Program 1.1: Macroeconomic Group
Macroeconomic Group contributed to a strong macroeconomic environment in Australia by providing quality policy advice and sound analysis of both domestic and international developments affecting the Australian economy. The group advised the Government on a wide range of matters relating to the performance of the Australian economy, including Australia’s current economic conditions and outlook, monetary and fiscal policies, and current and prospective international economic issues.
Macroeconomic Group examined the implications of subdued growth in the advanced economies, and developments in key emerging economies, the evolving sovereign debt crisis in Europe, the impact of introducing a carbon price on the Australian economy, natural disasters at home and abroad, conservative household spending behaviour and the effect of the high terms of trade and exchange rate on Australia’s economic growth and labour market performance.
Macroeconomic Group continued to contribute to improving the global economic environment and advancing Australia’s domestic and international interests. The group supported active Australian engagement in global and regional forums, helped utilise Australia’s strong bilateral relationships and worked directly with foreign governments, including through Treasury’s overseas posts. The group expanded its strategic analysis and advice on developments within key regional economies, particularly China and India.
Macroeconomic Group, through active engagement with the G20, advanced important initiatives to work towards the achievement of a strong, sustainable and balanced global economy. Specific initiatives sought to strengthen the legitimacy, credibility and effectiveness of international financial institutions, strengthen international standards for the regulation of the financial system, and improve international development outcomes.
Through its activities, Macroeconomic Group assisted Treasury ministers in their work and contributed to improving the wellbeing of the Australian people.
Macroeconomic Group’s key deliverables are to advise on:
- domestic and international developments affecting the Australian economy and forecasts of the direction of the Australian and international economies;
- the setting of sound macroeconomic policy;
- Australia’s involvement in the G20 to enhance cooperation on common international economic policy challenges, and preparation for Australia hosting the G20 in 2014;
- supporting and enhancing the effectiveness of international financial institutions, particularly the International Monetary Fund (IMF) and the World Bank;
- ongoing work with the Indonesian Government through the Australia-Indonesia Partnership for Reconstruction and Development;
- improving the linkages between the priorities of the G20, the Asia-Pacific Economic Cooperation (APEC) process, the Asia-Europe Meeting and the East Asia Summit processes;
- ongoing economic analysis and deeper engagement strategies with China and India, reflecting the importance of these countries in the international economy; and
- government initiatives to encourage broad-based, stable and inclusive economic growth and develop well-functioning economic ministries in the south Pacific.
Macroeconomic Group’s key outcomes were:
- providing analysis, preparing macroeconomic forecasts, and assisting in the formulation of policy solutions, taking into account domestic and international fiscal consolidation, the evolving sovereign debt crisis in Europe, Australia’s high terms of trade and exchange rate, the impacts of the Clean Energy Future Plan, the uneven global economic recovery, and structural reform challenges;
- contributing to the development of the Asian Century White Paper and assisting the work of the Prime Minister’s Manufacturing Taskforce;
- releasing an update to the Strong growth, low pollution: modelling a carbon price (SGLP) report in September 2011 and providing advice and analysis on the carbon pricing mechanism for the 2012-13 Budget;
- delivering presentations and published material, including economic forecasts and analysis, in budget papers and the Treasury’s Economic Roundup to increase public awareness of economic issues and developments;
- assisting the Government to manage and influence changing global conditions and advance Australia’s international economic interests through engagement with international and regional institutions and forums; and
- broadening and deepening engagement with key Asian and Pacific economies and contributing to improved policy outcomes through policy dialogue, cooperation, research and capacity building.
Analysis of performance
During 2011-12, the Treasury advised the Deputy Prime Minister and Treasurer, other members of the Government and relevant stakeholders on a range of macroeconomic issues:
- Economic and Fiscal Outlook. The Treasury provided analysis of the Australian and international economic outlook, including the Australian fiscal outlook, and prepared macroeconomic forecasts.
- Monetary and Fiscal Policy. The Treasury monitored domestic and international economic, financial and policy developments to assess their implications for macroeconomic policy settings.
- Economic growth, living standards and wellbeing. The Treasury analysed drivers of the Australian economy and factors likely to influence medium-term economic performance, including productivity and labour force participation rates. This analysis was used to develop policy recommendations to improve Australia’s economic growth potential, living standards and wellbeing.
The Treasury’s economic modelling contributed to the development of evidence-based policy analysis. Economic modelling, such as computable general equilibrium modelling, enables complex implications of policies and developments to be assessed and used to inform policy design.
The Treasury provided modelling advice and support on a wide range of government policy issues, including in relation to work around the Asian Century White Paper and certain tax and COAG reforms, while also continuing to use its modelling capabilities to support more general macroeconomic analysis and forecasting.
In 2011-12, the Treasury published the SGLP report, which provided comprehensive modelling of the international, domestic, sectoral and distributional effects of a carbon price. An update to the report was released in September 2011 to reflect the main features of the Clean Energy Future package. Advice and analysis has also been provided on the carbon pricing mechanism for the 2012-13 Budget and on emissions analysis with the Department of Climate Change and Energy Efficiency.
Economic forecasts prepared by the Treasury informed policy settings and underpinned expenditure and revenue budget estimates. For policy formulation purposes, macroeconomic forecasts provided an assessment of prospective developments within the economy and the risks surrounding the economic outlook.
The Treasury’s economic forecasts are subject to discussion and quality assurance through the Joint Economic Forecasting Group. This group, chaired by the Treasury, comprises the Reserve Bank of Australia (RBA), the Department of the Prime Minister and Cabinet, the Department of Finance and Deregulation, and the Australian Bureau of Statistics (ABS). These discussions, together with information gained from liaison with the private sector and other specialist departments and organisations, such as the Bureau of Resources and Energy Economics, helped in the develo
pment of the final version of the forecasts.
Treasury officials liaised extensively with the ABS, both formally through ongoing representation on the Australian Statistics Advisory Council and the Economic Statistics User Group, and informally through regular discussions, to review the quality and appropriateness of economic data.
The Treasury’s forecasting activity focused on 2011-12, 2012-13 and 2013-14, with forecasts published in the 2011-12 MYEFO and the 2012-13 Budget.
2012-13 Budget papers
The Treasury contributed to public awareness and debate on economic policy issues through its economic analysis in the annual budget papers and the 2011-12 MYEFO.
Published forecasts were accompanied by a written assessment of the economic outlook to help inform the public of key developments in the domestic and international economies and their likely effects on short-term economic growth.
The 2011-12 MYEFO and 2012-13 Budget presented a favourable outlook for the Australian economy, but noted the divergence in conditions facing different sectors. Strong demand for Australia’s mineral and energy exports continued to support historically high commodity prices and drive record levels of investment in the resources sector. However, conditions in some parts of the economy were expected to remain challenging, with unsettled global conditions, the high Australian dollar and changes in expenditure patterns towards services expected to weigh heavily on some sectors. The economy was expected to grow at around its trend rate over the forecast horizon, unemployment was forecast to remain low and inflation was expected to remain well contained.
Statement 4 of Budget Paper No. 1 Building Resilience Through National Saving discussed Australia’s path to building its national saving and the role of government policy in continuing this transition. Consistent with the Government’s medium-term fiscal strategy, the paper supported the view that improvements in government saving are desirable with the economy forecast to grow around trend and with close to full employment. The paper predicted that high levels of saving would likely be maintained over coming years and would improve economic resilience to external shocks.
As part of the 2012-13 Budget, the Government provided the Treasury with $45.2 million over four years for the organisation and logistics of G20 Finance Ministers’ and Central Bank Governors’ meetings and related officials’ meetings associated with Australia’s host year, and for related policy development on economic and financial issues.
Economic publications and speeches
The Treasury’s Economic Roundup included a regular summary of the key findings from the Treasury’s Business Liaison Program as well as research articles and speeches that provided detailed analysis and policy recommendations on:
- food prices in the Pacific;
- India’s long-term growth;
- the Government’s balance sheet;
- China’s demand for mineral and energy commodities; and
- reforms to consumer financial protection.
Senior Treasury officials assisted broader understanding of domestic and international macroeconomic issues by speaking with a range of organisations on topics including:
- the economic outlook;
- macroeconomic forecasting;
- national saving;
- long-term fiscal sustainability;
- the European sovereign debt crisis;
- the rise of China, India and other emerging economies;
- the resources boom and structural change;
- structural change and productivity;
- sovereign wealth funds;
- wellbeing and living standards; and
- the challenges facing Australia over the next decade.
Speeches were delivered to a wide range of organisations including:
- the Ai Group;
- the American Chamber of Commerce in Australia;
- the Australian Business Economists;
- the Australia-Israel Chamber of Commerce;
- the Australian National University;
- the Committee for Economic Development of Australia;
- the New Zealand Treasury;
- the Reserve Bank of Australia; and
- the University of Melbourne.
International policy advice
The Treasury worked towards enhancing international economic cooperation, particularly through the G20, helped advance Australia’s international priorities, and provided high quality economic analysis and advice on the implications for the Australian economy of international developments, including the evolving European sovereign debt crisis, the weak US economic recovery and developments in China.
To achieve these outcomes, the Treasury supported active Australian participation in global and regional forums, assisted the Deputy Prime Minister and Treasurer at international meetings, and helped strengthen bilateral relations. Treasury officials posted to Washington DC, London, Beijing, New Delhi, Jakarta, Tokyo, the IMF and the Organisation for Economic Co-operation and Development (OECD) contributed to analysis on regional economic and policy developments, helped strengthen relations with key institutions in their countries of accreditation and facilitated high-level meetings.
The Treasury worked with the Deputy Prime Minister and Treasurer to help shape the G20 agenda and to influence the outcomes of the G20 Cannes and Los Cabos Leaders’ Summits, as well as the four G20 Finance Ministers’ and Central Bank Governors’ meetings held during 2011-12.
Australia, through the Treasury, co-chaired (with Turkey) the G20 Working Group on International Financial Architecture in 2012. In the lead up to the Los Cabos Summit, this working group advised G20 finance ministers on:
- an agreed G20 outcome to increase IMF resources by more than US$450 billion;
- ways to enhance IMF surveillance;
- efforts to ensure full and timely implementation of the 2010 IMF Quota and Governance Reforms to improve IMF credibility, legitimacy and effectiveness; and
- measures to strengthen the international financial system, including new bank capital and liquidity standards.
The Treasury was also actively involved in the G20 working groups dealing with:
- strengthening the Framework for Strong, Sustainable and Balanced Growth;
- reforming the international monetary system;
- strengthening the international standards for the regulation of financial systems;
- improving the transparency and efficiency of commodity markets; and
- strengthening international development outcomes.
Financial Stability Board
The Treasury participates in the plenary meetings of the Financial Stability Board (FSB) and is a member of the FSB’s Standing Committee on Standards Implementation, Standing Committee on Supervisory and Regulatory Cooperation, and the Regional Consultative Group for Asia. The Treasury advised the Government on the key issues considered by the FSB, including the FSB’s peer review of the Australian financial system (released in September 2011) and efforts to expand and formalise FSB outreach through regional consultative groups.
International financial institutions
The Treasury supported the IMF in its role of ensuring the stability of the international monetary system. This occurred through the IMF Executive Board, attendance at the IMF-World Bank Spring and Annual Meetings, and participation in relevant G20 working groups.
During 2011-12, the Treasury ensured that Australia fulfilled its commitment made at the G20 Summit in Cannes to increase the resources available to the IMF by pledging an additional US$7 billion in a contingent bilateral loan to the IMF.
The Treasury supported the Worl
d Bank Group’s role in improving the living standards of the world’s poor by providing advice to the World Bank’s Executive Board and supporting Australia’s attendance at the World Bank Spring and Annual meetings. The Treasury facilitated the first payment to the International Bank for Reconstruction and Development’s capital increases, agreed by Bank members in 2010.
The Treasury also hosted visits by former World Bank President Robert Zoellick and Managing Director Sri Mulyani Indrawati.
Regional development banks
The Treasury continued to support the Asian Development Bank’s (ADB) efforts to promote development in the Asia-Pacific region. The Treasury encouraged strong contributions to the next replenishment of the Asian Development Fund and supported reforms underway at the ADB to ensure accountability and effectiveness.
The Treasury contributed to the work of the European Bank for Reconstruction and Development (EBRD) in assisting economies in Europe and Central Asia transition to open, market economies by providing support to Australia’s representative on the Board of Directors. The Treasury undertook legislative and treaty processes to facilitate the EBRD’s expansion to the Southern and Eastern Mediterranean region.
The Treasury further contributed to the Government’s consideration of whether Australia should become a member of the African Development Bank (AfDB) Group.
Official development assistance
The Treasury provided advice on general development and aid issues including Australia’s multilateral and bilateral aid programs, new expenditure initiatives, and the framework for Australia’s aid budget. The Treasury contributed to the whole-of-government process for the Government’s response to the Independent Review of Aid Effectiveness. This included the development of a Comprehensive Aid Policy Framework.
To strengthen Australia’s understanding of regional economic developments and to improve effectiveness and linkages between the G20 and regional forums, the Treasury continued to broaden and deepen its engagement with key regional organisations and partners by:
- working to improve the effectiveness of the APEC Finance Ministers’ Process and supporting Australia’s engagement with the Asia-Pacific region by undertaking technical workshops to build support for the Asia Regional Fund Passport and facilitating contributions to the APEC Pilot Public Private Partnerships Mentoring Scheme;
- working to strengthen regional financial cooperation by supporting the sustained establishment of a finance ministers’ process under the East Asia Summit;
- supporting the Deputy Prime Minister and Treasurer at bilateral and multilateral meetings with senior Chinese officials, including the Finance Minister, and with senior Hong Kong officials; and further Treasury’s engagement with key Chinese policymaking agencies, including an annual bilateral Macroeconomic Dialogue with the National Development and Reform Commission in Beijing;
- hosting the fourth annual India-Australia economic policy dialogue with the Indian Ministry of Finance as well as providing support for various senior visits both in India and in Australia;
- supporting economic stability in Indonesia through the development of A$1 billion contingent loan facility which Indonesia can access if global financial conditions deteriorate such that Indonesia’s borrowing costs reach unsustainable levels. Treasury has also worked closely with the Fiscal Policy Office of the Indonesian Ministry of Finance through the Government Partnership Fund to strengthen Indonesian economic policy advising capabilities and develop lasting institutional relationships with the Ministry;
- hosting the eighth annual economic policy dialogue with the Japanese Ministry of Finance; and
- hosting counterparts from the Korean Ministry of Strategy and Finance for the annual Australia-Korea Strategic Economic Dialogue.
The Treasury continued to promote economic management and development in the Pacific by undertaking research and analysis and by providing policy advice on a range of Australian Government Pacific-related policy issues. The Treasury also supported the attendance of the Parliamentary Secretary to the Treasurer at the 2011 Pacific Islands Forum Economic Ministers’ Meeting.
Treasury officials were deployed to Solomon Islands and Papua New Guinea (PNG) to assist in building sustainable and effective economic ministries, where their role involved providing advice and support to local officials on economic and fiscal issues. The Treasury also provided support to the Seychelles through a seconded official to AusAID.
The Treasury provided assistance to PNG, under the Joint Understanding between PNG and Australia on further cooperation on the PNG Liquefied Natural Gas Project, to assist PNG in the establishment of a transparent and well governed sovereign wealth fund.
The Treasury hosted two officials from Solomon Islands and also supported an official from the Australian Treasury to the PNG Treasury for a short-term program.