15 March 2016
Transcript - #2016031, 2016

Q&A, Australian Financial Review Business Summit, Melbourne

QUESTION:

Thank you, Treasurer. At the end – it was a great way to end it [your speech] – the need to reward the risk takers, so that they can become the growth makers. You've gone into, you've got a Budget which is in a pretty entrenched deficit – very hard to get out of. You've tried to get up a very big, substantial tax reform package behind the scenes. That's pretty difficult to do. Coming into this Budget, how much do you think you can at least set the scene for significant decreases in personal income taxes, we've got a top marginal rate now of close to 49 per cent, and as well company taxes given the stress of 30 per cent, which is high by international standards, and the need to get investment in the non-mining sector. How much can you at least set out a path for relief to reward the risk-takers for a lower personal and company income tax?

TREASURER:

Well, all of that Michael, can't be done in one Budget as I've just announced. It has to be done within budget after budget after budget. I think there's an expectation that every single one of those boxes is able to be ticked in one budget, but I think that's unrealistic. Managing the transition is something you do over time, not in just one point of time. We are in the situation we're in because of the state of the budget that we inherited and the size of the deficit that has become entrenched, and we have to fight our way out of it and work our way out of it and are doing that by just ensuring that you don't bring on, wherever possible, new expenditures on the books and you manage the cost base as tightly as you possibly can. There are enormous pressures on the Budget. Of course there are pressures, on the NDIS which is coming down the road that's a commitment that was made in good faith and bipartisanship, but when it was announced there was no plan to fund it. We believe that this is an important change, and we need to be able to fund it. To do that, we obviously need to address the things in the Budget that make that possible. There are also the pressures coming from the states and territories. On the issue of tax that you've raised, I want to be clear about the process that we've been undergoing. Yes, we went through a process where we looked at the issue of the GST. The GST wasn't about the GST. It was about whether we would engage in a tax mix switch to reduce personal income tax. You can fund personal income tax cuts in a number of ways. You can fund them out of a Budget surplus, which we don't have. You can fund them out of growth rates, strong growth in nominal GDP – doesn't exist. Last year's nominal GDP is 1.9 per cent. When they were consolidating budgets and giving tax cuts in previous times, I think the nominal GDP growth in the 90's was up around 5.4, or 6 per cent I think it was. In part in Paul Keating's time it was over 11. So, nominal GDP growth is not there to drive those reductions in income tax. The third area is to do a switch. So we examined it, we put it on the table. We didn't do what other governments had done, and said we're going to rule this out on politics. If we wanted to rule it out on politics we could have done it last September. The politics are obvious. What was not obvious, is no-one had actually sat down and done the work and said – well, will this lead to growth, what will it look like, what will the compensation be and what will that do to the ultimate goal you're trying to achieve. The simple facts were, the growth gains were modest and they were overwhelmed by a compensation bill because of the size of transfer and welfare payments in this country, which would have gone up to about one per cent of GDP. So we did the work, and we decided not to proceed I think carelessly and recklessly down a path that wouldn't achieve our objective. We'll take our time on these things, the Budget will be in May. We'll do that with every other measure that we're working.

QUESTION:

How conscious are you of the drag on the economy, on the risk-takers, of having a company tax rate of 30 per cent – high by international standards – and a 49 per cent top marginal income tax rate that cuts in at a relatively low rate of income.

TREASURER:

Well, the deficit levy will be coming off at the end of next year. That was a temporary measure introduced when we came to government a couple of years ago. Budgets are about choices, and I described it as dancing on the top of a pin head the other week, in terms of how we manoeuvre around this. So choices are going to have to be made about if there are revenues that are able to be derived as a result of the [inaudible] that I've talked about – that's the outcome. Well they have to be applied to the place that we think is best going to drive jobs and growth. Now, that will mean setting priorities and making decisions about whether its companies or other areas. In the other areas, like personal income tax, it has to be something that can make a difference. The best way to drive income tax cuts ultimately, is off growth. So our focus is very much on, let's drive growth.

QUESTION:

Is it the case, largely, that you'd like to give income tax cuts, it's very hard to do when you've got a Budget deficit and the growth of the welfare state spending, basically through the resources boom, has made it hard to deliver them. So, now you're having to basically do the hard work to get at what you might call, the middle class welfare – is that where you've really got to, you've really got to make big gains on that, and that's not easy, and that might take some time?

TREASURER:

Well we have made some gains on that and we've had our frustrations on that as well. I'll take you through this example to illustrate the $13 billion dollars in savings that we're trying to still get through the Parliament, one of those is the changes to the Family Tax Benefit supplement A and B. If you're not familiar with it, it's a once a year payment at the end of the financial year, provided to recipients of both of those payments. It was introduced many years ago as a balancing item to deal with the income estimation method for working out what the fortnightly payment would be. So, at the end of the year if you'd overestimated your income, you'd take it as a balancing item off that end of year supplement. With a one-touch payroll system, the income estimation doesn't exist anymore. So, we don't need that supplement any more. It will save us a billion dollars a year if we get rid of it. It has no welfare purpose whatsoever – but it's been opposed. This is an obvious Budget saving that can ensure that those resources can be directed to areas of either deficit reduction or as we proposed, to ensure more affordable child care for Australian families so we can see more families getting into the workforce. So, they're the sort of savings we're trying to achieve. They're the sort of savings that have been frustrated. Let's come back to your point, which is really about the choices we have to make and where we want to focus. Yes, you have to get welfare under control, and that is going to take a long time. We've already introduced many measures in this area, and I introduced many of them when I was the social services minister. That must continue down the path, and should we be elected, I think this will be an important area that particularly Christian Porter is focusing on, to make that system work better, to have the right incentives to get people into work and not be on welfare but on the issue of income tax. Well, it is our goal, I think, if the issue of the GST proved anything, if the style I and the Prime Minister have been engaged in over the last six months proves any of this, we will try and find a way to ensure that the earners in our economy get a better deal out of our tax system. We will have to start with those areas that are most likely to drive growth because the resources to do this are limited.

QUESTION:

As you said in your speech, Treasurer, and when you were social services minister you moved to basically pull out some of the middle class welfare that got people with assets of over a million excluding their house were still getting the aged pension – you tightened that up. Now, you have signaled again in your speech, that they are looking at superannuation. Last week the Assistant Treasurer came out with it seems to be quite an important purpose of superannuation – that superannuation and tax breaks are not there to accumulate wealth that can be passed to future generations which is a big signal that you are giving. Out of some of the reports that have gone to the Government, such as the [inaudible] report, suggested that in the mid-2000s 80 per cent of Australians on current measures will still be receiving a full or part pension. Is that a sustainable thing? What you are saying there is that pensions should be a welfare benefit and the super should be there to keep people off the welfare benefit. Is 80 per cent something that really needs to come down?

TREASURER:

Well, it depends on the composition of that 80 per cent. The other thing that that report shows and the intergenerational report, I think, shows is that a proportion of those who are on a part pension and those on the full pension in that 80 per cent actually lose. So, the vast majority of people there on the part pension, well a greater proportion of those are on a part pension than would have previously been on the full pension and that would be the outcome as the superannuation system matures…

QUESTION:

…still 80 per cent of Australians will be in some sort of…

TREASURER:

Well, it will be what the system delivers and that is why you have got to target your system on superannuation, where you have to target and make every incentive work for you is on those Australians who are most likely to be at risk of being dependent on a welfare payment into their retirement i.e. the pension. So, the reforms introduced really focusing on that sweet spot of where you can best channel those incentives rather than spreading them all over the place, rather than allowing other objectives which may have either have built up over time just [inaudible] or may well have been there as an issue or objective like the national savings purpose that was talked about as one of the original purposes. Well, $2 trillion I think that box can be ticked. So, we can really focus, I think, now on incentives on the areas that reduce the risk of people who might otherwise be on the pension not be on the pension. So, my objective would see that be less – that would be my objective.

QUESTION:

And in doing that in one way by looking at reducing, in effect, the access to tax breaks for people to get build up large superannuation balances that gives you more money to deal with other things such as tax breaks for example.

TREASURER:

It's not an estate planning tool. That is not what superannuation, we believe, was designed to be. It was designed, as I said, to help people who might have otherwise been on the pension to have a pool of retirement savings that they can draw down on to live on and to enjoy a quality of life in their retirement that they have worked hard to achieve. Being independent in retirement I put up there with owning your own home, raising your kids and making sure they are well educated and healthy. These are the great goals I think in Australian lives. That independence from the state, the ability to say I am able to get, like any other citizen, and I am not drawing. When we are able to achieve that I think that is quite a considerable achievement.

QUESTION:

Treasurer, finally, you were at the G20 Finance Ministers meeting in Shanghai a couple of weeks ago. There was a lot of gloom and doom particularly coming out of the IMF and the OECD about the world economy and China. They are calling for another round of coordinated stimulus. I think Australia was, you were opposed to that and I think you were [inaudible] saying that the rest of the world needs to focus of structural measures rather than new forms of helicopter drops of money from the sky and all those sorts of things. What is your reading, why are the, effectively the Northern Hemispheres, so into unconventional policies not focusing on the basics?

TREASURER:

Well, Glenn Stevens and I were the [inaudible] voices of optimism in the room at the G20 and I think we had allies; George Osborne was an ally in this, Minister Schäuble from Germany, he was also a supporter of this view. Look, I think what has happened over the last…that's why I made the reference to QE. I mean the morphine was there for the patient at the time but the patient is finding it hard to kick some seven or eight years later. There is a default setting in many of these places to go to, well, we must stimulate aggregate demand – the answer is monetary policy. Well, those things don't create demand they just bring it forward. The private sector creates demand, this was our argument. We need to focus on the structural reform policies that connect, unleash private demand in our economies. The Chinese Government made comments supporting the [inaudible] they talked about having a budget led to the efficient allocation of capital in their economy – music to our ears. These are the sorts of things that need to drive economic growth and the default setting of a collective action of monetary or fiscal stimulus I think has had its day in those forums. There was a much greater, I think, focus ultimately after the discussion of what are the structural reforms that are necessary in each of these economies to drive growth in each of these economies. From Australia's perspective to meet, really the old hand of the G20, Mr Schäuble and he is sitting there saying it is his goal to get gross debt to GDP to 60 per cent. You know and we are sitting, even with the states, at just over 30 per cent and peaking at that. It just goes to show how well Australia is positioned at the moment. By our standards gross debt to GDP of over 30 per cent is too high, by Coalition standards that is too high. By Coalition standards 25.9 per cent of your economy being on government expenditure is too high. Our standard says that that should come down and so I was having discussions with other finance ministers saying, well our plan is to consolidate the Budget. Our plan is to drive investment and growth and [inaudible] the economy. There are still others who want to go to the other room, well, I think history will serve us better.

QUESTION:

Treasurer, we have run out of time. Ladies and gentleman put your hands together for Scott Morrison.