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Address to the Institute of International Finance, Sydney
HON. J.B. HOCKEY Treasurer
AUSTRALIA’S G20 AGENDA
ADDRESS TO THE INSTITUTE OF INTERNATIONAL FINANCE 20 FEBRUARY 2014
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Thank you for your warm welcome.
In turn, let me welcome you to Sydney, my home city and I believe one of the great cities of the world.
This is the first time the Institute of International Finance has held an event in Australia, so let me say what a pleasure it is to have you here in the year of Australia’s presidency of the G20.
As you know, in two days’ time I will be chairing the first G20 Finance Ministers and Central Bank Governors meeting under Australia’s presidency.
Whilst the G20, which represents 85% of the world’s economy, will necessarily deal with the immediate issues confronting our nations such as the impact of tapering on capital flows, it has a formal agenda focussed on further stimulating economic growth and jobs.
It is therefore important to also remember that many informal discussions will augment the set agenda.
We are all seeking to achieve ambitious and meaningful outcomes over the weekend. That means we have a lot to get through.
So today, I would like to give you a sense of the key issues on which we will focus and the outcomes I want to achieve.
The G20 will address the key challenges facing the global economy in both the short term and over the longer horizon.
Key priorities are, as I said, to lift economic growth and create jobs while returning government budgets to a more sustainable footing.
We will be looking for ways the G20 can improve macroeconomic coordination to address these challenges.
We will be examining the recent bout of heightened financial market volatility, its causes and consequences, and what the G20 member counties can do about it.
We will also be setting out the G20’s work plans for financial regulation, tax reform and IMF reform - the three structural steps necessary to help make the global economy more resilient.
Ladies and Gentlemen, the global economy cannot afford complacency. We do not have time for reform fatigue.
But rather than touch on every item on our agenda, today I would like to focus on three broad themes:
1. Macroeconomic coordination;
2. Financial regulation; and
3. The tax agenda.
I will close by highlighting the important role that stakeholders like you can play in ensuring that the right issues are addressed and that solutions are practical and beneficial in the real world.
1. Macroeconomic Coordination
Let me start with macroeconomic coordination.
This will be the first meeting of G20 Finance Ministers and Central Bank Governors since October 2013. For some this may not seem like a long time but, as those of you in this room are well aware, in the global economy a lot can change in four months.
Since we last met in Washington, we have seen some signs that the global economy is recovering.
Growth in advanced economies, particularly the United States and Japan, looks to be picking up, with the Euro area resuming growth again.
Emerging market economies as a group are expected to continue to make strong contributions to global growth despite the recent episode of market volatility that some have experienced.
But we are not out of the woods yet. The global economic recovery is not yet sufficiently strong or broadly based to create enough jobs and to continue to lift people out of poverty. Key downside risks remain.
And again we find that we need to manage periods of increased volatility in financial markets and in capital flows.
A key question to be addressed is how episodes of financial market volatility are affecting emerging market economies. Some are experiencing exchange rate pressures, high inflation and capital outflows.
We must work together to understand how the destabilising effects can be managed to preserve economic growth and the integrity of financial systems.
What this means for the G20 is that we must continue to cooperate and improve our macroeconomic coordination.
Having said that, it is not always clear what macroeconomic coordination means, let alone how it can be improved.
At the moment, macroeconomic coordination is being talked about in the context of the US Federal Reserves’ gradual tapering of its asset purchase program. The Fed’s actions have economic implications both domestically, within the United States, and internationally. At issue is how the Fed should take into account the international implications of its actions.
There is no doubt that the Fed needs to be aware of these international implications in detail, and be mindful of them. But ultimately, the Fed has to operate in a manner that is consistent with its domestic mandate.
Within this mandate, it will clearly take into account international feedback effects on the US economy.
However, macroeconomic coordination involves something more than that.
From my perspective, macroeconomic coordination within the G20 is about three things.
Firstly, it’s about better sharing of information between nations and improved communication channels across jurisdictions.
Secondly, it is incumbent on us to use the full range of policy tools to achieve our shared objectives based on an agreed level of ambition for the global economy.
Finally, macroeconomic coordination means we must be ready to respond collectively at times of crisis.
So how does this translate to our current circumstances?
How might the G20 answer calls for greater macroeconomic coordination?
Current volatility appears to be driven by a combination of changes in global monetary policy settings and expectations, structural weaknesses in some countries, and fluctuations in the risk appetite of financial markets.
In my view, macroeconomic coordination starts with discussions that help to unpack these factors and, based on evidence, better understand what is causing particular outcomes.
Sharing information so that we can understand each others’ policies and the full extent of the linkages between these policies and outcomes is the first step in achieving better coordination.
And this is exactly what G20 ministers and governors will be doing.
Indeed, if we did not have a G20 we would need to invent something very much like it. This forum brings all the key economic decision makers in the world together at regular intervals. Together we have influence over all the key policy tools available to generate growth.
The meeting this weekend is an opportunity for in-depth engagement that can only improve economic policy making.
The gradual normalisation of monetary policies as growth recovers in advanced economies is a positive development and a sign of growing confidence in the outlook.
Some of the accompanying volatility is being driven by financial market uncertainty.
The G20 has often emphasised central bank communication as a key determinant of the market’s ability to anticipate monetary policy decisions and the future path of interest rates. Clear communication is itself a vital tool for increasing the efficacy and reliability of monetary policy.
But it’s not just central banks’ communication that is important.
Markets also want other policy certainty from governments. They seek assurances that their operating environment will not drastically change in unreasonable timeframes.
We must at all times fully explain our actions to each other and to the public, because clear communication, along with information sharing, is the very essence of macroeconomic coordination.
The second element of macroeconomic coordination is, in my view, the most important one. That is where, having understood the challenges facing all of us, we come together to set shared goals and to use the full range of policy tools to achieve them.
That was what the Framework for Strong, Sustainable and Balanced Growth developed in Pittsburgh in late 2009 was all about.
In the aftermath of the global financial crisis, the G20 recognised that the recovery was too slow and many downside risks remained. The Framework was the G20’s solution to improving its macroeconomic coordination.
Unfortunately, despite the G20’s initial intention to do so, it did not go down to the next layer of detail and set clear, practical goals. Further, the Mutual Assessment Process set up by the G20 did not provide enough top-down guidance to make sure our individual and collective actions were sufficiently well coordinated to maximise the impact on the global economy.
So, in St Petersburg late last year, Leaders agreed that strengthening growth and creating jobs was their top priority. And to achieve this, they asked Finance Ministers and Central Bank Governors to develop comprehensive growth strategies for presentation to the Brisbane Summit.
We will take this tasking from our Leaders very seriously.
In 2014, each member will develop and present a comprehensive strategy to strengthen economic growth and create jobs.
We will focus on policies to improve investment, trade and employment.
Analysis by international organisations such as the IMF, World Bank and the OECD suggest that actions in these areas, along with policies to improve private sector competition, offer a big gain for the global economy.
Our growth strategies will include measures in these areas to address existing vulnerabilities and support near-term growth by increasing demand, particularly investment. Fundamentally, we need to put in place policies to foster private sector growth.
This is directly relevant to the issues surrounding tapering and emerging market volatility. The more we can do to generate other sources of demand, the faster central banks will be able to exit from easy monetary policy. This will be beneficial in the medium term for financial stability.
Our growth strategies will have new structural reform commitments to boost longer-term growth potential. And they will be presented within a narrative that explains the context of these actions.
I would like to see the G20 lift its sights further and indicate in clear terms what it wants to achieve. I think there would be value in setting out in concrete and measurable terms the objectives we are aiming for. We shouldn’t talk in generalities about growth but should communicate our intentions to lift growth.
We will then need to deliver.
Our growth strategies are being developed by looking at global gaps and deficiencies in the reform agenda and we will need to respond to these gaps.
Ministers and Governors will have an analysis presented to us this weekend which will give us a good sense of the value that is on the table from ambitious but realistic reforms. We will then need to rise to the challenge of producing a policy package that can ‘shift the dial’ on growth.
The growth strategies will be part of the Brisbane Action Plan, and will demonstrate how members are working together to lift global economic growth and create jobs.
We all know that the path of economic recovery and growth is not always smooth. That is why, as political leaders, we must frame the economic challenge in terms that the community understands and ultimately accepts.
The third element of macroeconomic coordination is about ensuring that we are ready to collectively assist economies facing excessive volatility by having appropriate global financial safety nets in place. And the time to make sure they are in good shape is when we are not in crisis.
One way we can do this is to ensure that we collectively develop and adhere to a clear framework around the use of measured and temporary tools by countries facing excessive volatility. This includes the potential use of foreign reserves, macro prudential policies and capital flow management tools.
But at the same time, we do not want to risk entering into a world of beggar-thy-neighbour policy action, for that would be in the interests of no one - including, ultimately, the countries putting such measures in place.
We also need to make sure that we make the most of existing regional financial and bilateral arrangements.
Most importantly, the International Monetary Fund has a role to play as a credible, effective and legitimate lender of last resort.
This is one of many reasons why completing the IMF governance and quota reform is so important - and why I, as chair of the G20 Finance process, will be devoting considerable effort to trying to move this forward.
In the upcoming discussion, I welcome discussions about whether there are other ways that macroeconomic coordination can be strengthened.
But it is crucial that we identify practical and feasible actions to do so rather than talk in generalities.
In this way we can advance the cause of policy coordination this year, to the benefit of our citizens.
2. Financial Regulation
I would like to now turn to the issue of financial regulation.
The most acute phase of the global financial crisis has now passed.
Significant reform progress has been made.
2014 is the right time to begin transitioning the financial regulation agenda from one of ‘crisis response’ towards, ultimately, a more stable and predictable framework.
It is the right time for the objective of the G20 to be the promotion of greater certainty in the regulatory environment so that it can foster confidence and growth. The focus shouldn’t be about constantly adding to the regulation agenda. More regulation should be cast aside in favour of better regulation.
Given this, Australia will focus its efforts on delivering on the G20 commitments in four core reform areas:
1) building resilient financial institutions;
2) ending ‘too big to fail’;
3) addressing shadow banking risks; and
4) making derivatives markets more transparent and robust.
To build resilient financial institutions we must achieve progress in the implementation of the Basel III standards by the time of the Brisbane Summit in November.
Moreover, ending ‘too big to fail’ negotiations involves implementing strengthened crisis management powers, including cross-border regulatory cooperation. This will also require testing of recovery/resolution plans, and addressing implementation delays and risks for additional policy measures.
G20 Leaders have asked us to develop proposals to increase the loss absorbing capacity of big international banks when they fail, using “bail-inable” debt. We will carefully assess the implications of these proposals.
In the area of shadow banking the challenge is to monitor the implementation of agreed policy toolkits to combat contagion risks, because volatility and failures in the non-regulated shadow banking sector can easily spill into the formal banking sector. Work will also continue to develop information sharing processes to improve the oversight of shadow banking.
Finally in relation to ‘over the counter’ derivatives, we need to address gaps, conflicts and inconsistencies in how jurisdictions have implemented regulatory reforms. In this regard, we welcome the recent announcement of progress between US and European regulators towards harmonising the regulatory framework. These efforts provide certainty to business.
At the upcoming G20 Finance Ministers’ meeting, we will be seeking a commitment from countries to progress these core reforms in a way that promotes an efficient flow of global capital, reduces harmful fragmentation and minimises costs for business.
We will also be seeking a commitment to enhance cooperation across jurisdictions when it comes to implementing agreed G20 regulatory reforms. This has been particularly relevant with the implementation of the OTC derivatives reforms.
We want G20 countries to agree to recognise and accept each other’s regulatory regimes where they achieve equivalent outcomes, noting that countries should be given the appropriate flexibility in how obligations are met.
Outside these four core reforms, we expect that other work previously endorsed by the G20 will continue to be progressed by the Financial Stability Board, standard setting bodies and other international organisations.
But for this year our focus will be on delivering measurable progress on the four core reforms.
3. The Tax Agenda
I will now turn to the agenda on tax.
Businesses are adopting new ways of doing business. That is due in part to the increasing integration of financial systems and economies around the world, as well as to the phenomenal growth of the internet and other technologies.
The international tax framework has not kept pace with these changes. Our tax systems were built for a world where business was predominantly confined to national borders. This is not the reality of the twenty-first century.
As a consequence, we have seen the erosion of domestic tax bases resulting from international tax planning that takes advantage of the gaps in our current taxation systems.
And citizens expect a comprehensive response from the G20 on this, given the inefficiencies and unfairness apparent in the current system.
The problems are perceived to be particularly acute for digitised on-line businesses although the issues are broader than that.
The strains are evident, and there is world-wide dissatisfaction with tax outcomes.
There is common agreement that now is the time to finally bring our tax systems into the twenty-first century.
We need to make sure there are no gaps between our tax systems and we need to make sure we exchange tax information as a matter of course. Solutions must be global.
The G20 will work this year towards these changes to make sure our tax systems keep pace with the changing ways people do business.
A starting point will be discussion of a new standard that will enhance transparency through the automatic exchange of tax information.
This will help tax administrators know who is complying with the law and who is not.
We also need to develop reforms for our tax systems that do not unduly burden taxpayers. Finance Ministers will discuss the need to consult with businesses to ensure they are not over-burdened by requirements for information.
Finally this month, Finance Ministers will discuss our engagement with, and support for, developing countries. After all, our solution to these international tax challenges must be a truly global one.
This is an ambitious and challenging agenda on tax.
But, as you know, meaningful reform is never easy.
As Australia and most other countries know from past experience, successful reform requires strong leadership and a clear understanding of the mutual benefits.
But it also requires understanding of each stakeholder’s position, and negotiated compromise so that all sides are satisfied with the outcomes. Reforming our tax systems will be no different.
Now, I would like to round out the discussion with some words on engagement with stakeholders.
The five formal Engagement Groups of the G20, the Business 20, Think 20, Civil Society 20, Labour 20 and Youth 20, provide an important platform for representatives from non-government sectors to engage with G20 leaders on G20 policy.
Engagement and consultation make it possible for us to increase our understanding of policy areas as they affect our key stakeholders.
They help us see how these areas fit within the wider G20 agenda.
They provide more informed advice to government.
And they improve our implementation outcomes.
Effective consultation with stakeholders will help us minimise negative policy spillovers.
To be effective, engagement must be meaningful, timely and issues-based, it must be relevant and focussed on tangible results, and it must be dynamic, flexible and pro-active.
The Finance Ministers and Central Bank Governors meetings in 2014 will take a thematic approach that will help us to more comprehensively engage on particular issues and work streams.
Ensuring that the appropriate groups engage at critical points in the process will be crucial.
As I said at the outset, we have a weighty agenda but the global economy is dynamic and we must respond appropriately.
There is no finishing line when it comes to economic reform. It is an Olympic relay race with an unlimited number of runners.
We have to improve our macroeconomic coordination and put in place a robust work program to achieve tangible outcomes in areas such as financial regulation and tax.
But we have put a lot of effort into preparing for this forum and there will be some key innovations in how we work together.
We are designing sessions to improve the engagement between Ministers and Central Bank Governors. There will be member-led discussions, with International Organisations providing important analytical support.
We want to maximise interaction on the critical policy issues of the day, rather than have set pieces. And we want to focus on not just identifying desirable reform, but how to break through the political barriers to achieving change.
As a result I expect frank and robust discussions about how to achieve real outcomes. This will not be just talk - it will be focussed on actions.
There is a lot to do. It will be to the benefit of all of us that we get the job done.