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

20 December 2012

Press conference

Canberra

SUBJECTS: October Monthly Financial Statement; Global Economic Downturn; Surplus; Australian Economy.

TREASURER:

Today I want to say a few things about the Budget, about Budget management and about the importance of supporting jobs in our community. Now, we're a Labor Government, and nothing is more important to us than jobs and the job security of all of those people that we're proud to represent. Earlier today the Finance Minister released the Monthly Financial Statements for October - they show tax receipts for the first few months of the year are well below our forecasts. Now, the main reason for this is the very substantial hit to profits that Australian companies have experienced in the early months of this financial year, and this isn't just in resources, it's right across the board – companies, in particular, being hit by the high Australian dollar. This has had a greater than expected impact on tax revenue, so that cash receipts to the end of October are $3.9 billion behind our budget estimate. That's a really big hit to revenue, it's a huge wack to revenue.

Let's put this in some perspective: in just four months, we have already seen the full hit to revenue that we were expecting for the whole year. Obviously, dramatically lower tax revenue now makes it unlikely that there will be a surplus in 2012-13. We ought to be very clear about why this is the case: it's not because the Government is spending too much, it's because we didn't collect the amount of taxes that we expected to collect. Spending was actually $1.3 billion lower than forecast so far this year. What we've seen is a sledgehammer hit our revenues, we've seen that from almost the very beginning of the Global Financial Crisis, thanks to the deepest and most sustained period of global economic turmoil since the Great Depression. We're also seeing this hit to revenues in State budgets as well. What we are seeing in our own numbers today means that $160 billion has been ripped from the budget bottom line over 5 years, as that chart over there demonstrates.

During this period, we've had a proven track record of managing the budget responsibly, and in a balanced way, in what have been very challenging global conditions, and we've been making savings while we have been supporting growth and jobs. The ratio of spending to GDP is 23.8 per cent in 2012-13, which is lower than the average spend under the Howard Government. Spending is kept at or below 24 per cent of GDP across the forward estimates – that's the longest sustained run at that level in 30 years. All of this does make our budget one of the strongest in the developed world and our strategy has allowed the Reserve Bank to repeatedly cut interest rates. We will continue to exercise spending restraint, even in the face of the global volatility and uncertainty in the global economy. And of course, that volatility and uncertainty in the global economy has been combined with lower commodity prices and a high dollar, that has been a very unusual combination of events, and of course that unusual combination of events has weighed heavily on our revenues, particularly our business tax revenues. I would remind you all that since mid-2009, we've offset all of our new spending commitments, and that is why revenue to GDP is relatively low. I want to make this point very strongly today: in our next budget we will continue with that restraint and when we are funding new priorities and new Labor reforms, such as an NDIS and the Gonski school reforms, we will do that by changing priorities within the budget.

Our spending restraint has been very important, very important in terms of enabling the transition from public to private-led growth, but also in helping the transition from mining to non-mining growth, that has been giving the RBA scope to cut interest rates. Our economic fundamentals are strong and our economy is resilient, but what we are facing particularly when it comes to revenues is a set of unusual circumstances, which were all largely driven by global developments. So Real GDP remains solid, the unemployment rate is low and inflation remains contained, but growth in Nominal GDP has been much softer than many expected. And you'll see this in the next chart. Nominal GDP, which has become much weaker over a relatively short period of time and now softer than even expected in the September quarter national accounts.

Contributing to this has been a persistently high Australian dollar. We've had a persistently high Australian dollar in the face of declining terms of trade, that is lower prices for our commodity exports, which is a very unusual conjunction of events. The terms of trade have come off 14 per cent in the past year alone. To illustrate the impact of these challenges, since the 2010 Budget, when we first talked about bringing the Budget back to surplus in 2012-13, taxes this year have been written down by about $20 billion. You can see that reflected in that chart.

So through this whole period, we've kept making responsible savings to fill those (inaudible) that are emerging revenue hole. But things are a bit different now, so there's a main point I want to make today. At this stage I don't think it would be responsible to cut harder or further in 2012-13 to fill a hole in tax system if that puts jobs or growth at risk. While the real economy does remain resilient, I think it now has reached a point where it would be difficult to responsibly offset dramatic revenue downgrades with substantial, short term savings. I think that's the bottom line here - it wouldn't be responsible to continue to make up for the revenue hole if that endangered growth or jobs.

I simply couldn't stand here and say that would be the responsible thing to do - the risk of pushing up unemployment and further damaging our growth prospects. So I think the responsible thing to do now is to let the automatic stabilisers go to work on the revenue side of the Budget, that is the responsible thing to do in these circumstances. Our priority, in terms of managing the economy, will continue to be to sensibly support jobs for working Australians and growth in our economy. Of course the type of reckless disregard for sound economic policy we get from Mr Abbott and Mr Hockey on a daily basis, clearly put forward that risk. I just want to conclude with a few words because I've been in this job now for just over five years. During that period we've had unprecedented volatility in the global economy, we've had some of the most dramatic events since the Great Depression unfold; the Global Financial Crisis and of course the global recession. The aftershocks of those events are still ricocheting around the world and they're still impacting on our economy. There might be a tendency for some to focus, if you like, on the politics of what I'm saying today, and not the economics, but I want to make this point very clearly - if the worst thing people say is we got the economics right again but fell short on politics, I'll just say, so be it. Because I'm indicating to you today as I believe the responsible course of action. At the end of the day, I don't care about the political outcomes, I care about the economic outcomes. And the responsible course of action here, in terms of economic jargon, is to let the automatic stabilisers work on the revenue side of the budget. Not to do that would endanger jobs and growth, so the course of action I'm talking about today really comes I guess to the core of my values and the values of the Labor Party. My priorities, the Labor Party's priorities, are always the jobs of working Australians. The responsible thing to do in these circumstances it to make a thorough assessment of the budget in the new year, methodically working through all of the facts and all of the analysis that is before us, so we can continue to manage the economy responsibly to support employment. Over to you.

JOURNALIST:

Mr Swan, is this an acceptance now that the current settings are those you will carry through to the rest of the financial year or will you try to minimise now what is likely to be a deficit?

TREASURER:

Well, what I've said is, to use the economic jargon, we should let the automatic stabilisers work on the revenue side of the Budget. The point I'm making is we don't think it's responsible to cut harder or further to fill a short-term 2012/13 hole in the Budget. That wouldn't be the responsible thing to do because it has the possibility of jeopardising jobs and economic growth.

Now, when we brought down MYEFO, we made substantial cuts again to meet that objective, but what we've seen in the facts I've outlined today, which are contained in the statements issued by the Finance Minister, is a far bigger hit to growth than any of us anticipated. I've been looking very closely at this for the last week or so, last couple of weeks. Concerned about the impact of the nominal growth as it is weighed down on all of our revenue heads; company tax, individual , business and investment-type taxes, capital gains tax, run your way through to super funds tax, resource rent taxes - all of them, all of them have been hit, and why have they been hit?

Because really, well, what the nominal side of the economy is about is prices and the fact is that commodity price crash, the iron ore price which you know went down 38 per cent between June and September, down in real terms over that quarter by about 20 per cent. That's cascading through the economy, but it's broader, and this is the challenge, it's far broader than just resources. The dollar appears to be weighing more heavily on a range of industries, but if you just take mining, it's not only that prices have come down, the dollar is still up so they're copping it both ways in terms of profitability. Many of the companies in trade-exposed areas, either exporting or import competition, are feeling the dollar and that is weighing very, very heavily across the board. That's why I've formed the assessment today.

JOURNALIST:

In MYEFO you said the surplus would be $1.1 billion, now you're telling us it won't be there. Can you give people listening to this broadcast some idea of what sort of figures they should now be getting used to? Are we talking 2 or 3 billion dollars and given that over the past couple of years you've been so strident and so strong about guaranteeing the surplus, do you have any regrets about any of the language you used over the past few years?

TREASURER:

What I'm proudest of over the past few years has been the implementation of our medium term fiscal strategy which has had a number of elements. It's had restraint on expenditure and an emphasis on making the structural saves in the budget to make room for Labor priorities. And we've done that in an environment, think about this, where total revenues have been written down by $160 billion.

That's why when you look at those figures I gave you earlier in my remarks that spending as a percentage of GDP is relatively low by any historical comparison you care to make in Australia. We have been doing that because of our commitment to fiscal sustainability, not just for the short-term, but for the long-term. As you know, we've always said that with growth around trend and real growth around trend is still in prospect for this coming year, that a budget ought to come back to surplus. What I'm explaining today is this extraordinary hit which has come through essentially the taxation of businesses more broadly, it would be irresponsible in those circumstances to take a big cut to meet that goal because it would ultimately be self-defeating and we wouldn't have growth around trend.

JOURNALIST:

What sort of deficit numbers should people start to get used to and do you regret the previous comments you've made like "come hell and high water"?

TREASURER:

Can I just say how important our fiscal strategy has been. It's got a number of components, coming to surplus, but also making sure that you have a fiscal pathway and sustainability over the medium and long-term. We have been doing that methodically, making savings, $138 billion in savings over five budgets plus $16 billion in our last MYEFO.

When people, particularly market economists and rating agencies and so on, all make their judgments about these things, they look at what you've done in total and if you read most market economists, they acknowledge how serious the Government has been about its medium-term fiscal strategy and we are just as serious about it. The fact I am standing here today is an indication of how seriously I take it. New data out today makes it harder to get there and if we were to fill a temporary hole in taxation with further cuts, that would in fact impact upon growth and jobs and that wouldn't be the responsible thing to do in these circumstances.

JOURNALIST:

You're saying it's too early to know what the deficit figure is, Treasurer. Can I just ask, when do you think the plummeting revenue of the last five years is going to stop and rebound?

TREASURER:

We'll make, as I said before, a thorough assessment in the New Year. We'll methodically work through all of the data as it emerges. I don't think anyone back in June and July would have thought that we'd see a situation where commodity prices fall so far that that wasn't necessarily in some way followed by our dollar. We've got a very unusual set of circumstances that are producing this weak nominal growth which is there alongside around trend real growth. But what we are dealing with today is the outcome of what is quite an unusual set of circumstances and that's what I'm responding to.

JOURNALIST:

What's your prognosis about revenue?

TREASURER:

We'll make a thorough assessment in the New Year when we come back. But I just wanted to re-emphasise a couple of things I said in my remarks. One of the things that we have been [inaudible] over the whole period of the Government, from the time the Global Financial Crisis and global recession was continuing to implement a very disciplined fiscal strategy and we're continuing to do that.

JOURNALIST:

You said earlier that in the next Budget you'll continue with that spending restraint but given you've pointed to weak growth figures here, why continue with spending restraint in the next Budget anyway when you've acknowledged you won't have a surplus?

TREASURER:

What I was indicating is that we have a set of fiscal rules to bring about fiscal sustainability and I've indicated the circumstances in which we find to ourselves today. We'll thoroughly assess all of those circumstances in the New Year. Let me just remind you - and I think we spoke about this a lot when I bought down MYEFO and subsequently to the September National Accounts - there's a bit of a pathway through the global economy over the next couple of months and it would be good to get some sight of that before we come back and have a much more informed and thorough analysis of the outlook.

We've yet to see what's going to come out of the discussions on the fiscal cliff in the United States, we're starting to see some encouraging signs elsewhere in the global economy and that's good. I think the thing to do in these circumstances is come back with a fresh set of eyes and look at all of that outlook in the New Year. Given the enormity of the change in these figures, I'm here today explaining why that's important and what impact it is having.

JOURNALIST:

Would revenue measures like tax changes on superannuation still be on the table?

TREASURER:

I'm not going into any of the detail of the work we'd do on the way to the next Budget.

JOURNALIST:

You're putting everything under review but what are you saying to people coming into the next election about whether Labor's going to deliver a surplus in the next term?

TREASURER:

What I'm saying today is Labor has delivered responsible economic management over 5 years. Unlike most other developed countries we did not go into recession and unlike most other developed economies we plotted an exit strategy from stimulus to sustained growth over time and that's where we are. That is why, unlike the rest of the world, our budget is still in relatively good shape and our public debt is low. What I'm recognising today is that some things have changed, this data indicates a significant change. The facts have changed and I'm going through the implications of those for the future course of policy and outlining to you the way in which we'll handle that and the way in which we'll approach the challenge as we go through the New Year but just as we put in place responsible economic management for the past five years, we'll do it for the next five years, and we will outline of that framework when we've got a line of sight of data particularly emerging in greater clarity about what is occurring elsewhere in the world.

JOURNALIST:

Are you trying to indicate you're targeting a surplus any time in the next few years?

TREASURER:

Look what I'm indicating is that we are going to continue to apply our fiscal rules in a common-sense way and the whole point of the fiscal rules is to have sustainable growth. What I'm indicating about the data today is that if we were to engage in cuts immediately to make up the hole that we've clearly got in revenues, that would be counterproductive for growth and jobs in our economy and that being the case, we'll review where we are when we come back in the new year with a full appreciation of all of the facts.

JOURNALIST:

When did you take the decision that you announced today and who took it?

TREASURER:

I always consult with my Cabinet colleagues and I've had extensive discussions with the Prime Minister who is on leave, as you know, but I have been talking to her about the full ramifications of lower nominal growth and of course in the last week or two when we've had the data that the Finance Minister has presented today, those talks intensified when we saw the full ramifications of them. So I've spoken to a number my Cabinet colleagues about this and I have spoken with the Prime Minister.

JOURNALIST:

Treasurer, the storm clouds have been gathering for some time with the last GDP figures and you say trend on growth is still in prospect but if you look at the annualised rate from the last GDP figures, it's not on trend so how can you still say that?

TREASURER:

There's a couple of things in there I'll dispute. Growth is around trend, that's just a fact.

JOURNALIST:

(inaudible)

TREASURER:

You're seeking to mix and match various quarters. It is true in the first quarter, growth was much stronger than we anticipated and we experienced that for the first six months and it's been somewhat weaker in the second six months of the year, but we're still forecasting around trend growth but what I'm explaining is that there has been a fundamental change because the prices that we are now receiving for some of our key commodities have fallen dramatically.

The impact of the higher dollar is weighing very, very heavily on large sections of business not just in the resources sector and what that means is that companies overall are far less profitable. At the same time, and this is a point I really want to make because the last September quarter GDP figures show we have a resilient economy, unlike most other developed economies.

We've got an unemployment rate at 5.2. We've got growth around trend, we've got a really strong investment pipeline in resources and a big boost in exports that's going to come from that coming down the track over the next few years. We've got contained inflation and we've had interest rate cuts of 175 basis points over the past year or so.

So that's the resilient real economy, real GDP figure over here but on the other side of the ledger people are getting less money for their goods and services that they're providing and producing. On that side of the ledger, nominal GDP growth is low. I pulled out the historical figures and fact is that nominal GDP growth in Australia at the moment, absent the GFC, is the lowest it's been in a decade so these two things are happening at once. It's not usual for that to happen in this way. I don't think anyone in here would think it's usual to have the dollar high and commodity prices off but that's where we've been. The outcome of that is seeing most dramatically, of all of those things in the figures produced by the Finance Minister today.

JOURNALIST:

(inaudible) have you got rid of the constraint of the Budget surplus, you could spend a lot more on NDIS and Gonski?

TREASURER:

Sorry, I don't accept that characterisation of anything I've said today.

JOURNALIST:

You did say you were going to - in such spending that you would do it within the changing your Budget priorities. Can you expand on that?

TREASURER:

What I'm saying is that we decided to let the automatic stabilisers work when it comes to revenue. That is we're saying it doesn't make any sense to try and cut to make up for the revenue hole because all that would do would produce higher unemployment and less growth and in fact we wouldn't be any better off. But I also went to great lengths to say is that the rules that govern disciplined fiscal policy on the expenditure side of the budget are ones that we will continue to work with. It's not widely known or appreciated but the fact is that since the middle of 2009 we have offset all new spending and what we've said very clearly about Gonski and the NDIS is that we will make room within our existing envelopes to fund those. So I'm not seeing, and the Government doesn't see, that those could be funded by the fact that we're not coming back to surplus. We're not relaxing our approach on that side of the budget at all, what we're saying is its common sense if you really think about it that in the environment we find ourselves in internationally it wouldn't be wise to cut very significantly right now in the circumstances we find ourselves because we'd end up with lower growth.

JOURNALIST:

Was this a gut call or has Treasury told you if you maintain the press for a surplus and the required cuts that there would be a measurable impact on unemployment and growth and what sort of impact are we talking about? Or is it a gut call by you and the PM?

TREASURER:

It is an informed call by the Prime Minister, myself and other Ministers based on the full range of information that is usually provided to us by our economic advisers.

JOURNALIST:

Treasurer, do you expect the mining tax to generate any revenue over the course of this current year?

TREASURER:

One of the reasons that we're here having this broader discussion about the hit to revenue is because profitability of companies across the board, whether it's resource rent taxes, company taxes, super funds, all the rest of it, is really down significantly. It's hard to say but of course in the first quarter of the year we had very low commodity prices so it's not a great quarter to frame a judgment on. There's no doubt when you look at the data that the PRRT and MRRT will all be down substantially.

JOURNALIST:

Looking back now, do you have any concerns that perhaps you weren't conservative enough about accepting the forecasts from your professional forecasters about how commodity prices would move?

TREASURER:

I don't know on what basis you'd make that assertion. I have always accepted the advice of Treasury, particularly on commodity prices. There have been endless discussions before your time, here through numerous press conferences, where I've defended the Treasury's estimates of commodity prices. I would urge you to look more broadly if you have a degree of scepticism about some of these matters and see what most of the major market economists are saying at the moment. I don't think there's anyone in the country who forecast the size of the drop in commodity prices nor anyone who forecast the dollar would remain as high as it has in those circumstances.

JOURNALIST:

The last forecasts were only a couple of months ago and they were questioned at the time. Do you think that trying to get that $1.1 billion surplus figure in those forecasts was a bit of over-egging?

TREASURER:

No, I don't. Someone's been raising this question on Twitter as well so I'll respond to that. The fact is that revenue - some revenue heads are still coming back reasonably strongly, they're just not coming back as strongly as we'd assumed. There is still a very strong fiscal consolidation happening in the Australian economy. Let's be very clear about that. What I'm saying today is to take the consolidation even further because of a downturn in revenue is what would be irresponsible. When it comes to the estimates of the Treasury about commodity prices, the terms of trade, I think you'll find that generally they have been pretty accurate and I'm happy to refer you to officials. By the way, some of our officials are here, they are happy to make themselves available after this press conference to run through all of those issues and I'm sure they'd be very happy to run you through their forecasting record and how it stands up.

JOURNALIST:

What do you say to people, lobby groups, welfare groups and so on who say now that you're loosen to purse strings why don't you overturn your decision on Newstart?

TREASURER:

This is the point, I'm not loosening the purse strings. I want to make it really clear. I'm not loosening the purse strings. What I have decided to do, and I think this is the only responsible course of action, is not to cut to make up for a temporary revenue hole which has emerged of some significance in the last little while. There is no easing on the expenditure side of where we are right now so that point I can't emphasise strongly enough. Having said that, what we will do, and I think this is really important, because there is a whole lot of other factors at play here, particularly over the break when you're dealing with how the fiscal cliff's handled and a range of international factors, is that we'll come back and look at all of the analysis and data and so on in the New Year and I think that is the responsible thing to do.

Because having the capacity to respond to events a terribly important. This one of the things I have learned as Treasurer. Anyone who went through 2008 knows how important it is to look and look again at what's going on, to get on top of the trends. Things can move quickly. Things can change dramatically and one of the things I'm most proud of that we did as a Government was the way in which we responded and changed in the face of very significant changes in the international outlook.

JOURNALIST:

Does that mean you'll look at some of the MYEFO and Budget savings measures?

TREASURER:

No

JOURNALIST:

Such as the welfare changes and so on?

TREASURER:

No it doesn't mean any of that. All I'm saying is that responsible economic managers understand that when conditions change then they must change. What I've indicated today is given what we know at the moment, given the size of the revenue hole here, it would be irresponsible to cut harder or further in these circumstances if that was to jeopardise jobs and growth. This is the last one.

JOURNALIST:

You said just then that it was a temporary hole in the revenue. What gives you the confidence that it's temporary given I remember that you also said in 2008 we were going to have a temporary deficit and we've had a deficit ever since.

TREASURER:

That's because the Global Financial Crisis turned into a global recession and went on and on. What we do as policy-makers is that we act responsibly in the face of the circumstances that we deal with and this Government has always acted responsibly and got the big economic calls right.

What I'm saying to you today - and I'll be really clear - is that in light of this data, which is significant, we'll come back and look at it with fresh eyes and assess it in the first part of the New Year, we'll go through it methodically, we'll look at all the facts and we'll have another discussion then.

Thanks.