TREASURER:
The National Accounts for the September quarter indicate that the Australian economy performed exceptionally well in the September quarter, growing at 0.9 per cent, notwithstanding a very severe drought. And for the year, the Australian economy recorded growth of 3.7 per cent, again one of the strongest growing economies of the developed world. The growth was underpinned by solid increases in private investment, private business investment increased 2.9 per cent in the quarter and is 12.2 per cent higher than a year ago, and it was boosted by nearly 40 per cent increase in new engineering construction over the last year. So, this is very strong engineering and private business investment now kicking in to the Australian economy.
Our capital expenditure surveys continue to point to good strong growth over the course of 2002-03. You would be aware that we were forecasting housing to come off in this financial year, but in the Mid-Year Review we changed that to a slight increase and we are seeing that come through in this quarter with dwelling investment increasing by 3.3 per cent. So, it appears as if the housing construction is coming off but probably lasting a little longer than we expected at the time of the Budget. Notwithstanding that, private business investment has continued to kick in.
The effect of the drought is taken into account in these figures and we estimate that the effect of the drought is to take around about 0.4 percentage points off growth for the quarter.
So in other words, if we had had normal seasonal conditions, the 0.9 per cent for the quarter could have been as much as 0.4, could have been as much as 1.3 above that, so that the drought actually kicked in and cut about 0.4 percentage points off this.
As we see coming through in these figures the effect of the drought is very severe. Agricultural production fell 12.2 per cent in the September quarter and of course the weakness in agricultural production is being shown up in exports which shows up in the current account which has also detracted from growth in these figures.
On the income side, income growth was strong in the September quarter with compensation for employees growing 2.1 per cent, and company profits as we saw yesterday are strong, about 9.2 per cent higher than a year ago. And the area which does show a fall in incomes is in the mixed income area which is your individuals, non-employee individuals and that would be farmers again showing up declines in income.
The September quarter National Accounts show that inflationary pressures remain very moderate and the broadest measures of inflationary pressures which are in the National Accounts are household consumption chain price index, show growth of 0.7 per cent in the quarter and 2.8 per cent through the year.
So, in the midst of a difficult international environment and with a severe drought the Australian economy - led by business investment - continues to perform exceptionally well, giving us an economy which is still by world standards one of the growth economies of the developed world. The growth through the year to date, 3.7 per cent, is a little higher than we are forecasting for the year average so we would expect the drought to kick in in future quarters, again particularly in the December quarter, but we are forecasting good growth through the year of 3 per cent.
JOURNALIST:
The longer that construction lingers when we have low interest rates and we have building companies who are still putting in approvals for multi-storey units, doesn't that rate a very big risk that when the slowdown comes it could be quite hard?
TREASURER:
The building approvals that came through yesterday showed enormous volatility in the medium density area in particular. And I said yesterday in the Parliament, I wouldn't put too much on figures which show growth of 60 per cent one month, contraction of 30 per cent next month. You have got something statistical obviously happening in there. That is the first point. The second point I would make is that medium density developers are business people making their own decisions. My view is that we have probably got to a stage where there are as many tenants as there are constructed flats. But if professional developers think that is not the case, well they develop at their own risk. But I think I can say the housing sector is slowing. It hasn't stopped but it is slowing. And we are not seeing the levels of construction that we saw earlier. And we expect that slowing to continue. But the good thing is that private business investment is picking up. And if you leave aside the drought, the quality of these national accounts is very good, particularly in terms of the investment figures that you are seeing come through.
JOURNALIST:
The Reserve Bank Governor has said a lot about investment in apartments as tax driven. Do you think it is appropriate that you provide the tax incentives that are going to go to that purpose?
TREASURER:
Well, the Government has no plans to change negative gearing on property which is what lies behind the question. If you are professional investor, of course, you would be liable for capital gains tax on an investment unit. So, you are liable for capital gains tax and we have no proposals to change that. Look, I think some of that is tax driven but the point I keep making to people is this. That, at the end of the day, if you are buying a unit or a flat for investment purposes you have still got to have a tenant. And there are only so many tenants. And if you get to a stage where the number of flats or units exceeds the number of tenants then you will have much bigger losses than the ones you are trying to generate. And I always make the point, people say oh well isn't it great to have a loss for tax purposes, you have got to remember this, a loss is a loss. You can defray some of your losses against other income but you are still making a loss. And if you don't have a tenant that loss will be more substantial. So I have said to people before, you know, consider these investment deals very carefully, like most investments they can go up, they can come down.
JOURNALIST:
(Inaudible) drought an extra 0.4 per cent. Could you say that the drought is actually taking pressure off interest rates or is it going too far to say that?
TREASURER:
I don't see in these National Accounts any runaway inflationary pressures, I don't see any runaway consumption, in fact consumption is probably moderating. Now we have had very strong consumption. These National Accounts show that it's if anything, it is probably moderating in this quarter. So, the kinds of things that we focus our monetary policy on, in particular inflationary pressures seem to be quite subdued here. What the drought has done is, it has detracted, it has turned what would otherwise be a 4 per cent growth economy into a 3 per cent growth economy. It has obviously affected rural incomes very substantially. And they are down quite substantially and it is felt particularly in the export area. And so you have got a widening of the current account deficit which we are forecasting at about 4 - 4 ½ per cent.
JOURNALIST:
Mr Costello, with the investment in dwellings we not only see strong investment in dwellings but also alterations and additions, does that suggest to you that people are investing in existing homes and could that soften any impact on construction of new dwellings when it eventually occurs?
TREASURER:
I think that's absolutely right. And we actually had a bit of a note on that in the Budget, that we forecast that even though we expected new housing construction to fall off, renovations to continue. And this has actually been borne out. There's a lot of renovation work going on which is cushioning those housing construction figures. And I, if you want my back of the envelope explanation for that, I think a lot of people who had seen their property values go up quite considerably had decided to really try and capitalise their value on their family home with renovations. And they're probably seeing even their family home as an investment these days. This is an investment which is capital gains tax free. And there's a lot of renovation going on and that is cushioning those figures. And I think the observation that you made is absolutely right.
JOURNALIST:
Treasurer, given that we're now looking at a three per cent growth economy rather than, say, four per cent, are you confident that the unemployment rate could fall below six per cent still?
TREASURER:
Well the unemployment rate I think is at about six now. We actually forecast in the mid-year review six at the end of the year, June 2003. So what we're saying is we expect it will see-saw a bit over coming months. It's been a bit of a see-saw, it's been volatile, you could have a move up, you could have a move down, but we think by the end of the year about six. And if the drought breaks, if the economy were to, as a consequence, move back up to a higher growth rate than three per cent, sometime after June of next year you'd see that unemployment go lower. But we're not forecasting that in this financial year, not by June of next year.
JOURNALIST:
Treasurer, how would you rate the public response to the ALP attacks on your junior Minister, Senator Coonan? And, do you see a possibility that even if nothing substantial is established against Senator Coonan, that there might be some sense in the public of doubt, of doubt about the Government's handling of tax policy, given the personal example.
TREASURER:
I would rate the attacks against Senator Coonan as being without foundation, and I think they reflect very badly on the Labor Party. At the end of the day, nothing has been established against Senator Coonan. Senator Coonan owns a property in Woollahra, which is her home, and has paid her tax liabilities. And the rest is pure smear and innuendo. Now, you say to me, oh well, if you throw enough mud a little bit will stick, well I hope we haven't got to that stage in Australian public life where we say it doesn't matter whether the mud is true or not, we can make a little bit stick. I think it reflects very badly on the Labor Party. And including the insinuation that she'd witnessed some kind of false electoral form, which was false. Absolutely false. I think it's very important in public life we retain the capacity to distinguish fact from fiction, and that we don't punish people for fiction. And I don't think the Labor Party comes out of this very well at all.
JOURNALIST:
Treasurer, the Carlton Football Club's facing some questions about their tax affairs, and your team Essendon and a number of others have had tax problems over recent years, not paying their bills properly, are you concerned that high profile sporting clubs in the AFL and other competitions that are having these constant tax problems are not setting the right example to, you know, football fans and other people about tax liabilities?
TREASURER:
The thing about football is as professionalism has increased, what was once considered almost a voluntary sport is now a professional business.
Once upon a time these clubs were all about chook raffles and an honorarium to play a game. Now you've got players who are on multi-million dollar contracts...
JOURNALIST:
More than you.
TREASURER:
...paid far in excess of Federal Treasurers, and this is a business now, and once it became a business, it became subject to payroll taxes, fringe benefits taxes, and always was subject to income taxes. And these clubs have got to comply with the law, and it sets a very bad example if they don't. And if they don't then they're liable for prosecution and the Commissioner of Taxation I hope will treat them like any other taxpayer. They don't get any leniency for being a football club. In fact I would say to some of these clubs, because they are multi-million dollar businesses, you probably ought to be able to have a higher standard of compliance than your ordinary small business. But there is no leeway for clubs and even my own beloved club got a tax investigation, you know that, and they had to pay their liabilities and I'd say the same to any other, any other club that intends to get on the field, and it's the same in rugby league or any other sport.
JOURNALIST:
Treasurer, while we're on tax policy, can I ask you, is there scope, is there scope for the Government to impose tougher conditions on trusts? And when would you be releasing your, the Government's response to the Board of Taxation's report, which I understand is that you have received and which presumably will recommend tougher enforcement powers etcetera for Mr Carmody?
TREASURER:
Well let's not foreshadow what that will or will not recommend, but that will be a matter which the Government as a whole will have to consider and after the Government as a whole has considered, we'll make our announcement. It's just a matter of the Government considering those issues. But I wouldn't speculate on what may or may not be recommended.
JOURNALIST:
Do you believe that there's scope, as Treasurer, do you believe that there is scope for tougher enforcement of trusts? Presumably...
TREASURER:
Well, we've done a number of things in this area already as you know. Like ultimate beneficiary tests and a whole lot of other things. Profit first rule, I mean we've had a long discussion about this. After discussion and a draft legislation, it was obviously an unworkable idea. If any further recommendations are made to us, we'll consider them.
JOURNALIST:
The threshold savings ratio has fallen to 0.6 per cent. Is that a matter of concern to you?
TREASURER:
Well, as the National Accounts makes clear, the household savings ratio is a residual item. That is, they calculate income and they calculate consumption. And it's a residual item.
And they warn us not to take, they warn us to take caution in interpreting it as they say on page seven, because major components of household income and expenditure may be still subject to significant revisions. But I think what's been going on in this area for sometime, is that because people have had a wealth effect, they've been prepared to gear or to borrow against increasing wealth. And over the last five years there has been a large increase in per capita wealth in Australia, a lot of that's in property, some of that will be in shares, some of that's in other areas. In fact, I think since this Government was elected, I think in real terms, and I'll just try and give you the figure, household wealth has increased seven per cent per annum. So, that's in nearly seven years, an increase of nearly 50 per cent. Now, as I say a lot of that's in housing. But people, I think, over recent years have shown a tendency to be prepared to borrow or spend against their wealth. But having said that I would encourage people to save. I'm not saying that I'm anti-saving, saving is a good thing, but I think that probably explains some of the movement in relation to that. This is not just an Australian phenomenon of course, it's a phenomenon around the world.
JOURNALIST:
Treasurer, you've had a few days to consider the Victorian election result. Do you see the need for structural or cultural changes within the Victorian Division as a result of this defeat?
TREASURER:
I think we've got to focus on a few things. I think we need to re-energise party membership. I think we need to re-energise party office bearers and if that is a re-energising of political culture, yes I agree. And we're going to have a full review of the situation, which I welcome. And I think it's very important that we do that quickly because this will be the same organisation which takes the federal Members to the federal election. The organisation is something shared by both the State and the federal Members, so I think it's important that we make sure that the organisation, which will be carrying the nuts and bolts of the campaign, is in the best possible shape. It's the responsibility of the members to make sure that the policies are in the best possible shape.
JOURNALIST:
How do you re-energise Party members precisely in this situation?
TREASURER:
Well I like to encourage younger people to join the Party, I think that's very important...
JOURNALIST:
How do you do that?
TREASURER:
...we, and I have been involved in some of them, set up supporters groups which gives a lot of energy to the Party, some of those that I have been involved in, people that want to come to supporters groups, business people may not want to sit around and debate the minutes of the last meeting in someone's living room. There's a place for that kind of branch membership but there is a place for other kind of branch membership, people who have particular policy interests and that's one of the things that I have worked on pretty successfully over the last five years. Dennis.
JOURNALIST:
Mr Costello are you still confident of the Coalition Party Room endorsing legislation to go forward (inaudible) sale of Telstra next year?
TREASURER:
Well what we've said is that we will respond to the Estens Inquiry and once we have responded to that and made sure that the services for rural and regional Australia are as required, then we will be putting legislation up and I expect that will happen.
JOURNALIST:
Will you (inaudible) before Christmas?
TREASURER:
Now, the next question is of course when that legislation goes through the Senate, and I engage in long discussions with everybody and they say to me when do you think Telstra will be ready for sale? Let me ask you a question, when do you think the Senate would be ready to pass such legislation, because that's the answer to that question and it doesn't look to me as if it's all that imminent, the Senate is suddenly going to see a bolt of light and pass such legislation. So we have got Estens, legislation, Senate, and then if you were to overcome those hurdles, questions of price, and then we go on to another issue which excites financial markets, the bond market, and I say to them you know, one, two, three, four...five, don't get too excited by things.
JOURNALIST:
Are you be responding to Estens before Christmas, Mr Costello?
TREASURER:
That to me is probably a question for Senator Alston, who I'd be sure would be happy to take your question, Michelle. Thank you very much.