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Monday, 28 February 2011
Page: 1516

Mr CRAIG THOMSON (10:10 AM) —On behalf of the Standing Committee on Economics, I present the committee’s report entitled Review of the Reserve Bank of Australia annual report 2010 (first report), together with the minutes of proceedings.

Ordered that the report be made a parliamentary paper.

Mr CRAIG THOMSON —Over the last several years the Australian economy has, by any reasonable standards, been an outstanding performer. While many leading economies across the world continue to suffer from the effects of the global financial crisis, Australia has experienced steady growth throughout its economy as a whole, with significant gains in key sectors, such as the export orientated mining industry. The committee’s hearing confirmed the wisdom of the economic reforms that Australia has undertaken over the last generation—reforms that have provided us with a legacy of hard-won economic resilience.

The forecasts for Australian growth and stability provided by the Reserve Bank of Australia in late 2010 were positive. At the time of the hearing, Australian consumer price inflation was about 2½ per cent in underlying terms and about 2¾ per cent in headline terms and the bank forecast was for the economy to grow by 3½ per cent on an annual basis from the December quarter 2010, rising to a possible high of four per cent by the end of 2011.

This forecast, of course, preceded the cataclysmic flooding that swept across the eastern states of Australia, especially Queensland, and shall most likely be revised subject to a systematic reconsideration of the latest developments. Exactly to what extent in the longer term the flooding will impact on the forecast is unknown. The rebuilding of flood affected regions across Australia is going to be an immense national challenge. It is estimated that $5.6 billion is needed to rebuild flood affected regions across Australia. This will help communities to recover and get back on their feet. Budget spending cuts and reprioritisation will deliver two-thirds of the $5.6 billion needed to rebuild flood affected regions. The rest, as we know, will be provided by a modest one-year temporary levy.

Yet, regardless of what revised form the updated forecast ultimately takes, the November hearing offered us a valuable insight into the Australian national economy before the floods. Largely due to our favourable terms of trade—made possible by the urbanisation of China and India, with its resultant pressure on the price for minerals and fuel—Australia was rapidly closing the gap between actual and potential output. The principal drivers for economic growth were increases in private investment, robust income growth and a strong labour market. In the view of the RBA, the great challenge ahead was to raise productivity and expand the supply side of the economy. While inflation was lower than expected, the bank board expected that the prospect of further increases in the cash rate was sufficiently serious to justify their decision to raise interest rates in early November.

There was a rigorous investigation of this position by members of the committee, particularly in light of recent bank profits. The RBA continues to aim to keep inflation within the two to three per cent target range but without crushing the real economy in the process. Inflationary pressures that can be expected include the 10 per cent growth rate in China, the ebb and flow of the European economies and the fact that the US was not falling into another recession.

Other important factors that will have a bearing on a continued strong Australian economy include the fact that wages remaining steady—the pick-up in wage growth was no faster than was to be expected. The RBA governor’s view is that we should not grow the economy too quickly over an extended period; otherwise there is the potential for ‘getting into trouble’. The RBA governor made positive comments about the fiscal stimulus winding down, saying there were good signs that handing over of public spending to private spending was positive, with substantial increases in business investment. Of course, the government is doing a great deal in relation to improving competition in banking, including the banning of exit fees—which is being opposed by the opposition—boosting consumer flexibility to transfer deposits and mortgages, introducing a mandatory key fact sheet for new home loan customers and empowering the Australian Competition and Consumer Commission to launch more prosecutions in this area.

Australia continues to enjoy economic conditions that would be a welcome relief to almost all other industrialised countries. Inflation remains within the targeted range and unemployment remains relatively low in historic terms. On behalf of the committee, I would like to thank the Governor of the Reserve Bank of Australia, Mr Glenn Stevens, and other representatives of the RBA for appearing at the hearing on 26 November 2010. I would like to put on record my thanks to the secretariat for the fine work they have done in helping produce this report.