I can't tell you how pleased and honoured I am to address you in my first trip to the United Kingdom since becoming Australian Treasurer. I thank you for inviting me.
I don't suppose there are many relationships between nations that have changed quite as much than that between Australia and the United Kingdom over the last half century.
I'm reminded of a story that our great wartime Prime Minister John Curtin told to a welcoming dinner given by the Lord Mayor at the Guildhall when he visited London in 1944. It's a story that tells us so much about the relationship as it was only a generation or two back.
In his speech to the banquet Curtin recalled a family he knew in Adelaide. The son of his friends had gone to visit England and while he was here he met a girl. One thing led to another, as they often do. They fell in love and were married.
She was very reluctant, however, to go and live in Australia. When her new husband pressed her she confessed that she preferred to stay in England because, as she said, Australia was "where they sent the convicts".
Well Curtin's audience laughed politely but they didn't really know what to make of the Prime Minister's story. That is because it wasn't finished.
Curtin then explained that the husband had overcome his young wife's objections, and they went to live in Adelaide, where they were very happy and had two children.
When the children were old enough the husband suggested they take them to visit his wife's family in England. She said, however, that she couldn't possibly agree. When pressed she insisted she couldn't allow her children to go to England because, as she said, "that was where the convicts came from"!
I suppose that would have been a very characteristic joke about our relationship 60 or 70 years ago.
But even when I was a kid – and I am just a very little way into my own half century – our exports to the UK still accounted for around one-third of Australia's exports overall. A lot of it was wool for the looms of Manchester. In those days wool still made up nearly half of our total goods exports.
We have gone our very different ways since. You looked to Europe. We looked to Asia.
Your textile industry changed completely, and so did our rural industry. Wool today makes up less than two per cent of our exports, and we sell most of it to China. We sell you much more wine than wool, which I doubt anyone would have predicted even a couple of decades ago.
Australia and the UK have both become culturally and ethnically and economically much more diverse, and I think we are both better for it. We have both opened our economies to the world, and demonstrated the benefits of a free and open engagement with the global economy.
But even so today the UK is still our sixth biggest export market and our fifth biggest source of imports, it is the second biggest source of foreign direct investment into Australia, and the British are still the second biggest category after New Zealanders in our annual intake of migrants.
What I really wanted to discuss with you today, however, is the remarkable fact that despite going our own ways in the global economy, we have also developed some quite unexpected similarities. The most striking of these is that both Australia and the United Kingdom are now well into the 17th year of an uninterrupted economic expansion.
I am not entirely sure if we are alone in the world in having such long expansions – I think we probably are – but I am quite sure that for both of our nations these long upswings have changed the ways in which we think about ourselves and about our economic potential.
Compared to the difficult experience we both had over the preceding quarter century, these long upswings have I think restored confidence in the ability of our societies and our economies to adapt to change, to gain from economic globalisation, to thrive and flourish in a competitive world.
I won't presume to tell you about your own long expansion, but let me say a few words about ours.
It's an expansion that has spanned three different governments, and has its genesis in the far-sighted reforms of the 1980s and early 1990s.
Since 1991 Australia's output has increased by four-fifths and real incomes per head have increased half as much again.
We put on an additional three million jobs – an increase of nearly 40 per cent.
We have become a much more open economy. Our trade share, for example, has increased to over 40 per cent of GDP.
As it has grown, our trade has become more diverse. You might think we have just replaced wool with iron ore and coal, but the orders of magnitude are quite different. All our iron ore exports and all our coal exports, both selling at record prices, account for less than 20 per cent of our total exports. In fact all of our mining output, important as it is, accounts for just seven per cent of our GDP – much the same share it accounted for 20 years ago.
These days, as important as exports of wheat and meat and wool and so forth remain to Australia, our exports of elaborately transformed manufactures and of services are each bigger than our rural exports.
Our openness is evident also in the globalisation of Australian business. Australia has always welcomed foreign direct investment. The value of foreign direct investment in Australia has trebled in the last 16 years, and I am glad to say much of it is British.
But the more interesting statistic is that the value of Australian direct investment abroad has increased sevenfold over those years. A good deal of that investment is into the UK.
Today the stock of Australian direct investment abroad is roughly equal to the stock of foreign direct investment in Australia.
Last year the flow of Australian direct investment abroad exceeded the flow of direct investment into Australia – in other words, we joined the UK as a net exporter of foreign direct investment.
There have been big changes in Australia, and by and large we have done well in the last 16 years.
But in recent years we have become more and more aware that our economic expansion was getting tired, and that we needed to rethink our future. In the last five years for example our labour productivity has on average grown around half the rate we managed to achieve through most of the previous decade.
You will have heard a lot about our minerals and energy boom, and it's certainly true that our export earnings from metals, minerals and energy have increased very solidly in the last two years.
But while the value of these exports is up because of sharp price increases for coal and iron ore in particular, the volume increase has been much more subdued.
There is no doubt our export performance has been constrained by shortcomings on our roads, and our railways and ports.
There's no doubt we need more skills and more workers. That is evident enough in the fact that we now have far and away the biggest immigration intake in our history, and yet employers still tell me they have more jobs than they can find workers to fill them.
The conclusion we have come to in Australia is that if we are to continue to expand in the way we have in the past, we need to invest a lot more in our future.
That was the argument we put to the Australian people in the federal election late last year, it was the platform on which the Rudd Government was elected, and it's the policy program that we have been implementing at a cracking pace over the last six months.
It is the strategy behind the first Rudd Government Budget, which I introduced into Parliament last month. In that Budget we announced programs to modernise the economy.
For the first time in Australian history we have created a very large fund we can use specifically to modernise our infrastructure of ports, roads, rail and communications. We created another big fund to enhance our education system and our skills training. We created a fund to improve our health system.
What the Australian Government is proposing is nothing less than a modernisation of the architecture of the Australian economy.
In addition to the programs I have mentioned, our Budget also includes programs to address our needs in water, energy, early childhood education, and a range of other areas too long neglected.
In education we are committed to a long term reform program focused on improving access to high quality early childhood education, providing greater flexibility to schools to lift student outcomes, lifting teacher quality, and boosting the overall skill level of the Australian workforce. In this area, the Australian and British Governments share a common vision – to build outstanding education systems which support a more productive workforce and nurture opportunities for all citizens.
The Australian Government has no net debt, and our investment program won't create any. Indeed, our Budget is underpinned by a strong surplus of 1.8 per cent of GDP.
Not a cent from the Australian Government's new investment funds I described will come from borrowed money. They will be sustained by budget surpluses we will accumulate as a result of restraining the growth of public spending, and banking the gains from our prosperity.
Not a cent from the funds will be spent without the most rigorous examination of cost and benefit, of consistency with good market disciplines, of consistency with the proper roles of the private sector and of the States.
Not a cent will be spent without the benefit of advice from the expert councils we are now setting up to oversee these nation building funds.
Not a cent will be spent without going through the normal appropriation process of Cabinet and Parliament.
By putting in place 21st century infrastructure and world class education the Government can help build Australia's future productivity and sustain prosperity, while maintaining steady inflation outcomes over the medium to long term.
I mentioned earlier that Australia and the UK have developed some remarkable similarities, despite going our own ways in the global economy.
I have already mentioned that we are both into the 17th year of uninterrupted expansions. Another is that we are both completely engaged in the global economy. From time to time that engagement confronts us both with considerable challenges.
This has become even more strikingly apparent since the sub-prime financial crisis began in the US a little less than a year ago, and in one form or another rapidly spread to other developed economies – including yours and ours.
Australian banks had only small indirect exposures to US sub-prime debt. They didn't then and haven't since seen any significant increase in bad debt. In July last year, however, we too saw spreads increasing between the cash rate and the three month rate at which banks borrow – just as spreads blew out in other advanced economy financial markets. Our banks, too, for a while saw longer term funding become much more expensive and more difficult to access.
The market for Australian residential mortgage backed securities vanished late last year, just as it vanished elsewhere, even though there are insignificant default rates on Australian triple-A mortgages which make up those securities.
Nearly 12 months on and I'm encouraged to see we have so far weathered the crisis reasonably well. Our banks remain highly profitable, well capitalised and with expanding balance sheets.
But the fact that we experienced symptoms of the US sub-prime crisis without sharing any of its causes underlines the fact that it is not enough to have a good regulatory framework in Australia, not enough to have an astute central bank in Australia, not enough to have sound, well managed financial institutions in Australia.
We also need a global regulatory framework, a global early warning system, a global crisis management framework, that reduces the risk of financial crises in the future and mitigates their impact.
Earlier this week I was at the OECD in Paris, where among other issues — including climate change — I discussed global financial stability.
I was in Edinburgh this morning for a meeting with your Chancellor of the Exchequer, during which I complimented him on the excellent Treasury paper Embracing Financial Globalisation.
As that report argues, financial crises have a bigger impact on the economy today because the finance sector and financial transactions are much bigger now compared to the rest of the economy, because all financial markets are so closely linked, and because more financial risks these days have been assumed by households, particularly through home mortgages and individual superannuation accounts.
At the same time, we have all become more convinced that efficient and sensibly regulated financial markets can help direct our savings into the most profitable uses, smooth the abrupt dislocations that arise from credit controls, and increase the choices available to households.
The 17 year expansions that the UK and Australia have experienced are evidence that open financial markets can contribute to more stable and efficient output growth.
From here I will be going to Beijing for further discussions on the global economy, and then to discussions in Osaka around the meeting of the G8.
On the need for a better regulatory framework for global financial risks, the Australian Government shares the perspectives of the British Government – a point I developed with Alistair Darling yesterday.
That is why we join with the UK and other nations in seeking a global regulatory framework that ensures improved standards of transparency and disclosure by financial institutions, keeps pace with financial market innovation, encourages convergence of national regulatory standards, and delivers effective cross border supervision of international financial businesses.
That is why we welcome the recommendations of the Financial Stability Forum. We are implementing these recommendations domestically and supporting their wide adoption internationally.
Just last week I announced the creation of Australia's first financial claims scheme, which assures bank customers they would be promptly refunded their deposits, up to a limit of $20,000, in the very unlikely event a regulated institution failed.
A few weeks ago I announced that the Australian Government bond issue will be substantially increased, sustaining the role of these bonds in pricing long term debt across the whole market.
The new bond issue will be matched by an equivalent increase in the financial assets of the Australian Government, for no net change in the Government's balance sheet.
We are also moving to close regulatory loopholes in margin lending and mortgage origination.
Following the joint statement by Prime Minister Rudd and Prime Minister Brown in April, we are working with the UK on ways to ensure an effective early warning system for the global economy.
The IMF's strengthened role in financial surveillance and closer collaboration between the IMF and the Financial Stability Forum are key parts of this.
We also need to ensure that all systemically important economies have a role in crisis prevention and this may suggest greater involvement by a forum such as the G‑20.
Before concluding I would add that another area where global cooperation will be critical is climate change. Australia recognises that climate change is a global economic problem that requires a global economic solution.
One of the first official acts of this Government was to ratify the Kyoto Protocol. This signified our commitment to working with the global community in forging a global solution to climate change.
Since ratifying the Kyoto Protocol, Australia has been actively and constructively engaged in the UN negotiations and other key international climate change forums to forge a new post-2012 outcome on climate change that is equitable, and environmentally and economically effective.
Australia is looking for all countries, in particular the major economies, to make a contribution towards a strong post-2012 outcome with Australia and other developed economies taking the lead.
Because, as a global community, we stand at a critical juncture.
The detailed analysis of your Stern report highlighted the urgent need to address climate change – and that the costs of climate change inaction greatly outweigh the costs of action. That's why countries committed to tackling the climate change challenge will find, in Australia, a partner ready to embrace its responsibilities.
Australia has committed to reducing greenhouse gas emissions by 60 per cent by 2050 (from 2000 levels). To help achieve this target, we will introduce a 'cap and trade' emissions trading scheme in 2010, with the design features of the scheme to be finalised by the end of 2008. Australia recognises that because individual emitters are better placed to discern the costs of reducing their emissions, market based mechanisms will lead to lowest cost abatement.
Australia adopted an emissions trading scheme as our preferred market based instrument in part because it will enable future international linkages – which will allow individuals and firms to pursue lowest cost abatement opportunities across countries. The scheme underlines the usefulness of efficient financial markets, able to price future risks.
The process of transforming to a low carbon economy will mean investing in new low emission technologies. That's why the Australian Government is investing in accelerating the development and deployment of these technologies, through our new clean coal and renewable energy funds.
Through these measures and more, the Australian Government will be an active participant in global efforts to lock in a lower carbon emissions future.
These are certainly challenging times in the global economy. The sharp slowdown in the US and turbulence in global financial markets mean that global growth will slow relative to our forecasts a year ago. Global share markets have fallen, borrowing costs have risen, and confidence has deteriorated around the world.
While financial markets have settled in recent weeks, spreads remain elevated and we are by no means out of the woods.
To complicate matters, rising energy and food prices are contributing to a build up in global inflationary pressures. No economy is immune from these forces, and certainly not Australia's.
But for Australia, these challenges come at a time when our economy is benefiting from a surge in global commodity prices. In the last four years the Australian dollar index for our commodity prices has almost doubled. Higher commodity prices have already significantly boosted domestic incomes and have helped contribute to the Government's overall strong fiscal position.
Our major markets are in Asia, where growth has been little affected by the slowdown in the United States. This is why I argue Australia is in a strong position from which to meet the challenge of global turbulence, provided we get the economic fundamentals right. Getting those fundamentals right means we need to deal with unacceptably high inflation today, as well as invest for tomorrow.
There is no doubt that our strong fiscal position and the continuing strength of commodity prices present a once in a generation opportunity to build a modern economy capable of meeting the challenges of the future.
And it is an opportunity that the new Rudd Government intends to grasp with both hands. By investing in future productivity and future prosperity. By building a strong and flexible economy, with a world class financial system, that can thrive in an increasingly competitive global economy.
And by using this opportunity to begin tackling the big challenges on the horizon, like climate change.
We are determined to put in place the infrastructure, the skills, to ensure we have the means to permit Australia's long expansion to continue for many years to come.
Under the Rudd Government Australia will remain – as the UK remains – an exemplar of openness, of engagement with the global economy, and of a willingness to invest in our own future.