CNBC – Street Signs

Senator the Hon Mathias Cormann
Minister for Finance






Mid Year Economic and Fiscal Outlook

PRESENTER: So the Budget is still in deficit. Still a hole but a less big one forecast, I guess, is the take away.

Thanks very much Martin. Yeah we have seen a deterioration when it comes to the budgetary position going forward over the forward estimates. Let’s bring up our wall and show you just what the picture looks like because, given of course the fact that we have had falling commodity prices, the position has deteriorated over the course of those next four years. In terms of where we see the Budget deficit coming in for this current fiscal year, blowing out to $37.4 billion versus $35.1 billion that was forecast back in May. 2016 $33.7 versus $25.8 billion. $23 versus $14 billion in 2017-18 and $14.2 versus about $6.9 billion for 2018-19 before the Budget gets back into surplus in 2021. Of course we know that the iron ore price has been falling precipitously and we have seen the Government revise down their expectations for that commodity today down to $39 a tonne versus $48 at the May Budget. We have also seen some revisions to economic growth. But the Australian dollar has ticked up a little bit higher now trading closer to 0.73 US cents. Economic growth cut to 2.5 per cent for the 2015-16 year versus 2.75 per cent and for 2016-17 down to 2.75 per cent from 3.25 per cent. Welfare bearing the brunt of savings cuts about $1.3 billion taken out across that particular part of spending. But let’s get more with the Finance Minister of Australia, Mathias Cormann, joining us now live from Perth. Senator Cormann thanks very much for joining us. I want to start with just how the Australian economy is looking right now. Has the economy deteriorated that much since May or has spending been on the rise under the new Prime Minister?

Well the economy in Australia continues to grow despite additional global economic head winds, despite significant falls in our terms of trade. If you look at the level of jobs growth it has actually been very strong. We have had a very strong third quarter of growth by international standards. So the economy is strengthening despite all of the head winds and when it comes to the Budget position if you look at what’s been happening there the Budget position over the forward estimates continues to improve. The deficit over the forward estimates is expected to decline and that is of course because we have been able to control expenditure. Spending is about $13.3 billion less in this four year forward estimates period, than had been anticipated at Budget time in May.

All right talk to us about the iron ore price because we of course have been focussing a lot on that over the last few weeks and given that it is now sitting at $37 a tonne, your forecasting an average price at $39 a tonne going forward, that is down from $48 in May. Do you still think that given we’re seeing the price below that $39 a tonne level that might even still be too optimistic?

Well what we are using here is a technical assumption to estimate revenue moving forward. When we came into government the price for iron ore was sitting at about $120 a tonne. Of course in subsequent updates we have been required to downgrade that to $90, then to $60, $48 and incidentally when we pursued those initial downgrades people were saying to us that we were being too pessimistic and we were trying to make the numbers look worse on coming into government than what they were actually likely to be. We’re using a technical assumption that is there for all to see. Nobody knows precisely what the price is going to be moving forward. The price that we’ve taken to estimate revenue is the average price over the four weeks prior to the closure of the books for MYEFO purposes and that is the $39 that is reflected in our revenue forecasts. 

JOURNALIST: Minister, this is Mark, going to jump in here. One of the ways you can make up a lot of ground in terms of the Budget deficit as well as in terms of Government revenue is through privatisations. You’ve sold off a water system already. A lot of people are watching what you do with your rail network, I know you’ve appointed independent advisers and we’ll probably have to wait until the next Budget next year for more clarity on that, but can you give us a little more visibility in terms of how important it is for the new Turnbull Government and for you, in terms of selling off these State assets to make up ground in terms of the deficit?

MATHIAS CORMANN: Coming into government we’ve always said that we would assess very carefully whether it was appropriate for Government to continue to be involved in various businesses that the Government was involved in at that time. For example, in 2013 when we came into government, the Australian Government still owned a private health insurance fund. Private health insurance is a very competitive market here in Australia and we were able to sell Medibank Private in 2014 for about $5.7 billion, which was the biggest privatisation in the world in that year. We are now carefully assessing future ownership options for the Australian Rail Track Corporation. What we’ve initiated now is a scoping study to explore and assess the various issues and whether there is a case for the Australian Rail Track Corporation to be moved into private ownership. The question here really is to assess whether in private ownership the Australian Rail Track Corporation could perform better and whether the capital that is currently tied up in that business could be better deployed elsewhere on behalf of the Australian people. 

Okay that’s a question of efficiency I understand. Minister, my next question before I hand back to Matt is kind of a cheeky one but we’re obliged to ask. I do not expect you to provide anything quantitative, but I am hoping for a sort of qualitative answer. And the question is, the Australian dollar, your currency, at these levels, and I ask trying to give viewers a look at where we’re trading right now at 72 to 71, are you comfortable with the Aussie at this level?

MATHIAS CORMANN: Well obviously the value of the Australian dollar is set by the market, but what I can say is that having a floating exchange rate is part of the automatic stabilisers that helps us as a trade-exposed economy to make the structural adjustment from resource investment driven growth to broader drivers of economic activity in Australia. The fact that the value of the Australian dollar has responded to the fall in commodity prices we’re able to achieve in global markets helps to cushion the effects of lower commodity prices in the economy and helps to make other parts of the economy internationally more competitive. That is exactly how the system is designed to work. 

I just want to end up by talking about the jobs picture. The Treasurer today spoke about an improving jobs picture here in Australia. We’ve certainly seen some stellar numbers over the last two months when you look at those Bureau of Statistics numbers, sizable gains when it comes to employment month on month. Can we believe these numbers? Is the economy really doing that well despite the fact that we’ve got this economy in transition, we’re seeing the growth levels downgraded, the deficit’s going to be wider than expected and yet according to the ABS, NSW added 50,000 jobs last month? Something doesn’t quite add up here.

Well it does add up, because what we’ve seen in the Australian economy is a shift to more employment-intensive sectors in the economy. In particular the services sector has picked up some of the slack from a lessening of resource industry related investment activity. That is entirely consistent with what we are observing in the market. Since we came into government in September 2013, more than 450,000 new jobs have been created in the economy. So it’s not just a phenomenon in the last few weeks or months, it’s something we’ve been able to achieve over a sustained period now. If you look at the lead indicators - job advertisements - all of the data in relation to job advertisements is very promising indeed, in terms of the employment outlook moving forward. 

Alright, we’re out of time but we appreciate you joining us, hot on the heels of delivering that mid-year budget update, Senator Mathias Cormann, the Finance Minister of Australia. Thanks very much. 


Senator the Hon Mathias Cormann, Minister for Finance, Perth