Senate Economics Legislation Committee, , 2:06:52 to 2:28:43
Senators debate national accounts data, forecasting discrepancies between Treasury and the RBA, and the government's productivity record.
Topics: Agricultural productivity, Employment, Government spending
Speakers: Dr Angelia Grant, James Paterson, Hon Katy Gallagher, Jenny Wilkinson PSM, Lisa Darmanin, Andrew Bragg, Hon Matthew Canavan
>> Thank you, Chair and Secretary. Thank you for your indulgence. Um I just want to go back to your opening statement uh where you said, and I quote, "Private demand has made a stronger contribution to growth than public demand over the last four quarters." What was the rate of growth of private demand and the rate of growth of public demand in the September national
so Senator, in the September quarter national accounts, new private final demand grew by 1.2% to be 3.1% higher through the year and new public final demand grew by 1.1% in the quarter to be 1.5% higher through
the year. So I I noticed the emphasis on the word new. Um that's not the table that I have uh from the ABS. Um I've got uh public final demand uh 1.2% for the September quarter, private final demand 1.1% to the quarter. What is the reason for you choosing new uh private and new public demand? Uh so
senator when we use the term new that means that we are abstracting from secondhand asset sales between the public and private sectors. This is longstanding uh practice. There is a footnote uh to the forecast tables that uh let you know we focus on new for both so that asset transfers don't affect our view of what is happening in the private and the public sectors. So that's the
most relevant comparison to um the forecasts that are published in the um
>> I'm interested in understanding why you think uh assets should be excluded. So if the government goes and buys used assets, why shouldn't that count?
>> Oh, so it's the transfer of assets, Senator. So imagine uh something got built by the private sector and was transferred to the government sector or vice versa. That can hit the growth rates when it's simply just transferring of assets. So we try to abstract from
>> So if the government went and bought uh 100,000 used cars that wouldn't have any inflationary effect.
>> Uh so we would look at again new public final demand. So if that was the case, you would see an asset transfer from the private sector to the public sector. So one would be down and one would be up. We just try to abstract from that kind of noise in the data. That that is all this is.
>> But that wasn't my question. >> If the government went on a spending spree to buy 100,000 used cars, just as an example, would that have an inflationary effect? What would happen to the price of used cars?
>> Yep. So uh that is different in the sense of the there would be an income effect from that. So income would shift from the uh private sector well the government would pay the private sector for those cars. They would earn income for that. So that would have an income flow but it wouldn't have an activity flow and we focus very much on the activity impact.
>> And I'm that's why I've asked about inflation. What would be the what would be the effect on inflation if the government went and bought 100,000 used cars?
>> Well, that's a hypothetical.
>> well, just trying to understand
>> the government is not doing that.
>> Yeah, thank you. Glad to hear that, Mister. You never know. Um I'm interested in unpacking understanding why this is Treasury's apparently preferred uh method. Um so I've asked what the effects Senator don't need the >> Thanks Senator Purposes rather than hypothetical. Grant could you answer the
>> Yes I can
>> I think she has answered the question about six times.
>> No because my question was about inflation and uh Dr. Grant hasn't explained what the impact of inflation would be.
>> So Senator I want to take a lot of care about the the kind of context and the counterfactual. So maybe if I step back a little bit whenever we are asked to assess the impact of anything it depends on a lot of different factors. So we would look at whatever was actually happening and we would assess it at that point. But as the secretary said, this is a very this is a $2.8 trillion economy. >> So something like the the purchase of vehicles um in the the kind of magnitude that you're talking about would be difficult to affect the aggregates. It's just hard for me to get into kind of details about certain things that go up or down and what that would mean when, as you know, the economy is pretty interrelated and it's pretty uh connected. We would want to know exactly what it was that we thought was happening, what the context was within that, and it's very hard for me to speculate.
>> Well, let me give you a real example, not a hypothetical example. As um my colleague Senator Bragg has pointed out, the government is buying uh houses from the private market, used houses uh from the private market and calling them new as part of an attempt to pump up the numbers of housing construction. >> So negative. That's a real example. >> Pardon?
>> So negative.
>> I mean it's literally true. Um so that's a real example. We don't need the hypothetical used cars example. what the effect of government buying uh houses in the market be on inflation. Is it upward or downward?
>> So again, Senator, we think about activity. If it's a transfer of an asset, whether that be a car or a house, that doesn't affect activity within the
>> but would it affect inflation?
>> Well, we would link inflation to activity. So if if you're seeing asset transfers throughout the economy and we don't think that's having an overall impact on activity, then you wouldn't be thinking about the link to inflation particularly strongly.
>> I think argument as I understand it on housing is it does affect activity. This is going to produce more houses. >> The government buying houses is going to generate more houses.
>> So again, Senator, I really want to take it but we're talking about one sector of the economy. I'm talking about the aggregate.
>> Sure. And I'm asking what would the contribution of this sector to the aggregate? Would it be up or down on inflation?
>> Also, Senator, I couldn't possibly speculate uh on that in this kind of hypothetical. I really
>> It's not hypothetical. It's actual.
>> Well, again, in terms of this economy, big aggregates, right? like that's where we focus for assessing what is happening in aggregate demand, aggregate supply, where does it sit in balance, what does that mean for the labor market and what does it mean for inflation
>> but I can't ask you about a thousand different transactions that the government enters into that would be a waste of everyone's time and I appreciate that any one decision by government and any one sector will make a small contribution but I still want to know what that contribution is would it be positive or negative
>> I I just can't speculate Senator on that
to clarify bit just clarification Dr. Grant you said earlier that um historical population average growth is 1.5 seemed a bit high to me so I went and had a look at the data on estimated residential population I don't know what data set you're using but on this one ABS figures the average this century pre-COVID was 1.1% per year even from 2010 to 2020 was 1.2 two. I'm just wondering where'd you get 1.5 from?
>> Uh, so Senator, I was referring so in the population statement that was released in January, uh, in one of the early pages. I'm just on page one with one of the the tables, >> I was referring to our most recent population growth number, which was 1.5. That's the most recent number. >> And I made reference to an average growth rate, which is in paragraph two. And it says that the average growth rate in population was 1.4% experienced in the 2010s. That was the the figure I was refer
>> Maybe you could just clarify for that on notice because I've I've got the data right here in front of me and I'm getting 1.2. I just Yep. I'm just highlighting from 2010 to 2019 to 2019. So not not factoring in co I've got 1.2.
>> Very happy to check that. Senator
>> 1.4 course seems a bit higher and and over this century just to be clear I've got 1.1 >> for the 21st century but pre-COVID okay thank you
>> okay I'll just move to my final line question thank you chair um so I want to ask about RBA uh forecasts for the economy um in the statement of monetary policy in February there's now really quite a large divergence between the RBA's forecast for the economy and treasury's forecast for the economy particularly economic growth Um, secretary, you be aware um of that
>> Uh, I am. Yes.
what what do you think is the reason for the RBA's significantly more pessimistic view about growth? For example, that to June 27, they say the economy will grow 1.6%, you say it'll grow 2.25%. Uh, to June 28, they say it'll grow by 1.6%, 6% you say it'll grow by 2.5%.
>> You should probably ask the RBA >> about what underpins their forecast. I don't think it's reasonable to ask Treasury. >> Treasury will update the Treasury will update their forecasts in the normal way uh through the budget process.
>> Sorry, no, no, this is macro. Uh I'm asking about Treasury's forecasts and why they're different from the RBA's
forecast. This is why utterly estimates question. Well, if I heard your question properly, you said what what has led to the RBA revising their forecasts? And I'm saying that's a question you should put to the RBA when they appear
>> and we will. Um, Miss Wilkinson, why is Treasury so much more optimistic about than the RBA about economic growth? Uh
so our forecasts the most recent forecasts uh that Treasury has um published were the forecasts in Mayo. >> Um obviously um we will update our forecasts in the budget context. Um so there is partly a timing question between myo and um the RBA forecasts which were released a couple of weeks ago. There are some key parameters which are different between those forecasts. Um Dr. Grant can probably uh just speak to a couple of those key underlying assumptions which are different um because those have changed between my EO and uh and now
>> please um do explain why in the six weeks between my EO and the February S SNP there's been such a big change in the outlook for the economy.
Uh so Senator I just want to be um clear that I I'm just going to comment on some of the assumptions that underpin both sets of forecasts that have moved in between uh the publication of the myo forecast and then the RBA's more recent forecasts. So as you know the interest rate expectation by the market so it's a technical assumption not a view we take on interest rates but we have seen the market shift their interest rate expectations the exchange rate has also appreciated quite a bit in that period and we have seen movements in commodity prices that are like so in our assumptions there are just a lot of things that move in a volatile way they do matter for when we set forecasts we will be updating all of our technical assumptions uh for the budget.
>> So you're saying that the difference of 6 weeks or thereabouts from my EO and the S SNP is enough to account for a 0.15% difference in the 26 financial year, a 65 difference in the 27 financial year and a.9 difference in the 28th financial year. I mean these are orders of magnitude more pessimistic.
Sorry Senator, I should have been clearer to say that one of the factors that will be impacting >> uh the difference will be an update in technical assumptions.
>> What are some of the others?
>> Oh, that will that will depend on the data that is released um between now and budget. We will take a look at it, but we have some partial data for the December quarter. And as the secretary has said, the private sector has shown more strength than we expected in the second half of last year. So we know that and we also know that within that we've had labor market tightness and we've seen the inflation rate come up a little more than we expected. We will assess all of that for budget.
>> That these two things were released about 6 weeks apart. It's a lot of change in a very short period of time. You're really saying the economy turned on a dime in that six week period.
>> I'm saying that the technical assumptions have shifted quite a bit in that six week period.
>> Okay. What do you think? What's the reason for such persistently low forecasts uh of economic growth? I mean, the RBA's forecast of 1.6% economic growth is the lowest in its
>> So, the RBA would be best placed to explain their forecast, Senator.
>> But I'm interested in your belief about why the economy is growing so slowly.
>> Well, you're but you're using the RBA's uh forecast, so I think it's appropriate you ask the RBA. We will certainly ask
the RBA.
>> We can speak to our forecasts as published at my info and we will speak to our forecasts when they are published at budget. But um uh and I think we had a discussion about this at last estimates. Um so happy Yeah.
>> is low is low productivity growth contributing to uh low economic growth
>> you in our forecasts.
>> Go ahead. So in the detailed forecast period center when we build up from the bottom of the economy so we are looking at all sectors of the expenditure component of GDP and again it goes to what the secretary said we will assess what has changed what looks different to what we expected why do we think that looks different and what is driving those differences once we've done that in the kind of the next two years so the detailed forecast period is very bottomup driven by us. We will then think about the economy at a more aggregate level and at that kind of time frame supply the supply side and where you think the economy balances becomes particularly [snorts] important. So the productivity uh numbers and the assumption that we make on productivity does drive our view of uh potential output growth in the
low rates of economic growth to be generating inflation aren't they? One of the reasons why you'd be having inflation even with such low levels of economic growth is because productivity is not growing. Isn't that right?
>> So our growth rates are 2 and a4%. So we forecast real GDP to grow by 2 and a4% in 202526 and 2 and a4% in 2026.
>> You think we're going to hit those
>> They are our latest numbers Senator. They're our latest forecast. We will of course update them >> um for budget but they are our latest forecast.
>> Most economists would say that's pretty
>> Senator, all we can speak to is our the latest publish forecast.
>> What's your latest expectations about productivity growth? What's the assumption you're making about productivity growth?
>> So the long-term assumption for productivity growth is 1.2%. And it takes a while to get there. So in the near-term detailed forecast period, it is much lower than that and it transitions to 1.2. 2 over the Ford estimates.
>> When's the last time we hit 1.2?
>> So, Senator, this is based on the annual national accounts and I say that because you do get slight revisions in the quarterly, but for these numbers, uh, it is important. Productivity grew by 1.5% in 202122. That's labor productivity.
So and since then how have we gone?
>> So Senator this comes back to the question that we the discussion we had right at the beginning about cyclical productivity growth and structural and um uh and so um and you know one of the one of the challenges in thinking about productivity growth is that there are these long-term structural trends um and so we have to have a shortrun assumption about productivity growth which is as I understand it not that different from where the reserve bank is. The Reserve Bank only forecasts over the next two years. They don't have to think about what the long-term projections are, but we have to think about what those what those would be.
>> But since that year where we had that 1.5% growth, how have we gone? My understanding is for the next few years after that it was negative and in recent years it's been maxing out at kind of 7.8%. Is that right?
>> So the like the secretary just said like you are right. We saw a very subdued growth uh in productivity in 2023 24. It was negative in 2024 25 on the latest quarterly numbers and you have to take care they can be volatile but it grew by 2% in the quarter and it's at8% higher through the year.
>> So still a long way below the 1.2% assumption.
>> If I just remind you that um over the decade to um 2020 average annual labor productivity growth in Australia was the slowest in 60 years. Um, and I think even Senator Hume acknowledged that when you were in government, you didn't do enough on the productivity agenda. In fact, you had the productivity commission reports and they sat on the shelf and you did nothing. And that is why since coming to government, we have revi on treasury advice revised back down the productivity assumption in the budget. uh and that is why the treasur is leading a productivity agenda which I'll note on the two recent tests of that you've opposed the EPBC reforms and the regulatory reform bill you have opposed both of them. So let's just be clear here while you sit here and criticize efforts around productivity that you are obstructing and have obstructed in the Senate every attempt uh to address some of the challenges in
the economy. >> You've been in government for four years and productivity's gone backwards. Productivity did not go backwards under the previous government. It's a good thing.
>> It's a long-term challenge facing our economy that you ignored in government and we are investing in and the the treasurer has already said uh that productivity will be a priority.
>> We went backwards about a decade in productivity in your first
>> priority and uh is being considered in the budget context. But when you have to actually vote and do something about it, you guys walk away. We're not in
government, Minister. You are.
>> Yeah. Well, you're you're sort of a
semblance of an opposition at the
moment, though, aren't you? And you still have a vote in the Senate, and you voted no to the EPBC reforms, which were
about addressing some of these past.
So, let's just put your record uh on the table here.
>> Yeah. Well, let's see how your record of your actual performance in government over the last four years, which is
productivity going. >> Yes. And I'm very happy to be measured
wouldn't be boasting about backwards sliding productivity. That's just me.
>> Well, have a look at what you did when you were in government. Absolutely nothing.
>> Productivity.
>> You left us a mess and the treasurer has been addressing it since coming to government and we will continue to do so. It is a long-term challenge. Do you
>> I do, chair, but I sense we're really kind of bumping up against time. So, I will have to put the rest on notice.
>> Um, I much appreciate that. Thank you. So um we will now break for a uh suspend for a short break. Um Senator Bragg still has some questions for corporate. So um Secretary you are free to go but if um anyone associated with >> Oh sorry. Okay one quick one before we go to a break.
>> Sorry just one quickly. Thanks secretary. Just in relation to the um appointment of the ASICH chair were you involved with that? >> Are you on the panel?
>> Yes I chaired the panel. And who else
was on the panel?
>> Uh um John Lonsdale was on the panel and Katherine Jones, the secretary of attorney generals was on the panel.
>> Okay. And I guess my question is I mean ASICH has had a very bad enforcement record in the last couple of years. We've seen first guardians >> first guardian shield line collapses. We've seen >> very few prosecutions in fact decline number of prosecutions and referrals to DPP. So I'm just wondering whether other people with strong prosecution experience were considered for this
>> Uh there were um a range of candidates who were interviewed through the process
>> external. >> Okay. Thank you.
>> Thank you. So um we'll suspend for a short break. Um we can say goodbye to you Miss Wilkinson. um uh those officials related to corporate if you could um stay until after the break. Um I would also just like to note that we will table your opening statement. Um and also advise anyone who's following at home um or elsewhere that the National Competition Council uh will be released from the program. So we'll see everyone at 11:45.