Senate Economics Legislation Committee, , 0:00 to 37:27
The committee discusses the macroeconomic outlook and long-term productivity trends in the domestic economy.
Topics: Agricultural productivity, Government spending, Data centres
Speakers: Jenny Wilkinson PSM, James Paterson, Lisa Darmanin, Hon Katy Gallagher, Unknown Speaker
Morning everyone. 9:00 will kick off. I declare open this hearing of the Senate Economics Legislation Committee into the 2526 additional budget estimates. I begin by acknowledging the traditional owners of the land on which we meet today and pay my respects to elders past and present. I extend that respect to any Aboriginal and Toouristra Islander peoples here today. The committee is due to report to the Senate on Tuesday 31st of March 2026. The committee has set 20th of February 26 as the date by which senators are to submit written questions on notice and 10th of April 26 as the date for the return of answers to questions taken on notice. The committee's proceedings today will begin with the Department of Treasury's macroeconomic group and international corporate and investment group. The committee will be conducting today's hearing in person and via teleconference. Understanding order 26, the committee must take all evidence in public session. This includes answers to questions on notice. And I remind all witnesses that in giving evidence to the committee, they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false and misleading evidence. The Senate has endorsed the following test of evidence of questions at estimates hearings. Any questions going to the operations or financial positions of the department and agencies which are seeking funds in estimates are relevant questions for the purpose of estimates hearings. I remind officers that the Senate has resolved that there are no areas in connection with the expenditure of public funds where any person has a discretion to withhold details or explanations from the parliament or its committees unless the parliament has expressly provided otherwise. The Senate has resolved also that an officer of a department of the Commonwealth shall not be asked to give opinions on matters of policy and shall be given reasonable opportunity to refer questions asked of the officer to superior officers or to a minister. This resolution does not preclude questions asking for explanations of policies or factual questions about when and how policies were adopted. Witnesses are reminded of the Senate order specifying the processes by which a claim of public interest immunity should be raised. I incorporate the public community statement into the Hansard and I remind senators of their obligations under the behavior code for Australian parliamentarians to treat witnesses with dignity, dignity, courtesy, fairness and respect. An officer called to answer a question for the first time should state their full name and the capacity in which they appear. And I remind committee members and witnesses who are appearing via video conference and who are not speaking to mute their I now welcome Senator the Honorable Katie Gallagher, Minister for Finance, representing the treasur. >> Morning. >> Minister, do you wish to make an opening statement? >> Thank you. And the committee welcomes representatives from the Department of Treasury Macroeconomic Group and International Corporate and Investment Group. I welcome Miss Jenny Wilkinson, Secretary to the Treasury. Miss Wilkinson, uh I see we've have an opening statement from you. Would you like to take us through that?
>> Thank you, chair. uh and thank you to the committee for the opportunity to make an opening statement. I'll focus my remarks on what has changed in the macroeconomy since my appearance in December last year. So, global growth continues to be more resilient than expected following last year's increase in US tariffs. China and the United States have both outperformed expectations despite weaker bilateral trade between them. This appears to have occurred because many tariffs were implemented later and at lower rates than was initially proposed. There has been a diversification of trade flows and there was some frontloading of imports ahead of the tariff changes. However, as the full impact of higher trade costs materialize and the trading system becomes less efficient, this is expected to weigh on growth and supply chains over time. China's economy grew by 5% in 2025 in line with the official growth target. A large part of this story has been the continued strength in Chinese exports. As a result of US trade restrictions, Chinese exports have been redirected to alternative markets, including markets in the Azan and European Union regions. Meanwhile, domestic momentum in the Chinese economy has slowed as the property sector continues to weigh on aggregate demand. The US economy grew by 4.4% in annualized terms in the September quarter supported by solid household spending. US household consumption was strong in 2025 and there was a lift in investment in software and technology related capital. There are however some signs of weakening in the US labor market. Recent data continue to point to slowing jobs growth. This is driving market expectations of further monetary policy easing by the US Federal Reserve. Recent data across the world indicates some persistence in inflation outcomes across major economies across the United States, the United Kingdom, Canada, and New Zealand. Inflation remains elevated above monetary policy targets even as labor markets have softened. In contrast, the uh the inflation outlook in major European economies is relatively contained. These differing paths have left central banks facing more difficult choices between returning inflation to target and supporting activity. Uncertainty over US trade policy, including court challenges to tariff arrangements, continue to cloud global trade. At the same time, the ongoing conflict in Ukraine and recent tensions in the Middle East, including around Iran, have raised concerns about global oil markets and commodity prices. Rising uncertainties have been reflected in financial markets with the price of gold exhibiting significant volatility, including reaching record highs as investors continue to seek safe haven Turning to Australia, there continues to be underlying positive momentum in the domestic economy. Solid annual growth is expected over the next two years. Private demand has made a stronger contribution to growth than public demand over the past four quarters. Business investment has strengthened as firms invest heavily in software and cloud computing infrastructure. This includes the construction of data centers which is expected to support growth in non-mining investment going Given much of this investment has a high import share, it has had a minimal direct impact on GDP, but it has the potential to raise the productive capacity of the economy over time. Dwelling investment is gaining momentum and while volatile approvals for new housing supply have picked up and this has translated into higher commencements and an elevated level of activity. This is expected to support continued growth in dwelling investment in the near term. Higher rental yields have supported apartment and townhouse approvals in re recent years which has throw flowed through to higher construction activity. Alongside this, household consumption has strengthened over the past year, supported by rising real household incomes. Signs are emerging of stronger household spending on discretionary services, suggesting that households may be more confidently navigating cost of Treasury is monitoring the economic impact of recent n natural disasters. Around 1.4 million people are living in areas affected by bush fires in Victoria and flooding in Queensland. We currently estimate the total or the loss of economic activity could reach nearly a billion dollars or around.1% of real quarterly GDP. Support for affected communities is being delivered through Commonwealth and state government arrangements. The labor market was broadly broadly stable through 2025 with high participation and low unemployment. This stability is expected to continue in the forecast period. In December 25, the unemployment rate fell to 4.1% and the participation rate remained high by historical standards. The labor market is expected to soften a little this year, but the unemployment rate is expected to remain low by historical standards. Employment growth eased through 2025. This reflected a slowdown in non-market sector employment which was partially offset by market sector employment recovering consistent with the shift from public sector to private sectorled growth. Indicators such as job vacancies and business surveys of hiring intentions are steady suggesting employment will continue to grow around its current pace in the near term. The labor force participation rate was 66.7% in December. While it eased slightly in 2025, it remains well above prepandemic levels. Australia has avoided the large rises in unemployment or sharp declines in participation seen in other advanced economies over the past few years after inflation moderated substantially from its peak in late 2022. It increased in the second half of last year. Headline inflation was 3.6% 6% over the year to the December quarter, a little above the 256 myo forecast. A major contributor to this increase was the expiry of state government electricity rebates. Headline inflation is likely to increase further in January as the Commonwealth rebates come to an Measures of underlying inflation, which largely exclude the impacts of rebates and other one-off factors, also rose in the second half of 2025. While the December quarter outcome was a little less than the September quarter outcome, both were higher than we had expected. The RBA's preferred measure of underlying inflation, the quarterly trimmed mean, rose from 2.7% over the year to the June quarter to 3.4% 4% over the year to the December quarter. Our assessment is that the pick up in underlying inflation reflects a combination of temporary and more persistent factors. The temporary factors include some business and service providers rebuilding margins following a period in which they had been unable to pass higher input costs onto households and volatility in travel components. More persistence has been observed in the food and market services components in particular. These recent data have increased the risk that inflation is higher and takes longer to return to the target band than expected at myo. Expected ongoing constrained growth in wages and the higher exchange rate should support inflation returning to the target band. Finally, I'd like to confirm that on the 13th of January, Treasury's internal audit provider commenced a management initiated review of the adequacy and effectiveness of the controls for state payments administration. Uh this will consider opportunities to strengthen these controls taking into account the measures we've already implemented to strengthen our processes, procedures, and training. The final rep report will be delivered to me in March 2026. The ANAO has also initiated planning for a potential audit interstate payment arrangements under the federation funding agreements framework in 20256 which we have supported. Thank you for the opportunity to give this opening statement and I welcome your questions.
Uh thank you so much. Um I'll just kick off with a a short couple. um your reflections there about um Australia being in a in terms of the domestic economy being in a good position particularly around um positive momentum in the domestic economy and um a solid growth um expectation over the next couple of years. I did want to know if you could talk a little bit more about productivity and in terms of the challenge um you know over what we've seen over the last um period of time around it being a long-standing challenge um and you know what your observations have been more recently I guess while we know that quarterly movements um can be volatile um what has been your observation in the more immediate term?
I think it's widely understood that productivity is a key driver of economic growth and it's important um for living standards and um this has been a this is uh clearly been a high priority for um this government um as it was for um previous governments and the the recent work that the productivity commission um has undertaken uh uh is really looking into um in through five different pillars uh what are the opportunities uh to improve productivity growth across it's hard to measure productivity uh on a short-term basis. Most of the analysis suggests that you should be looking at productivity growth over long-term trends. Um but even in Australia over the long term I think it's widely understood and I think this has been um this has been made clear in the most recent uh intergenerational reports the last two or three um that productivity growth has been weaker in Australia than in previous uh in previous periods. Um maybe like I I want to be careful about this. I mean in the September quarter labor productivity did increase a little by 2% to be8% higher over the year and if you look at the market sector growth has been about 1.1% through the year um and that's encouraging. One of the tricky things in Australia is that um obviously the mining sector uh has a big impact on outcomes and productivity in the mining sector as we've observed over time um is um highly highly cyclical. Um but when I when I think about um Australia's productivity outcomes um it it does reflect a combination of uh shorter term cyclical factors um and also sort of longer term sort of structural uh structural challenges. In terms of the cyclical factors, frankly, the strong performance of the labor market over the last few years in a in a direct sense, um, uh, uh, has meant that we've had weaker productivity growth than in other countries where they've had a weaker weaker employment outcomes. Um, and sort of why is that? Well, it's partly because when firms take on new more workers, um that can happen more rapidly than changes to the capital stock. So, uh it's it's pretty widely acknowledged that changes to the capital stock lag employment growth. It just takes time for for firms to make decisions about investment and to install new capital. So this means in a sort of mechanical sense um average capital per worker um will tend to lower when you have a period of strong employment growth. Um and so that's that's kind of a key reason why in a cyclical sense you can end up with a period of weak productivity growth when you have strong employment growth. But I'm not denying that there aren't um longerterm factors. Um our experience with weak productivity growth mir mirrors that of many other um uh advanced economies. Um this reflects a number of different things. It reflects um the structural shift towards the non-market sector which is occurring across most advanced economies uh which is partly driven by an aging population uh and growing demand for care services. Um uh it's also been acknowledged in Australia and in many other advanced economies that there are sort of long what I'd call long run challenges in the construction sector where productivity growth uh has been weak. Um and and then there's the sort of the broader puzzle about what the impact of technology changes well when the impact of technology changes will be evident in the productivity data. uh um there's no question that across the world over the last two years and I think you know since sort of the end of 2022 um there's been a really significant shift in terms of the the um the development of AI technologies um those are gradually being diffused across the economy but we've known from previous episodes where there have been significant technological shifts that at sometime it can take time for that then to be evident in um the productivity statistics. So we need to you know we we are expecting that there that there should be some evidence of this um uh uh going forward but it's always hard to predict um when um those sorts of changes will be evident in the Um what are the sorts of things that domestic policy can do to improve productivity? Um uh you know you can and and some of these things are covered in the five the uh you can encourage investment, remove barriers to investment, remove barriers to innovation and dynamism. Um uh an important channel for Australia is is creating strong linkages with global frontier firms. Um Australia is typically a strong adopter of technologies. We're a small open economy. So you know there is a there is a limit on the extent to which we can be the innovator in some of these technologies but we have evidence over time of being a strong adopter. Um and then of course the government can help to ensure that workers uh and managers have the appropriate skills um to take up new technologies when they're available. That's probably I think that's probably my answer. Anything you want to add? No.
>> Okay. Maybe just one quick followup and then I will move on. Um so I think in your opening statement you talked about business investment strengthening um and particularly in terms of kind of the technology piece um and you know what you just talked about then in terms of there being a lag time in with businesses investing um and seeing outcomes like is there anything else that um you would say in terms of um the recent business performance um in our economy. Um what are the drivers and um I guess how optimistic you are around um that kind of longer term um uptick
playing out. Yeah. So, so, so, so just in terms of the investments in technology and data centers, um, I think that around the world, there's been a bit of a surprise about um, how strong the investment has been in the second half of last year. So, this this certainly occurred in the US and my recollection is that I've been reading about um, similarly in Southeast Asian countries. There's there's there this there does seem to be a very significant shift that's taken place more quickly than we'd expected. It's always hard when you're when you're doing macroeconomic forecast to identify when there are these sorts of shifts in more broadly um the business surveys suggest that capacity utilization is at pretty high rates in Australian uh firms. Um and uh that we would we would generally take as being a an indicator that um businesses are using their capital stock intensively and would be uh looking you know that that's that creates the right environment for them to be then looking towards additional investments in order to um grow their ability to supply output to their um their customers.
Thank you. Thank you, uh Senator Paterson.
>> Thank you, Chair. Uh good morning, Secretary. Uh you may be familiar with the media reports uh speculating about the deterioration between the pre-election uh economic and fiscal outlook and the midyear economic and fiscal outlook. Um, for example, there's been reporting in the financial review which attempts to quantify that midterm uh deterioration in the budget bottom line at about $57 billion.
>> Um, so Senator, I'm I'm aware of that. Um, I'm aware of that media reporting.
>> Yep. >> Do you have Sorry.
>> No, no, go ahead.
>> Um, do you have the exact figure? I think the 57 is just from, you know, percentage point rounded figures in my AFO. Do you have the exact figure of the deterioration in the budget bottom line over the midterm?
>> Um, Senator, so so this is a question which is going to, I presume, go to the details of fiscal policy and the determination of the medium-term projections. Um, I will have I'm I'm happy to answer at a high level here, but then I think it would be more appropriate for those questions to be put to fiscal group when they uh when they arrive because I won't have all of those details.
>> Sure, I do appreciate that caveat and I will explore details if necessary with fiscal but obviously you signed off on PIPO uh as secretary and so I think it is important to have uh to understand
your understanding of it. So, so, so my look, my advice is that when thinking about medium-term projections, it is much more sensible to think about it in terms of um outcomes as a share of GDP. >> Um that's how we present them in the MAFO and in budgets. Um and that's uh nominal numbers are just much less comparable as the economy grows over time. So um we we have a strong view in Treasury that um it's much uh it's much more useful it's it's it's more meaningful to show medium-term estimates as a share of GDP in order to indicate what's happening. And that's indeed what's what is uh presented >> in my EO. So um see if I can find it in my EO in the charts. >> Oh, no. That's my info. My >> I don't have Where are we? you got it. >> Yeah. So, in the charts on page the charts on page 54 show as a share of GDP how the underlying cash balance has changed. That's chart 3.1. And then charts 3.5 and 3.6 six uh show how total receipts and total payments as a share of GDP have changed since um between um between uh PIO and Mayo and and Senator we think that's this is this is the right way to be thinking about the medium-term um uh because it's very hard for anyone to grapple with kind of what a particular quantum is relative to the size you know relative to an economy which is you know like it's currently about 2.7 trillion >> uh growing to I'm not quite sure where it grows to by the end of the medium term. So it's it's just you got to keep these numbers have to be considered in context which is why we >> uh provide our forecasts why why these are presented as share of GDP.
>> Sure. I I do understand your caution on that, but I still think it's it's worthy understanding what the dollar figures are because you're right, numbers out of context a long time in the future are hard to understand. But even harder to understand for people is percentage of GDP in which financial year a long time in the future as well. And it's these are complex economic concepts. Dollar terms at least have kind of some relative meaning. So do you have the precise figure? Is it $57 billion? Is it a little bit less? is a little bit more >> Thank Thanks, Senator O'Neal. It's not necessary. Um, Secretary,
>> it was cuz you know, you're about to line up a massive distortion and she's just giving you the argument why you shouldn't be doing that.
>> I think I've asked two questions so far.
>> Yeah. Make sure they're genuine.
>> So, so, so the the the figures I have are about how the the underlying cash balance has changed as a share of GDP over the medium term.
>> So, you don't have the dollar figures?
>> No, I do not have the dollar figure.
Will someone else at Treasury have the dollar figures or fiscal group have the figures?
>> So, so the information that is provided in the budget papers uh is we think the most appropriate way of assessing how the underlying cash balance has changed over time. we think so so um uh so that you know at the end of the day it's always a matter for government as to how uh information is presented in the budget papers but that that is the most meaningful way in which we can uh we think that these sorts of things should be
>> sure I I do understand your the preference that you express and I I the logic of it is evident but I still would like to know if you have the number do you have the number
>> uh no I don't have the number Does
anyone at Treasury have the number?
I I'd have to I'd have to take that on
>> Okay. All right. Well, then for our purposes, let's just assume 57's in the ballpark and maybe a little bit more, a little bit less, but let's assume that's in the ballpark. Um, can you explain what caused the deterioration between
Senator, I think you might need to take these questions to um to fiscal group, but I I will just point you back to charts 3.1, 3.5, and 3.6. Um and you can see that over the period you can see that um uh the uh projection for total receipts as a share of GDP um declines over the course of the of the um medium-term. Um payments is a bit lumpier but by the end of the medium term is broadly around where it was at
>> Sure. Um but I'm I still want to understand what caused it. I mean this is macro group. Macro wasn't involved in producing this forecast.
>> Uh well it's really I mean the these these graphs are responsibility of fiscal group but but I think this I think the information that you're after is presented in charts 3.5 to 3.6 that shows how um the how total receipts and total payments uh have are expected to change over time and how that varied between PIO and my EO.
>> Sure. But was it um by as a result of parameter variations forecasting or was it a result of policy decisions? What's the cause of it?
>> So so the medium-term projections we um we produce differently from how we produce the estimates over the forward estimates. So we don't have a breakdown between uh expenditure variations and policy decisions for the medium-term numbers. That's just not the way in which these projections are conducted.
>> Right? So there's no policy decisions reflected in the medium-term variations.
>> No, no. What I said is we do not have a breakdown between policy decisions and expenditure variations in terms of the the level or the change. There are some so where there are decisions that are taken by government which have impacts for particular programs before the medium-term they are some they are I think usually taken into account but it'll depend a little bit on what the project what the particular policy is. Um but there are that then assumptions have to be made over the medium term about how other areas of expenditure um then are expected to change over the period and so there are a combination of there are different different elements of the medium-term are projected in different ways.
>> Sure. But if you are producing these statistics and charts you either are including policy decisions or you are not including policy decisions. So I'm understanding from your answer that policy decisions are included and are reflected in those figures.
>> So all policy decisions taken by are incorporated in the medium-term projections. Absolutely >> right. I I guess what I'm getting at Senator is it's it's more comes to the question of sort of technically the way in which um projections are generated over different horizons and we have a different approach for the forward estimates >> uh from the medium-term from the IGR projections and that's because there are so in the in the forward estimates there is extremely detailed information that is compiled bottom up um by the department of finance using the central bud um budget management system that is that together is what um on a line by line basis uh uh creates the medium-term h sorry the forward estimates
>> sure I do understand
>> we don't we just don't we do not have the same there there is not the same level of granularity
>> I'm not asking for the same level of granularity but if you are incorporating policy decisions into the medium forecast of those policy decisions. They have been incorporated. So you should be able to reverse that out and say this much of it was due to policy decisions.
>> So we we've never provided a breakdown of the medium of medium-term changes between policy decisions and expenditure variations. Very happy to take
>> you might not have provided that in the past, but that's not a reason for not providing.
>> No, no, no, no. Sorry, Senator. What I'm saying is I'm happy to take I'm not quite sure how that would be done in the current methodology. happy to take it on notice to to um well you can have a discussion with fiscal group when they're here this afternoon um about the individual components um uh but you know sort of happy to think about how else that information could be provided to you but it's just it's not something that
>> in the six months between when you signed off on PIO and the government published my we have a circa $57 billion deterioration in the budget bottom I think the public's entitled to know is this because your forecasts about the economy have changed and therefore that's had implications for the budget or is it because policy decisions have been made which have deteriorated the budget bottom line or if it's a combination of both what is the proportion shared by each combination. I think those are reasonable questions for the public to want to want to have answers to.
>> So I I I hear your questions. I I'm just saying that the way in which the medium-term is generated, there is not that breakdown um that is um that that can be generated. But I'm I as I've said to you, Senator, you know, this is medium-term projections have been produced this way for as long as medium projection medium-term projections have ever been produced. >> I'm not suggesting there is not. No, no. All I'm saying is I
>> you're asking for something different to be done and that's not the way Treasury does their medium-term um We sorry
minister we just heard the secretary say that policy decisions are incorporated into this like there are two component two of
>> the ingredients that go into yeah
>> there are two possible components of this of these changes policy decisions parameter variations in order to know what that change is you have to add those two things together and so if you've added those two things together to get a total number you must also be able to reverse engineer that and say this much was from parameter this much was from policy I don't understand why this is impossible to do.
>> 2 minutes, Senator Paterson.
>> Well, we're not going to change the way medium-term projections are done.
>> I'm not asking.
>> Well, you are. That's exactly what you're asking.
>> I'm not. I'm just asking how you constructed this medium-term projection.
>> They are put together in the same way they were done under your government.
>> I'm not suggesting anything.
>> Secretary has answered your questions. Minister, look, she's >> think we talked to fiscal group this afternoon. Um but >> will fiscal group be able to answer that question? >> And 3.6 give you the information you're after.
>> So will fiscal group be able to answer
that question? fiscal group will be able to give you more detail on how some of the individual will like if you like how the medium-term is constructed that that's what they'll be able to provide you with and um but um I I can tell you now that we don't we we do not have a split between policy decisions and expenditure variations um over the medium term.
>> Well, how on earth did you arrive at the number if you didn't add the policy variations to the parameter variations? I just how could you possibly produce it anything without having those two
>> Senator, I'm just I'm just telling you about the method.
>> Okay, last question then. Look, I've had a chart provided to me which kind of just puts in graphic form the numbers. I might ask the secretariat to provide that to you >> um from my EFO the numbers from my EFO and it just shows the difference between
>> or someone else has produced a document for you.
>> They're your numbers minister from your document. If you disagree, we can use >> That's fine.
>> No, I'm just asking who's the author of the documental.
>> So, the the thing that I'm interested in is that the the largest variation in the medium-term appears to be in 2930. Um, in other years, the variation is less, but um the variation in 2930 seems to be largest. Secretary, can you explain or account for why there's a particular divergence in the budget bottom line in the 2930 financial year?
chart 3.1 that's been produced with a different axis? Is that all this is?
>> Yes, they're your numbers. This is just so it's visual.
>> All right. Well, this just been given to us, so we're trying to
>> Yeah, that's fine.
>> understand it.
>> I mean, you can we could just do it by the numbers in the in my if you prefer, but there's a big the biggest variation is in the 2930 financial year. And I'm
don't so you you can ask fiscal group you know what what are so on the payment side there they there do there are lumpy decisions which are incorporated in the so there are that sorry let me just see here what's this this is just oh this is over the medium-term projections oh yeah so in the in myo it does outline what some of the significant shifts Uh um but I but I I don't think it says in the particular year you're talking about. So I think you should take that up with fiscal group and see whether they can help you.
>> Secretary, you just said there are particularly lumpy policy decisions that are reflected in my info. If you know that, you should be able to tell me what they are and how what they had up to.
>> No, no, what I'm saying is that there there are lumpy payments over time. So that so it is it is not surprising that payments as a share of GDP moves up and down because there are decisions about >> six months. What's changed in six month? >> No, there are decisions about defense spending or there decisions. That's what
we're trying to get to the bottom of what are these decisions which have led to this change.
>> No, all I'm saying is that and sorry the other thing is that there are there's some of the lumpiness comes out of as I understand it the debt issuance policy. So there are a range of different things. Very happy for you to take that up with fiscal group and see how they can help you.
>> I think we'll have to thank you.