16 July 2019

Address to the Australian Chamber of Commerce and Industry Lunch Brisbane, ‘Growing the Australian Economy in Challenging Times’

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Last night I was at the Townsville pub with the new local member for Herbert Phil Thompson - a person who served his country with distinction on the battlefield and who will now make a great contribution in the Parliament.

We got talking to some locals - sugarcane farmers near retirement who loved their time on the land but were disappointed that their children had sought employment in the city.

The publican who hadn’t had dinner with her husband for weeks because he was busy doubling up as a bouncer having to deal with an upsurge in the number of people using the drug ice.

Then there were the surveyors and engineers employed by Adani, excited to get their project up off the ground, but spoke about how the activists had targeted their contractors.

Then there was the grazier who lost thousands of head of cattle in the floods but was so grateful for the quick response of the Morrison Government.

But what was clear from this series of conversations was that they reflected both the struggle and success of life up north, where people are so resilient but also so positive. And as Queenslanders and as Australians they have a lot to be positive about.

And so today I want to share with you my optimism about why the Australian economy, despite the challenges we face, can and will continue to grow and deliver benefits to all Australians.

Indeed just last week the Reserve Bank Governor, senior Treasury officials and I sat down for a wide-ranging discussion on the domestic economy and the global economic outlook.

We agreed the economy has shown remarkable resilience and continues to grow despite the challenges we face.

There is every reason to expect that Australia’s economic expansion will continue.

This is because the fundamentals of the Australian economy are sound and its foundations remain strong.

Critical to this is the importance of maintaining a competitive business environment.  

One that encourages firms to expand, innovate, invest and employ more people.

It goes to the heart of the Morrison Government’s approach to managing the economy.

It shaped the Budget I delivered a few months ago.

It framed the choice in the May election. 

It is our priority going forward.

Today I want to make three main points:

  • First, the Australian economy has strong foundations which has seen us enjoy almost 28 consecutive years of economic growth, much to the envy of the rest of the world.
  • Second, there are significant economic challenges both at home and abroad, not the least of which is the ongoing uncertainty arising from global trade tensions.
  • And third, the Coalition Government has an economic plan which is designed to see Australia through these challenges, including a record $100 billion of infrastructure spending with major projects here in Queensland.

Strong Foundations

Australia’s economic performance both past and present has been acknowledged around the world.

It was a point repeatedly made to me in recent meetings with G20 finance ministers in Japan.

Invariably, the question is asked ‘how did Australia manage its unbroken 28 year expansion?’.

Of course it has been a combination of reforms, prudent management, our ability to take advantage of our rich endowments of natural resources and our proximity to growing Asian markets.

Between 1991-92 and 2017-18 the size of our national economy has become almost two and a half times larger - growing from $780 billion to $1.8 trillion in real terms.

Proportionally, as a share of the working age population, the workforce is bigger than ever before.

Australia’s labour force participation rate is at an historic high of 66 per cent, with participation rates for women and older Australians particularly strong.

A welcome counterpart is that the proportion of the working age population receiving a welfare payment – at just 14.3 per cent – is at a generational low.

These are the dividends that flow from having a persistently strong economy.

Australia is just one of ten countries that has a AAA credit rating from the three leading agencies.

We have a budget that is returning to surplus this year, the first in 12 years, and a plan to pay off net debt by the end of the next decade.

Australia’s general government net debt at around 20 per cent of GDP is low by international standards, at just a quarter of the G20 advanced country average.

These are strong foundations.

And with strong foundations we can have confidence about building a stronger, better Australia.

Challenges

Of course it has not always been smooth sailing across these 28 years.

Inevitably there have been times when growth has been slower than we would like.

While average annual growth has been a little over 3 per cent since 1990-91, we have seen three separate episodes in that period when growth has temporarily fallen below 2 per cent.

It is the nature of a healthy, dynamic economy that from time to time some sectors and regions of the country will experience softness.

In Australia’s case, we have to contend with weather events, the vagaries of global economic developments and shifts in sentiment more generally.

After strong growth in early 2018, the Australian economy slowed in the second half of that year, and into 2019.

Our growth over the year to the March Quarter was 1.8 per cent.

This recent performance reflects the impact of a number of challenges the economy has had to contend with. 

Flood, fire and drought have impacted regions across the country, including here in Queensland.

The February 2019 floods resulted in the devastating loss of over half a million head of cattle as well as widespread damage to infrastructure. 

The Morrison Government is providing $6.3 billion in drought support and a further $3.3 billion for those affected by flood.

In this year’s Budget we also announced the establishment of a $3.9 billion Emergency Response Fund that will ensure additional resourcing to support future natural disaster recovery efforts.

While there is more to do, significant progress has been made to assist in the recovery effort for the North Queensland livestock industry and associated communities.

More broadly, the challenges in the agricultural sector have shown up in the National Accounts with farm GDP falling by almost 7 per cent over the past year.

The economy has also been affected by a significant softening in the Australian housing market.

Since peaking in September 2017 house prices across the eight capital cities have fallen 10 per cent. 

Developments in the housing market have been driven by a number of factors.

There was APRA’s interventions to bring down growth in the investor segment of the market to more sustainable levels, and there was uncertainty around the Opposition’s proposed housing tax which impacted upon sentiment.

This contributed to a decline in dwelling investment, with growth falling by around 3 per cent over the year to the March Quarter.

While dwelling investment accounts for just 6 per cent of GDP, it nevertheless generates widespread spill-over effects across the economy.

Retail spending in housing-related categories such as furnishings, household equipment and hardware and garden supplies has recorded softness recently as the housing market has come off.

Within the National Accounts, there is an often overlooked component of investment – known as ‘ownership transfer costs’.

It consists of stamp duty, conveyancing costs and other costs associated with transferring ownership of an asset such as a house.

The most recent accounts showed this measure fell by 23.8 per cent over the year, and was responsible for reducing total economic growth by 0.4 percentage points. 

Household consumption growth, more generally, also moderated in the second half of 2018 and into this year. 

With household consumption accounting for almost 60 per cent of GDP, consumers play a vital role in keeping the economy strong.

Recent softness on spending reflects a period of wage and income growth that has been slower than we would like.

Along with almost every other developed country, we face particular challenges when it comes to boosting the pace of wages growth.

Lower inflation and inflation expectations, moderate productivity growth and ongoing spare capacity in the labour market despite strong jobs growth have all contributed.

There are signs of improvement, but ultimately the best way to get higher wages growth is through a strong economy with rising productivity.

In recent months we have also seen trade tensions weigh heavily on the global outlook.

The reality is that the world has become more interconnected.

Global supply chains are both more entrenched and more efficient.

This means disruptions – through trade tensions and protectionist measures – are more keenly and more widely felt.

Of particular concern is the impact that this uncertainty is having on the investment intentions of firms and potentially the deferral of the capital expenditure that economies need to grow.

According to the International Monetary Fund, business investment in the advanced economies is forecast to slow from 3.8 per cent in 2017 to 2.5 per cent this year.

This is why our message on trade and investment has been clear and is supported by our own experience - free trade and foreign investment creates jobs.

But the reality is the continuing uncertainties are generating significant headwinds and downside risks to the global economy and, as a result, to our economy as well.

Reasons to be positive

Clearly the economy is facing pressures. 

But with sound fundamentals and strong economic foundations there is a lot to be positive about.

There are signs the property market is stabilising.

The latest Corelogic results show a slight rise in Sydney and Melbourne housing prices in June.

I am encouraged that auction clearance rates in those cities are now currently around 70 per cent, and are well up on the 50 per cent clearance rates this time last year.

With uncertainty around housing taxes clearing post-election, as well as the Reserve Bank’s recent interest rate cuts, sentiment is improving and we should see more buyers returning to the market.

The Government’s First Home Loan Deposit scheme to start on 1 January next year will also help another 10,000 first home buyers realise their goal of buying their first home sooner.

Australia’s terms of trade – the prices we receive for our exports compared with the prices we pay for our imports – have held up at higher than expected levels.

Key commodity prices, particularly for iron ore, are strong. 

At Budget, spot prices for iron ore were assumed to level out at $US55 per tonne.  Current spot prices are around double that.

This reflects both demand side effects – with China’s production of steel up by around 20 per cent over the past two years - as well as on the supply side, as production disruptions in Brazil take time to be fully restored.

There was also encouraging business lending data released last week by the Bureau of Statistics.

The value of lending to business rose strongly in May, to be almost 35 per cent higher than a year ago. 

The largest increase was recorded in the mining sector and we continue to expect a pick-up in resource investment in the year ahead, after six years of decline.

A coming boost to the economy

On top of these signs, we can be confident the Government’s economic plan will help to boost the economy in the months ahead.

Our plan was spelt out in the budget and underpinned the policy platform the Coalition took to the election.

It was carefully crafted and will provide timely support – over both the short and medium term.

Since the election we have successfully legislated our tax plan.

This plan will deliver over $300 billion of tax relief over the coming decade including longer term structural reform that abolishes an entire tax bracket, and will see 94 per cent of taxpayers pay a marginal tax rate of no more than 30 cents in the dollar. Australians will not easily forget that this tax relief was opposed by the Labor Party every step of the way.

This includes $144 billion of tax cuts from legislated measures in the 2018-19 Budget and a further $158 billion from measures in this year’s Budget.

These tax reforms are the most significant in more than two decades.

Importantly the tax relief has already started to flow.

As of this morning over 1.6 million tax returns had been lodged with the Australian Tax Office.

This is more than double the number received by the corresponding period the year before.

Ten million Australians will get a tax cut and around four million of them will receive the full $1,080.

The personal income tax measures announced in the last two budgets together will boost household incomes in aggregate across Australia by $8 billion per year.

With these tax cuts targeted to lower and middle income Australians, who tend to have a higher propensity to spend, we expect to see a timely flow-through into higher household consumption.

Indeed, according to Citibank analysts, the mix of two interest rate cuts, the tax cuts, easing cost of living and early evidence of a stabilising housing market are combining to provide a favourable backdrop for discretionary retail.

A rightful role for infrastructure

A central part of the Coalition’s economic plan is our ambitious program of infrastructure investment.

From a domestic perspective, infrastructure is an important part of our economic plan.

Which does three things.

It supports activity now.

It builds economic capacity in the future.

And it makes for better lives, helping all Australians get home sooner and safer.

Since 2013, the Coalition Government has announced more than 900 major infrastructure projects and initiated more than 25,000 smaller projects across the nation.

Of these major projects, some 160 are under construction or development.

120 projects are in the pre‑construction stage - involving detailed design and planning works, procurements, or environmental assessment.

And 280 projects have been completed.

Over the next decade, the Australian Government is investing a record $100 billion in infrastructure projects. 

Importantly, our rolling 10 year plan provides certainty for industry.

The pipeline allows the construction sector to sustain its workforce and plan for the future, with confidence that there will be ongoing Australian Government investment.

In the three years before the Coalition came to office, Commonwealth infrastructure expenditure averaged $6 billion per annum. 

It is now averaging over $10 billion, each year, across the forward estimates period to 2022-23.

This includes one of the biggest transport infrastructure projects in a generation, with $9.3 billion invested in the Melbourne to Brisbane Inland Rail project which will substantially boost capacity through the freight corridor.

Demand for freight transport along this corridor is expected to grow substantially from just under 5 million tonnes in 2016 to almost 40 million tonnes by 2050.

Developing a freight line of 1,700 kilometres – of which 500 kilometres will comprise new sections - will in future facilitate a 24 hour journey time for double-stacked freight trains between Brisbane and Melbourne, via New South Wales. 

For Queensland it will bring an estimated $6 billion of investment, approximately 7,000 jobs, and an estimated contribution to the Queensland economy of $7.3 billion.

Our infrastructure investment plan will expand Australia’s export capacity elsewhere.

We have targeted our investment through the $4.5 billion Roads of Strategic Importance initiative.

We will fund projects that ensure our key freight roads can efficiently connect agricultural and mining regions to ports, airports and other transport hubs.

This initiative is investing in over 25 key freight corridors across the country.

Our commitment to infrastructure right across Queensland is demonstrated by substantial funding which continues the $10 billion Bruce Highway upgrade.

Almost $800 million has also been committed for projects across the northern parts of this vast state under our Roads of Strategic Importance initiative. 

The Australian Government has also committed $1.1 billion to the Toowoomba Second Range Crossing project, which is due to be completed later in 2019 and which I look forward to visiting tomorrow.

This project will reduce travel time across the Range by up to 40 minutes for heavy commercial vehicles, leading to increased freight efficiencies.

In February 2019, the Coalition Government committed to develop a City Deal for South East Queensland in partnership with Queensland Government and the Council of Mayors.

To support this growth, the City Deal will focus on six priority areas: Connecting Infrastructure; Jobs and Skills; Liveability and Sustainability; Housing and Planning; Digital; and Governance and Leadership.

The City Deal will build on the more than $7 billion of funding provided nationally for congestion busting road and rail projects by the Australian Government.

The Government has also committed to a 20 year plan for a faster rail network to support our major regional centres and take pressure off our largest cities. 

Supported by the National Faster Rail Agency, business cases are underway on a number of fast rail corridors including Brisbane to the regions of Moreton Bay and the Sunshine Coast.

The Government has also committed funding for other new faster rail business cases including for Brisbane to the Gold Coast.

Despite our record $100 billion infrastructure pipeline I am conscious that there have been some calls for there to be even more infrastructure spending or a bring-forward of major projects.

We always keep an open mind, however, one must always take into account the practical challenges.

Long lead times and significant planning and regulatory coordination means that major projects cannot materialise quickly.

That is why our focus has been on developing a substantial pipeline that is maintained and rolled forward on an ongoing basis. 

Conclusion

While it is clear that the Australian economy faces a number of challenges, some are within and others outside of our control. I understand the public’s high expectations of government, but I have to confess that controlling the weather and managing great power relations are sometimes beyond us!

Nevertheless, those levers of economic management that we can control are being used to Australia’s advantage and give us reason to be positive about the outlook.

Tax cuts to provide both short term relief and longer term reform, a record pipeline of infrastructure spending to boost the productive capacity of the nation and a new skills package to create 80,000 new apprenticeships were all outlined in the Budget and are now being faithfully implemented.

It is this plan laid out in the Budget that will help ensure Australia’s remarkable record of 28 consecutive years continues and in doing so creates better lives for all Australians.