TREASURER:
The Mid-Year Review of Australia’s economy shows that Australia’s potential is strong, that our economy continues to grow and that our Budget is in sound shape.
I release today the Mid-Year Economic and Fiscal Outlook. Notwithstanding a weak set of National Accounts in September we forecast that the Australian economy will continue to grow by around 3 per cent. Our forecast for inflation is a little higher than it was at Budget time, around 3 per cent, which is the top of the band that the Government and the Reserve Bank set - between 2 and 3 per cent. Inflation is being pushed higher by world oil prices feeding into petrol prices. We look for a stabilisation in relation to those prices in the quarters to come.
The fiscal outlook remains strong with the Government expecting an underlying cash surplus of $11.5 billion in this financial year. This improvement largely reflects increased dividends and interest and stronger company profits in the last financial year feeding through to collections this year.
The Government has increased expenses since the Budget by around about $1.7 billion. The largest area of increase has been in relation to drought assistance. The rural sector continues to suffer an on-going drought.
The Commonwealth Government in on track to eliminate net debt this financial year. That would mean that after 10 years of careful management under a Coalition Government net debt, which was $96 billion in 1996, will be reduced to zero. And for the first time we are projecting in our forward estimates that net worth will be positive by 2008-09.
The Mid-Year Review incorporates some important changes to the treatment of Telstra. I want to refer you to the assumptions in relation to Telstra which are contained on page 26.
Firstly, rather than providing as we have in previous Budgets for the proceeds of the privatisation of Telstra to be received in three years, commencing from 2006-07, we now have incorporated the proceeds of Telstra privatisation as being received in one year – 2006-07 – that is the next financial year.
Secondly, previously proceeds of Telstra have been factored in at a price of $5.25. The underlying assumption in this Mid-Year Review is the 90 day average price of Telstra up until the 8th of December when we ruled off the books. The consequence, the assumption for the Telstra price, the 90 days average price, is $4.13. That is a far more realistic price than $5.25 in the current climate.
Some people will say that is still above market but the Government has decided to take a 90 day average as we do in relation to a number of other assumptions.
Can I say that the Government has not decided to sell Telstra in one instalment in the next financial year. The reason why we have taken this assumption in relation to the Mid-Year Review is we expect either Telstra will be sold or if the full sale of Telstra does not go ahead it may well be that the Future Fund will hold Telstra shares and in those circumstances the earnings from those shares will be allocated to the Fund rather than the Budget.
So whichever way you look at it, the earnings from the proceeds of Telstra would not be received in the underlying cash balance after 2006-2007. They are technical assumptions and I explain them for the sake of the record, they can be found on page 26.
But all in all, what this shows is that the Australian economy continues to grow, we continue to be one of the strongest economies in the world, our fiscal position is stronger than nearly every other developed economy at a time when major economies around the world like the United States are in deficit, our Commonwealth financial position is much stronger.
Although inflation is heading towards the higher end of the band, it is important than we remain vigilant and the Government takes decisions which will ensure that we can keep inflation low because the pay off for that are low interest rates and the Government remains very focussed on keeping inflation low for that reason.
What this review shows is that Australia’s prospects are strong, notwithstanding difficult challenges particularly in relation to oil from overseas and it is a strength which will underpin job opportunities for future Australians. Questions?
JOURNALIST:
Are there any plans to deliver bigger tax cuts now that you know the size of the projected surplus?
TREASURER:
Well, at the Budget time for next year we were forecasting an underlying cash balance at around $8 billion and now we are forecasting around about $10 billion. That is about one per cent of GDP, it is important that we continue to have government savings if we want to keep interest rates low. Now that already factors in tax cuts which are legislated from 1 July 2006.
JOURNALIST:
Does that mean no?
TREASURER:
Well, I am pointing out that we have already legislated tax cuts for next year. We cut taxes in 2003, 2004, 2005 and we have got another tax cut legislated in 2006. We go into this budget round with some spending ambitions from some Ministers. If we are able to keep spending to a minimum then the pay-off will always be low tax and I promise you I will go into this round trying to keep spending to a minimum.
JOURNALIST:
Does that suggest though Treasurer, that there is no scope for serious structural tax reform? You said at your press conference last week on the National Accounts that you shouldn’t count on permanent income from things like the terms of trade that won’t be permanent. Is that foreshadowing there simply isn’t room for other than giving back what happens to be left over?
TREASURER:
Well, if you can balance your Budget, if you can meet your expenses then your tax rates should be as low as possible. That is why we cut tax in 2003, 2004, 2005 and we have another tax cut legislated for 2006. Now, if we can keep spending to a minimum, perhaps if we could even shave spending then of course you get the opportunity to cut taxes. But the most important thing in this Budget round is to keep a grip on expenses because if we don’t keep a grip on expenses then we will have higher taxes than otherwise would be the case.
JOURNALIST:
But you (inaudible) have you…
TREASURER:
What?
JOURNALIST:
…(inaudible)…
TREASURER:
Keeping a brake on expenses, may not be popular…
JOURNALIST:
…perhaps (inaudible). You are obviously aware of (inaudible) around, have you, firstly would it be popular and secondly did you see Malcolm Turnbull’s comments (inaudible) tonight?
TREASURER:
Would it be popular to keep a grip on expenses? I find actually that there is a lot of pressure for more spending, and over the years as the person who has tried to keep a grip on expenses, I have not found that a popular role at all. But I do believe that if we can keep a grip on expenses, then that is the key to keeping taxes low, because if we have to increase spending, then you do not have the room to reduce taxes at the same time. There are countries that try and do that, the United States has tried to do that, and all they end up with, is massive budget deficits. I do not have any intention of, having dug the Australian economy out of a $10 billion annual Budget deficit and a $96 billion debt, neither I nor the Government has any stomach to go back into deficit and run up debt again. All that will do is put pressure on interest rates. There is one promise we made the Australian people at the last election, and that was to so manage the economy as to keep interest rates low, and my focus is continuing strong economic management which will keep interest rates low, because in my view there is one thing that will hit household budgets harder than anything else - an increase in their mortgage interest rates.
JOURNALIST:
What about Mr Turnbull’s comments (inaudible) in Sydney tonight?
TREASURER:
No.
JOURNALIST:
Is it damaging, do you think Treasurer, that you have a backbencher that continues to talk out, to criticise you, criticise the tax system, to criticise the lack of reform, like he is about to?
TREASURER:
Well I cannot comment on anything that is going to be said tonight, obviously I do not know what is going to be said.
JOURNALIST:
The surge in company tax, is it sustainable?
TREASURER:
Part of the surge in company tax is the mineral industry. The mineral industry is, as we know, profiting from the rise in China and extremely high prices in relation to coal and iron ore. I believe that the rise of China will go on for some time, and I believe that therefore prices will be stronger for some time, but I do not believe they will be record prices for some time. And the reason for that is, we are not the only country that can supply coal and gas, and iron ore to China. Other countries all around the world are lifting their production. Countries like Brazil and Argentina, and Indonesia, and when all those other countries lift their production and supply increases, then the demand will not drive the kind of record prices we have currently got. I think that prices will normalise. Now this is why we have got to beat the field. This is why we have got to increase our capacity and get into these markets while the going is good. This is why I get so worked up about Dalrymple Bay and Hay Point, but the good news is that we are now starting to clear some of these infrastructures bottlenecks. There is a massive investment that is going on in the minerals industry, and I believe over the course of this year we will be able to take advantage of those prices. I hope we beat the field. I hope the prices last forever. I have a feeling they will not. But the earlier we get into them, the more we will be able to take advantage of them.
JOURNALIST:
On Mr Turnbull Treasurer, is his participation in the tax debate damaging?
TREASURER:
Oh no, everybody is entitled to put forward views, and we welcome all views.
JOURNALIST:
Even if they are (inaudible) to the Government?
TREASURER:
Well, I am sure that all people, particularly all members of the Government would recognise the achievements that the Government’s had. Here we have a situation where after ten years, we have balanced the Budget; we have retired debt; we have historically low interest rates – 1.7 million new jobs have been created in Australia. We have cut capital gains tax in half. We have cut company tax. We have had income tax cuts in 2003, 2004, 2005 and 2006. We have abolished wholesale sales tax, financial institutions duty, bank account debits tax, stamp duties on mortgages and shares. We have introduced capital gains rollout relief, halved it for small business, demerger relief …
JOURNALIST:
Well that does not seem to be enough for Mr Turnbull?
TREASURER:
Well you know when you actually look at what has happened in relation to economic and tax management in Australia over the last ten years, it is quite substantial, and I think members of the press too, will recognise that. I am sure they will in their stories. I always like to believe the best of people. Any other questions?
JOURNALIST:
Treasurer, you have got growth running along around potential over the next four years, which will give us something like nineteen years of steady growth. At what point do you think we might actually see that cycle turn?
TREASURER:
Well look, this is the point I keep on making to people. This has been an exceptional period for Australia. This is probably going to turn out to be the greatest period of economic growth for at least a century. Maybe ever. And there is an attitude that says, ‘Oh, it all just runs itself’, it does not. Look around the world. Other countries would be trying to have an outcome like this, and are working towards an outcome like this, but can not get it. And this idea that we can all sit down and assume it will last forever and it will run itself - it will not. This idea that the minerals boom will last forever - it will not. You have got assumptions in here about what things would look like on continuing growth for another four years. I think we can do it. But you point out, you are now talking about nineteen years of growth. Is there a period in Australian history when we have had that? And when you get in the middle of one of these long periods, the temptation is just to assume that nothing can ever interrupt it. Now, we have overcome very, very difficult economic times. The Asian financial collapse; the US recession; the world record oil prices; the one in a hundred year drought. And if we could keep our economy growing at rates like this, it would be, well it would be an achievement that we have never had in Australia before. But that is what we are going to try to do. We are going to try and do something that has not been done in Australian history before, and if we can bring it off, it will be something worth having done.
JOURNALIST:
Do you agree with Macfarlane’s comments the other night that Gerard should have told the Board what was going on?
TREASURER:
Well look, I have been asked a lot of questions in relation to this and I do not have anything to add.
Okay. Thank you.