The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

2 March 2011

Press Conference

Canberra

2 February 2011

SUBJECTS: National Accounts; Carbon Debate; Military Pensions

TREASURER:

Well today's GDP figures are a very solid result for our economy, especially when you consider the difficult conditions abroad and of course, the very testing conditions that we've seen at home. The National Account show our economy grew by 0.7 per cent in the final quarter of last year. Now this is an impressive result against the backdrop, an impressive result against the backdrop of wild weather at the end of last year. It certainly did have an impact in the figures we're going to discuss today and of course as you know this will be much worse in the first quarter of 2011. But it's robust in the context of the patchy global economic circumstances and, of course we must consider, robust in the face of the withdrawal of fiscal stimulus. I think it's further confirmation that our economic fundamentals are strong, although we do have soft spots in the economy and we do have to cope as a community and as an economy with the impact of natural disasters.

And of course, we are yet to see the impact of what occurred in South East Queensland in the first part of this year, in January, and of course the impacts of Cyclone Yasi which followed. They will all hit in the March quarter. But I think we can take comfort from the genuine strength, the genuine underlying strength that we see in these figures. Now the chart I'm about to show just gives, once again, the illustration that you have between the strength of the Australian economy and other developed economies. Other countries are struggling to come back to the same output levels they had when the global financial crisis began. What you can see with Australia is that our economy has grown by 5 and a half per cent since March 08. Compare that to these other developed economises, and essentially the difference here is a rate of 5 per cent unemployment in Australia compared to double digit unemployment in countries of the G7. And I've just come back from the G20 meeting in Paris – unemployment in the Euro zone is 10 per cent. Unemployment in the United States is around 9. What Australia escaped was the massive destruction that flows from the high and prolonged unemployment and the capital destruction that comes with that. And that explains the advantage for Australia that has flowed from our strength during the global financial crisis. I'll just make that point, because getting the fundamental economic calls right is absolutely critical to how Australia proceeds from here. And because we got them right at the height of the global financial crisis and the global recession, we are in a far stronger position to deal with the impact of natural disasters and also to put in place a future economic agenda which will enable us to maximise all of the opportunities that flow from Mining Boom Mark II.

I just want to make a few points about the data today. I've rarely seen such a complex set of interactions such as you do see in the data today. GDP rose from 0.7 per cent in the December quarter to be 2.7 per cent higher over the year. Now this outcome was underpinned by a strong rise in exports, a pickup in machinery and equipment investment, and a rebuilding of inventories. Exports made a strong contribution to growth in the quarter, adding 0.7 percentage points to growth, and that's despite, despite the hit to coal exports that occurred in the December quarter. There we saw some of our key rail lines shut down towards the end of December, which reduced coal production by around $1 billion.

Machinery and equipment investment increased by 4.7 per cent in the quarter. Now this is quite remarkable, and you don't see it in the overall aggregates here. You might recall that through to the December quarter of 09, we had an investment allowance in place for small business that produced a surge in investment in that area in machinery and equipment. It then dropped off because there'd been a surge in investment at the end of 09, it's now coming back, and that's a very encouraging sign. And while engineering construction fell slightly in the quarter, this comes on the top of two very strong quarters of engineering construction growth - a very big run up in activity there.

The point I make is that these figures, particularly in these areas, can be very lumpy. And a reduction in one quarter may not necessarily be an indication of where that particular sector has been for a year, and that characterisation does impact on a number of the aggregates in the data. So that data can be lumpy, but we have seen investment in engineering construction have a strong rise of 12.4 per cent over the year. Now that's entirely consistent with what has received a lot of publicity in recent times, the capital data, the capex data which came out a few days ago. Businesses are planning to invest a record $129 billion in 2010/11 -- $129 billion. That's up 16 per cent from the estimate of one year ago. And they are also going on to invest more in 2011-12.

The point I want to make here is that there is a very, very strong investment pipeline in place. And this investment pipeline of course coincides with the continued wind down in the fiscal stimulus measures. The withdrawal of stimulus subtracted around 0.3 percentage points from growth in the quarter, and around 1 per cent from growth in 2010. As I said before, inventory rebuilding has also contributed to the growth outcome, but a big proportion of the inventory build-up in these figures reflects a run-up in agricultural stocks, the inability to get exports out during the quarter.

So there are lots of influences moving in different directions here. Now, of course, these accounts today also show some mixed conditions in other areas of the economy. It's very apparent from these figures that consumers remain cautious in their approach to spending, opting to take advantage of rising incomes to save a bit more and to pay down debt. That's also very clear. We've seen modest consumer spending and the household saving ratio remaining at very high levels of 9.7 per cent, and we're still yet to see the recovery in non-residential construction. Activity in this sector remains almost 30 per cent below its pre-crisis levels. And this brings me of course to the challenge of the floods because whilst this is another good quarter for our country, the March quarter will be a very difficult quarter, and will reflect the full impact of flood and cyclones.

The natural disasters that hit our country earlier this year were the worst in our history and of course we've been up front about what that means for our economy but of course what it means for many families and the toll it has taken has also been particularly destructive. We estimate that the heavy rains that hit the eastern states in December sliced around 0.4 percentage points off quarterly growth in the final quarter of last year, 0.4 percent off growth in the December quarter. And what we know is the hit to the March quarter will be even bigger than that, much bigger than that.

I've just got this chart here which I think gives you an estimated impact on output or production across a number of industries by quarter and as you can see the impact whether it's coal, agriculture, tourism or other is going to be substantial when we get to the March quarter having already sliced 0.4 percentage points off the December quarter. So they will take a heavy toll on output, and of course they will take a heavy toll on our Budget.

So we have the immediate task of rebuilding and that's underway and that requires an immediate injection of funds and the Commonwealth has moved in that direction as you know. But we also do face the prospect of lower budget revenues from lower growth in the earlier part of this year. But that doesn't in any way deter us from our fiscal objectives of returning the Budget to surplus in 2012-13 and we're doing that so we can manage the impact of Mining Boom Mark II which you see reflected in the very strong investment pipeline that is coming forward as we speak.

So the Government is determined to keep the wheels of reform turning, and implementing our plans to strengthen and broaden the economy. I think today's outcome is encouraging, it can give us cause for confidence that we can not only rebuild our economy and bounce back strongly but also deal with the challenges of the future. If these events had occurred in any other developed economy in the world, they would not have been able to cope with the way we can cope with it. If you just look at the underlying fundamentals: unemployment at 5 per cent, something like 330,000 jobs created in Australia through last year, around 30,000 jobs a month, rising national income, and as I said before a very strong pipeline of business investment. Just as we dealt with the global financial crisis and the global recession, just as we worked together to do that, we can use the underlying strength of the economy to work together to cope with the impact of the floods and the cyclones and the challenges of Mining Boom Mark II. I'm very optimistic that we can do all of those things. Thank you.

JOURNALIST:

Mr Swan, can you just explain to us – you talked about all the complex and contrary trends and you also suggested that you will get lower revenue that expected in the first half of this year, what particular revenue bases would be hit by these things? Because something like coal production wouldn't necessarily just flow straight through…

TREASURER:

Well let's just take coal: less volume, but higher price. Where the balance of that falls is a challenge for us to work out in the Budget. So we certainly know less production, but we also know higher prices. We know that record prices have been paid for iron ore, for example, in recent times. So many of these swings and roundabouts, and that is just one example of what is a complex set of interactions. But I think you as a casual observer had been listening to what companies have been reporting, and I think lower corporate profitability for example, will probably mean lower company tax revenue. But I'm not in the position to forecast that as against higher commodity prices, what they will bring in.

You might well recall when we published the mid-year review that when the dollar was high it also eats away at your revenue particularly when you are relying on strong pricing, particularly in the mining sector. So in all of these areas there are swings and roundabouts. But from what I've seen so far we'll have lower company tax revenues.

JOURNALIST:

Treasurer just in relation to that particular point. You did say though that there would be a heavy toll on the budget, does that mean overall you think there is going to be much reduced revenue?

TREASURER:

Well there's a heavy toll on the Budget in terms of spending on reconstruction to start with and also lower activity. What we've said is that, that growth will be reduced by about 0.5 as a consequence of these events, 0.5 is the figure we've used. What I've said to you today that the impact of the floods before we get to the flooding in south-east Queensland and Yasi is 0.4. So obviously there'll be a big hit to growth in the March quarter, around 1 percent but then you have a rebound which comes in the subsequent quarter and quarters. So the balance of all this is something that we will do our very best to forecast, and deal with as we present new forecasts in the Budget.

JOURNALIST:

Treasurer, government spending was very strong in the September quarter, up 2.2 per cent following a rise of about 1.7 percent the previous quarter, that's very rapid growth. What we're the factors behind that?

TREASURER:

Well, we should actually disaggregate that. Because if you actually look at public investment, only 0.2 in the quarter. What that tends to reflect is the withdrawal of the stimulus monies from the economy. It was 11.9 per cent through the year so that's coming down. That's very important to keep in mind. And of course it's contribution to growth, public investment, was actually zero in the quarter but 0.7 per cent through the year, so what that figure reflects is the withdrawal of stimulus. In terms of public consumption, I'm told the Commonwealth contribution to public consumption largely reflects the indexation of certain aged-care payments which take place at a certain time of the year, but if you took that out the average public final demand wouldn't be that far from what it normally is, but it will predominantly reflect activities of state governments and timings of particular expenditures by state government so there is nothing extraordinary there.

JOURNALIST:

Treasurer, yesterday ABARE released some very bullish forecasts on iron ore, coal prices for 11-12, 12-13. Are they, is it fair to assume that they are better than the forecasts that were used in MYEFO for the MRRT revenue flows?

TREASURER:

Well I'm sure there'll be a debate about the accuracy of various forecasters when it comes to commodity prices and where they are going. The reason that we in May last year moved as we did in terms of our response to the Henry Report and its recommendation to put in a resource rent tax was precisely because we recognise that our terms of trade are going to be permanently higher as a consequence of increased demand, a structural increase in demand for key commodities in our economy. Now there was a debate then that the Treasury forecasts of commodity prices were far too optimistic. Now of course we all know the history of what's occurred since then. I can tell you from my discussions internationally, from talking to large investors, from seeing many of those investors come through my door and talk about their investment plans whether it's in coal-seam methane, whether it's in gas, in Western Australia or many other areas, that there's going to be a very strong and prolonged increase in demand for our key commodities and that will have a price impact.

As I said last year in the lead up to the Budget, I believe the Treasury has been quite conservative in its estimates and many people where very derisory of that. The fact is that we are seeing an outlook which is now more optimistic that anybody could have imagined. And we will take all those factors into account. But the estimates that we have put in place, subsequent to that in terms of PEFO, the mid-year review and what we'll do the Budget, we'll always be cautious and even in any of the estimates that we've got know we don't assume that prices will stay at what they are know which is 140 year high on a five-yearly average. A 140 year high. So we will assume that they will come off but that's for the forecasters to do, to do their work talking to the companies, liaising and presenting their best forecasts.

JOURNALIST:

So the ABARE forecasts are higher than the MYEFO forecasts (inaudible) – is that what you are saying?

TREASURER:

No, I'm not about to go through and compare the ABARE forecast to the MYEFO forecast, that is not my job, I am not a forecaster. What I will do is I will take the best estimates of our forecasters, forecasters are intelligent people. Our forecasters will work with other regulators, our forecasters work with other departments of state, our forecasters work with industry, and our forecasters – at the end of the day – produce their best forecast.

It is not my job to arbitrate between various forecasting bodies, I will never do that. I have got a lot of respect for ABARE, but it won't necessarily be the Treasury view about where these things are going. But what ABARE points to, what the Treasury points to, what the Reserve Bank points to, what the companies point to, is that our terms of trade based on high commodity prices, particularly for the commodities that we export in great volumes, are going to be higher as we go forward historically, and therefore that does have impacts. But what you shouldn't factor into all of this is an automatic assumption that just because price goes up that there aren't other factors impacting on both the profitability of the companies and revenue. Because as I had to explain to everyone in the mid-year review, even though we had record prices then, what we had was what no one ever expected at the Budget which was a dollar which was at par with the US.

That actually then meant we had to provide new forecasts for the MRRT revenue and it was revised down by a couple of [billion] dollars as a consequence of the exchange rate effect. So complex effects of price, volume, exchange rates and so on, and expectations about global growth. But the reason why I am so optimistic about our economy and where we are going in the long term is that we are in the right place of the world at the right time with the right commodities. And if we get things right, if we get our fiscal position in shape, our medium-term fiscal strategy implemented, get the investment both private and public in the infrastructure we need, if we train our workforce, get the balance in labour supply right, we've got some really great opportunities for Australia for the long term.

JOURNALIST:

Treasurer, just on another issue, one of the key issues that lead the Labor Party to change leadership last year was the previous leader's handling of the carbon tax issue, the ETS. Isn't the new track towards a carbon price as outlined by the Prime Minister in fact virtually identical to what Kevin Rudd was proposing? And if it wasn't, what are the differences?

TREASURER:

No in fact, I don't accept the characterisation of what you said at all, I don't accept that that was the principle reason that events changed, I don't accept that, and also I don't accept that what we have outlined is identical because we haven't outlined the full design of an emissions trading system, that is what we are still consulting on.

We have not outlined a carbon price, we have not outlined the coverage of the scheme. What we are doing is what we said we would do, we would seek to get a community consensus and through the Multi-Party Committee on Climate Change that is what we are working on. And as we work our way through that, then we will reach a conclusion. But I can't say now whether the conclusion will be one that is identical, nearly like, or not like, the previous emissions trading system. We are going to work through a genuine discussion with industry, a genuine discussion with the minor parties, and a genuine discussion with the environmental movement and a genuine discussion with the community.

JOURNALIST:

What do you make of Sophie Mirabella's comments and Eric Abetz's comments this morning?

TREASURER:

Well, I think this debate needs facts and not fear. And I have been, well, surprised and then subsequently appalled by what appears to be a very deliberate strategy from the Liberal Party frontbench to compare ministers and the Prime Minister to terrorists and murderous dictators. It is just not on. This is absolutely unacceptable in our public life. We are having a spirited debate, but for senior members of parliament on the opposition frontbench to go out and compare members of the government to murderous dictators is just beyond belief really.

JOURNALIST:

Do you think it was done with the (inaudible – but we should get)

TREASURER:

Well, I think it has been done deliberately to distract attention from the fact that the Liberal Party have a policy to combat change which is going to slug the Budget in this country by tens of billions of dollars – that is what I think it was done to do today.

JOURNALIST:

Do you think the debate has become too over-heated or too personalised, speaking more broadly, on both sides?

TREASURER:

Well, I've got to say, no one on the Government has said anything like Mr Abbott or Shadow Minister Mirabella, or Mr Dutton – nothing like that, at all, I just think it is chalk and cheese. The sort of images that they are using are outrageous, and I think they are dangerous for our country.

JOURNALIST:

How dangerous?

TREASURER:

Well, they are just dangerous, they incite people in the way in which they are spoken. There has been a debate, as you know, about this in the United States. I don't want to see us go down that road. I don't even want to be necessarily talking about these things, and they should desist.

JOURNALIST:

Would you back Mr Windsor's comments that this could take us down the line of the Tea Party-style (inaudible)

TREASURER:

I think it is inflammatory rhetoric that the country doesn't deserve and shouldn't have.

JOURNALIST:

Treasurer, will you be asking Treasury to model the impact on the economy of whatever carbon price system would have (inaudible)

TREASURER:

Of course, as we go through we will be. When we settle on a final design of an emissions trading scheme, that will be incorporated into all of the detailed work we do. And of course that involves Treasury modelling.

JOURNALIST:

One other issue Treasurer, military pensions. There is some disquiet, it would seem, on Labor's backbenches about this, a growing chorus of complaints – what priority does this have for the government? Will you be able to find room (inaudible)

TREASURER:

Well, I've just been through here a very, very difficult Budget situation, one that we will deal with as we have dealt with responsibly in the past, we will deal with it responsibly in the future. And as we go the Budget, I don't speculate about what we will do or not do. But, when this matter was raised during the campaign, and the way in which it was raised during the campaign by the Liberals, was one of such a budgetary cost that it would have had a very, very big impact on the Budget – one which the Liberals couldn't fund, again. Thanks.