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Legislative Assembly for the ACT: 2003 Week 5 Hansard (8 May) . . Page.. 1723 ..

MR SMYTH (continuing):

Turning to the outlook for economic growth, Treasury's forecasts have traditionally been conservative. This reflects the mindset developed in the early and mid-1990s, when economic growth rates were low and there was a sense of disbelief that the higher growth rates of more recent years could continue. It also reflects an understandable desire on the part of officials to set a low estimate and be pleased when it is exceeded, rather than aim too high and then be criticised for being overly optimistic. On that basis, you would expect the forecasts of economic growth in this budget to be low, but you should not accept them as being valid or realistic.

Another reason for expecting low official growth forecasts in this budget is that the Treasurer wants to avoid any criticism arising from forecasting an increase in economic activity as a result of the bushfires. I must say I disagree. I am strengthened in my view by independent analysts of the ACT economy, who are saying that bushfire recovery activities will add about one percentage point to economic growth rates over the next 18 months. This is simply a reality-an outcome of an unfortunate event.

Hence, on an annual basis, gross state product will grow more like 3.8 per cent in the coming financial year, rather than the 3.1 per cent for this budget year. The incomes and profits of local businesses supplying materials, household items and services will be the main reason for that greater gross state product.

State final demand is also likely to be high, due to sustained household consumption and private investment, boosted by greater building activity and expenditure on domestic items. I am further strengthened in my view that economic growth will be higher than forecast by the general outlook for the economy.

The Treasurer forecasts an increase in interest rates, and uses that as a reason for keeping consumption and investment down. I disagree. The only factor that will suppress consumption and investment is a lack of confidence in the ability of Labor to control its spending, and fear that we are heading down the well-worn Labor path of big spending, higher taxes and deeper debt.

The Treasurer's forecast of gradual increases in interest rates was probably made several months ago, when he was spooked by media speculation about the future rates, both in Australia and the US. It is now clear, from economic information and associated analysis, that interest rates are on hold for the foreseeable future and are likely to go down, rather than up.

Moreover, the Treasurer's expectation of upward pressure on prices, because of the impact of oil prices and the extended drought, is not soundly based. The outlook for oil prices is stable or down, mainly because of the increased supply expected from Iraq and the difficulty OPEC will have in trying to reduce world supply, in the face of diplomatic pressure not to deny Iraq the means of recovery.

Mr Speaker, the impact of the drought is already factored into prices, so there is no point in trying to cite the drought as a cause of higher prices in the year ahead. In fact, prices could even moderate, as a consequence of recovery from the drought.

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