Managing GFC 1 and GFC 2

Launch of Peter Hartcher's "The Sweet Spot"

Speech, E&OE, check against delivery

Sydney Opera House

25 November 2011

It is a pleasure to be here at the launch of Peter Hartcher's book, "The Sweet Spot".

The core contention of Peter's book is that Australia has fundamentally been well governed, and this has underpinned our prosperity through a number of external shocks, including the most recent shock – the global financial crisis of 2008-09 resulting in the worst global recession since the Great Depression three quarters of a century ago.

It is with some personal regret that Peter waited until after I was Prime Minister to reach this conclusion.

Thanks mate.

As they say in politics, timing is everything.

Nonetheless, it is, timely to be launching his book today as it is the day after the 4th anniversary of the Government's election to office.

My core contention is three-fold: first, that the last four years has demonstrated that the Government has managed the worst that the global economy can throw at us and almost uniquely kept Australia out of recession and, instead, overseen employment growth of nearly 750,000.

Second, the Government can, therefore, manage whatever comes next, in part because of the experience we have gained in the first crisis, although no two crises are ever identical.

Third, despite these rolling external crises, the Government has nonetheless implemented a rolling program of socio-economic reform when fiscal resources have been tight and fiscal consolidation well underway.

If we go back to 2007, after nearly 12 years of conservative rule, we were elected with an ambitious platform of reform and with equally ambitious expectations of reform - including education, health, pension reform, paid maternity leave, high speed broadband, climate change, indigenous policy, troop withdrawal from Iraq, not to mention a Defence White Paper taking us out to 2030.

The degree of difficulty in implementing this reform agenda increased exponentially as the financial and economic crisis unfolded.

World economic conditions changed rapidly during the course of 2007 and dramatically at the end of 2008 following the collapse of Lehman Brothers.

Global merchandise trade fell by around 40 per cent.

Share markets collapsed.

In just a few months the New York Stock Exchange and the London Exchange lost more than a third.

Japan's share market fell 60 per cent.

We often forget that the mighty Shanghai Index also lost 70 per cent.

Interbank lending spreads increased 30 fold as liquidity in the financial markets dried up.

There were runs on banks – a global dash for cash.

Major financial institutions fell like nine pins – 30 of them collapsing around the world, or having to be booted out by their governments.

Then there was the real economy.

Major developed economies fell one by one into recession.

Across the major advanced countries, unemployment rates increased by almost 3 per cent in the space of a year as small and medium businesses went to the wall.

In Australia, our response was to do whatever was necessary to avoid recession at home and reduce its impact abroad.

Domestically we took strong, early, decisive action to guarantee the banks.

We feared a run on the banks – so we took the extraordinary step of guaranteeing the deposits of every Australian depositor.

We feared the total collapse of bank lending to business – so - sovereign guarantees were extended to Australian inter‑bank lending to keep the arteries of finance flowing.

We maintained a watching brief on every single financial institution in the country – down to the smallest credit union and building society.

The result: in Australia, no single institution of consequence failed.

Business and consumer confidence was supported – without which we would have faltered and fallen like the rest of the OECD.

For the government, confidence was key.

Then came the next part – rebuilding the real economy.

We learnt from the past.

We asked what we had to do to avoid recession – how we could compensate for the collapse in private demand.

We asked about the lessons of the recession of the early 90s.

And the advice was clear: go early, go hard, go households.

And we did.

We provided a well-crafted stimulus package worth around 4.8 per cent of GDP.

It included cash payments to support consumption, a trebling of the first home owners' grant to support construction and an increased business tax break for private investment.

Treasury estimates that without our stimulus package, unemployment would have risen to 8.25 per cent in 2010.

I am proud of the Government's economic stimulus strategy, the way we phased it, and the results we produced.

I am proud of the more than 200,000 jobs that Treasury estimates were saved by the stimulus.

And I'm proud of the fact that since the 2007 election we have generated nearly 750,000 new jobs, while many economies, four years later, are grappling with double digit unemployment at horrendous human cost.

I am old enough to remember the intergenerational impact of long-term unemployment arising from the earlier recessions in Australia.

Third generation unemployment.

The destruction of regions and towns.

As Prime Minister, at the time, I was determined to do everything possible to avoid this.

I know Peter's book notes that our "economic triumph in managing Australian growth through the global crisis" was not a political victory.

That is true.

However I would much rather be criticised for getting the politics wrong in 2010, while getting the policy right in 2008-09.

The truth is we went for it.

We deployed as much science and scheduling as possible to avoid both the reality and the psychology of recession.

And it worked.

International Response to the Crisis

Internationally we were also strongly engaged with the response to the Global Financial Crisis.

As Prime Minister, together with my colleagues the domestic response to the crisis was my day time job - chairing one GFC working group after another.

Our night time job, given the time differences with Australia, was actively participating in the global response.

The truth is there was little time for much sleep for anybody in those days.

Faced with the threat of imminent financial and economic collapse, as we were in September 2008, the world needed a coordinated policy response that markets would believe in.

We needed to show a real capacity to remove doubts about fundamental vulnerabilities in the financial system.

The pre-eminent body of the time was the G8 — but it failed the test of legitimacy in the new economic realities of the new century.

No China.

No India.

No Brazil.

No Korea.

The composition of the G8 ignored that the greatest engine of economic growth for the decade ahead would be the dynamic economies of the Asia-Pacific region.

As Peter recounts in his book, Australia played an instrumental role in establishing the G20.

It seems extraordinary now, but there was actually a debate about whether there was a need for such a body of the level of heads of governments.

We overcame the attempts to maintain the G8 as the old boys club of times past.

The G20 included appropriate representation from around the planet, included 85 per cent of the world economy, as well as representatives from every continent including, for the first time, three countries from the Muslim world as well.

The first G20 leaders meeting took place in Washington in November 2008 soon after Lehman's collapse.

The immediate task we faced was to rebuild confidence in the financial system, by making sure central banks provided enough liquidity and, in turn, ensuring systemically critical financial institutions could be recapitalised and remain solvent.

Leaders also agreed not to resort to trade or investment protectionism.

Five months later, in London in April 2009, leaders struck an unprecedented deal to coordinate fiscal and monetary stimulus measures to avert the threat of a new global depression.

$US 5 trillion in stimulus measures were agreed.

The result, according to later IMF analysis, and as reflected in market responses, was that the London Summit 'broke the fall' of the global crisis.

The G20 also established a new Financial Stability Board to coordinate and oversee the implementation of reforms in financial regulation.

Six months later, at Pittsburgh in September 2009, the G20 agreed on the Framework for Strong, Sustainable and Balanced Growth — setting out a way in which the G20 would encourage long-term global recovery, by supporting new drivers of growth and by charting a credible path back to surplus.

Processes were also established to increase the voting powers of emerging economies at the IMF and the World Bank.

In Toronto in June 2010, advanced deficit economies committed to at least halve their fiscal deficits by 2013.

And in Seoul in November last year, the G20 agreed to develop guidelines to address large current account imbalances within the Framework for Balanced Growth agreed to in Pittsburgh.

Seoul also agreed to the Seoul Development Consensus as the G20 recognised the challenges facing developing countries in meeting the Millennium Development Goals – and the critical role of developing country growth in kick-starting global growth.

Last month Cannes set the basis for IMF resources to be increased for future global contingencies.

The G20 also agreed to the Cannes Action Plan for Growth and Jobs and reinvigorated a push for global trade liberalisation.

So in the space of 3 ½ years, the G20 has in fact become the premier body for global economic governance.

But we delude ourselves if we believe its future is guaranteed.

The G20 will either perform or die.

No country more than Australia has an incentive for the ongoing success of the G20.

We need to provide continuing creative and practical ideas to nourish the G20, so that it can play its part in stabilising the global economy, and build its long-term stature.

And that means dealing effectively with the second phase of the global financial crisis.

Storm clouds are gathering again, and global growth prospects are growing dimmer under the increasingly deep shadow cast by the Euro-zone debt crisis.

High yields on Italy's and Spain's sovereign debt are putting immense strains on European banks with parallel repercussions for the global financial system.

Calls for stronger European Central Bank interventions are becoming louder and more urgent.

As the EU's October rescue package remains largely unimplemented, a 9 December EU Summit looms as critical for the future of global financial stability.

Lessons Learned

This ongoing turmoil means that, more than three years since the global financial crisis began, we still cannot see its end point.

But we are in a position to look back on our experiences and learn from policy successes and failures.

So what are the global lessons learned from the first phase of the crisis that might now be applied to the second?

LESSON 1: POLICY MUST BE CLEAR AND BOLD

The first lesson of the financial crisis is that, to be effective, policy responses must be clear and bold.

We have learned, painfully at times, that tentative or half‑hearted initiatives do not work.

Several times during this extended crisis, 'band-aid' policy solutions have served only to create more uncertainty and more volatility.

For example, Europe's series of stop-gap measures to deal with the crisis in Greece over the last 12 months only bought time (and often not very much time) before crisis conditions re-emerged.

And the US Treasury's first two attempts to deal with troubled assets in their banking system were vague and tentative, before they finally (and effectively) got it right.

These policies sapped market confidence, rather than boosting it.

There seemed to be a permanent mis-cueing between tentative policy action on the one hand, and market expectations for decisive action on the other.

Given the fragility of sentiment, the worst thing is for politicians to meet and then not produce a result beyond a well written press release.

Under those circumstances, better not to meet at all.

Where policy has worked, it has been clear and bold.

In this category we could include the US solution to troubled assets in February 2009, the London G20 summit stimulus package, the Chinese stimulus, the Australian stimulus and the Australian bank guarantee.

Clear, bold policies work because confidence is self-fulfilling.

In 2008 bank depositors lost confidence in the stability of the banks holding their assets.

A crisis of confidence becomes a real crisis when it precipitates a run on the banks.

Only clear and bold policies have worked during this crisis because they have the capacity to arrest a downwards spiral in confidence.

LESSON 2: GOVERNMENT MATTERS

The second lesson of this crisis is that government matters.

Conservatives believe that governments should play a minimal role – delivering fiscal balance and otherwise leaving the economy alone.

They also tried that in the 1930s.

It didn't end well.

Such a conservative ideology results in a disastrous abdication of responsibility both before and during a genuine crisis.

Let us remember that the sovereign debt crisis afflicting the public sector in many countries today is caused, almost exclusively, by the fiscal impact of the financial crisis in the private sector.

In other words, bailing out the banks blew out budget deficits and sovereign debt – creating the ingredients of round 2 of the crisis.

The alternative (i.e. not bailing out systematically important banks) would have been even more disastrous, as a run on the banks would have precipitated a re-run of the events of the 1930s.

It should be pointed out that before the crisis, Spain, Ireland and several other crisis countries were in reasonably strong fiscal positions.

Their public debt exploded after the crisis because a private sector collapse necessitated massive government bailouts, and at the same time the collapse of government revenues.

The causes of the recent deterioration in public sector fiscal positions are, broadly, as follows:

  1. slow or negative growth causing falling tax revenues;
  2. financial sector bailouts;
  3. stimulus packages to support weak private demand in the absence of strong budgetary positions to begin with; and
  4. unsustainable historical growth in program and entitlement spending.

That is to say: public sector deficits have been caused by private sector imbalances in many countries, rather than the other way around.

For Australia, our approach has been to expand fiscal outlays in support of an expansionary monetary policy to offset collapsing private demand; and then to embrace fiscal consolidation as private demand recovers.

And that is what the government is now doing.

LESSON 3: POLICIES THAT PROMOTE GROWTH ARE ESSENTIAL

The third lesson is that economic growth is key.

The biggest risk to our economies, to our workforces and to sovereign creditworthiness is slow growth.

Because Australia did not go into recession and because growth and revenues have generally held up, it is entirely appropriate for us to have the objective of returning the budget to surplus in 2012-13.

Globally, if economies are growing, more people will be in work paying taxes, and debt to GDP ratios will fall as GDP rises.

It is difficult to simply cut your way out of a recession.

If, for example, austerity measures reduce the rate of economic growth below the interest rate on government debt, it makes it extremely challenging to reduce debt to GDP ratios.

Australia's fiscal program during the financial crisis got the balance right.

We implemented countercyclical fiscal policy in the near term and combined it with medium term fiscal rules to impose fiscal consolidation when the economy was in recovery.

By contrast, the austerity policies in some European countries may be leading to further economic contraction which will ultimately lead to further fiscal trouble as tax receipts remain low.

Policies for Australia

Australia's still relies heavily on our resources boom as a driver of growth and exports in our economy.

There is a genuine risk of a fall in commodity prices if the Chinese economy falters, which will then have flow on affects to our exports, employment, economic growth and tax revenues.

So Australia needs to diversify its economy to provide some insurance against this scenario.

This is why we have invested so heavily in infrastructure and education.

This is why the Government from before its election warned of the need to prepare for when the mining boom is over.

That is why the Government has backed radical investment in the long term drivers of productivity growth.

In education.

In skills.

In training.

In overall human capital development.

In transformative infrastructure like the National Broadband Network.

In market diversification across other destinations and with a new emphasis on agri-business, manufacturing and the range of service industry exports.

This has long been part of an integrated policy approach to avoid total dependency on a single market and a limited number of resource products within that market.

Despite the renewed uncertainty about what will happen in Europe, the IMF predicts a positive economic outlook for Australia relative to the G7 economies.

Australia is in a better position to deal with shocks than almost any developed country.

We came out of the crisis with one of the strongest fiscal and sovereign debt positions in the OECD.

With the exception of Saudi Arabia, Australia has the lowest general government net debt to GDP ratio in the G20.

And Australia's current fiscal balance is far healthier than other G20 countries.

According to the IMF Australia's net borrowing to GDP will be 3.9 per cent in 2011.

This compares to the US net borrowing of 9.6 per cent of GDP and 10.3 per cent for Japan.

What few people realise is that measured by GDP per capita Australia is now the richest country in the G20.

As global clouds are gather once again, the Government's policy response is to remain globally engaged.

Through the G20 we are strongly supporting more resources for the IMF to deal with ongoing financial market turmoil.

We remain committed to adequately resourcing the IMF despite the Hansonite policies of the Coalition to oppose it.

Through the work of the Financial Stability Board (FSB), coupled with the Basel III standards we agreed last year, Australia is supporting measures to ensure the financial system is more resilient in the future.

Domestically Australia is carefully calibrating fiscal policy so it remains broadly counter-cyclical.

And as noted above, we have committed to returning the budget to surplus in 2012-13 ahead of all major advanced economies.

But the ultimate purpose of this careful approach to macro-economic management is not simply a balanced budget.

It is still to provide the nation with the capacity to deliver a broad policy dividend for the Australian people.

Once again, since 2007 nearly 750,000 jobs have been created.

We expect another 500,000 jobs to be created over the next two years.

Protecting Australia from the scourge of the larger scale long-term unemployment is the ultimate social policy achievement of the Government.

The Government has doubled school investment, upgraded facilities at every school and provided parents with far more accurate and reliable data on their child's progress as well as the performance of their school.

We have invested in the biggest health and hospital reform program since Medicare.

We have made the largest ever increases to the aged pension and now we are now looking at improving aged care to give people more choice and control.

We have increased the child care rebate from 30 per cent to 50 per cent.

We have introduced Australia's first paid parental leave scheme, which more than 55,000 families have benefited from.

And we have started laying the foundations for a National Disability Insurance Scheme.

And all this is possible because we have kept the economy strong.

Conclusion - The Reason for Optimism

As the Government celebrates its 4th anniversary there is much reason for confidence.

We have successfully managed the worst economic crisis in 75 years while implementing a significant reform agenda.

In the immediate-term, despite the steady stream of unsettling news from Europe, Australian's economic indicators are remaining relatively sound.

Business and consumer confidence are generally improving, albeit at a slow pace.

Retail spending is growing, even if it is below long term trends.

There is a rational basis for optimism for Australia because Australia has successfully dealt with past crises and is capable of doing so again.

We have managed our way through the worst the world economy has thrown at us.

We have survived.

And we have prospered.

While Captain NO – the alternative Prime Minister – said the sky would fall in, that we would collapse into recession and that unemployment would go through the roof.

I say again, Mr Abbott has neither the judgement nor the temperament to be Prime Minister of this country – most particularly at a time of rolling global economic crisis.

Based on our experience the Government will manage whatever the global economy cares to throw at us next.

And I welcome this book's contribution to our national economic debate.

ENDS

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