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An Australian story - from fading uncle to economic success

By Peter Costello - posted Thursday, 9 March 2006


I want to take you back to the early 1990s to the kind of nation we were then - insecure, uncertain about our economic prospects, battered by recession, suffering high unemployment and job insecurity, and scarred by the recent experience of 17 per cent mortgage interest rates.

On a visit to Australia in 1994 the former Prime Minister of Singapore Lee Kuan Yew reiterated a previous warning that Australia could become the “poor white trash of Asia”. This was partly a reflection on Australia’s economic state. It was also a reflection on the rise of the “Asian Tigers”.

The dynamic growth of East Asia was in stark contrast to the economic malaise of Australia. When the government appealed for “enmeshment” in Asia it was making an economic appeal. The thinking was that if we could join a region that was successful we could overcome our own weakness.

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The rise of the Asian Tigers through the ’80s and the comparative decline of Australia through the recession of the early ’90s sapped our confidence as a nation. And what is more, it sapped the respect for Australia among our neighbours and the wider international community.

The Coalition Government was elected in March 1996. We laid down an economic program setting out medium-term targets on fiscal policy, monetary policy and debt management. By July 1997 we were on track to balance the budget for the first time in seven years. It was a close run.

Beginning with mass capital outflow from Thailand in June-July 1997, financial contagion began spreading around the region. Those in Australia who had marvelled at the growth rates and saving rates of Asian Tigers saw these countries stagger and reel. They could only shudder to think what would happen to Australia - considered by many to have a weaker economy.

But Australia did not succumb to the Asian financial and economic collapse. In 1997-98 our growth rate was 4.5 per cent. We produced the first balanced budget in seven years. Paul Krugman writing in Fortune Magazine in December 1998 dubbed Australia “the miracle economy”.

In March 1996 the APEC Finance Ministers met in Japan. It was the first APEC meeting I attended. We were given a polite welcome but we were not respected. Australia was tolerated much as a fading uncle is tolerated at Christmas dinner - there out of politeness and past association rather than present or future expectation.

But we proved strong and resilient through the Asian economic crisis. We survived and we offered financial assistance to badly affected economies in the region.

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In May 1999 APEC Finance Ministers met at Langkawi in Malaysia. We were not the fading relation at this meeting. Australia had won a great deal of respect. The region knew Australia was a success story and they wanted to learn from its experience. Now we had people talking of the “Australian model”.

Since 1996 Australia has had continuous growth averaging 3.5 per cent per annum. During that period Singapore has had three recessions, Hong Kong has had three recessions, Korea has had one recession, Taiwan has had two recessions, Japan has had four recessions, and the United States went into a recession in 2001.

Over the last 10 years Australia has earned a great deal of respect amongst its neighbours and the other economies of the world. Australia’s achievements have given its people a lot more self respect. The nation feels more secure about itself. This is the Australian revival.

The Australian economic revival has led to the revival of confidence and respect. And we can measure the economic revival against other developed nations. Through the ’80s and ’90s we fell below the average GDP per capita of the OECD countries. From the beginning of this decade we turned positive in the rankings.

Since 1996 we have had eight surplus budgets, and are on the verge of eliminating Commonwealth debt, inflation has been stable notwithstanding huge pressures from what in truth has amounted to the third oil shock.

A number of steps have been important in getting us to where we are.

The March 1996 election was fought on the basis that the Commonwealth Budget was in surplus. Kim Beazley, then Finance Minister, repeatedly affirmed in the campaign that the budget was in surplus, for example, saying on February 1, 1996: “… we’re operating in surplus, and our projections are for surpluses in the future.”

However, the day after the election on March 2, 1996 the Treasury estimated the deficit at $9.0 billion (1.9 per cent of GDP). The outcome was in fact a deficit of $10.1 billion (2.1 per cent of GDP).

Immediately after the election the Coalition Government announced that it would legislate to prevent such deception ever occurring again.

We introduced the Charter of Budget Honesty Act 1998 which provides mandatory reporting standards and the preparation of a pre-election statement by the Secretaries of Treasury and Finance. Now the public is told the actual state of the budget before the election campaign and is able to assess policy against agreed facts before they vote.

The new government also announced an immediate Commission of Audit to identify all assets and liabilities of the Commonwealth including all contingent liabilities and unfunded superannuation to get a true picture of Commonwealth finances.

On August 14, 1996, upon the appointment of a new Governor of the Reserve Bank, the governor and I entered an agreement to set inflation targets, to direct monetary policy at those targets, and to guarantee the independence of the Central Bank. This was the origin of a medium-term framework for monetary policy.

In our first budget the Government laid down a medium-term framework for fiscal policy. The objective was “maintaining an underlying balance on average over the course of the economic cycle. This approach will ensure that over time the Commonwealth Budget makes no overall call on private sector saving and therefore does not detract from national saving.”

In ten budgets since 1996-97 there have been eight surpluses cumulating to an estimated $59 billion over 10 years. Commonwealth net debt will this year be eliminated.

Net interest payments which were $8.4 billion (1.5 per cent of GDP in 1996-97) will fall to $0.3 billion in 2006-07 (0.0 per cent of GDP). And thereafter net interest payments will be negative. In 2006-07 1.5 per cent of GDP represents a saving of around $15 billion - this shows the value of our debt reduction strategy.

Few today would dispute the success of these policies. But monetary targeting, fiscal targeting and debt management were all vigorously opposed by the Opposition. Labor went further in opposing the Government’s framework for monetary policy by claiming the agreement was illegal.

Several other key policy settings that have made a difference.

From 2000 the introduction of GST paved the way for the abolition of a raft of other indirect taxes, which gives Australia one of the most streamlined indirect tax bases in the world.

The 2000 Tax Reform cut 12 family and childcare payments to 3. Taper rate reductions have eased effective marginal tax rates. From July 1, 1996 to July 1, 2006 income tax rates have been cut substantially and thresholds have been pushed out. Company tax has been cut from 36 cents to 30 cents. Capital gains tax for individuals has been halved.

Since 1996 the Australian Government and the states have undertaken a comprehensive review program of legislation that restricts competition. Those restrictions that cannot be justified on a public interest basis have been abolished.

We have brought maximum textile, clothing and footwear tariffs down from 37 per cent in 1996 to 17.5 per cent now, and due to fall to 10 per cent in 2010 and 5 per cent in 2015.

We have reduced passenger motor vehicle tariffs from 25 per cent in 1996 to 10 per cent now and 5 per cent in 2010.

We removed more than 250 nuisance tariffs in 1999, and have negotiated Free Trade Agreements with the United States, Singapore and Thailand.

The Government has now enacted several rounds of labour market reform - the first of which was 1997 and the most recent is to commence in March 2006.

Labour market reform has broken down centralised wage fixation. Enterprise bargaining has protected against the transmission of uncompetitive wages out of profitable areas of the economy to unprofitable ones, a process which in the past promoted business failure and unemployment.

Of all of the economic indicators the one that means the most to me is the reduction in unemployment. During the recession of the early 90s unemployment rose and the unemployment rate neared 11 per cent of our fellow Australians without a job. The Minister for Employment (Kim Beazley) at the time stated that high unemployment was a permanent part of the landscape and that people should get used to this idea. This was defeatism that excused inaction on the tough decisions that had to be made.

Economic growth is the most lasting solution for unemployment, and a gradual steady decline in unemployment has followed from solid economic growth.

In March 1996 the standard variable mortgage interest rate stood at 10.5 per cent. The standard variable mortgage rate now stands at 7.3 per cent. The reduction in interest rates over the past ten years has provided borrowers with substantial reductions in interest expenses. With the average new mortgage today at around $220,000, the fall in interest rates from the 1996 level of 10.5 per cent represents a monthly interest saving of $585.

As you compare Australia with other developed countries it is clear that Australia is a low tax country. We are the eighth lowest taxing country in the OECD. Our tax levels are actually in an even better position than the OECD figures indicate because our Budget is in surplus and government debt is practically zero. It should not surprise people that we are a low tax country, because we are a low spending country compared to international practice. The two go hand in hand.

In the OECD Australia has the second lowest level of government spending as a share of GDP at 35.7 per cent, lower even than the United States. According to the OECD the Australian level of government spending as a proportion of GDP has declined from the 1996 level of 38 per cent to 35.7 per cent.

Some people may wonder how it is that tax and spending have declined as a proportion of GDP, when they see that the government seems to be spending more. This is an important point to understand - the government has been spending more in critical areas but the rate of increase has been lower than the growth rate of the economy.

What is the end result of all of this reform? Well, we are currently in the longest growth phase in Australian history. Longer even than the famous ’50s boom which ended in recession in 1961.

People’s incomes have risen substantially, and more people are in jobs. In its 2004 Survey of Australia, the OECD noted that Australia has become:

a model for other OECD countries in … the tenacity and thoroughness with which deep structural reforms were proposed, discussed, legislated, implemented and followed up in virtually all markets, creating a deep-seated “competition culture”.

What do I think when I reflect on these ten years? Let me go through a few disparate thoughts.

Economic management is a weighty responsibility. People’s livelihoods depend on it. Their mortgages, their jobs, their businesses, turn on it. People can see the discipline and seriousness we have brought to the task. They can judge for themselves the results.

Aside from what we have done, it is important to also remember what we have not done.

We could have tried to jump on the Asian Tiger model and run a corporatist government - we didn’t. We could have been swept up by dotcom mania, as urged by many - but we didn’t. We could have miscalculated in the face of the Asian financial crisis, or the worst drought in 100 years, or in the face of threats from terror or war or SARS or the current oil shock. We didn’t.

And while we have improved our position in the world we cannot sit back and relax. The world economy is ruthless, competition unrelenting, and to compete in the future we need to make all of our policy settings first class. We need to make every post a winner. We need to be willing to re-examine our existing policies to see if they cannot be improved.

In the economic domain we must strive for efficiency and flexibility, with taxes as low as possible and as simple as possible, with regulation limited to where it is strictly necessary, with welfare as a safety net not a feather bed. We must ensure that Australian workers are skilled and educated enough to adapt to new circumstances and if necessary change jobs.

We must aim to lift those that remain marginalised or living in poverty or suffering health problems or disabilities. We must lift those Australians so that they too can enjoy the wonderful opportunities that most Australians take for granted.

We must look at how to improve opportunities for women, create the most female-friendly environment in the world.

Our natural environment needs to be nurtured and sustained, and our dry continent needs solutions to our water shortage problems.

Our defence forces need to be well equipped, our health system needs to meet best international practices.

We have many, many issues to address.

Our future in Australia will be a positive one and an exciting one if we can continue to embrace change and adapt to new circumstances.

I came into parliament with my priorities as helping families, helping the unemployed, and getting small business back to prosperity. My values were shaped as a youngster in a modest suburb - by my parents, family, school, church - it was a million miles away from fiscal policy and tax law and international finance.

But the simple principles are the most important, and even when dealing with the most complex and large issues I keep coming back to them - living within your means, working hard, being careful and not squandering your money.

Not bad principles for a youngster, and not bad principles for an economy.

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Article edited by Allan Sharp.
If you'd like to be a volunteer editor too, click here.

This is an edited version of the Treasurer’s address to the National Press Club on March 1, 2006. Read the full speech here.



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About the Author

Peter Costello AO is a former, and longest serving, Commonwealth Treasurer. He is a company director and a corporate advisor with the boutique firm ECG Financial Pty Ltd which advises on mergers and acquisitions, foreign investment, competition and regulatory issues.

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