26 April 2018
Transcript - #2018059, 2018

Australian Business Economists, Q and A session, Sydney

Subjects: Australia’s housing markets; Turnbull Government’s Enterprise Tax Plan to drive economic growth; immigration

QUESTION:

Treasurer, thank you for your presentation. A lot of our discussion is on tax policy at the moment, the Reserve Bank of Australia for the past decade or two has highlighted the role of negative gearing and capital gains tax concessions in driving housing credit and elevated home prices. The Labor Party appears to agree with that sort of analysis and has a stated policy of dramatically reducing negative gearing and capital gains tax concessions. Newspoll says that the Labor Party might be the Government in the next 18 months or so. My question is, do you have, do you and the Treasury have a view on what dramatically reduced negative gearing and capital gains tax concessions might do to house prices and economic activity more generally?

TREASURER:

My view hasn't changed. It would damage the economy. What we did earlier in the year, you will be very familiar with, and I note today that one of those macro prudential changes has been lifted today and that is the credit growth speed limit that was put in place by APRA and that has been lifted today. I don't think that would have been a great surprise. It had done its job. The other change that was put in place was a cap on interest only loans, and that remains in place. Now, when those macro prudential measures were put in place, what they were designed to do, I think they have achieved. That is it has certainly slowed what had been a very high rate of growth in the housing markets, particularly in Sydney and Melbourne. Now, in Sydney we saw double-digit house prices towards the top end, not at the lower end of the double digits to even and even slightly below. Now it’s going to be different suburb to suburb but overall, that had the effect of curbing what had been the exacerbated price movements in those markets, which were fundamentally caused by an imbalance between supply and demand. So, the real issue is about supply and demand. A price signal that was set many years ago was not responded to in terms of housing supply for about a decade, and the lag of that was fundamentally responsible for the drive-up in house prices and that has been exacerbated by what was happening with investor credit growth. So, what we have seen from the macro measures that have been put in place is a slowing in that growth back to what I know the Reserve Bank sees as much more comfortable levels. So that, if the issue that they were trying to address, the Labor Party, was to remove that exacerbation of that growth, that has already been done. It has already been done. And that was done with what I call a scalpel, a very calibrated measure with macropru. Now, they want to get the axe out and then get someone else behind them with a chainsaw because these are not things that you can lightly change and reverse. Macropru measures can be changed this afternoon. They were changed yesterday afternoon, this morning. They can be done very simply. They can be done very carefully. And they can be altered. You go and put major tax system shocks into the housing market, for parts of our tax system for the housing market that have been around for a century, if you think that will have no impact on how, and [inaudible], it is their view, that this will have no real impact on the housing markets in Australia, then they are more stupid than I thought. I mean this is dangerous policy and it is driven by envy, it is not driven by economics. And this is what really, really concerns me about them. When people look at Australia I think they see two broader risks. They see. Obviously, our connection with Asia and particularly China, and they want to be assured that things there are continuing to do well. And I don’t think every economist in the room is ever going to agree on anything but I think there will be a pretty good balance who will say that that story is pretty reliable. The other one is their concern about our housing markets and the potential for a housing market shock and what that would not only mean for the housing market, but what that would mean for consumer confidence and everything that flows from that. If that were to occur, then we are into very, very different territory from the sort of growth story I was talking about today. And so we have taken action to deal with some of the pressures there. What the Labor Party wants to do, I think, would put us in real peril.

QUESTION:

Bill Evans, chief economist at Westpac. Treasurer, the corporate tax cuts comparison to the U.S., the U.S. cut there’s from whatever it was 32 to 21 immediately, and we expect to see a lift in investment that will lift productivity, that will raise wages, and some companies have even raised wages already in the expectation of wider surpluses, but our corporate tax cuts, as you pointed out, are extremely back-end loaded. The large taxpayers don’t get their 4-5 per cent until 2026-27. I think only about 5 per cent of the cost of those tax cuts will occur before 2021-22. Walk me through the profile that says that those corporate tax cuts will lead to some relief, say, for the Reserve Bank Governor on wages in the near term. Or is it really only very much a long-term aspiration to link those tax cuts with wages and investment?

TREASURER:

Well, obviously, Bill, it is one of the many measures the Government has taken in terms of spurring growth and addressing some of the other issues you raised. Let’s go back to the question specifically, in terms of what has already been legislated of our Enterprise Tax Plan, that I introduced in the 2016-17 Budget, which I note the Prime Minister and I took to an election and then won. We have been able to legislate now up to $50 million and that has been a bit more than $25 billion of that plan. So, already, the cost from that point of view, bearing in mind what I said towards the end of my remarks. That is not 5 per cent, that is almost half, it’s a big chunk of what has been legislated has come with that revenue impact. The $35 billion is what remains roughly of the tax plan taking us out over the medium term. The next one of those changes wouldn’t kick in until 2019-20. That would be when the next ones would sit. So largely everything is going to happen between when the plan was first introduced and the first of July is already legislated. So, it is a question of what happens after that. Our Enterprise Tax Plan is different to what some other countries are doing. I agree with reducing the tax burden, but you have also got to pay for it. People have made commentary about the position in the U.S. and what the impact will be on their fiscal situation, and what that means on markets and all of the rest of it. That’s fair enough to make those points but you can’t make those points about our plan, because our Plan has been deliberately staged, a bit like what the French have done. They have got also a staged plan and that means that they can be fully absorbed within the budget, keep us on a position of balance over the medium term, as well as respecting our tax speed limit. And the combination of all of these things, particularly having legislated cuts for many years in advance, is that businesses are able to fully understand what the tax impacts would be on any of their investments of a much larger scale, which larger businesses are more inclined to be looking at over a longer period of time. Smaller businesses will be looking at what is going to happen over the next couple of years, which is why we looked at them first. But the larger businesses we have done this to provide certainty. I actually equate a lot of what we are doing on our Enterprise Tax Plan with our infrastructure plan. We are investing in rail and road and airports and port infrastructure all around the country. Why? So, people can see where we are going, what we are putting in place to support the investments that they wish to make. The same is true with trade, to ensure that people who are investing in Australia understand what the rules are and what the conditions will be and what the opportunities are. So, when you combine all of these things together they tell a very compelling story. Even our infrastructure plan which I think has given the bank even more confidence when it comes to what the Government is seeking to do in terms of strengthening and building the economy which can lead to the growth in business which can obviously lead to what can happen with wages. So, that is the thinking behind the plan. That is the basic set out of the costs, and obviously the costs are bigger later in the period when you have everyone in the tent at that time and all of the businesses that are involved. I do make this point, not that Bill has raised it, but others have, particularly this idea that somehow you can separate out one particular part of the economy and apply, based sectorally, a different rate of corporate tax. I don’t think that's a very wise idea. We already have a different measure of dealing with the large five banks, it’s called the bank levy and it will raise by about the time that companies of that size were to get to 25 per cent and look back in the middle of that chart, that bank levy would have raised over $16 billion by that time so there is already a built-in process for dealing with those sort of other sectoral issues.

QUESTION:

You mentioned concerns for investors about housing [inaudible], they’re at it again a bit at the moment worrying about potential for a credit card crunch to come in Australia on the housing side if banks decided to tighten up the supply of credit maybe because of the environment at the moment, Royal Commission, etcetera. Can you guarantee that won’t happen?

TREASURER:

Guarantee what won’t happen?

QUESTION:

We won’t get a sharp slowing in housing credit growth from about six per cent per annum at the moment to say zero or a contraction over the next three years – absence of shocks to the economy?

TREASURER:

Well, what APRA have done in the last 24 hours is remove the speed limit on credit growth. So, what credit growth is is up to many of the organisations that are represented in this room. So, where they’re lending and who they’re lending to will determine what credit growth is and where people want to invest and what they want to invest in. One of the figures that I’m most pleased about over the last 12 months is that 12.4 per cent increase in non-mining investment in the economy. That’s got to be financed, that’s got to be funded, and increasingly so into the future. It’s going into the productive parts of our economy. So, that’s why I’ve been such a passionate advocate for technology and financial services and the competition that will come from that and service providers that are moving into this space which I don’t expect the banks will ever go into. It’s just not really their business model but others will and I think that will see other capital flow. If you’re talking particularly about the housing markets, well, in the housing markets there were some things that were distorting housing markets from the credit point of view. I think APRA has taken the right decisions to try and remove those distortions to the extent that there were issues which were also being distorted by some of the foreign investment rules – I think we’ve addressed those as well. I just want to see our housing markets respond to supply and demand, not tax.

QUESTION:

Thank you, Treasurer, for the address. My question is around immigration actually. So we know that large-scale immigration into Australia in recent years has been [inaudible]. It’s been a wonderful thing that helps the economy grow and [inaudible] people arriving but it’s also widely accepted that it creates some pressures. You mentioned being stuck on the road to Tullamarine and building infrastructure as a response to that. We also know, in a sense, I’m not saying it’s the only factor but it is a contributing factor to the housing affordability issue. We know that the supply side eventually kicks in, and it’s true of housing and [inaudible] infrastructure side. I’m just wondering if there’s any – if the Government has ruled out any change to the immigration target…

TREASURER:

It’s not a target, it’s a cap.

QUESTION:

Okay, a cap. Sorry, to the cap. But is there ever a role, I guess, I mean in terms of just pulling back on the demand side there to allow the other investment supply side to catch up?

TREASURER:

The answer is largely in the correction I made and that is it’s a cap, it’s not a target. That was changed by the Prime Minister and I back in 2016. As a previous Immigration Minister, I’m very well aware of what the impact of a target over a cap was and I was pleased that we were able to make that change. So, we are below that cap now and years prior to that we were not, we were about 7,000 below it last year. Where that number ultimately falls below that cap would be a function of demand. But will also be a function of what occurs as we’ve tightened up a lot of the rules and the system. Now, about half of people who become permanent citizens, permanent residents I should say, in this country are already here. That’s why I’ve made the observation that if you want to look at what’s driving population growth then it’s about, in rough terms, it’s about 40 per cent natural increase in temporary migration, that’s driving the overall population so of the – it’s about 40 per cent temporary, 40 per cent natural increase, 20 per cent permanent. In fact, around 200,000 I think in 2015-16, of the 200,000 increase in net overseas migration in that year, only 70,000 was due to permanent migration. The balance was all due to temporary migration. So, that’s what’s really been driving those numbers up. If you’re sitting on the tram or the bus or the train and you’re wanting to know why those extra seats are being taken up – well, if there’s ten extra seats then four of them have been taken up by people who were born in Australian, four of them were taken up by people who are here for 12 out of 16 months and the other two are taken up by new permanent migrants to Australia. So, you’ve got to understand how you might be trying to better manage the flow of temporary migrants in Australia. We’ve toughened up on some of the rules around skilled temporary migrants but let’s not forget, in tourism and in international students, these are very big parts of our economy, and they’ve been responsible for a lot of the growth that we’ve seen. They’re an important part of our services exports story and our exports story more generally. So we need to carefully consider, frankly, what the impact would be of seeking to change the trajectory of that. I remember some years ago, back in about 2009 I think it was, when there was a hardwired link between temporary migration and permanent migration that largely the education industry was basically selling visas. Now, that was stopped, and rightly, but now we’ve seen – and there were terrible effects in the Victorian economy from that. Now, we’ve seen that restore, but based on real business-based growth, not visa-based growth. And that’s been a good thing for the Victorian economy. So, you’ve got to tighten up on how you run your immigration program. We want people to come who are going to make a contribution, not take one. So as long as that’s being done, so long as you keep your borders secure, and I don’t think anyone could challenge the fact that this is a Government that has had the strongest border security controls of any Government and we will continue to have that. So long as you’ve got that, you have tight controls over how you’re running your program then I think you’ll see population growth levels that come out of your migration program, that you can be confident will be making a net contribution. What you also have to do is you’ve got to build the roads, you’ve got to build the schools, you’ve got to build the hospitals, you’ve got to build the infrastructure and that, as I said in my statement, all depends on a strong economy. That’s why a Budget that focuses on a strong economy is the Budget we need now and will always need to lift the living standards in this country.

QUESTION:

Thanks, Treasurer, for your remarks. Really, since 2009, I think globally there's been a lot of myths floating around and the one in Canberra which I'm surprised by…

TREASURER:

There's not just one, I suspect.

QUESTION:

No, but there is a big one going around that lower rates of tax leads to more investment. If that were the case, America would, of course, be in the biggest investment boom in its history, but it is not. U.S. investment has only risen really for the past 12 months, 90 per cent of that has really been driven by shale, namely higher oil prices. U.S. companies have used higher earnings to fund buybacks and increase their dividends. So, can I ask you, what do you believe makes Australian corporations unique in the sense that they will take these lower taxes and actually increase more, particularly when there's no particularly fast rise in commensurate demand from the household sector, given record low wages growth and record high debt?

TREASURER:

When we cut taxes, we've had 1,000 jobs being created every day over the last 12 months for a start. On top of that, I also don't believe the counter-factual. What makes people think that taxing businesses more will make them do better? Apply it to your own personal circumstances. How are you going to be better off if I tax you more? How are you going to be better off? This is the problem with the high tax club. They’ve got a million ideas about how they could raise taxes on everybody so they can spend it on the things that they want to spend it on. Well, we fundamentally believe this as a principle and that is that Australians and Australian businesses know better how to spend their money than any Government does, than any academic does, than any economist does, than any politician does. They know how to spend their money better than we do and we want them to keep it. That is my answer.

QUESTION:

Australian businesses don't just increase spending because they have it. Australian businesses increase spending because they can see a big structural rise in demand.

TREASURER:

They can see a return for their investment and part of that return for investment is being able to keep the return from their investment. That's why it's important that we believe in an economy that provides people with incentive not just a big tax bill from Bill Shorten. Thank you.