Senator the Hon. Mathias Cormann
Minister for Finance
Special Minister of State
Leader of the Government in the Senate
Senator for Western Australia
Date: Monday, 16 December 2019
PAUL ALLEN: Australia’s mid-year budget update shows economic realities starting to bear down on government finances. Ministers lowered the forecast budget surplus for the 12 months through next June, and the following 3 fiscal years on reduced expectations of tax revenue over that period. So let’s discuss all of this with Finance minister Mathias Cormann, who joins us now from Canberra. Minister thanks so much for joining us today. As we have seen, the Government reducing the size of the forecast surpluses $2 billion this year and over the forward estimates as well. So is the reality of a slowing economy starting to hit the budget bottom line now?
MATHIAS CORMANN: The Australian economy continues to grow. But we are not immune from what is happening in the global economy. After successive global economic growth downgrades, that impacts on our economy. It is impacting on our revenue base. That is the adjustment that you are seeing in our half yearly budget today. Even though we had to write down $30 billion plus in tax revenue, we remain on track to deliver a surplus this year and each year over the forward estimates and over the medium term with those surpluses growing to more than one per cent as a share of GDP.
PAUL ALLEN: Yeah and now in terms of growth we have a chart here on the Bloomberg terminal that illustrates what you are saying. Yes Australia is still growing, that impressive record still remaining intact. But as you admit growth is easing. Is it time then to consider maybe walking back on this idea of bringing the budget back in the black and following the example of Japan and New Zealand and doing what the RBA wants to see and that’s a bit of fiscal stimulus.
MATHIAS CORMANN: No. We have delivered significant income tax relief, which has provided significant stimulus to the economy. If you look at our performance, our economic growth performance for the first three quarters of the 2019 calendar year, they have been stronger than the last two quarters in the 2018 calendar year. So we are heading in the right direction. Our outlook is positive. We had significant tax relief. We had significant monetary policy support with lower cash rates. We had significant additional investment in infrastructure. A pickup in the resources sector And stabilisation in the housing market. Things are heading in the right direction. Though we are impacted by what is happening in other parts of the world.
PAUL ALLEN: You did mention there the pickup in the resources sector and the budget is predicated on an iron ore price of $55 a tonne and in that respect Australia has been very fortunate prices have been closer to $90 a tonne. So how grim would the revenue picture be if it hadn’t been for that stroke of luck.
MATHIAS CORMANN: It is not a stroke of luck. I completely reject that. It is cautious and conservative forecasting. When we came into government in 2013 we inherited an iron ore price forecast of $120 a tonne. The price actually went down to $45 a tonne. So we have kept it consistent, recognising the volatility in our commodity prices for our key exports, we have maintained very conservative forecasting assumptions. $55 in 2018-19 against an actual price of $72 over that financial year. This financial year its sitting at $85 a tonne and we are forecasting $55 a tonne by the end of June next year, as a matter of caution and conservatism.
PAUL ALLEN: We have also seen not just economic growth forecasts but also wage forecasts lowered as well for the coming years is it time to perhaps bring forward some of that tax relief that is in the Budget.
MATHIAS CORMANN: We have legislated more than $300 billion in income tax relief in the last two financial years. A lot of that is still working its way through the economy as we speak. We will continue to make sensible carefully considered judgements in the lead up to the next Budget. But real wages growth remains stronger than when we came into Government. Wages continue to grow above inflation. The growth in disposable income in the last quarter was the highest in more than a decade. 2.5 per cent growth in disposable income in the most recent quarter. More than 5 per cent growth in disposable income over the most recent 12 month period. These are good figures. But we would like to see wages growth strengthen into the future. Our plan for the economy is designed to help achieve that.
KATHLEEN HAYS: Minister Cormann its Kathleen Hays in New York, yes disposable income may be up but one of the striking things that have been happening in the economy recently is consumers aren’t spending. Some people feel that the consumer has looked at the rate cuts by the RBA and is worried about the economy, could this also be a signal that they see things in the economy that are worrisome and that’s why they’re pulling back?
MATHIAS CORMANN: I think there is a range of things that flow into consumer confidence and consumer perceptions. A lot of the uncertainty at the global level. People in Australia are very aware we are a trading economy. When you have significant trade tensions between the US and China that has an impact on us. People are aware of Brexit, very aware of Brexit here in Australia. But the good news is that on both those fronts the outlook has been improving in recent times. Some of the developments in terms of the discussions between the US and China are very encouraging. The resolution of Brexit a few days ago with the re-election of the Johnson government, is also very encouraging. So we expect that in the weeks and months to come that the global environment will become somewhat more benign. That should also help with consumer confidence here in Australia.
KATHLEEN HAYS: I know ministers of finance often don’t want to comment on their central bank but broadly speaking it seems like the RBA, Reserve Bank of Australia is not keen on doing bond purchases, not keen on quantitative easing, in fact a lot of central banks are trying to get away from that. Broadly speaking would you rather not take steps to do infrastructure spending do something that would help the economy in this time where things are a bit tight. Then are you content to see that kind of step taken and hope that it works.
MATHIAS CORMANN: Our economy continues to grow where quite a few other economies around the world have actually been shrinking. We already have a number of significant infrastructure program with an investment of more than $100 billion over the next decade. We will continue to make these judgements. You are right monetary policy is a matter for the Reserve Bank. The Reserve Bank makes these decisions independently. The Reserve Bank governor has made it very clear he cannot foresee a scenario where unconventional monetary policy options would be required in Australia. Our economic circumstance does not warrant that sort of discussion even. Our economy in a global context continues to perform comparatively well. Our outlook in a global context is positive.
KATHLEEN HAYS: When I interview your colleague Josh Frydenberg at the IMF in October when it came to the impact of the trade war on Australia he says like others this has a lot to do with uncertainty. Yes business people around the world are uncertain they haven’t been investing as much. Is it your sense from what you know at this point that where the US and China for example are going on their trade deal. With so many questions about how far this goes is that going to be enough to relieve uncertainty and take that pressure of the Australian economy?
MATHIAS CORMANN: Things are heading in the right direction. We are very encouraged by the recent developments. We understand there are still more issues to be resolved. However we have always said it is in the interest of both the US and China and it is in our interest and we believe it is in the interestof countries around the world for these trade tensions to be resolved and for there to be a new sustainable accommodation in relation to trade matters between the US and China moving forward. We are an open trading economy. We are globally focused but also a globally exposed trading economy, so anything that helps to improve the global growth outlook is good for us.
PAUL ALLEN: In terms of things you can’t control Australia are also gripped by a drought at the moment, what extent is that weighing on growth forecasts?
MATHIAS CORMANN: That is one of the significant challenges domestically that we have been dealing with. A significant drought in regional Australia which has had an impact on the agricultural sector and the output from the agricultural sector and bushfires in large parts of Australia too. These are things we have to deal with from time to time. These are not things we can control, but we have to make the best of the situation we find ourselves in.
PAUL ALLEN: Just briefly, I am wondering if you at all regret painting yourself into the corner on returning the budget to surplus. If that political promise hadn’t been made, would now be an opportune time to spend?
MATHIAS CORMANN: Not at all. We think it is very important for the Australian people and for the strength of the Australian economy into the future, not just tomorrow but over the medium and long term, that Government lives within its means. Australians relying on the welfare and health and educational services we provide, they rely on the government being able to sustainably fund all of these services without increasing taxes to a level where we would harm economic growth and employment growth in the future. So we are working very hard to ensure that Australians today and into the future have the best possible opportunity to get ahead and to keep taxes as a share of the economy at a reasonable level is an important part of that. That means that we will need to continue to control expenditure growth moving forward.
PAUL ALLEN: Alright thank you so much Australia Finance Minister and Senator Mathias Cormann joining us there to discuss the midyear economic and fiscal outlook.