Senator RICE: I am also interested in the level of growth. The statement says: As our economy transitions to broader‑based growth, near‑term economic activity will continue to be supported by household consumption, dwelling investment and exports, while falling mining investment is expected to continue to detract from growth … How important do you see housing construction continuing to be? How important has it been in sustaining positive GDP growth since the GFC?
Mr Fraser: Like many Western developed countries, it is a very important element. It reflects the aspirations of the community, and I think it is fair to say people have had higher aspirations for their dwellings. It has been a key part of our forecasts. When we do these forecasts, we look at the sectors, and housing is one which we have confidence in. The consumption and everything at the moment—not everything, but most things—point to that being sustained as well.
Mr Ray: We actually have dwelling investment growth slowing in 2016-17, but it is at a high level. That is based on our understanding of the supply chain.
Senator RICE: I am interested in the contrast between the statement there that dwelling investment is expected to continue to be a significant part of growth and yet, as you note, the forecast is that we are going from growth of 7.9 last year and eight this year down in 2016-17 to two and in 2017-18 to one. That does not seem to add up to me.
Mr Ray: But it is still growing and it is what is by historical standards an elevated level.
Senator RICE: So still growing but at a lower rate.
Mr Ray: The level is still high.
Senator RICE: Surely, given that tapering off will not be as important to our overall growth as it has been for the last number of years—
Senator Cormann: But it is still a net positive.
Mr Ray: It is still supporting growth, unlike, say, mining investment, which is detracting from growth.
Senator RICE: So you still expect to see growth in housing construction and growth in people employed in housing construction?
Mr Ray: Yes.
Senator RICE: It seems to me that there is still a bit of a contradiction given the importance that that high level of housing growth has been to supporting the level of growth we have had in the economy at the moment. Would you accept that, with those lower levels, it is not going to be as significant in future years as it has been?
Mr Ray: It is just as significant as it has been for the level of activity. It is not making as large a contribution to growth. That I accept. So it is moderating.
Senator RICE: Do you expect that there is going to be an oversupply of housing in the near future?
Mr Ray: No.
Senator RICE: Is it basically going to match population growth?
Mr Fraser: It has been a central issue for the Heads of Treasuries and the Treasurer's meeting with the Council on Federal Financial Relations about affordable housing, and there is certainly not going to be an oversupply of housing. The worry is more about keeping up the infrastructure, that is the land release, and the infrastructure to service that. That is why the state governments and the federal government have been working on initiatives to increase the supply of housing. We are certainly not in a position where we think there will be an oversupply of housing.
Senator RICE: With regard to infrastructure, how important do you see infrastructure being in terms of that overall growth?
Mr Fraser: I think it is very important. I have said that on previous occasions. I think around the world we are probably suffering a little bit by the lack of infrastructure in previous decades. Certainly the opportunities should have been grasped more firmly in the seventies and eighties to build infrastructure. In the countries that did—there were big infrastructure surges in the United States in the fifties and sixties, and in the United Kingdom, particularly with transport, in the late fifties and through the sixties—the return on that infrastructure is far, far greater than anybody forecast at the time. I think it is very heartening to see that there is a recognition over the past decade or so that we need to do something about infrastructure. The problem is, and it has always been, that it is slow. It is slow to develop the projects and it is slow to construct the projects. There have been a number of initiatives which came out of the G20: we have the Global Infrastructure Hub in Sydney, which is successfully operating and I am chairman of that, and we have the Asian Infrastructure Investment Bank, which we have a board member on. More beyond that, we have the multilateral development institutions focussing on infrastructure. But there is a lot of talk and we need to get on and start digging things.
Senator RICE: Again, there is the contrast between seeing that infrastructure is important and yet in Budget Paper No. 3, Table 2.3, in the total payments for infrastructure for the states, we actually see them declining over the forward estimates from $6.9 billion this year to $3.9 billion in 2019-20.
Mr Brennan: I think when I eyeball that table, probably the biggest contributor to that movement is the Asset Recycling Initiative. The Asset Recycling Initiative was always a time limited or a kind of one-off initiative aimed at providing states with some incentive to sell assets and to use the proceeds to invest or reinvest in productive infrastructure. The nature of that National Partnership Agreement that was signed with the states was with a view then that we would have a series of bilateral agreements with individual states about which assets they might privatise and what new investments they might make. The government is in an advanced stage of finalising those negotiations and there were always, basically, two milestone payments under that agreement: one at the point where the asset sale process commenced and the planning around the infrastructure investment was under way, and the second once the asset sale was complete and the actual construction of the infrastructure investment was underway. The profile we have there for the Asset Recycling Initiative, which was always a capped program, basically reflects the timing of those milestone payments. When I look at the reduction over time, those, along with the one-off payment to Western Australia, are probably the biggest drivers of the trend that you are referring to.
Senator RICE: Given what we hear about the rhetoric of the importance of infrastructure in maintaining the growth, particularly as the mining sector is in decline, that does not seem to be consistent with that in those fall off in payments to the states over the forwards.
Mr Brennan: I just note that it could reflect higher than usual payments in the early years; things like the Asset Recycling Initiative effect have added to the infrastructure spend over the short term.
Senator RICE: But would you agree that that trend, that pattern, is not consistent with infrastructure having a greater importance over the forwards in terms of its contribution to our growth?
Mr Fraser: Well, for the economy if we rely purely on the government sector to grow infrastructure, it will be a tough task. Where infrastructure can really blossom—and this is happening, but not as quickly as it should—is the private sector's interest in infrastructure. In my previous life we had a very large infrastructure fund and we were not alone in that—other asset management companies are doing that and have done that. That is where the real boost for our infrastructure will come—that people see opportunities with infrastructure and they invest in groups to do it. The thing around the world, which is what I referred to earlier, is the lead time from having an idea about infrastructure to somebody actually turning a sod of earth.
Senator RICE: Potentially what you are saying is that, if you have the private sector wanting to invest, it may pick up but it is not likely to pick up over the next four to five years, given that lead time.
Mr Fraser: Infrastructure takes about 12 to 15 years to return to investors, so if people are going to invest in infrastructure they have to be willing to accept no liquidity for up to 12 years. It is a very long lead time project. What is encouraging is in our region, in particular with those bodies that I mentioned earlier, there is a real sense that partnerships between the public sector and the private sector are starting to look more attractive and more likely. It is not just in transport, road transport, ports or railways; it is in the whole gamut of infrastructure, including social services. That to me is probably recognition, as I said at the start, that we underinvested as a world in infrastructure over the past few decades.
Senator RICE: But you are seeing that growth to be private investment in infrastructure that is going to be required?
Mr Fraser: If you took the number of conferences they have around the world as your gauge, you would be terribly optimistic. There have been a lot of conferences, but I am very hesitant to say that the game is won. But I do think there is certainly a lot more private sector interest in putting together infrastructure funds both here and elsewhere in the world to marshal investors—and increasingly retail investors—into infrastructure. That is part of a response to the low-interest rate environment. People are now starting to seek out other investment opportunities.
Senator RICE: Moving to interest rates, in the overall narrative you say:
The Australian economy is forecast to strengthen over the next few years—with historically low interest rates and a lower exchange rate supporting growth in household consumption and exports. I am interested in contrasting that with what is said about low-interest rates globally. You also say: Expectations for global growth have moderated over the course of 2016 … economic difficulties in a number of commodity exporting countries weighing on the outlook.
Monetary policy settings—
that is, low—
in advanced economies reflecting low inflation and a weaker growth outlook.
So you are saying that low inflation and exchange rates in Australia are going to have a different outcome than what you are saying is going to be happening globally.
Mr Fraser: Well we are having a different outcome than globally—
Senator RICE: Why is Australia different?
Mr Fraser: Bluntly, we are doing quite well. As I have said in the previous estimates, we have been swimming against the tide in a pretty good fashion. I am hoping the tide gets less and that we continue to swim stronger. We have benefited I think from not having been dragged into the vortex of negative interest rates, and I think that is a credit to the Reserve Bank. We are in a situation where we have got good real GDP growth. Prices are coming off, but we have a very good labour market.
Senator RICE: Basically it seems to me that the low-interest rates are what have fuelled the housing boom and housing construction. That is coming off, so why do you expect growth then to continue with low-interest rates that are not fuelling that growth elsewhere in the world?
Mr Fraser: The drivers of the housing market around the world are the subject of many studies. Every investment bank puts out a study that gives different conclusions. The fundamental driver of housing is demographics. Then you have affordability issues. Interest rates clearly play a part in that. But, as I said earlier, it is also a question of land supply. Of course, the situation with the housing market in Australia has very wide regional differences, as it does elsewhere. Then you also have situations where some cities are far more attractive to foreigners that others—clearly, New York, Zurich, for reasons I cannot understand, and London. Obviously, Sydney is very attractive. So it is a mix. You cannot just put it down to interest rates. But, clearly, the lower interest rates will not reduce demand by itself, but there are other factors at play. The banks, of course, have been making some changes to their eligibility requirements for housing, and we will see how it comes out.
Senator RICE: Looking at why Australia has been different over the last few years, housing seems to have been a big part of it. You are forecasting that the housing demand is going to drop off. The logical conclusion is: the combination of low interest rates and low growth will actually mean that the growth is likely to drop off in Australia, as well.
Mr Fraser: As Mr Ray indicated, it is a slowing, but it is a slowing from a much higher level. So if you think of the contributions to growth as weighted averages, we have a much higher level. Sure, the growth is lower, but compared with a few years ago it is still a very big contribution to our growth. And it is possible—
Senator RICE: Overall, given that we have housing dropping off, we have the mining sector dropping off, what does underpin your forecast for growth in the Australian economy?
Mr Fraser: I will hand back to Nigel, but I will say again that housing is slowing, but from a much higher level. Back to you, Mr Ray.
Mr Ray: I am not sure that I have that much to add to my earlier answer. We are forecasting real growth next year to be the same rate as real growth this year. Then we are forecasting acceleration in real growth in 2017-18. As I said in answer to Senator Wong, part of that is that we have a smaller detraction from growth from the fall in mining investment. Secondly, we have a larger contribution to growth from non-mining business investment.
Senator RICE: What sort of businesses are we talking about there in the non-mining business investment?
Mr Ray: We are talking about businesses right across the economy.
Senator RICE: In any particular sectors?
Mr Ray: In 2017-18, it is not in particular sectors; it is across the economy.
Senator RICE: Given that we seem to be relying upon these sectors, I am interested to know what the basis of growth is in those non-mining sectors.
Mr Ray: We have capacity utilisation, which is currently at historic highs. We have business confidence and business expectations that are relatively high. We have low cost of capital relatively—historically. We have continued demand both from offshore and from domestically. Our expectation is that, at some point, with those conditions, businesses will invest.
Senator RICE: So you do not have any particular sectors? It is just, given those underlying factors, there is a general sense that the non-mining sector will pick?
Mr Ray: That is right.
Senator RICE: Is there a reason why they will pick up more over the next four years than they have in the last four, for example?
Mr Ray: The underlying conditions in the economy are gradually tightening. It is the case that forecasts for global growth have been revised down again but, if you take our major trading partners, our major trading partners are growing at a faster rate than the global average and have been for some time, and that is continuing. So we are seeing quite strong growth. We have had growth in mining exports recently, particularly, iron ore but in the future, particularly, LNG. We have growth in services exports, including tourism and higher education. So those things are continuing to support growth.
Senator RICE: Thank you.