1 June 2017
Speech - #2017013, 2017

Address to the Committee for Economic Development of Australia State of the Nation Conference, Parliament House, Canberra

Check against delivery

Thanks very much, Lyndal, for that introduction.

In framing this year’s conference, CEDA has posed the question on whether Australia can continue its golden run of 25 years of economic growth?

The answer is: Yes, of course we can.

But just as before, we will have to fight for it. We will have to continue to earn it. And pursue it with determination and resolve.

It can never be assumed that economic growth will just happen, simply because growth has been our companion for 26 years.

Certainly, the growth we have banked in recent years should be respected, because it has been hard-won, and secured during difficult times.

As our global peers have struggled, we have stayed the course and locked in growth, defying stubborn headwinds and punching above our weight, as is our custom.

But we now stand at an important juncture.

Here, making the right choices are paramount to ensuring further chapters are written into Australia’s growth story.

This is why our Budget is both proactive and pointed.

It is once again focussed on generating growth, because we understand when businesses large and small grow, Australians benefit through increased job opportunities, and a well-earned pay rise.

We understand that when governments invest wisely in large-scale infrastructure projects, whole cities and regions receive an injection of productivity that boosts our economy.

To secure the better days ahead, we must make the right choices and not be intimidated by the obstacles that stand in our way.

After a few weak years, there is a clear shift occurring in the global economy.

Global growth has taken a battering in the wake of the GFC, as nations collectively struggled to get back on their feet and return to trend levels. The recovery since the GFC has certainly been less pronounced and far slower than most seasoned economists had predicted.

Thankfully, downgrades in growth forecasts around the world are now becoming the exception to the norm.

There is credible reason for renewed optimism.

After remaining subdued for several years, global trade volume growth is starting to increase, and there has been some improvement in the outlook for business investment and industrial production in major economies.

Importantly, our major trading partners are set to continue outperforming the wider global economy, with our Asian trading partners in particular expected to grow strongly.

Chinese GDP growth has ticked up in early 2017, but the nation’s high levels of debt-to-GDP continue to concern commentators.

Despite the anti-Trump doomsayers who predicted a further period of economic malaise, the United States economy is still performing well, with a continued economic expansion and an unemployment rate falling to its pre-GFC low of 4.4 per cent.

India’s economy is showing remarkable resilience and is expected to remain the world’s fastest growing major economy over the forecast period, with tremendous upside for the Australian economy.

And then there is Japan, where an Olympics-fuelled boom is fostering strong growth in exports and investments, leading to the nation’s unemployment rate plummeting to levels last seen in in the mid-1990s.

Of course, this renewed optimism across the globe does not come without uncertainties that could sweep the legs out from any sustained period of recovery.

High levels of debt in some of our major trading partners remains a risk to the region, as noted by ratings agency Moody’s which this month downgraded the Chinese sovereign credit rating by one notch.

This long-awaited uptick in global growth is good news for Australia.

Because we are well positioned to take advantage of this shift.

And that isn’t through luck or good fortune, but prudent economic management and an understanding of the crucial need to concentrate on building growth and stability.

Economic growth is the result of positioning ourselves in the global economy so when good times abound, we flourish as a nation, and when the headwinds do arrive, we are sheltered from the worst.

The long unwind from the mining investment boom has been a significant drag on our economy, restraining growth under trend levels and narrowing options for business investment.

That drag on the economy is almost at an end, with the RBA Governor recently confirming that we are around 90 per cent of the way through the downturn from the peak of the mining investment boom.

Even with this lingering weight, Australia’s economic performance continues to stack-up favourably with the most advanced economies, including other major commodity exporters.

Real GDP growth is expected to rebound to 2¾ per cent in 2017-18 after easing in the near-term as a result of weather-related factors in 2016-17 including Tropical Cyclone Debbie.

The Turnbull Government has taken prudent steps in the budget to revise down our expectation of growth in 2016-17. We recognised that such weather incidents, particularly in Queensland and Northern NSW, would place downward pressure on growth, which was evident in last week’s construction data.

Real GDP growth is forecast to rise to 3 per cent in 2018-19, buoyed by continued strong growth in exports and an anticipated lift in household consumption.

While as a whole, the nation is consolidating its growth, some States and Territories are doing a lot better than others.

There is no doubt Western Australia and Queensland have been hit hardest hit by the transition away from mining investment-led growth.

Across the Nullarbor, for example, business investment has fallen 30 per cent in nominal terms since the recent peak in 2012-13.

In contrast, New South Wales and Victoria have been growing faster than their decade averages, supported by solid population growth, household consumption, housing starts, and a pick-up in non-mining investment.

That is not to say that there are no risks to this growth story. There are risks around the momentum in household consumption, as well as uncertainty around dwelling investment and non-mining business investment.

Next week, the ABS will release the National Accounts data for the March Quarter 2017.

In previous quarters we’ve seen some lumpiness in the data.

In the 2016 December quarter, for example, the National Accounts data rebounded strongly from the unexpected weak result in September.

Although growth in the September quarter was weighed by temporary weather-related weakness in the construction sector, overall the weakness was relatively broad-based.

This again shows that economic growth — here or anywhere in the world — cannot be taken for granted.

In more recent months, the economic data coming through has been mixed.

We have witnessed a sustained rally in jobs growth, with seven consecutive months of job creation. During that time, 179,000 more Australians found jobs - 37,400 people in the month of April alone. What has been particularly welcome has been that almost 150,000 full-time positions have been created in the last seven months.

On a further impressive note, growth in private engineering construction work done in the March quarter was positive for the first time since the June quarter of 2015.

On the eve of the Budget, the NAB Monthly Business Survey saw its business confidence figures jump to a seven-year high, strengthening from the solid results recorded in the previous month and confirming a new reality in the business sector - that confidence is the new black.

Importantly, this was the first survey to occur after the Turnbull Government’s success in legislating substantial tax cuts for 3.2 million small and medium businesses.

Clearly, there is a deep understanding that such tax cuts will drive economic growth and deliver more and better paid jobs.

However, retail trade volumes, which account for around one third of household consumption, rose only modestly in the March quarter.

In addition, quarterly private residential construction work done fell, with some of that reflecting the adverse weather we have spoken of.

As we approached the end of the March quarter, Tropical Cyclone Debbie hit Queensland and northern NSW hard, tragically resulting in 12 Australians losing their life.

As expected, Cyclone Debbie will also have a significant bearing on economic activity and commodity prices.

For commodity prices, Cyclone Debbie induced a rapid and transient doubling in metallurgical coal prices. But given the considerable volatility that there has been in commodity prices more generally over 2016-17, in the Budget we maintained the judgement on the forecasts on the judgment that it is prudent to assume that prices for metallurgical coal and iron ore will not be sustained at recent higher levels. 

This was supported by market and industry consultation.

Similarly, we have taken a prudent stance on our real GDP forecasts, which are broadly consistent with those of the Reserve Bank, international organisations and private sector economists. In fact, the Budget forecasts for real GDP growth are ¼ of a percentage point below the midpoint of the RBA forecasts across the forecast horizon, and lower than those of the IMF.

Similarly, we revised down our growth forecast for 2016-17, given that we anticipate the fallout from Cyclone Debbie will reduce real GDP growth by a quarter of a percentage point in the June quarter of 2017, predominantly through lost coal exports, and pauses in construction.

The cyclone not only significantly disrupted Australia’s coal sector in Queensland, but it also damaged crops and local tourism.

Queensland’s Mackay region was among the hardest hit, losing crops of capsicums, sugar cane and fresh tomatoes. As a result, we expect fruit and vegetable prices to rise, but we don’t expect the impact on overall inflation to be significant.

The price rises are expected to add less than ¼ of a percentage point to the CPI over the June and September quarters of 2017.

There will of course be more data released before we see the full March quarter accounts on Wednesday.

We are building Australia, road by road, runway by runway, rail by rail.

In the 2017 Economic and political overview, CEDA identified infrastructure investment as one of the main drivers of growth. 

Our infrastructure plan benefits every state, and is set to deliver a boom in productivity across major regions that could lead to prolonged economic growth and a surge in employment.

We are building two major infrastructure projects — the Western Sydney Airport and the Melbourne to Brisbane Inland Rail — the second of which will have significant benefits not just for Melbourne and Brisbane, but every region that is connected along the way.

We are upgrading the Bruce Highway in Queensland. We are spending $1 billion on road and rail projects in Victoria, including a $500 million regional rail package and $30 million to get planning done for the Melbourne Airport Rail Link.  The regional rail package includes $100 million to duplicate the Geelong-Waurn Ponds line and $290 million to upgrade the Gippsland Line.

And we will establish a $10 billion National Rail Program that will stand ready to invest in proven major rail projects throughout the country.

The establishment of our new Infrastructure and Project Financing Agency will assist the Government to make the right choices on funding and financing to deliver infrastructure projects. 

The Agency adds to the Government’s robust and internationally recognised institutions, such as Infrastructure Australia, that advise on infrastructure investments.

After a few years of strong growth in some of our major cities, there are some encouraging signs that housing price growth is starting to temper.

A period of more subdued growth will no doubt come as a relief to some prospective first home buyers and those on low incomes that feel like they are being priced out of the market for good.

Only this morning, CoreLogic released data showing prices in the hot market of Sydney dropped 1.3 per cent after recording flat growth in April. The drop was steeper south of the border in Melbourne which saw a 1.7 per cent reduction in prices, while combined prices in the nation’s five state capitals backtracked 1.1 per cent.

This recent easing of course reflects some of the prudent measures undertaken by APRA to take some of the heat out of the market by, among other things, clamping down on interest only loans.

Given around eighty per cent of Australia’s $2.1 trillion household debt is tied up in mortgages, it is important to tread carefully when tinkering with the housing market.

If you hack away at negative gearing or take the axe to other integral tax concessions, as Labor continues to propose, you invite a hard landing in the housing market that would create havoc in the wider economy. It would costs jobs and wages.

And because we don’t have a single housing market in Australia, sweeping changes to such policies would have crippling effects on fragile markets like Perth.

This is where APRA’s “small-step” approach to addressing market concerns is the most effective weapon in our arsenal. It is about using the scalpel rather than the chainsaw.

Earlier this year, APRA announced measures to improve the quality of residential mortgage lending, zeroing in on interest only loans.

These measures coincided with ASIC’s action on responsible lending, and similar moves undertaken by APRA in December 2014.

Data released just two days ago showed that the value of new interest-only housing loans as a share of all new lending has declined from a peak of around 46 per cent to 36 per cent. There is further work to go on reducing this to below the 30 per cent benchmark set by APRA at the end of March.

But even before those measures have taken effect, and for the first time since December 2009, we saw the actual number of interest-only loans decline in the March quarter, down by 0.4 per cent on the previous quarter.

Our budget measures seek to mirror APRA’s scalpel approach to addressing housing affordability, as we tighten the rules for foreign investors, give first homebuyers a tax cut so they can save for a deposit faster, and provide retirees with tax incentives to downsize.

But the core of our comprehensive housing affordability measures remains the inherent need to boost supply. We need to build more homes, unleash the supply of affordable housing and pave the way for more institutional and private investment in the sector.

That is how you help young people to pursue the great Australian dream of homeownership, without risking a market shock that will see house prices fall sharply and rents soar.

We will do this by rewarding councils and State governments who speed up their planning processes, incentivise the private sector to invest in affordable housing projects, and create a land bank to define what government land could be redirected to housing.

And we remain focussed on living within our means as a Government and returning the budget back to a sustainable balance.

This task drives every decision we make as a government, knowing that Australians expect us to live within our means and ensure our debt is not lumped on the shoulders of their kids and their grandkids.

The underlying cash balance will improve from a forecast deficit of $29.4 billion in 2017–18 to a projected surplus of $7.4 billion in 2020–21. Growth in payments has been restricted to less than 2 per cent per year.

And that is an important point to note: For those who have expressed concern about our spending, real growth in spending is only 1.9 per cent in this budget and the forward estimates.

Since our election in 2013 real growth in expenditure has been just 2.0%, that is half the rate of growth of the Labor years.

That means, this Coalition Government is spending at a rate lower than the previous five governments and extending back almost 50 years.

Such restraint and discipline puts us on the enviable path towards a compelling achievement: that from 2018-19, we will no longer be borrowing to pay for our everyday expenses like welfare, health and education.

Indeed, the fruits from living within our means.

Thanks, again, to CEDA for hosting today’s conference.

The Turnbull Government is making the right choices to ensure our nation’s remarkable economic growth story continues.

In strengthening the state of the nation we have committed to making sure all Australians can share in the spoils of hard-won growth.

Thank you.