TREASURER:
The Mid-Year Economic Review for 2002-03 released today demonstrates the continued resilience of the Australian economy notwithstanding very difficult international conditions and notwithstanding the severe drought.
The Government has today revised down its forecast for growth in 2002-03 to 3 per cent from a Budget forecast of 3 ¾ per cent. This is nearly all related to the drought which is now gripping most of the country. And whereas at Budget time we forecast farm product to grow by 3 ¾ per cent, in the Mid-Year Review we forecast it to contract by 17 per cent. In fact, the contraction in relation to crops is very much more significant. But, the 17 per cent contraction is in relation to the farm sector overall.
In the non-farm economy, the economy continues to grow strongly. And as a consequence of that our growth will be 3 per cent forecast through 2002-2003, again leading the developed economies of the world. And, for the first time we put down a forecast in this Mid-Year Review for the next financial year 2003-04 of 4 per cent. That assumes a bounce-back from drought in the next financial year and also a strengthening world economy.
The fiscal position in this Mid-Year Review for the current financial year 2002-2003 is essentially unchanged with a cash surplus forecast of around $2.1 billion. This is notwithstanding spending measures since the Budget, in particular, for the victims of the Bali terrorist attacks, for enhancements to security in the wake of Bali, for a large new program of immunisation in relation to meningococcal C and for a medical indemnity insurance package.
We have also made provision in this Mid-Year Review for further drought assistance under the Exceptional Circumstances program of $327 million over 3 years, that is in addition to measures already announced, which amount to around $12 million over 3 years, interim assistance for Bourke and Brewarrina, actual Exceptional Circumstances for Bourke and Brewarrina, assistance to the Farmhand Foundation, and the Prime Minister will be announcing some additional measures of around $4 million in new expenses today. That is a decision which is being made today so it won't appear in this Mid-Year Review.
Notwithstanding those additional measures, the expenses have actually slightly declined because of favourable parameters working in favour of the Government, higher than forecast GST collections, which means that assistance to the States is going to be some $170 million less, and a lower unemployment rate than we forecast at Budget time which means savings of around $150 million on unemployment benefits. So, there have been additional expenses since the Budget offset by more favourable parameter changes in relation particularly to those two items.
Cash receipts have fallen, but fallen only slightly. So, you have had a slight fall in tax cash receipts, a slight fall in expenses and a Budget outcome more or less the same.
The Mid-Year Review forecasts some worsening in the current account deficit, particularly as a consequence of the drought and reduced farm exports and additionally a more difficult international climate. The Consumer Price Index is forecast to be within our target band of 2 to 3 per cent over the coming year, and, as I said earlier, we expect growth to rebound in 2003-04.
The risks which we see to the economy in the forthcoming year would be if the drought should persist into 2003-04, that is, into the next financial year, that would obviously affect the rebound which we're forecasting, and if the international economy should weaken. Our assessment is that the international economy remains quite fragile. The United States recovery is slow and difficult, Europe is revising its growth forecast down including the United Kingdom, Japan continues to disappoint in terms of growth and the international climate is in many respects as difficult as it has been for a very long period of time.
The Budget does incorporate the Government's policy for the full privatisation of Telstra, subject to the Government being satisfied as to rural and regional services. For the purposes of the Budget, we have to make an assessment as to when the likely sale will take place. The assessment that we have made for the purposes of the Budget is that it will not take place before 2004-05. That is, a year later than we assessed to be the case at Budget time. We assessed that for a number of reasons. The first is obviously the Government has to respond to the Estens Inquiry, after responding to the Estens Inquiry and meeting rural and regional concerns, it will be necessary to prepare legislation, that legislation has to pass the Senate. I don't think that the Senate is showing itself in the mood to pass that legislation with any great hurry. And we expect that it would take some time to actually negotiate that. They are the two preconditions.
We have said previously, I have said in the House, the Prime Minister has said, that obviously before any sale, even after those two conditions, we would assess the value for the taxpayer. So, essentially we have moved back our assessment of when that is likely to happen by a year, the effect of Telstra in relation to the forward estimates is essentially neutral, essentially neutral, so that that doesn't have an effect on the bottom line in a substantive or significant way, either way.
But, all in all, notwithstanding a very difficult international climate, notwithstanding a severe drought, the Australian economy continues to outperform the economies of the developed world, and our fiscal position is strong and the Government has been able to meet a couple of crises, both in Bali and with drought, and still keep its fiscal strategy intact for the current financial year.
JOURNALIST:
Mr Costello, do the new figures for Telstra incorporate a different price estimate than the previous figures?
TREASURER:
The price estimate has been revised down somewhat, but I want to make this clear. The price estimates that we put are obviously what we consider reasonable assumptions, but reasonable assumptions in 2004-05 and following. Now, don't take me as a sharemarket forecaster. I am not saying that I can tell you what the price of Telstra is going to be in 2005 or 2006 or 2007. What we are saying is we have taken advice on reasonable assumptions and the effect of that is that essentially it is neutral over the Budget forward estimates.
JOURNALIST:
Treasurer can you tell us what the revised estimates are on Telstra?
TREASURER:
I prefer not to do that, because once I name a price, the markets might take that as my assessment of fair value, and the sharp stockbrokers who we will have to negotiate with for the sale, might try and hold me to it. So, as we have always done in the past, and as always was done with Labor privatisations, we retain our price assumptions as commercial-in-confidence.
JOURNALIST:
Are we right to presume that the (inaudible) three equal sales as we've been...?
TREASURER:
Yes. All we have done, we have allowed it as an assumption of three tranches and moved it back a year.
JOURNALIST:
(inaudible) there at all Mr Costello because there is no sign that the Senate would pass it in a year which you are now assuming it would be able to be sold?
TREASURER:
The reason we haven't, Michelle, is once the Government has a policy, we factor that policy into the Budget. And if I were to take that out of the Budget then I would be open to another criticism, ie that the Government no longer believes it is important for full equity in Telstra to be offered to the public. That is our position subject to rural and regional services, and obviously subject to the Senate. So, as we do with all of our decisions, for example, I still have factored into this Budget the passing of our measures on Pharmaceutical Benefits. Now, that has been defeated once in the Senate, the Government does not accept that defeat. The Government will be rolling that up to the Senate a second time. If by the end of the financial year that has not gone through, the Labor Party will have forced us to spend additional money. The policy that we have is, if it is a Government policy, it's accounted for in the Budget.
JOURNALIST:
But doesn't this negate the advantage of these forecasts? Because, quite clearly the Prime Minister is rolling back the whole Telstra thing further and further, you're not going to sell it in a election year?
TREASURER:
Well, we believe Michelle, that we will argue our case in front of the Australian Senate and we'll proceed on the basis that they will accept our wisdom. At the end of the day, can I make this point, Government has to produce a Budget, the Senate has the luxury of not having to produce a Budget. And the Budget is always produced on the basis on our assumptions and not on the basis of the ...
JOURNALIST:
This isn't the Budget though, this is legislation (inaudible)...
TREASURER:
I'm sorry, no, you are asking me about the Budget effect. This is our Budget and our Mid-Year Review. Yes.
JOURNALIST:
I noticed that you are forecasting a three per cent fall in housing investment at the time of the Budget, now you've turned around to forecasting a nine per cent rise. Isn't that a little bit worrying and doesn't it suggest that the Reserve Bank's failed in talking down the housing market and it's not in for a soft, gentle landing?
TREASURER:
We expected that the housing market would come off at Budget time, and yet it appears as if construction has still being continuing at a more subdued rate in this financial year, but still continuing, not falling. And you're quite right, we're forecasting that it will actually increase. That's because we've now got nearly the first five months of the financial year in and it has increased. But it is a much slower rate of increase than we had in 2001 and 2002, so it's slowing, but it is not falling. And I've said earlier that particularly in the medium density area, I think there's now evidence of oversupply, but it appears to me in the housing area and particularly in the renovations area, people are still building, particularly in the renovations area.
JOURNALIST:
Mr Costello, the outlook also says that rapid rises in housing prices, and increasing household debt in some developed countries pose another emerging threat? How much of a problem is that in Australia?
TREASURER:
Well I think when we're talking about other developed countries, we'd probably be talking about the United Kingdom there. I think in the United Kingdom in the last year, house prices have gone up 30 per cent. In fact, I was at a G20 meeting over the weekend and I had the chance to discuss the UK housing market with the Governor of the Bank of England and by comparison with the UK the Australian housing market looks the model of sanity. So, that's what we're referring to there, and it's obviously something that's on the minds of UK policy makers.
JOURNALIST:
Mr Costello, you said the international economy remains quite fragile and the drought has obviously, could make conditions worse in Australia when it comes to GDP. In terms of next year's Budget, is it shaping as one of the toughest Budgets in years, and what's your message to some of the spending Ministers like Brendan Nelson and Joe Hockey, who will be bringing forward big reform programs over the next few months and be hoping that you and Senator Minchin would be prepared to give them lots of money for those reform programs.
TREASURER:
Well I know Senator Minchin is one of the most searching Finance Ministers that you could imagine, so he will be giving them a searching time, that I am sure in the Expenditure Review Committee. Look, 2003-2004 depends to some degree on whether or not the drought breaks. This has been a very severe drought and if the drought breaks then we'll have good growth. If it doesn't break, then we'd be winding back these forecasts for 2003-2004. But even on the assumption that the drought breaks, we still have what I would call a moderate surplus forecast and certainly not a moderate surplus that would withstand any large new spending. My expectation is that as we go down to the Expenditure Review Committee, there will be some demands coming out of Defence and they will have priority over everything else and once they are taken into account, I don't believe that there will be much room. Now the other factor to bear in mind here is of course is what the Senate does. Bear in mind, the Senate is still holding up Budget measures from May. And if the program of Senate obstructionism is successful, that will make things tighter again.
JOURNALIST:
Treasurer,...
TREASURER:
Sorry, Mr Bongiorno, sir.
JOURNALIST:
Thank you very much Treasurer. Are you saying in the last couple of answers that you've given, that you as Treasurer are committed to maintaining fiscal policy in such a way as to keep delivering cash surpluses?
TREASURER:
Our policy is whilst the economy grows and grows strongly, yes we should deliver surpluses. Now, that's been the policy that I instituted in 1996 and certainly if the economy was growing at four per cent at 2003-2004, we should deliver a surplus. Yes.
JOURNALIST:
Mr Costello, at this stage can you rule out any additional revenue raising measures such as new taxes, levies, surcharges?
TREASURER:
We don't have any plans in relation to any of those matters because as you can see we are coming through a difficult year. Perhaps the international economy is not as tough as it was in 2001 in the sense that the US is now out of recession, but a difficult international environment and a drought, and we're budgeting for a surplus. So we're starting to see the benefits of some economic policy. We managed to keep the economy out of recession in 2001 when all the economies of the region went into recession. That will give us a growth opportunity I hope in the next financial year as long as the drought breaks. And we'll be budgeting for a surplus. Now, now, I know what you're going to say to me, because it's been asked before: what happens if Australia goes to war or what happens if there's a substantial military engagement. These are matters you don't budget for because you hope they don't occur, but Dennis, if we're engaged, if we were to engage in military action, you ask me then, but we are not engaged in a substantial military action at the moment and we hope that the Iraqi regime complies with weapons inspections, and disarms. And like all Australians we'd be glad if Australia's military contribution can be considered in that light, in a successful outcome of UN resolutions. Yes?
JOURNALIST:
Mr Costello, just going to the accuracy of these figures again, if you assume the way the revenue affects the Government legislation in the Senate, what is the cash surplus position?
TREASURER:
Well we...
JOURNALIST:
Access Economics say's it's about a billion, assuming that these things are passed already?
TREASURER:
No, we don't have any revenue measures in the Senate. What we have in the Senate are some savings measures, particularly in relation to the Pharmaceutical Benefits Scheme. That is a saving measure of $300 million per annum of which we have already lost $150 million. Right.
JOURNALIST:
Welfare reform?
TREASURER:
Welfare reform is a net expense. That is, in the early years the additional investment in training places exceeds the savings from having tighter disability. Now, we have had the Australian Labor Party complain for years that the Disability Pension is hiding unemployment. You put the acid on them and you say we will reform the Disability Pensions Scheme and they block it. It's breathtaking, it is absolutely breathtaking. Now, we are interested in long term reform in this country. We don't want the Disability Pension to hide the unemployment rate. We don't want people who are capable of part time work to be locked out of the labour market for the rest of their life. So we are trying to reform the disability system. It actually, in early years, costs money and delivers savings as you progressively give people the opportunity to re-enter the workforce.
JOURNALIST:
So the pharmaceuticals legislation is the only legislation which is going to affect revenue?
TREASURER:
Well the pharmaceutical, as I said, pharmaceuticals are, was a saving of the order $300 million of which, due to come in on 1 July, which the Labor Party has already defeated 6 months worth.
JOURNALIST:
Treasurer, the big increases in company tax collections and other individuals' tax collections, what is your assessment of what is happening there, and how much of the increase in other tax, other individuals' tax collections, is the black economy effect?
TREASURER:
The income tax take from wage and salary earners is less than we forecast at Budget time. The company tax is greater and our experience is there are long lead times on company tax. That could be reflecting substantial profits as long ago as 2001, 2002. "Other income" is the category of the self-employed, and not wage and salary earners, but other individuals self-employed. There could be a factor in there of GST. I think as time develops the GST system is becoming more and more robust and there could be a factor in there.
JOURNALIST:
Treasurer, do you see just, still see using the accrual method as a reform? There have been reports from people (inaudible) than me, that the Government is sliding away from this?
TREASURER:
Paul, we think that accruals helps agencies budget. It allows them to Budget for things like depreciation. But in terms of what the Commonwealth actually pays what it takes out of the economy, what it puts into the economy, the cash is really the best measure. But so that we don't get criticised either way, we do it on both. We now, you know, the problem here is not a lack of information, if I may say so, the problem here is a surfeit of information. We have got so many measures out there that you can take whichever one you like and nobody can ever criticise us for not having the measures out there. And it is basically like trying to run every transaction according to two sets of rules. Personally I think that the cash tells you a lot more about the economy, whether you are getting a fiscal stimulus or whether you are not. Whether you are putting money in, whether you are taking it out. The cash is also the GFS. It has been developed by the IMF, it is what the IMF demands countries around the world follow. The accrual is a kind of measure you would use in a company. But lest anybody say that, you know, I am having it one way or the other, we do both.
Two more questions.
JOURNALIST:
Mr Costello, your colleague Robert Hill says the Government is not afraid of having a double dissolution election. Given the Senate is holding large slabs of your Budget hostage and indeed the Telstra sale, are we moving closer, is the Government moving closer to having a double dissolution election? And would you be happy to fight on the basis of full privatisation of Telstra and the PBS changes that you have introduced?
TREASURER:
Look, Steve, our policy is if we think something is important for the long term future of Australia, like for example, re-basing the Pharmaceutical Benefits Scheme, with an ageing population and scientific advances, no area of Commonwealth expenditure is growing faster. And re-basing that is important to the sustainability of the scheme. Now, because the Labor Party has nothing else to stand for it thinks that opposing those sorts of measures might get it back in the game. Our attitude is, having had defeated these things because they are important we will roll them up again to the Senate. We will ask the Senate to reconsider. I am not going past that. I hope the Senate reconsiders. These are Budget measures, these are Budget measures, they are factored into the bottom line. We ask the Senate to pass them. I can't even understand the rationale why it won't, you know, other than as I said complete and naked opportunism. Now, if the Senate rejects it a second time, well, we will have to deal with that when it happens. But we have not had that rejected a second time, we are going to ask the Senate to reconsider its position.
JOURNALIST:
(inaudible)
TREASURER:
Well now, we will take two last ones, Philip and Dennis.
JOURNALIST:
What would be an acceptable result for the Victorian Liberals in the election?
TREASURER:
Look, let me make this point. The Victorian Liberal Party is in the Victorian election to win Government. It is in it to win Government, that is what it is running for. The fact of the matter is that Labor is a front runner and is now starting to get complacent, believes that it can win overwhelming majorities and control both Houses. And that is the opportunity for the Victorian Liberal Party to punch home that message that that would be a bad thing for Victoria. And I will say this, I think Robert Doyle as the Leader of the Opposition has performed outstandingly through this campaign. In the face of a number of setbacks I think he has shown true grit. And I know him pretty well and I think he will be eking out every last vote to 6.01 on Saturday night.
Dennis.
JOURNALIST:
Mr Costello, just on your comments on the sale of Telstra, when would be the earliest under these new assumptions that we would see legislation presented to the Parliament for the full sale of Telstra?
TREASURER:
Look, we have got to respond to the Estens Inquiry first and we will be looking at that this year. And subject to that, legislation I imagine, would go into the Parliament early next year. Now, the Senate might surprise me and it might sail it through and then everything could be advanced. But judging from what Senator Lees and others have been saying, I, you know, it doesn't look very likely. I hope they do surprise. Nobody would be happier than me Dennis, but I have got to make a realistic assumption as to how long that is going to take and it just doesn't look, notwithstanding the changes in the composition of the Senate, it just doesn't look imminent. That's all I can say.
Thank you all very much for your time, thanks.