The Federal Budget surplus is projected to hit $4.6 billion this year, according to the Treasurer, Peter Costello.
Releasing the Mid-Year Economic and Fiscal Outlook, Costello said the government expected to receive a net increase of $2 billion in tax revenues, most of this from increased company tax. Allowing for increased expenditure of $1 billion on the MedicarePlus package, pharmaceutical benefits, drought assistance and the commitment to the Solomon Islands, the budget surplus will increase from the budget forecast of $2.2 billiob to $4.6 billion.
Australia’s economic growth forecast has also been upgraded from 3.25 per cent to 3.75%, due mainly to an easing of the drought.
The Treasurer said Australia’s net debt was now $23 billion, down $73 billion since 1996.
Taking questions from journalists, Costello also linked the fracas involving the Democrats leader Andrew Bartlett with Mark Latham, claiming there was no difference between the two incidents.
- Listen to Costello’s press conference (30m)
- Download the Mid-Year Economic Outlook (PDF)
Transcript of Peter Costello’s press conference discussing the Mid-Year Economic and Fiscal Outlook.
TREASURER PETER COSTELLO: Today I release the Mid-Year Economic and Fiscal Outlook for the current financial year, 2003-2004. The Fiscal Outlook shows that the Government remains on track to record a surplus in the current financial year, the sixth surplus of this Government since it was elected in 1996 and as you can see from the summary of Budget aggregates, the Government has revised up its forecasts for this year and the forward estimates years, by around about $2 billion. The revisions upward of $2 billion comprised of increase in company tax of around $3 billion, offset by additional expenses of around $1 billion, and that’s the story more or less right across the forward estimates.
Increased company tax arises from higher profits. It was the higher profits that you saw reflected in the Final Budget Outcome for last financial year, and essentially we have revised upwards the company profits estimates for this year and across the forward estimates in accordance with the outcome for the last year.
The additional expenses of approximately $1 billion per annum are comprised of additional spending on the MedicarePlus package, that package as you know was a $2.4 billion package over four years, so a little over half a billion per year. Increased Pharmaceutical Benefits Scheme listing of about a billion dollars over four years, in particular new drugs such as Enbrel, Avandia/Actos and Mabthera. Additional drought expenditure, including an additional $400 million in 2003-04 and Australia’s commitment to the Solomon Islands. A list of those policy decisions is on page 22 and essentially they amount to around about $1 billion per annum across the forward estimates.
The Australian Budget, notwithstanding the difficulties that we have recorded, remains in a solid surplus. As you can see at the table on page 2, we are in a much stronger position than the United States or Europe or the OECD, countries which are all running very substantial Budget deficits. But the Australian financial position is strong and this is the pay-off of seven and a half years of hard work.
We estimate net debt will continue to fall in 2003-04 with our best estimate at the moment that it will fall to around $23 billion, a reduction of nearly $73 billion from the peak of net debt under Labor of $96 billion. And that’s the pay-off of the last seven and a half years of hard work.
In relation to our economic forecasts, the economic forecasts have been revised up a little for 2003-2004. At Budget time the forecast for GDP was 3¼ and we have revised that up to 3¾ per cent and that is principally a result of a strengthening international economy. We did factor in at the time of the Budget the ending of the drought and in large parts of Australia the drought has now ended. But the international economy is increasing, it is stronger, that is providing increased opportunities for Australia. To some degree that has been offset by the fact that the Australian currency has appreciated quite markedly over the year. That has been a negative for our growth, leading to net exports detracting quite considerably from growth, but the situation should be turning as the international markets pick up and as the drought comes back there should be an improvement in our current account deficit in the next financial year.
So, all in all, this is a testament to a resilient economy, an economy which managed to go through the US recession and the international downturn and keep growing, an economy which is still growing, based on sound Budget fundamentals, low inflation and still comparatively low interest rates which are ensuring that Australia can meet the challenges from overseas.
JOURNALIST: Treasurer, I have noticed that the CPI is forecast lower than the Budget. Is there a lesson in there for the Reserve Bank in regard to monetary policy, that maybe enough is enough?
COSTELLO: Well, let me say in relation to the Consumer Price Index, at Budget time, we were forecasting a year average of 2¾ per cent. We are now forecasting a year average of 2¼ per cent. That is, inflation is lower than we expected at Budget time and we believe will be falling through the course of 2004 and into 2005. I reiterate what I have said on numbers of occasions, Australia is a low inflation environment. And if anything, our inflation is hitting the bottom of the band, the target that we have, 2 to 3 per cent. Now I acknowledge that there is an exchange rate factor in that. But even when you take out the exchange rate factor, I do not believe that you are seeing the emergence of inflationary pressures in the Australian economy.
JOURNALIST: Mr Costello, the figures don’t include anything for the missile defence program. Is that because it is beyond the forward period? And do you have any estimates of what sort of impact it might have in the future?
COSTELLO: No, I don’t Laura.
JOURNALIST: So, has there been any sort of forecasts put to you at all?
COSTELLO: I don’t think the missile defence program would have large expenses for Australia. I think the program is going to be developed and paid for by the United States. We may be providing facilities, but Australia is not building a missile shield. It is not going to be an Australian cost.
JOURNALIST: I’m sorry, facilities? I thought there was some talk about research?
COSTELLO: Well, facilities would be provided but I think the large expenditures in relation to the missile shield would be the development of the weaponry and the capacity.
JOURNALIST: But sorry, what do you mean by facilities I’m just not sure what you mean by that?
COSTELLO: Well, we have numbers of facilities, defence facilities, here in Australia Laura and those defence facilities would be available.
JOURNALIST: Are these existing ones?
COSTELLO: I am not going into any further details but we have numbers of facilities, we don’t talk in great detail about them but those facilities cooperate at the moment in relation to early warning and intelligence and I imagine they would be part of this program.
JOURNALIST: Treasury nominates the way the current housing cycle plays out as one of the risks to the economic outlook. Can you articulate a bit more how much of a risk that is?
COSTELLO: Well, when we look at risks to the economic outlook we try and imagine all conceivable possibilities. Mostly they don’t arise. But since we try and identify risks, we do try and put everything in there. As you can see the risks that could arise would be the global recovery may not come about. On the domestic front we notice that there could be two risks, one is that you could get an adverse shock, which could affect people who have household debt, and the other is that you may not get an adverse shock, in which case spending would continue to run on.
So, you look at it from all possible angles. We notice the exchange rate in relation to a risk, but as you go back to our Budget papers we are normally very exhaustive in trying to find risks.
JOURNALIST: So you are quite satisfied are you about the housing cycle and the possibility of a correction?
COSTELLO: Well I think, I have said now probably for 18 months, two years that I expect there to be a correction in the housing market. I have made the point over and over again to investors that the property market is not a one way bet. When the equity markets fell I said to people, just as the price of shares can fall, so the price of property can fall. I believe we are now seeing, in particular in relation to the unit and apartment market in some of our big cities, a price correction coming through. And I reiterate what I have been saying now for a long period of time, there is no such thing as a one way market. Property markets do not continue to grow under all circumstances and at all times. And the other point that I have continually made to people, I have made this over 12 months, 18 months, when you see interest rates at historic lows and they are still by international… and they are still by historical standards low in Australia, you must bear in mind that you are taking a 30 year mortgage and over the course of 30 years, interest rates will vary. But I have been saying that over, it has been a mantra. Whether or not people have been listening to me is another question, but I have been saying it.
JOURNALIST: Have you, I notice you list as one of the risks, a possibility of a large correction last at a later time, do you think the recent interest rate rises may moderate that risk?
COSTELLO: Dennis, my view on interest rate rises is this, that the home mortgage variable interest rate, I think, is 7.07 per cent, a touch over 7. By historical standards, that is very low. Even under our Government the average has been 7.15, and under the previous Government it was 12 ¾ per cent. Let me say that again – 12 ¾ per cent. That was the average over 13 years. Now, I have consistently said to people, that these are, by historical standards low interest rates, and people who are making long term decisions should factor that into their thinking. During the period that I have been Treasurer, it has been between 10.5, which it was when we were elected, and it has been down in the low sixes. So, even in that band, 7.07 is still at the lower end of that band, and still below the average of this Government.
JOURNALIST: But on much larger mortgages of course, so given…
COSTELLO: So, Russell, but hang on Russell, can I just make this point. If interest rates come down, people tend to borrow more. That is one of the reasons why you reduce interest rates, incidentally. You reduce interest rates so that people can buy more. It is considered stimulation for the economy. And nobody should be surprised that if interest rates are lower, people buy more, that is what the whole theory of monetary policy as stimulation is all about.
Now, as it turns out, the people who have been borrowing more, actually have had accumulating wealth. So their net asset position has actually been increasing and that is the point I have been trying to make in the Parliament. We can look at this, their net asset position has been increasing. But I come back to the point, and I have made it over and over and over again, that a 30 year mortgage, you have got to think about not just where you are in 2003, but 2033. You could get a Labor Government at some point in those 30 years, and factor that into your thinking.
JOURNALIST: Talking about Labor Governments, you didn’t poll well against Mr Latham at the weekend poll, are you disappointed after you obviously put a fair bit of effort into trying to discredit his position over the last couple of months…
COSTELLO: I haven’t seen any scientific weekend polls.
JOURNALIST: …and are you going to change you method of attack?
COSTELLO: Look, you have all read it, you have all written it. Mark Latham was a Shadow Treasurer for five months and was a singular failure. I don’t think there is any doubt about that. In that period of time, he didn’t produce a single policy. He would throw up a proposition which as soon as it was looked at in the light of day melted away. We found out it wasn’t a policy at all, we had the matched savings. account, remember? That wasn’t a policy, when we pointed out it was $5 for every $1 of savings. We had the equity accounts for shares, it turned out that wasn’t a policy either. We had the proposal for changed income taxes for higher income earners. It turned out that wasn’t a policy either. And there is a whole history here whether you go back, on negative gearing, remember that? We had that for twelve hours, and as you go back, you don’t find anything substantive there at all.
JOURNALIST: So, is he going to be an easy target?
COSTELLO: Well, my point is this, that I don’t think he has any substantive policy positions. Lots of conflicting unstable ideas. We had the progressive expenditure tax, remember? The regional GST, you remember that? The capital gains tax on the family home. What he wants to do now, is, he wants to say that no statement he made prior to his election as leader counts against him. But he was a frontbencher and a Member of Parliament all through this period, and I think you are entitled to look at somebody’s policy position. That is, you say attack, I argue policy, always have. I have always argued policy and I think he is weak on policy.
JOURNALIST: You said that the GST wasn’t your GST after it was introduced because of the changes made to it, do you stand by that?
COSTELLO: I never said it wasn’t my GST. Quite the contrary, Dennis, I will tell you. I was the author of the policy, all through its implementation I never walked away from it for a moment, not for a moment. And I, if you go back through the records, you will find that I was on the record as the one person that never disassociated himself from the GST, ever.
JOURNALIST: With the exemption of food.
COSTELLO: If I had had my way, it would have been far better. But why did we not have our way? Because the Labor Party blocked it in the Senate with a policy called ‘rollback.’ Talk about a rollback, we are apparently going to rollback to Mr Crean as the Shadow Treasurer, now. Or are we not? Rollback or throw back?
JOURNALIST: Talking of taxes Treasurer, are you proposing to use these higher surpluses for tax cuts, and are you concerned, given the higher growth forecasts, there could be a risk of overheating?
COSTELLO: Well, one of the consequences of the Labor Party blocking our tax plan, was that we were not able to increase that threshold as we proposed to $75,000, the threshold for the top marginal tax rate. It has always been a source of frustration to me. I worked incredibly hard on that tax plan. We went to an election and we won the election. And after the election I thought we should have been entitled to introduce our policy. We weren’t, we were frustrated. The Labor Party wouldn’t allow it. So, now that the Labor Party’s leader has changed Labor’s policy, I expect that he will support our position of lifting that threshold…
JOURNALIST: Can you afford to do it, now?
COSTELLO: …but like all of Mr Latham’s prognostications, the question is whether it will wither as the sun comes up and turn to mist, like so many of the other things that he has said over the last seven years.
JOURNALIST: Mr Costello, when will you bring in legislation to test Mr Latham on this very point.
COSTELLO: Michelle, we don’t run our timetables according to Mr Latham.
JOURNALIST: The projection for 2004-05 was only 3.8, that doesn’t allow, if that turns out to be correct, it doesn’t allow for a very big tax cut though, does it?
COSTELLO: Well, when you say only 3.8…
JOURNALIST: Well, it is a surplus.
COSTELLO: …it’s a surplus unlike nearly all of the western world, and its revision is up, on the Budget. Now, you know, I keep pointing out there are some people that try and advertise themselves by putting out forecasts and sometimes mislead you, and I have consistently advised the ABC against that, have I not Russell?
JOURNALIST: I think you have, yes.
COSTELLO: But, you know, it is a surplus, and I think it is responsible to run a surplus. What we decide to do in next year’s Budget, will be announced at the time of next year’s Budget.
JOURNALIST: But would it be responsible to loosen fiscal policy as you are revising up your forecast for growth and as the Reserve Bank is clearly concerned about the strength of the domestic economy. Would that be responsible?
COSTELLO: Look, when you talk about tightening or loosening fiscal policy, let me put a few propositions here. The Australian Budget is in surplus. The US Budget is in deficit of about 4 per cent of GDP. If we were in the same position as the Americans, we would be running a $40 billion deficit today. So, our fiscal policy is $40 billion tighter than the US economy. Does that mean we have got a tight fiscal policy or a loose fiscal policy? At the Budget this year, we thought the surplus would be, next year, $1.3 billion, and now we are forecasting $3.8. Does that mean over the last 6 months fiscal policy tightened, or loosened? The only reason I pose these questions is when you are looking at fiscal policy and the contribution that it makes, it is always important to know where you are starting from. And the point I am making, is, we are starting from a position which is tighter than practically any other western country. We are starting from a position where our Commonwealth debt to GDP ratio is lower than practically any other western country. When you go to an IMF meeting, and they go around the table, and the Americans come in and say well, you know, we expect to have our budget in balance, this is what they said, by 2012. And then you go to France and Germany, who tell you that they are at risk of fines for breaching the Maastricht requirements because they are outside the 3 per cent band.
Now, people, and you say, well you know we have got a budget surplus in Australia, it might half a per cent of GDP, it might be 1 per cent, they interrupt, they say, did you just say surplus? This is a word that is not used around the table of the IMF executive except in relation to Australia.
JOURNALIST: But this is not about international comparisons Treasurer, what the question is about, is the fact that you have got not one arm of macro economic policy trying to slow the economy down, and the question is, if you loosen fiscal policy, won’t you be heading in the other direction?
COSTELLO: Well, I am not sure that is the case though, Laura.
JOURNALIST: So, you are not sure that if you spend the surplus…
COSTELLO: I am not sure that that is the case.
JOURNALIST: (inaudible) unemployment at 5 ¾ per cent, it is down, but it has been moving more slowly than all the other numbers, is there much you can do about accelerating the decline?
COSTELLO: What, reducing the rate of unemployment further? I don’t like to talk about reducing unemployment as accelerating the decline, Dennis, I would just rather re-phrase that. Reduce unemployment further? Yes, we could, if the Senate would get out of the way and pass our measures to improve the Labor Market, and reform the welfare system, I believe you could lock unemployment in below 6 per cent, and you could take it further, yes.
JOURNALIST: Treasurer, why are the average earnings forecast (inaudible) given the stronger economy?
COSTELLO: Well, this is just, you are just looking at changes on changes, that is the best estimate that we have got at the moment.
JOURNALIST: Does it mean higher than expected surplus undermine the Senate, your arguments about the Senate blocking the PBS and Disability Pension reforms?
COSTELLO: Not in the slightest. Can I tell you, the lifting and extension, this is just since the Budget, in relation to Glivec, Mabthera, Avandia, Enbrel, EpiPen and Remicade, just those dugs alone, has added $1 billion of expenses over the next four years, $1 billion. Now, let’s suppose between now and Budget you had another four, adding another billion. This is the fastest growing area of Commonwealth expenditure. The population is ageing, medical science is delivering new treatments to us, we subsidise them. They are available, some of these treatments cost $1,000, some of them cost more. They are available for $3.70 to a pensioner. We are trying to lift the co-payment to $4.60.
JOURNALIST: But isn’t that what surpluses are for, to spend on services such as…
COSTELLO: Russell, you are looking out 5, 10, 20, 40 years. This program will break. There are very few countries in the world that operate a pharmaceutical benefits scheme like this. If you do not make this scheme financially viable with small steps now, in five or in ten years time, it will just break. Now, when we try and reform the Pharmaceutical Benefits Scheme, we are trying to do something for Australia in 10 years and 20 years time. And I hear all about how the Labor Party is now going to support the Government on positive reforms. Well, big test. The first test, when is the Labor Party going to pass that measure to put that Pharmaceutical Benefits Scheme on a more sustainable basis? Do it tomorrow.
JOURNALIST: Do these figures assume that the health changes go through?
COSTELLO: These figures actually assume that PBS goes through, too, by the way…
JOURNALIST: The recent health changes.
COSTELLO: …so that as the Senate continues to block it, they are just knocking more off the bottom line. All the measures that we have blocked in the Senate are factored into this Budget’s bottom line. So, they will just be knocking off from the bottom line, more money.
JOURNALIST: Treasurer, you talk up the merits of sound economic management, how then do you justify throwing millions upon millions of dollars at the ethanol industry, which reports to the Government suggest involve massive taxpayer subsidies?
COSTELLO: Look, I haven’t seen that report, but…
JOURNALIST: You were involved in the discussion on biofuels, you know the…
COSTELLO: Well, look, let me see the report and have a discussion. But can I say in relation to the ethanol industry, what the Government has announced to date, as I understand it, was a, essentially a tariff on ethanol which was cashed back out for Australian producers, ie, you didn’t get a grant without paying the tariff or the excise. That’s what happened. That is what – everybody talked about the grants to the ethanol industry. They got a grant which cashed back out their excise.
JOURNALIST: …Manildra (inaudible).
COSTELLO: That, well, well, that was to ensure that Australian producers were not knocked out of the business, that’s why it was done. Now, in addition to that I don’t know that the Government has actually engaged in any promises of large sums of money.
JOURNALIST: Is it likely?
COSTELLO: Well, when I read my newspaper today, and I read that it was all going to come up, was it, in a week’s time, or two weeks time, so, thank you for alerting me.
JOURNALIST: Any sympathy for Andrew Bartlett?
COSTELLO: Well, Andrew Bartlett gets drunk and assaults someone, and he is compelled to stand aside. Another person gets drunk, has a fight over property and assaults someone, and they make him party leader…
JOURNALIST: Any sympathy for either of them?
COSTELLO: …so, you explain that to me. It is the same thing, a fight over property, followed by an assault, and you hear Mr Latham giving advice to Mr Bartlett yesterday on lifting standards.
JOURNALIST: With respect, I mean Andrew Bartlett got drunk and assaulted a Liberal Senator, he has acknowledged and he is the leader of the party, I mean Mr Latham wasn’t leader of the party. Mr Latham wasn’t leader of the Party at the time.
COSTELLO: No, but he got drunk and he assaulted a taxi driver, and they made him the Leader of the Party. Now, explain the difference.
JOURNALIST: Do you think he has got a drinking problem as well?
COSTELLO: I am not saying anything about that, but I am saying, it is an interesting juxtaposition as I thought, you know, I heard Mr Latham said yesterday that he would sack a frontbencher that behaved like that. Well, which frontbencher do you think he might have had in mind? Himself?
JOURNALIST: Treasurer, has Andrew Bartlett disqualified himself from leading the Democrats?
COSTELLO: Well, look, he has made an apology, he should have made an apology. He says that he is going to seek help, that is fair enough, and let’s see what happens. I don’t know, has the Leader of the Labor Party ever issued an apology to Bashir Mustafa?
JOURNALIST: Can the Government still negotiate…
COSTELLO: That’s an interesting question.
JOURNALIST: …without a leader, to get through the rest of your agenda?
COSTELLO: Well, we will negotiate with whoever is interested in good policy. And if it is the Democrats that is good, and if it is the Independents that is good too. And if it is the Labor Party, that is even better. Thanks.
