Senator the Hon. Mathias Cormann
Minister for Finance and the Public Service
Leader of the Government in the Senate
Senator for Western Australia
The Hon. Josh Frydenberg MP
Deputy Leader of the Liberal Party
Federal Member for Kooyong
Date: Monday, 17 December 2018
JOSH FRYDENBERG: Today's MYEFO is a strong demonstration that the Liberal and National Party Government and their economic plan is working. One of the proudest achievements of the Government has been the creation of over 1.1 million new jobs since we were elected in 2013.
This has seen the unemployment rate fall to a six year low of five per cent. We have completed our 27th year, consecutive year, of economic growth and the Australian economy is growing faster than the OECD average and of all G7 nations, except the United States.
The strength of the Australian economy has been recognised by the International Monetary Fund, the OECD and our AAA credit rating has been reaffirmed. As a result of the strong economy and the Government's sound fiscal management, the Budget is set to return to a surplus in 2019-20 after a decade of deficits.
At the same time, the Government is able to make record investments to provide the essential services that Australians rely on and we are doing all of this without raising taxes. There is more to be done, but this update shows that our plan is working.
The underlying cash balance in 2018-19 is forecast to improve to a $5.2 billion deficit, about two-thirds lower than the Budget estimate of $14.5 billion in May. The 2018-19 deficit is now 0.3 per cent of GDP, one-tenth of the deficit of three per cent of GDP that we inherited from Labor in 2013-14.
The underlying cash balance for 2019-20 is now expected to reach a surplus of $4.1 billion, almost doubling the surplus estimated for that year in the May Budget. This will be the first Budget surplus since the last year of the Howard Government.
The surplus will increase to $12.5 billion in 2020-21 and $19 billion in 2021-22. The cumulative surpluses over the next four years will be $30.3 billion, around double what was announced in the May Budget.
The combination of a growing economy, with a record number of people in work, is helping both sides of the ledger, increasing our revenues while also decreasing our expenditure.
Previous decisions taken by the Government to ensure payments are better targeted as well as steps taken to ensure the integrity of the tax system are also continuing to benefit the Budget. Consistent with a strong and growing economy, the tax share of GDP is expected to be 23.8 per cent of GDP in 2021-22 and the Coalition's tax speed-limit equal to 23.9 per cent of GDP is reached and then held from 2025-26.
The cap ensures that the Government lives within its means by not imposing an increasing of tax as a burden on Australians over time, which would adversely affect growth, cost jobs and investment.
The Government has also successfully controlled expenditure in its efforts to return the Budget to surplus. Compared to the 2018-19 Budget, payments are lower in each year of the forward estimates with the payments-to-GDP ratio expected to be 24.9 per cent in 2018-19, falling to 24.6 per cent in 2020-21.
Average annual real growth in payments over the five years from 2017-18 is expected to be 1.9 per cent. This is the lowest level for any government in 50 years. I want to repeat that, with spending growth down to 1.9 per cent, this is the lowest level for any government in 50 years.
This is even after taking into account new spending commitments in MYEFO to support schools, hospitals, drought-stricken communities and a newer and fairer model for distributing the GST.
In accordance with our disciplined Budget management, new spending has been offset by reduced spending elsewhere, Mathias will have a bit more to say about this in a moment.
Importantly, the improvement we are seeing in the Budget position across the forward estimates carries through to the medium-term. The Budget is projected to remain in surplus throughout the next decade with surpluses of more than one per cent of GDP from 2025-26.
By 2028-29, the underlying cash balance is projected to be in surplus to the tune of 1.5 per cent of GDP. An improved fiscal position is driving a dramatic reduction in net debt over the next 10 years. This is one of the many dividends we get from sound budget management and the Government's plan for a stronger economy.
From a figure of 18.2 per cent of GDP in 2018-19, net debt is projected to fall to just 1.5 per cent of GDP by 2028-29. A stronger balance sheet is important to provide the Government with flexibility to respond to unanticipated events during the times of financial crises or economic shocks.
The Australian economy continues to perform strongly and well. Business conditions have supported the creation of 300,000 new jobs in the past year with the unemployment rate falling to its lowest level since 2012. A stronger economy is key to a stronger budget position and it is a key to delivering better services.
Real GDP is expected to grow by 2 ¾ per cent in 2018-19, in line with the economy’s growth potential. Growth in 2018-19 has been revised slightly lower since Budget, in part reflecting the impact of the drought on rural exports and the lower mining investment, following the completion of the remaining LNG projects in the Northern Territory and Western Australia.
Growth is expected to strengthen to three per cent in 2019-2020. This marks an important milestone for the Australian economy. The drag from mining investment is expected to have run its course as mining companies invest to maintain large capital stocks and maintain production.
Since the May Budget, we have seen labour market conditions remain strong as they have been over the past 12 months. The forecast for employment growth for both 2018-19 and 2019-20 has been raised by a quarter of a percentage point compared with the Budget.
Likewise, the unemployment rate is expected to remain at 5 per cent, a quarter of a percentage point lower than forecast at the time of the Budget.
Year-end wage growth is expected to rise from 2 ½ per cent in 2018-19 to three per cent in 2019-20. Growth in the Wages Price Index picked up to 2.3 per cent through-the-year to the September quarter, its strongest outcome in three years as the unemployment rate fell to a six year low.
Nominal GDP, which is critical for the Budget numbers today, is forecast to grow by 4 ¾ per cent in 2018-19, which is stronger than expected at Budget time, reflecting a boost in the terms of trade from higher than assumed commodity prices.
Metallurgical coal prices in particular have been high, which reflects our prudent approach to forecasting the terms of trade as the metallurgical coal price is still assumed to decline, which does weigh on the nominal GDP growth in 2019-20, which at 3.5 per cent is lower compared to the Budget. It's important to note that the level of nominal GDP does remain higher over the period.
Finally, having a strong economy as Australia does, it's not an end in itself, rather it is a means to a better way of life for all Australians so that they have the opportunities that they deserve and the essential services that they need.
In this Budget update, the Government is delivering $1.25 billion for a new community health and hospitals program. A further $1.4 billion is committed for new listings on the Pharmaceutical Benefits Scheme.
There is an additional $287 million to bring forward the release of 10,000 home-care packages, as well as $111 million to support older Australians and residential care facilities in regional areas and those at risk of homelessness.
Schools receive a big boost in this Budget update. More than a $4 billion of additional funding will go to non-government schools.
The Government is responding to the drought, with over $1.8 billion in assistance measures and concessional loans to support drought-affected farmers as well as establishing a new Future Drought Fund which will increase to $5 billion over time.
Government infrastructure funding for projects, both at home and abroad, are also covered in this Budget update and building on the Government's $75 billion National Infrastructure Plan and rollout, there is $750 million in this update to expand the national Water Infrastructure Development Fund.
Australia's army of more than three million small businesses will also benefit from the initiatives in this Budget update. This includes accelerated tax relief for businesses with an annual turnover of less than $50 million, a $2 billion Securitisation Fund to increase access to finance and other measures to cut red tape.
Ladies and gentlemen, these new MYEFO measures and initiatives are only possible because the Australian Government's books are the best in over a decade. Today's update shows the Australian economy is on the right track giving us much to look forward to.
The benefit of the strong economy under the Liberal and National Government and Prime Minister Scott Morrison, is that more and improved services are being funded without increasing taxes.
We continue to deliver tax relief for hardworking Australians and small businesses. And today's strong Budget update is no accident.
It's the product of hard-earned gains over more than five years and these can be quickly and easily squandered should Australia allow the Labor Party to revert to their high-taxing, high-spending agenda which, as they have shown before, is a recipe for less jobs and lower growth.
Getting the Budget back to surplus is our first job, paying back Labor's debt is our next job.
I'll quickly take you through a few slides and then hand over to Mathias.
In terms of this first slide, it shows the steady improvement in our books as we have moved from having a deficit of three per cent of GDP, which was Labor's last Budget in 2013-14, to having a deficit which is just 0.3 per cent of GDP in 2018-19.
Next year, the Budget is on track for a surplus of just over $4 billion or 0.2 per cent of GDP, rising to 0.9 per cent of GDP in 2020-21 at the end of the forward estimates.
The next slide shows improvement in the net debt position. And this is an improvement since the time of the Budget. We are falling to a low point of net debt to GDP of just 1.5 per cent at the end of the medium term, in 2028-29 and this is in contrast to the 3.8 per cent, which was predicted at the time of the Budget.
This improvement is a product of growing surpluses which will be consistently above one per cent of GDP from 2025-26 onwards.
This slide shows the strong performance in terms of bringing the real growth in payments or spending under control. When we came to Government we inherited spending which was growing at around four per cent per annum and we have now brought it down to 1.9 per cent which is the lowest level of any government in 50 years.
And we have done so at the same time as increasing funding for schools, for hospitals, for drought-stricken communities and getting a better deal for a fairer distribution of the GST.
This is a slide that points out and puts in context Australia's very strong economic performance compared to other nations around the world. This is looking at G7 nations. It's based back to September 2013, when we came to Government. Australia had outperformed all these other nations in terms of our economic growth over that period.
And this is reflected in the fact that our AAA credit rating has been reaffirmed by the leading credit rating agencies and also by the fact that our economic plan has been strongly endorsed by the OECD and the IMF. We expect that economic performance to continue.
In terms of employment growth, this has been the big success of the Liberal and National Government, creating nearly 1.2 million new jobs, the majority of which have been full-time.
And we have created these jobs by promoting free trade, by promoting and advancing small business and by cutting taxes. This is all combined to deliver this story today.
Finally, the unemployment rate. When we came to Government, Labor left us an unemployment rate at just over 5.7 per cent. Today, we have brought it down to 5 per cent, the lowest in six years and, importantly, the improvements today in MYEFO are an improvement on the Budget forecast where unemployment is to be and that is to remain at 5 per cent. So I'll now hand over to Mathias.
MATHIAS CORMANN: Thank you very much Treasurer. When we came into Government just over five years ago, the economy and the Budget were heading in the wrong direction. The Australian economy was weakening, unemployment was rising and the federal Budget position was rapidly deteriorating.
What our half-yearly Budget update today clearly shows is the progress we continue to make in delivering on our plan for jobs and growth and on our plan to repair the Budget.
Our economy, jobs, the Budget are all now heading in the right direction. Our economy continues to grow strongly. Employment growth remains strong. At 5 per cent the unemployment rate is below where it was anticipated it would be, even just seven months ago at Budget time and our Budget continues on its consistently improving trajectory back to a sustainable surplus.
It has taken us two terms to fix the Budget mess Labor left behind after just two terms in office.
This is not the time to go back to Labor’s discredited approach of the past.
Going back to Labor’s discredited approach of the past would take us back to a weakening economy, rising unemployment and a rapidly deteriorating Budget position - reducing opportunities for Australian families to get ahead, reducing the opportunity for Government to fund the essential services Australians rightly expect.
Today we are now back in a position where our recurrent revenue more than pays for our recurrent expenditure.
That is an important point out of the half-yearly Budget update today. Our net operating balance is now $4.9 billion in surplus, up from a small $2.4 billion deficit at Budget time just seven months ago.
And in contrast, to some of the misinformed commentary from our political opponents in recent days and again today, we have continued to effectively control expenditure growth.
Our continued efforts to effectively control expenditure growth are a central foundation of the Budget repair story over the last five and bit years.
Real spending growth as the Treasurer has indicated has been kept at just 1.9 per cent, well below the 4 per cent average annual growth in spending above inflation, which we inherited from Labor over their forward estimates period and over the medium term at the time when they lost Government.
In fact, expenditure growth under our Government over the past five years and the next forward estimates is well below the level of expenditure growth of any Australian Government in living memory.
Nominal payments in the 2018-19 half-yearly Budget update are lower than at Budget time in every year over the forward estimates period.
Overall, payments are now projected to be $3.5 billion lower than at Budget, which comes on top of a $7 billion reduction in payments reflected in the 2017-18 Final Budget Outcome.
We continue to more than offset any new spending increases with spending reductions in other parts of the Budget. The net impact of policy decisions on the payments side of the Budget is a $423 million improvement, after taking Senate positions into account, as well as the ongoing structural impact of past Government decisions to reduce expenditure and related reductions in public debt interest payments.
Spending as a share of GDP, which under Labor’s policy settings was headed for 26.5 per cent and rising remains below 25 per cent and is expected to reduce further down to 24.6 per cent, back below the 30 year average.
Government net debt, which peaked last financial year as a share of GDP is now on track to reach just 1.5 per cent as a share of GDP over the medium term.
In relation to progressing Budget repair measures through the Senate, we can also report that since the last election, the Government has now secured the passage through the Parliament of over $56 billion in Budget repair measures.
Budget repair measures implemented since the 2013 Election have delivered a net improvement of more than $400 billion to the Budget bottom line over the medium term to 2028-29. That is the structural effect, the structural net effect of Budget repair measures, non-tax related Budget repair measures, taken since the 2013 Election have led to a net improvement of $400 billion. These are policy decisions, not any sort of circumstances falling our way.
The net impact of Budget repair measures announced prior to the 2018-19 Mid-Year Economic and Fiscal Outlook yet to be legislated is now just $5.4 billion, of which just about $0.5 billion is on the expenditure side of the Budget.
Stronger growth continues to deliver more jobs and better opportunities for Australian families to get ahead and it also delivers a stronger Budget to pay for the important services Australians expect their Government to deliver.
Over the last five years, our efforts to control expenditure, our efforts to build a stronger economy, an economy which creates more jobs, combined with our efforts to get spending on a more sustainable foundation and trajectory for the future has led us into the position we are in today.
This is certainly not the time to change direction, because if we go back to the way things were done in the past, we get the same outcomes that we got in the past and that is bad for families around Australia wanting to get ahead.
REPORTER: You have about $10 billion in decisions taken but not yet announced. Is that an election war chest, is that a big announcement over summer with some tax cuts, perhaps?
JOSH FRYDENBERG: Well, David, look, we have important decisions to take as a Government in terms of ensuring that this positive trajectory continues, that we continue to strengthen the Australian economy. We are committed to targeted spending and lower taxes. That's our track record and it's delivered more than 1.1 million new jobs.
But we're not going to make any announcements today. What we are saying is that we will approach all these issues in a carefully, considered, methodical way, just as we have done to date and that is why today's result, today's budget update numbers are the best for Australia in over a decade.
MATHIAS CORMANN: This is a half-yearly Budget update. It includes the decisions and reconciles the impact of the decisions that we have made since Budget. Beyond that, we continue to work to put the Australian economy and the Budget on the strongest possible foundation and trajectory for the future.
It is no secret that we are committed to lower taxes as part of our plan to strengthen the economy, create more jobs and ensure that Australians have the best possible opportunity to get ahead. As the Treasurer said, this is only an update. Between now and the election there will be another Budget, there will be a Pre-Election Economic and Fiscal Outlook and decisions will be announced in the usual way between now and the election.
REPORTER: Treasurer, [inaudible] down wages and household consumption since the last budget, is that symptomatic of a wider problem in the economy, in that you’re heading towards surplus, but many voters aren’t?
JOSH FRYDENBERG: Well, unemployment has actually also been revised downwards, which is a positive reflection of the strong job creation that we are seeing across the economy.
In terms of the Wages Price Index, as you know, it increased by 2.3 per cent recently, which was the biggest jump in three years, and the Reserve Bank Governor himself has said that he expects to see an improvement in wages over time as that spare capacity in the labour market is eaten into and we continue to see the strong jobs growth.
But, the gradual wages growth that we've seen in Australia is not unique to us. I mean, in the United Kingdom, they have unemployment at around 4 per cent and they have flat wages growth. So, this is a phenomenon that we're seeing globally. But, here in Australia, we are taking the measures necessary, whether it's the investment in infrastructure, whether it's cutting taxes, whether it's driving more competition, to actually get better wages growth.
But, I'll tell you what, what will deliver a worse outcome for the workers of Australia and that's the $200 billion of higher taxes that Bill Shorten and the Labor Party are promising. It doesn't matter what the question is, Labor's answer is higher taxes. Higher taxes on your income, higher taxes on your business, higher taxes on your housing, - and we've seen today that the public don't like Labor's plans to abolish negative gearing as we know it - higher taxes on your electricity bill and higher taxes on your retirement. This is what Labor is promising and that will hurt the workers of Australia.
REPORTER: Treasurer, do these numbers give you a fighting chance at the next election?
JOSH FRYDENBERG: These numbers do reflect five hard years of work by the Prime Minister, in his role as the Treasurer, by Mathias Cormann as the Finance Minister, throughout this period, and by other members of the government.
This is no accident. Today's results are no accident. What we have done is we've actually restrained our spending and targeted our spending, but we've also stayed true to our tax to GDP cap at 23.9 per cent…
REPORTER: But, the polls are no accident either? Do these give you optimism?
JOSH FRYDENBERG: But, what the Labor Party is promising the Australian people is higher taxes and higher spending.
Now, when you lift those restraints, you will end up with budget deficits and irresponsible fiscal management.
Can I just say one last thing? Chris Bowen gave a speech at the National Press Club shortly after we came to government and he set us a number of tests. He said that unemployment needed to be below 6 per cent for us to be successful. He said we needed to maintain our AAA credit rating. He actually even said, you need to keep the tax to GDP ratio down below 23.7 per cent, which it is today. And he said we needed to be in the top ten economies in the world.
We have met all of those standards that he set and, you know, now he's trying to change the tune. We've seen at the Labor conference that Labor has abandoned this tax to GDP cap, which means that under Labor the taxes will be limitless.
MATHIAS CORMANN: And just on this point. The last time I have seen the Labor Party this cocky about the upcoming election and the last time I remember senior representatives of the press gallery declaring the election result five months out, was in 2001 when Kim Beazley as Opposition Leader for five years thought he was going to sail into The Lodge. Everybody knows about the final outcome.
Let me say that Kim Beazley as an alternative Prime Minister was way more electable than Mr Shorten. Way more electable than Mr Shorten.
The next point I would make is that right now people do not have to decide on who they want to run the country and the economy over the next three years after the next election. As we go to the next election and as people get to appreciate the full impact of Labor's $200 billion in higher taxes on the economy, on jobs, on their future opportunity to get ahead and on the capacity of the Government to fund the services they expect, I am very confident that we will be competitive.
We certainly will do everything we can to ensure that Australians can continue to benefit from our agenda of stronger growth, more jobs, a sustainable Budget position and an Australia that is safe and secure.
REPORTER: What is the Government's rule to bank all revenue upgrades and could you just clarify what the rule is going forward, because there does seem to have been a tweak around it?
JOSH FRYDENBERG: Well, in terms of the improvements we've seen on both sides of the ledger, that have seen us move to this position with the dramatic improvement, a two-thirds improvement, in the 2018-19 deficit, is a result of improvements on the revenue side, but also improvements on the payments side. We will be coming into surplus in 2019-20, a nearly doubling of the surplus that was predicted at the May budget, that again is a result in improvements on the revenue side, just as it is on the payment side.
MATHIAS CORMANN: On the payments side, we have more than offset any decisions to increase spending with spending reductions in other parts of the Budget once you take account of Senate positions, which we always have in the past and once you take into account the structural effect of decisions that we have made on the spending side in the past.
On the revenue side, there are a number of important rules that work together and one key rule is the 23.9 percent tax as a share of GDP cap, which we believe is important to keep the economy strong and to keep employment growth strong and to ensure that Australians have the best possible opportunity to get ahead on the back of stronger investment and stronger growth.
So, our commitment to keep taxes as a share of GDP below the 23.9 per cent cap is reflected in these numbers and that is the reason why we had to make the adjustments that we have made.
REPORTER: I think the question is about, Treasurer, the other aspect of your budget repair strategy, item two. You say you've reprinted it. The overall impact of shifts in receipts and payments due to changes in the economy will be banked as an improvement to the budget bottom line. Do you still regard yourself as bound by that element of your budget repair strategy?
MATHIAS CORMANN: Well, I've just directly answered that question.
REPORTER: No, you haven't. You referred to the tax to GDP and you referred to other aspects of it. Do you regard yourself as bound by the commitment to bank changes in the budget position due to changes in the economy?
MATHIAS CORMANN: Well, this is our fiscal strategy. If we had not made the decisions that we have made, we would have exceeded the 23.9 per cent tax as a share of GDP…
REPORTER: No, I'm asking about the commitment to bank...
MATHIAS CORMANN: No, you are ignoring the answer.
REPORTER:…parameter revenue, parameter variations due to changes in the…
MATHIAS CORMANN: I think you are ignoring the answer.
REPORTER: Well, that's my question.
MATHIAS CORMANN: Well, the answer is, we have made the decisions that we have made in order to remain below the 23.9 per cent tax as a share of GDP cap…
REPORTER: Yes, but, that is not what I asked about.
MATHIAS CORMANN: Sure, but I am explaining the answer and that is an important part of our fiscal strategy too. There are different components to it that have to be balanced with each other. We have made these decisions.
JOSH FRYDENBERG: Can I say, the other contrast is with the Labor Party, who don't believe that they have a
speed limit when it comes to increased taxes. They have said in their platform that they are debating at the moment that it has no useful purpose. This is after Chris Bowen actually said to the Press Club a test of our success would be to stay below the 23.7 per cent tax to GDP, which we've done. And as the Finance Minister said, in this MYEFO, in the out years, we've kept to our cap, we're staying under it, we're not exceeding it, and as a result of that, there will be benefits to the Australian people.
REPORTER: You've actually stated, we know that climate change is a really big issue for a lot of the electorate, and the Wentworth by-election is a good example of that. Yet in this MYEFO, there is a reduction in climate change specific funding from $1.9 billion to $1.25 billion in the forward estimates. Can you explain why you've made that decision?
JOSH FRYDENBERG: Look, we continue to fund a range of measures across the economy to drive reductions in emissions. And, as you know, we've still got a quarter of a billion dollars in the Emissions Reduction Fund. And that has been very successful and seeing the cost of abatement, about $12-13 a tonne. What we have done through the Renewable Energy Target is seen the emissions in the electricity sector continue to fall. We have a National Energy Productivity Plan, which is designed to get energy efficiency up by 40 per cent by 2030 with a whole new range of standards for appliances.
But, unlike the Labor Party, who have a recklessly high target, who haven't told the Australian people what the true cost of a 45 per cent emissions reduction target is and how they're going to get there. We have a set of targeted policies which have actually shown that they're working. Because the emissions on a per capita and GDP basis are now the lowest in Australia they've been in 28 years.
REPORTER: Is the speed limit more important than the budget repair strategy?
MATHIAS CORMANN: We are repairing the Budget.
REPORTER: If given a choice between the two, you have opted to go for the speed limit over Budget repair?
MATHIAS CORMANN: Well, no, sorry and this is what I was just going to say to Peter as well and it is a very, very important point. The really important focus of our Government is to keep the economy strong, so that Australians today and into the future have the best possible opportunity to get ahead, because we also understand that a stronger economy delivers a stronger and improving Budget position.
If we increase the overall tax burden beyond the 23.9 per cent, we will harm economic growth into the future. So it is a matter of balancing competing priorities and making judgements, as we have over the last five years.
JOSH FRYDENBERG: And can I just say, if you look at these numbers in total, what you've seen is, since the May budget, so since the May budget, we have seen the 2018-19 deficit come down by around two-thirds. We have seen the 2019-20 budget surplus almost double. And we've seen around $30 billion, a bit more than $30 billion, and a doubling of the cumulative surpluses over the forward period.
Chris Bowen, my counterpart, he likes to mimic and to quote Paul Keating. Well, he should think about this. These are the surpluses that Australia needs to have.
Thank you very much.