Program 1.1: Department of the Treasury (continued)
Macroeconomic Group advised the Government on 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, in a volatile environment.
Macroeconomic Group examined:
- the implications of ongoing subdued growth in the advanced economies, and volatility in key emerging economies;
- the implications resulting from the economic crisis in the euro area;
- the impact of introducing a carbon price on the Australian economy;
- continued prudent household spending behaviour, and
- the transitions underway in the economy with the peaking of the mining investment boom and the continuing decline in the terms of trade.
Macroeconomic Group is responsible for delivering the Finance Ministers and Central Bank Governors’ and related meetings of the G20 in 2014. In preparation for Australia’s presidency, the group is supporting Russia, the current chair, to build a strong foundation for 2014.
In response to the Australia in the Asian Century White Paper, the group has continued to build bilateral cooperation with strategically important regional partners including China, Japan, India, Indonesia and Korea, while also building relationships and cooperation with Vietnam and the Philippines through Treasury’s overseas posts.
Through active engagement with the G20, Macroeconomic Group advanced important initiatives to work towards the achievement of a strong, sustainable and balanced global economy. Specific initiatives sought to support reform that ensures the legitimacy, credibility and effectiveness of international financial institutions, particularly the International Monetary Fund (IMF) and the World Bank; strengthen international standards for the regulation of the financial system; and improve international development outcomes.
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;
- economy-wide modelling and a range of government policies, and modelling advice to other departments and agencies;
- findings from Treasury’s liaison program with the business community across Australia;
- the effectiveness of international financial institutions, particularly the IMF and the World Bank;
- policy issues, risks and challenges being discussed by the G20 with a view to contributing Australia’s perspective and shaping the G20 agenda and actions;
- the policy agenda, engagement priorities and strategies ahead of Australia’s G20 host year, as well the preparation of G20 processes and logistics;
- ongoing economic analysis and deeper engagement with China, Japan, India and Indonesia, reflecting the increasing importance of these countries in the international economy; and
- improving the linkages between the priorities of the G20, the Asia-Pacific Economic Cooperation (APEC) process and the East Asia Summit processes.
Macroeconomic Group’s key outcomes were:
- providing analysis, preparing macroeconomic forecasts, and assisting in the formulation of policy solutions, taking into account:
- ongoing weakness in advanced economies and growth transition in key emerging economies, such as China;
- domestic and international fiscal consolidation;
- the transition away from the investment phase in the resources sector to growth in exports and non-resources sectors;
- the impact of Australia’s high exchange rate;
- the impacts of the Clean Energy Future Plan;
- the uneven global economic recovery;
- the evolving economic crisis in the euro zone; and
- structural reform challenges.
- publicly releasing the results of the 2012 Review of Treasury’s Forecasting Methodology and Performance and implementing the recommendations of the Review;
- contributing to the development of the Australia in the Asian Century White Paper, including modelling support;
- providing specific modelling analysis of business tax reform options for the Business Tax Working Group;
- providing advice and analysis related to the carbon pricing mechanism and related budget estimates;
- providing modelling assistance to other Government departments and agencies as required;
- delivering presentations and published material, including economic forecasts and analysis, in budget papers and the Treasury’s Economic Roundup and Working Papers series to increase public awareness of economic issues and developments;
- assisting the Government to manage changing global economic conditions and to influence the development of international economic policy through engagement with international and regional institutions and forums;
- broadening and deepening engagement with key Asian and Pacific economies and contributing to improved policy outcomes through policy dialogue, cooperation, research and capacity building;
- strengthening of key relationships through a number of G20-related meetings with stakeholders, including both member and non-member countries, as well as domestic and international organisations;
- assisting the development of G20 policy positions and priorities, including in preparation for Australia’s presidency;
- advising on government initiatives to encourage broad-based, stable and inclusive economic growth and developing well-functioning economic ministries in the south Pacific; and
- Australia’s involvement in the African Development Bank (AfDB) and contributing to the work leading to the Australian Government’s decision to join the AfDB.
Analysis of performance
During 2012-13, the Treasury advised Treasury ministers, 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 key analytical work, such as modelling of:
- developments for the Australia in the Asian Century White Paper;
- tax policy options, including for the Business Tax Working Group; and
- climate change mitigation policy impacts for Budget estimates and annual emissions projections, as well as commencing analysis in support of reviews being conducted by the Climate Change Authority.
- Australia-China relations, China’s economic transition and growth prospects for consumption and exports;
- Treasury’s wellbeing framework;
- the measurement of market expectations for inflation;
- sovereign wealth funds;
- the appreciation of the Australian dollar;
- sustainability; and
- unemployment disparity across regions.
- the economic outlook;
- macroeconomic forecasting;
- long-term international GDP forecasts;
- global economic developments, including developments in the United States;
- the euro area economic crisis and underlying structural issues in European economies;
- the rise of China, India and other emerging economies;
- Renminbi internationalisation in China;
- the Japanese economy;
- unconventional monetary policy;
- fiscal policy and the terms of trade;
- macroprudential policy;
- structural budget balance measures;
- structural change and the Asian century;
- tax base erosion and profit shifting;
- the international monetary system;
- structural change and the impact of Asia’s rise;
- state of the Australian economy; and
- wellbeing, living standards and economic growth.
- the Australian Business Economists;
- the Australian Conference of Economists;
- the California-Asia Business Council;
- the John Curtin Institute of Public Policy;
- the Reinventing Bretton Woods Committee;
- the Productivity Commission and Australian Bureau of Statistics;
- Senior Executive Service (SES) forums; and
- the Japanese and Indonesian Ministries of Finance.
- The Treasury undertook initial operational planning for Australia’s G20 host year in 2014. This includes developing core functions in the areas of transport, airports and accommodation; security; accreditation; media and communications; venue and event logistics; delegate liaison; and the programming governance to deliver finance track meetings during Australia’s hosting.
- 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 Region Funds Passport and providing support and technical assistance to Indonesia as 2013 APEC host;
- 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 and Hong Kong officials, and further Treasury’s engagement with key Chinese policymaking agencies, through joint research with China’s National Development and Reform Commission on topics of mutual interest such as global commodity markets;
- signing a new memorandum of understanding on bilateral economic partnership with the Indian Ministry of Finance to provide for the continuation of the annual economic policy dialogue, as well as supporting senior visits in India and in Australia;
- signing a new memorandum of understanding with the Indonesian Fiscal Policy Agency and supporting economic stability in Indonesia by developing a 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 Partnerships Fund to strengthen Indonesian economic policy advising capabilities and to develop lasting institutional relationships with the Ministry;
- signing a new memorandum of understanding with the Vietnamese Ministry of Finance that includes an ongoing bilateral dialogue;
- attending the ninth annual economic policy dialogue with the Japanese Ministry of Finance; and
- visiting the Korean Ministry of Strategy and Finance for the annual Australia-Korea Strategic Economic Dialogue.
Cross-departmental modelling advice was also provided to a range of portfolios on policy issues under consideration by the Government, as well as also continuing to use our modelling capabilities to support more general macroeconomic analysis and forecasting.
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 developing 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.
In 2012, the Secretary to the Treasury commissioned an independently-overseen Review of Treasury’s Forecasting Methodology and Performance. The Review found that Treasury approaches the forecasting task in a professional manner and the forecasts it generates are broadly as accurate as those of both domestic forecasters and those generated by comparable agencies in countries with similar institutional arrangements to Australia. The Review made 11 recommendations on how to improve forecasting performance, all of which are currently being implemented.
The Treasury’s forecasting activity focused on 2012-13, 2013-14 and 2014-15, with forecasts published in the 2012-13 MYEFO and the 2013-14 Budget.
2013-14 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 2012-13 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 2012-13 MYEFO and 2013-14 Budget presented the outlook for the Australian economy. The 2013-14 Budget noted that against the backdrop of a fragile global recovery, the Australian economy is expected to undergo two large transitions over the next few years. After the largest investment boom in Australia’s recent history, the resources boom will transition away from the investment phase towards growth in production and exports. More broadly, the economy will transition to non-resource drivers of growth. There is, however, a risk that a less-than-seamless transition to non-resources sectors as major contributors to growth will result in a period of weaker growth in activity and jobs, but low interest rates and recent falls in the exchange rate will support this transition. The economy was expected to grow close to its trend rate over the forecast horizon, unemployment was forecast to remain low and inflation was expected to remain well-contained.
In response to Recommendation 5 of the 2012 Review of Treasury’s Forecasting Methodology and Performance, Statement 2 of Budget Paper No.1 published a high-level review of Treasury’s economic forecast errors.
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.
Statement 4 of Budget Paper No. 1 Fiscal Policy in the Current Economic Environment reported on the sustainability of the Government’s fiscal position with reference to a range of internationally-recognised metrics and outlined how the Government intended to balance competing fiscal policy priorities over the short and medium term.
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:
As part of its Working Paper series the Treasury published updated estimates of the structural budget balance of the Australian Government, with the aim of contributing to the broader public debate on fiscal sustainability.
Treasury, the RBA and the IMF jointly hosted a conference on Structural Change and the Rise of Asia on 19 September 2012 at the Hyatt Hotel, Canberra. The conference program, papers, speaker profiles and transcript (including video feed) are all available on the Treasury web page.
Senior Treasury officials assisted broader understanding of domestic and international macroeconomic issues by speaking with a range of organisations on topics including:
Speeches were delivered to a wide range of organisations including:
International policy advice
The Treasury worked to enhancing international economic cooperation, including through the G20 and by providing economic analysis and advice on the implications for the Australian economy of international developments. In particular the advice focused on the evolving Euro area’s economic crisis, the drawn-out US economic recovery, quantitative easing policies and growth outlooks in advanced economies, reform policies, leadership change and macroeconomic policies in China.
To achieve our outcomes, the Treasury supported active Australian participation in global and regional forums, assisted Treasury min
isters at international meetings, and helped strengthen bilateral relations. There are Treasury officials at posts in Washington DC, London, Beijing, New Delhi, Jakarta, Tokyo and the Organisation for Economic Cooperation and Development (OECD).Treasury maintained close contact with its constituency offices in the International Monetary Fund, World Bank, Asian Development Bank and the European Bank for Reconstruction and Development (EBRD).
The Treasury participated in the G20 and assisted the Deputy Prime Minister and Treasurer at three Finance Ministers’ and Central Bank Governors’ meetings.
The presidency leads a three-member management group of previous, current and future chairs, referred to at the Troika. From 1 December 2012 the Treasury supported Russia as a member of the Troika and co-chairs, together with Turkey, the G20 Working Group on International Financial Architecture.
The Treasury also undertook bilateral discussions and engagement in the margins of the G20 meetings to strengthen bilateral relations.
Financial Stability Board
The Treasury is a member of the Financial Stability Board (FSB) Plenary and Steering Committee and contributes to the work of its Standing Committees. The Treasury advised the Government on the key issues considered by the FSB, and was also involved in the FSB Regional Consultative Group for Asia.
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 2012-13, the Treasury ensured that Australia fulfilled its commitment made at the G20 Summit in Cannes to increase the resources available to the IMF by developing legislation to enable a US$7 billion contingent bilateral loan to the IMF to come into force. This legislation received Royal Assent on 28 June. Treasury also facilitated a contribution of A$13.9 million to the Poverty Reduction Growth Trust (PRGT) as part of the first distribution of IMF windfall gold sales profits and made preparations to participate in the second distribution of gold sales profits in 2014-15, estimated at A$36.7 million.
The Treasury supported the World 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 also provided a submission to the Independent Panel Review of the World Bank’s annual Doing Business report.
Regional development banks
The Treasury continued to support the Asian Development Bank’s (ADB) efforts to promote development in the Asia-Pacific region through close engagement with the ADB Executive Director.
The Treasury also contributed to the work of the EBRD.
The Treasury advanced the Government’s commitment to join 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. This included examining proposals for Australian Civilian Corps (ACC) deployments and Government Partnership for Development (GPFD) proposals.
To strengthen Australia’s understanding of regional economic developments and to improve effectiveness and linkages between the G20 and regional forums, the Treasury continued its engagement with key regional organisations and partners by:
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 2012 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 Nauru through the short-term placement of a Treasury official.
The Australia-Hong Kong RMB Trade and Investment Dialogue
The Australia-Hong Kong RMB Trade and Investment Dialogue, held in Sydney in April 2013, provided a forum to discuss how to capture new business opportunities arising from the wider use of the RMB in trade and investment in our region and to facilitate the participation of Australian businesses in this growing market.