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Transcript of press conference: Parliament House, Canberra: 23 April 2009: IMF world economic outlook.

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PRESS CONFERENCE Parliament House, Canberra

23 April 2009


SUBJECTS: IMF World Economic Outlook

TREASURER: I just wanted to say a few words about the IMF report and forecast that is out overnight. I think it’s fair to say that it paints a bleak outlook for the global economy and certainly a very tough backdrop for the forthcoming Budget.

Advanced economies are expected to shrink by an unprecedented 3.8 per cent in 2009, and this is the fifth downgrade in global growth from the IMF in just over six months. I think that gives you a measure of the magnitude of this very sharp global contraction. As the IMF said itself, by any measure this downturn represents by far the deepest global recession since the Great Depression.

Some of our key trading partners have a far worse recession in 2009 than Australia. The euro area: -4.2 per cent. The UK: - 4.1 per cent. And Japan: a massive 6.2 per cent.

The IMF’s bleak assessment does present the most challenging backdrop to an Australian Budget in living memory. The deepening global recession will have severe consequences for the Budget’s forecast for growth, unemployment and revenue. It’s the worst set of global forecasts that the IMF has yet brought down because it now believes that the recession will be deeper and longer than previously forecast, and of course this has made an Australian recession inevitable.

But the IMF also confirms that we are in better shape than many other advanced economies. And this of course is in large part because of the decisive actions we’ve taken to stimulate the economy, to support jobs, and also, critically, to support our financial system.

The IMF is forecasting our own economy will contract by 1.4 per cent in 2009 before growing by 0.6 per cent in 2010.

The forecast for growth in our economy is two and a half times better than all advanced economies put together, four times better than Japan.

But clearly Australia is not immune from this global recession - its size and the swiftness that has emerged.

As a result of this global recession, the IMF forecasts unemployment will rise to 7.8 per cent by the end of 2010. This is of course much lower than the 9.2 per cent forecast for advanced economies as a whole, and of course double digit figures are expected in some countries.

And of course the global recession is severely eroding government revenues right around the world. Budget deficits in major advanced economies are expected to reach 10.5 per cent this year. Now, notwithstanding the massive hit to revenues in our own Budget, the IMF has noted that our fiscal position remains strong. The deepening global recession is why it is so important that the Budget continues to support jobs, to support jobs now, and to invest in the building blocks of recovery, and of course we will do this in a responsible and in a sustainable way.

The IMF report also demonstrates that why this backdrop is so challenging, and that is one of the reasons why in an hour or two I’ll be jumping on a plane and going to the IMF meetings and G-20 meetings in Washington over the weekend.

Over to you.

JOURNALIST: Is there a risk that the unemployment forecast for Australia could (inaudible) be conservative, and that unemployment could hit double digit figures?

TREASURER: These are certainly very pessimistic forecasts, and they are forecasts which point to the fact that they think the risk is on the downside. But their forecast for unemployment for Australia in 2010 is 7.8. What I can say in answer to your question is that

the Government will do everything that we possibly can by way of economic stimulus to support jobs now in the Australian economy and to put in place the building blocks for recovery so that we can maximise the employment opportunities that will flow from global recovery when it comes. And that’s the task of the Budget - to continue economic stimulus, to support jobs, to invest in the future so that when global recovery comes and growth returns, we will maximise the employment opportunities that flow from that.

JOURNALIST: There’s no guarantee we won’t get back to those early ’90s levels?

TREASURER: There’s no guarantees when you are in the middle of the most savage global recession since the Great Depression. But what we must not lose sight of, as I’ve said before, Michelle, is the underlying strength of the Australian economy, and you can see that as you go through these forecasts. There are plenty of other forecasts for double digit figures elsewhere but they’re not here in the IMF forecasts.

What the IMF does is report both yesterday and I think today - I recommend it for you to look at - is point to how we’ve been most dramatically affected by what’s occurring in the United States, but particularly in Asia.

Many of you will recall in press conferences I’ve done here before I’ve been to previous IMF meetings how this global recession has unfolded. At the IMF last October the view then was that the advanced economies were rapidly all heading for recession but that the hope of the side was the developing world, and particularly the developing world in our region. That was last October. By the time we got to the November G-20 Leaders’ Meeting in Washington the balance of risk had changed. Not only was the developed world heading quickly to recession, but there was then the prospect that the developing world was also heading towards recession. And what has unfolded in the first quarter of this year is that far from decoupling

- the Asian countries decoupling from the United States - they have been affected [with] lightning speed by the recession in the United States and other advanced economies. So, what we’ve seen in the first quarter of this year is dramatic contractions in growth - in Japan, in Taiwan, in Thailand, in Singapore - and these have been transmitted very quickly to this country. And that is one of the reasons why we are looking at these forecasts now, because the recession has become truly global and it has had a dramatic impact in many of those countries in Asia which have been so important to maintaining and supporting employment in this country.

JOURNALIST: Treasurer, the IMF’s Jorg Decressin says that Australia’s relatively good position viz-à-viz the rest of the world is because it did its homework during the good times. Given the Howard Government presided over 11 of those recent years of good times, isn’t it time that you as Treasurer at least acknowledged a little of the good work of the previous government (inaudible) the recession?

TREASURER: I’ve certainly acknowledged the frameworks that were put in place in Australia in the ’90s. The IMF and the OECD and everybody else has done so, acknowledged the importance of those frameworks to our underlying strengths in our economy - the strength of our financial system particularly important, the state of our Budget particularly important in this environment, but also…

JOURNALIST: (inaudible)

TREASURER: Not just the Howard Government’s work. If you want to go through the platform that created the modern Australian economy, we can start in the late ’80s and run right through. It’s not all exclusively the Howard Government’s work. And one of the tasks that we’ve actually got, and we had last year and we’ve got this year, is to repair the damage that was done by the failure of the previous government to put in place the investment in infrastructure and skills and education that is so essential to maximising the opportunities that come to this country from recovery. So, governments of both persuasions have contributed to the underlying fiscal strength, and also the underlying policy framework that the IMF and the OECD tick off on. And I’ll give credit to Mr Howard. I’ll give credit to Mr Costello. I’ll give credit to their predecessors who put in place a framework that has certainly put us in a stronger position than many other countries.

JOURNALIST: Treasurer, will you have to raise taxes?

TREASURER: Well, I don’t speculate about what we’re doing in the Budget. The most important thing that we will do in this Budget is to continue to support jobs and employment and growth by continuing stimulus. But of course we do have to have over time

a medium term fiscal framework. It’s very important that we continue with stimulus. It’s very important that we let the automatic stabilisers work because in this environment, and this is what the Liberal Party I think and Mr Hockey and Mr Turnbull are advocating, they’re advocating that there wouldn’t be any need to have a temporary deficit. So, the only way they could avoid a temporary deficit in a circumstance where you’ve had a write down already of revenues of $115 billion between May last year and February this year, the only way they could avoid a temporary deficit is either savagely cut spending or dramatically increase taxes. And that doesn’t make sense in the middle of a global recession.

What we will do is operate within a medium term fiscal framework that we outlined in great detail in the statement that we made in February. And I’d like to take you through it, because

not only must we stimulate the economy now, we must prepare for the future by investing in the productive capacity of the economy, and put in place a plan for recovery which does mean bringing the Budget back to surplus over time. And we adopted in our [February] statement a very important fiscal rule that I want to take you through. “As the economy recovers and grows above trend, the Government will take action to return the Budget to surplus by doing two things: allowing the level of tax receipts to recover naturally as the economy improves, while maintaining the Government’s commitment to keep taxation as a share of GDP below the 2007/08 level on average” - first rule. Secondly: “holding real growth in spending to 2 per cent a year until the Budget returns to surplus.”

They’re the fiscal rules that we operate by, and what they mean at the moment is letting, to use the jargon, the automatic stabilisers work. There’s been a sharp cut in demand which is producing a dramatic drop in revenues. That produces a temporary deficit. The right thing to do in these circumstances is to run a temporary deficit so we can support jobs and support growth. As the global economy recovers, revenues recover. When growth returns to trend, then the Budget returns to surplus over time, and we do that by putting in place those rules that I’ve outlined, and particularly the second one I draw your attention to - the constraint on spending as growth returns to and moves above trend.

JOURNALIST: Treasurer, how realistic is the prospect of an early recovery in Australia given what you talked about before with our reliance on Asia and (inaudible) of 6.2 per cent contraction?

TREASURER: Well, these are particularly gloomy forecasts from the IMF. We have to do everything that we can domestically to support domestic growth, and we’re doing that. And that’s why our stimulus packages have been so important, and you can see their

importance reflected right across the economy in terms of a whole raft of data. But ultimately the pace with which we can move into recovery depends upon the extent to which recovery comes and the speed it comes with in the rest of the world. I myself personally am a

little bit optimistic about China, and that’s a good thing. You’ll see various reports about what is going on in the United States. But I think the two economies that are most important to making sure that we come out of this more quickly than we otherwise might are basically China and on the other hand the United States.

That’s the other reason for going to the G-20 and IMF meetings this weekend, just to get a further assessment of how my colleagues, my fellow Finance Ministers, who I’m getting to know very well, how they are seeing the world. Because if you go through some of the forecasts for some of those countries around the world: Germany: - 5. These are huge figures and we need to get a firsthand account from people as to how they’re seeing the outlook. Just as things went down so dramatically and so quickly, there’s always a possibility of maybe things could come back a bit more quickly. But if you’re looking at this IMF report, it’s not anything other than bleak. But what we have to do is everything within our power to continue stimulus, to make those investments for the future, and to operate within that fiscal framework that I outlined last February, and that is certainly the overall framework for our Budget.