Press Conference
Parliament House
9 November 2010
SUBJECTS: Mid-Year Economic and Fiscal Outlook
TREASURER:
The update that I’m releasing today shows that Australia remains ahead of the pack with strong growth, and a return to surplus in three years. These numbers demonstrate the fastest, most positive turnaround in the government finances in 40 years. The fastest and most positive turnaround in government finances in 40 years. And this is actually quite remarkable when you consider the global uncertainty, the fiscal carnage in other countries, quite remarkable. Quite remarkable that we’re getting back in the black at record pace.
These numbers and the pace of fiscal consolidation make Australia stand out as a developed economy. In particular this is the case given how fragile the global economy is at the moment. There’s not a major advanced economy in the world that wouldn’t prefer our economic and budget position.
Also this update is delivering the first stage in full on the commitments we’ve made to the Australian people at the last election. So this is stage one of the full implementation of all of our election commitments. In particular, our Trade Apprenticeship Income Bonus that will help around 200,000 trade apprentices like brickies and mechanics to stay in training. Our $274 million investment in mental health services and suicide prevention, or the $400 million to use the technologies of the future to improve access to health services. Our Paid Paternity Leave Scheme so dads can spend time with a new born baby and new tax breaks for green building to encourage more environmentally friendly workplaces – just to name a few.
In addition, we’re also investing $800 million over five years in critical transport and community infrastructure to grow our regions. We’ve detailed and fully offset more than half of our election commitments in the MYEFO and we’ve made an allocation in the MYEFO for the remainder of our commitments that will be progressed and fully detailed in the Budget next year.
I just want to say a little bit about the economic context. I think this is particularly important. The update forecasts strong growth, falling unemployment and a big pipeline of investment that’s gathering momentum. It demonstrates the continued strength and resilience of our economy, despite that fragile global environment I was talking about before.
As you’re aware, many of the major industrial economies are still struggling under the weight of near double digit unemployment, sluggish recoveries, and high public debt. We are in a far superior position. We have strong growth, with growth forecast to be 3¼ per cent in 2010-11 and 3¾ percent in 2011-12. We have strong job creation, with a further 380,000 more jobs expected to be created in the next 18 months.
Now, that’s on top of something like 600,000 jobs that have been created since the Government was first elected. We have falling unemployment, down to 4½ per cent by mid 2012, and as I said before we have a strong pipeline of private investment about to gear up.
Now, as this chart shows, our economy is already streets ahead of the other major advanced economies and you can see what a strength it has been for Australia not to go into recession because as you see as we move out through 2011 and 2012 we continue to move ahead relatively on the other major advanced economies. Some of them are still struggling to get back to where they were prior to the global recession. Now while our economy continues to create jobs, of course many of those economies are simply struggling to get back to where they were.
In terms of the fiscal outlook, we are in very good nick and that’s despite the fragilities in the global economy and, of course the high Australian dollar.
As these charts show, we continue to have a fiscal position that is the envy of the world. Compared with the major advanced economies, we’re back to surplus sooner and our debt levels will peak at dramatically lower levels as those graphs demonstrate.
Now, as you are also aware the high Australian dollar means our exporters are less profitable and that means less tax revenues. In total, tax revenue has been revised down by close to $10 billion since the Pre-Election Fiscal Update which was delivered in July.
That does mean the deficit for this year is slightly higher at $41.5 billion dollars or 3 per cent of GDP. This is still less than one third of the average deficit of G7 economies in 2010 and despite this hit to revenues, we remain on track to get the Budget back to surplus in 2012-13 with a surplus of $3.1 billion or 0.2 per cent of GDP.
The fact that we are on track to come back to surplus is a tribute to the methodical application of our strict fiscal rules which we first announced in February 2009. That is holding real growth in spending to less than 2 per cent a year and, of course ensuring that the stronger economy feeds through to a stronger budget position by banking all improvements in revenue, all improvements in revenue.
By doing both those things, the 2 per cent cap, by banking the improvements in revenue, we’ve got both arms of fiscal policy working together to deliver the fastest fiscal consolidation in more than 40 years, and I say 40 years because that’s the period from which we have figures available to make the comparisons.
Now, as this chart shows, we’re delivering a fiscal improvement of 4½ per cent of GDP over the three years to 2012-13. More than half of that comes from spending restraint. This year alone, that fiscal improvement is 1.3 per cent of GDP, almost all of which is driven by a reduction in spending as a share of our economy but you can see how it moves through. So generally it’s about half and half. Spending restraint on the one hand and revenue improvement on the other.
Now, as this next chart shows, and I think it’s a particularly important chart given the public debate, this fiscal consolidation is much faster than what occurred in both the 1980s and the 1990s downturns. Much faster, and that’s what that graph demonstrates. So it’s much faster than at any other time on record.
So we are getting back to surplus at record speed compared to previous periods. So we are reducing the Government’s contribution to demand in a measured and in a responsible way, and which makes sure we can continue to invest in the capacity that we need to sustain the growth that we desire into the future.
So I just want to give you bit more of a sense of history, because there’s a lot of talk about who spent what, where, when, how and why. This next chart is an important chart. This chart shows that we’re budgeting for real spending growth in the next two years of 0.2 per cent on average in the next two years, that 0.2 down there at the end is where we are in terms of growth over that two year period. Now what I want to point out to you is that tiny orange bar there is very favourably compared to what occurred at the height of the previous boom under the previous government where they had spending exceeding their growth.
So that is yet another way of demonstrating the fastest fiscal consolidation in over 40 years and how that stands up in a comparative sense to what has occurred in the past. The point I want to make is that we put our fiscal rules in place in February last year because we understood that as we moved to stimulate the economy we had to put in place the exit strategy for the future. That we had to put in place the program of reform to bring the Budget back to surplus, and now that growth has returned and is above trend the application of the 2 per cent rule and the banking of new revenue is all occurring and bringing us back into surplus in the way we envisaged. That is – we were intent when we put that rule in place not to repeat the mistakes of the past that are demonstrated by that period there in the 2000 expansion when the previous government was spending like generously at the height of a mining boom.
Now, I just want to conclude and then I’m happy to take all of your questions. There’s one thing that matters here today more than the numbers and I think it’s something that goes to the very heart of what the Government is about and it also goes to the very heart of what the Labor Party is about. It goes to the very heart of why I went into politics in the first place. Because a strong economy is an economy that creates jobs. It’s an economy which creates opportunities for people. It’s an economy where people can have an opportunity to achieve in the future because we have growth and opportunity that flows from that growth.
That’s why I’m optimistic about the future of this country. It’s why I’m so optimistic about these numbers today. Because what they represent is hundreds of thousands more Australians in work and in work which provides the opportunities for them to fulfil their dreams and to look after their families and it’s not just the jobs that were saved during the recession. It’s not just the jobs that have been created since then. It’s also about the jobs that are coming down the pipeline.
I think I’ve mentioned before that a little over 18 months it’s expected that we will have around 1 million more Australians in work than when we were first elected. That’s a remarkable achievement for this country an absolutely remarkable achievement for this country when you consider what is going on in other major advanced economies, what’s going on in Europe, the debate in the United States and to be coming back to surplus in three years – well ahead of any other major advanced economy at the same time I think is something that we should all be optimistic about, because we’ve done this in the context of the worst slump in the global economy since the great depression.
So I’m proud of the numbers and I’m delighted to be here to talk about them and I welcome your questions because we do have a positive agenda for the future. One to build capacity and to meet the challenges of mining boom mark II, and they are challenges of capacity. They are challenges which mean that we have to make the investments for the future to achieve sustainable growth and the job creation that comes with it, and at the core of that is responsible economic management.
JOURNALIST:
You’re forecasting a very impressive fall in unemployment halfway through next year – 4 ½ per cent instead of 5 [per cent]. But then in the following year –
TREASURER:
4¾ [per cent], and then down to 4 ½ [per cent].
JOURNALIST:
Yeah.
TREASURER:
Yep.
JOURNALIST:
But then after that it goes back to 5 [per cent].
TREASURER:
Well, the forecast period is 2010-11, 2011-12 and then we’ve got the projection period and you’ll note that the growth rates are down to 3 [per cent], and 3 [per cent] as well. But we are creating jobs and in quite a strong fashion at the moment.
JOURNALIST:
Treasurer, are there any election promises that have been delayed, restructured and cut over the forward estimates? To the best of your knowledge.
TREASURER:
We’re committed to delivering our election commitments in full and as I’ve indicated in my remarks we’ve probably, we’ve accounted for – in measures in this statement – over half of our election commitments. We’ll deliver them in full and the remainder will be delivered as measures in the Budget.
JOURNALIST:
Are there any that have been, today, that you’ve changed the timing of?
TREASURER:
I’ve already indicated that the clean car initiative has had the timing changed. That pre-exists today.
JOURNALIST:
Treasurer, could you clarify (inaudible) on that point. The contingency reserve’s been drawn down quite significantly. Is that because you’ve made allocations?
TREASURER:
Yes, we had made allocations for those election commitments that I’m not announcing today and we will be working on through to the Budget. And we put that allocation in the contingency reserve.
JOURNALIST:
Does that mean all of your election promises are essentially funded via the contingency reserve?
TREASURER:
Yes, that’s right.
JOURNALIST:
And also, could I ask on revenue, are the resources rent tax seems to have been quite resilient despite some suggestions they were going to fall.
TREASURER:
No. If I can just go through here and find it to draw your attention to the appropriate table. You’ll see it, table 324, and the detail is in the footnote at the bottom in ‘a’. So the adjusted revenue is $3.3 billion in 2012-13, $4.1 in 2013-14. So they are down about $3 [billion].
JOURNALIST:
Which table’s that?
TREASURER:
324. I want to make a point about that because it’s a very good question from Laura because it demonstrates the challenge that we’ve had with the budget because in the MRRT revenue as well as in company tax more generally, this is where we’ve had the hit from the value of the dollar. The fact is that all of these contracts are signed in US dollars and what that means is for a given price our companies are receiving less and are less profitable.
JOURNALIST:
(inaudible) Treasurer, that the argument or a precedent has been brought up about the resources rent tax that you were (inaudible) optimistic?
TREASURER:
No, not at all, not at all. Absolutely not. There’s no change to the revenues of the MRRT that comes from anything else other than the exchange rate effect. No change at all. None whatsoever. And in fact, and this is very relevant to this debate because I think you’ll recall it well, coal and iron ore prices, of which there is much debate when this debate was raging earlier in the year, still remain relatively high. Quite high. We don’t expect to see any dramatic change in those prices. So we’re not dealing here with any great price effect in terms of… What we’re dealing with is solely here, the exchange rate effect. And that’s why tax revenues over all are down about $10 billion. It largely reflects lesser company profitability of which the figures for the MRRT are part.
JOURNALIST:
On that specific topic, in terms of mining exports, has Treasury adjusted commodity prices and/or volumes up or down?
TREASURER:
Well I don’t think they’ve dramatically changed any of those things at all. In fact, if you look at both the Reserve Bank and the Treasury you’ll find in some of these areas the Reserve Bank is a bit more optimistic than the Treasury. But what we’re dealing with here is just an exchange rate effect. The outlook in this area is very strong.
JOURNALIST: How is it that the (inaudible) is almost entirely due to the appreciation of the Australian dollar - about $3.1 billion. So almost entirely, sir. Has there been some slight other tweaks around potential commodity prices.
TREASURER:
No, no. Well, this is a complex area of forecasting but let me take you through some elements of it and why they would say ‘almost entirely’. First of all, you’ve got the reduction in the profitability that comes from the fact that the contracts are in US dollars. There are also some upsides. For example, you know there may be other things that they import. Part of their processes, whether they are making gains the other way. So it’s not an absolutely straight, linear ‘oh the currency’s down 15 per cent so it’s straight 15 per cent’. That’s all.
JOURNALIST:
Treasurer, can we get something on the commodity prices (inaudible)?
TREASURER:
No, no. What we have always provided, what the previous Government has always provided is being provided here. It is done in the normal way as it has been done under previous Governments and we’re providing what is always provided. We’re not going beyond that.
JOURNALIST:
(inaudible) It was 12 then it turned out to be 24. Now it’s 10.5, now it’s 7.4.
TREASURER:
All that’s occurred here is that there is a write-down of revenues of $10 billion of which part of that is MRRT revenue. There’s a wider write-down across the budget caused by the exchange rate effect.
JOURNALIST:
(inaudible)
TREASURER:
Well, sorry, I’ll just go back to that because I really do want to answer this. I provided a very full explanation of all of those issues when I provided the update prior to the election. Your suggestion that it might be due to some dramatic change in either the way in which the tax is operating or in volumes overall or something like that is not the case, ok?
JOURNALIST:
Treasurer, the fall in unemployment growth down to the level which Treasury said is at around (inaudible). It has inflation rising through 3 per cent with risks on the upside. Does that inflationary outlook concern you and if inflationary risks materialise would there be a role for further fiscal policy or would you see that as largely a matter for the RBA?
TREASURER:
Well, first of all this is the fastest fiscal consolidation since the 1960s. That’s why we’ve got it in place. It is faster than the 1980s, it’s faster than the 1990s and it’s never been done before. And the other thing I’ll tell you that has never been done before is that there’s never been an election campaign where $1 wasn’t added to the budget bottom line. And what drives the Government here is what drove us when we originally put in place our strict fiscal rules. That is, as the economy grows above trend, we are withdrawing the public claim on resources. That’s what fiscal consolidation is about. But we are also very mindful, as you know, of the fact that we still need to build capacity in the economy because one of the problems we had when the previous Government had their spending spree at the height of the boom, they weren’t investing in a lot of the economic capacity enhancing infrastructure. This Government is doing that. And we think that’s important. We can’t starve sections of the economy of the critical investment that they need to enhance the capacity to cope with the strong growth which is coming from the investment pipeline.
JOURNALIST:
Treasurer, (inaudible) variation - $3.4 billion for a draw down in the conservative bias allowance. Is that different from what you’ve criticised the Coalition for?
TREASURER:
No, not at all. No. In fact there’s a good section on the contingency reserve and I recommend it for everybody to read, but not late at night. But, there are three or four sections to the contingency reserve. The first one is the conservative bias allowance, which is what you’re referring to which was fiddled with unsuccessfully by the Coalition and Treasury and Finance blew the whistle on that fiddle when they brought it out but they got $9 out of [$]10 of the net savings all wrong. The fact is, the way in which the conservative bias allowance has been treated in these accounts is exactly the same as was treated under Peter Costello. So there’s been absolutely no change there whatsoever. The other thing that you have, or the other items that you can have, in the contingency reserve are allocations for commercial-in-confidence items. You can have allocations as we have got in the contingency reserve this time - financial allocation for other election commitments that we’re working on but haven’t completed and will deliver in the Budget, and there may be some policy decisions and so on which for various reasons can’t necessarily be announced now so the allocations will be in there. There’s a very good section in the MYEFO on all of that but we haven’t changed anything whatsoever on the conservative bias allowance.
JOURNALIST:
But what will your actual figure be, Treasurer? I mean the draw down to a ¼ per cent of (inaudible). You had two per cent at the last Budget (inaudible)
TREASURER:
But at each MYEFO it is down but then it trends up.
JOURNALIST:
But are you anticipating it going back to (inaudible)
TREASURER:
Well, yeah. Whatever the… I can’t… I haven’t got the table in front of me but I’m happy to go through it with you afterwards. But it always goes up. So it starts low and goes up to the last year of the forward estimates. That is what the previous Government did and that is what we are doing. There’s been no change.
JOURNALIST:
(Inaudible) It’s $2.1 million this year but the largest effect comes in 2013-14. Why aren’t you actually worried about the (inaudible)
TREASURER:
That’s a very good question.
JOURNALIST:
(Inaudible)
TREASURER:
Well, there are swings and roundabouts. I haven’t probably been through in the detail that I ought to on the exchange rate. It’s been a long-standing practice of the Treasury under both Governments to forecast the exchange rate at the level it’s at when they’re finalising their forecasts. In the case of this MYEFO that’s late October. You make the legitimate point that the currency as it is now could go higher but I never speculate about that. And of course it could go in the other direction as well and I don’t speculate about that. And so yes, that does have revenue impacts. We’ve been through a (inaudible). So what we do is we prepare our forecasts on the basis of the exchange rate at the level it was when the forecasts were prepared and it may well be next time, by the time we come to Budget, we’ll be using a different level of exchange rate and that will have its implications for the revenue.
JOURNALIST:
Treasurer, does 3.4 billion of savings that are in MYEFO. Are any of those new savings that weren’t announced during the campaign and if there are, can you tell us how much, or what they are?
TREASURER:
Well, there are some. There is for example, the saving that we put in place to fund the priority regional infrastructure fund for example which wasn’t announced in the campaign but was announced as part of our response and agreement with the independents. That’s one. I couldn’t detail them all. I’m happy to go through them with you later but, that’s –
JOURNALIST:
Are there any that are new today that weren’t part of the deal with the independents or the election?
TREASURER:
There may be a few but they won’t be significant, and I’m happy to give you a list of those as well. We’ve always got an eye, you know, for bits and pieces that are around. So there are some but I can say that it’s not a major amount of the total and I’m happy to give you give you a list.
JOURNALIST:
(Inaudible) some people say that’s the problem and I take your point obviously that growth is better than expected but if you have a $10 billion hitch in revenue, wouldn't people expect that you would announce some new savings measures today?
TREASURER:
Well, we have. We’ve just been through –
JOURNALIST:
(Inaudible)
TREASURER:
No of course not.
JOURNALIST:
(Inaudible)
TREASURER:
No I don't think anyone reasonably would for the reasons that I’ve just responded to the previous question there about where this could go. You can’t take a dramatic change of direction based on one snap shot of the currency at one particular time that wouldn't be logical. That wouldn't be a common sense thing to do. What we’ve got to do in this environment is apply our fiscal rules and we’ve accepted this (inaudible) of making sure that we’re offsetting all of our new spending consistent with our fiscal rules, banking the upward revisions of revenue and yes there has been an impact of the currency, the most important thing her is we’ve got the underlying fundamentals right and sometimes in these papers and these forecasts you’ll have a variable that’s moving around like that and you work within it.
JOURNALIST:
Mr Swan is it prudent to be talking about a cut to migration given that Australia is heading into a situation of full employment?
TREASURER:
Well, what we’ve done in the last six months is reorientate our migration program and refocused it much more clearly on skills and that’s exactly what is required in the circumstances that we are in at this very moment.
JOURNALIST:
Mr Swan, there’s been nearly six thousand (inaudible) maritime arrivals this year, surpassing the Howard government’s highest levels. Yet immigration spending is forecast to remain the same –
TREASURER:
I think you’ll find there’s an allocation in here for the measures that the minister outlined –
JOURNALIST:
Is that the $55 million?
TREASURER:
Yes, that’s right.
JOURNALIST:
Yes, but other than that there’s nothing new.
TREASURER:
Well, that’s new.
JOURNALIST:
So, I mean, does getting the Budget back to surplus come at a cost to strong border protection?
TREASURER:
Not at all. I mean, I think you’ll see and I’m happy to provide the figures to you, that the Government has had a very strong emphasis on border protection and I think the figures that I’ll supply to you in detail will demonstrate that amply because it’s much stronger than detention centres. It’s what we’re doing off shore. It’s what we’re doing in patrols. I’m happy to provide you with the detail of that, I don't have every one of those figures in my head as we speak but I’m happy to get them to you.
JOURNALIST:
Treasurer, would you consider increasing the amount of residential mortgage backed securities that the Government could guarantee, to increase competition to second-tier lenders in the banking sector?
TREASURER:
What we are doing is what I put in place some time ago and it’s having an impact out there. We haven’t yet finished putting in place the full $16 billion of AAA rated residential mortgage backed securities which have kept the super structure of the securitisation industry alive and provided the basis for a more impressive competition from non-bank lenders and smaller banks and that’s been very important and you’ll see any number of people in that sector have made that point. How important that investment has been and it remains an ongoing and an important part of a whole tranche of measures required to make our banking system more competitive in the longer term.
JOURNALIST:
Do you believe that’s enough?
TREASURER:
Well, I’m not going to speculate about –
JOURNALIST:
Treasurer, back on Sam’s question. You no doubt have heard some of the economists saying that the Aussie dollar could get to $1.10 or beyond. Wouldn't it be prudent to start trimming your cloth just in case?
TREASURER:
What would be prudent is to do what’s right for the economy and not to overreact to the level of the dollar on one day or week of a year. That’s the prudent thing to do. That’s the sensible, common sense thing to do.
JOURNALIST:
(Inaudible) your reserve says $1.00 and you’re saying 98.5 (inaudible).
TREASURER:
I’m sorry, I’m not saying that. I’m saying that the forecasting method used by the Treasury is the same now as it was under the previous government. Is to look at the level of the dollar at the time that they finalise their forecasts, not seek to forecast (inaudible) or into the future. They’ve never tried to do it and they’re not going to necessarily do it in the future. The prudent thing to do is just to understand what we’re dealing with, which is what I’ve been trying to explain today. And it does have an impact on revenue, a very significant impact on revenue and we’ve talked about that today, but I think the most important thing is not to actually overreact to that.
JOURNALIST:
(Inaudible) that is was prudent to find more spending cuts, not because of fluctuation in the dollar but because of the underlying structure of the Budget.
TREASURER:
No, I don't read it like that at all. In fact the Treasury and Finance Red Books are pretty happy with the Government’s application of its strict fiscal rules. What we have done has offset all the expenditure of the election campaign, this is a first in history. I know that’s something that Treasury and Finance Department are very happy about. The provision for those things that we should have provision for according to our Budget rules and we’ll continue to do that in the Budget. I would remind you this is just the Budget update. It’s an Economic and Budget update and then next year when we do the full Budget we will continue to deliver the rest of our election commitments and to operate the fiscal strategy that we’re committed to.
JOURNALIST:
Treasury and Finance might be very happy with what you’ve done in the election but particularly Finance in their incoming brief was very explicit about saying you need to take early action on spending because of the pressures on the Budget in the medium term and talked about things being (inaudible). It all suggests that they are expecting some more spending cuts by the statement.
TREASURER:
I don't accept that characterisation of the Finance Red Book.
JOURNALIST:
In terms of the political situation (inaudible). It’s a very different situation to governments in the past (inaudible).
TREASURER:
Yes, in the past when they had big majorities they spent like drunken sailors.
JOURNALIST:
In both the House of Representatives and the Senate there’s no guarantee you can get key measures through. You know, including the Mining Tax. How can you continue to guarantee that you will get to surplus by a certain stage if you know, you don't even know yet if some of these measures are going to get through Parliament.
TREASURER:
By an appeal to common sense. By an appeal to all Australians, including members of minor parties and they’re representatives in this house that the fiscal discipline and the fiscal settings that we’ve put in place will maximise the prosperity of this country and the Government will not waiver from that. It is acknowledged in our agreements with the minor parties, the importance of the fiscal strategy, it’s our bottom line. Bringing this Budget back to surplus in three years, three years early is absolutely an essential part of making Australia an even more prosperous country in the years ahead. Thanks very much.
JOURNALIST:
(Inaudible)
TREASURER:
I’m not speculating on the Budget.
