QUEENSLAND TREASURY

2019-20 Budget: Economic and Fiscal Update

20 November 2019

Patrick WildieAssistant Under Treasurer, Economic Strategy Division

QUEENSLAND TREASURY

Structure of the Queensland Economy

QUEENSLAND TREASURY

The economy is constantly adjusting

0%

20%

40%

60%

80%

1864 1901 1933 1961 1976 1986 1996 2006 2016

Farming and other ruralMiningManufacturing , electricity and gas, constructionServices

Employment by industry, Queensland

3

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Services based economy

4

1. Percent of gross value added (GVA), nominal. Tourism is 2017-18

Source: ABS 5220.0 and Tourism Research Australia.

Share of economic output, by industry1, 2018-19

-8.2%

-18.3%

28.5%

5.2%

19.8%

11.6%

5.4%

55.0%

-100 -50 0 50 100 150 200 250

Balancing Item

Overseas Imports

Overseas Exports

Public Investment

Public Consumption

Business Investment

Dwelling Investment

Household Consumption

Queensland gross state product2, by component, 2018-19

2. Nominal, $ billion

Source: ABS 5220.0

0 3 6 9 12

TourismMin ing

ConstructionOwnership of dwellings

Health & social assistanceManufacturing

FinanceProf. servicesPublic admin

TransportEducation

Retail tradeWholesale tradeSupport services

UtilitiesRental & real estate

Accomm. & foodAgriculture

Other servicesCommunicationsArts & recreation

Rest of Australia

Queensland

Household spending the largest component.

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But resources still clearly the largest export sector

5

1. Nominal, $ billion

Sources: unpublished ABS trade data and Queensland Treasury.

Queensland overseas exports, by sector1

0 5 10 15 20 25 30 35 40 45

Other goods

Tourism

Thermal coal

Rural

Metals

Other services

LNG

Metallurgical coal

2018-19

2008-09

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Exports are closely linked to growth in Emerging Asia

6

1. Nominal value of merchandise exports, $ billion. Sources: ABS unpublished trade data and Tourism Research Australia.

Queensland merchandise exports by country1

0 3 6 9 12 15 18 21 24 27 30

China

Japan

India

South Korea

Taiwan

Vietnam

Malaysia

USA

Netherlands

Indonesia

2008-09

2018-19

International tourist nights(millions)

0 1 2 3 4 5

United Kingdom

New Zealand

China

Taiwan

Japan

USA

Germany

South Korea

India

France200820172018

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But services sector is still the key employer

7

Source: ABS 6291.0.

0 5 10 15

UtilitiesInformation, media & telecoms

Rental, hiring & real estateArts & recreation services

Financial & insurance servicesMining

Agriculture, forestry & fishingWholesale trade

Administrative & supportOther services

Transport, postal & warehousingPublic administration & safety

Professional, scientific & technicalManufacturing

Accommodation & food servicesEducation & training

ConstructionRetail trade

Health care & social assistance

%

Queensland industry shares of employment, 2018-19

2019-20 Budget Economic Outlook:As at June 2019

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Queensland’s Economic Performance in 2017-18

9

• Economic growth strong in 2017-18 (3.5%).

• Household consumption was soft (up 2.3%).

• Strong economic activity was matched by strong employment growth (up 4.1%).

• Unemployment rate improved (6.2% to 6.0%) but tempered by greater participation.

Gross state product, by component in 2017-18

1. (CVM, 2016-17 ref. year)2. Includes interstate trade and statistical discrepancy.Source: Queensland State Accounts

Expenditure Component Value1

($ billions)Annual % Change

Household consumption 192.8 +2.3

Dwelling investment 19.4 -3.9

Business investment 38.4 +13.1

Public final demand 84.7 +4.0

Overseas exports 89.2 +2.6

Overseas imports -65.1 +13.5

Other2 -18.2 -24.5

Gross State Product 341.2 +3.5

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External economic drivers ... Softer global and national outlook

10

1. Rounded to nearest decimal place.Source: International Monetary Fund.

• IMF, RBA and Commonwealth Treasury all downgraded their growth forecasts.• Weaker domestic growth and inflation induced a RBA rate cut.

IMF global growth forecast1 by iteration (annual % change)

Sources: ASX and RBA.

ASX cash rate futures implied yield curve(%)

3.0

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4.0

2018 2019 2020

Apr-18 Jul-18 Oct-18 Jan-19 Apr-19

0.50

0.75

1.00

1.25

1.50

1.75

Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20

4 Dec 2018 27 May 2019 RBA cash rate

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Key domestic trends…Housing materially weaker

11

Sources: ABS 5601.0 and 5609.0.

• Approvals had fallen faster and further than previously anticipated. • Finance commitments had also fallen substantially. • Earlier weakness in investor market has spread to owner-occupiers.

Owner-occupier finance commitments(trend, monthly, $ billions)

3.0

3.2

3.4

3.6

Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Budget 2019-20 MYFER 2018-19 Budget 2018-19

-2.8%

-13.1%

2,000

2,500

3,000

3,500

4,000

Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Budget 2019-20 MYFER 2018-19 Budget 2018-19

-7.1%

-32.1%

Dwelling approvals(trend, monthly)

Source: ABS 8731.0.

QUEENSLAND TREASURY

12

Private investment falling in 2018-19, but starting to recover from 2019-20

• Housing downturn and easing in business investment slows 2018-19 growth in domestic activity. • GSP growth easing from 3% in 2019-20 to 2¾%, but with stronger domestic activity across FE’s.

Contributions to quarterly SFD1 Growth, Queensland Contributions to GSP2 Growth

2. CVM, 2016-17 reference year.Source: Queensland Treasury, Queensland State Accounts (QSA).

1. Trend, CVM, 2016-17 reference year.Source: ABS 5206.0.

-2

-1

0

1

2

Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19

Household consumption Dwelling investment

Business investment Public final demand

State final demand

-6

-3

0

3

6

2012-13 2014-15 2016-17 2018-19 2020-21 2022-23

Domestic activity Trade Sector GSP

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Overseas exports and commodity prices

13

Overseas merchandise exports, Queensland(original, year-ending, $ billion)

Sources: ABS unpublished trade data and Queensland Treasury.

0

15

30

45

60

75

90

Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19

Metallurgical coal LNG Minerals

Rural Thermal coal Other manufactured

Other non-rural

Major exports prices, Queensland(Index, rolling quarterly, October quarter 2016=100)

80

100

120

140

160

180

200

Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 Apr-19

Hard-coking coal Thermal coal Semi-soft/PCI coal¹ LNG¹

1. Queensland Treasury estimate.Sources: ABS unpublished trade data and Queensland Treasury.

• Higher LNG and coal prices drive strong nominal exports growth, but volume growth subdued.• Commodity prices have moderated in recent months, reflecting a deterioration in global conditions.

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Services exports provide opportunities

14

Tourism in Queensland(millions, year-ended)

International student enrolments, Queensland(thousands)

Source: Commonwealth Department of Education and Training.

0

20

40

60

80

100

120

140

2008 2010 2012 2014 2016 2018

Asia Americas Europe Other

Source: Tourism Research Australia.

• Competitive A$ and higher incomes in Asia are expected to drive growth in services exports.• Strong link between education & tourism, although QLD growth softer than southern states.

Level % change

Mar-09 Mar-18 Mar-19 Year Decade

International nights 26.9 36.1 35.3 -2.2 31.3

Dec-08 Dec-17 Dec-18 Year DecadeDomestic tourist nights 60.0 64.3 68.2 6.2 13.7

Interstate nights 29.1 31.5 32.3 2.7 11.1

Intrastate nights 31.0 32.8 35.9 9.5 16.1

Day trips 23.6 30.7 33.6 9.4 42.2

QUEENSLAND TREASURY

Labour market conditions

15

Queensland labour market outlook1

1. Forecasts are from 2019-20 Budget. 2. Percentage change, year-average.3. Percent, year-average.Sources: ABS 6202.0 and Queensland Treasury.

4.0

5.0

6.0

7.0

8.0

0

1

2

3

4

5

2010-11 2012-13 2014-15 2016-17 2018-19 2020-21 2022-23

Employment growth² (lhs) Unemployment rate³ (rhs)

• After surging in 2017-18, employment growth expected to return to more sustainable rates.• Unemployment to stabilise at around 6%, before edging lower by the end of the FE’s.

QUEENSLAND TREASURY

Regional labour markets

16

Unemployment rate(%, year-average)

Change in unemployment rate by region(year to May 2019, percentage point)

Source: ABS 6291.0.55.001. Source: ABS 6291.0.55.001.

2

4

6

8

10

May-09 May-11 May-13 May-15 May-17 May-19

South East Queensland Regional Queensland

-3 -2 -1 0 1 2 3 4

Wide BayTownsville

Queensland - OutbackMackay

Darling Downs - MaranoaCentral Queensland

CairnsRegional total

ToowoombaSunshine Coast

Moreton Bay - SouthMoreton Bay - NorthLogan - Beaudesert

IpswichGold Coast

BrisbaneSEQ total

Reg

iona

lSE

Q

• Labour market conditions in regional Queensland have continued to converge with those in SEQ.• Supported by regionally important industries, such as resources & tourism.

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Population

17

• Population growth has recovered to be above the national average• Driven by a rise in education related visas and NSW inflows

Queensland overseas migration, Queensland(thousand persons)

Source: ABS 3101.0

-10

0

10

20

30

40

50

60

70

2004 2006 2008 2010 2012 2014 2016 2018

Education & training Visitors & working holidaySkilled visas New ZealandOther

0.0

0.5

1.0

1.5

2.0

2.5

-10

0

10

20

30

40

50

60

Jun-91 Jun-98 Jun-05 Jun-12 Jun-19

NSWVicWAOtherSyd/Bris house price ratio (rhs)

Net interstate migration1, Queensland(thousand persons)

1. Four quarter sumSources: ABS 3101.0, CoreLogic

QUEENSLAND TREASURY

2018-19 Outcomes – Domestic activity weaker than Budget forecasts

18

Components of 2018-19 GSP growth, Queensland

Budget 2019-20 QSA, June 2019

(Estimated actual) (QSA actual)

Chain Volume Measures, original % change % change

Household consumption 2½ 1.8

Private investment -3½ -5.9

Dw ellings -5½ -2.4

Business -3 -7.8

Non-dw elling construction -9¼ -15.3

Machinery and equipment 6½ 3.8

Private final demand 1 -0.2

Public final demand 4½ 4.4

State final demand 1¾ 0.9Net overseas exports ¹ ½ 1.2

Overseas exports of goods and services 3½ 3.9

less Overseas imports of goods and services 1½ -0.9

Gross state product 2¾ 2.5

Nominal gross state product 6 6.1

1. % point contribution to GSP growth.

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Risks and opportunities

19

• Challenges and risks to the Queensland outlook are primarily global and national in nature.• Weaker global conditions (US-China trade tensions and dysfunctional Brexit process).

• Uncertainty surrounding extent and duration of Chinese coal import restrictions.

• National outlook (property prices, downgrade to GDP growth and RBA rate cuts).

• However, factors that supported confidence in ongoing growth in the Queensland economy. • Population growth - 1.8% in December 2018, above national (1.6%), supported by more affordable housing

attracting interstate and overseas migrants. Expected to continue.

• Business investment - Returning to growth, supported by machinery & equipment, renewables and maintaining our large mining capital stock (new CSG tenements, Olive Downs met coal).

• Tourism and education exports - Continues to be boosted by lower A$ and growing Asian middle-class.• Housing renovation activity - Record high in March quarter 2019, expected to continue to grow strongly.• Federal election result - Removed some uncertainty for investment by households and business.• Real retail trade – Accelerated to 2.7% over the year to June quarter 2019 (national 0.2%).

2019-20 Budget Strategy

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Queensland’s Economic Plan

21

2019-20 Budget Fiscal Outlook

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Background/overview – Budget 2019-20

23

• Challenging revenue conditions:

• GST – revised down $1.5 billion since MYFER, $2.3 billion since 2018-19 Budget

• Transfer duties - $1 billion lower since MYFER, $1.3 billion since 2018-19 Budget

• Royalties strong, but expected to decline

• Dividends expected to fall

• Impact of natural disasters occurred in the 2018-19 - total cost of $1.3 billion over FEs

• Revenue growth is still expected to outpace expenses growth from 2021-22

• Service Priority Review Office (SPRO) has been established in Queensland Treasury – driving the

realisation of reprioritisation targets

• NFPS capital program spend of $49.5 billion over four years to 2022–23

• Borrowing to grow but remain affordable and controlled

QUEENSLAND TREASURY

How revenue is raised

24

Revenue by operating statement category(general government sector, %)

State taxation revenue, 25.1%.

GST, 23.5%.Other grants, 22.8%.

Sales of goods and services, 9.9%.

Interest income, 3.5%.

Dividends and tax equivalents, 3.7%.

Royalties and land rents, 9.3%. Other revenue, 2.0%.

Revenue by operating statement category(general government sector, %)

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Key revenues have passed peaks

25

1

2

3

4

5

6

8

10

12

14

16

18

2010–11 2012–13 2014–15 2016–17 2018–19 2020–21 2022–23

GST (lhs) Dividend and income tax equivalents (rhs) Royalties (rhs)

Key revenues(general government sector, $ billion)

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Spending by purpose

26

Health, 31.2%.

Other services, 8.4%.

Education, 24.9%.

Social welfare, housing and other community

services, 9.2%.

Economic services, 4.0%.

Public order and safety, 9.4%.

Transport and communications, 10.5%.

Environmental protection, recreation and culture,

2.3%.

Spending by purpose(general government sector, %)

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Spending by type

27

Employee expenses, 42.2%.

Superannuation expenses, 6.0%.

Other operating expenses, 26.2%.

Depreciation and amortisation, 6.6%.

Other interest expenses, 2.8%.

Grant expenses, 16.2%.

Spending by type(general government sector, %)

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Key measures

28

Measures Revenue over FEs

Petroleum royalty rate $378m (net of GST impact)

Land tax $238m

Land Tax absentee surcharge adjustment $540m

Office of State Revenue Compliance $220m

Reprioritisation target GG $1.7b

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Net operating balance

29

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 2016–17 2017–18 2018–19 2019–20 2020–21 2021–22 2022–23

Net operating balance(general government sector, $ million)

QUEENSLAND TREASURY

Purchases of non-financial assets

30

Purchases of non-financial assets($ billion)

0

2

4

6

8

10

12

14

16

18

2002–03 2006–07 2010–11 2014–15 2018–19 2022–23

General government sector Public non-financial corporations The size of the State’s infrastructure investment program has increased in each year since 2015–16.

Four year $49.5 billion program.

In 2019-20 this investment will directly support 40,500 jobs across Queensland, 25,500 in regions outside of Greater Brisbane.

QUEENSLAND TREASURY

Debt to grow to support infrastructure investment

31

0

10

20

30

40

50

60

70

80

90

100

1999

–00

2000

–01

2001

–02

2002

–03

2003

–04

2004

–05

2005

–06

2006

–07

2007

–08

2008

–09

2009

–10

2010

–11

2011

–12

2012

–13

2013

–14

2014

–15

2015

–16

2016

–17

2017

–18

2018

–19

2019

–20

2020

–21

2021

–22

2022

–23

General government sector Public non-financial corporations

Borrowings(general government sector, $ billion)

Economic developments since Budget:As at November 2019

QUEENSLAND TREASURY

External conditions have deteriorated further since Budget

33

Source: Consensus Economics

• Industrial production outlooks for Queensland major trading partners (MTPs) have weakened.• Trade flows of Queensland’s major trading partners have declined.

Industrial Production Forecast for 2019(annual % change)

* First 10 monthsSource: Datastream

Total Exports and Imports (9 months to Sept 2019, annual growth)

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Japan Korea Taiwan China India US EuroZone

Jan 2019 Mar 2019 May 2019 Jul 2019 Sep-19 Oct-19 Exports Imports

China -0.1 -5.0

Hong Kong -4.6 -6.5

Japan -4.9 -2.4

Korea* -10.3 -5.8

Singapore -4.0 -0.5

Taiwan +1.2 +2.6

QUEENSLAND TREASURY

Australia’s growth prospects have moderated, another rate cut possible

34

Nov 2018

Feb 2019

May 2019

Aug 2019

Nov 2019

GDP 3.3 3.0 2.6 2.4 2.3

HDI 3.0 2.7 2.6 2.5 1.6

Consumption 3.0 2.5 2.0 1.5 1.4

Dwelling Investment -2.4 -4.5 -6.7 -9.0 -11.3

Employment 2.1 2.1 2.0 2.2 2.3

Unemployment Rate* 5.0 5.0 5.0 5.2 5.2

CPI (trimmed mean) 2.2 2.0 1.7 1.6 1.9

RBA Economic Forecasts(annual % change in Q4 2019)

GDP: Gross Domestic Product; HDI: Household Disposable Income* quarterly, % in Q4 2019Source: RBA

0.87

0.52 0.49 0.460.37

0.13

0.48 0.51 0.530.60

0.01 0.01 0.01 0.03

0.0

0.2

0.4

0.6

0.8

1.0

Dec Feb-20 Mar Apr May0.75% 0.50% 0.25% 0.00%

Probabilities of Cash Rate implied by Futures Prices1

1. As at market close 11 November.Sources: ASX and Queensland Treasury

Thank You