Senator the Hon. Mathias Cormann
Minister for Finance
Special Minister of State
Leader of the Government in the Senate
Senator for Western Australia
The Hon. Josh Frydenberg
Date: Monday, 16 December 2019
JOSH FRYDENBERG: Good morning. It’s a pleasure to be here with my friend and colleague, the Finance Minister. We’ll both make statements and then happy to take some questions. Australians can be confident about their economic future. With the first current account surplus in 40 years, welfare dependency at its lowest level in 30 years, the biggest tax cuts in 20 years, and the first balanced budget in 11 years. More than 1.4 million new jobs have been created since we’ve come to Government; there is record investments in schools, hospitals, aged care and disability support. Household disposable income has risen at its fastest rate in more than a decade and Australia has maintained its AAA credit rating. The Australian economy’s remarkable resilience has occurred in the face of strong global and domestic economic headwinds. Our devastating drought has already taken a quarter of a percentage point off GDP growth and reduced farm output by a significant amount over the last two years. Global trade tensions have weighed heavily on consumer and business sentiment with forecasts for global economic growth and that of our major trading partners downgraded in today’s MYEFO. Despite these challenges, MYEFO demonstrates that the Australian economy continues to grow with the Budget returning to surplus for the first time in 12 years. There are three key takeout’s from today’s MYEFO. First, the Government is living within its means and paying down Labor’s debt. Surpluses over the forward estimates total $23.5 billion and build to 1 per cent of GDP by 2026-27. With a forecast surplus of $5 billion in 2019-20, it is a $53.5 billion turnaround on the deficit that we inherited upon coming to Government. With gross debt having peaked in 2017-18 and net debt falling over the forward estimates, the nation’s interest bill on its debt burden falls from $19 billion last year to $14.5 billion in 2022-23. Over the forward estimates in cumulative terms, this amounts to $13.5 billion that no longer needs to be spent on interest payments. This stronger fiscal position is achieved with a tax to GDP ratio of 23.1 per cent and this falls to 22.9 per cent at the end of the forwards. Real growth in spending is 1.3 per cent per annum on average over the forwards, reflecting more Australians in work. Spending as a proportion of GDP is at 24.5 per cent this year, below the 30 year average. Our pathway to surplus has been steady and consistent, not relying on overly optimistic commodity forecasts. In MYEFO, we have kept the iron ore price assumption at US$55 per tonne by the end of the June quarter 2020, despite the current spot price being around US$85 a tonne. Metallurgical and thermal coal price assumptions have both been reduced to $134 and $64 respectively, reflecting recent price movements.
This is impacting on nominal GDP growth which is forecast to be 3 ¼ per cent in 2019-20 and 2 ¼ per cent in 2020-21. This impacts on revenue forecasts which have been revised in MYEFO. Second, MYEFO demonstrates that the Australian economy continues to grow. This year growth is forecast to be 2 ¼ per cent, lifting to 2 ¾ per cent next year. Next year the Australian economy is expected to grow faster than any nation in the G7, and faster than the OECD average of 1.6 per cent. Growth is being driven by a number of factors including public final demand, household consumption, exports and business investment. Public final demand which covers consumption and investment, including the NDIS and transport infrastructure spending, is forecast to grow 4 ¾ per cent this year which is up from budget, and mining investment is forecast to grow for the first time in seven years. Household consumption, while lower than budget, is still forecast to grow by 1 ¾ per cent in 2019-20. With the recent national accounts showing household disposable income had its fastest rate of growth in a decade off the back of the Government’s tax cuts. Export growth remains strong, supported by new free trade agreements and increased demand for our services exports which is forecast to increase by 5 ½ per cent in 2019-20. The labour market remains strong with employment growth forecast to be 1 ¾ per cent in 2019-20 and the participation rate around historic highs of 66 per cent, which is upgraded from 65 ½ per cent at budget. While wage growth and inflation have both been revised downwards, wages are forecast to increase at 2 ½ per cent this year and next, which is above the forecast for the rate of inflation. Third, with the Government’s economic plan delivering continued economic growth and a stronger budget position, MYEFO demonstrates we have the capacity and flexibility to invest in the areas that the public need most. MYEFO confirms that since the budget, we have made policy decisions to provide an additional $8.3 billion over the forward estimates, including $2.4 billion in 2019-20. This includes $4.2 billion in accelerated infrastructure projects over the forward estimates, which is part of our $100 billion 10 year infrastructure pipeline. There is $2.9 billion of work brought forward on projects including the north east link, the north south corridor, the Tonkin, the Bass, the Bruce and Princes highways, and $1.3 billion in new projects. There is additional funding for drought support including further investments in the Drought Communities Support Initiative with $300 million to support eligible local councils compete for capital works, and to complete capital works. There’s $138 million for Roads to Recovery for 128 local government areas impacted by drought, and additional funding for income support, financial counselling and mental health services. The budget update also includes $624 million in additional funding for aged care including a half a billion dollars for 10,000 home care packages, $25 million to improve medication management to reduce the use of chemical constraints in aged care, and $10 million for dementia training for aged care workers. As we go forward, we will continue to maintain a disciplined and responsible approach to managing the nation’s finances. With the budget back under control, our fiscal strategy now focuses on paying down Labor’s debt with sustainable surpluses over the cycle, keeping taxes low and under our self-imposed cap and targeting spending to boost productivity, workforce participation and guaranteeing the essential services that Australians need and rely upon. In our 29th consecutive year of economic growth, Australians can be confident about their economic future. Mathias.
MATHIAS CORMANN: Thank you very much Treasurer. Despite significant global economic headwinds and domestic challenges like the drought and bushfires impacting on our economy, our economy continues to grow, employment growth remains strong, wages continue to grow faster than inflation, disposable incomes are growing at their fastest rate in more than 10 years and we remain on track to return to surplus this financial year. That is even after significant revenue write downs, after legislating significant income tax relief, after continuing to provide record funding for the essential services Australian rely on, and after the additional investment into key priority areas in this budget update.
It is as a result of careful, considered budget management that we are able to boost funding for aged care from $21.4 billion in 2019-20 to $25.4 billion in 2022-23, invest an additional $4.2 billion into productivity enhancing infrastructure over the current forward estimates period and provide an additional $1.3 billion to support farmers and communities impacted by the drought. Despite increased expenditure on those high priority areas and significant revenue write downs, we remain on track to return to surplus and remain in surplus as we continue to control expenditure growth. We have implemented around $70 billion of budget repair measures since the 2016 election and about $200 billion in budget repair measures since the 2013 election through to 2022-23. These structural savings continue to improve the spending growth trajectory over time. Average annual growth in payments over the four years from 2019-20 is expected to remain at a record low of 1.3 per cent. That is well below the four 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. Nominal payments in the 2019-20 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 $11.5 billion lower than at Budget. Spending as a share of GDP remains below 25 per cent over the forward estimates. Remember it was headed to 26.5 per cent and rising when Labor lost government in 2013. With spending now at 24.5 in 2019-20 and reducing to 24.4 per cent as a share of GDP by 2022-23, well below the 30 year average. Considering the international context in particular, Australia continues to perform well. We will continue to make decisions in a careful and considered fashion to position Australia in the best possible way for the future. Thank you.
QUESTION: Treasurer, given you’ve wiped $30 billion off the forward estimates for the surplus, how can you be so sure that you’ll still be in surplus by June the following year, etc?
JOSH FRYDENBERG: Well, let me make two points. The first, if you look at our last three Final Budget Outcomes, we have bettered what was forecast by $37 billion. When Labor was last in office, they went backwards in their Final Budget Outcomes. And as you heard from both the Finance Minister and myself, we have actually been pretty prudent when it comes to assumptions, for example around the commodity forecasts. The second point I want to reiterate is about the surplus. The surplus has never been an end in itself, but a means to an end. An end which is to reduce interest payments to free up money to be spent elsewhere across the economy. And as you can see from the MYEFO document, we went from interest payments on our debt from $19 million last year, going down to $14.5 billion over the forward estimates. Cumulatively that’s $13.5 billion that is being freed up that would have otherwise been sent to bond holders as interest on our debt for money that can be spent in other areas of need across the economy. The other side will continue to talk about surpluses, but we know they’ll never deliver them. They talk about higher taxes, we know they will deliver them. But with us it’s about having prudent forecasts, being calm and considered and disciplined when it comes to economic management, so that the country is living within its means so that we have the flexibility to respond to external shocks when and should they occur.
QUESTION: Just on wage growth though. The total sector’s down about $30 billion and of that, it looks that about half is reduction in income tax receipts and [inaudible]. They’re earning less, they’re paying less taxes, but they’re also spending less. So if you were to work out, for the average worker, if you think wage growth is flat lining at 2.5 per cent, how much less is the average worker going to receive in their pocket as a result of you, getting the forecasts not quite right for wage growth? How much less are workers going to get in their pocket?
JOSH FRYDENBERG: A couple of points. The first thing is the revenue write downs are across a number of different areas. The second is when it comes to wages, real wages are growing by 0.6 per cent which is higher than when we came to Government which was 0.5 per cent, and higher than inflation. And that’s what’s really important to understand. And in terms of lifting wages into the future, that’s about driving more productivity, that’s about our tax cuts, that’s about our infrastructure spending, that’s about our deregulation and other supply side reforms. The other key point Samantha, is that when it comes to the most recent National Accounts, we saw household disposable income, that’s money in pockets, that’s money in pockets, having its biggest increase in a decade. That’s the money that’s flowing through the tax cuts. Now, you refer to GST and consumption, and yes, some people are saving while others are spending. Ultimately, it’s up to the Australian people to decide whether they spend or they save. What we have seen in these numbers is that consumption will pick up as more of that money is spent.
QUESTION: But, do you know the answer? Because Labor’s suggested that workers are up to $2,000 worse off. Is that wrong?
JOSH FRYDENBERG: Well, the thing I’ll say about Labor is that they went into the election, and it’s still their policy, with income tax increases. So we’re not going to take lectures from the Labor Party when it comes to wages. The other key point is in Labor’s last three Budgets, they had wages right down. And when it comes to real minimum wages, they were down in three out of Labor’s six years of Government. They’ve gone up every year under us. So, we won’t take lectures from Labor with $387 billion of higher taxes, including on peoples’ incomes.
MATHIAS CORMANN: Let’s be very clear on this, real wages growth under our Government is stronger than it was when Labor lost government. So real wages growth, the gap between wages growth and inflation, is bigger than it was when Labor lost government. And indeed, under Labor the lowest income earners – those on the minimum wage – were on the receiving end of real cuts in wages. Under our Government, during our period in government, they have received increases in real wages every year. Indeed, disposable income, if Labor had been successful at the election in May, people would have had lower disposable income where now they are benefitting from the highest increase in disposable income in more than a decade. 2.5 per cent in the most recent quarter. More than five per cent over the past year. What actually matters to the Australian people is how much of their own money remains in their pocket and under Labor, demonstrably, they would have been significantly worse off.
QUESTION: The consumption outlook is fairly grim. $9.9 billion less in GST over the next four years. Looking to the May Budget, are you going to have to do more to lift consumption? Are you going to have to do more to lift consumption? Will you bring forward Stage Two of the tax cuts? I mean, are you going to have to consider something beyond what you’ve already flagged, which is a business investment allowance in May? Will there be a consumption…
JOSH FRYDENBERG: Couple of points, firstly, this is a midyear update and so we’ll wait for the Budget. But in relation to GST, because you raise that point, $65 billion today goes to $75 billion by the end of the forwards. It’s up by around 56 per cent over the decade and the GST numbers in today’s documents are pretty consistent with where the states have expected them to land. So you’re right, they’re lower than the states would’ve hoped, and indeed the Government would’ve hoped, but in fact they’re pretty consistent with where the states have been forecasting it. Shane.
QUESTION: Let’s go to unemployment, your forecasts are going up. The Reserve Bank has clearly said it had to come down under four and a half. Treasury thinks [inaudible] was five. What in this Budget gets unemployment down? Or is the forecast the assumption we can’t do any better on taking the jobs rate down below four and a half?
JOSH FRYDENBERG: Well a couple of things. Firstly to say, when we came to government unemployment was at 5.7 per cent, today unemployment is at 5.3 per cent and what we have seen is the creation of more than 1.4 million jobs. The majority of which are full time. We have a record number of women in work, a record number of seniors in work and what has actually been upgraded in these numbers compared to budget is the participation rate. It’s gone up to from 65 and a half up to 66 per cent. So that is around record highs. What is going to drive more employment across the economy is our infrastructure spending, is the increase spending that we’re providing into hospitals and schools and the full roll out of the NDIS, is the tax cuts which spur economic activity across the economy. The other number to point out to you Shane is the employment growth number. And as you know it’s been around two per cent today and the numbers here are to one and three quarter per cent, but as you know, the OECD average for employment growth is about 0.9, and again when we came to government it was 0.7. So employment growth has been strong…
QUESTION: The Reserve Bank is absolutely rock solidly clear that it’s got to get down under four and a half. Your policies, as embodied in MYEFO, don’t get within a bull’s roar. How do you change that?
MATHIAS CORMANN: Look at our last couple of Budgets when we have outperformed employment growth forecasts again and again and again. Employment growth helps to bring down the unemployment rate. Employment growth which is stronger than population growth helps to bring down the unemployment rate. If you look at the last couple of Budgets we have consistently outperformed our forecasts. Which is why we delivered more than 1.4 million new jobs.
QUESTION: Treasurer, these forecasts, some of them pessimistic on international growth, nominal GDP, they build in that actually those US China tariffs were going to be implemented and actually they are no longer going ahead with that, they’re going to cut them. There’s also Boris Johnson’s election victory. Have you been a little bit concerned about these forecasts and what do you hope for from the end of the uncertainty of some of those international events might mean for the Australian economy in the Budget?
JOSH FRYDENBERG: Well that’s an important question and we’re obviously very pleased about Boris Johnson’s victory in the United Kingdom, and the certainty and the stability that will bring as well as the economic opportunities for Australia through a tree trade agreement. We obviously welcome the developments in the US and China trading relationship and we’ve been very public in our concerns about the uncertainty to the investment and consumer confidence climate from those uncertainties. But you’re right, we have downgraded and these numbers, not only global economic growth but also for the individual growth numbers and our major trading partners and that’s consistent with the IMF and the OECD. So those numbers reflect the events at the time. Let’s just wait and see what happens from here.
QUESTION: But Treasurer is it optimistic to then on the other side, assume that the drought is going to break and that farm outlook will return to normal in 2021?
JOSH FRYDENBERG: So that has been standard in budgets, for both sides of politics in terms of bringing back those seasonal conditions to normal. What though you will see in these numbers is that it takes a while for farmers once a drought breaks to restock their herds, so that’s occurring more slowly than it does for cropping. Cropping can get back to normal cycles faster than maybe herds can. But again, we’re just like you, praying and hoping that the drought breaks and the impact on farm GDP and growth has been very significant and as I said, it’s knocked about a quarter of a percentage off GDP. But also, it’s required the Government to do what is expected of it, which is to continue to support those farmers and is about $1.3 billion dollars of new measures we’re announced since the Budget.
QUESTION: Treasurer you save us about $13.5 billion worth of interest payments over the next four years, but that’s really because the RBA has cut the interest rate three times. Are you leaning on the RBA to ensure your circumstances are intact over the next four years?
JOSH FRYDENBERG: Well actually, global interest rates have come down, more than fifty central banks have reduced interest rates and the Australian Reserve Bank is no different. Monetary policy is a matter for them, a fiscal policy is a matter for us. But I do note that the lower interest rates, probably a factor that has contributed to recent increases in house prices and what will be seen as a stabilisation in the housing market post-election, a bit of the uncertainty that hung over that sector as a result of Labor’s policies, we’re now seeing clearance rates up, we’re now seeing prices up, and that’s good for the economy because it plays into households’ confidence which is a factor in household consumption which is about 60 per cent of GDP.
QUESTION: Treasurer you’ve got wage price index returning to three per cent by 2022…
JOSH FRYDENBERG: 2022-23. Yep….
QUESTION: …what is your plan to meet that given previous forecasts have been unreliable?
JOSH FRYDENBERG: In terms of stronger growth, in terms of ensuring that the economy continues to build, more people find a job, the tax cuts get fully rolled out over time, this is what’s going to contribute to higher wages, more jobs and a stronger economy. And as I said, real wages have been increasing, so wages have been increasing faster than inflation, but what we didn’t do is go into the election with higher taxes on people’s incomes, that’s what our political opponents did and that’s still their policy.
QUESTION: Just further on the wage price index, the next financial year which only begins in what, six months or so, it’s gone from 3.25 per cent down to 2.5, it’s a huge drop. How is it so wrong a few months ago and how will that give people confidence it will hit 3 per cent?
JOSH FRYDENBERG: Well I go back to my answer earlier, which is when it comes to the performance of the Government in the final budget outcomes, and this wages are one forecast among a number of them in a budget, we have outperformed, and we’ve added $37 billion improvement in our last 3 final budget outcomes than what was forecast.
QUESTION: Treasurer, how do you make companies more competitive in the international market place given you’ve given away big business tax cuts?
JOSH FRYDENBERG: Well in terms of infrastructure spending that’s absolutely critical in terms of the productive capacity, helping get goods to market earlier, helping to open up new opportunities through free trade agreements. When we came to government, 26 per cent of our two way trading relationships were covered by free trade agreements. Now it’s over 70 per cent and we’ve opened opportunities to nearly two billion new customers for Australian businesses. Deregulation, and we’ve already seen the Government outline its early initiatives and that’s helping businesses employ more people, helping food exporters reduce the paperwork involved and of course, and Mathias knows this well from Western Australia, reducing the time taken to get environmental approvals for major projects. That’s going to improve the competitiveness of business. There’s a whole series of things, just the other week, last week the Prime Minister, myself, Paul Fletcher, announcing significant changes in terms of digital platforms. Again, that’s about improving the competitiveness of that sector, taking the advice of the ACCC. In the energy markets, we’ve announced a significant range of reforms, again based on the advice of the ACCC.
QUESTION: Treasurer, the document today, says that if the iron ore price were to fall faster than assumed, then it would cost the Budget about $7.5 billion so bang goes your surplus. Isn’t your story today iron ore or bust?
JOSH FRYDENBERG: Well the story today is that we’ve been very conservative – it’s actually quite the opposite Mark, it’s actually we’ve been very conservative about our iron ore forecasts at $55 at the end of the June Quarter in 2020, compares to $85 for the current price today. That means any increase on those assumptions gets banked to the bottom line, it’s good news for the Budget. But what we have done, and the Finance Minister’s been the Finance Minister throughout the duration of this Government, what we have always done is be conservative and prudent around our commodity forecasts and if you look at metallurgical coal and thermal coal, they’ve both been reduced…
MATHIAS CORMAN: The proof is in the pudding. 2018-19 Budget we had based our assumptions on a $55 a tonne price for iron ore, then the actual price was $72 a tonne which is part of the reason why we had a substantially better final budget outcome.
JOSH FRYDENBERG: Last question….
QUESTION: If the proof is in the pudding, we’ve got household consumption, dwelling investment, business investment, private final demand, export and imports all down since your reelection, why do Australians have any cause to be optimistic if this is the state of the books?
MATHIAS CORMAN: Because if you look at our past performance, over the last three Budgets in particular, we have been delivering better than forecast in aggregate and, indeed, better than forecast in relation to one thing that really matters which is increased employment growth, which means better opportunity for all Australians to get ahead.
JOSH FRYDENBERG: Thank you very much