Friday, January 28, 2011

Swan: GDP to take a $7 billion hit, mostly in one quarter


Taken literally it'd mean negative growth that quarter


THE HON WAYNE SWAN MP

ADDRESS TO CEO INSTITUTE (QUEENSLAND)

THE IMPACT OF THE FLOODS ON OUR PATCHWORK ECONOMY

Thanks very much for having me and for that kind introduction.

I’d like to thank everyone for being here today, at such a challenging time for our state in particular, for other flood-affected communities in Victoria and elsewhere, and for the national economy more broadly. I’m sure all of you have many competing demands on your time, whether you’ve been personally affected by the floods or involved in the huge rescue and cleanup operation, or whether you’re looking after staff, or whether you’re just trying to get your business back on its feet.

Like me, you would have been inspired by the sheer depth of the community spirit we’ve seen in Queensland in recent weeks. Given the scale of the floods, we’re going to need every ounce of that community and corporate spirit, as we turn our attention to the economic costs and the economic recovery.

As you’ll expect, I’ll talk quite a bit today about those economic impacts. In particular, I’m going to talk a bit about how and why the Government decided to fund the $5.6 billion reconstruction program – including the $2 billion initial payment to Queensland - through a combination of the one-off levy, delaying some infrastructure projects and spending cuts, rather than by simply putting the entire cost on the existing Budget...
I’m also going to talk about the longer-term challenge facing our economy: dealing with the pressures of a patchwork economy. The issues of flood reconstruction and dealing with the mining boom present very different challenges but they’re united by a critical factor – the capacity constraints we face, particularly in the labour market.

Of course, as Treasurer, you’d expect me to focus on the economic magnitude of the floods, and I will. But first let’s put them into their proper perspective.

The economic questions pale into insignificance next to the human cost of what we’ve seen in recent weeks. Like all Australians I’ve been deeply saddened by the loss of life – some heart-wrenching stories of self-sacrifice, of lives and families torn apart. With so much pain and loss still being experienced, our focus remains on human, not monetary values. There are still people to mourn and remember.

It’s been inspiring to see how people have come together in recent weeks – people, communities, businesses – everyone has done what needed to be done, no questions asked. But now, as the waters gradually recede, and the full extent of the damage is revealed, we turn to an assessment of the costs to our economy and our budget, and the repair and rebuilding task.

ECONOMIC MAGNITUDE

It’s pretty hard to make comparisons between different disasters – they’re all awful when it comes to living through them, whether you’re talking about the Newcastle Earthquake or the Black Saturday Bushfires. But what the Prime Minister said yesterday gives you a sense of just how big and damaging these floods have been.

I was around during the ’74 floods – I was a student back then and working part-time as a sewerage maintenance man for Brisbane City Council – so I got a pretty good view of it all in ’74. That flood was bad – but the impact this time is going to be much worse, because the state’s grown so much since then. There are 3.1 million people living in affected areas, this time around, compared with 2 million for the whole state back then. Queensland accounts for 19 per cent of Australia’s national output, compared with 14 per cent a generation or so ago.

The truth is this is likely to end up being the most costly disaster in Australian history. The fact that Queensland makes a bigger contribution now to national prosperity means that these floods will hit us that much harder.

Our assessment of the effect on Gross Domestic Product is only preliminary at this stage, but Treasury estimates that in 2010-11, the loss is likely to be around ½ of a percentage point of GDP.

Of course the rebuild effort will add to GDP again in time, but this is unlikely to fully offset the immediate output loss.

The main negative impact from the floods will be concentrated in the March quarter. A large part of the GDP impact will be from lost coal production and the effect this will have on our export volumes. Treasury estimates that several billion dollars will be lost in coal production – somewhere around 15 million tonnes of coal.

A lot of that production is concentrated in the Bowen Basin, where supply chains have been seriously hampered by the floodwaters. While the effects vary from mine to mine, the industry estimates that the worst affected mines could be disrupted for months. Queensland alone produces about 80 per cent of Australia’s exports of coking coal. And when you consider that coking coal represents about 10 per cent of our exports, and 2 per cent of our GDP, you can see that the impact here is going to be significant. Of course, some of this negative impact will be offset by higher commodity prices – but the production losses will still be immense.

Agricultural production has been hard hit, too. In many ways, some of the cruellest impacts have been and will be on our farmers. Treasury estimates the sector’s losses could be around $1 billion– a huge hit when the country relies on Queensland for so much of its food produce.

While these are only preliminary estimates and they will of course be updated as more information is received, ABARE is estimating loss of Queensland fruit and vegetable crops at around $225 million.

For cotton, ABARE estimates around $150 million worth of damage to crops, representing around 7 per cent of Australia’s total plantings. It also estimates that the floods have damaged 15 – 20 percent of the state’s planted grain sorghum crop, representing around $30 million.

The unfortunate reality is that all Australians are going to see the impact of this on the economy, particularly in the March quarter, at the supermarket checkout:

• 32 per cent of our vegetables are produced in Queensland

• 33 per cent of our fruit

• 68 per cent of our mangoes are from Queensland

• 55 per cent of our tomatoes are from Queensland

So the floods have wiped out a significant part of our country’s food bowl, and this is going to feed into prices. Based on Treasury’s numbers, the floods are expected to increase CPI inflation by about ¼ of a percentage point in the March quarter. This spike should only be temporary, but it’s inevitable that it’s going to cost more for fruit and veg for a while. We saw this happen after Cyclone Larry in 2006 – when banana prices went up to $15 a kilo but then fell, some months later, back down to $2 a kilo.

Another industry that will take a battering is tourism. Queensland has such a great tourism industry – it makes up around 4 per cent of Gross State Product – but it’s being hit hard by the floods. Treasury estimates the damage to tourism could be in the region of $300 million.

That’s why Andrew Fraser and I have announced a new $10 million Tourism Industry Support Package, to provide a vital boost for the many families and small businesses who depend on Queensland’s reputation as one of the world’s most attractive tourism destinations. The package will include a domestic marketing campaign to assure all Australians that many of Queensland’s most iconic destinations are largely unaffected by the floods.

Other industries have also been directly affected – especially with the huge disruption to urban centres like Brisbane. Outside mining, agriculture and tourism, Treasury estimates put the damage bill across a range of other industries at around $½ billion.

You get the picture: there’s no getting away from the fact that this disaster, not just in Queensland but Victoria and elsewhere as well, is going to cost Australia dearly.

I’m sure no-one here is under any illusions about just how long a reconstruction effort we’ve got in front of us. It is going to take years to recover from the 2011 floods, not months. And in the end, Queensland will recover strongly – strongly, but slowly.

FEDERAL RESPONSE

So that’s an early view on the economic impact. Of course, the floods are also going to have a significant impact on our budget bottom line. As the Prime Minister said yesterday, our initial estimates suggest the Commonwealth contribution will be something like $5.6 billion.

That’s why we announced a one-year levy, the deferral of $1 billion worth of scheduled infrastructure spending to make room for the rebuild task, and $2.8 billion in difficult spending cuts.

Let me make some points about our response. Firstly, we were very conscious, in designing it, that the last thing we wanted to do was take precious resources away from flood victims, or stretch the capacity of Australians to help us rebuild Queensland.

That’s why the one-year levy won’t be paid by those who have been affected by the flood, and why we will only raise it from people earning more than $50,000. This means that half of Australian taxpayers won’t pay anything at all and over 60 per cent of them will pay less than one dollar a week.

We recognise that many, many people have already donated generously to help the victims of the floods – and this levy doesn’t ignore that generosity. It’s a way of paying for the reconstruction of essential infrastructure that needs to take place – roads, bridges, ports – so Queensland can get back on its feet, after the initial disaster phase.

Secondly, we know the economy and parts of the labour market are already under extreme pressure from the mining boom. That’s why we have some labour market programs in the policy mix, and why we deferred $1 billion worth of other infrastructure spending, to ensure we have the capacity to rebuild priority projects first.

This means two-thirds of the funding for the rebuilding of flood affected communities comes from spending cuts and one-third from the levy. Commentators have asked why we haven’t taken the whole cost in to the budget, rather than putting on a levy. Well, as the Prime Minister said yesterday – in a growing economy, we shouldn’t put off until tomorrow what we can deal with today.

Paying for the reconstruction is not a commitment we step away from – but it’s a factor that has big ramifications for the budget. The Australian Government Disaster Recovery Payments have given short term financial assistance to Australians affected by the floods, and this is expected to cost over $600 million. And claims under the Disaster Income Recovery Subsidy are expected to cost a further $120 million.

The slowdown in economic activity across a range of industries will also reduce the tax revenues coming to government.

Clearly – and there has been a lot of public commentary on this point – this will put increased pressure on our fiscal strategy, on our plan to bring the budget back to surplus by 2012-13. I want to make two points about why it’s important that we bring the budget back to surplus – because I think they are crucial.

Fiscal responsibility is about keeping our budget in a position where it can deal with surprises like the floods in the future. Getting back to surplus gives us more firepower for future battles. During the global financial crisis, our strong balance sheet – built in part on difficult saves in our first budget – meant we were immediately able to respond to the crisis with a stimulus program that helped our economy weather the storm. But reloading the fiscal cannon to deal with future surprises is not the only reason why returning the Budget to surplus by 2012-13 is the right thing to do.

The main reason it is the right thing to do is because it is the right response to dealing with the longer term challenges facing the Australian economy. As awful as these floods have been, they haven’t knocked the Australian economy off its longer term course, and they haven’t altered the longer term challenges we face, particularly the mining boom mark II. The mining boom is contributing to strong private economic activity, and strong employment growth. Capacity constraints are building, and unemployment is low.

In these circumstances, the right thing to do is for government spending to make room for the strengthening private economic activity. It is text book fiscal policy. And the right way to do that is through a combination of cuts to other public programs, delaying some infrastructure programs and a temporary levy.

As the Prime Minister has said, borrowing to fund the public reconstruction effort would be the soft option. With capacity constraints building, unemployment low, and an impressive pipeline of new mining-related investment, the right thing to do is to pay-as-we-go for the public reconstruction efforts. Applying some fiscal restraint to other parts of the economy frees up resources to help rebuild after the floods, and reduces pressure on our growing national economy.

PATCHWORK ECONOMY

I raise these points about our broader economy because it is crucial that when we’re rebuilding Queensland we’re doing it in a way that recognises we have broader responsibilities to the broader economy too. We cannot, and will not, lose sight of the broader challenges of our economy as boom conditions return to other parts of the country.

Like me, you’d be struck by just how much Australia’s story right now is the story of a patchwork economy. As one part of the country rides high, another struggles. The mining boom caused by the rise of China and India has led to much faster growth in some places than others. So I want to spend some of my remaining time today talking about the longer term challenges facing Australia, beyond the reconstruction.

While the floods are very much front of mind at the moment, I’m confident that we’ll overcome them, and rebuild Queensland. And as we do, the longer-term questions we’ll face are the challenges of the return of boom conditions.

Globally, we’re witnessing a changing of the guard. China and India are giants of the past with extraordinary futures. In recent years, we have seen an inexorable shift of power from West to East, as they – and other Asian countries – have industrialised. The global financial crisis has only reinforced their relative importance within the world economy. And coming decades are only going to continue this economic convergence.

The United States will still be a global superpower, but this will be the Asian Century. Over the past three decades, the Chinese economy has grown 10 per cent a year, on average – equivalent to doubling in size every 8 years. A similar story can be told for India. Together, they were 7 per cent of the global economy in 1990. Today, they’re 19 per cent.

By 2050, China and India alone are expected to make up over a third of the global economy. A continuation of current trends will see India become the world’s third largest economy around 2015, and China overtake the United States as the world’s largest economy around 2020.

Not just by chance but by choice, Australia has been making the most of this – which has seen us become a standout performer in an uncertain world economy. A combination of good policy during the global financial crisis, hanging on to the enduring benefits of the reforms put in place by previous governments and our natural advantages in Asia give us cause for confidence. Since coming to office we have created 700,000 jobs while other advanced economies shed millions of jobs, and our public finances are among the strongest in the developed world.

Resources are a source of strength, but the higher dollar and other factors make life difficult for people working in sectors like tourism and manufacturing. Even before the Queensland floods and the massive reconstruction effort they will bring, we were already expecting to see the re‑emergence of labour shortages and bottlenecks in some industries. The impact of mining boom mark II on our economy cannot be understated – it will be profound, as big as the structural change associated with the floating of the dollar, of tearing down Australia’s tariff walls in the '80s.

The truth is – the speed with which we can rebuild Queensland will be limited by the tightness of labour, as will the extent to which we can take advantage of the mining boom. This is one of our core challenges – there are only so many skilled tradespeople and workers to go around. In that context, as we work to rebuild Queensland and beyond, our core task is to permanently rebalance the economy to better leverage the opportunities of the Asian Century.

Our challenge is to create a flexible high-productivity, low-pollution economy – and it’s a challenge equivalent in scale to Hawke’s and Keating’s successful reforms that opened up our economy to the world. On top of that, we need to ensure we’re harnessing the talents and efforts of more Australians – giving more people a stake in the next generation of growth and prosperity.

Our policy settings are already addressing these challenges, and are routinely commended by global institutions, but we know there’s more that can be done with community support. As the PM said yesterday, Australians rightly expect their Government to be able to do more than one thing at a time. Our record investments in training and infrastructure, a carbon price to encourage investment in renewable energy, and an NBN to boost the digital economy are absolutely crucial to building productivity. We can’t lose sight of these broader policy objectives while we deal with the challenges imposed on Queensland and other parts of the country by mother nature.

The coming Budget was always going to be about the challenges of our patchwork economy – it’s just that the floods have added additional complexity to the policy response we need. It’s too early to go into detail, but what I can tell you is that the budget will focus on making sure our economy – already stretched by the boom and now the reconstruction effort – can get the people it needs.

It will recognise education is the principle driver of prosperity in an economy that demands we draw more heavily on the talents and efforts of even more of our people. It will build on the PM’s conviction that our nation can create opportunities for all, and that if we all work together to grasp these opportunities we will prosper together. And above all it will maintain the economic discipline that has been a hallmark of this government.

CONCLUSION

So ladies and gentlemen, thank you again for coming today. Sometimes in the public arena we don’t talk enough about the good work that our corporate sector does, as if those in business don’t take a broad enough view of what’s important for the communities in which they operate, or for their staff. What we’ve seen in spades, through this flood emergency, is how wrong that view is.

We’ve seen corporate Australia open its hearts to the victims of the flood, in all sorts of ways – donations, direct assistance, dropping off needed supplies out of stock without any thought of recompense. The business taskforce I chair is off to a great start as well. It’s this community spirit, from CEOs like yourselves, from all sectors of our economy, and from all corners of our country, that convinces me we can still face the future with confidence.


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1 comments:

Anonymous said...

Dear Peter
At present, deficits seem a fetish for both sides of politics and the subject of much comment by economists. Could you tell me [or at least point me in the right direction] whether any of the surpluses achieved in the last half a dozen or so budgets of the Howard government were actually structural deficits, suggesting that they were too expansionary at a time when these budgets should have been much tighter and even larger surplues achieved.

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