ADDRESS TO THE

MERRILL LYNCH AUSTRALIAN INVESTMENT CONFERENCE

NEW YORK

THURSDAY, 29 SEPTEMBER 2005

It is a great pleasure to be back again to open this twentieth Merrill Lynch

Australian Investment Conference in New York.

I will speak in a moment about the state of the Australian economy and the

measures the Government proposes to drive further economic growth.

But I would like to begin by reflecting on the state of the Australian – US

economic relationship.

The United States is Australia’s second largest trading partner after

Japan. Major Australian exports to the US in 2004 include beef, wine, crude

oil and passenger motor vehicles. Major Australian imports from the US were

aircraft, pharmaceuticals and telecommunications equipment.

Our countries signed a free trade agreement in 2004 which became effective

on 1 January 2005. Over time this will reduce many of the remaining trade barriers

to the flow of goods and services between our countries. Screening thresholds

for US investment in Australian companies and commercial property have been

raised. This means that transaction costs for US investment in Australia have

been correspondingly lowered.

The FTA will be good for both trade and investment. Australian foreign direct

investment in the US totalled $A140 billion at the end of 2004, quite comparable

with the level of US direct investment in Australia of $A153billion. Portfolio

equity investment is also high, with Australia having invested $A82 billion

in the United States and the US holding $A66billion of Australian assets. In

other words, we have a strong direct investment relationship and a burgeoning

financial services relationship between our two countries. Under the free trade

agreement both countries have agreed to consider ways to integrate our financial

service sectors.

You would be aware that recent legislation in the United States, the Sarbanes

– Oxley Act, applies to Australian companies that are listed in the United States

and has extra-territorial effect, applying US law even to Australian operations.

Some of the requirements applying to such companies duplicate our own; some

are more prescriptive. By listing in the United States, Australian companies

are subject to a whole series of new obligations in addition to those imposed

by Australian law.

There is no doubt that a closer integration of our trading relationship would

occur if we were able to apply the principles of mutual recognition. If Australian

regulation was recognised as trustworthy in the US and US regulation was recognised

as trustworthy in Australia, companies could be allowed to trade in each of

the countries without duplicating the corporate requirements on both sides of

the Pacific.

For example, suppose there was mutual recognition of qualifications and licencing

of stockbrokers and exchanges. A US broker would be able to trade Australian

securities for US clients over the screen on the Australian Stock Exchange.

Australian recognition of US regulation would allow an Australian stockbroker

to trade US securities for Australian clients over the screen.

This week I proposed a path that could lead to such outcomes and had very positive

discussions with the Securities and Exchange Commission about it. The regulatory

recognition of our respective regulatory systems could significantly cut regulatory

overlap, transaction costs and boost two way investment. Australia is keen to

move down this path and will rapidly seize any opportunity to accomplish concrete

practical improvements in this area.

Let me now describe the Australian economy.

Australian macro-economic management is conducted within a medium term framework,

which our Government laid out nearly 10 years ago. This includes a fiscal strategy

with the primary objective of maintaining budget balance, on average, over the

economic cycle and pursuing surpluses while growth prospects are sound. Government

debt will be reduced with the proceeds of budget surpluses. Monetary policy

will be independently set to an inflation target agreed between the Reserve

Bank of Australia and the Government. Structural policy will be directed towards

improving productivity.

The framework has been enormously successful and Australian economic outcomes

are very strong in key areas.

The economy has recorded more than a decade of consecutive annual economic

growth. GDP per capita has grown, on average, much faster than in both the US

and the OECD. In 1990 Australia’s GDP per capita was 18^th in

the OECD, today it is 8^th.

For the first time in more than two decades, Australia’s unemployment

rate went below that of the US – indeed, at 5.0 per cent, unemployment

in Australia is at a 30 year low.

Inflation is currently 2.5 per cent and has averaged 2.4 per cent since

1996. This compares with an average of 8 per cent in the 1980’s.

The fiscal position is dramatically stronger than it was in the early 90s.

For 2004-05, the budget outcome was a surplus of 1.6 per cent of GDP, the 7^th

surplus in 9 budget outcomes completed since the Government came to office.

In contrast, most other countries in the OECD are significantly in deficit –

the major Europeans are exceeding the stability and growth pact ceiling of 3

per cent of GDP, while Japan and the US have deficits of 7.2 per cent and 3.6

per cent of GDP respectively.

The consequence of our disciplined approach to the Budget is that the Commonwealth

Government’s net debt has fallen from around 20percent of GDP in 1996

to 1.3 per cent at 30June 2005. Within the next year the Commonwealth Government

will have no net debt, a position to which only a few other countries lay claim.

In the major OECD economies government debt to GDP ratios are rising.

Now is not the time to relax on economic reform, however. As a medium sized

open trading economy Australia must continue the reform process, if it wants

to maintain and improve its standard of living.

A key initiative in the fiscal area is the establishment of the Future Fund

to meet the Government’s unfunded superannuation liabilities. The Fund

will receive initial funding sourced from the 2004-05 budget surplus and accumulated

surpluses. The Fund will invest future budget surpluses and proceeds from the

proposed sale of the Government’s remaining 51.8percent share in Telstra,

Australia’s largest telecommunications company.

The earnings of the Future Fund will be reinvested and will not be available

to be used for other recurrent expenditure. Draw-downs from the Fund will not

be allowed until such time as it has accumulated assets sufficient to offset

the superannuation liabilities, which we hope will be around 2020. This policy

will strengthen Australia’s long-term financial position in a way which

will prepare for the effects of demographic change which we know we will be

facing at that time.

We have embarked on another round of labour market reforms to further encourage

agreement–making at the workplace and individual level. By simplifying

the basic burden of unfair dismissal laws on small business, the latest wave

of proposed reforms will help employees and firms better match their skills

and increase the flexibility of working arrangements for all involved.

The Government will also sell its majority stake in Telstra which promises

to be the single biggest Initial Public Offering ever conducted. Legislative

approval for the sale has now been achieved. While the timing of the sale will

depend on market conditions, (as the Government wishes to maximise the returns

for taxpayers), the arrangements are proceeding so as to be ready for 2006.

Our motivation for selling the remaining stake in Telstra is not to spend the

proceeds but to provide a more flexible and competitive telecommunications environment.

Government has a key role in setting the regulatory framework for this part

of the economy, but has a fundamental conflict of interest if it also owns the

major player in the market. Resolving the ownership of Telstra will resolve

this conflict and help government focus on its key responsibility of getting

right the competitive regulatory environment applying to this key industry.

While I will not go into detail, we are also focused on further reforms in

diverse areas such as water, electricity and the regulatory burden on business.

The Government’s commitment to reform has paid off for Australia, a point

increasingly recognised by others.

The World Bank’s latest “Doing Business” report, released

a couple of weeks ago, ranked Australia as the 6^th best place in

the world to do business.

And the World Economic Forum Global Competitiveness Report 2005 released yesterday,

ranked Australia 10^th out of 117 countries in terms of economic competitiveness.

The area where Australia ranked worst was the real effective exchange rate,

where Australia ranked 113 out of 117. Since Australia has a freely floating

exchange rate this is not an area for government intervention.

Before finishing this morning, let me briefly touch on a particular aspect

of Australia’s economic outlook – the impact of China’s demand

for our exports.

As you all know, strong growth in China has spurred demand for raw materials,

particularly bulk mineral commodities. Australia is a major exporter of coal

and iron ore – together they make up between 15and 20percent of our

exports by value – and, as the primary inputs into steel production, these

are two of the commodities that have benefited most from this increase in industrial

production in China and elsewhere.

The world’s major commodity producers were a little caught out by the

suddenness of the increase in demand for coal and iron ore, and new supply has

been slow to come on-stream. Simple economics tells us that an increase in demand

with no supply response will lead to an increase in prices. This is exactly

what has happened, with the prices received by Australian producers of iron

ore increasing by around 70percent in the latest round of contract negotiations,

and the prices received for metallurgical coal more than doubling.

Australia’s terms of trade now are higher than the peak in the early

1970s and are approaching the early 1950s wool boom peak that followed the Korean

War. As a result of this increase in commodity prices, the profits and share

prices of many mining companies operating in Australia have increased sharply.

The increase in the terms of trade is leading to a significant improvement

in Australia’s trade deficit. We expect Australia’s trade position

to improve further as export volumes increase in response to the large amount

of investment that has been going on in the mining sector.

But let me sound a cautionary note: with commodity prices so high, there is

a lot of investment going on around the world to increase production of iron

ore and coal – and not just in Australia. As this additional supply reaches

world markets, commodity prices could begin to fall again, and historical experience

tells us that they can fall quite quickly.

Australia is presently receiving a sharp income boost associated with higher

commodity prices. This is not going to be permanent. A portion of this income

is being saved through budget surpluses and invested with the Government’s

Future Fund to meet future pressures. The danger of allocating this income to

recurrent expenditure is that expenditures continue indefinitely whereas the

surge in the terms of trade will prove transitory.

The rapid industrialisation of the Chinese economy also presents some challenges

for Australia and the rest of the world. Chinese exporters are becoming increasingly

competitive in markets for sophisticated manufactures. This shift in relative

prices does present some significant adjustment challenges for manufacturers

in countries such as Australia and the United States. Nevertheless, the benefits

of free trade are well understood, and improving productivity and living standards

in China will be good for the world economy in the long run if we resist the

temptation of protectionism.

The policies we are pursuing reflect our view that the best way to encourage

investment and to create wealth is to create an environment for sustainable

growth. The best environment for sustainable growth is one of credible, medium-term

economic policies that, as far as possible, use market mechanisms to allocate

resources efficiently in the economy. Australia is very focused on these policies.