Transcript No. 98/71

Hon Peter Costello MP

Press Conference

17 December 1998

12.30 pm

E&EO

SUBJECTS: Mid Year Economic and Fiscal Outlook, tax reform

TREASURER:

(Inaudible Sound and Vision technical problem). region we have managed throughout this crisis to outperform most of the world. These forecasts, done on calendar years, show in calendar 1998, according to MYEFO growth, of something like four and a half per cent. Similar to forecasts for Consensus forecasting. The OECD report in November had calendar year growth a little lower and the IMF a little lower too, most probably taking into account the last quarters national accounts both of those would have been higher up about these marks. Translating our forecast for 1999/2000, a forecast which we release for the first time today into a calendar year, again youre comparing it with Consensus, the OECD and the IMF, you see continuing strong growth for the future year.

The growth that we put for 1999 forecast, our first forecast for 1999/2000, is for growth to be strengthening throughout the year and for growth by the end of the year to be three and a half per cent in through the year terms, which would be by June of 2000, but averaging two and three quarter per cent throughout the 1999/2000 year. Just to give you some international comparisons as to how that compares, again on a calendar basis not on a financial year basis which is in the Mid Year Review, 1998 shows Australia growing substantially stronger than US growth, OECD growth, Japan now in serious recession if not depression, and troubled Asia, which is Korea, Thailand, Indonesia and Malaysia, showing contractions of near eight per cent.

The impressive performance of the Australian economy forecast on all of those forecasts to continue through 1999, equaling US growth, outperforming the OECD and withstanding continuation in relation to Asia. The extraordinary performance of the Australian economy has been at a time when youve had troubled Asia contracting by 10 per cent and Japan now in its third or fourth year of recession if not depression. The Australian economy has outperformed the region and the world which, again, I pay tribute to Australias exporters, helped no doubt by low interest rates and exchange rate variation, it has been a fantastic performance to have got through 1998 and continuing into 1999.

We expect that calendar 1999 will be the weaker period of growth with growth as I said strengthening in the second part of the 1999/2000 financial year and picking up again in the year 2000 to be at three and a half per cent by June of 2000.

What the picture today shows is, in the face of the Asian financial fury, with some parts of Asia contracting by as much as 10 per cent, the Australian economy has been a solid rock, strong rock, outperforming the world. We now have a conjunction of events in Australia where you have inflation down a little over one per cent, a Budget now in its second year of surplus, with surpluses forecast right across the forward estimates, the Government on track to reach its debt retirement program which was to halve Labors debt to GDP ratio over the five years to 2000/2001 a goal which is still within our grasp, absent Telstra. And with Telstra the possibility that we could retire Commonwealth debt altogether early into the new century. Low inflation, strong growth, a balanced Budget, a debt retirement program, productivity improvements and in the face of the Asian financial storm continuing growing employment, this is a very impressive performance by the Australian economy. It vindicates the Governments record of economic management and it underscores the importance of continuing good economic management into the years to come so that we can continue to achieve outcomes of this dimension.

Treasurer, youve said your growth forecast for this year is now going to be three and a quarter per cent after originally having it at three and then revising it down to two and three quarter just before the Budget. Do you think the Treasury was spooked by the pessimism around from private sector economists?

No, I dont think we were because most of the people were saying when we had forecasts of three and two and three quarter that we were wildly over optimistic. If you read the press and the commentators and go back and have a look at what they were saying through July and August and September, have a look at what some of the newspapers in this country were saying that, you know, we were complacent, over optimistic. As it turns out, to the degree that we were wrong, it was because we were under forecasting when we were being attacked for wildly over forecasting. Go back to the election campaign, people were saying that forecasts for 1999/2000 were also wildly optimistic. Today our first forecast is for a year average of two and three quarter and through the year three and a half. So I dont think it was the Government that was spooked. In fact I think it was the Government that held its head and was right throughout that period.

With this revised upward growth figure are you expecting any benefit to flow through to employment? Whats happened to employment?

Well, yes, we revise up our employment forecast for the current year, its shown on table three. We revise up the employment forecast from one and three quarter to two per cent. But because we also believe that coming into calendar 1999 youre going to get some weakening in the domestic economy and the continuing full brunt of Asia we dont think that will move the unemployment forecast much. I think unemployment in this country is a little under eight. It saw-tooths below and up to eight per cent. Its probably somewhere in the high sevens and we expect that unemployment rate to be more or less constant through the year but we certainly are expecting some stronger employment growth than we had forecast just prior to the election. Not of the enormous strength that weve seen in the first quarter of this financial year, but continuing throughout the year.

Treasurer, earlier today the dollar rose on the back of whats happening in the Gulf. Can you tell us whats happening with the dollar at the moment and how that might be affecting the long term of our exporters?

Well, you can all see for yourself whats happening with the dollar at the moment, its about 62 and a half US cents as I recall, before I came around. The Australian dollar has been an instrument of adjustment throughout the Asian financial crisis. It is one of the reasons why our exporters have been able to divert to other markets. Another one of the reasons why tourism from North America and Europe has strengthened. It has been a successful instrument of adjustment I believe. Its future course will be influenced by domestic issues and by international issues and, as you know, I never comment on its likely future direction.

Treasurer, speaking of the tourism sector, the Monash model which remodelled the Treasury assumptions to work out the impact of the tax package on the economy, its macroeconomic variables of growth, consumption and employment found that the decision to tax foreign tourists would have an adverse impact on the terms of trade and in the long run wed actually be slightly poorer as a result of the tax package. Whats your response to that?

Well I dont accept for a moment that wed be slightly poorer as a result of the modernisation of the Australian taxation system. Not for a moment. And certainly not for a moment when you take into account the increases in disposable income that all Australians are going to receive as a result of that. But as I understand it in relation to the Monash model they have different profiles of growth. As I recall, and I havent seen the full report, they have growth strengthening in the shorter term and then levelling off. But it doesnt matter which way you model this and which assumptions you make, we cited in our tax package I think the Melbourne Institute, we cited Salomon Brothers, we cited Econtech. All of these forecasters I think have made the point that with a more efficient taxation system, all other things being equal, youll get a better economy.

None of them modelled the actual tax package?

Well they modelled like tax package.

Like is not the actual package.

It stands to reason doesnt it George that with a more efficient taxation system and a less distortionary taxation system, with resources not being diverted to less productive areas, youll get a more productive economy. And Ive always argued that. But thats just one of the arguments for tax change and the other argument for tax change is, well there are so many other arguments arent there, to encourage savings, to encourage incentive, to reduce personal income taxes, to modernise your base on a growing part of the economy. You dont have to take my word for it, you could take Labors word for it in the mid 80s, when it used to have principle. You could look at an IMF report. You could look at an OECD report. The Labor Party, lets be frank about this, is engaging in the most shameless, populist opportunism to prevent the building of a new taxation system but hoping to take advantage of it. If there were any principle to this Mr Beazley would be promising upon his election to repeal tax modernisation and go back to a wholesale sales tax, if he really believed it, he doesnt. His attitude is we will make the Government, the Coalition lead and do the hard work and take advantage from it. Most shameless, opportunistic anti-national interest position that youve ever seen. Now, Labor was not always like that, once upon a time Labor cared about economic policy. I didnt always agree with it but you could say it was in their pitching. Now you have the most shameless, opportunistic, revisionist, trogladytic, dinosauric group of people that youll ever come across.

Treasurer can I ask you a question about the current forecasts and monetary policy? The statement which you and the Reserve Bank Governor signed provided you with the opportunity to comment on monetary policy if you wish to do so, without jeopardising the independence of the Reserve Bank.

Of me commenting on monetary policy?

Yes, without jeopardising the independence of the Bank. My question is this, with your revised forecasts for the outlook for 1998/99 shave more than nine inflation (inaudible) past, but with unemployment still forecast to remain at about eight percent. Do you believe there is any possibility of further stimulus to the economy from monetary policy?

Well, Im going to preface this remark by saying, as I always do, that I dont comment on future movements in interest rates. But Ill make this point, inflation is low, unemployment is still too high, but I think as the Bank has made clear in its recent statements, there will be other issues that will be bearing on the mind of the Bank and on the mind of the government in the forthcoming year. One is, there has been enormous volatility in international financial markets and thats obviously been something that weve all been keeping an eye on. The other is, of course, that Australias current account deficit will be comparatively high in the forthcoming year. It wont be of the six or six plus dimensions that it was during our two crises in the eighties and our other in the mid nineties, but as we say here we expect it to be averaging five and a half percent. You may even get quarters where it goes a little bit high, but were saying averaging five and a half percent over the course of the year. That will be something that will be weighing on the Banks mind as its weighing on my mind when looking at monetary policy.

Are you concerned about the fact that business surveys including your economic outlook provisions show that business investment spending is slowing, is that a matter of concern to you, a negative turn?

Well its a matter that we take into account in these forecasts. I think in panel B we have a year average forecast for total business investment of one percent. Thats the sort of underlying rate. Now thats coming off very strong business investment over the last four or five years, one of the effects that we think is showing through as a result of the international situation. But we would be expecting, coming into 2000, some recovery in relation to that. I think, I think I could say that most people, certainly the Government, thinks that theres going to be something of a dip before a build up. The question is where you time it. The dip from the extraordinarily high growth at the moment we think is in calendar 99 and the pick up, the strengthening, back to very strong rates of growth, sometime in 2000. Now people have got different timings in relation to that and that changes your year average growth profiles. But I think we would all agree that there is going to be a strengthening sometime in the new century or the new millennium, whichever way you want to look at it, or the New Year.

Can I ask you a related question, about the dollar, I know you dont want to comment on the future level of the dollar but in terms of its importance looking at the way these numbers come together its a fear that youre relying on a big push from the low dollar making local manufacturers more competitive and keeping down imports. How important do you think it is that the dollar stays around its present level? I mean how, is there a threat to the Australian economy if the dollar moves far from its current level in either direction?

See, let me preface this by saying, I never want to look forward, right, to where the dollar may go or should go or we want it to go but Ill look back and Ill make this point, and I think I did earlier, that the adjustment on the exchange rate was very significant for our exporters and it was very significant for the import competing industries. That has been one of the successes over the course of the year and it meant that our exporters performed much better than people were expecting. The second point Ill make where I think things have turned out better than were expected, is that it wouldve been expected by now that the exchange rate was feeding more into inflation, I think most people wouldve expected it to have fed more into inflation by now than it in fact has. To have had that movement on the exchange rate, and Im still talking historically, and to still have low inflation means that you have got a very competitive domestic economy. And thats the other point that Id like to draw out of this. The benefits that we are seeing now, the kind of benefits that a competitive domestic economy brings, a competitive domestic economy meant that prices were kept low not withstanding the exchange rate changes. A competitive domestic economy meant that our exports could stay up in the face of this kind of thing. You know, a year or two ago who wouldve thought that youd get in the boom area of Asia an eight percent contraction. And I just stop there to switch forward and to say, this is the argument for competition in the Australian economy, to keep the competition rolling so that you get the possibility for this kind of flexible adjustment in the challenges of the future. You know, I think that theres been strangely enough a lot of people whove started becoming critical of the benefits of a competitive economy just at the time when youre starting to see many of the advantages. And I make that point to flip forward and to say lets keep building this if you want to see the advantages in five years time.

Treasurer, what dollar impact did the Voss Report and other concessions to the tax package have on the projected budget bottom line?

It was pretty minimal actually. I think the Finance Minister said minimal. Its not finally precise, but its something of the order of $40 million or something. But in a package of $30 billion it was quite small.

Treasurer, I had the joy of being asked to inform you that weve had a technical glitch at the start of this Press Conference and television have imposed on you to repeat your overview (inaudible).

Is that for everybody or just for the National Nine News?

No thats for everybody.

OK, I thought you were going to say at that point more money for ABC digitisation. OK well Ill just finish on that if thats alright.

Im sorry to do this to you.

Thats alright, thats alright, Im just sort of composing it in my mind.

Now let me do an introduction to farewell you all. The mid year review which I released today demonstrates an impressive performance of the Australian economy in the eye of the Asian financial storm. Today, the Government releases forecasts for growth in the 1998/1999 year which are stronger than in the May budget or in the pre-election statement. Australias growth rate of 3 percent will make Australia one of the strongest economies in the developed world and the strong man of this region. In the face of the Asian financial fury Australia has been a rock of economic stability and growth. With low inflation, low interest rates, a budget balance and a increased surplus in this financial year with surpluses across all the forward year estimates with a debt retirement programme, the Australian economy is performing very impressively. These are the rewards of good economic management, but its important that good economic management continue if we are to strengthen the economy against the challenges it will face in the next five to ten years. The news today is good news, good news for stronger growth, for stronger employment, good news for Australias strengthening economic position against very difficult international events. It puts us back in the winners circle as we face the forthcoming year.

Could I ask you, given the strength of the picture that youre portraying do you think the unemployed in Australia could feel disappointed theres not a bigger dividend in all of this for them?

I think weve got to continue to work on unemployment. But what a low interest rate, strong growth environment means is that employment will grow faster than we imagined in the current year by about two percent and best of all what weve done is weve managed to avoid the massive disemployment which is going on all around us as economies go into recession. To have avoided recession, to have outgrown the US, the OECD and the world, to have two percent employment growth in these most difficult of times, is a testament to strong economic management and its the good policy thatll keep the good results flowing.

Thanks.