2 March 2016
Transcript - #2016020, 2016

Press conference, Canberra

SUBJECTS: December quarter National Accounts show positive transition continues; taxation; Budget 2016; Labor’s rushed and reckless negative gearing policy; Labor’s reckless tax and spend approach to the Budget

TREASURER:

Today's December quarter National Accounts show once again that Australia continues to successfully manage the transition from the largest resources investment boom in our history to broader-based growth and, in turn, secures Australia's economic future. In the face of global uncertainty and strong head winds, our economy continues to transition and grow. Real GDP grew by 0.6 per cent in the December quarter and by a strong 3 per cent compared to a year ago, up from a revised 2.7 per cent through the year to September. This is the strongest pace of through-the-year growth since the March quarter of 2014 just prior to the 14-15 Budget and is consistent with the strength of job creation in the second half of last year.

We are growing faster than every economy in the G7 and growing well above the OECD average. We are growing faster than the United States and the United Kingdom and more than twice the pace of comparable resource-based economies like Canada. We are matching the growth rates in economies like South Korea.

The key drivers of economic growth shown in the December quarter figures were household consumption, new housing construction, services exports and public investment, more than offsetting continued and expected declines in resources investment. The changing composition of our drivers of growth demonstrates the transition to broader based growth that is underway in our economy and the increases in both consumer confidence and improving business conditions. Strong employment growth continues to support solid growth in household consumption which rose by 0.8 per cent in the December quarter. Construction of new dwelling increased 3.6 per cent. Particularly in apartments where investors are more prevalent and by 12.1 per cent over the past year responding to record low rates.

The combined effect of recent changes by APRA that led to a tightening of investor lending criteria, together with strong growth and housing supply and a considerable pipeline of work underway has helped to moderate growth in dwelling prices over recent months and it is welcome. This is good news for first home buyers. While having no impact on the December growth figures, net exports though contributed one percentage point to growth through the year to December as export growth has outpaced imports growth. This follows the strong contribution of net exports to economic growth in the September quarter figures.

Exports continued to grow in the December quarter rising 0.6 per cent. Looking through quarterly volatility the growth in exports is broadly based and [inaudible].

Real commodity exports have risen by around 13 per cent over the past year and mining exports have risen by about 5 per cent compared to a year ago as resource investment projects reached completion.

Service exports have risen by 80 per cent over the last year with sectors like tourism and education being particularly strong performers.

Business investment continued to detract from growth in the December growth expected, declined, falling by 2.7 per cent to be 12 per cent lower than a year ago. This is driven by the expected decline as Australia transitions from the investment phase of the mining boom. So no surprises there.

The terms of trade result was once again negative, impacted by further falls in commodity prices in the quarter which reduces what we earned from our exports. The terms of trade is now closing in on the 20 year average, after falling more than a third since its peak in the September quarter of 2011.

Wage income shows modest growth which has supported the strong employment growth outcomes we saw over the year with more than 300,000 jobs created last year.

While profits growth improved in the December Quarter after a period of weakness like wages it still remains well below longer term trends.

Government revenues will also continue to be impacted by more modest growth in nominal GDP, rising by a subdued 0.4 per cent in the December Quarter weighed down by both commodity price falls and continued moderate inflation. Lower levels of nominal GDP growth means lower growth in what Australians earn which means lower revenues for Governments. In MYEFO there was a substantial write-down, in fact it was the principle write-down of revenues from the last Budget as a result of revised forecasts for nominal GDP growth. Now this will remain a key conditioning factor as we frame the 2016-17 Budget. It is one of the major challenges for achieving our medium term fiscal consolidation strategy.

So, I said the other week this will take budgets, and budgets, and budgets. Year average nominal GDP growth last year was just 1.9 per cent. Now during previous periods of fiscal consolidation, budgets being returned to surplus, nominal GDP growth in those particular periods averaged 5.7 per cent in the 1990s and 11.4 per cent in the 1980s. Now, while these periods also involved very significant expenditure restraint which continues to be absolutely necessary and my primary focus as we prepare the Budget, the tail winds of stronger nominal GDP growth during those periods boosting revenues made a significant contribution to the fiscal consolidation outcomes that were achieved at that time. It did provide some rather helpful tailwinds.

With solid consumption we wouldn't mind the same breeze. With solid consumption demand and robust employment growth the next phase of Australia's transition will be the businesses in the modern resources sector of the economy to increase their investment.

Conditions are in place for this to occur, interest rates are low, the dollar, as the Governor of the Reserve Bank likes to say and rightly, is doing its job and has depreciated over the last few years assisting our export and import competing industries and business conditions in the non-mining sector are above average.

As a Government it requires us to continue to keenly focus on the policies that will boost investment and consumer confidence that will drive productivity gains in our economy, particularly on our very keen focus on innovation and to continue to open up new markets through our successful and ambitious trade agenda and continue on our path of fiscal consolidation.

Tax and spend is not a plan that will support the continued successful transition of our economy. Tax and spend is not a plan that will boost investor confidence. Tax and spend is not a plan for jobs and growth – but it's the plan being followed by our opponents.

Our transitioning economy is aligned with the transitioning economies of our trading partners, in particular China. As they are moving from a production to a consumption based economy, we are moving to a diversified, more sophisticated economy with innovation and services driving sustainable and growing trade and incomes.

Today's data shows again further strong signs of the successful transition that is being made in our economy and that is creating a new and emerging momentum for that economy in our future.

QUESTION:

Treasurer, you talked about not having the tailwind of higher GDP – nominal GDP. Now, one of the objectives of tax reform is to get a growth dividend but of course you've scaled back those tax reform ambitions in recent weeks. Are you still confident that you can get a growth dividend from the tax reform agenda? And what do you say to people who sense a drift in the Government's intentions at the moment on tax reform?

TREASURER:

Tax is part of a broader range of policies that the Government is pursuing. I talked about the innovation agenda. I talked about in the past the infrastructure agenda. We have talked about many other areas of improving productivity right across the economy and this is important. Tax is obviously part of it but as I have said on other occasions the scope for what can be done in tax is , in the environment we are in quite conditioned. If you want to change tax rates and particularly reduce tax rates then that is traditionally funded out of a surplus. Well the Labor Party didn't leave us one. We left them one. They certainly didn't leave us one. You can fund it out of good strong nominal GDP growth as I was mentioning before where there was nominal GDP growth during other periods of fiscal consolidation with over five per cent and indeed one year over 11 per cent. That is not our outlook. So, you are reduced to a very constrained series of options. As you know if you look at some of these and you look at the tax mix switch idea and because of the significant cost of compensation that was necessary which could add as much as one per cent of GDP to outlays - now, by the time you try to fiscally consolidate adding one per cent of GDP to outlays to achieve that would have been very significant to the Budget and also overwhelmed the gains that could have been achieved economically. So you have got to deal with the situation you are in and that is moderated via the series of options we have available to us in this area. But the broader principle is this - you don't tax higher to spend higher and that is not what we are going to do. You don't tax higher to spend higher. That is what our opponents want to do. We will seek to alleviate the tax burden for both individuals and companies wherever we can in the conditions we find ourselves in but not at the expense of the real task we have around fiscal consolidation nor at the expense of loading up tax higher and higher.

QUESTION:

Treasurer, you were talking ostensibly about bracket creep and the impact that is having on people. What do you think is a reasonable tax cut for someone who might be being pushed into the 37 per cent tax rate?

TREASURER:

Well, I have been concerned for some time about the fact that we are going to see hundreds of thousands of Australians moving to higher tax brackets. That has been occurring now for some time and that will continue to occur unless there are changes that we are able to make but those changes have to be funded and, as we are certainly doing, as we continue to seek to control new expenditure and address current expenditure levels then those gains need to be put into the medium term fiscal strategy. They need to be put towards ensuring that we are reducing the deficit. That is why our discussions and analysis around tax has been very much about the mix of taxes and to see how those mix of taxes can be improved to provide the sort of relief that you are referring to. So that process is not yet complete. The Budget, surprisingly, is still in May, that hasn't changed – it is not going to change, it will be in May and the full details of what the Government plans in those areas will…

QUESTION:

Do you think people say looking forward to say a $10 a week tax cut or $20 tax cut – what sort of a tax cut would a person say 'this is a real tax cut by Scott Morrison'?

TREASURER:

The real challenge here is it is a prospective challenge and what you want to have happen in your economy is for people who are out there having a go and working and saving and investing, you want them to be able to get more from what they are putting in. Whether it is a company or whether it is an individual or a small business, an innovator. That is why we put the tax incentives in around small business and innovation to ensure that they can get a better dividend about what they are putting in. The great news of this story that we are talking about today in the December Quarter National Accounts, is that the transition is occurring. It is not promised – it is happening. It is not only us who recognise it. I met with Chinese Finance Minister Lou Jiwei on the weekend and its clear the Chinese Government acknowledge what is happening in our economy and were impressed by it. Many other commodity based economies are nowhere near their performance we're achieving. So, look, we want to ensure that there is the reward for the people putting in that extra effort but that is obviously constrained by the fiscal environment in which we work.

QUESTION:

Treasurer, you say that it is a prospective challenge and you have said previously that changes will have to be phased in and you are talking about the future. Are you suggesting that such changes, such tax relief, such changes to the tax mix will occur down the track, beyond the next election?

TREASURER:

What I am suggesting Dennis is that any changes that we are making will be announced in the Budget. Today I am talking about the December Quarter National Accounts. You are very welcome to come to the press conference we hold after the Budget and ask these same questions.

QUESTION:

Treasurer, what do you make of Tony Abbott's contribution to the debate?

TREASURER:

Do we have questions on the December Quarter National Accounts? Perhaps there are some economists in the crowd.

QUESTION:

Treasurer, you make the point that we are doing better than the G7. We might also make the point that they also have very weak nominal growth issues, maybe not as much as us but they do. Yet their fiscal consolidation is quicker than ours according to the OECD.

TREASURER:

They are working also from a far worse position. Take the UK for example, their size of government as a share of the economy is still larger than ours. So, they have had to travel a lot further than Australia has had to. It is quite striking when you have the opportunity to go and discuss these matters with your colleagues when there are some economies that have rates of debt to GDP three times ours and saying they have room, they have fiscal room. We don't share that because we judge our conditions based on our standards. The Coalition standard is that obviously we don't want to see debt where it is. The Coalition's standards are that we don't want to see the deficit remain where it is. By continuing to provide our standards to how we manage our economy rather than the standards of others, that I think is one of the ways why we will continue to be successful with our policy settings.

QUESTION:

Following on from Jason's point, with weak nominal growth do you still expect to be able to achieve reduced government spending as a share of GDP across the years ahead?

TREASURER:

This remains our objective and it must be. The MYEFO estimates and projections as you know have government spending as a share of the economy falling to 25.3 per cent over the Budget and forward estimates down from 25.9. That remains the track we are on and that still has us above the long run average. Revenue as a share of GDP, on the MYEFO estimates, crosses the line of the long run average next year but expenditure as a share of the economy doesn't get to that level over the Budget and forward estimates. So, revenue as a share of the economy will continue rise over the Budget and forward estimates and there are some projections that put that up as high as 25.8 per cent. So, those revenues lift. Being able to forecast those revenues and the sort of unpredictability of the volatility of what we are seeing with prices and things like that has been a challenge for some years now. We all know that. That impacts on the parameter estimates of the Budget and that will continue to be an issue over the next few months if we seek to lock in what they will be for the Budget. What I am talking about on nominal GDP is this - in MYEFO we made a considered decision to revise those forecasts and projections around growth and I think that was a very realistic assessment of a situation at that point in time. We were seeking to be very candid with the Australian people. There was no suggestion from anyone and nor was there in any of the commentary any 'blue-skying' of the out year forecasts which has been a trick of the previous government. That is not something I am seeing to engage with. I'm looking to be really honest with the Australian people and say there is global uncertainty, there is global volatility. Our growth performance, 3 per cent through the year in these figures, is very encouraging and there should be a pat on the back for every Australian who has been out there making this transition of our economy work. But for it to continue, we need to continue to go down the path of fiscal consolidation. We need to continue to go down the path of productivity improvements. We need to continue to go down the path of supporting investor confidence. I tell you one thing you don't do if you want to support investor confidence is you don't jack up the Capital Gains Tax on investment which is what those opposite are seeking to do.

QUESTION:

Now Treasurer, just on this point about fiscal consolidation. You're stressing all the time that you'll be reviewing new spending, that there will be restraint in relation to new spending. But what about existing spending?

TREASURER:

I never put it as a binary proposition Paul.

QUESTION:

You have stressed it pretty heavily. Given all the constraints on the Government, surely, surely the Government should be more robust at looking at...

TREASURER:

It's a myth. What you have put to me is a complete myth. I have been consistent in saying that we need to get Government expenditure under control and that applies to the base, as well as new expenditure. That was demonstrated in the announcements we made in MYEFO. So that's my practice. That's my record. It was my record also as Social Services Minister, where I delivered some of the bigger social welfare reforms that formed part of the last Budget. So I'm no stranger to having to deal with the expenditure challenge and I'm no stranger to actually seeing those things pass through the Parliament either – one of the few measures where we had those sorts of successes was when I was Social Services Minister. So I understand the challenge of getting expenditure under control and have the record of having delivered on it. I'll keep doing that, but the point I was making a week or so ago, is that yes we have made savings in the Budget but we've also spent a lot as well. Now thankfully we haven't spent more than we've saved. If it had been the other mob, well they would have spent it all and saved nothing. How do I know that? Because when I look at their current plans, that's exactly what they are - spend a lot more, save nothing. So that's why we will continue down that path Paul. That's out record. It is both things, and we're going through that Budget process now and we'll continue to keep a close eye on every, every dollar of expenditure because every dollar of expenditure has to carry its own weight. Every element of the tax system has to carry its own weight. My point about that is it has to be fit for purpose and it has to do its job, because when you're dealing with a global economy like this, and you're dealing with a nominal growth scenario like this, it all has to add up and it all has to drive to the point of the objective it's seeking to achieve.

QUESTION:

Treasurer, do you still believe that there are excesses in the current negative gearing arrangements?

TREASURER:

My comments on that relate to the distribution of how people engage in it. Now, you could call them enthusiasms. You can call them whatever you like. But there is no doubt that there is a distribution about how people engage with negative gearing. There is nothing wrong with that, that is part of the tax system. It is an entirely legitimate practice to offset the cost of earning an income against that income. You then have to ask yourself the question about the broader impact of that distribution, of how people engaging in those practices impacts on the broader economy and whether there is any justification for making any changes on that. That's what the Government has been working through. In September of last year, the Prime Minister put negative gearing and all of these other issues back on the table, and so we've been going through a very deliberative process of working through those issues and to determine what would be the impact if you were to make changes in any of these areas. That's why we haven't made an announcement on these issues because we are going through the considered process. Now our opponents failed to do that. They have put forward a policy where they are going to take one in three purchases out of the existing property market. One in three. And they think that will have no impact. They think that negative gearers, those on high incomes are driving around in flash cars, doing drive-by auction bids all around the country. It's not. It's nurses, it's teachers, it's policemen, it's emergency services workers, it's paramedics, that's who negatively gears. And that's who we back. When I say I want to back Australians in, these are the Australians I am talking about. It's mums and dads who are investing. It's people running businesses. It's people making big decisions, in companies out there that are employing more people, that's what we're focused on. We'll do the homework. We'll do the homework, then we'll make an announcement. Those opposite will just speculate something, and cross their fingers and hope it works. That's no way to manage a transitioning economy, and that's why they can't be trusted.

QUESTION:

Where are the excesses though, that's what you were asked about?

TREASURER:

Well I think I've answered the question, Peter. There is a distribution of people involving themselves in negative gearing. Some – the vast majority – 70 per cent of those involved in negative gearing, sorry, two-thirds have a taxable income of $80,000 or less and 70 per cent of them only have one property and have a net rental loss of less than $10,000. Now, if you go to the other end of people with net rental losses of over $50,000 it is about 1.6 per cent of those who engage in negative gearing. Now, that is just a simple statement of the distribution of who engages in negative gearing and obviously those who are more engaged in negative gearing have higher incomes than those who are on modest incomes. Now it is an entirely legitimate practice and the question the government works through, unlike what our opponents have done, is well if you were to make any changes in that area what would be the impact on the property market? What would be the impact on the people out there engaging in buying houses and things like this every day? So, that is what we are doing the work on, Peter. That is why we haven't rushed out there. We don't feel the need to respond to everything Chris Bowen or Bill Shorten does. The Australian people don't either I don't think. They can say whatever they like. They can put whatever crazy idea out there they like but the government will do things in a measured and considered way. Because remember this - what they are proposing is, under their plan, when you put the key in the door of a new property you buy it turns into an old property. At least one in three prospective purchasers of that property you bought have walked away. It is like driving a new car off the lot. That is what the impact is of what Labor is proposing. Now, they are free to propose it but they clearly haven't worked through the consequences.

QUESTION:

You told Dennis when he asked his question wait for the Budget for the tax policy, is that consistent…

TREASURER:

That is the back marker.

QUESTION:

That is the back marker, but you're not precluding a pre-Budget release of the tax policy as the Prime Minister was alluding to on the weekend?

TREASURER:

Well, the Government has all options available to it and I have said that is the back marker and I think that is what people expect.

QUESTION:

Treasurer, you mentioned the $50,000, have you looked at caps below $50,000, perhaps as low as $25,000 or $20,000?

TREASURER:

Well, I haven't suggested we are looking at caps at [inaudible] Dennis. That is what you suggested so I am not going to agree with the premise of your question. All I have simply said is that we have looked at the distribution of those who are engaged and they are common based facts. You can look them up yourself and work this out for yourself and you can work that through. The Government is just working through a very orderly process on this. We are not going to rush it just because Bill Shorten is impatient. He can wait and the Australian people know that we are going through a considered process and we will come to an answer that is in the best interests of the Australian economy and Australians. Why is that so important? It is so important because they are the ones who are producing the figures I am talking about today. They are the ones who are making this transition in our economy work and our job is to back them in with good decisions that support them in their efforts. That is what will always be the focus of economic policy under this Government. Thank you very much.

QUESTION:

Just one question about Pat Dodson…

TREASURER:

This is on National Accounts.