Press Conference

Parliament House, Canberra

Wednesday, 1 March 2006
11.45 am

SUBJECTS:

National Accounts December Quarter, NSW economy, GST, company profits, savings

TREASURER:

The National Accounts released for the December quarter of 2005 show solid economic growth of 0.5 per cent for the quarter and 2.7 per cent for the year. Growth is being led by very strong business investment. Household consumption continues but at moderate levels and dwelling investment is actually subtracting from growth. Our national income remains very robust and is

5.2 per cent higher through the year. A large part of this is the increase in the terms of trade which are now at their highest levels since 1974. But business investment in the Australian economy is very strong. New private engineering construction which was up by 7.1 per cent in the quarter is now 29.8 per cent higher through the year. Machinery and equipment investment; 15.8 per cent higher through the year, and mining capital expenditure has grown 68.4 per cent through the year to December 2005.

Household consumption growth is moderate, running at around 2.9 per cent through the year and spending on dwelling investment actually fell. Inflation remains moderate. And so the picture that we see of the Australian economy is coming off a very rapid increase, in housing values, which supported very strong growths in consumption. We are now seeing a moderation. It is a moderation which the Government welcomes. It is a moderation which continued through the course of 2005. The growth is now being taken up by business investment. Business investment will increase the capacity of the Australian economy, and business investment is particularly strong in that area of the economy, the minerals area, where prices are as high as they are today. This is actually a welcome switch in the economy from housing and consumption into business investment and that investment will lead an increase in exports over the course of 2006 and that investment will increase the capacity of the Australian economy. It would be a big problem for us if this very strong terms of trade increase was to work out in inflationary forces. To date, inflation remains moderate. But we cannot afford to be complacent about that. Not only do we have a terms of trade increase we have record levels of oil prices and as I have warned before it is important that we do not get second round effects out of the increase in petrol prices which we see at the bowser. So a re-balancing economy continuing with solid economic growth. We will not relent in ensuring that we have good strong economic management, but the prospects for Australia are strong.

JOURNALIST:

Mr Costello, do these figures suggest given the surge in business activity that we can not really afford to have a resurgence of household consumption over the next 12 months?

TREASURER:

Well, we would like to see moderation continue in the housing cycle and in relation to consumption. I think the two are quite related actually. I think the fact housing prices increased so much in the late part of the 1990s and the early part of the 2000s meant that people who were sitting on this accumulation of value in their home and equity felt much more confident about borrowing against their rising house prices and consuming. Now, I warned over and over and over again that we didn’t want to see an overheated housing cycle. And you have got to say to date the moderation in house prices and in the housing cycle has been as good as anyone could have hoped for. What we are seeing on the back of that is a moderation in consumption too that is a welcome thing we wouldn’t want strong unsustainable consumption to start off before its time again.

JOURNALIST:

(inaudible) Governor Macfarlane’s suggestion the other day in front of the House Economics Committee that we are entering a period where growth is smaller I think 2s and 3s than the 3s and 4s of the past because of essentially (inaudible) up against and capacity constraints and using up all the slack as we came out of recession in the last 14 years.

TREASURER:

Well the growth is 2.7 per cent but what we see in these figures is the building capacity and you are quite right that the long economic cycle I think we have used up the un-used capacity and now we are building capacity and when you see figures, particularly in mining, capital expenditure an increase of 68.4 per cent this is truly amazing. And when you see new private engineering construction, now a lot of that will be in the mining sector but a lot of it is not too, a lot of it is in roads for example, the Government’s road building programme that is going on at the moment. Roads like the Western Sydney (inaudible), these are big engineering projects that are now increasing the capacity of the Australian economy.

JOURNALIST:

Mr Costello, what is your reaction to New South Wales economy, is it teetering on a (inaudible) recession?

TREASURER:

Well, New South Wales has been lagging the national growth rate over the course of the last year. I think that principally the reason why it has been lagging is that they road a housing boom right up and we are now seeing a correction in the housing market. A lot of that growth in New South Wales was based on house prices when the correction came it was always going to be a larger correction in New South Wales. And this is the point I made at the time, that that run up in housing prices was not going to be sustainable. State Governments made financial decisions based on what would be a passing phase assuming it would be permanent they would make a big mistake that is the point I made at the time. If you assume that the run up in house prices was going to be permanent, that you could use it for your tax base, that you could use it for your growth, then you weren’t factoring the fact that markets correct and this is the point I also make about the terms of trade. Now, I am the person that is making the point over and over again that the terms of trade will not be permanent, they are the highest at the moment we have had since 1974 but don’t assume they are going to be there for 10 or 20 years.

JOURNALIST:

(inaudible) New South Wales, do you see it going further (inaudible) backwards?

TREASURER:

Well, New South Wales has been lagging the growth rates of Australia generally and of other states and the reason for that is that the correction particularly in the housing market has been stronger in New South Wales. Why is the correction stronger? Because the increase was stronger. What we know about markets is the higher they go generally the larger the correction becomes.

JOURNALIST:

(inaudible) technical recession?

TREASURER:

Oh look, I am not going to use the R word, I will just make this observation. New South Wales has had a growth rate which has lagged the Australian average and that is because of the correction principally in property markets.

JOURNALIST:

(inaudible) New South Wales, what is your response to the State Premier Iemma who has launched an attack today on the carve up of the GST describing it as corrupt.

TREASURER:

Well, he should speak to his fellow premiers. No, let’s make this point, the GST is producing more money for each state than they ever expected or were ever promised.

JOURNALIST:

He says they that they are robbed, New South Wales.

TREASURER:

No, but the point is this, that he is getting more than he was ever promised or expected, he says others are getting even more than I am getting in my increase over what I was promised and expected. You know, the cake is bigger and my slice is bigger but somebody else’s slice is even bigger than mine and this is an argument that he must have with his fellow premiers and I would recommend that he speak to Premier Beattie and Premier Carpenter and the other Premiers and push his arguments with them. It is not a matter for the Commonwealth, the Commonwealth doesn’t get any of this money at all.

JOURNALIST:

Treasurer, (inaudible) on Sunday you used the analogy of a birthday cake, you described the states as siblings and I think you posed yourself as the Mother (inaudible). I don’t know what sort of family you grew up in but in my family (inaudible) the other siblings didn’t expect (inaudible) work out an equal share of the cake, (inaudible) should get involved?

TREASURER:

Well, you know, these are grown men as it turns out and I think it is realistic to expect political leaders to deal with these issues. You know, the suggestion that you can be elected the Premier of a state but you can’t be expected to negotiate allocations of revenue is not one I would endorse.

JOURNALIST:

Mr Costello, the corporate profits were quite strong again, would you (inaudible) Budget?

TREASURER:

Corporate profits?

JOURNALIST:

Yes.

TREASURER:

Well, corporate profits are strong and that means that company tax receipts are strong as they have been in the last year and the year before that. Now, this is actually a good thing for Australian taxpayers that quite a deal of weight of the tax system has been picked up by Australian corporates. I sometimes hear Australian corporates say, oh, well corporate taxes are high as if the Government has put tax up. No, the Government actually cut tax, we cut tax from 36 to 30 per cent, it is just that the profits have been so strong that the 30 per cent rate has actually produced very strong revenues. Now, of course if company profits turn down again so too will company tax collections.

JOURNALIST:

When you warned of that danger of a similar terms of trade will sustain these historic high levels and are making decision based on that wrong assumption, what sort of policies do you have in mind that we shouldn’t (inaudible)?

TREASURER:

Well I will just make the point that in financial terms because we have very strong terms of trade that is in particular pushing up company profits in particular sectors which is generating strong revenues. Now, we can’t assume that those profits will be high in perpetuity, that the receipts will be high in perpetuity and make financial decisions to spend what could be a passing benefit from terms of trade on a permanent basis. We have got to be very careful about this. Terms of trade booms have got Australia into trouble in the past. Managing a terms of trade boom is actually quite a tricky business.

JOURNALIST:

Treasurer, household savings remain (inaudible) negative, how much is (inaudible) concern is that that Australians are obviously spending much more than they earn and if (inaudible) 3 per cent GDP growth (inaudible)?

TREASURER:

Well, we forecast 3 per cent through the course of the year. You would have to say that although it is still within the range we are probably under the range at the moment. I am not going to be revising any figures but you would have to say on the figures that we have had in the first two quarters we are probably just a whisker under the range that we put there in the mid year review we certainly won’t be over and it would have to be exceptionally strong two quarters to actually get there by the end of the financial year. Your other question was I’m sorry.

JOURNALIST:

Household savings ratio.

TREASURER:

Well, household savings ratio improved a little bit, it is not strong. One of the reasons for that is the way it which it is collected. The publication itself warns about the methodology that is involved, what I would say about the households savings ratio is I think people have reduced their consumption somewhat in the last two quarters we can see that in the consumption figures, we can see that in the housing figures and I think people have been a little more careful. I think they are starting to put a little more aside that is something that I would welcome and I would actually encourage.

Thank you all very for your time, thanks.