Speech - Australia'a Response To The Global Financial Crisis




"Australia's Response To The Global Financial Crisis"




It is a real pleasure to be here to launch this paper by Chris Barrett, Australia Scholar at the Woodrow Wilson International Centre for Scholars, and to be doing so with Australia's Ambassador to the United States, Kim Beazley.

Kim and I first met Chris, when Kim took on the unenviable task of Opposition Leader following 13 years of Government and Chris and I were both members of his staff. Chris later became my Chief of Staff, in what will go down as one of the most difficult times the Australian economy has faced and during one of the most successful policy responses.

His paper gives us a very considered and thorough explanation of the key factors that contributed to Australia's successful policy response to the GFC. Chris will talk to his own paper. My job here is just to launch it. But reading through it, there are a few points I wanted to draw people's attention to, particularly for their policy relevance for the future. And I also want to take this opportunity to make a few comments about the challenges that lie ahead for Australia and the policy approaches we are bringing to these challenges.

The fundamental point of Chris' paper is the most obvious one: fiscal policy made a huge difference to Australia's economic fortunes during the most recent crisis. And with it has come a renewed appreciation for the role of targeted, timely and temporary fiscal policy in the arsenal of policy makers. As Dominique Strauss-Kahn [Managing Director, International Monetary Fund] said just last week:

"Under the old paradigm, fiscal policy was definitely the neglected child of the policy family. Its role was limited to automatic stabilizers—letting budget deficits move up and down with the cycle—and discretionary policy was regarded with deep suspicion. But fiscal policy had a Sleeping Beauty moment during the crisis—with monetary policy running out of steam, and with the financial system on its knees, the forgotten tool arrived to prop up aggregate demand and save the world from an economic freefall."

Chris' paper shows the critical role that fiscal policy played in Australia's response to the GFC and its role in Australia avoiding the subsequent global recession that afflicted virtually every single advanced economy.

Chris' analysis shows that Australia would have suffered two significant negative quarters of growth during the crisis in the absence of the government's successful policy response.

It also shows that in the second of these quarters – the June quarter of 2009 - GDP would have contracted by 1.4 per cent had the government not acted. That's larger than the worst negative quarter of the early 1990s recession of -1.3 in March 1991. The Australians present in the audience today will shudder to hear that.

None of us have forgotten the awful recession of the early 1990s, and in fact it was our determination not to relive that experience that shaped so many of the actions we took. Not only did it shape the size of the fiscal stimulus used to avoid recession, but it shaped the timing. Because we knew that to delay action in the face of a global downturn of the magnitude we were facing would be to threaten the closure of countless businesses, and to consign tens of thousands of people to the unemployment scrapheap.

The paper points out that Australia went into the crisis with the benefit of many years of good economic policies. But it's also right in pointing out that both Canada and New Zealand enjoyed similar advantages yet both suffered much more significantly than Australia during the crisis: both shrinking by more than 3 per cent over several quarters.

Nor was it the mining sector that saved Australia, as some would like to have you believe. In fact, Australia saw proportionally greater job losses in the mining sector than in the rest of the economy.

What is most important for policymakers – not just in Australia but around the world ­­– is the analysis here of what made the fiscal response in Australia more successful. It's easy to overlook what governments can do to be ready for crises.

The narratives we often hear back home about how lucky Australia was are not only historically inaccurate, they also teach absolutely the wrong lesson of the history of this period. It's a passive, conservative view that demands nothing of policy and public officials.

Australia's policy experience through 2008 and 2009 created a new template for future crisis management. Because it was not luck that saved Australia – it was the collective efforts of the Australian community and Australian businesses, led by their Government, that saved our economy.

First, we had to understand the magnitude of the global crisis that was heading our way. Visits such as these to the US were invaluable, just as the close contact with the US Administration was. In fact, in April 2008, I would get one of my starkest warnings, from a straight-talking Australian hedge fund manager, who had called America home for the previous 20 years.

As we discussed the fallout from the collapse of Bear Stearns, he warned that Bear Stearns was not the end, it was not even the beginning of the end, it was just the end of the beginning. It was from this, and our broader international engagement, that we were able to move early – well before the collapse of Lehman Brothers – to prepare the Australian economy for what would turn out to be the worst global recession in 75 years.

We moved to recalibrate the budget that I would deliver a month later to take account of the countervailing forces in the global economy and within two months I announced a number of measures to strengthen and prepare our financial system for the collapse that was to come. This is just one example of how the success of Australia's response lies in the willingness to act, both before and during a crisis. Some would rather put this down to luck, but they are actually the outcomes of policy decisions, including through taking the tough decisions over many years to building the strong economic fundamentals, that make an economy resilient. But they also include being, as Chris puts it:

"…prepared to act on the fiscal front when it is justified by the economic circumstances and when the odds of success are sufficiently high accounting for the risks of intervention … A blanket denial of the potential effectiveness of fiscal policy deprives policymakers of options at the precise times they are most in need of them."

These are the strengths Australia built for itself in the decades leading up to the crisis, and they are strong policy actions we took during the crisis. These saw Australia avoid recession, virtually the only advanced economy to do so. And it means that in the past 3 or so years Australia has created over 750,000 jobs, while advanced economies have shed about 30 million positions.

Just as it was the foresight and the willingness to act ahead of time that was so critical during the GFC, it is this same approach that is ensuring that we are focused on the policies for the future and not just lauding our achievements of the past. You can see this in the way we are returning our budget to surplus without choking off the economic recovery. And it is there in the way we are looking to the next challenge of rising demands for our commodities – what I call Mining Boom Mark II. It is to this topic that I want to turn to in my remaining remarks.

Next month I will deliver my fourth budget and this one will be just as difficult as those that have come before it. Natural disasters both at home and abroad are taking their toll on the Australian economy and they will significantly impact our budget in the short term. To put them into perspective, the natural disasters will reduce growth in Australia by up to ¾ of a percentage point in 2010-11. The early years of the budget will bear the brunt of the natural disasters, as rebuilding costs and reduced revenues hit the budget bottom line.

The floods that hit eastern Australia, particularly in my home state of Queensland, as well as Cyclone Yasi - a storm every bit as powerful as Katrina - are estimated to have inflicted a damages bill of $9 billion on our economy, particularly to our mining and farming sectors. And the disasters in Japan, our second biggest trading partner, are forecast to reduce commodity export revenue by about $2 billion. But these events have not knocked our economy off course.

Our economy is resilient and we will withstand the impacts of these natural disasters, just like we withstood the GFC better than other developed economies. The economic fundamentals of Australia remain strong when compared to other advanced nations. Unemployment in Australia recently dropped to 4.9 per cent, while jobless rates in the US and Europe have an 8 or a 9 in front of them. Our budget is on track to return to surplus in 2012-13, well ahead of any of the major advanced economies. And our net debt is forecast to peak at less than one tenth the average of G7 economies.

Australia is also situated in the fastest growing region in the global economy in this, the Asian century. And our terms of trade are close to their highest sustained level in 140 years, which is contributing to an unprecedented investment boom. But with this boom comes immense challenges. These conditions are demanding adjustments in our economy that are equal to any that have come before – from the floating of the dollar, to the tearing down of the tariff wall or the liberalisation of our financial system.

While our mining and associated industries are feeling the full impact of rising global demand, other sectors are faced with a strong dollar – at a 28 year high against the US dollar. These sectors also have to compete for scarce labour, and deal with the continuing fallout from the Global Financial Crisis. This presents just as difficult a set of circumstances to that we faced at the height of the GFC. And just as our past budgets were focused on moving decisively to deal with the Global Financial Crisis and then with recovery, the budget I deliver next month will be targeted directly at dealing with the challenges of Mining Boom Mark II. This means keeping our budget on track to return to surplus, despite the short‑term hit to budget revenues.

Just as it was right to step in and support the economy when the private sector was in retreat, it's equally the right thing to make space as the private sector recovers. Or as I have put it, if we are going to be Keynesians in the downturn, we have to be Keynesians on the way up again. This means restraining spending and budgeting for surpluses so we do not compound the pressures on our economy. And this means taking difficult decisions now to keep ahead of the challenges, rather than playing catch up down the track when the consequences of inaction could be much more severe.

The boom will still test the economy's capacity – it will mean more demand for resources, particularly skilled workers. That's why – as the Prime Minister said yesterday – we must invest in skills and boost workforce participation to tackle these labour shortages, while also providing the opportunities for all Australians to participate and benefit from the boom. And it means continuing to build productivity - a top economic priority of this Government from day one.

Let me finish by saying Australia is on the cusp of something truly special in the Asian Century. Our objective is to make the benefits of the coming boom outlast the boom itself – and that means continuing to get the policy settings right.

Chris' paper talks about how it was the Spring IMF/World Bank meetings in 2008 right here in Washington that started to shift our policies towards crisis response back in Australia – five months before Lehman Brothers ever happened.

He tells the lesson of how the willingness to act, and do so decisively, can go a long way to meeting the worst the world can throw at us. But he tells a much larger story: that governments must always focus on the challenges ahead, adapt to changing circumstance and be willing to take the tough decisions. That's what guided us during the crisis and it's what guides us now as I go about applying the global context I'll be discussing with my G20 colleagues here to my fourth budget in less than four weeks' time.

I commend Chris' paper to you and I take great pride in launching it today.