Press Conference
Parliament House
2 November 2009
SUBJECTS: Mid-Year Economic and Fiscal Outlook
TREASURER:
Well, welcome. I just wanted to spend a bit of time going through what is a fair bit of detail, so I will take my time to go through it. And there's plenty of time to take questions.
What today's Budget update shows over time is lower unemployment, higher growth, lower deficits and lower debt compared with our Budget forecasts. And I think what these forecasts today do is underscore the strength of our position as the strongest performing advanced economy in the world. Now, this is a heartening assessment I think for Australians. I think it shows what we can do when we work together, but I think it's also a timely reminder that the global recession is not finished with Australia just yet.
So here's a bit of a snapshot of some of the results. Growth is 2 percentage points stronger than forecast in 2009-10, but the economy will continue to operate below capacity for some time. Unemployment is expected to peak 1¾ percentage points lower – but another 105,000 Australians are forecast to be without work. Debt peaks $50 billion lower than forecast and budget deficits are expected to be 1 per cent of GDP lower each year from 2010-11, but there's still a lot of hard work to do to get back to surplus.
And of course, the stronger than expected economic performance we see today is the result of community resilience, the success of economic stimulus in Australia, and I think the combined efforts of governments and central banks right around the world. Stimulus has had a greater than expected impact on confidence and, of course, concerted global action has had a greater than expected impact on global growth, and together these things go a long way to explaining the improved forecasts we see today. The Government's stimulus strategy has meant 200,000 more Australians will keep their jobs, and together with the better than expected global recovery, it means that Australia has avoided a deep recession.
Now, despite the improved outlook, the full effects of the global recession are still being felt on our economy and considerable challenges do remain, and I do want to spend a bit of time just running though the detail. Now, as you can see from this chart, Australia is expected to outperform the rest of the world, growing in 2009-10 when every other advanced economy will contract…
JOURNALIST:
So that's Australia in 2009-10 and the rest of the world in 2009?
TREASURER:
Yes, but it won't be much different if you were to do it the other way. We did discuss that when we thought about putting up the chart, and I'm happy to provide one for you later if that's what you would like to do. You do make these compromises as you go through, but it's the simplest way to explain it, and the point is still the same, Tim.
Now, MYEFO forecasts stronger growth of 1½ per cent in 2009-10 and 2¾ per cent in 2010-11. This compares to Budget forecasts of minus ½ per cent in 2009-10 and 2¼ per cent in 2010-11. All of the growth in 2008-09 and all of the expected growth in 2009-10 is due to the direct impacts of our stimulus. Without it, Australia would have had two full years or two consecutive years, would have gone without growth for two consecutive years. That would have cost tens of thousands of jobs.
Stimulus and improved prospects for the global economy have resulted in a shallower downturn, and that means less ground to be made up during the recovery. Reflecting this, the medium-term growth forecasts have been revised to 4 per cent, and the economy is now expected to return to capacity in 2014‑15 – two years sooner than forecast at the Budget.
Unemployment is now expected to peak at 6¾ per cent in June 2010 – lower and earlier than the peak of 8½ per cent forecast at the Budget. Now, while this is a welcome improvement, it still amounts to an additional 105,000 unemployed Australians on top of what has already occurred.
Inflation pressures are expected to remain subdued as the economy continues to operate below capacity, with inflation expected to be 2¼ per cent in both 2009-10 and 2010-11.
Now, despite the improved outlook, the impacts of the global recession are still being felt and hefty challenges do remain. As I said before, the economy will continue to operate below capacity for some time and, of course, further rises in unemployment are expected. The decline in the terms of trade is expected to drag export earnings down by a massive $55 billion in 2009-10 and deliver the biggest fall in business profits on record. And the big reduction in hours worked will weigh most certainly on household incomes. Together these factors mean that the nominal economy is expected to grow at its weakest rate in almost 50 years in 2009-10.
Private sector activity also remains weak, and business investment is still expected to fall by 6½ per cent in 2009-10. This would be the sharpest contraction in business investment since the early 1990s.
It's for all these reasons that the Government judges that a gradual withdrawal of stimulus remains appropriate. It's a view which is overwhelmingly backed by the business community because they know that stimulus means keeping the doors of Australian business open while private demand is weak. And as you know, the stimulus has been designed to provide maximum support for the economy quickly, and then to gradually phase down as the private sector recovers. And of course, as you can see from this chart, the Government did step in to support growth in 2009-10 – you see that very substantial intervention there on the left when the private sector was in retreat – but as you can see in 2010-11, that is withdrawn as private activity recovers.
Now, the Government's objective throughout this global recession has been to ensure that the right amount of support is provided to the economy and that we are getting value for money. This is also why the Government has previously adjusted spending within the stimulus program and redirected resources, for example, to apprentices. And it's why we've also made some further minor adjustments to the stimulus package in this MYEFO. In addition to delivering a small net saving to the Budget, this will ensure our program best suits the conditions and continues to provide value for money.
The slight recalibration of stimulus measures is intended to complement the designed withdrawal of stimulus, and as you know, the stimulus has already peaked and is already tapering away. It will begin to subtract from growth in the March quarter 2010, making room for expansion in private activity. We judge that a more drastic or immediate withdrawal of stimulus would cost too many jobs, hurt too many small businesses and put the recovery at risk. Completely withdrawing all of the stimulus from our economy at once would reduce growth by 2½ per cent in 2010-11, and that would risk stalling the economy before a self-sustaining recovery in private activity has taken hold.
The Government will, of course, make further adjustments in the future if necessary to keep ensuring that the stimulus suits conditions. This shows that we are serious about ensuring we are providing the right amount of support while not jeopardising the recovery by ripping out all of the stimulus overnight, as our opponents suggest.
I just want to move on to the budget forecasts. Now, as I said before, the Budget update forecasts lower debt, lower deficits across the forward estimates. Now, as I said before, the better budget performance is a result of a combination of a disciplined approach to spending and targeted fiscal stimulus, and that has contributed to stronger outcomes. Stimulus means, as I said before, less Australians collecting benefits than would otherwise be the case, and certainly more revenue down the track.
Now, this chart here shows tax revenues at the 2008-09 Budget before the full impact of the global recession came through. Now, of course, as you know in the May Budget we estimated that the impact of the global recession was going to strip $210 billion from budget revenues across the forward estimates, and of course, you can see that impact there. That's what we accounted for in the May Budget. Now, the update today shows that only $40 billion of those tax revenues are returning – we're only forecasting $40 billion of that $210 billion revenue collapse to return across the forward estimates. So what I'm saying to you is that leaves a very big hole still in budget revenues – that leaves a $170 billion hit to budget revenues because of the global recession. So the point here is that there is still a lot of ground that needs to be made up.
So the recovery in budget revenues that we're forecasting will be slower than the recovery of the economy, and the reason for that is accumulated losses as they continue to drag through the system. The lag in revenue recovery means that the budget deficit in 2009-10 is largely unchanged from the Budget at $57.7 billion or 4.7 per cent of GDP. From 2010-11 onwards, forecast budget deficits are about 1 per cent of GDP a year lower than expected at the Budget. Current projections are for the budget deficit to fall from 4.7 per cent of GDP in 2009-10 to 1.1 per cent of GDP by 2012‑13, and of course, for the Budget to return to surplus in 2015‑16.
Net debt is now expected to peak at 10 per cent of GDP in 2013-14 as you can see in the chart, compared to 13.8 per cent of GDP which was forecast at the Budget. That represents a reduction in peak net debt of around $50 billion. And it means that Australia's net debt remains dramatically lower than any major advanced economy – one of the reasons of course for our AAA credit rating. You can see there the vast difference between Australia's peak in net debt and what has been experienced by other major advanced economies.
Now, of course this improved budget outlook does not diminish the Government's commitment to our fiscal strategy that will see us return the Budget to surplus as soon as possible. We said we'd offset new spending, and you can see from MYEFO today that we have done precisely that. And I can tell you that wasn't an easy job. This is the first time that a MYEFO has contained a net saving from all of the policy decisions – the very first time. So we've been very serious about this fiscal rule that we put forward – first in February and then again in the Budget this year – of offsetting new spending. It shows that we are fair dinkum about sticking to our fiscal strategy.
We also said that we would bank the revenue improvements which are naturally associated with economic recovery, and we've done that as well. And of course, we'd said that we would impose a strict spending cap when the economy is growing at above trend rates, and we've met that in today's figures as well.
Now, let me finish on this point and then I'm happy to take your questions. I think one of the things that we can be proudest about in our economy is how successfully we have fought the permanent destruction of skills and capital that usually comes with a prolonged and sharp downturn. And I think that's what Australians have done as we've faced this global recession. It's what we've achieved together.
I want to stress that the avoidance of the destruction of the skills base and our capital base means a lot more to the Government than just the figures in this document here. What it means is that there are young people who are in work who otherwise would not be in work. What it means is that there are breadwinners who continue to have a job who otherwise would not have had a job. What it means is that there are small businesses that have been able to keep their doors open and have been able to continue to operate, whereas otherwise they would have hit the fence.
So when we go through all the numbers in this document and we talk about the impact of stimulus and what it's meant, what Australia has achieved is something special – we have avoided the destruction of our capital and our skills base that is usually accompanied by a sharp recession. That's something that I think all Australians can be proud of, because it's something that we've done together. You would have heard me say on a number of occasions that the impact of stimulus has been far greater than the sum of its parts, and what Australia has been able to do during this global recession is to maintain a degree of optimism about the future that has not been characteristic of any other advanced economy. And that comes from the fact that Australians have worked together in this global recession to achieve these sorts of outcomes, which are encouraging. But the fact is that the impacts of this global recession are still with us for some time to come, and you can see it in the data that I've run through today. Over to you.
JOURNALIST:
Do these figures (inaudible) in some ways at least, the claims that maybe the Government did overshoot, panic even?
TREASURER:
Not at all. Let's just run through the data and what it really means. The first thing is that it doesn't matter how you look at this document, nor for that matter it doesn't matter how you look at many of the other forecasts that are out there from the private sector – there is still plenty of spare capacity in our economy. It doesn't matter what you're looking at, but most people are forecasting a rise in unemployment as we go forward – not necessarily from people losing their current jobs, but from new entrants to the labour force being unable to get jobs.
What you can see here in terms of the cut to our national income from the decline in our terms of trade is a very substantial hit to national income. What you can see here is very weak private business investment. That combined with the fact that it doesn't matter who you look at who's forecasting internationally, there is not guaranteed sustained recovery in private demand globally. Things are much better in our region and that's a good thing for our country, but the global economy has still got a long way to go before anyone can be confident that we are going to see a sustained return of private demand in the global economy. All of those things mixed together mean that the settings that we've put in place we believe are appropriate.
You know in preparation for this discussion today I thought I would go back and have a bit of a look at some of the criticism that was made on Budget night when we were up there talking about the revenue crash of $210 billion, our forecasts for growth and so on. It was a savage criticism made of the Government that night and through subsequent days that everything we put forward was too optimistic. We are doing our level best through all of the great technical work that is done in the Treasury and through liaising as we do with the private sector, to try and get the balance right here, because we are still dealing with a difficult situation globally, and if you go out there on the ground and talk to people who are running small businesses and so on, they're not declaring victory. The really good thing, the really encouraging thing about where we are at the moment is that no one ever thought this country would be in this space. We have avoided a sharp recession.
JOURNALIST:
Treasurer, I suppose since you claim to have saved at least 105,000 jobs, you would say it would be worth every cent wouldn't you?
TREASURER:
Well, the figure we're using is 200,000, and it has been worth every cent because it's not just the people that unfortunately lose their jobs – it's what happens to them and their families and their communities down the track. And of course nothing is more destructive, nothing is more debilitating to a country and to an economy than prolonged and high unemployment, because it brings with it an accompanying social and economic cost you don't necessarily see accounted for under the usual headlines that go through budgets like this. It's the businesses that didn't hit the fence, that have remained open.
The great thing about the stimulus is that as a consequence of the stimulus, what we've got is we've got businesses that are employing workers and businesses that are investing in capacity because they know there is a pipeline of activity that goes out into the future. And when it comes to a marginal decision they may have to make about whether they keep someone on or they put someone off, whether they give them fewer hours or whether they give them more hours – the one thing that has given people the confidence to be optimistic about that outlook is that pipeline that we've put in place. And now of course part of that pipeline that we've put in place is the essential capacity building that the economy desperately needs irrespective of the events that have flowed from the global recession.
JOURNALIST:
Treasurer, if the growth is 2.5 per cent as it was forecast to be in May but the deficit is exactly the same, aren't you being excessively cautious on the deficit outlook?
TREASURER:
Not at all. I mean, you can go through the detail, you can read the analysis of the Treasury here and I think it makes common sense as well. I don't actually think you need the analysis of the Treasury to reach the conclusion that I'm about to go to. Basically, of that $210 billion revenue write-down, we've still got a revenue collapse of $170 billion. And what the Treasury is saying particularly is that when it comes to business taxation, there is a real lag because there are just a lot of accumulated losses in the system. You'll see in other parts of this document, for example, a rapid recovery of GST revenue. You might not have got to that yet, but not this year, not next year, but as we go out over the forward estimates, which doesn't flow to the Commonwealth, but is a substantial consequence of the avoided destruction I was talking about before and the confidence that exists amongst consumers and businesses. It's happening there, and the States will be the beneficiaries of that. But it's not happening to the extent that we might have expected in some of our traditional sources of revenue which have really been the gold bars that have kept government going in recent years. It's not happening with company taxation, it's not happening with capital taxation.
JOURNALIST:
Is the First Home Owners Scheme modification that was announced on the weekend an inclusion in MYEFO?
TREASURER:
No, the First Home Owners Scheme that was announced on the weekend was a decision that the States take to (inaudible), something we agreed to at COAG. It doesn't actually…
JOURNALIST:
Does it affect the forecast of drawing investment (inaudible)?
TREASURER:
I would have to go and check with – no I don't think so. It's basically, the states are topping up these schemes and that's where this one comes from. And it was a measure we'd agreed to with the Premiers and Treasurers, I think – I'm happy to be corrected on this – at the last December COAG.
JOURNALIST:
We've got net debt peaking in 2013-14 as it was in the Budget by $50 billion less. Do you anticipate Australia will get out of debt quicker than you did in the Budget, or is (inaudible)?
TREASURER:
Well, it depends on how the revenue numbers go. We've said that our intention is to get the Budget back to surplus as quickly as we responsibly can, consistent with achieving the objectives that I've talked about all morning – having employment growth. I mean, if you were to adopt the approach of our political opponents and say we should rip out all the stimulus or we should put a cap on the amount of spending at 25 per cent, that would just be a recipe for sending the economy down the gurgler.
JOURNALIST:
But they don't say that. They say rip out part.
TREASURER:
But they don't tell you how much. And they have put the 25 per cent cap out there on spending which would be implemented by them, which would be a sure-fire recipe for pushing unemployment up very quickly or ratcheting up a whole lot of taxes or something.
JOURNALIST:
Treasurer, just back on the housing for a second. The housing market seems to be in a world of its own with 8.4 per cent growth over the last six months and partly fuelled by the boost to the First Home Buyers Grant. Also, is there a risk that the Reserve Bank in moving too quickly on interest rates might be bringing too much pain onto home owners, and all those new home owners, in withdrawing stimulus through monetary policy when fiscal policy stimulus is going to naturally be withdrawn under your plan?
TREASURER:
Well, the first point is this: that the Reserve takes its decisions independently of us. And the Governor has made this point, so I'll make it as well – rates are at 50-year lows. He's made the point they can't stay there forever, and that as the economy begins to recover they will begin to adjust over time. The Governor has also made the point that he's entirely comfortable with our fiscal program and our fiscal outlook, and the withdrawal of stimulus and its pace. So the decision that the Governor will take will be a decision that his Board takes independently of any of the issues we're dealing with today, because they are a natural consequence of moving from 50-year lows to some other slightly less expansionary stance.
There's been a big boost to the first home owner section of the market, and that's been a good thing. There's a gradual return to growth, as we see in the figures today, which should further bolster the market. The part of the market that most concerns me is that we're not necessarily getting the investment into what I call the multi-unit dwellings, and I think that remains an issue in terms of housing supply. But I think anyone contemplating owning or buying a home or whatever ought to look closely at what the Governor's had to say, rather than some of the more exaggerated reporting of what the Reserve may or may not be doing over time.
JOURNALIST:
The Budget also puts a much higher cost on the CPRS – saying now that it's going to add an extra $1.2 billion over forward estimates.
TREASURER:
That's right.
JOURNALIST:
As Treasurer, are you concerned that this puts some constraint on the modification the Government might consider making to the scheme in its negotiations with the Opposition?
TREASURER:
Well, the Opposition has been saying that apparently there's all this spare cash slopping around, and it's not. And there has been an adjustment to the revenues brought about by two factors, and we've decided to set these out because we do take our negotiations with the Opposition in good faith on this question. The first factor is that the relative price on international permits becomes cheaper, which will affect the price of our permits which will mean less revenue. And then secondly some uncovered sectors are emitting more, which will mean fewer permits covering the covered sectors, or issued to the covered sectors. Those two things combined are taken into account in the medium-term forecasts and they don't leave a lot of room for any further discretionary decisions.
JOURNALIST:
Treasurer, you've got net interest payments on the securities going above, over $5 billion over the forward estimates. Is that a reflection of thinking within Treasury that the cost of those securities you're putting out there is going to escalate, even though the amount you're putting out is coming down?
TREASURER:
Well, the cost at the long end of the curve is already up, and the estimates that the Treasury uses will reflect that fact (inaudible) market expectations in that area – that's all.
JOURNALIST:
(Inaudible) forecasting further increases in debt or was that just based on the snap-shot as it was?
TREASURER:
It's a snap-shot.
JOURNALIST:
Is Peter Costello the best man for the job?
TREASURER:
Well, as someone who has done the job of Treasurer for a couple of years, I think I can attest to the fact that anyone who has done this job for a significant period of time is eminently qualified for appointment to a senior government position. And I have always, all of my political life, had the view that if someone had the ability and the talent, that their political party badge shouldn't preclude them from an appointment to a government position. And it was the unfortunate case for 12 long years that no one with our badge was ever appointed to anything. And I think it's about time we put that sort of mentality to bed. Now, Peter Costello and I have had some pretty significant differences over the years, and it's also the case and it will remain the case that we will probably never agree about some fundamental aspects of economic policy, but none of those things necessarily preclude the appointment to the Future Fund Board.
