Australian economy will strengthen as tax cuts kick in, says Treasury’s Steven Kennedy

The global economy is uncertain, but the economic settings in Australia are right, new Treasury secretary says.

Secretary to the Treasury Dr Steven Kennedy and Minister for Finance Mathias Cormann appear before a Senate Estimates hearing. Picture: AAP

New Treasury secretary Steven Kennedy says he is “cautiously optimistic” about the Australian economy strengthening and is calling for patience in evaluating any positive impact from the government’s flagship tax cut package on consumer spending.

Appearing before a Senate Estimates committee on Wednesday, Dr Kennedy said the effect of the government’s low-and-middle-income tax refund program would “become clear towards the end of this year”.

He also pushed back against calls for fiscal spending, arguing that instances where stimulus was needed were rare and usually associated with external shocks.

“In periods of crisis, there is a case for further temporary fiscal actions … The circumstances or crisis that would warrant temporary fiscal responses are uncommon,” Dr Kennedy said.

According to the most recent official figures, retail spending rose by a weaker than expected 0.4 per cent in seasonally adjusted terms in August after the Australian Taxation Office had delivered tax refunds worth $14.5 billion to 5.4 million workers. This followed weak figures of between minus 0.1 per cent and 0.3 per cent in the three months prior.

The Australian economy recently logged its worst annual growth since the global financial crisis, and the IMF’s World Economic Outlook last week cut its growth forecast for the Australian economy from 2.1 per cent to 1.7 per cent — a level below the government’s and the Reserve Bank’s forecasts of about 2.25 per cent.

“I’m cautiously optimistic about how the economy is going to strengthen through this current cycle,” Dr Kennedy said.

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“My view is that the settings are right for the economy to strengthen. I don’t really carry significant concerns about the immediate or near term or medium term outlook for the economy. It’s really the global conditions. The set of issues that I’m watching very closely is how these tensions around global trade resolve themselves. The features of the domestic economy are strong and well balanced,” he said.

Dr Kennedy said it was difficult to point to data that showed the impact of the government’s tax cuts on household spending, but he believed the refunds would be having a “positive” impact.

“Maybe the environment was weaker than we expected. Trying to pick that out of the macro data is difficult. We should wait a little bit longer. We will never know the counterfactual,” Dr Kennedy said.

“Although we have some indicators of consumption available for the September quarter, which have not shown a particularly large improvement, these are only partial. And it is difficult to know what these indicators would have been had the tax cuts not been implemented,” he said.

“We will continue to assess the data on consumption as it becomes available, but it is worth noting that even if households initially use the tax cuts to pay down debt faster, this will still bring forward the point at which households could increase spending.”

The fact that businesses were not taking advantage of low interest rates to invest in their operations was a “puzzle”, Dr Kennedy said.

He questioned whether the “hurdle rates” used by companies to guide their investment decisions based on what return they could expect, remained too high.

It was Dr Kennedy’s first appearance at Senate Estimates as Treasury secretary. Dr Kennedy, who trained and worked as a nurse, was an economic adviser to Kevin Rudd and was hand-picked by Julia Gillard just days into her Prime Ministership to run a “business of government” section in her Parliament House office to end bottlenecks in the working of government, was appointed as the government’s chief economic adviser in July to take over from Scott Morrison’s former chief of staff Philip Gaetjens.