7 February 2018
Transcript - #2018010, 2018

Interview with David Speers, Sky News

SUBJECTS: equity markets; wage growth; Productivity Commission draft report into competition in the Australian financial sector; Turnbull Government’s Banking Executive Accountability Regime passes the Senate; Liberal Party

DAVID SPEERS:

Treasurer, thanks very much for your time this afternoon. A lot of people will have been watching their investments, their savings, pretty worried over the last 24 to 48 hours, there’s some better news today but what’s your message to them?

TREASURER:

I think to just remain calm and take the advice. We have seen the markets improve today. I mean there’s a difference between what happens in the real economy and what happens in markets, and I think those investors understand that and many of their superannuation investments obviously are linked to indexes and so there’s a stability that is built into that longer term horizon. So, take the advice but I think what we have to be clear about here is what has been happening has been a recalibration in the United States that’s had its ripple effects to many markets but we’re now seeing an immediate response to correct back the other way.

SPEERS:

So, a recalibration, not something more serious?

TREASURER:

No, clearly not. A part of it, a substantial part of it in the US is about the response to their economy doing better than expectations, a more bullish view about where inflation is going, that wage data that came through last week which was above market expectations. So in some respects, it’s actually a response to better news.

SPEERS:

Indeed. Is that how you see this – the cause of this? Better economic news drives the market down – on this occasion at least?

TREASURER:

What it has changed is what the market was seeing in terms of where they think inflation’s going and what’s been happening with bond yields. So, that could also be fed into by the expected increase in borrowings out of the US. In Australia, we’ve stopped issuing new borrowings for everyday expenditure and our net debt as a share of GDP peaks next year and then falls to 7.7 per cent over the next ten years. So, what’s happening in the Australian real economy and with our own fiscal situation and with our own bond issuances is quite different to what we’re seeing in the States.

SPEERS:

You’re right. The wage increase is a little higher than expected in the US sparked this  sell-off on Wall St – the funny thing is we desperately want some wage increase here in Australia, don’t we?

TREASURER:

Yes, but in the US you had price to earnings ratios significantly elevated to what they are in Australia and I was in the US last week and those observations were being made about how long could those sort of levels times earnings could be sustained in those US markets. So, I think for many there was an expectation that a recalibration was going to occur at some point.

SPEERS:

So you’re sort of saying we’re not as exposed in Australia with those price earnings ratios, we shouldn’t…

TREASURER:

Our market’s different.

SPEERS:

…pull everything out of the market.

TREASURER:

Of course not. Of course not. That’s never the response and I think that’s what we’re seeing play out today.

SPEERS:

Keep your money in the share market.

TREASURER:

Yes, you just keep calm with these things. I mean, the Government is as well. We don’t jump at shadows.

SPEERS:

Let me come to this issue of wages. It’s a big issue – cost of living for everyone both sides of politics have different ways of tackling it. Just tell us, what is your plan to get wages up?

TREASURER:

For companies to invest, grow their business, see their returns rise so they can invest more in their employees.

SPEERS:

How do you do that?

TREASURER:

By giving them the opportunity and the head space in the room to earn more. To say to them, “What you’ve earned, we want you to keep so you can put it back into your business in your employees to remain competitive.” And that can be in higher wages, it can be investment in new equipment, it could be investment in new premises, plant, new products – that’s how your business grows and we’re saying to those businesses, “we want to give you that headroom. We want to give you that backing.” Starting with small and medium sized businesses and working our way up – which is the difference between the US plan because that’s what is affordable within our Budget environment. They’re the laws of supply and demand, David.

SPEERS:

You’ve been pointing to the US experience with the Trump tax cuts, they are bigger than what you’ve proposed and they are immediate – yours, as you point out, are stretched over time. So, are we really going to see the wage increase that you suggested we might?

TREASURER:

This isn’t happening in isolation. It’s not the only thing we’re doing. We’re doing everything from making our banking system more competitive and we’ve been pursuing that. We’ve got a defence industry plan which is about helping our manufacturing industry transition. We’re opening up new trade for the country and for businesses. We’ve investing in innovation. We have a broad-based economic plan which has one goal and that is to drive investment, because when businesses invest they get more competitive and they grow and that lifts the earnings for all Australians.

SPEERS:

Okay, but if you work for Coles or Myer or Woolies, as you pointed out yesterday, you’re not going to see that company tax cut for those big companies for six years or so…

TREASURER:

Correct.

SPEERS:

When are those workers going to get a wage rise?

TREASURER:

Again, it’s about the growth in the economy. Who benefits from the growth in the economy? Coles and Woolies are not immune from a growing Australian economy and a boost in consumption. All that…

SPEERS:

Well it’s been growing for a few years, wages haven’t.

TREASURER:

Yes, and one of the reasons why we haven’t seen wages growth in Australia that we might have seen in other periods of time is because we have had this hangover from the mining and investment boom and the impacts of commodity prices on keeping those incomes at level some years ago…

SPEERS:

Just explain this to us because Labor’s been running this line: company profits went up 20 per cent last year, wages two per cent.

TREASURER:

This is the great lie of Bill Shorten and Chris Bowen. In one year, we had an improvement in the gross operating surplus – which is basically company profits – and that went up in one year for mining companies based off the back of a sharp spike in commodity prices. That wasn’t felt by the corner shop. That wasn’t felt by Coles or Woolies. It was in the mining sector and isolated to one part. If you go back over the last six years, the growth in the gross operating surplus, company profits, and you look at the compensation of employees figures in the national accounts – that’s the proxy for overall wages paid in the country – that grew six times and more faster than company profits over the last six years. If you want an increase in wages, businesses need to be earning more consistently. They need to know they’re going to keep earning more and when they know they’re going to keep earning more, they’re going to invest more and that’s when wages lift. A one-off shock from commodity prices is not going to deliver a sustainable wage increase.

SPEERS:

Would you like to see businesses give that commitment? Maybe not a compact per se with the Government but some sort of commitment from them publicly that they will use a company tax cut to boost wages?

TREASURER:

Some already have. From memory, I think Qantas have already even said that…

SPEERS:

Should more of them do that?

TREASURER:

I’ll leave that to them…

SPEERS:

It would help [inaudible]…

TREASURER:

That is obviously helpful. It’s obviously helpful for companies to talk about which way they might do it but what I’m not in the business of as Treasurer is telling every business in the country about how they should be running their show. I want to give them the room and the space to be able to grow and invest and make the calls that they need to make in their business to grow their business because the wage growth just doesn’t come from the passing through of a tax cut for a business, it comes from the growth that they’ll experience by investing more. One of the reasons you grow productivity – which basically means more and better paid jobs – in the economy is when you get more investment in the tools and the equipment and the support and the training that each and every worker gets.

SPEERS:

On the banks, the Productivity Commission says, “get rid of the four pillars policy.” What do you reckon?

TREASURER:

They actually didn’t say that. They’ve highlighted the fact that it may well be redundant but then they warn at the same time that if you abolish the four pillars policy, you may end up with three. So, it’s a question of whether they think that would actually be a better outcome. I think we need to recognise that our banking and financial system is heavily regulated and it is also one of the strongest in the world. Now, if you want full [inaudible] competition in your banking and financial sector, abolish the four pillars policy and you abolish all the foreign investment controls you can have in Australian banks, well, you’d certainly increase competition but probably your banks would be owned by foreign companies…

SPEERS:

So, you’re not looking at that?

TREASURER:

Well if you take those arguments to their extension. I think what the Productivity Commission has largely observed is that that four pillars policy is almost self-reinforcing now. If you were to remove it you’d be more likely to see fewer of those banks at that level, not more.

SPEERS:

Okay, so that’s a no? That’s a no.

TREASURER:

No one’s proposing to change that, neither is the Productivity Commission.

SPEERS:

But the Productivity Commission also suggests your bank levy will result in higher fees for customers.

TREASURER:

No, I don’t accept that and there’s no evidence to support that in their report either and I also don’t accept their analysis when it comes to the macro-prudential controls we’ve put on interest-only lending either. It basically doesn’t take account of the fact that those measures were designed to do this: an investor will be prepared to spend ‘x’, a fixed amount on what they’re going to pay on a loan. Now, in sending that price signal, they’re still paying the same amount that they were in interest but they haven’t borrowed as much and so I think it’s a fairly superficial analysis. It’s not modelling and I certainly wouldn’t agree and I know that’s the view of a number of other agencies. You’ve got to get stability, system strength, all of these things balanced up. Now, we put those measures in place. We saw house prices fall in growth from 17 per cent to one per cent in Sydney and if that hadn’t happened then those investors just would have borrowed more and they would have been claiming the same deductions and I don’t think that takes into account.

SPEERS:

Just quickly on the banks, the CBA – Commonwealth – today allocated around $200 million to help them pay Royal Commission costs. Is that roughly what you’d expect the banks to be paying and who’s going to end up carrying that bill?

TREASURER:

It’s going to be an expensive exercise and we’ll see what it produces…

SPEERS:

Customers? Shareholders will have to wear that?

TREASURER:

People know what my views are about this and how it became regrettably necessary to go down this path but today, the Banking Executive Accountability Regime passed the Senate. We’re just getting on with it. We’re going to get on with making our banking system more competitive, even stronger than it is today and ensuring that it’s accountable and that legislation – necessary legislation – controls and sends clear messages of accountability to senior banking executives that the rules apply to you too.

SPEERS:

Finally on some internal political matters for the Liberal Party. You’re the former state director in New South Wales and the New South Wales AGM for the Liberal Party is on Saturday. A lot of internal debate as you’d be aware about how give the rank-and-file members the greatest say. There’s the Warringah motion to give a much greater say on pre-selection, now a Bennelong motion which is a compromise model. Where are you sitting on this?

TREASURER:

They’re all in one way or another talking about plebiscites and I’m on record supporting plebiscites, the Prime Minister is, the former Prime Minister is so I don’t think there is a great debate about that. What concerns me about the Bennelong motion as opposed to the Warringah motion is that I really worry about the [inaudible] for rural and regional members of the party in New South Wales. I’m a pragmatist when it comes to seeing how organised groupings work in political parties. They tend to have an ability to survive almost anything in any political organisation – you know, the school PMC for that matter – but you don’t want to see that extend its influence out into the rural and regional areas and that’s why I respectfully say to my fellow members that they should be very cautious about extending a central component to country and rural pre-selections and also the method of the Senate, it really does worry me with the portional representation model, that that will also lead to a silencing of the voice of rural and regional New South Wales party members and as a former director, out in those rural regional areas, I didn’t see some of those other influences as much as I saw in the city.

SPEERS:

And a question about when all these changes should take effect,  before the coming state and federal elections?

TREASURER:

  I’ll leave that up to them. I’ve done the role of director. I’ll leave it to Chris to work out what’s practical and it has to be practical. Once the party’s made a decision, well, they need to get on and implement it.

SPEERS:

Treasurer Scott Morrison, thank you.

TREASURER:

Thanks, David. Great to be here on the bench.