Politics with Michelle Grattan: Treasurer Josh Frydenberg on a slowing economy

This week’s June quarter national accounts showed weakness in business investment and consumer spending, reflecting an all-round lack of confidence. Still, Treasurer Josh Frydenberg remains optimistic about the economy.

In this episode of Politics with Michelle Grattan, Frydenberg talks about the government’s discussions with the Reserve Bank on a new agreement covering the inflation target, saying:

If you look at the last 20 quarters, 17 of those were outside the [2-3%] band and today inflation is at 1.6%.[…]You want to have a target which can be met, which is met, and is not merely just aspirational.

He also promises to announce the proposed inquiry into retirement incomes before year’s end.

Transcript (edited for clarity)

Michelle Grattan: The Australian economy is still growing but only slowly, according to this week’s June quarter national accounts. These show weaknesses in business investment and consumer spending, reflecting an all round lack of confidence. The government says the tax cuts, which have been flowing to people in recent weeks will boost the economy in the September quarter, as will the interest rate cuts that we’ve seen recently. But the future remains uncertain with the international economic situation weak and volatile. To talk about these issues, we have with us the treasurer Josh Frydenberg.

Josh Frydenberg, you’ve been urging companies to invest, but what do you say to the cautious CEO who says, “I’m responsible to my shareholders and I want to wait and see how things pan out?”

Josh Frydenberg: Well, I was warmly heartened by the response that my comments got on the speech on productivity, Michelle. There was the CEOs of Seek, and Wesfarmers, and UBS and Macquarie Bank, and the chairman of CSL among others who all made the point that this debate, this discussion about investment by companies, is a good one to have. Particularly given that over the last 12 months we’ve seen A$29 billion worth of special dividends and share buybacks, which is a 140% increase on the average over the preceding four years. Companies do have to act, of course, in the best interests of shareholders but the best interests of shareholders can be served by investing for growth for a medium and long term strategy to build the business, to open new markets, and to get the best possible plant and equipment. That was my point particularly as productivity drives higher wages, drives economic growth, and we have seen some challenges in productivity and particularly on the investment side.

Michelle Grattan: Now, while this week’s national accounts show some growth, it is below what’s required to meet the budget’s projections. You’ve indicated the government is looking at a business investment allowance but not until the next budget. Is there anything needed from the government in the shorter term to help realise the budget forecasts?

Josh Frydenberg: Well, Michelle, in terms of the year average numbers, the growth that we announced yesterday was slightly below the budget forecast in terms of real GDP growth but above the budget forecast for nominal GDP growth. And that’s important to understand, that distinction, because it’s the nominal numbers that drive the government’s revenues and determine the budget outcomes. The June quarter did not take into account the significant tax cuts that passed the parliament and now more than A$14 billion has flowed through to household budgets. And it doesn’t take into account fully the 50 basis point interest rate cut. So let’s wait and see what happens in the September quarter and in subsequent quarters as a result of those measures. But the prime minister has written to state premiers about infrastructure projects that could potentially be brought forward. We have a ten year A$100 billion pipeline of infrastructure spending but where appropriate, where we won’t have capacity constraints, where we can work in partnership with the states, we will look at that infrastructure pipeline.

Michelle Grattan: So you’re confident at this point that the September quarter - including the impact of those tax cuts - will be stronger than the June one?

Josh Frydenberg: Well, let’s wait and see what that number is. I obviously don’t have a crystal ball but what I do know is that the tax cuts were not captured in the June quarter, they will be captured in the September quarter. And the full flow through impact of the interest rate cuts weren’t captured in the June quarter but they will be captured in the September quarter and subsequent quarter. So let’s wait and see how that plays out. But certainly the numbers that we saw yesterday, 0.5% for the quarter shows that the Australian economy continues to grow. We’ve had 28 consecutive years of economic growth - a record that hasn’t been matched by any other developed nation. And while Germany and Sweden and Singapore and the United Kingdom and others experienced negative growth in the June quarter, the Australian economy, in contrast, continues to grow.

Michelle Grattan: You’ve indicated you’ll soon finalise the new agreement between the government and the Reserve Bank. These agreements cover the inflation target range which is currently 2-3% annually. But there’s some confusion, I think, about what you are seeking to do here. Could you explain in simple terms what you want to do with this new agreement?

Josh Frydenberg: Well, this is the subject of a discussion that’s currently underway between treasury and the Reserve Bank. The target, which formally came into being in 1996, of a 2-3% inflation target has actually served Australia well. During that time we’ve pretty much been in the middle of that band. But if you look at the last 20 quarters, 17 of those were outside that band and today inflation’s at 1.6%. Now, inflation is important because it helps set expectations and those expectations in business flow through to wages, for example. And so you want to have a target which can be met, which is met, and is not merely just aspirational. So we’re having a discussion about what improvements could be made to that target. It’s a discussion that we’re having with a view to signing a document between myself and the governor in due course.

Michelle Grattan: So it’s about the content, the actual target, and about the bank explaining itself better in relation to achieving or not achieving that target. Is that right? It’s got two legs here?

Josh Frydenberg: Well, the 2-3%, I think, has served Australia well. And so I do support the governor in the maintenance of such a target. But there are some other changes that we are contemplating that we’re discussing with the governor. I won’t go into details about those as yet because it’s an ongoing discussion but it is an agreement that I think that has served Australia well since the year it’s been in place.

Michelle Grattan: So might this new agreement require the bank to be more aggressive - that is, less tardy - in adjusting rates?

Josh Frydenberg: Look, I’m not going to go into further detail about that because it’s an ongoing conversation, other than to say 2-3% has served Australia well. But as you know, we’re 1.6% and below that as we have been for the majority of the time in the last 20 quarters.

Michelle Grattan: Would you anticipate any further cut in interest rates before the end of this calendar year?

Josh Frydenberg: Well, as you know, the timing and the nature of monetary policy is one for the independent Reserve Bank and I respect their responsibility for monetary policy as the government’s responsible for fiscal policy, and so they’ll make their decisions based on their best judgement at the time.

Michelle Grattan: Now, the government puts a lot of emphasis – to put it mildly - on achieving the projected surplus. But can putting so much stress on trying to get a surplus lead to a distortion in the proper balance between fiscal and monetary policy in managing the economy?

Josh Frydenberg: Well, I think that they need to, and they should, and they are working together to strengthen the Australian economy. As the governor himself said, the tax cuts and the infrastructure spending is going to have an impact out there on economic activity. And, of course, household budgets. And we will see the full impact of those in the September quarter and subsequent quarters. But the point is interest rates have come down around the world. Australia is not unique in that regard, as the governor pointed out in one of his speeches. Three-quarters of developed economies have an inflation rate that’s under 2% and about a third of them have an inflation rate that’s under 1%. So this concept of having relatively low inflation, relatively low unemployment - which at around 5% was previously thought of as full employment – that’s no longer the case. And also having low interest rates is a new paradigm for central banks, and they’re working through that.

Michelle Grattan: You mentioned before the prime minister writing to the states about infrastructure. Do you think the states are doing enough to support economic growth?

Josh Frydenberg: Well, they’re certainly investing in infrastructure. I mean no two states are the same, both in terms of need and spending patterns. But we work closely with the states and, as you know, we’ve taken as a government decisions which have been on the drawing board for half a century, whether it’s a second airport for Sydney, whether it’s the Snowy 2.0 project, or whether it’s an airport rail link in Melbourne. These are all projects that have been talked about for a long time, speculated upon, but governments haven’t actually put the money up to have them built and in the Commonwealth’s case that’s what we’re doing.

Michelle Grattan: So you don’t think that the fact that there are political differences between the federal government and some state governments - the Labor governments - is inhibiting the relationship when it comes to good economic policy?

Josh Frydenberg: Well there’s no doubt there are some differences on priority projects, for example in Victoria we’ve made no secret that there’s $A4 billion waiting for the East West Link to be built. That’s an important project that will reduce congestion in parts of Melbourne, get people to work early, get them home sooner and safer too. Now it’s inexplicable that the Andrews government continues to reject that particular project and indeed that they spent more than a billion dollars of taxpayers money not to build that road. That’s where they have a job of explaining it to the Victorian people. But you know there are other projects. And the prime minister was with Daniel Andrews just a couple of days ago talking about working together on the Monash project. So we are working in lots of different areas with the state governments, Labor and Liberal state governments, on infrastructure projects.

Michelle Grattan: Another front in your portfolio, you flagged soon after the election that there’d be an inquiry into retirement incomes. Are you still planning to go ahead with this? And when can we expect to see it formally unveiled?

Josh Frydenberg: Well, work is underway on that and I’ve been in extensive discussions with Treasury, and the goal is to have that announced before the end of the year.

Michelle Grattan: As long as that?

Josh Frydenberg: Well, I’m just giving myself a bit of runway.

Michelle Grattan: And will it be a comprehensive inquiry or will you carve out certain areas? Or exempt certain areas, I should say.

Josh Frydenberg: What we want to better understand is the impact of the policy parameters that we have on public savings, on private savings. We have an ageing population for example, Michelle, and that’s going to provide challenges to our fiscal sustainability. As well as we have a compulsory super rate and that’s seen superannuation hit $A2.8 trillion today and will grow substantially over time. So as I’ve said publicly before, we want to see the impact on the public and private savings of the policies that we currently have in place.

Michelle Grattan: When the Productivity Commission recommended that inquiry, it did put superannuation front and centre in terms of saying it should be done before the next increases started, going to 12%. The government claims that it is committed to those increases, to moving to 12% and yet people don’t really seem to believe that commitment. A lot of your backbenchers say it shouldn’t be carried out. Is that commitment still alive?

Josh Frydenberg: Well, as the prime minister and I have made clear both in the parliament and outside the parliament, the issue is, what is the impact on public and private savings of an ageing population, and of a compulsory super system. And understanding that is important for policymakers. But we’re not reopening that that issue in relation to what is a legislated increase to 12%.

Michelle Grattan: And so the inquiry won’t reopen that issue?

Josh Frydenberg: The inquiry is going to be looking at the public and private savings. I’ll have more to say about that in due course. But as for the legislated increase to 12%, well the prime minister and I’ve answered that.

Michelle Grattan: Now, just a couple of quick things to finish up. You looked very happy when you were asked on Wednesday about the budget outcome. Are we justified in thinking that the bottom line will be very close to balance, if not in balance?

Josh Frydenberg: Well, I’m not at liberty to share that with you right now, Michelle. But obviously, you know, we’ve had the continued growth of the Australian economy, we’ve had relatively higher terms of trade. We estimated a deficit of just over $A4 billion for the 18-19 year and what you can be sure of is it will be better than that when we release it.

Michelle Grattan: And just finally, when people look into their own personal crystal balls for 2020, should they be optimistic about their own financial circumstances, and Australia’s economic circumstances more generally? We know that you keep talking about the headwinds and they seem to become increasingly strong from abroad. But what is the outlook for ordinary individuals, wage earners for the next 12 months?

Josh Frydenberg: Well, you wouldn’t want to be in any other economy other than Australia, in terms of meeting these challenging domestic and international headwinds. And they’re real and they’re present and when it comes to the global economy, we’ve seen the IMF and the OECD both downgrade their economic outlook. And we know it plays out in terms of investment decisions that are deferred, capital inflows that have slowed and also the growth in the volume of trade also reducing. That’s the impact of the uncertainty at the global level. In terms of the domestic economy, the impact of the drought and the flood is very significant and yesterday’s national accounts showed that farm GDP has come down by more than 8% through the year and that’s got a human cost as well as an economic cost. At the same time, and this is the positive side to the economy, we’ve seen very strong employment growth 2.6% which is more than three times what we inherited which was 0.7% and more than double the OECD average of 1.1%. And the fact that we’ve created more than 1.4 million new jobs - eight out of ten new jobs being full time over the last 12 months - and with workforce participation at a record high, that is a very positive story. Compensation of employees, which is the euphemism for the wages and salary bill for the economy, was up 5% in the numbers that we released yesterday. We’ve maintained our triple A credit rating. As you say, the budget is going to be coming back to surplus for the first time in more than a decade. And the tax cuts have passed the parliament, most significant in more than two decades. So the fundamentals of the Australian economy is strong. There are challenges. There’s certainly no complacency and we’re working hard to ensure that the economy continues to grow. Jobs are created and that lower taxes are there for all Australian workers.

Michelle Grattan: Thanks, Josh Frydenberg, for talking with us in what is a busy economic week. That’s all for today’s Conversation podcast.

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