15 December 2015
Transcript - #2016073, 2015

Business Spectator KGB Podcast

SUBJECTS: Mid-Year Economic and Fiscal Outlook; Harper Review; superannuation; National Platform for Economic Growth and Jobs; Budget.

ALAN KOHLER:

Well, I wonder if we could start, Treasurer, with you just telling us in your words what’s come out of the budget in the last six months since May and what’s come in. You know, what have you lost, and how much have you been able to make up?

TREASURER:

This is a budget update, not a new budget, of course. And we have seen a reduction in the receipts, particularly because of things such as commodity prices and the changes to the growth forecasts and outlook. I think it’s a far more realistic assessment of where we’re going. And that has seen receipts fall by some $37.6 billion over the budget in the forward estimates. On top of that, we’ve had to deal with some new expenditure decisions since the budget and what we’ve been able to do at the end of all of that process is to ensure that the new spends have been offset by our various savings and other revenue measures to ensure that on a policy basis there’s been no addition to the deficit. In fact, there’s been a positive contribution of some $400 million to that. But over the budget and forward estimates more generally, what we’ve seen is expenditure as a percentage of GDP fall from 25.9 per cent down to 25.3 per cent. There is still more work to do there, obviously beyond that, because the long-run average is around 24.8 per cent. But even with what’s happening with revenue, we will see that rise from around 24 per cent this year. It will get to the long-run average next year and, I think, that goes to the heart of this issue about where you really need to focus on revenue and expenditure. Over the budget and forward estimates, I mean, we are still above the long-run average on expenditure, but we will see revenue come in line with that long-run average. At the end of the cycle, at least the budget and forward estimates, we will see the budget position go on deficit to 0.7 per cent. Now that is, frankly, just under the long-run average for the underlying cash balance over the last 30 years or so, so it’s an improvement, it’s a pathway forward, but we are not in the position of seeking to rush to this result. We are seeing, I think, some emerging signs of momentum in the economy and we need to get the balance and continuing to nurture that and the jobs and growth that come from that and keep a very steady course.

KOHLER:

In a broad sense, aren’t you struggling with the fact that permanent promises were made, both spending promises and tax cuts, on the basis of cyclical receipts?

TREASURER:

You can’t go and chase cyclic movements in revenue, up or down, with revenue or expenditure measures. Those parameter impacts will come and they will go, whether it’s iron ore prices or whether it’s changes in other factors which impact on the budget. What we’re seeking to do is structurally deal with the overall position of revenue and expenditure. Over the last few years, we’ve been able to get through the Parliament almost $90bn of budget repair measures. There’s still a little bit more to go on that. There’s around $14bn in addition to that, which still sits before the Senate and before the Parliament. So, we have taken steps, as we have again in this latest update, to ensure that we’re offsetting any additional expenditure with savings and other measures. On the revenue side, as I said, we are in a position over the budget and forwards where it will return to its longer-run average, so that’s why the expenditure remains the focus structurally to ensure that we get on to a more steady footing in the future.

ROBERT GOTTLIEBSEN:

Scott, given the size of the deficit, why don’t you take a tough line with your public servants and end the duplication between the states and the Commonwealth in health and education, as you originally promised? Why don’t you also cut the health costs, because there are many billions out there to be introduced with modern technology and hospitals and communications with doctors? These are low-hanging fruits that are just sitting there ready to be plucked if you’ve got the courage to do it.

TREASURER:

I think the assumption that that’s not occurring would be wrong. The Government is in direct discussions as part of the federation reform process to deal with issues not just in health, but in issues such as housing or in education and a range of fronts. When you’re working in that area, they’re not unilateral decisions of the Commonwealth Government, they’re actually decisions to be taken as part of the federation. We have been quite diligent in identifying and actually putting through the Parliament some $90bn worth of savings over just the last two and a half years and we’ve got further progress to make on that, as I’ve set out. Now, the federation reform is a really important part of that process. I announced our response to the Harper Review a little while ago and that was also another important area where you can drive the sort of change at service delivery levels, particularly at the state and territory government level, and providing incentives for that, as was done under the Hilmer process many years ago, which added 2.5 per cent to GDP. So, I think we very much are engaging those sorts of issues, Robert, but at the same time, you need to continue to engage in the delivery of government services which meets people’s expectations and you want to ensure that you’re not taking a position on expenditure which could put at risk the growth which we are seeing to start to emerge as the economy transitions.

KOHLER:

But, Treasurer, just looking at the MYEFO and the forward estimates and so on, it just seems to me that the only way the budget is going to get back in to surplus in kind of anyone’s lifetime is through the Federation Reform. It’s kind of at that point, isn’t it?

TREASURER:

I wouldn’t agree with that. We’re on a pathway to get the budget back to balance, which is set out in this MYEFO. Now, it gets us down to 0.7 per cent of GDP, down from 2.3 per cent this year, over the course of the next four years. Now, that is a fairly significant decline in the deficit over the next four years, but we have to patient about how we proceed with this. I gave the analogy at the press conference when I talked about it’s a bit like going on that summer holiday drive to your destination. You know how to get there; there are plenty of people sitting in the back seat saying, ‘are we there yet, are we there yet?’, and wanting you to take detours. Well, there’s no detour to getting back to budget balance. It has to be patient; it has to be methodical; it has to be balanced and it has to be measured; and that’s what we’re doing.

GOTTLIEBSEN:

When do you think that the full benefits of the end to duplication and the introduction of technology in to hospitals and medical communication will really start to show big benefits? Is it one year away, two years away, three years away?

TREASURER:

But we already are seeing it now, Robert. That’s already happening now. And just to make the assumption that it’s not, I think, is to misrepresent the situation. It’s something that is changing all the time. I’m in Western Australia at the moment. We have a public hospital run by a private company at Joondalup. That was one of the things that was identified in the Harper Review. Now, that’s a good reform. That is doing exactly what you’re talking about. And through the further Harper reform processes we are hoping to see more of that. That job is never, ever finished. It’s an ever-receding finishing line, as John Howard used to say, when it comes to these reform issues. You start it and you keep going and you keep adding to it all the time.

GOTTLIEBSEN:

Can you tell us, as much as you can, about what’s ahead for superannuation? In particular, I’d just like to add, would you undertake that if there are to be changes in superannuation and blows to superannuation people, will equivalent changes be made in the public sector?

TREASURER:

Are you referring to pensions or are you referring to public sector …?

GOTTLIEBSEN:

The whole superannuation scheme for the public servants.

TREASURER:

Right, right. Firstly on superannuation, there’s nothing in the MYEFO which goes to those issues and it should be clear about that. But as we’ve made clear, the Prime Minister and I are looking closely at how we can make the superannuation system more fit for purpose. And its purpose, particularly when it comes to tax incentives, is to ensure that people don’t end up on welfare payments in retirement; that is, on the pension. And so it does have to have, I think, that very firm focus. I think over the years, superannuation tax incentives have become all things to all people. It can potentially be seen as a way of funding inheritance pools and various other things. Now, when the incentives were first introduced and the guarantee levy was first introduced, it was also about building up a national pool of savings. I think we can safely say it’s been very successful in achieving that goal, but where it goes from here, I think, is very much about ensuring that individual Australians can be independent in their retirement and particularly those who would be at risk of otherwise not being independent. A number of things have to happen for that to occur. You need greater flexibility in the system and greater choice. You’ve got people whose superannuation is being directed in to union funds without any say in the matter. You’ve got issues around the governance of superannuation which we’re seeking to see reformed. You’ve got issues around advice and information, which needs to be available to people to make good choices about their own superannuation. And of course, you’ve got the targeting of the tax incentives and how they work and what’s fair in the overall scheme of things on that front. So, we’re looking at making the superannuation system better in addressing all of those issues. The Labor Party just sees it as a big bucket of cash to tax. Now, that’s not our approach, but we’ll be taking, I think, a more constructive view of this and we’ll be dealing with that between now and the next election.

KOHLER:

Just hearing you talk about the need for patience and being measured and balanced and all that stuff, I can’t help but observe that that’s not what occurred in 2014 in the budget then. It was anything but patient and measured.

TREASURER:

Well, it’s important to learn. It’s important to learn and move in sync with the Australian people. And what we’re seeing — I’m sure you’re seeing it too — Australians aren’t naive to the economic situation that we’re facing globally or even domestically. They know we had a big mining boom. They know that there was an explosion in commodity prices. They know we’re going through a transition; that the world is changing as well, whether it’s in China or in Europe or elsewhere. And so they know there are some strong headwinds. I think in today’s statement we’ve been very honest with them and realistic about what the issues are going forward. But that’s why growth is so important in this environment. That’s why we identified it as our number one policy goal. Jobs will come from growth. This time around with the transition in the economy, we are seeing more job-intensive growth come, which is to be expected given it’s more in service-related industries and it’s becoming a more people-driven economy rather than a resources-driven economy. I look forward to the day when you do a statement like MYEFO or the budget, then one of the most important issues that people focus on is not the iron ore price because at the moment it does have that sort of an impact on our revenues. In the future, we hope it will have less of an impact because we’ll have a more diversified economy. So that’s the plan. That’s what we’ve recognised and that’s what we’ve appreciated over the last couple of years, and the Prime Minister and I are I think very much in sync with where the Australian people are at on what the priorities are and how we’re addressing them and at the pace we’re addressing them.

KOHLER:

Just as you grapple with the expenditures in the light of the commodity price downturn and the fall in terms of trade, iron ore price down, do you think mistakes were also made in budgets back in 2005, 2006 also by the Coalition at the time?

TREASURER:

Well, no government is perfect. The Howard-Costello Government, I think came pretty close, they were a good government and we remember it fondly, but they were dealing with a different set of circumstances to the ones we’re dealing with today. But we seek to pride the same principles. There are some changes that I made as Social Services Minister to pensions and to family tax benefits and still seeking to make some of those changes which reverse some of the measures that were introduced in the latter stages of the Howard-Costello Government, but equally we’ve had to do a lot of work to where there were some parts of the welfare system that became very entrenched under the previous government which started off as one-off payments under the Coalition Government previously and became, you know, part of the machinery and architecture of the welfare system under the Rudd-Gillard-Rudd Governments. What we’re doing on payments in particular was we’re trying to make them fit the purpose. I’ll give you a good example, if you can indulge me. On family tax benefit payments, for example, we have a proposal to abolish the family tax benefit supplements. They are once-a-year payments, sort of a ‘Christmas in July’ bonus on family tax benefits that were originally introduced to deal with an accounting issue about estimating people’s income and were used as a balancing item. Now in this MYEFO we’ve got funding for the single-touch payroll system, which will remove that requirement for that altogether, but yet the Labor Party and others in the Senate want to continue that once-a-year payment which no longer has a welfare purpose. Now, we’re seeking to have that removed and that will save some several billions of dollars over the budget and forward estimates. So, you’ve got to make your payments fit for purpose and to do that, you’ve got to define very clearly what the purpose is. That’s how we were successful in actually getting the changes to the part pension through in the last budget because we made it very clear that the pension, at the end of the day, is a welfare payment for those who haven’t been able to put themselves in a position of independence in their retirement. A generation on, then we would hope as a result of, well what I was just talking about, on superannuation that we’ll have less and less people falling in the need for that. The age pension is a very expensive part of the budget and the best way to address that in the longer term is to help people to be more independent in retirement.

GOTTLIEBSEN:

Most of the independent economists are forecasting tougher employment conditions next year and higher unemployment. Do you think they’re wrong?

TREASURER:

Well, they’re not actually doing that, Robert. Over time they’re actually starting to see the more job-intensive growth coming through and they’re revising many of their estimates down in terms of the unemployment rate. We’re at 5.8 per cent. We had 71,000 extra jobs in the last month and that wasn’t just a one off; that was two months running at strong jobs growth. And we’ve been seeing that come through things like the ANZ job ads and some of the sentiment surveys and expectations and conditions issues around employment now for some months. Much of that…

GOTTLIEBSEN:

Do you expect that to continue?

TREASURER:

That’s what the leading indicators are telling us. We’ve taken a conservative position on unemployment in this update statement today at 6 per cent. Now, that’s an improvement on where it was previously forecast in the budget, but you know today unemployment is at 5.8 per cent. So, if it proves to be better than that, it will obviously have a positive impact on the bottom line in the Budget.

KOHLER:

You mentioned the federation reform and the importance of that in terms of getting the budget under control and so on in the future. Do you expect that some of those big items will be achieved, will be signed off before the budget in May next year?

TREASURER:

Well, they’re very big changes and I can’t speak for the states and territories on these things. We can only put things up and see what progress we can make. But just in the way you’ve structured the question, the point of federation reform is not to balance the budget; it’s to grow the economy. Growing the economy — which actually is my point — is the way that we can improve the budget situation combined with controlling expenditure. I don’t see the budget as an end in its own right; it is a means to an end.

KOHLER:

Okay. Well, we’ll have to leave it there. Thanks very much, Treasurer.

TREASURER:

Thanks very much for your time, Alan and Robert. It was good to be with you.

GOTTLIEBSEN:

Thank you.