JOSH FRYDENBERG:
So we have a few slides here, firstly, on real GDP growth. As I said, we’re down 1.9 per cent for the quarter. The median market expectation was a decline of 2.5 per cent, but GDP growth is 3.9 per cent up through the year.
Next slide. This slide very much tells the story of the lockdowns. As you can see, there was growth across the jurisdictions who were not in extended lockdowns: Tasmania, Northern Territory, Queensland, South Australia and Western Australia. Victoria fell 1.4 per cent; the Act 1.6 per cent; and New South Wales 6.5 per cent. As I said, Sydney metro was in lockdown for the entire quarter, whereas in Victoria it was in lockdown for a shorter period of that time.
This is the parts to today’s numbers. Household consumption, which fell considerably, the second largest fall on record, was the key driver of the contributions to the real GDP outcome. We saw new business investment down slightly. New public final demand, government spending, was a contributor in a positive way. The change in inventories is quite interesting because we started to see the implications of some of the supply side constraints. Clearly, businesses who were in lockdown were running down their existing inventories, but at the same time it was harder for businesses to get those imports, particularly motor vehicles. Motor vehicles was a large factor in this change in inventories. As you know, there are issues with global supply chains, whether it’s semiconductors, whether it’s steel parts, which are playing into the availability of motor vehicles which was a factor in the change in inventories. Very positive story on net exports. Volumes, obviously commodity prices were high. Iron ore prices averaged at $174 a tonne through that September quarter. We saw metallurgical and thermal coal prices higher than we had expected at budget. And agricultural prices have also been strong as well as volumes off a better harvest. GDP down 1.9 per cent. As I said, household consumption, that’s a telling story, still up 1.8 per cent through the year.
Next slide. This is the breakdown, 11 of the 17 categories explaining what actually happened on the household consumption story. As people were subject to these health restrictions, the ability to spend on transport services, the ability to get to a retail store obviously inhibited, and recreation culture was also impacted by that.
Next slide. Dwelling investment is a very positive story and, as you know, it’s been programs like HomeBuilder which have supported that. 11.4 per cent up through the year and marginally up for the quarter.
Next slide. Again, new business investment. You would think during a recession, the first in nearly 30 years, the COVID recession, that you would see big drops in business investment, but supported by the government’s expanded instant asset write‑off, we did see an increase through the year of 9.1 per cent but it was down in that quarter. Farm GDP, another very strong story for the economy.
Next slide. Household gross disposable income. Again, it’s up through the year and this has been supported by the tax relief that we’ve been providing as well as, as you can see, the social assistance benefits that have been provided. But compensation of employees is up, and that’s the wages and the salaries bill for the country.
This is very important to understand that pre‑pandemic the household savings ratio was around 5 per cent, give or take. We saw it go as high as 23.6 per cent back in the June quarter last year. Now it’s risen again, spiked again to 19.8 per cent. And again that is a function of people not being able to get out and about and spend. So $370 billion has been accumulated on household and business balance sheets, about $220 billion of which is household balance sheets, and $150 billion of which is on business balance sheets.
This shows Australia’s relatively strong performance relative to other countries. It’s been a strong economic performance, but this puts it in relative terms. If you compare to pre‑pandemic levels, we’re just 0.2 per cent below where we were going into the pandemic. So, a strong economic performance given it’s the biggest economic shock since the Great Depression and this is relative to other nations.
That completes. Are there any questions?
JOURNALIST:
Treasurer, I know it’s no surprise to you or anyone that I want to ask about WA. WA wasn’t locked down. The iron ore price was higher than expected. How much of an impact did the success of that state have on the national economy? Obviously, McGowan has been saying this for a long time about how we’re propping it all up. Is that true or did it not really factor in?
JOSH FRYDENBERG:
Well, we welcome the contribution from WA’s strong mining sector. Nominal GDP was down just 0.6 per cent. That matters, as Shane and others know, to my budget bottom line. And we did see higher than initially forecast iron ore prices. It started, at the start of the September quarter, it was just over $200 a tonne, it ended the September quarter at $94 a tonne, it averaged $174 a tonne. We have sensitivity analyses in the budget about what the increase in the iron ore price means to our budget bottom line, but it’s substantial. We have always had a conservative forecast and we have a glide path down to $55 a tonne in our budget for iron ore. So, there has been a good boost to the budget from the higher than expected iron ore prices, but I note that it’s come down even a little bit more since the end of that September quarter. It’s now tracking at around $88 free onboard.
JOURNALIST:
Treasurer, you said before we have to live with COVID and its variants. So would the Federal Government again fund, via disaster or business payments, any future lockdowns that cover entire capital cities or entire states?
JOSH FRYDENBERG:
Well, thanks Tom. The first thing to say is I, you and all of Australia doesn’t want to go back to lockdowns. It’s not just the economic cost. And I speak as a Melbournian here, who in Melbourne we endured the longest lockdown of any city in the world. It’s not just the economic cost it’s also what Patrick McGorry has termed the “shadow pandemic”, the impact on people’s wellbeing. I mean, kids were out of the classroom for more than a year in Victoria. We don’t want to go back to lockdowns. And that’s why I welcome the outcomes from National Cabinet yesterday, which was that Premiers, Chief Ministers and the Prime Minister are doing a wait‑and‑see, but with the view that this is really just a pause that we have announced, a two‑week pause with respect to skilled labour and humanitarian visa holders and international students. We want to know more about the severity of this virus, the transmissibility of the virus, as well as the ability of the vaccines to be a defence against this virus. So, I’m really hoping, Tom, that there is no further need for that emergency assistance that we provided, but we’ve always, as you know, from day one of this pandemic, done everything humanly possible to provide that level of economic support to people who need it most. We did bring to an end JobKeeper after we extended it for a further six months, and we were criticised at the time for doing it. Our political opponents wanted to extend JobKeeper. They wanted to keep the taps on. Then we brought to an end the COVID disaster payments. We tapered it with an extra two weeks. We brought that to an end. Again, the opposition criticised us for turning those emergency support payments off. But they had to come off, and now the economy needs to find its equilibrium. And the good news is that 350,000 jobs are coming back. So, we will always provide the economic support that is needed, but I hope for the economy’s sake, but more importantly for the community’s sake, that the lockdowns are very much behind us.
JOURNALIST:
On the economic recovery, the Prime Minister has taken aim at the maritime union and the blockages on the docks, and he said you’re going to commission a Productivity Commission review into the (inaudible) on the ports. Given the ACCC’s already sort of identified the problem why do we need a PC report? Why can’t you just act based on what the ACCC said? And can I just ask a second question, we’ve just reported that your colleague Greg Hunt is about to announce his retirement from politics. Do you have any information on that or anything to say on that?
JOSH FRYDENBERG:
Well I will wait to see the details about Greg Hunt’s comments that you referred to, but Greg is, you know, my closest friend in this place. I’m the godfather to his beautiful daughter Poppy and he’s the godfather to my daughter Gemma and we are very, very dear friends, and he’s been an outstanding Health Minister through this crisis. The fact that Australia has one of the lowest mortality rates in the world and the fact that we have one of the highest vaccination rates in the world is due in no small part to the incredible work that all health professionals have done across Australia, but Greg as the Health Minister during this once‑in‑a‑century pandemic has been absolutely outstanding. But I’ll leave any further comments to see exactly what statements you’re referring to.
You raise a very important point about the efficiency on our ports, and I will be releasing, probably next week Phil, the terms of reference on this PC report. The first thing to say is during the pandemic, because of the health restrictions, we saw a substitution effect in consumption behaviour. So, people couldn’t go out to cafes and restaurants, couldn’t take a holiday, couldn’t stay at a hotel. So they moved their consumption from services to goods. We saw, for example, in the June quarter a 9.9 per cent increase in import volumes, and we’ve seen that right around the world. And this has started to put pressure on supply chains and on port activity, so much so that the ships are full and prices in some cases have gone up 200 to 300 per cent, freight costs, in some cases and even higher in other costs. What the ACCC report, I think, did very effectively, was it did shine a light on the productivity challenge in our ports, and it said four out of five Australian ports were in the bottom quartile of global ports for their efficiency. And there was more than 350 global ports that the World Bank report had initially assessed, which the Productivity Commission referenced. The other thing that the – sorry the ACCC referenced. The other point the ACCC made was that the median time that a container spent on an Australian port was three times the median time a container spent on a Japanese port; more than double the median time spent by a container on the Chinese port; more than 50 per cent the median time that a container spent on a New Zealand or a Singapore port. And so clearly, there are issues in our ports. Where the Productivity Commission, I think, can really add value is it can do a whole‑of‑economy look at this, not just through a competition law lens. It can look at infrastructure access and rail access, for one. It can look at the container park space issues that’s come up. It might look at some of the restrictive employment practices that are in place in some of our ports. So it can look at a whole range of issues, and it can give us an interim report before the middle of next year, and then obviously complete a larger report after that. So I think this is a really important issue that goes to Australia’s competitiveness. It goes to the cost of goods for Australians. And certainly when it comes to industrial relations action, and I notice there’s a pause on that issue until 10 December, but we’re watching it very closely because we don’t want Australians to not get their presents for Christmas because of supply chain constraints and because of industrial action by our unions on our ports. The unions should not be allowed to hold up Australians getting their presents at Christmas.
JOURNALIST:
Treasurer, just on the Omicron variant and a lot of economists have said that Omicron, new variants, they are kind of a question‑mark risk factor to our rebound in the economy globally. Do you think the OECD should be looking at targeting or helping developing nations get vaccination rates up more than what they are in terms of kind of global economic continuity?
JOSH FRYDENBERG:
It’s a really – look, this is a really important issue, which Australia has a role to play, which we’re doing in the Pacific specifically, and all developed countries have a key role to play in vaccinating Africa, in vaccinating the Pacific, in vaccinating Asia, because when those vaccination rates are lower there’s a greater likelihood of not only hospitalisations and deaths and cases, but also mutations of the virus as well. It is an issue that’s come up in my discussions with Janet Yellen and with my Canadian and New Zealand counterparts and the UK counterparts. We all are doing our bit to try to get the vaccine distributed as quickly as possible most widely, and I think that’s really important.
JOURNALIST:
Treasurer, you talked about the $360, $370 billion in savings that has been pent up. You’re hoping that people are going to spend that over the next 6 to 12 months, but that of course is going to come up against those supply‑side issues that you talked about. They’re not expected to ease until the second half of next year. How concerned are you about how that will flow through to inflation and those pressures that we’re starting to see come through over the last few months?
JOSH FRYDENBERG:
Well, firstly it’s not all going to be spent. There’s always a savings ratio, as I said, of around five per cent, but it’s a lot of damn money that people have saved. And it’s money that they’ve accumulated because they haven’t been able to spend, but it’s also been the government support that has been being provided. When I talk to the economists, and there are a few of them down at Treasury, they make it very clear that this is a real net positive for the recovery. This is going to give our recovery momentum. And, as you know, the RBA have upgraded their growth forecast from 4.25 to 5.5 per cent for next year, and it’s going to be part of our story in terms of driving that unemployment rate down to historically low levels. See, we’ve turned off the taps for emergency support. We’ve obviously provided record tax relief. And we’re shifting the economy and, of course, next year’s budget is about this as well. We’re shifting the economy to, you know, driving productivity gains, infrastructure, skills, deregulation, the digital transformation, energy investments. They’re all the inputs to driving our economy forward. And we had to put in place those emergency support payments. They were necessary. They prevented, as I said earlier, a scarring of the labour market. It’s very easy for us to sit here in December 2021 without lockdowns and forget what was occurring last March when thousands of our fellow Australians were lining up outside Centrelink having lost their jobs, and small business owners were fearful of losing their life savings and their business. I’ve met many of those small business owners. I’ve met many of those families. And yet we have come through this in a better position than nearly every other country. Now, you referenced inflation, and I think that’s a very important question. Underlying inflation is at 2.1 per cent today. That’s the first time that underlying inflation has been in the RBA’s target band since 2015. It’s not the house view at this point in time that the inflationary pressures in Australia are the same as the inflationary pressures, for example, in the United States where they have seen their underlying inflation equivalent at just over 4 per cent. There have been supply‑side constraints. There have been pressures on building materials – steel, timber. There have been, obviously, some fuel price increases. That’s come together but it’s not the same experience of the UK and indeed the United States. So, having inflation at 2.1 per cent, that’s not a bad thing. But we’re watching it very, very closely, bearing in mind that there is still spare capacity in the labour market. There’s still spare capacity in the economy. And that’s why Phil Lowe takes his view about interest rates. Now it’s not for the Treasurer to give a sermon on interest rates, that’s a matter for the independent RBA. But that’s behind their thinking. Their thinking is about chewing up that spare capacity in the labour market, driving that unemployment rate down and assisting in that way. Ross.
JOURNALIST:
Just a question on that. Does inflation and the bout of inflation actually help the government deal with the debt that’s being accumulated over these past two years? And indeed, at what point do you believe the timing and the strategy is right to start to deal with the debt that’s been accumulated?
JOSH FRYDENBERG:
Well, thanks Ross. Well, the best way to deal with the debt burden which is obviously higher as a result of the spending required during this pandemic is to grow the economy. And I point you to the UCB – the underlying cash balance – that I announced the deficit in October last year with the budget. Now, it’s just around $213 billion. When we saw the final budget outcome for 2021, it came in at around $134 billion. It was an $80 billion improvement. Why? Because we saw a stronger labour market. So we saw less people on welfare and more people in jobs, and as a result of being in jobs they paid tax and that was revenue for the government. So, our focus is driving that unemployment rate down as a way to help repair the budget. But there is obviously a little bit of inflationary pressures, certainly more persistent than was originally thought, but in terms of the overall settings for the economy, we’re watching that very closely.
JOURNALIST:
Treasurer, the Omicron variant arrived as Australia was in the middle of reopening, which made it easier to put a pause because we weren’t fully open to all international travel. We know there are going to be more variants.
JOSH FRYDENBERG:
Correct.
JOURNALIST: Is it going to be impossible to do this kind of measure in the future if we are reopened, a variant comes along, or do you envision that we may again pause international travel, or does that have to be ruled out once we are reopened?
JOSH FRYDENBERG:
Well, again, if I take you back to this year’s budget in May, we had an assumption about what the migration settings were, and the opening of the borders were. The assumption was that it would gradually reopen from mid next year. I’m going to update those assumptions in MYEFO. Let me just tell you, we’re doing better than expected. Those borders are opening earlier than we expected. This is just a pause and some of the early signs are actually positive. And again, we take the medical advice. I was in the National Security Committee meeting where this decision was taken on the pause, and we heard from the Chief Medical Officer and from the Health Minister and from the Head of the Health Department, Professor Murphy, and we were being cautious. We certainly weren’t locking us into any longer‑term decisions about the international border settings, but the premise of your question is right, which is, with these higher vaccination rates, Clare, we absolutely need to learn to live with the virus and its variants. There will be more cases. Tragically, there will be some deaths. But we’ve seen the efficacy of this vaccine. It’s been highly effective. It’s reduced the transmissibility. It’s reduced the number of cases and to know that Australia is now double‑vaxed at 87 per cent plus and single vaxed above 90 per cent, does auger well for the future. Thanks Shane.
JOURNALIST:
Just following up from Ross’s question about the budget, you said early in the virus – getting unemployment sustainably under 6 per cent, that would be a target and then start looking at budget repair, the medium‑term fiscal strength…
JOSH FRYDENBERG:
Then I changed it to 5 per cent.
JOURNALIST:
Then you changed it, and I brought it along just for you just in case you had forgotten. It’s very broad. Should you be putting in place tangible measurable targets, say, getting 5 per cent, where you start really thinking about repairing a budget? Like your forecast for the next year is a $99 billion deficit and $75 billion the year after. Do you need to look at tangible, definable targets that people can measure your ability?
JOSH FRYDENBERG:
Well, the first thing to say is we have been tracking better than forecasts. So, as you’d be aware, we put out monthly financial statements, Shane, and they’ve been better for 2021–22 again, than our forecasts. And in the May budget, we didn’t factor in the Delta outbreak and what we’ve seen today, yet we’re still seeing some better budget outcomes than initially forecast. That being said, we have brought to an end those emergency payments. We’ve been moving to the next phase of our economic response, and that of course has meant more investments in infrastructure, the business investment incentives, the tax relief for households, the heavy investment in skills, 463,000 job training places, 270,000 of which have already been applied, the $2.7 billion I put in the budget for apprenticeships which is seeing trade apprentices at record numbers. Those are the initiatives that we’re putting in place and we are moving the budget to different settings. Obviously, we’ll update those numbers for you, Shane, on December 16, which is the day of MYEFO, and then of course the intention in the calendar has been for a budget next year. Last question.
JOURNALIST:
One of the things that Phil Lowe said a couple of weeks back was that a measure of success was that the cash rate would lift, that that would be a good sign, not a bad sign. There’s a whole lot of parents who might think “How on earth are my kids going to be able to afford to buy properties?” Housing affordability is going to be a big issue at the next federal election. What are you going to do to make sure that having a home that you call your own, that is your own, is actually an affordable dream?
JOSH FRYDENBERG:
Well, firstly, Andrew, thank you for that question. The monthly mortgage repayments on an average $500,000 mortgage, 30 years in length, is $600 a month lower under us today than it was under Labor – $600 a month less.
JOURNALIST:
That’s not the point of Phil Lowe’s observation, is it?
JOSH FRYDENBERG:
But the point is we are seeing historically low interest rates, and this is really important because the servicing for people on their mortgages is back to where it was, as a proportion of their disposable income, in the 2000s. With respect to getting into the housing market, it’s been a little bit different to previous housing cycles, where in this cycle we’ve seen more owner–occupiers coming into the market with first home buyers at the highest numbers in about 13 years. Now, we’re starting to see some more investors come in, in the latest data, but we’ve seen owner–occupiers and first home buyers coming into the market. But, Andrew, don’t think that this is an Australian‑only phenomenon about rising house prices. As I’m advised, the house prices that we’ve seen in Australia, increasing in some cases by more than 20 per cent this year, have been mirrored by similar movements in the United States and in New Zealand and in other markets. Why? It’s a function largely of historically low interest rates, but also there is an issue here of supply because there’s a demand and a supply side to this equation. So, there’s work that’s going on as to how we can increase supply but that is really mostly in the bailiwick of the states because they have planning and zoning and land release and the like. So, there is work going on there and we have NHFIC that plays a role and having supported 13,000 affordable homes. But a very telling statistic is that since this term of government, so in the last three years, 320,000 Australians have come into a home as a result of our programs, whether it’s the HomeBuilder program or the First Home Super Saver Scheme or the Loan Guarantee Scheme. We’ve been providing this support which has helped people get into homes. So Andrew, it is a very important issue. A lot of people are being challenged by the higher house prices. I have been concerned about the heat in the housing market. That’s why when I met with the Council of Financial Regulators, I was very supportive of what APRA did in increasing the serviceability buffer from 2.5 to 3 per cent. What that basically means is that when the bank assesses Andrew Probyn’s capacity to pay back his loan or to meet the interest payments on his loan, they’re now putting in a 3 per cent buffer, the interest rate being 3 per cent higher than otherwise he is paying, just to ensure that there is no risk to the stability of the financial system. I’ve welcomed that. Maybe it’s not the last thing they’ll do, I don’t know. But this will be a discussion that I will continue to have with our prudential regulator APRA, with Phil Lowe as the Governor of the Reserve Bank in my discussions with them, because I do want to ensure that we continue to get Australians into a home.
Thank you very much.