Or those who bag ‘middle class

welfare’ then attack the Government for sensible steps towards making it more sustainable.

It’s not good enough to beat the drum on better targeting payments then attack the dozens of

saves that are doing exactly that. Or to simultaneously claim there are not enough savings

while in the same pages of the same paper attack the individual saves. It’s absurd to be in

favour of strict fiscal rules yet attack those measures that make them real.

We have consistently improved the long-term position of the budget by making significant

structural savings. Many people in this room have long argued for these sorts of reforms, to

ensure that our budget position can improve and strengthen over time. Unfortunately, the

appetite for structural reform in the column inches before the fact hasn’t always been

consistent with what we have seen in coverage after difficult decisions are made. The fact is

through a series of good decisions we have a budget position that many of my G20 colleagues

would love to replicate. This despite the fact that between 2007-08 and 2009-10 the tax-to-GDP ratio fell by 3.5 percentage points, the largest two-year fall in the tax-to-GDP ratio since

the end of the Korean War boom. This meant that the global financial crisis led to write

downs in tax receipts of almost $160 billion over the five years from 2008-09 to 2012-13. If

the tax-to-GDP ratio was still 23.7 per cent - that is, what we inherited in 2007-08 - we

would have a massive surplus of $24 billion in the current year. That means we’re delivering

a surplus by restraining spending. Real spending growth is estimated to average just 1.1 per

cent per year across the forward estimates. And spending won’t exceed 24 per cent of GDP

across the forward estimates, the longest such run in 30 years. All this means Australia’s

public finances remain among the strongest in the developed world. There’s been a lot of talk

this week about the slim surplus we published in the mid-year update, but a lot of it misses

the point. As important as the surplus is, it’s also the pathway you’re on that matters to

markets and the international community, as well as our ability to adhere to the rules we set

ourselves during the depths of the crisis.

Remember in Toronto in June 2010, advanced G20 economies committed to halving their

deficits by 2013 - the year ours will be eliminated? While we’re on track for surplus, the US

and the UK won’t be getting near to halving their deficits. Now, the facts about how we’ve

improved the structural position of the budget are even more remarkable than the numbers in

MYEFO. These structural saves put us in a better position to deal with any future volatility in

commodity prices and the terms of trade, like we’ve seen in recent times. And there’ll be

more to come as we make the necessary room for bold new investments in disability

insurance and schools. The story to now is an impressive one. Without some of our long-term

savings, the underlying cash balance would be around $14 billion lower in 2012-13. This

would grow over time, reaching around $51.4 billion or 2.0 per cent of GDP in a decade - a

truly massive difference. These savings also have a profound impact on Australia’s financial

position in years to come. Without these savings, net debt would not return to zero in

2020-21, instead it would be over $250 billion in that year. These are the facts and they tell

an exceptional story. To put them in perspective, net government debt in the US is expected

to reach more than $13 trillion, or over 80 per cent of GDP this year - and gross federal

government debt is expected to reach its highest level since a brief period following World

War Two.

Now, whether in Australia or in the United States, how we respond to fiscal challenges

speaks directly to our priorities and values. Where we get the savings from and who we ask to

bear the burden are the most important questions for anyone, anywhere, doing the hard yards

of budget repair. That’s why the post-election discussion in the United States will be so

important, as they try and juggle one side wanting to cut deeper into entitlements and the

other wanting to repair the revenue base. You get a really detailed sense of these negotiations

in the Bob Woodward book, for anyone who is interested and hasn’t seen it. And I’m told the

David Corn book is pretty good on this front as well. Our own approach in the mid-year

update was to continue the fiscal consolidation in a way that had the least damaging impact

on the economy and the most vulnerable. And the way we went about that stands in pretty

stark contrast to how some of the state governments have hacked away at frontline services

and jobs, in a way that hurts their economies and their communities. We’ve shown that good

fiscal policy, guided by the right values delivers both a stronger society and a stronger

economy. As we were supporting jobs we put in place the strict fiscal frameworks that have

us returning to surplus ahead of every major advanced economy. With it has come a

rebalancing in monetary and fiscal policy, which has not been widely remarked upon.

Maintaining a strong economy and sound fiscal policy has seen increased appetite to invest in

Australia. Where we were once seen as an optional investment destination, Australia is now

seen as a necessary part of any portfolio, whether it be private or public investors - and these

investment flows have propped up our sustained high dollar. This, combined with our fiscal

consolidation and contained inflation, has all meant that our economy has more room to run

lower rates than we have in the past. These are some of the economic dividends of good,

solid policy. But there are dividends for our community as well that flow from the choices we

make in response to budget constraints. This goes to how we encourage genuine social

mobility and avoid an inequality that damages not just our society but also our economy. This

is something I’ve been talking about my whole political life and I’m pleased to see it finally

getting the attention it deserves in the academic community and now right across the financial

press. I can certainly recommend Joseph Stiglitz’s latest book, The Price of Inequality - and

point you to a review I wrote of it recently. In the US, Stiglitz sees an inequality that is as

inefficient as it is unfair. The most interesting perspective he provides is on the distinction

between genuine wealth creation and wealth transfer. These wealth transfers involve the

redistribution of wealth from the bottom to the top without any benefit to the vast majority. In

fact, they destroy wealth in the process - as those at the top waste resources fighting to tilt the

rules of the game in their favour. In contrast, real wealth creation contributes to economic

growth and widespread prosperity. This is the wealth creation we seek, here and around the

world - the sort that has seen our economy grow 11 per cent since before the crisis, and go

from the 15th to the 12th largest economy.

Not all will agree with Stiglitz’s precise diagnosis, let alone his solutions. Yet he provides a

powerful framework for thinking about inequality and how it relates to the fiscal choices we

make and who bears the burden of long-overdue budget repair. This reflects a growing trend

in international economic thought. In recent weeks the International Monetary Fund and

participants in the Davos summit have all given it well-deserved attention. But most notable

of all has been the intervention of The Economist magazine, which devoted its mid-October

issue to the dangers that rising inequality posed to the global economy. As it reported, while

inequalities between countries have fallen in recent decades, inequalities within nations have

risen alarmingly. Today, “more than two-thirds of the world’s people live in countries where

income disparities have risen since 1980, often to a startling degree”. So I’m delighted that

our country is finally talking about inequality. While obviously not everyone agrees with my

views, I think most thoughtful contributors can agree that we need to avoid the damaging and

divisive inequality seen in countries like the US. The danger of this, as The Economist

recognised, lies in declining economic prosperity, because extreme inequality weakens

demand, slows growth, wastes human talent and can sow the seeds for financial crises. The

way forward, The Economist concludes, is to ensure a nation’s growth path benefits every

citizen by tackling rent seeking, better targeting welfare, creating a fairer tax system, and

investing in education. This is part of a genuine wealth creation agenda. So my critics are not

just criticising me with the class warfare tag, they are also criticising the IMF, the Davos

summiteers, Joseph Stiglitz, and the editorial standard bearers of global capitalism for doing

the same.

Let me finish by saying all governments have difficult choices to make and I’m proud of

those we’ve made here in Australia. Every treasurer when faced with a shrinking tax base and

ever-growing demands for new spending programs has to choose carefully their priorities and

the people they most want to help. And the sum total of those decisions can chart one of two

paths - towards a more equal or less equal society. I’m proud of the path we’ve chosen here

in Australia. And we all watch with great interest the choices the Americans make in the

months ahead. Thank you again and I look forward to a couple of questions.