On Tuesday I'll be releasing the Mid-Year Economic and Fiscal Outlook, a really important report card on our public finances and our economy. Despite some hefty threats to the bottom line, the MYEFO will still document the most positive turnaround in the budget since records were first kept in the 1960s. Those of you who have been following recent commentary would know that the biggest factor in the mid-year update will be the negative impact the high Australian dollar is having on revenues. Movements in currency markets and the shaky global recovery were also topics of discussion in meetings I had in China and Japan last week, and I'll update you on these important conversations as well.
I won't pre-empt too much of the MYEFO in this note today; instead, I want to explain how, despite the stunning success of our domestic economy, there are global and domestic factors which make it possible to grow faster as an economy but still receive less tax revenue. This week, our dollar again reached parity with the US dollar, after the US Federal Reserve announced further steps to support a struggling US economy. The rise in the Australian dollar doesn't just have implications for the economy, but for the Government's budget as well. The higher dollar means our exporters bring home less income and that flows through to reduced company and resource taxes. That's just the logical conclusion of the dollar going up the way it has in the couple of months since the previous Budget update was issued during the election campaign.
Commodity export earnings are particularly affected, because they are contracted in US dollars. The stark impact of the dollar's appreciation on commodity prices was demonstrated with new figures released by the Reserve Bank last week which showed that while non-rural commodity prices have increased by over 6 per cent in US dollars since the middle of this year, prices in Australian dollar terms have fallen by more than 7 per cent over the same period because of the dollar's appreciation.
Last week, there was also a bit of commentary about how international demand for our non-renewable resources, especially iron ore and coal, remains very healthy, and this is driving a new commodity boom on both sides of Australia. This presents significant opportunities for Australia, but also creates significant challenges. Our policies are designed to ensure that Australians get a fairer return for their non-renewable resources, to promote growth across the entire economy through company and business tax cuts, and boosting the national savings pool with investments in superannuation.
We also understand the need to reinvest in the regional areas that generate the returns. We remember the capacity bottlenecks that emerged during the last commodity boom, and how they held Australia back. That is why the Government is investing $6 billion through a new Regional Infrastructure Fund. This fund will deliver vital economic infrastructure, especially for our mining regions in Western Australia and Queensland, and help us achieve our goal of sustainable growth with low inflation into the future.
Last week's decision by the independent Reserve Bank was a tough one for families and it's been even tougher for customers of the Commonwealth Bank. That's why the Gillard Government has been focussed for some time on doing what we can to make our banking system more competitive. We've already taken some important steps like our $16 billion investment in Residential Mortgage-Backed Securities, which has been critical in helping some of the smaller lenders fund cheaper home loans and put more competitive pressure on the big banks. And we've cracked down on unfair mortgage exit fees so that customers can walk down the road and get a better deal without being locked into a bank that they're not happy with.
We've also been working with our financial regulators to develop a new banking competition package. One part of this package has been working closely with the ACCC to carefully and methodically design new laws to prevent price signalling. There is no silver bullet here, and the global financial crisis hit smaller Australian lenders particularly hard, so it will take time to build up more competition between banks. But the Government has been working through it in a considered way to ensure these reforms are enduring and effective and don't let the banks off the hook, or have unintended consequences for other sectors of our economy. You'll be hearing more in this space soon.
On top of our plans for the banking system, we're also building consensus for a price on carbon – another crucial economic reform. Next week will see the second meeting of the Multi-Party Climate Change Committee, and one of the key issues for the Committee to consider is how a carbon price can help support investment in efficient, low emissions infrastructure, reducing pressure on electricity prices over time. Rod Sims, Chairman of the Independent Pricing and Regulatory Tribunal, cast some light on this last week, saying: "By not having a carbon price, we are going to have energy price increases anyway… Nobody will invest in coal-fired power stations given the uncertainty about what the policy is going to be in the future; but without a carbon price they don't have the price signal to invest in the most efficient alternative either."
The success of our economic policies to date has been partly based on tireless global engagement, especially in Asia. That's why I held a day full of key bilateral discussions with my Chinese counterparts in Beijing on Thursday, including with Vice-Premier Li Keqiang. China is Australia's largest trading partner, and my talks focused on further strengthening our already strong economic relationship so that it benefits all Australians.
Then yesterday I attended the APEC Finance Ministers' Meeting in Kyoto, Japan, which focussed on supporting economic growth and development in our region. Strong and stable economic growth in our region is critical to the future prospects of the Australian economy, in particular our key export industries. The clear message from my colleagues was that the global recovery remains patchy, with emerging APEC economies doing well, while the recovery in key developed economies – the US and Japan – is struggling to gain momentum.
I stressed the importance of continuing with economic reforms that will lift growth and of countries having sound fiscal frameworks. In doing so, I highlighted Australia's foresight in implementing a strict fiscal strategy that underpins our return to surplus, far quicker than that of any major advanced economy. While Australia's net government debt is expected to peak at around 6 per cent in 2012, some APEC economies face net government debt many times this, including Japan which is currently over 100 per cent.
I presented an important report into infrastructure investment in the region - Meeting APEC's infrastructure challenge: breaking the PPP logjam. It highlighted the importance of mobilising private and public funds to meet the infrastructure needs of the Asia Pacific region. Australia, Singapore and the World Bank also committed to support emerging APEC economies with Public Private Partnerships, because we understand the role nation building can play in the future growth prospects in our own economies and throughout the region.
During these important engagements, we had timely reminders of just how stark the difference is between Australia's economic performance and that of other major advanced economies. Unemployment in Europe rose to 10.1 per cent and remained stubbornly high in the US at 9.6 per cent, while in Australia unemployment is nearly half this, at 5.1 per cent. The MYEFO I wrote about at the start of this note will be another chapter in this remarkable Australian economic story, not just during the GFC but throughout 20 years of growth.
After I hand down the mid-year update, I will participate in the G20 Leaders' Summit in Seoul with Prime Minister Gillard. It will be another big week and I look forward to updating you on it next Sunday.
Deputy Prime Minister and Treasurer of Australia
Sunday 7 November 2010