Event: Stephen Walters interview with Andrew Geoghegan, Ausbiz
Speakers: Andrew Geoghegan, host Ausbiz; Stephen Walters, chief economist, Business Council of Australia
Topics: The Business Council of Australia’s pre-budget statement; economic outlook; federal budget
Andrew Geoghegan, host Ausbiz: Now attention locally will be turning next week to the all-important budget, the first one to be handed down by the new Labor government. Let's get some assessment of what's likely and perhaps what should be in the budget. Stephen Walters joining us from the Business Council of Australia, he is the chief economist there. Stephen, good to catch up with you. So, let's first look at the economic environment as faced by the government at the moment. So many challenges as Jim Chalmers has well-articulated recently. What are the most pressing issues given obviously those inflationary pressures?
Stephen Walters, chief economist, Business Council of Australia: Yes, that's a big one clearly Andrew, but we've seen Australia probably doing better than most economies on the inflation front. That's not to say inflation isn’t uncomfortably high and it probably has a little bit further to rise. But when you look at some of those inflation numbers that are coming out of the US and even New Zealand, closer to home, they're at multi-decade highs. Closer to 10 per cent in the US and about 9 per cent in the UK. So, it's still a big challenge for us. But I think to your question, what's the biggest challenge for the budget in terms of the economy? It's probably the global environment. We've seen in recent weeks, both the OECD in Paris and the IMF in Washington both significantly downgrade growth expectations, particularly for the world economy, but also for Australia. So, both of those very well-respected bodies lowered growth in Australia to about 2 per cent next year. Now we'll see what the budget on Tuesday does to the Australian growth forecast, but pretty clearly, it's difficult for Australia, even though we've done really well in terms of rebounding from the pandemic with unemployment really low, when the global growth environment is deteriorating. And of course, we've got all those geopolitical problems, not just the war in Ukraine, but elsewhere it's a pretty tough environment. As the Treasurer keeps saying, the storm clouds are gathering, overseas in particular.
Andrew: Of course, it's a delicate path to tread as far as the Reserve Bank is concerned. Where do you see those rates heading and what is the likelihood that perhaps Australia could fall into recession?
Stephen: Well, I think the Reserve Bank Deputy Governor, Michelle Bullock, made a very interesting speech a couple of days ago, and I think it was pretty clear she was telling everyone we should expect further rate hikes. I think that's a perfectly sensible response given the Reserve Bank is an inflation targeting central bank that they'll keep raising interest rates. I think it was really instructive that the Reserve Bank Board moved back to those sorts of more conventional quarter point rate hikes that we're used to, rather than those five in a row 50 basis point hikes that we saw earlier. So, I expect probably on Melbourne Cup Day, it'll sort of be a half an hour before the big race. The Reserve Bank will raise interest rates another quarter point, I suspect, probably again in December. And then we'll see what happens over the summer, but I know that markets are pricing further rate heights into next year. Whether that triggers a recession, I think that's unlikely. As I said earlier, we've got those very esteemed overseas bodies forecasting growth of around 2 per cent next year in Australia. That's far from recessionary. Inflation will persist being quite high for quite some time. It does take some time for some of these overseas pressures, particularly the supply constraints you mentioned earlier, the high energy prices, to feed through. But look, I think there are risks, but will Australia face a recession next year? I still think that's unlikely.
Andrew: Stephen, with all that in mind, what would you like to see in the government's first budget?
Stephen: Our core priority is that the government lays out a very clear fiscal strategy. I think we saw in the UK recently, what happens when you announce policy, particularly around fiscal policy, without a clear strategy. We've seen the reaction of that. So, I think a very clear strategy on what is the long-term plan for our budget. And as you said, this is the first budget of the new government. So, I think it's a great opportunity for the Treasurer to lay out what is the long-term plan. Now we think there's some really high priorities in that, and the number one is growing the economy. So, I mentioned that probably the economy is going to slow down a little bit in terms of its growth next year. So how do we grow the economy? We need to look at things like productivity. We've had our worst decade of productivity growth for 60 years, so we really need to start thinking about that. And you'll see the budget next week that the productivity assumption will be lowered to a 20-year average, rather than the 30-year average, which is quite low. How do we get the dynamism back into the economy? And this comes to things like how do we encourage people to shift jobs into more productive and more satisfying roles? How do we bring back that dynamism in the business community? How do we get the tax system to be more efficient? We've got some really big drags in our tax system right now. We also want some real control of spending. You've heard a lot of discussion in recent weeks about the so-called big five spending initiatives, the big structural spending initiatives, that the budget has over the coming decades. Things like health, aged care, defence, the NDIS, and of course the growing interest bill. We really want to do some control in those areas. If you can just bring down real growth in spending from 3 per cent to 2 per cent, you can actually deliver a budget surplus over time. So, we really think that's important as well. So, we're looking for both that long term plan, as well as some indications of how to make the budget more sustainable. We can't just rely on high commodity prices and delayed spending in COVID pandemic responses, for example, to get the budget back in order. We need some really tough decisions to be made, and particularly that means some spending control.
Andrew: Stephen, perhaps the most controversial aspect of the budget will be what the government does with those proposed tax cuts. What's the view of the BCA as to which path they should tread there?
Stephen: We are very still much in favour of the stage three income tax cuts. We think not only do they hamper back substantial bracket creep, which is a lazy way to repair the budget, frankly, is to just let people drift up into higher tax brackets. So, we are very much in favour of those tax cuts staying and the indications are from the government that that will be the case. And of course, we've got another budget in six months, so let's wait and see what the government does there. But we are very pleased that the government has indicated those tax cuts will stay. They're a really important reform of the economy. They're not just tax cuts for higher income earners. They're actually a really important reform, by providing greater incentives into the budget. We'd also like to see incentives for business to keep investing over time. Of course, we'd like, in the very longer term, a lower corporate tax rate. Our tax rate for corporates are still very high relative to the rest of the world. We don't expect any change in that anytime soon. But of course, over time, that's what we'd like to see, a lower corporate tax rate. Because Australia is really in the race for global capital and global talent. So, we need to have those right incentives around, not just our personal tax regime, but the business tax regime too.
Andrew: Well, we look forward to the Business Council's response post-budget. Stephen, thanks so much for joining us.
Stephen: My pleasure, Andrew.