Mid Year Economic and Fiscal Outlook

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Address to the Canberra Branch of the Economics Society of Australia – “Policy Reforms to Strengthen the ‘New Economy'”
November 14, 2000
Mid Year Review,  Fuel,  Roads,  Employee Entitlements
November 16, 2000
Address to the Canberra Branch of the Economics Society of Australia – “Policy Reforms to Strengthen the ‘New Economy'”
November 14, 2000
Mid Year Review,  Fuel,  Roads,  Employee Entitlements
November 16, 2000

Mid Year Economic and Fiscal Outlook

Transcript No. 2000/103





Press Conference

Mid Year Economic and Fiscal Outlook

Wednesday, 15 November2000

12.00 pm



Today I am releasing the Mid-Year Economic and Fiscal Outlook for the current financial

year 2000-2001. The fifth such Mid-Year Review under this Government. And in this Mid-Year

Review, the Government revises up its growth forecasts for the current year and revises up

the fiscal outlook. This is a good news story. It illustrates the fact the Australian

economy continues to grow strongly. As the Australian economy continues to grow strongly,

unemployment will continue to fall and our budget position will strengthen.

The expected Budget outcome in cash terms for the current financial year has been

revised up from $2.8 billion to $4.3 billion, an increase of about $1.5 billion. And

we’ve revised up our forecasts for the next financial year 2001-2002 and on current

projections the Government is forecasting fiscal surpluses all the way across the forward


In particular, the Budget bottom line for the current year has been revised up from

stronger than expected revenues, particularly in the area of company tax. Company profits,

in the last financial year, were at all time records. As company profits increase, company

tax collections increase and, indeed, collections from other individuals, they are

non-incorporated individuals in business, have also grown. And revenues principally coming

out of the company tax area are up by about $4.2 billion. Expenses have increased by

about $2.6 billion. Principally, on savings bonuses, which have been paid to older

Australians who had higher than we had forecast investment income leading to higher

savings bonuses. A much greater take-up of the Government’s private health insurance

rebate, and revised treatment of superannuation. So revenues up by about $4.2 billion,

expense is up by about $2.6 billion.

There also appears to be from early returns on GST at least one one-off transitional

feature which will strengthen the situation in the current year, that is a time lag in

relation to the claims of refunds, which the Government had not estimated in its budget

position. That has the effect of strengthening in a one-off basis this particular year as

less input tax credits are paid out in the current year and payments drop across to next


The Commonwealth Government net debt is estimated to fall to the lowest level in a

decade. In its last five budgets the Labor Party ran up Commonwealth debt by $80 billion.

By the end of this year we will have paid off over $50 billion of that. We’re

5/8’s of the way there. We have nearly paid back the Labor Party run up of debt in

its last five budgets.

Employment is expected to increase in a stronger way than we thought at Budget with

strong three per cent growth in this current financial year. As you know, unemployment is

now the lowest in a decade. And if we continue to run the Australian economy at these

rates of growth, unemployment will fall further. And I would expect in the next financial

year, if we keep the current growth rates continuing, you will see an unemployment rate

with a five in front of it, which would be the lowest unemployment in 25 years.

The current account deficit is expected to significantly improve over the course of

this year as exports grow and most of the increase in growth that we’re forecasting,

such as it is up from 3- to 4 per cent will come out of the export area.

Can I just make one point in relation to revenues because I know there’s been a

lot of talk about this. As the price of petrol goes up, the excise take does not increase.

A very important point to make. Excise is a flat cents per litre and as the price goes up,

excise does not increase. In fact, you’ll see in these Budget papers that because

volumes, sales volumes, are going to be less than expected at Budget time, the actual

excise taking has been revised downwards in these Budget papers. It is true that the

petroleum resource rent tax goes up as the price of oil goes up. You have figure in these

Budget papers, I believe, of about $480 million. But that is a tax on the super profits of

oil companies. That is, as oil companies make higher profits, the petroleum resource rent

tax kicks in. It’s like a super profits tax and it raises more. But the Government

does not take more from excise. In fact, as you’ll see in these particular figures

the excise take has actually been revised downwards because of the expected lower volumes

of sales as a result of the price rises. Where the revenue increases have come in this

particular update is out of company tax from very high company profits. Sure there is a

contribution from the super profit tax on the oil companies as well because they are in a

profitable situation at the moment but what we are seeing now as we reduce our debt, as we

strengthen our economy, as we get more people back in work, the Budget starts

strengthening itself. More people in work, more income tax, less unemployment benefits,

the reduction of debt, less interest payments, and a strengthening fiscal position as we

continue the good work of economic reform.


Treasurer how come surpluses in the outer years say years three and four (inaudible)

are revised down? Is there a particular reason for that?


Well in the forward years outside next year we put in projections and the projections

for growth that we’ve got in the forward years are 3 per cent. The changes I think

are largely in relation to classifications. They’re certainly not changes in relation

to policy decisions which have not had a big impact on all of these matters. But, and I

make this point over and over again, you’re looking out in the forward years, these

are projections based on standard parameters and no policy change. They are what would

happen if nothing changed. Now we put them out there to give you an idea as to what would

happen if nothing changed. We certainly don’t put them out as a forecast of what the

outcome is going to be in 2003-04. The only forecast that we put out for what an outcome

will be is in relation to the current year.


Treasurer what’s the use for this mid year review without the impact of the GST in

its first quarter?


Well it has the impact of GST in it. The revenue estimates in relation to the GST are

continued in accordance with our best forecasts. We have made one significant adjustment

in this particular year in relation to transitional factors which we have now noticed.

Which we have now noticed. They are transitional factors which we believe we can identify

on the monthly returns. Now to date in relation to GST we have the monthly return of July,

August, September. The October return will be coming in later this month. But in relation

to quarterly returns which is the bulk of returns, we do not yet have one complete return.

The return date as you know is 11 November, last Friday, but for those lodging through

agents, agents were only required to have 50 per cent of their returns in by Friday and

have until the end of this month. So you have not yet got the first quarterly return in

which is the bulk of the return. So we, we can’t say what revenue we’re going to

get off the quarterly returns and the best advice to me is even off the back of the first

quarterly return you wouldn’t have a clear idea. You’ll have a clearer idea of

revenues involved at the end of the second quarterly return so probably some time in March

of next year, is when you’ll have a clear idea. So apart from the transitional

factors which we noticed off the monthly, for which we’ve made allowances, we have

continued the revenue estimates and in accordance with those that we’ve forecast off

the economy wide economic parameters, and I have no reason to believe that there are any

more accurate numbers that could be put in.


Treasurer, a large amount of the, a large part of the billion dollar increase in

company tax collection last year, the unexpected increase, came from the windfall of

obligations that were expected to have been paid in the next financial year this year, how

much will that one-off effect simply shifting the timing of payments is incorporated in

the increase in company tax payments that you’re forecasting this year?


We made a small allowance in this year for the higher than expected base from which we

started. That is you have a base, an outcome of last year and you look at what’s

happening in relation to growth and profits and you work off that base. So if your base is

higher it always has an effect. But we have tried to as best we can adjust for all the one

off factors and take one off factors out so that that number will be as robust as

possible. One of the reasons why you have this disparity between cash and fiscal is that

as we are moving our accounting system from a cash base to an accrual, you include in the

accrual basis liabilities which have accrued but have not yet been paid. Now and

that’s the real reason for the big difference between the fiscal balance and the cash

balance. Until that completely washes out of the system, which I think will be at the end

of next financial year I will keep referring you to the cash balances as the best measure

of what we’ve historically known of Budget outcomes.


Treasurer, what proportion of this surplus will go in debt retirement?


Well, well I’ve made this point many times before – but where you have a

surplus, the only thing you can do is retire debt. This is a very important point. The

surplus is when you get to the end of the year and you’ve got all your money in and

you’ve paid all your money out, what is left over. And what you do is you book that

to the bank. If you owe money you pay down your debt. If you didn’t owe money

you’d build up a credit position. People who say well why don’t you spend the

surplus are basically saying don’t return a surplus. A surplus is what’s left

after you’ve finished your expenditures. So if somebody says well spend the surplus

on this, this, this and this, at the end of the day that is not a surplus. It’s been

spent. A surplus is what’s left after all of the spending has finished. So if

you’ve produced a surplus, the only thing you can do with it is to retire debt. If

you spend it, it is not a surplus. We’ve got to change our whole way of thinking on

this. So the outcome of what we raise over and above what we’ve spent will be booked

to the bank. Be booked to the bank. Either to retire debt which is we have a big debt

position, or if you didn’t have debt and there are a few countries in the world that

are in that position, you build up an asset position.


So Treasurer, will you be insisting that your other Ministers find savings to offset

their new spending proposals so that aside from any variation on growth which is the other

variable, that those projected surpluses that you have published today will actually come

to fruition?


Oh well, if you’re asking me the approach that I’ll be taking to next years

Budget, I promise you that I’ll be taking an approach which will be consistent with

good fiscal management. Yes I will, but will I be announcing what I expect the outcome of

next years Budget to be today? No I won’t. What I’m giving you is what I believe

on all of the advice given to me will be the outcome for this year. And it will be, I

believe, a healthy surplus which is consistent with our financial management.


Treasurer (inaudible) is it good fiscal management to keep building up growing

surpluses over time so you know in a few years time $8 billion, a couple of years time $8

billion, a couple years time after that $14 billion, is that good fiscal management to

keep building up massive surpluses over time?


Well, I know people will look at the forward projections and see these large numbers

out there in 2003-04, but I keep on making this point. That is what would happen if the

economy kept growing at 3 per cent and not an iota of policy was changed anywhere. Now

we don’t fix in stone our Budgets four years in advance. What we’re trying to do

with those projections is to show you where we would be. We fix our Budget for the

particular forthcoming year. This particular forthcoming year we’ve fixed our Budget

so that we’ll return a healthy surplus. Can I just make a larger point. I mean what

is the purpose of a surplus Budget? This is an interesting point, I think there could be

three purposes for running a surplus. The first is if you thought you had runaway demand

in an economy you might try and use fiscal policy to dampen demand. I don’t think

we’re in that situation. Secondly if you had a bad debt position you’ve got to

run a surplus to try and pay down your debt and we had a debt blowout under Labor of $80

billion and we’ve now paid off $50 billion of it. So that’s one of the reasons

we’re running surpluses, to strengthen our debt position. The third reason why you

could run a surplus, and this is more in Australia’s case, is if you have an

imbalance between investment and saving which is measured in the current account, if the

Government contributes to savings, the Government to the extent that it contributes to

savings improves the current account. Now we have an improving current account. It’s

going to be improving this year. We think back into the low four per cents. And the

Government is doing its bit by building savings. If the Government were running deficits,

the current account deficit would be that much worse because the Government would be

calling on savings rather than building savings. So I think the most important reason for

a surplus at this time, is so that we make a positive contribution on the current account

and the subsidiary one is to get our balance sheet back into order. I mean wouldn’t

it be a wonderful thing if we had no Commonwealth debt.

When I became the Treasurer, every year we had to raise $9 billion of taxes to service

our debt. And if we had no debt, that would mean $9 billion less in taxes was required, or

if you wanted to look at it another way, you could have the same taxes and $9 billion of

more spending on health or education.


Given that you’ve got these economic forecasts which are for a strong economy next

year and you’re projecting a strong budget position, do you think the

Government’s in a position to boondoggle the bush with road projects?


Well obviously I would never use the word boondoggle, which I think was a terrible

insult to country Australia by Mr Beazley who apparently thinks that roads that rural

people need to use are an irrelevancy.

What the Government has said is that it believes that it has the capacity to improve

road infrastructure. Not just in rural Australia, but in outer-metropolitan Australia as

well. And I think well targetted and prudently run, that would be a good investment. And

anybody who says that’s an irrelevancy as Mr Beazley does, I think is completely out

of touch with Australian sentiment.


Treasurer, just picking up your analysis on excise and the price of petrol. Isn’t

it true however that GST increases as the price of petrol increases? And is it not also

true that the adjustment for excise takes into account increasing or higher inflation, and

…inaudible… prediction here today are for increasing inflation, therefore the

excise will go up, therefore the relief that many people are demanding is receding further

and further back.


Well I want to make a number of points about this, if I can, just to go through it bit

by bit, because I think a lot of concepts are run together in the press and there are a

lot of interested lobby groups who have an incentive in running them together.

First point. The petrol excise is about 38 cents a litre. And the Commonwealth

guarantees about eight cents a litre to States. As the price of petrol goes up, that 38

cents a litre does not change. If the price of petrol were 50 cents, it would be 38 cents

a litre. If it’s a dollar, it’s 38 cents a litre, if it’s a $1.20,

it’s 38 cents a litre. An excise is cents per litre. It is not ad valorem, right. It

doesn’t move in accordance with price. Now there’s a lot of people who say the

price of petrol has gone up, you’ve got more out of excise. That is not right. Excise

is the same.

The second point you come to, you make this point. Oh well, GST is a tax on value, it

is an ad valorem. So GST must go up as price goes up. That was the second point that you

made. And by and large, GST is about 1/11 of the price. Okay. The truth of the matter is,

in relation to consumption is, the GST revenues overall relate to total consumption. It

maybe true that if consumption increases in one area of the economy, GST there might

increase, but that’s because people have switched spending from another area of the

economy, where proceeds have fallen. When you look at GST revenues, it’s overall

consumption. And there’s a lot of people that say if consumption has gone up here or

if value’s gone up here, you must have got more there, but you’ve probably got

less over here as well. The consumption is the same. If I’ve spent more on petrol, I

may have spent less on entertainment. And the ad valorem tax works off the overall value

of consumption. That’s the second point.

The third point which you raise is in relation to indexation. Yes, it is true that

because excise is not ad valorem, because it’s constant whilst prices move up, if you

didn’t index your excise, the tax to price would fall as a percentage. Quite

different to the income tax. The income tax is 20 per cent – as wages go up, it is always

20 per cent. If it’s a fixed cents per litre, as price goes up, it would fall as a

proportion of price. Which is why in 1983 the Labor Party introduced indexation. The

legislation which we have never touched which is governing all future movements. Now,

nobody seemed to be all that concerned when inflation was eight per cent, that was the

index of petrol was eight per cent per annum, it’s only once we went to a low

inflation world and we got used to one per cent that this argument came up. Now what is

the GST effect on the indexation. We’ll give you the rough figures. We think the GST

effect in the September CPI quarter was less than three per cent. And once the whole new

tax system has washed through the system, will be less than two per cent. The effect on

the indexation would therefore be two per cent of 38 cents. Two per cent of 38 cents,

which is roughly, what, about point eight of a cent. These estimates that have been

flowing around, it’s the CPI effect on 38 cents. And by the way, you’d have to

take it both ways, if you want to take it when the new tax system adds to inflation,

you’d want to take it out of the indexation factor, what about when it detracts?

Should we take that out as well? You’ve got to get these things in perspective here.

There is a belief around, I know I’ve said this several times, there is a belief

around that excise goes up as price goes up. It doesn’t. That is a misconception and

I think it’s been to some degree it’s been in the press, but also of course,

there are some of the Automobile Clubs that have pushed that line. It’s not the case.


Treasurer, would you like to see further round of income tax cuts next year?


Well, obviously I’m not going to talk about next year. And, you know, the

balancing act that we have is the following. One, we want to maintain strong fiscal

position. Two, we want to invest in important things. And three, we want a low tax regime.

Now, if you gave away any one of those, you could do the other two. And if you gave away a

responsible fiscal position, you could have low tax and more expenditure. If you gave away

low tax, you could have a responsible fiscal position and a lot of expenditure. If you

gave away responsible expenditure, you could have a good fiscal position and low tax.

It’s that you want to hold the three of them in creative balance that is the art.


Is that the order?


I think, I must say, I’ll say one thing, I think a responsible fiscal position is

a number one priority for this Government. Yes it is. We’ve made that a hallmark. We

came to office, the Budget was $10 billion in deficit, Commonwealth debt had blown out by

$80 billion in five budgets, we said over a three year period we’d get the Budget

back into balance, we did it in two. We said over a four year period we would halve the

debt to GDP ratio, we exceeded that. We’ve set Australia into a strong fiscal

position and we’re not going to let that go. We are not going to let that go. Along

the way we have managed to reduce taxes. In this year, 2000-2001 in net terms is about a

$5 billion tax cut.


Treasurer, would you support the French buying the Ranger uranium mine? And if I could

also ask, why should …older unemployed mow lawns.


Well I have no current knowledge of French proposals to buy Ranger uranium mine, and if

there was, it would be put into a foreign investment application and would be handled in

accordance with the national interest. And we never really comment on these things in


You’re probably referring to that AAP story which was picked up in The Canberra

Times today. Look, I gave the Higgins Memorial Lecture last night. I think I had some

very serious things to say and I think the AAP wire missed all of them. And what I was

asked was about the need for retraining and reskilling which I said was important lifelong

business for all employees. I also made the point that as our economy is increasingly a

services based economy, a lot of the employment opportunities, the new ones, are in

services based industries. And even though I think employment has not declined in goods

making industries, the fact is that employment has increased in services based industries

and people are moving out of goods production into services. That is the point I made. And

there have been 800,000 new jobs since the Government was elected and most of them in

services. I thought it was a serious point that I made. But obviously it was lost on the

AAP wire.


Treasurer (inaudible) revenue windfall from the GST and haven’t you deliberately

held this statement well before the end of the year and indeed before the finalistion of

the first quarterly return so that you don’t have to tell us how big that windfall is

going to be?


No, I have released the November Mid Year Review…


You normally release it in December…


Well last year I released it in November.


Late November then.


Late November is not normally December in my book.


Well why is it just four days after the recent return.


It may be in your book. We bring down a May Budget and I try and after 6 months update

it with a November Mid Year Review. I think I’ve said to you, you wouldn’t have

the analysis of the first quarterly returns I don’t think until Christmas at the

earliest and the best advice to me is that even with the first quarterly returns

you’d want to see a second one before you could get any meaningful fix. And the best

advice to me is we will have a pretty meaningful fix on GST revenue after we’ve had

time to analyse the second return which from memory is due in at the end of January I

believe. Although accountants will have late lodgement and we will have a fix in March or





Now hang on, what was the other part of your question which I also violently disagreed

with? Anyway look we do these things in November. And we put in our best estimates. There

it is. Let me show you what the Mid Year Review was before I became Treasurer. That. It

was, that was Ralph Willis’ Mid Year Review in January of 1996. That was it. Two

pages with the famous statement, that the Budget, and that was January, he used to have

August Budgets, right, and then 6 months later, as it was the case 5 months later in

January he put out a Mid Year Review with the famous forecast of $100 million surplus.

That was it. Now these things honestly in years gone by that would have been considered a

Budget. The, you know, we are now almost doing two Budgets a year and that’s my fifth

one and you know, it dwarfs that with all due respect.


Where is the additional roads funding included in this?


When an announcement is made in relation to roads funding, can I say what’s

included in this is every policy decision that the Cabinet has made including, and

you’ll find this in the text, provision for the Defence White Paper, because the

National Security Committee has made that decision and the financial implications of that

are included in the bottom line. This statement includes all decisions of the Cabinet or

it’s sub committees on all measures to date. The Cabinet and it’s sub committees

have not taken a decision on the amount of road funding and when that is done and

announced you should just subtract that off the $4.3 billion projection.


Treasurer, the assumptions of Treasury…


Well the Defence number has been allowed in here, but the amount has not published,

because the amount has not been actually formally announced. I have seen speculation but I

believe, oh I’d love to announce it but I’d probably have a very stroppy Defence

Minister on my back saying that it’s not my job to do it.


Treasurer, the Government’s underlying asumptions here seem to be far more

optimistic than business, Australian business, and therefore projections on unemployment

for one would also seem to be similarly optimistic.


I don’t know. Look these are judgement calls. We said 3 -, we’ve increased

it to 4. Why did we increase it to 4, well because our exports are going to be very strong

in this financial year. The world economy is strong. We’ve got a, an opportunity

because of other factors to sell our exports. Our export growth has been very strong and I

think we forecast here that exports of goods and services are going to grow by 9 per cent.

Exports are going to contribute to growth for the first time since the Asian financial

crisis. And that is going to be a very strong impetus for Australia. Now you keep your

economy growing above 3 and between 3 and 4, you get employment growth at 2 per cent or

above, you take a percentage point off the unemployment rate a year. Broad rule of

thumb, 4 per cent growth, 2 per cent employment growth, percent off the unemployment

rate. 1996 unemployment rate 8 per cent. Four years of 4 per cent growth, average 2 per

cent growth, per cent off a year, 2 per cent off, we’re down at 6 . If you can

keep the economy growing above 3 between 3 and 4 for another year, you’ll take

percentage point off. You will be down in 5 territory. Now can we do it? Well we’ve

come through thirteen consecutive quarters of plus 4 per cent growth. Can we, can we do it

for another couple of quarters? Well I hope we can. Because if we do we’re holding

out the prospects for people who want to work in Australia to be able to get jobs.

Unemployment rate is the lowest in a decade. If you take it through 6 per cent it becomes

the lowest in 25 years. And these are really worthwhile goals to strive for. We got the

Budget back now where it was 30 years ago. We’ve got the debt position back where it

was 30 years ago. We’ve got inflation back where it was 30 years ago. We’ve got

a productivity much higher than it has been at any time during those 30 years and if you

could get the unemployment back to the kind of lows that we only experienced 30 years ago,

that would be a great thing for Australia.


In that last campaign you ridiculed repeatedly the idea of a 5 per cent unemployment

figure even over two terms. Weren’t you a little pessimistic or opportunistic in



No I ridiculed the Labor Party’s claim that they could get unemployment to 5 per

cent. Which I didn’t believe and I don’t think they believed. And it was a claim

that they persistently made all throughout the period when they had unemployment at 9-10

and 11. And they did not have one whit of economic policy which could have produced

outcomes like this. Outcomes like this have come off a balanced Budget, the repayment of

debt, low inflation, labour market reform, tax reform, every element of which was

opportunistically opposed. And the really interesting question would be if we extrapolated

all of those things out, what the unemployment rate would now be. It would probably, I

mean the Labor Party, it wasn’t that they weren’t trying on unemployment, they

really were they just had the wrong prescriptions. And they were trying and they got it to

8 per cent. But you needed the right prescriptions to take it down through 8 per

cent and the right prescription was not running around saying I’ve got a target,

I’ve got a target, I’ve got a target. What we needed was we needed action. And

you know this is, we have had to fight very, very hard. All of our measures to get the

Budget back in balance were opposed by the Labor Party and don’t forget that. They

said if you balanced the Budget you would bring on a recession. That’s what they

said. They said if you reformed the taxation system people would lose their jobs. Now we

fought every step of the way. We won and we are starting to see some of the results. But

I’ll make the same point again, if we gave up the game now, we could lose some of the

benefits. So let’s keep trying. Thank you all very much for your time. Thank you.