18 December 2017
Transcript - #2017253, 2017

Interview with Yousef Gamal El-Din, Bloomberg

SUBJECTS: MYEFO 2017

YOUSEF GAMAL EL-DIN: 

Thanks for your time Treasurer. Let’s kick off then with wage growth, or the lack there of, you’ve shaved a quarter of a point off your forecast through the forward estimates, would you say that you’re still being a little bit over optimistic?

TREASURER:

No I wouldn’t say that, I mean we look at this every six months of course but what’s been happening in Australia over the last five or six years is the mining investment boom and the impact on the terms of trade, commodity prices and so on has sort of dislocated what you’d call normal transmission in the labour market and with that now passing through the economy we’re expecting the more normal relationship in the labour market to come back into action. And that would mean as the labour market continues to tighten we’d expect to see stronger wage outcomes out over the next four years. The other part of this was of course in the September quarter we had some low consumption figures and that’s fed into our forecast but overall we’ve got an improvement in the budget position and that has largely come because of our lower payments we’re expecting because of the strong reforms we’ve put in in the welfare sector and keeping welfare spending under control.

GAMAL EL-DIN:

Why has there been such little movement and improvement in pay packets? You look at some of your peers in the US and the UK and in other places around the world and yet the unemployment rate is lower there, why is Australia a little bit different?

TREASURER:

Well for the reason I just said and that has to do with the impact of the mining investment boom on the labour market in Australia and the split out between producer and consumer wages and that was also impacted by exchange rate impacts which meant that consumers for a long period of time were able to realise wages that were really paying well above where productivity was at. Now some years later now as that impact works its way out of the system we’re seeing those two lines of producer and consumer wages coming back together in a sort of normal transmission on wage market outcomes starting to prevail.

GAMAL EL-DIN:

You’ve got corporate profits that are being swelled by higher commodity prices, are you being conservative enough given the volatility we often see in those commodity prices?

TREASURER:

Well we de-risked the Budget on our commodity price forecasts several years ago and nothing in today’s update on our Budget has really anything to do with what’s happened on commodity prices. We’ve been extremely conservative on both iron ore and metallurgical coal and so on which has you know an understandably big impact on things in Australia given our resources focus, but we factored that in some time ago. Our Budget has a free on board price of 55 on iron ore for example and it’s closer to 60 today. So we’ve de-risked the Budget around those issues and what you’re seeing in our results today is an improvement in the overall economy in Australia and it comes out of the mining investment boom. I mean non-mining investment is forecast to be up 5 per cent, most recent September quarter accounts had non-mining investment and private investment up 7.5 per cent, public investment up 12.5 per cent, so it is a very much investment driven story in our economy at the moment.

GAMAL EL-DIN:

The Prime Minister has foreshadowed efforts to lower some of the personal income taxes, it would be a huge shot in the arm for households how realistic a goal is it though?

TREASURER:

Totally realistic, I mean that’s what we’re now focusing our attention on we want to put more back in the pockets of households of middle incomes especially in Australia and that’s the focus of our efforts between now and going into next year and that will be done while at the same time not putting at risk our AAA credit rating which we’ve continued to maintain in what has been a pretty challenging environment and one of the few economies that has been able to maintain that and key in that is just making sure that our expenditure is under control, that we’re maintaining our trajectory back to a Budget balance in 2021, which is now forecast to be up over $10 billion, we were having this conversation a year ago that same year ago it was forecast to just over $1 billion so there’s been a real improvement over the year and a lot of that has come in in just the last two years.

GAMAL EL-DIN:

The RBA has been on hold with rates for a year and a half, as you look to the road ahead how much tolerance do you sense Australians have for higher rates?

TREASURER:

Well right now I don’t think there’s any risk of that being realised so it’s obviously a decision for the independent Reserve Bank here in Australia. One of the things we did earlier in the year was again de-risk the environment particularly around the housing markets in Australia. We had some pretty hot markets in Sydney and Melbourne and there was a lot of sort of peak investor interest which was driving that because of the supply demand imbalance in those two big cities, now we changed the rules around interest only lending and that’s taken a lot of the heat out of the top end of those markets which means they’ve come back to a much more of a soft landing and that’s been de-risking I think the housing market fairly significantly in Australia so I think that is has proved a more stable place for us going forward. And I think for rates more generally, the cash rate, it means that there is no real pressure on the  cash rate to deal with housing market shocks because we’ve been able to have a very calibrated policy response which has got us into pretty smooth territory.

GAMAL EL-DIN:

The US dollar has been going from weakness to weakness so as you look to 2018 again are you going to get a relief on the currency front, the weaker Aussie dollar that sounds like exactly what you could use right now?

TREASURER:

Well, that has happened a bit of late we don’t wake up every morning and make all of our decisions based on where its trading on that particular day of course you take a bit of a longer term view on these things. But one of the big issues when we’re looking overseas at the moment is what’s happening with corporate tax rates I mean it’s not just the Trump tax cuts which we all think is not that far away, but I mean the French government, the UK government here in our own region we’re seeing similar types of movements, even the Japanese government has been, the Abe government has been making some noises. We’ve got our own response to that with our enterprise tax plan which would see corporate rates come down to 25 per cent, we’ve got half of that through our parliament and we remain very committed to getting the other half through.

GAMAL EL-DIN:

You’re the first Treasurer, I’m looking here at the statistics, in a long time to enjoy better revenue than forecast, how confident are you in the outlook for 2021 in terms of achieving the surplus that you desire?

TREASURER:

Well it’s a projection but I think it’s a very sound projection and it’s improved over the past two years. One of the reasons I think we’ve put ourselves in that position is we’ve just been very sober when it comes to the forecasts we’ve made. I mean several years ago when I became Treasurer I just took some difficult calls about de-risking the Budget on forecasts and we’ve continued to do that and I think that has been well received I think by the ratings agencies and people looking in on the Australian economy that the numbers that they see are real, they’re credible and the Government has a clear plan to return the Budget back to balance. We’ve had five budget updates now over that period and all of them have maintained a projected balance back in 2021 and that balance has only gotten stronger over that period.

GAMAL EL-DIN:

If you could choose one key risk for 2018 that could derail some of your forecasts, something that, well I’m not going to say keeps you up at night, but makes you a little bit nervous for 2018 what would it be?

TREASURER:

Well, there are the two issues that we always have to manage here in Australia and as a big trading nation China is our biggest trading partner but I don’t think there are any real sort of short to medium term risks there that would make us overly anxious, we maintain an outstanding relationship with China our biggest trading partner and we continue to work that relationship very practically. On top of that I think we’ve already been getting ahead on managing the risks in our housing sector which I know from overseas there’s been a bit of interest in that but over the course of this year I think we’ve got that and I think the overall level of household debt, which is fundamentally about housing debt, we’ve got that under control as well. We’re seeing a real shift off the interest only back to principal and interest loans, people are converting across and I think that’s de-risking the market.

GAMAL EL-DIN:

Scott Morrison, Treasurer of Australia, thank you very much again for joining us on the program.