It's good, very good to be back in Brissy, sunny Brisbane today, when you come from cold Canberra as I do these days. And to be here today with our friends from the business community to discuss some of the challenges we face in response to this global recession.
Also to thank ACCI for its assistance in organising this event and to reinforce something which Craig said before in relation to the temporary investment allowance, at currently 30 per cent, prospectively 50 per cent for small business through until the end of the year. You might say how did that come about and you might say what is the point of coming to gatherings like this?
Well I was at a gathering like this at the end of last year in Canberra with ACCI and sat at the table with the guys and girls from ACCI and they put this to me as an idea. So that's about how it went, I think. And I went back and badgered the Treasury with it and we bounced it around the table a few times. A bit of nip and tuck here and there but that's where it came from. It came from interaction like this with your representatives in peak industry bodies.
So the purpose of gatherings like this is twofold. One is to engage with you as the men and women of small business and of business in general about our strategy for dealing with the global economic recession. But the second is this, to also hear from you about any idea you have for us about how we can do things better. That is the purpose of being here today.
My simple message today is that there are strong factual grounds on why Australia can be confident about its economic future. There are strong factual grounds which underpin the proposition that Australia is doing better than most other economies at this difficult time.
My central purpose today here in Brisbane, as I have done in Melbourne and Sydney earlier in the week is to present the core economic data which underpins this message of confidence for our future and to outline the core elements of the economic strategy we are implementing which underpins so much of the data.
We all know what the global reality is; the global reality we together face. That the world is facing the worst global recession in three quarters of a century, that global growth is contracting for the first time since the IMF began keeping records. That global trade flows have collapsed and global investment flows have collapsed and the inevitable increase in global unemployment is well and truly underway.
But despite all of these global challenges, Australia is weathering the storm better than nearly all of our global competitors. Bear these three facts in mind. Our economic growth is higher than all the other major advanced economies in the world. Our deficit is the lowest of all the major advanced economies in the world. And our level of net debt is the lowest of all the major advanced economies in the world. It's important to bear these three facts, core facts, in mind.
When Lehman Brothers collapsed late last year, share markets around the world fell off a cliff and governments around the world dramatically revised down their forecasts for economic growth. I said that as a nation we were all in this together. Big business, small business, governments - federal, state and local - business and unions, government and the community sector, all in this together. Because if we fight this together as we have been, we can cushion Australia from the worst aspects, the absolute worst aspects of the global recession.
From day one, the Australian Chamber of Commerce and Industry has played a strong role in meeting this challenge. The Government values its relationship with ACCI and the opportunity for regular consultation across the wide range of policy challenges facing the business community. That dialogue between business and government from our perspective is essential. I know that businesses around the nation are working hard to hold onto their staff and keep contributing to economic activity.
Today I want to tell you as Prime Minister of Australia that I appreciate your efforts. These are tough decisions, they are hard decisions. As Craig said before, for small business in particular, cash flow is key. When you have uncertainties concerning markets, when you have uncertainties concerning how the global economy will unfold in the future, these are tough and hard decisions. But those which you have made in terms of retaining your staff wherever that has been possible, we as the Government of Australia appreciate your efforts because we know it is difficult, difficult out there.
Today I want to outline the challenges facing the global economy and the Government's strategy of nation building for recovery to see us through the global recession. And I will be interested later, as I said before, to hearing your responses and any propositions or questions you put to us.
Let's turn to the data which is with us today. The global economy is experiencing the worst economic collapse in three quarters of a century. If you look at the data which is before us, the data here, and compare what we are projecting for 2009 in terms of contraction of global growth of 1.3, and contrasting it with what happened in the recession of 1991, 1.5 percent global growth positive and 1982, global growth positive at 0.9. And those two previous earlier recessions globally being in fact the low points since the IMF began collecting data back in 1951, you will see in relative terms where we are against economic history. These are, since the period of the data began to be collected, unprecedented times. For the global economy to be contracting as a whole in 2009 is unprecedented since the IMF began collecting data way back in 1951.
The average contraction in growth in the March quarter across the OECD economies was 2.1 per cent. And falling growth has been particularly pronounced among Australia's trading partners. Eight out of our top 10 trading partners are in recession and growth in the remaining two countries, India and China - to the right of your screen - has fallen dramatically over the last year. This of course directly affects Australia.
Across the developed world, only three of the 33 advanced economies recorded positive growth in the March quarter. Australia was one of those three - we are the orange bar on the top right, growing at 0.4 per cent in the first quarter. In the March quarter Australia was the fastest growing economy in the OECD group of developed countries. And we are the only major advanced economy not to have fallen into recession at this point.
But Australia is not out of the woods just because we have so far avoided a technical recession. There are many bumps in the road which lie ahead. I don't need a crystal ball to tell you that there will be more bad news to come, with growth continuing to be slow, and unemployment continuing to rise. But the bottom line is this, as the data demonstrates: Australia is faring better than most around the world, in part because we this Government, took early and decisive action.
The Government acted early and decisively to support the economy, to step in while the private sector was in retreat. When the global financial crisis intensified in September last year, the Government recognised the severity of the crisis and formulated a comprehensive economic strategy to support the economy.
In the short term, the government moved quickly to respond to the immediate crisis in the banking sector. Our first priority was to ensure that the flow of credit to Australian businesses and mortgagees didn't evaporate as global financial markets collapsed. Members of ACCI and business people around the world know better than most that credit is the lifeblood of the economy. Without credit, businesses do not have the cash they need to support their operations and grow their business.
During the financial crisis, the global financial system went into meltdown and inter-bank lending ground to a halt. If you look at this particular chart you will see where the three month bank credit spreads were headed around the rest of the world. That in orange at the top shows a spread of in excess of 350 basis points in the United States. The black line is the UK which represents a credit spread at the peak of the crisis of some 300 basis points. And you can also see where those in the Euro-zone were with three month bank credit spreads as well, peaking at something 150 basis points to 200 basis points and Australia is the white line underneath, considerably south of that.
This was the challenge that we faced. It is the physical availability of credit and the price of credit given the constraints in global financial markets which occurred following the Lehmans' collapse. As the chart indicates, the financial crisis caused the price of risk to increase dramatically. Inter-bank lending virtually froze. Australian banks found themselves unable to raise the offshore funds they need to lend into the Australian market.
Again I draw your attention to the table. In September, Australian bank raisings had fallen to just $1.7 billion, down from the $13 billion a month earlier in the year. As the chart indicates, in October there were no raisings at all. Offshore markets were totally closed to Australian banks. That is why the Government took a historic decision in October to guarantee term wholesale funding for APRA regulated banks, building societies, and credit unions. The guarantee, as you can see again from the slide, had an immediate effect. Remember there were no offshore raisings at all in October, none in November. Once the guarantee kicked in, in December you began to see a recovery.
To help the guarantee, offshore markets had opened to Australian banks and they were able to raise than $15.4 billion in guaranteed funds that month. And in January they raised more than 20 billion offshore. With the guarantee, domestic banks could access much needed funds to support lending in Australia.
It is important also to look at what has happened to the composition of the fund raisings by banks in most recent months. The grey part of each bar of this offshore raisings, that which have been possible of the basis of the Government guarantee. The black part of the bar represents domestic raisings which have been made possible on the back of the Government guarantee and the little bit of white and orange underneath are those which have so far been able to be raised absent the Government guarantee. As you can see, as of the May data there is some emerging sign of some return to normality but my overall point to you is that absent the Government guarantee to inter-bank lending, the pattern that we saw evolve in October, and November and the beginning of September would have continued, effectively resulting in a strangulation of credit supplies to the Australian economy.
That is why we acted. It is the first time in the history of the Commonwealth that the Government has had to provide a guarantee, a sovereign guarantee to inter-bank lending. The consequences for the real economy and the supply of credit to businesses such as yours, however, would have been catastrophic in the absence of the provision of that guarantee. These then are the decisions that we have taken, that is why we believe it's important that all Australians and financial institutions are marching in the same direction.
That is why I believe Australians have every right to be furious with today's decision by the Commonwealth Bank to increase its home loan rate, hindering the efforts of the Government, the Reserve Bank and the business community to stimulate the economy during this global recession. We are all in this together, businesses, workers, government, the Reserve Bank. And today's decision by the Commonwealth Bank runs counter to this nation-wide effort.
In addition to helping stabilise the financial system, the Government has also acted to support activity in the real economy. Our plan has been simple; to support jobs today, small businesses today, apprentices today by building the essential infrastructure that Australia needs for tomorrow.
Our approach to stimulating the economy was to start with the components of aggregate demand and then identify policy levers that could be used to support activity in each area. This is very much the chart that were presented with in the Cabinet last October in working out how precisely we could act by way of Government policy intervention to provide support for the economy in what was looming as a very difficult year ahead, given that the private sector was in retreat for the reasons I described before.
The key components of Gross Domestic Product in Australia of course are as follows: consumption - about 54 per cent of GDP; dwelling construction - about six per cent of GDP; private business investment - critically 17 per cent of GDP; and public final demand 22 per cent of GDP. In each of these key areas, we sought to identify measures to support the economy. And we looked for measures that would support the economy right through the global recession; from immediate support, to medium-term action, right through to long-term action.
Let me turn to some short term measures. Our first measures were designed to provide immediate short term support to the Australian economy as the global economy deteriorated rapidly. Since infrastructure investment has long lead times, the Government decided to introduce fast-acting measures to directly stimulate consumer demand. Remember consumption represents some 54 to 55 per cent of the total (inaudible) economy. It's the place you go to if you need to have an immediate effect.
To achieve this we invested $21 billion to provide immediate support to the economy through cash payments to families, to pensioners, veterans, and low income earners. As the chart shows, those payments have boosted the Australian retail sector. While in the major advanced economies, retail sales have fallen on average by 1.1 per cent since November last year, in Australia retail sales have grown 4.8 per cent during this time.
In the March quarter, the consumption component of GDP contributed positive 0.3 per cent to growth. There is no doubt that without the economic stimulus package phase one that I have just described through cash payments, we would not have seen the positive numbers in last year's* National Accounts.
Of course there are other factors at play but without the stimulus measures we would clearly have fallen into a technical recession. This therefore I believe is an important set of data. Again if you look at the impact of retail sales in Australia relative to the Euro-area, New Zealand, Japan, Canada and the United States there is a clear and demonstrable effect which arises from the direct investment that we undertook beginning in the fourth quarter last year, necessary in order to provide immediate injection in the economy.
Second, we introduced another measure to stimulate the housing sector. The Government introduced a $2 billion First Home Owners Boost to support the housing and construction industry. This has been a significant boost to construction activity. Housing finance commitments have increased substantially, particularly the number of loans for the construction of new houses, which has increased by 42.6 per cent since the First Home Owners Boost was introduced in the October statement of last year.
The recent trend in building approvals has also been upward, following the sharp falls in 2008. Compared to the same time last year but before the onset of the global recession, building approvals are down by only 16 per cent in Australia. That is 16 per cent down in Australia and that compares to falls of 38 per cent in Canada, 50 per cent in the US and 57 per cent in New Zealand.
In the March National Accounts, private dwelling construction contributed minus 0.3 per cent to growth, a solid result for a cyclical industry in the context of a global recession that has seen construction grind to a halt in most advanced economies. In aggregate, the national accounts figures last week demonstrated these short term measures have worked to support the economy until our infrastructure investment comes online.
As the chart indicates, without the short term economic cash stimulus payments, Australian growth would have been minus 0.2 per cent in the March quarter, pushing Australia into a technical recession. Many businesses including a number of those represented in this room, particularly in the retail sector, would have found it very difficult to keep their heads above water through the global economic storm were this action not taken.
Again when you look at the, both sides of the slide, both in December ‘08 when you see the impact of the measures we took, on the left hand side in the light blue, the data without stimulus. Orange representing the actual stimulus having flowed through but in particular in March ‘09 you saw more stimulus flow through, the result again included below the line with the orange bar being that above the line following the stimulus.
The demonstrable effect of these actions is clear in the data. Beyond the immediate term, the Government also acted early to support the economy in the medium term. To support business investment we've taken decisive action to strengthen the incentives for business to make capital investments by introducing the 30 per cent business tax break for capital investment and a 50 per cent break for small businesses. This is a major initiative for business and we believe it will assist in encouraging businesses to invest for the future and for economic recovery.
As chart indicates, Australian business investment through the year to March was positive at 1.1 per cent, a much stronger business investment than our peer countries. Again, if you look at the comparable data, all the other economies are south of the line among major advanced economies, and Australia just north of the line. In addition, the Government has sought to boost public investment. The Government has stepped in to boost the construction and associated industries by investing in medium term, shovel-ready infrastructure projects that we've spoken of so much of in recent times.
Firstly, the largest school modernisation program in Australia's history, generating local jobs for businesses on thousands of sites around the nation.
Second, construction of 20,000 new social and defence homes and repairing almost 50,000 homes. I've come just early this morning from Upper Kedron, a classic example. This is defence housing for our men and women in uniform living in Enoggera. The current program nationwide is to roll out about 1,000 more, extra units of defence housing. With the arrival of the economic stimulus strategy, we've decided to increase that by a further 800 units of housing.
In the city of Brisbane, 103 of those units are being constructed at the moment. The people I met this morning out at Upper Kedron were in fact tradies from all over Brisbane working in considerable numbers on that site. In that particular part of the site I think we had some 40 or 50 houses under construction and I handed over the keys to the Brigadier from Enoggera. This is a program we announced in February. We've handed over the keys for first new houses as of the middle of June.
Given what you all know happens within the wheels of government, that ain't bad.
Third thing is providing free ceiling insulation for 2.7 million Australian homes and this has been of direct assistance to not just the ceiling insulation industry, not just of direct benefit of course in terms of its greenhouse gas impact, but also all the associated industries, transport, manufacture, installation and everything associated with it. All together these measures put in aggregate represent $30 billion or about three per cent of GDP being invested directly into construction, in construction related activity starting this quarter, kicking into full swing in the following quarter, that's the third quarter of ‘09 through until the middle of ‘10 and beyond and then tapering down.
The objective with this and the other measures is as follows; to build the infrastructure we need for tomorrow, in so doing support the jobs and the small businesses and the apprenticeships who need support today.
The school modernisation program in particular is of fundamental importance. We are turning every primary school in the country into a construction site - every one, government, non-government, without apology, 7,500 of them.
Our secondary schools - 500 of 2,500 will have the construction of new science centres or new language centres. In primary schools, 21st century libraries. And in all these schools -10,000 nationwide - injections of funds to support fundamental maintenance and repairs as well. The objective is to support jobs, small business and apprenticeships in local areas now and on top of that build the schools that we need for the 21st century. This is part and parcel of what will unfold in the months and quarters ahead.
Over the longer term, the Government's strategy is nation building for recovery. We are supporting jobs today by investing in the longer term infrastructure the nation needs for tomorrow as well, investing in major rail, road and port projects. Investing in major clean energy projects including what would become the largest solar energy project anywhere in the world of 1,000 megawatts. We'll also be investing up to $43 billion in partnership with the private sector to build a high speed National Broadband Network to finally bring Australia to the global digital economy of the 21st century.
In total, about $50 billion for around 70 per cent of the Government's overall stimulus package is directed to nation building infrastructure over the medium to long term. And by the end of the year, we'll have more than 35,000 construction projects underway around the country, 35,000. As the chart indicates, public final demand is set to grow strongly driven by a record 25 per cent increase in public investment in ‘09-10.
The Federal Government is making up a large part of the increase, stepping in to use our strong balance sheet to support investment. This strategy of short, medium and long term measures to support the economy during the global recession has helped to cushion Australia from the worst impacts of the global recession. In aggregate, Treasury has estimated without our nation building for recovery plan over 200,000 more Australians would be out of work. Without government action unemployment would peak at over 10 per cent.
Yesterday we saw an increase in unemployment to 5.7 per cent, returning it to where it was in March this year, although employment remained fairly steady falling by about 1,700. This data confirms the global recession is continueing to have a direct impact on the Australian economy and on Australian jobs. No one likes to see unemployment rise as a result of the global recession. But Australia's unemployment rate is lower than all the major advanced economies except Japan.
Again, bear this in mind - we have the fastest growth of the major advanced economies.
We have the lowest deficit of the major advanced economies.
We have the lowest debt of the major advanced economies and we have the second lowest unemployment rate of the major advanced economies.
In these difficult economic circumstances it is hard to produce results like this. Government policy action has been instrumental. Actions also, independently by you as the women and men in business have been equally critical.
While there's a tough road ahead, Australia is weathering the storm better than most economies in the rest of the advanced world. And Australians have every reason to remain confident that we'll continue to weather the storm of the global recession better than most other advanced economies.
If we go to the impact of all these measures on growth, overall the Government stimulus will have a significant impact on growth. In 2009-10, Treasury estimates that growth will be increased by 2.75 per cent as a result of government stimulus investments. In 2010-11 growth will be increased by 1.5 per cent. And again, I will draw your attention to the graph and the difference between pre-stimulus measures and post-stimulus measures as underpinned by the data which is in front of you.
In the last few days, we have received some positive indications that businesses and consumers are reacting positively to stimulus packages.
I welcome the news on Tuesday that business confidence has been on the rise. The increase in business confidence for May is the sharpest rise in business confidence since 1989. Business confidence is now at its highest level since February 2008.
Data out on Wednesday this week showed consumer sentiment was up by 12 per cent in June. This is the largest increase in 22 years. Consumer sentiment is now up 20 per cent since the announcement of the Government's first economic stimulus package back in October. The consumer sentiment index is now at its highest level since January 2008.
There is still a long way to go, but this data suggests that Australian businesses and consumers can see some light at the end of the tunnel. And again I say by no means are we out of the woods yet. But if government had not acted early and decisively, Australia would already be in a severe recession and that in turn would have negatively affected confidence, both business and consumer confidence.
The global recession has of course had a significant effect on Budget bottom lines, both in Australia and around the world. The Australian Budget has been hit with a $210 billion collapse in Australian tax revenues because of the global recession. This is the greatest collapse in tax revenues in our nation's history and has made a Budget deficit necessary in Australia until the economy recovers. But despite the revenue collapse and the measures that we have taken to stimulate the economy, Australia's AAA credit rating has been reaffirmed since the Budget.
On debt and deficit, Australia's net debt is now lower than any of the other major advanced economies. Australia to the left of your screen and then you move through Canada, the United Kingdom, the United States, the advanced 25, the Euro area and Japan.
Government net debt as a share of GDP is expected to rise to 75 per cent in the Euro area, 83 per cent in the UK, 83 per cent in the US and 136 per cent in Japan. By contrast Australia's net debt is projected to peak at 13.8 per cent of GDP in 2013-2014 before it starts to fall again as our economy moves into a stronger period of growth.
And Australia's deficit of 4.9 per cent of GDP is the lowest of the advanced economies. The budget deficit in the United States is 13.6 per cent of GDP. In Japan, the deficit is 9.9 per cent of GDP. The UK, it's 9.8 per cent of GDP. I'd say to you all as leaders of the business community it is important to bear these fundamental facts, the statistical data in mind as you confront a dishonest scare campaign on debt and deficit. We have taken these measures consciously to stimulate the economy and I repeat - of the major advanced economies, Australia is now the fastest growing with the lowest net debt, the lowest deficit and with the second lowest unemployment rate.
To conclude, the Government is acting decisively and comprehensively to support economic growth. This represents for us a new partnership between government and the business sector and it demonstrates the Australian Government is committed to the support and opportunities for business. In particular, I'd encourage all businesses to make the most of the incentives the government has implemented during the past nine months. I repeat and reiterate what Craig had to say before, to encourage all of you as businesses to take advantage of the 30 per cent general business tax break for eligible investments that are available until the 30th of June and the 50 per cent small business tax break that lasts until the end of this year. This tax break for investment is a measure strongly advocated by ACCI, as I indicated before, and we would like you as people in business, tailored to the circumstances of your individual business, to make maximum advantage, to take maximum advantage of it.
The Government cannot stop the global recession, we cannot stop the recession causing harm to businesses. We cannot cause the global recession to stop harming employment. But as a Government by acting we can make a difference.
There are two alternative strategies here. You can sit back and sit on your hands and do nothing. You can complain and you can moan and you blame somebody else for events that began beyond our shores and were not controlled by us, which began in US financial markets more than a year and a half ago.
Or you can say and conclude, as we the Government have done, that we have responsibility to act, a responsibility to intervene, a responsibility to make a temporary difference while the private sector is in retreat, by government stepping into the breach. That underpins the economic strategy we've embraced. And to do so on the base of a prudent financial strategy which sees the Budget return to surplus in the medium term and to use those surpluses to repay government borrowings. This has been a responsible strategy for Australia.
I believe we've demonstrated in the past nine months that by working together we, government and business, can cushion Australia from the worst impacts of this global recession. I say again, we are not out of the woods yet. There are still many problems that still lie ahead.
But we intend to maintain this active and dynamic partnership with business to see Australia through. Nation building for recovery, but equally nation building for the future using skills, using infrastructure and the other investments that we make now to support jobs, to support business and to support apprenticeships to use those investments also to turbocharge productivity growth for our economy into the future.
That's the Government's mission, thank you for your support