Press Conference – Mid-Year Economic and Fiscal Outlook, FBT, Defence-East Timor Levy

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1999-2000 Mid-Year Economic and Fiscal Outlook
November 24, 1999
Appointment to the Financial Sector Advisory Council
November 30, 1999
1999-2000 Mid-Year Economic and Fiscal Outlook
November 24, 1999
Appointment to the Financial Sector Advisory Council
November 30, 1999

Press Conference – Mid-Year Economic and Fiscal Outlook, FBT, Defence-East Timor Levy

Transcript No. 99/91


The Hon Peter Costello MP


Press Conference

Thursday, 25 November 1999

12.00 pm


SUBJECT: Mid-Year Economic and Fiscal Outlook, FBT, Defence-East Timor Levy


Well today I’m releasing the Mid-Year Economic and Fiscal Outlook, the fourth such

document that has been released by this Government and it is released under the Charter of

Budget Honesty, one of the great innovations in the setting of budgetary policy introduced

by this government.

The Mid-Year Economic and Fiscal Outlook revises up the Government’s growth

forecasts for the current year from 3 per cent to 3 per cent and for the first time puts

a forecast for 2000-2001, again, higher than the previous projections at 3- per cent.

Previously 2000-2001 has been 3. The principal reasons for revising our growth forecasts

up for the Australian economy are international developments. We expect the US economy to

continue strongly for there to be a pick-up in growth in Europe and for recovery in Asia.

And I think for the first time, we can say that the Asian financial and economic crisis

appears to have come to an end. That is that we lived through 1997-1998 and into 1999 in

extremely adverse circumstances. It appears now as if Asia is on the mend.

The Budget projections for 1999-2000 still show a healthy surplus. The underlying cash

balance which was projected to be at $5.2 billion we now project, we now forecast to be at

$3.4 billion. Principally the change is the cost of Australia’s commitment in East

Timor which in the current year, as you know, is about $1 billion and all of that cost

will be borne by the Budget.

 In relation to the year 2000-2001, the starting point as you know was weaker and

the cost of the amendments forced on the Government in order to secure its new tax package

were about $1.8 billion. The difference in public debt interest caused by the delay in the

sale of Telstra was about $0.5 of a billion and East Timor again in that year has a cost

of about $1 billion. The Government will be implementing, as we know, a temporary, 12

month Defence-East Timor levy to recover some part of the cost of operations in East Timor

in 2000-2001.

The inflation forecasts which I’ve already flagged in several speeches is for

inflation to be in 2000-2001 underlying around 2 per cent. That through the year, the

GST impact would be around 2- per cent, meaning that the total CPI through the year on

that basis would be around 5. The good news in relation to these forecasts is that the

Government believes that employment growth will be significantly higher in the current

year than we were forecasting at Budget time, and I think I can say for the first time we

would expect in the year 2000 for unemployment to go below 7 per cent. That is, that

Australia, we believe next year will break the 7 per cent barrier. That unemployment by

the end of the financial year will be closer to 6- per cent, which of course would be the

lowest unemployment rate we’ve had for the whole of the ten years, for the decade,

and is, I believe, a foretaste of the progress that we could make on unemployment in

2000-2001 if we keep the Australian economy growing in the way that it is, with low

inflation. We would expect to see further inroads into unemployment throughout the course

of 2000-2001 and I think for the country, psychologically, to break through a 7 per cent

unemployment rate would be very significant.

Since the Government’s come to office in 1996, over 570,000 net new jobs have been

created and, at employment growth of 2 per cent throughout the course of 1999-2000, you

would expect significant net new job increases throughout the course of the year 2000.

When our Government was elected in 1996 we set ourselves two fiscal targets. The first

was to turn the Budget deficit, which was then $10 billion in deficit, to a surplus in our

first term. We achieved that goal a year ahead of time. We achieved that after two years.

The second target that we set ourselves was by 2000-2001, to halve the debt to GDP ratio

from 20 per cent to 10 per cent. We will again achieve that a year in advance of our

target. In the current year, in 1999-2000, the Commonwealth net debt to GDP ratio will

fall below 10 per cent. Again delivering a year ahead of the target we set ourselves in


The Budget will remain in surplus across the forward estimates. It will mean that the

Government will have to take a very disciplined approach to fiscal policy to ensure that

we deliver it. The big structural reforms which the Government is putting in place now,

such as taxation reform will increase the long term growth rate of the Australian economy

and if the Australian economy continues to grow, we will see significant achievements on

the jobs front. More growth means more jobs for Australians. And the employment

opportunities in the future will be better.


Mr Costello you say that you set targets for both the Budget and reducing debt and now

you’ve met both those targets and you tell us the unemployment rate looks like its

going to come to 6- and with low inflation it can go lower. What’s your unemployment

target now that you need a new target, and when will that be met?


Well, we’ve always said in relation to unemployment that you should try and get

unemployment as low as it can possibly go. And I think there are really two elements to

creating jobs in this country.

There’s a cyclical element, which is if you keep your economy running strongly, a

growing economy will produce jobs. And I think in cyclical terms, you are now seeing very

strong results. There’s also the structural point. The structural point says that no

matter how good the cycle runs, if you’ve got a structural impediment you’ll

always have a premium of unemployment. And the structural element that we in Australia

still have to deal with are areas like our labour markets, the interaction of welfare and

work, the tax system. We are working on the tax system, we’ll be able to start

delivering on that from July next year as we take out some of the really high effective

marginal tax rates. We’ve got some significant wins under our belt on industrial

relations and the Minister is proposing as you know new industrial relations changes.

They’re things that are going to go to the structural unemployment in this country

and reduce that, and if we continue to run the strong economy, and this is a strong

economy by world standards. This is looking at 3 per cent growth in 1999–2000, up

back around the 4’s, 3 – in 2000-2001. This is a strong economy by world standards

on low inflation. If we continue to run the economy within those ranges, then we can

continue to create more jobs.


On those figures, in the tenth year of positive economic growth and having marked up

your growth forecast for this year and next year, and having added to the tax burden with

the Timor levy you end up with a budget surplus of only billion dollars. Are you

satisfied that that’s a good performance?


Well, normally after a long period of growth you would have high inflation which would

have taken people into higher tax brackets and got bracket creep and you are running in

fact into 2000-2001 with low growth, low inflation sorry, high growth on low inflation,

which isn’t producing bracket creep which is the way governments’ financed

themselves throughout the 1980s and what’s more income tax reductions, income tax

reductions. Now it’s entirely the right thing to be doing, to be reducing income

taxes. As you get your budget into a strong position and you retire debt, you can afford

to have income tax reductions. Now you said all of this with an East Timor levy, an East

Timor levy of 0.5 or 1 per cent, raising $900 million and personal income tax cuts,

cutting, what, $12 billion. So even…


… but the personal income tax cuts were in the Budget forecasts?


The personal tax cuts were in the Budget forecasts because it is only right in a period

of growth when you’ve got Commonwealth debt under control, to reduce the incidence of

income tax. Now, I often make this point, we now have debt to GDP at around 10 per cent.

If the Senate passes the Government’s Telstra proposals and the proceeds of that is

used to retire debt, in 2003 we could eliminate all Commonwealth debt, eliminate it. The

debt to GDP ratio in 2003 for Australia could be zero. Now if you’re running into a

situation where you’ve got your debt under control and your budget in surplus, I

think it’s entirely proper to have tax relief and the Government is having tax

relief. I make another point and I think this is an important point, that you don’t

want to also give away the opportunity for the big structural changes. Cutting personal

income taxes which the Government is going to do in 2000-2001 is right for all the reasons

I’ve given you, but, to use that for the big structural change of the Australian

taxation system, which is broadening the indirect tax base, is to also build long term

changes. It’s the same in relation to business taxation.

What we’re doing on business taxation, when this legislation goes through the

Senate is no short-term thing. It’s not for this financial year or the next financial

year or the year after. These are the big structural changes that we are now

accomplishing. And we are using the good economic policy to also bring about the big

structural changes, which will set this country up for decades.


Treasurer, you also say on page nine here that the refunds of individual income tax

have been much lower to date than anticipated? Why is this?


Well, it may well be that people aren’t having as many expenses of whatever it is.

But that’s just what we’re seeing from our collections, but they have been lower

than we thought they would be and are likely to remain so for the year as a whole. It

could be any level of reasons, it could be that their expenses weren’t as great,

could be, for example, that there’s better compliance going on, so they’re not

able to claim as many. There could be any number of reasons.


You’ve got the Treasury telling you 3 per cent and the Reserve Bank suggesting

that growth … could well re-accelerate to 4 per cent. Which one do you believe?


Well I don’t know that the Reserve Bank said that at all. Certainly I’ve

never seen the Governor of the Reserve Bank say that.



He’s certainly suggested it in the last …



Well you said he said it. I’ve never seen him say that at all, in fact in all of

my discussions he’s always indicated that his forecasts are very much substantially

the same as my own. And in fact when we do our forecasts we always discuss them.


Treasurer, you would have to say that 5 per cent unemployment is looking good within

three years on this rate?


Well, I am saying today for the first time that we expect unemployment to go through 7

per cent. What’s more we think by June of 2000, that’s in about 6 months time it

could be as low as 6 – per cent. And if employment keeps growing at 2 per cent, then it

would fall further. If you can keep employment growing in this country at 2 per cent you

eat into unemployment. And it would fall lower in the latter part of 2000. Now, we’ve

got to make sure that we keep the strong economy rolling, because if you keep the strong

economy rolling and you have 2 per cent employment growth, you’ll keep that

unemployment figure coming down. But there’s also another element to all of this and

that is that there will always be a rate of structural unemployment whilst we still have

inflexible labour markets.

Whilst we haven’t fixed the interaction between our labour markets and our social

security system, whilst we haven’t got the best kind of taxation system. And

that’s a second contributing factor as you start dealing with those, you start eating

into that structural rate of unemployment. So, you know 6 – per cent unemployment would I

think be welcomed by all Australians, it’s certainly lower than we’ve seen in

the last 10 years in this country, more people getting jobs is a great thing for

Australian home owners.


Are you in favour of a further round of labour market reform along the lines proposed

by Mr Reith, using the corporation’s power?


Yes, I’m in favour of a further round of labour market reforms. And I’m in

favour of a further round as proposed by Mr Reith, yes, absolutely. I will be one of his

greatest cheerleaders as he embarks upon that reform.


And what have you got in mind Mr Costello, about the interaction of the social security

system then?


Well the first part about it, we’re doing on 1 July next year. We’re changing

the shade-out rate in relation to family allowances, so that the effective marginal tax

rates go lower as you know, as you in Australia earn more income your tax rate rises and

we start phasing out your welfare benefits. Now we’re shading that down so that

families don’t have that shade-out as quickly as it currently is, so that they get to

keep more of what they earn. The second thing we’re doing is we’re getting 80

per cent of Australians, you know, most wage and salary earners in this country on a top

marginal rate of 30 per cent. So top marginal rate of 30 per cent, slower shade out for

the great bulk of Australian wage and salary earners, we’re reducing effective

marginal tax rates.


So would you like to do more since you’re implying that …..?


Well, look, I think we should always aim for the best possible policy, but I always

say, you know, let’s digest this meal before we start eating the next one. We’ve

got this to do on 1 July next year, and once we get though that, 1 July next year, we see

the benefits that that brings, maybe in the years to come we can move further.


Treasurer, you say that…..


Sorry, there was a chap behind you before we have a second.


Are you worried about the expenses side of the ledger, from my reading you’ve got

the next financial year at $5.8 billion blowout in the estimated expenses from May Budget

to this particular review now. And it appears what $879 million of that is specific

parameter variations. Are you concerned about that slippage on the expenditure side, page

47 Treasurer?


No, the principle changes are as I’ve already indicated to you, $1.8 billion as a

result of the new tax system – that’s 1.8 billion, that’s the principle amount

of it. $1 billion as a result of East Timor. Now, you say to me am I concerned about an

expense blowout of $1 billion in East Timor. Look, if go….




Well hang on I’m giving it to you. If you are going to assume your regional

responsibilities, it costs money. And I think every Australian is proud of what our troops

are doing in East Timor. You know, troops and battalions don’t get raised from

nowhere, and when they’re raised and trained and sent off to a theatre of war they

have to be properly funded, and they will be. The other large item was $500 million in

relation to public debt interest. The fact of the matter is that our Telstra sale was

delayed, it will now be done over two years rather than one. So the more debt that

you’re carrying the more public debt interest that you will have to actually bear.

But bear this in mind, I mean, when we came to Office, I think the Commonwealth was

carrying something like $90 billion in debt, and now it’s down in the 60s. So what

that means is that by reducing public debt by $30 billion, our interest bill came down

and, you know, what a position to be in if the Telstra sale went through, what a position

to be in in 2003 where your interest bill was zero. I mean, that would take your public

debt interest right out of the equation. So, you know, the big changes since Budget, $1.8

billion in relation to the tax changes, $1 billion in relation to East Timor, $0.5 billion

in relation to public debt interest.


Treasurer that’s the point of the Budget bottom line. The $3.1 billion Budget

surplus forecast six months ago did it not turn out to be a big enough shock absorber for

the tax promises that you’ve given the Democrats and East Timor. Surely you

can’t be suggesting that a $500 million Budget surplus is a big enough shock absorber

for anything unforeseen like …inaudible…happened a year …inaudible…?


Well, when we were bringing down the Budget, we weren’t putting shock absorbers in

for the defeat of our policy. You say there were shock absorbers, you know, as a

consequence of the agreement with the Democrats, let me make the point, and I’m sure

you’re aware of it. If the Australian Labor Party hadn’t voted against our tax

reform, then there wouldn’t have been any change to our estimates. The fact of the

matter is, and I make this point over and over again, if the Senate defeats the

Government’s legislation, it has a cost. That is one of the reasons I try and get my

legislation through the Senate unchanged. The Labor Party now is saying that they will

vote for business tax reform because we have a mandate.

I actually thought at the last election the mandate we got was on the GST. You know,

there we were debating the GST all the way through the election campaign and we won,

apparently we didn’t get a mandate on that, what we actually got was something we

never debated through the election – the Business Taxation Report, which Mr Ralph

delivered subsequent to the election period itself.




So apparently we got a mandate on business tax but we didn’t get it on indirect

tax. I think we got a mandate on indirect tax, and the truth of the matter is if the

Senate had accepted that mandate and passed the legislation we’d have been $1.8

billion better off. Now, one of the reasons why I do these updates is that we give you the

cost, the full cost of when we can’t get our legislation through the Parliament, and

we factor it into the Budget. And its really the combination in that one year 2000-2001 of

the cost of the tax changes, of East Timor and the delay of Telstra which contributes

mostly to the position in 2000-2001. I point out this, in 2001-2 and 2002-3, as long as we

keep and maintain a disciplined financial position we’ll be getting in a much

stronger position. And why will we be getting a much stronger position? Because the big

structural changes will now start kicking in. That Goods and Services Tax, after we get

through the implementation year, will provide a very steady source of revenue to the

States. Quite a substantial growth revenue to the States and that will secure their

financial positions as well.


Stronger growth forecast ….inaudible… gone together with the fiscal expansion

next year of $5 billion. You would have to have said that that would be a recipe for high

interest rates and markets will be down…inaudible… wouldn’t you?


No. I wouldn’t think that markets would have to do anything. They’ll make

their own judgements and their own decisions. The situation in 2000-2001 will be that our

underlying inflation will be about 2.5 per cent. And our target is between 2 and 3 per

cent, so it’s right bang in the middle of the target. I guess we’ve been spoilt

over the last couple of years, because we’ve been exceeding our targets by so much,

but that will be right bang in the middle of the target. Now, I think that it’s

important we all keep our eyes on inflation, underlying inflation. That’s what our

monetary policy is going to be directed towards, and if you want a clue to monetary policy

look at our targets and look at our inflation.


Mr Costello given that you’ve got some structural changes coming in next year and

in the year 2001 as you’ve said, and if the economy appears to grow, as you said, and

the industrial relations changes come through. Can the unemployment rate fall below 5 per



Well, look let’s, you know, let’s not get too carried away with ourselves

just yet.


How low can it go?


It can go, I believe, next year below 7 per cent. And if we keep doing the right things

in terms of economic policy it will go low further. But let’s not get carried away.


Treasurer the….


Last question please.


Treasurer, going back to the Timor tax. Do you accept that there are some anomalies

linked to the new FBT regime that will see people on cash wages below $50,000 having to

pay the Medicare Levy?


The FBT measures, the FBT reporting measures are not taken into account on the Medicare

Levy and they are not being taken into account in relation to those thresholds. That is,

those thresholds are your taxable income thresholds, they’re not the thresholds which

are made up of taxable income plus fringe benefits. The fringe benefits doesn’t apply

in relation to the Medicare surcharge as it is and we’ll be running the increase in

the Medicare surcharge on the same principles.

Thank you, thanks very much.