Peter Costello


Address to Australian Business in Europe - "Economic Perspectives 2003: Australia and the Asia Pacific Region"





Thank you for offering me the opportunity to speak here this morning.

I want to talk today about two interrelated themes.

First, about the reasons behind Australia's impressive economic growth, and the strong institutions and sound policies that have supported this performance.

Second, about Australia's position in the dynamic East Asian region and the opportunities this presents for European companies.

Our strong links with East Asia provide European business with wide-ranging opportunities to use Australia as a competitive base for regional expansion.

Some have described Australia as 'the miracle economy', and while divine intervention is always welcome, our strong growth over the past decade has been due, to a much larger extent, on policies and institutions focussed on ensuring sound economic management.

Importantly, this has created a highly competitive environment within which both domestic and foreign firms can operate. And it has better enabled the Australian economy to reap the benefits of relationships built with the European Union and East Asia. Australia's success is the consequence of many years of hard work.

Reaping The Benefits From Reform

Over recent years, the Australian economy has proven to be very resilient. The economy has grown, on average, by around 4 per cent per annum over the past decade. Many expected the Asian financial crisis in 1997-98 to drive the Australian economy into recession. In fact, Australia survived the most significant downturn of recent years in our region with only limited impact on our growth.

More recently, the prolonged weakness in the international economy has coincided with the most severe drought Australia has experienced in the last century. In the absence of the drought, the economy would have again achieved around 4 per cent growth in the current financial year. As it is, despite the global weakness and the drought, growth of 3% is forecast for the current financial year.

Despite strong economic growth and falling unemployment, both wages growth and inflation remain moderate. This was unimaginable in the 1980s and early '90s. Strong productivity growth - one of the best in the industrialised world - has been a hallmark of the Australian economy over the past decade.

Looking ahead, the Australian economy is expected to continue to outperform most of the world's advanced economies - a view recently endorsed by both the IMF and the OECD.

Our experience highlights the theme of this year's OECD Ministerial meeting. Well-targeted economic policies provide a substantial flow of benefits over a long period.

For Australia, structural reform has brought greater competition to the markets for products, services and labour. Australia has embarked on an ambitious trade reform agenda which has left the level of tariffs at 5 per cent or less on most goods.

In the financial sector, the removal of banking regulations has allowed better access to finance, and has allowed the value of the currency to be determined by competitive forces.

A significant focus of efforts since our Government came to power in 1996 was improving flexibility in our labour market. Enterprise bargaining and a focus on productivity-based outcomes has significantly increased the productivity of Australia's labour force. So much so, that our productivity performance has outstripped that of the United States.

Competition has been introduced into industries formerly dominated by government-owned monopolies. Opening the telecommunications sector to full competition has delivered conspicuous benefits to end users.

Tax reform has been a key priority of the Government over the past five years. Business tax initiatives and indirect tax reforms have given Australia a modern and internationally competitive taxation system. This benefits Australian businesses competing on the international stage.

The Goods and Services Tax (GST), the cornerstone of the new indirect tax base, has met its goals.

  • Inefficient taxes, particularly the wholesale sales tax and financial institution duties, have been abolished.
  • By removing all taxes on exports the GST has also improved the productivity of the investment capital of Australian businesses.
  • We have funded a huge reduction in personal taxes - worth around $12 billion per year, and most taxpayers now face a top marginal tax rate of 30 per cent or less.

Business tax arrangements have also been modernised and improved. The centrepiece of these reforms has been the significant reduction in company tax rates to an internationally competitive 30 per cent.

The Government has also acted responsively to remove impediments to business investment.

Recent venture capital reforms have been designed to provide an internationally competitive framework to encourage more foreign investment and expertise in Australian business.

Of course Australia cannot afford to rest on its impressive reform credentials. We must do more. A recent step in the economic reform process has been the release of the ninth instalment of our Corporate Economic Reform Program (CLERP) to enhance the corporate disclosure framework - something I spoke about yesterday at the OECD forum.

These reforms aim to further strengthen the regulatory framework in the areas of financial reporting, continuous disclosure and the protection of shareholder rights. They will also promote auditor independence and improve the quality of financial information to shareholders and the market more generally.

The reforms have been part of an on-going process whereby the Government has been systematically reviewing Australia's corporate regulation.

We are also currently reviewing Australia's international tax rules. The key issues for the review include:

  • Improving our attractiveness as a location for internationally-focused companies to operate global and regional businesses.
  • Enhancing Australia as a global financial services centre by examining the foreign investment fund provisions and the capital gains tax treatment of non-residents investing in Australian managed funds; and
  • Improving Australia's tax treatment of foreign expatriates to enhance Australia's attractiveness to overseas expertise.

Although I have emphasised the importance of structural and regulatory reforms, we cannot overestimate the benefits from a sound macroeconomic policy framework.

Australia's macroeconomic policies now have a great deal of credibility and certainty. This has been vital in creating a platform for solid and sustainable growth.

Australia now has one of the lowest levels of general government net debt in the OECD - 5 percent of GDP and it is still falling. Australia's total tax burden is already amongst the lowest for the developed economies. According to the OECD, government revenues in 2002 are expected to have been 32.7 per cent of GDP in Australia, compared with the OECD average of 35 per cent.

As a reflection of the success of Australia's macroeconomic policy framework and structural reforms, ratings agencies Moody's and Standard & Poor's both recently upgraded Australia's Foreign Currency credit rating to 'AAA'.

Australia, Europe and the Asia-Pacific: shared interests

As we witness tumultuous events around the world, it is worth acknowledging the success of Europe in economic integration from customs union to a common currency. And the process is continuing with the enlargement of the EU in 2004 by 10 new countries. Enlargement will create a more expansive dynamic and growing market. However, this past success should not lead to complacency - EU growth is currently subdued, and it is not just a transitory problem. Serious structural problems arising from persistent budget deficits, high public debt, rigid labour markets and distorted product markets - especially in agriculture - will constrain future growth and policy options if they are not addressed quickly. Europe's emerging demographic challenges make it even more imperative to move now, and to move quickly.

Governments across the EU are beginning to tackle structural problems, particularly in the area of labour market reform. But Australia's experience shows that reform needs to be ongoing and broadly-based. Comprehensive structural reform in Europe would help re-balance global growth and see Europe live up to its ambitious Lisbon Agenda goal of becoming the world's most dynamic knowledge-based economy by 2010.

A stable global security environment is also important for sustained growth and prosperity. Australia has recently demonstrated its willingness to contribute to this objective through our involvement in both Afghanistan and the Middle East. We believe democracies need to shoulder the burden, and encourage others to take on a greater share of these global responsibilities.

Australia's relationship with the EU is well-established and deep, underpinned by substantial people-to-people links. The EU as a whole has been Australia's largest single economic partner for the past 11 years - it is our largest partner in terms of two-way trade in goods and two-way trade in services, the largest investor in Australia, and the second largest destination for Australian investment overseas, with Australian investment in Europe totalling A$127 billion at end June 2002.

Reflecting the maturity of the relationship, Australia's economic links with the EU are more diversified than with most of our other trading partners. And while Australia is a base for hundreds of EU companies, many with links to the Asia-Pacific, there is a clear basis for strengthening the relationship and tackling future challenges and opportunities.

EU plans to develop single markets in key sectors, such as energy and financial services, should also further reduce barriers and costs for Australian companies seeking to do business in the EU.

But enlargement also has the potential to adversely impact on Australian interests. Extension to new members of protectionist measures under the Common Agricultural Policy would further distort world agricultural markets. While this would harm Australia, it would be a savage blow to the developing world. The Monterey Consensus highlights the critical role of trade liberalisation in global efforts to boost growth and fight entrenched poverty - a view also strongly expressed by WTO Director-General Dr. Supachai Panitchpakdi, at the International Monetary and Financial Committee meeting earlier this month.

For these reasons we welcome the fact that the process of enlargement, by adding to existing fiscal pressures, has led some EU members to push harder for agricultural reform. Still, there remains substantial resistance among other EU members. The EU can only enjoy the benefits of agricultural liberalisation when its political leadership acts in the interests of the majority of its citizens, rather than in the narrow interests of the agricultural sector.

As the EU undergoes its own historic expansion, it is natural that much of its focus is inward. However, it will be important that these changes not detract from EU engagement with our region. Europe is an important partner for the Asia-Pacific. The EU is the region's second most important trading partner and source of inward investment after the US. The EU can be a force for stability and growth in the Asia-Pacific and we would not wish to see it back away from engagement.

Of course Australia's economic and strategic interests are inextricably bound up with the Asia-Pacific region. Our recent economic performance has been assisted by the return of East Asia to substantial growth.

East Asia now accounts for 53 per cent of Australia's exports and 45 per cent of our imports. Our investment linkages are less developed, though they will increase with continued reform, growth and stability in the region, and continued openness of the Australian economy to inward and outward investment flows.

Australia's strong and diverse economy, complementary economic structure, sophisticated financial markets and transparent rules-based commercial system offer substantial value to economic partners in East Asia, and to business outside the region, seeking to use Australia as a base for regional expansion.

China's decision last year to award a 25-year LNG contract worth $20 to $25 billion to Australia is a powerful demonstration of the important trade developing in the region.

Our Shared Challenges

East Asia's size and dynamism make its future economic performance vitally important to the global economy. The region now accounts for 27 per cent of world output on a purchasing power parity basis, up from only 16 per cent in 1980.

Any renewed financial instability and economic weakness would pose serious risks to both regional and global security and to economic prosperity, particularly were this the result of further terrorist attacks or from social and political upheaval.

In this regard, an important focus of our bilateral dialogue with the EU has been our cooperative endeavours on counter-terrorism and transnational crime. The EU also continues to play an important role in the provision of development aid and other financial support to ASEAN and the Pacific.

The increased interest in East Asia in recent years in exploring regional responses to shared economic and financial challenges is clearly a development of great significance.

The principal catalyst has been the 1997-98 financial crisis, which had a sobering effect on the region. This prompted recognition of the extent of economic interdependence and common challenges to improve financial, legal and regulatory systems to enhance growth.

But East Asia has also observed the deeper regional integration occurring in Europe and the Americas, and is thinking about how it too can enhance its competitiveness and benefit from closer, more institutionalised, integration.

For us, this shift to regionalism is most obviously manifest in the formation of ASEAN+3. Regional forums can bring policymakers together to discuss issues in a constructive and open manner. This enables collaboration to identify and manage shared risks. It may also improve the region's ability to project its interests and provide a regional perspective in global institutions and forums. Australia supports East Asia's desire for stronger voice and representation globally as it pursues its collective economic interests.

We see our economic engagement with the Asia-Pacific as being guided by three priorities.

The first is building capacity to establish sound domestic institutions, markets, and policies in the emerging Asia-Pacific economies. This is an area in which Australia has much to offer and where our Australian Treasury is actively engaged.

The second priority is to rekindle the momentum of trade liberalisation, in support of APEC's trade liberalisation commitments, and to break the current logjam in the Doha Round. While this logjam is most apparent in agriculture, it is affecting services and other negotiations as well. We risk the failure of the Doha Round without a sustained commitment from all countries. This is where you, here, can play a role by pressing all governments to accelerate the Doha process.

The third priority is to strengthen regional and international financial architecture to better prevent and deal with financial crises. We are supporting regional efforts to improve policy dialogue and surveillance. We will also explore constructive ways to advance regional financial cooperation, including through regional mechanisms for crisis financing that complement, and help improve the effectiveness of, existing global mechanisms.

Australia and Europe will inevitably have differing emphases in their approach to economic policies. But we must not lose sight of our common objectives of securing open, competitive economies and a strong global trading system.

ABIE can continue to play a valuable role in the process by raising the profile of Australia in Europe and stimulating discussion on our strong mutual interests. Beyond that, ABIE will, I am sure, continue its first rate work in providing networking opportunities for Australian business people in Europe and for Europeans with Australia. By building on the strong economic links between Australia and Europe, we can all benefit.

29 Apr 2003

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