HON. WAYNE SWAN MP
FEDERAL MEMBER FOR LILLEY
ADDRESS TO THE FINANCIAL SERVICES COUNCIL DELOITTE LEADERSHIP SERIES LUNCH
"Applying The Lessons Of The Crisis To The Challenges Of The Future"
WEDNESDAY, 8 DECEMBER 2010
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Can I start by thanking:
You don't just represent an industry that is globally recognised as one of the fundamental strengths of our economy. With more than 135 members who invest over $1.3 trillion on behalf of more than 10 million Australians, you guys pretty much are the cornerstone of our national savings.
In a capital-hungry country like ours it would be very hard to find a hundred people in one room who are more crucial to building the nation's savings pool. And you're tremendously well-represented by John Brogden – someone I have a lot to do with these days and someone I admire a great deal, not just for his advocacy of your industry, but for his advocacy of economic reform in the broader national interest.
Today I want to talk about reform through the prism of the lessons we learned during the global financial crisis – chief among them, the possibilities we can grasp as a country if we successfully stay one step ahead of developments.
Foresight and planning is just as important to positioning for the challenges of Mining Boom Mark II - and ensuring we have a stable and competitive banking system - as it was to staring down the GFC.
This theme unites the three things I want to talk about today:
I've been tremendously proud of what our country has been able to achieve during the sharpest synchronised global downturn in 75 years. For me personally, the really satisfying thing about Australia's performance over the last three years has been the creation of 650,000 jobs. That's a remarkable achievement when you consider that's occurred in the face of the worst global slump in 75 years that saw the world shed something like 30 million jobs. Most developed countries are struggling to get their economies back to pre-crisis production levels, while we've grown our economy by almost 5 per cent since the middle of 2008.
Of course, we know that despite our economic success story, that there are people in our community that are doing it tough and finding it hard to make ends meet. But in a sea of uncertainty and volatility, Australia has demonstrated its resilience. And I can tell you from my experience at G20 meetings that our national economic success story has attracted a lot of praise from overseas friends.
But what I'm proudest of tends to go unnoticed – that while we did what was necessary to cushion Australia from the worst impacts of the crisis, we were quietly putting in place the foundations for future growth.
When you look to countries like the US and Europe today – they are still dealing with the aftermath of recession and double-digit unemployment. In the US, more than four in every 10 unemployed Americans have been out of work for over six months. That doesn't just destroy families and communities - it destroys an economy's skills base as well. It puts a nation on the back foot when the recovery eventually comes.
Australia's position couldn't be more different. It wasn't reflected in much of the commentary of the national accounts last week, but our economic fundamentals remain remarkably strong. And the work we did during the crisis has set us up to really capitalise on the recovery and prepare for what I call Mining Boom Mark II.
You see, we didn't just act to protect growth and jobs in the short term, but to build our economic capacity for the long term as well. We protected our skills and capital base, which means we're in a strong position to make the most of the opportunities ahead. And unlike so much of the world now grappling with the challenges of a post-recession economy, we are now dealing with the challenges of growth.
While a volatile global environment means it won't all be smooth sailing from here, we've got good reasons to be confident about our future:
To give you a sense of it:
Obviously, these opportunities will stretch our economy's capacity. It's a huge jolt of increased activity for our economy. The cause is no secret.
I've spent a lot of time in Asia recently, and I'm absolutely certain that the demand for our commodities and the consequent impact on prices and our terms of trade is going to be enduring.
The IMF estimates that within five years, Asia will be comparable in size to the economies of the US and Europe combined. And that's not just a story about China. It's also India, Indonesia, Korea and others. But what it means is structural changes for our economy that are every bit as big as when we floated the dollar and brought down tariff walls. And it will require the same careful management that those reforms did.
But for a nation that stared down the global recession, these challenges are not beyond us, so long as we never forget the lessons of the crisis – that the best-performing nations are those that plan. That's why we are training more workers and investing record amounts in our roads, railways and ports to build new capacity. It's why we're cutting business taxes, to attract more investment and further boost productivity. It's also why we're building a bigger pool of national savings by reforming the national super system.
I know I'm preaching to the converted here, but national savings are so absolutely critical to our capital-hungry country. The challenge we have is to take on board a once in a century investment boom without straining our economy.
We saw this investment boom coming even during the depths of the crisis – so we started thinking about how we could boost savings and make Australia an even more attractive investment destination. We planned to substantially increase a domestic savings pool that is already roughly the same size as our GDP. We're not unique in this respect – but we're in the top tier of countries in terms of national pension savings as a proportion of GDP.
In a capital-hungry economy like ours, these retirement savings make a big contribution to our investment needs. Our super reforms – including our increase to the superannuation guarantee - will add another half a trillion dollars to national savings by 2035. And by deepening that pool we can generate more of the capital we need across our own economy.
The GFC showed how crucial it is for capital-hungry nations to have domestic savings. But we're not just focusing on private savings. Our fiscal strategy also means we are increasing public saving relative to investment by around 4½ per cent of GDP over the next three years.
The other way to satisfy our hunger for capital is to attract it from overseas. That's why we had the foresight during the GFC to start planning to lower the corporate tax rate to 29 per cent – making it easier for Australian businesses to compete, and making us a more attractive location for foreign investment. And we're delivering other reforms to make Australia an even more attractive destination and build the strength of our financial sector.
After coming to government we set up the Australian Financial Centre Forum to look at how we could make Australia a leading regional financial centre with a more outward looking focus. Out of that came the Johnson Report, which found that we've got the most sophisticated and advanced financial sector in the region. We're working to build on the advantages that come with that.
Our reforms to interest withholding tax – announced on Budget night – will allow local subsidiaries of foreign banks to access cheaper funding. That's good for competition – and means that they'll be able to lend more cheaply to Australian businesses and households. That will help smaller lenders, putting more competitive pressure on the big banks over time.
We've asked the Board of Taxation to look at an investment manager regime, to encourage offshore investors to put money into Australia through more tax certainty.
And another idea out of the Johnson Report – which would be of great interest to fund managers – is an Asia Region Funds Management Passport. This could help market funds across borders. It's an exciting concept and one that interests our neighbours – which is why we'll be further exploring the idea in 2011 within a group of APEC economies.
Ensuring we can satisfy our hunger for capital is one way we're staying ahead of developments so we prosper in the years ahead. The financial sector reforms we've already put in place, and those I will be announcing soon, are another example where we remain well equipped due to our early action.
The plans I will announce within the next week are all about making the banking system more competitive to help get a sustainable flow of credit to Australian families and businesses. I'm sure you wouldn't expect me to pre-empt the specifics of those policies today. But I do want to take the opportunity to situate them among the suite of successful policies we've implemented in this space since we came to government.
As you all know, the GFC had a devastating impact on the international financial system. I've just got back recently from the G20 Leaders Meeting in Seoul where we endorsed some of the biggest reforms to the global financial system in decades. This is all about ensuring we never have a repeat of the kind of devastation inflicted on the global economy by the GFC.
Of course we'll meet the new international standards, which are all about building better quality capital in the banking system and a substantial liquidity buffer for our banks. But it's really important to remember that Australia's financial system didn't suffer the same excesses as we saw in Europe and the US, and so we won't have to go through the same degree of adjustment. And there's simply not enough government debt in Australia for our banks to meet new liquidity standards - as they were originally drafted. That's why our global peers have now recognised this and are committed to developing rules that recognise those very low levels of government debt by international standards. So we're working through these reforms at the global level and ensuring they are appropriately implemented here.
But the GFC not only hit stability, it has impacted on competition throughout the world. Globally, it saw financial institutions fall over or shrink. Others remain on life support. While we did not face anything like that here, our regulators had to make their own tough calls at the heart of the crisis, when stability had to be our central focus.
The GFC also hit hard at markets critical to banking competition right around the world. The residential mortgage backed securities market – RMBS - has been a key driver of competition globally.
In Australia over the past 15 years, the local RMBS market has been the key driver of home loan competition. It allowed the likes of Aussie, Wizard and many regional banks to tap reliable, well priced funds and put competitive pressure on the Big Four. This brought down net interest margins over time and got a lot of Australians a better deal on their mortgage.
While our financial system avoided the excesses experienced in the US and Europe, it did not escape the savage impacts of the global financial crisis. RMBS issuance shrunk from over $60 billion in issuance in 2007, to around $15 billion in 2008 and 2009. This has taken much of the push for competition out of our banking system.
Because of this, I moved in 2008 to invest an initial $8 billion in AAA‑rated RMBS - and a further $8 billion in 2009. By moving quickly, we kept the infrastructure of the RMBS market going. So now we can strengthen the market – and through it competition – rather than starting from scratch.
In the same vein, our deposit guarantees helped sustain the stability of our banking system – shielding us from the devastation we could have seen.
So we've still got our diverse banking infrastructure, with both large and smaller lenders, building societies, credit unions and regional banks.
Our wholesale funding guarantee was also vital to keeping the flow of credit to home buyers and small businesses alive. Some $65 billion of funding was raised by smaller lenders to support their position in the lending market and put competitive pressure on the Big Four.
So while most countries are still trying to restore stability and rebuild their financial sectors, we're able to work on competition. There's that lesson from the GFC again – that in preparing early, taking the right decisions ahead of developments, we've been able to set the country up to deal with new challenges, sooner than our peers.
There are no silver bullets when it comes to boosting competition in the banking system, given the lingering impact of the global financial crisis. We're going to have to take reforms one step at a time, to support smaller lenders. We're working on measures to make it that little bit easier to walk down the street and get a better deal. And we're trying to support a diversity of funding sources for our entire banking system - and its stability.
But as everyone in this room knows, changes of this nature will take time and it is critical that we get these reforms right to maintain the stability of our banking sector while making sure it is competitive. That's why I have been working for a number of months on a series of reforms to the banking system to continue to support both stability and competition.
I am determined to get this right. That's why I have been working with our regulators on the design of these reforms and it is also why I will work closely with industry on their implementation.
Within a week I will outline a responsible package that will build on our efforts to support competition in the face of the worst global financial crisis in 75 years.
Now, as is always the case, a lot of people have asked for a lot of things to be included among these reforms. And I am certain that no one will get all that they would like. But I am determined to put in place changes that support competition and ensure the ongoing stability of our banking system. And ultimately I am determined to build a banking system that does the right thing by Australians, whether they are looking to buy a home or invest in a business.
I want to finish by urging all of you in this room to participate in the implementation phase and contribute to the successful delivery of these reforms. Because you understand, like very few others, the importance of foresight and planning for the future.
The importance of getting in place the right structures to boost national savings and ensure the sustainable flow of credit to the families and businesses that did so much to ensure we emerged from the global downturn in a far superior position than our peers. And the importance of the carefully-considered economic reforms the Gillard Government is so determined to implement in the national interest.
Thanks very much.