Interview with Fran Kelly
ABC Radio National Breakfast
29 January 2009
SUBJECTS: IMF Report; Global Recession; Economic Security Strategy; Deficits; Jobs
KELLY:
Treasurer, thanks for joining us again on Breakfast.
TREASURER:
Good morning, Fran. It's great to be back in the new year.
KELLY:
Treasurer, these are very grim forecasts indeed from the IMF, but timely action, pace, is what the Monetary Fund says is needed. Isn't it about time that our Government did more? Put a second package on the table?
TREASURER:
Well, these are, Fran, very sobering forecasts. They are, I think, the third downward revision of IMF forecasts in just four months. So, there has been a dramatic slowing in global growth. That slowing now is hitting hard in all developed economies and, sadly, it is also moving to developing economies. So, we're not immune from the impact of that.
Back last October when we moved very early with our Economic Security Strategy and our $10 billion stimulus then many people questioned the wisdom of it. I think what these global forecasts show is the wisdom of the early action we took last October with our Economic Security Strategy and we said then that we stood ready to take further action should global conditions demand it.
We are now evaluating all of the data coming in from around the world and of course we're looking at the impact of that October Economic Security Strategy. Only yesterday you saw some data from Woolworths, for example, which showed that the Economic Security Strategy had had a most direct impact in terms of boosting domestic demand, domestic growth, and of course, supporting jobs.
KELLY:
In terms of acting, though, and when to act, the IMF report shows that the global situation has deteriorated. If you need any more proof - and I'm sure you got plenty of briefings when you were in the US just last week about the state of the world economy - the proof is there, things have got even worse than they were last October. Surely the time to act is now because, as the IMF said, until governments take forceful action to restore confidence in financial markets there will be no recovery. If you want to stay ahead of the game you've got to act.
TREASURER:
Well, I think we have been ahead of the game and the IMF...
KELLY:
Yes, but this is an ongoing crisis.
TREASURER:
Of course it is and that's one of the reasons why I was in the United States late last week talking to policy-makers. There's no doubt there is a very strong case for overwhelming force to be used in terms of direct stimulus to nations around the world, and of course Australia will be impacted by this global contraction. The consequence of that is we will have to consider, and have on the table, all of the options. But we don't rule out any action in this environment, but the action we do take will be responsible, it will be hard-headed and it will be effective.
KELLY:
But will it be soon?
TREASURER:
Well, I'm not going to speculate about that on this program this morning, Fran. But last October we moved early and there were many in the community who questioned the need for that action last October, the size of the action that we took.
But I think what you see in this IMF report today is that the sharp contraction in the global economy that's occurred basically since then has caused a huge drop in global demand, and what the IMF says about that is that governments must act. They must act early, they must act directly, and they must act in a temporary way, but they must act to boost demand in the face of this global slump.
KELLY:
That's exactly right. Early in the program we spoke to Jorg Decressin, he's one of the chief economists of the IMF, one of the co-authors of this report, and he stated - I suppose it's not rocket science - but one of the reasons for the continuing severity of the global financial crisis was consumer confidence. Let's have a listen.
DECRESSIN:
The second important element is confidence. I mean, producer and consumer confidence have fallen off the cliff in the last couple of months and the data that has come in on industrial production has been abysmal. Confidence is very important for the economy and it's very difficult to forecast. Famous British economist, John Maynard Keynes, called this 'animal spirits' and they have been taking a turn for the worse to the extent that we did not imagine back in October.
KELLY:
That's Jorg Decressin from the IMF. There's no doubt that those animal spirits here are needing some taming too. I know you keep saying we will act but we're not sure when. But that consumer confidence needs to hear from the Government that action is coming and probably an expectation it's going to have to be bigger than the first package to reassure people. Is that a challenge you face?
TREASURER:
Well Fran, we got ahead of the curve when we put in place the Economic Security Strategy last October. And in this debate about what's occurring in the global economy, we should never lose sight of the underlying strengths of the Australian economy. And one of those strengths during this period of great global uncertainty was the fact we had an economic stimulus package in place while confidence globally and demand globally was falling off the cliff.
The second point is that we have a very strong banking sector, perhaps the strongest banking of anywhere in the world.
But most importantly, there's probably no government in the developed world which has more capacity to respond further than Australia. We've got a lot of room to move when it comes to both fiscal policy and monetary policy, and both myself and the Prime Minister have made it clear that as the situation demands it, we won't hesitate to act.
KELLY:
Okay. In terms of acting, there's plenty of calls, or plenty of free advice coming your way. Business is looking at jobs and says more money is needed for training, in particular to keep apprentices studying, for instance, even if they get laid off; if possible, assistance to help keep them in jobs. Is that a good start? Do you see merit in that kind of idea?
TREASURER:
I think all those options do need to be on the table, training and many other initiatives for the medium-term and long-term. But the point that the IMF makes, we've got to underscore this, is that given that there has been such a sharp fall in global demand, we've now got the worst global economic conditions since WWII. What the IMF says is that there is a need for direct stimulus, immediate stimulus, temporary stimulus to reverse that very sharp fall.
KELLY:
So, that means more money directly for things like building programs, for instance, low-cost housing, affordable housing?
TREASURER:
It could mean a range of expenditures. But the most important thing that we must do is to arrest the slump in demand which has been caused by these dramatic global circumstances.
KELLY:
The most immediate stimulus would be tax cuts, as Malcolm Turnbull has been saying for weeks now, isn't it?
TREASURER:
Fran, the IMF rejects tax cuts because tax cuts don't necessarily bring the immediate stimulus that is required. Tax cuts are basically an amount of money which is spread over the whole year. They don't necessarily deliver the most direct stimulus in these circumstances. So, in fact, the IMF's solution that has been put forward in this report directly contradicts what Malcolm Turnbull has been saying. But look, I'm not interested in what Mr Turnbull is saying. What I'm interested in is the national interest. And this Government will act swiftly and decisively in the national interest and we will put in place, if required, a range of policy responses which are consistent with the IMF's analysis.
KELLY:
And is the budget deficit debate now behind us? Last year deficit was a dirty word in this country. You didn't even want to utter it. Now the IMF says governments basically must go into deficit and they're predicting Australia should look at a deficit over time of $35 billion.
TREASURER:
Well, there's no doubt that this dramatic slowing in global growth has caused a dramatic slump in commodity prices and that has a dramatic impact on the bottom line of our Budget. Back in MYEFO in November we revised down revenues by something like $40 billion over the forward estimates, and that was before we have now seen the worst of what's happening in the international economy, and there's no doubt this will have further implications for the bottom line in our Budget.
KELLY:
In other words the next Budget will be a deficit Budget and there's nothing wrong with that?
TREASURER:
We've said before that if there was a further slowing in global growth we would entertain a temporary deficit - a temporary deficit to protect jobs and to strengthen growth.
KELLY:
Talking about those MYEFO forecasts - Mid-Year Economic Review Forecasts from November - they will now be out of date again too, won't they? How soon will you give us some revised forecasts?
TREASURER:
Well Fran, we'll update those in the normal way.
KELLY:
Not till the Budget?
TREASURER:
Well, we don't do updates on a daily basis or a weekly basis. We sit down and examine all this in a hard-headed and methodical and responsible way. But there's no doubt that there are very significant implications for the bottom line of our Budget caused by this slump in global growth, and most particularly the drop in revenue coming to our Budget from lower commodity prices.
KELLY:
Talking about revised forecasts, Access Economics is predicting that unemployment could be as high as 7.5 per cent by early next year. What's Treasury telling you?
TREASURER:
Well, I don't respond to individual forecasts. We've made it very clear at MYEFO and we've made it clear on many occasions since MYEFO that this dramatic slowing in global growth will have an impact on unemployment and it will certainly push unemployment up. That's the reason we moved so swiftly back in October with our Economic Security Strategy, and that is very much to the fore of our mind as we consider our response to this further dramatic collapse in global growth. It's all about supporting jobs. It's all about supporting Australian families to have employment in the face of this very dramatic global recession.
KELLY:
Treasurer, as you've already said, there's room to move on fiscal policy and on monetary policy. The Reserve Bank meets again next week. Given the state of the economy and yesterday's inflation figures, do you expect a hefty drop in interest rates next week, and is that your message to the RBA? Keep dropping rates as one of the levers to protect our economy.
TREASURER:
Fran, you know that I don't speculate about RBA decisions in terms of interest rates. I made the observation earlier that the Australian Government has more room to move when it comes to fiscal and monetary policies than just about any other government in the developed world.
KELLY:
And just finally, Treasurer, there's been a wave of job cuts. There's more and more companies, retail outlets, going into receivership. What's your message to people who are facing the loss of their job?
TREASURER:
My message is that the Australian Government will do everything within its power to support jobs and to support and strengthen growth in the Australian economy in the face of this prolonged and sharp global recession.
KELLY:
Treasurer, thanks so much for joining us.
