HON. WAYNE SWAN MP
FEDERAL MEMBER FOR LILLEY
"Economic Impact Of Recent Natural Disasters"
WEDNESDAY, 23 MARCH 2011
***CHECK AGAINST DELIVERY***
Mr Speaker, over the past few months we have witnessed a series of truly tragic natural disasters - both here and abroad.
At home, our country has been ravaged by floods, with Cyclone Yasi in the north and bushfires in the west. Overseas, we have seen earthquakes hit Christchurch and in the past 12 days we have watched the horrific images as one of the largest earthquakes on record hit Japan, followed by the devastating impact of the subsequent tsunami.
These events have tested us, and tested our friends. But it has been inspiring to see the way in which communities have come together –here at home and globally – to help those in need.
Our focus has of course been on providing immediate relief and assistance and getting on with the difficult task of rebuilding our affected communities. But it is appropriate that just before Parliament breaks prior to the Budget that I update Members on the likely impacts of these events on our economy and our budget preparations.
Mr Speaker, our thoughts in the past few weeks has rightly been with the Japanese people and we've been focused on providing assistance, particularly to those Australians in Japan. These events will leave behind a tragic loss of human life and a damage bill running into many billions of dollars. The economic consequences of these events will become clearer in the coming weeks and months. But we know that as the third largest global economy, this disaster will inevitably impact on the global economy and on our own.
Japan accounts for around 6 percent of global GDP and is also an important economy for Australia. Japan is our second biggest trading partner and our third largest source of foreign investment. Around one-sixth of all our exports are to Japan – almost $40 billion. We are Japan's largest supplier of coal, and they are also an important destination for our iron ore exports.
Treasury's initial assessment is that there is likely to be a short-term impact on some Australian exports to Japan in coming quarters.
Japanese demand for steel making inputs is likely to fall in the near-term following the closure of several large steel-making plants and the disruption to Japanese manufacturing. Commodity markets have also generally weakened. Thermal coal prices are down around 7 per cent since the earthquake and iron ore prices are down around 4 per cent. But there may be some rise in demand for other fuels such as LNG as other forms of energy production are more heavily utilised.
In the medium term, reconstruction will support growth in Japan and add to demand for Australia's bulk commodity exports. But the risks surrounding this assessment are considerable and to the downside. Any escalation in the problems at the Fukushima Dai-ichi nuclear reactors would exacerbate the economic impact on Japan and the global economy, as would further disruption to closely integrated production networks in Japan.
There are also considerable risks of dislocation in global energy markets, including rising coal, gas and oil prices. These events could adversely impact global confidence at a time when the world economy is already facing significant challenges, and there is new instability in parts of the Middle East and North Africa. We will of course continue to monitor the situation closely, including the impact of these events on the global economy and on our own.
Mr Speaker, Australia has also taken a direct hit from natural disasters here at home. In economic terms, the January floods and Cyclone Yasi will likely be the largest natural disaster in our history. Together, they will likely reduce economic growth by around ½ a percentage point this financial year.
The supply chains for our coal exports were severely hampered, and production at some of our big mines continues to be disrupted by the floodwaters. On top of this, fruit and vegetable crops have been damaged – the disasters wiped out a significant part of the country's food bowl.
Between our coal and agricultural industries alone, we expect that production will be reduced by around $8 billion – which is slightly larger than our earlier estimates.
Our tourism sector has suffered, and other industries – such as manufacturing, retail and transport – have been put under enormous pressure. This is a cruel blow for those sectors already struggling to cope with the high dollar.
The loss of production has also translated into higher prices for families – especially for fruit and vegetables. The region affected by Yasi produces 90 per cent of Australia's bananas and around one third of our sugar cane.
We expect that the January floods and Cyclone Yasi will increase CPI inflation by ½ of a percentage point in the March quarter, perhaps more. While this will hurt families doing it tough, these price rises will be temporary, unwinding as crops re-grow and production comes back on line.
But just as we are now seeing in Japan and have witnessed in Christchurch as well, the way the community in Queensland and Australia has pulled together has been inspiring. We have seen community groups, business and governments at all levels chip in to help the rebuild.
The Queensland Premier's Disaster Relief Appeal has raised more than $240 million dollars. This is in addition to tens of millions of dollars of in-kind assistance. And the Federal Government is providing more than $6 billion for flood and cyclone affected regions across Australia, with the vast majority being invested in rebuilding damaged public infrastructure, such as roads, bridges and schools. More than two thirds of this will be funded through budget savings, with the remainder funded through a modest, temporary levy. And I am pleased to see that this levy passed the Senate yesterday, with the support of every single Labor MP and Senator from Queensland.
I don't want to get political here, but I do wonder how the Queensland MPs on that side of the house will look their constituents in the eye when they head home this Friday.
Mr Speaker, it is against the backdrop of these natural disasters that we will spend the coming weeks putting the final touches on our fourth budget.
Recent events – both here and abroad – will make a difficult task even more difficult. The early years of the budget estimates will bear the brunt of the rebuilding and recovery costs, and Government revenue will also take a hit from weaker growth in the short term.
But keeping our budget on track to return to surplus by 2012-13 is the right economic strategy for an economy which is expected to be pushing up against its capacity over the coming years. Just as it was the right thing to step in and support demand during the global recession, it is the right thing to do to step back when private demand is strengthening.
We've already put in place around five and a half billion dollars in savings to meet the cost of rebuilding from the floods and cyclone. And we're sticking to our strict fiscal rules, including our cap on real spending of 2 per cent or less in above trend growth years. We understand that this will mean that we need to do a lot of things in this Budget that won't be popular, but they'll be the right thing to do.
While these events pose big challenges for our budget preparations, they will not knock our economy off its medium term path. We weren't beaten by the Global Financial Crisis and we will not be beaten now. Because of the decisions we took during the GFC and our strong fundamentals, we face these new challenges from a position of strength.
The Australian economy is half way through its 20th year of continuous economic growth, with low unemployment, a solid investment pipeline, strong public finances and a sturdy financial system.
In resources alone, investment has gone from $35 billion last year to an estimated $56 billion for this financial year. Next year, it is expected to increase even further, to a record $76 billion. On top of this we have strong job creation – over 300,000 jobs have been added in the past year, and over 700,000 since we came to Government. And we are on track to return the budget to surplus faster than any major advanced economy.
Our position of strength gives us the confidence to make the right policy choices, and our fourth Budget will also keep the wheels of reform turning. We will not lose sight of the important task of transforming our economy.
We have an ambitious agenda to keep our economy strong and prepare it for the challenges and opportunities that lie ahead. We have a plan to build capacity through making critical investments in infrastructure, skills and education. We're doing the hard yards in tax reform and superannuation, to broaden the economy and boost national savings.
This will be another responsible budget that helps manage an economy in transition.
We are committed to preparing our economy for the future and making sure we are best placed to take advantage of the opportunities.
On climate change we are putting in place the policies to transition our economy to the low carbon future. It is important that we decouple our economic growth from growth in carbon pollution - we know the earlier we start the lower the cost and the better placed our economy will be.
With the associated investment pipeline, we know that the mining boom will also continue to push our economy towards its capacity. That's why we are investing in the infrastructure and skills, while also putting in place the policies to support increased workforce participation and labour supply. It is also why it remains critical that we deliver on our fiscal commitments and stick to our strict fiscal rules in the upcoming Budget.
But we will approach this task knowing that by making the tough calls now, we are putting our economy in a position of strength.
This was the approach we took to dealing with the worst global recession in 75 years.
It is the approach that we have taken when putting together our previous budgets.
And it is the approach we will take in finalising the budget I will deliver in this chamber in less than seven weeks.