25 August 2016
Transcript - #2016112, 2016

Bloomberg address Q&A, Sydney

SUBJECTS: Economic growth; Parliament; foreign investment; dividend imputation; making superannuation more sustainable

MODERATOR:

You’ve given us a very frank assessment of the challenges that we face in trying to spur growth in Australia. And you’ve noted that it’s time for hard questions. That’s strikingly similar to Governor Glenn Stevens’ comment that it’s time for a hardnosed conversation about the need for reform. That conversation was tough enough in the first parliament when you had 96. How much tougher is it going to be now with a razor thin majority of just one and are you going to be in a position to lead that debate and ultimately win the argument.

TREASURER:

Well that’s the question and how tight it is, or not tight it is in the parliament is really not the issue. What I’m seeking to do today is point out that there is no alternative. That is what needs to be addressed. What I’ve said today I don’t think is in any way terribly different from what I’ve been saying since coming into the role and then when I was last here and speaking in this very room or in other places, the language I’ve used today is not dissimilar to what I have on other occasions. We set out in the Budget I think a way to address these sorts of challenges and we took it to the Australian people and they’ve returned us and now we’ve got to get on with it. Now I’m more optimistic about this Parliament than the last one. I’m already engaging with crossbenchers and the presentation I’ve given to you today about the issues and risks that I’ve outlined today, I’ve presented to them in discussions we’ve had to date as well as my own colleagues. So that’s the context of it. Three years before us, we all sit down next week in the parliament and I think Australians expect us to get on with it.

MODERATOR:

So you’re more optimistic about the current make-up of the…

TREASURER:

It’s my natural disposition.

MODERATOR:

One Nation with four senators, Nic Xenophon’s team has three. You think it’s going to be an easier mix this time around?

TREASURER:

I think the politics are different in this Senate. I think the context is different in this Senate. Don’t underestimate the significance of the Senate voting reforms before the last election. The Senators who are elected into this parliament got there because lots of people voted for them. Not because someone did a deal behind closed doors on preference arrangements. They have a constituency, and they have an accountability and a responsibility that goes with any elected office. I’ve been impressed to date by the way many of these new members of parliament have been thirsting for information to get across the detail. They’re not being rushed into decisions on particular bills and things like that, and I would encourage them to keep going down that path. Now there are others like Senators Leyonhjelm and Day who were very familiar with all the measures that we’ve talked about today. They understand that. As a result we’ve spent a bit more time brining some of the new member up to speed with that. But they both have very good records when it comes to addressing these issues and we respect that. Hopefully they’ll have more fellow travellers on at least those issues in this Parliament. But there are fewer moving parts, I would argue, provided, those new parties that have been elected both in One National and the Xenophon team actually hold together and I see no reason why they shouldn’t but as we learnt with PUP last time, but mind you I don’t think the dynamics are that of that arrangement exist within the new members.

QUESTION:

How do you currently rate your chances of getting the company tax cuts through the Parliament that were announced in the last Budget?

TREASURER:

I’ll be presenting them next week because I believe, and the Prime Minister and the whole team believes this is critical to drive investment. Increasing taxes on investment is not a way to increase investment. As I’ve said, and indeed Governor Stevens has said, and I know Guy Debelle is here today as well and he’d be familiar with these issues, driving that investment in the non-mining sector of the economy is critically important to our growth going forward. Everything we’ve sought to do has been about trying to see that number shift, and it is proving incredibly stubborn. Now conditions from NAB’s survey and others - sentiment etcetera, all of this, utilisation levels, all these things are improving. But we’re not seeing that number shift. I think it’s important that both with an economic reform agenda, and progress being made in the parliamentary space on the challenges that I’ve noted today, can only assist in encouraging us to do that. When I go to the G20 forums and things like that I do get a bit puzzled that the question of what are we doing to encourage private sector investment gets relegated and we spend a lot of time talking about fiscal stimulus and monetary policy. We’ve sort of done that. I think our Reserve Bank under Glenn’s leadership has showed enormous restraint, enormous restraint, and they should be commended for that.

MODERATOR:

You’ve talked about, in the speech, the need to coax private capital out of its cave, and clearly in such an environment foreign direct investment is even more important for Australia. Are you running the risk of sending out mixed messages to the international investment community with both the Ausgrid and the Kidman bids knocked back?

TREASURER:

No. If the argument is that the only way foreign investment is encouraged in Australia is they get a 100 per cent ‘yes’, well, I think that’s an absurd proposition and I know you’re not making that proposition. Australia is a sovereign country. We get to say no. As the Prime Minister said on radio this morning it’s harder to invest in China than it is in Australia. The Chinese Government understands this. I think China’s investors understand this. We engage with them about these decisions. That engagement doesn’t always have to be done in a press conference. It can be done directly through all the usual channels. You can have confidence that those honest exchanges take place. But it is not the common practice for there to be rejections, in fact the overwhelming practice is for there to be endorsements. Obviously the larger transactions come before me, obviously where national security issues come into play, well they are almost self-determining in the way they define themselves. But, you do have to look for the investment that’s coming and Glenn again made a good point about this. What is the investment going to be in; passive interests? Or interests that are actually going to drive greater productivity and growth? And in the agricultural sector in particular, some of those that I’ve been criticised for saying yes to, have involved hundreds of millions of dollars of investment in boosting both the capital in those businesses as well as the productivity and efficiency of those businesses, with the introduction of new cropping practices, this is the sort of investment that is needed in those places, and so I think those haven’t been difficult decisions to make, but they have certainly attracted quite a lot of commentary.

MODERATOR:

On the Ausgrid decision, obviously, no one in this room would question the prerogative of making it a decision like that on national security grounds but what seems to have left the bidders, members of the banking community even Premier Mike Baird perplexed is why the decision came at such a late stage in the process.

TREASURER:

Well they are complicated assets and when the national security agencies identify issues that require obvious decisions well that’s what you have to do. If those processes can be further improved then you can be assured the Prime Minister and I will be seeking to do that but what I tried to say and communicate in relation to the Ausgrid decision in particular, is you can’t just apply linear rules from other decisions to these transactions. They are very, very difficult. The assets are different. Some people may think they know what the inter-connections between these assets and other things within the system are but they clearly don’t by the nature of the commentary they have provided. We are in the privileged position to have access to that sort of information, which we obviously can’t go into detail about, and we obviously have to exercise our responsivities in making those decisions. We have worked really closely with New South Wales on this, both with Mike Baird and I particularly with Gladys Berejiklian. They have run a meticulous and outstanding process and we’ve worked closely with them particularly over the past few weeks so they are in a position to go back and re-engage the markets on this issue. I’m confident they will perform well.

MODERATOR:

I think it’s time to open it up to our audience. Gentleman in the front row here.

QUESTION:

Hi my name is (inaudible), I’m from Basis Point Consulting and I have a question regarding several times that you talked about building on the growth in the banking system. But we’ve seen a significant pull back over the past 12 months, particularly in banking system’s involvement in the property sector belt and things like that. That has led to a rise in private lending, non-bank lending. Could you comment on that, do you view that as an unregulated threat to the system or is that a catalyst from economic growth?

TREASURER:

I call it competition, and I am not troubled by those types of outcomes nor am I troubled about the prudence being exercised by both APRA and the banks in revising some of their criteria. When you have got a low rate environment I think you have to be careful to ensure that people will continue to take care in these decisions but I don’t think at this stage there is anything alarming in the trends we have seen there. We can be very confident that given the nature of our financial system, the Council of Financial Regulators, the close working relationship that exists between all the players that any sort of early vulnerabilities that would exist there would be picked up on and acted on. I think that is what we saw with APRA’s engagement on investor lending in the sector. I think as the Governor has pointed out that has had a positive outcome. In low rate environments you have got to be careful. As I said rates may be low but the principle still has to be paid back.

MODERATOR:

We have got a shy audience this morning.

TREASURER:

I suspect the audience next week in Parliament won’t be shy.

QUESTION:

 My personal view and it’s a laymen’s view is that dividend imputation has been one of the main reasons why the Australian banks have been so strong. The economy has been fairly resilient. From the economic debate, political debate, it seems that politicians don’t have a strong understanding about how dividend imputation works and the relationship between it and the corporate and personal tax rates. Your predecessor actually flew the idea past about getting rid of dividend imputation. Could you comment please?

TREASURER:

We have no plans to change those arrangements. More broadly in relation to the way imputation works I think one of the issues that the banks obviously deal with is they are often seen as dividend factories for shareholders and that obviously weighs heavily on the decisions they make. That is why I have stressed that when banks make decisions – and I think this is one of the virtues of the House of Representatives Economics Committee process that we have set in train – is that the many and different and varied beneficiaries of the banks activities and how banks are seeing to address those constituencies, they will have an opportunity to put it out in the public domain and have that tested by the Parliamentary committee. So, I can assure you that we understand dividend imputation maybe a little better than your question suggests of some of us. But we are not choosing to change that system. I have heard those recommendations they have come from others before as well but through the inquiries and reviews that we did prior to the last Budget that was not something that we thought we would change.

QUESTION:

Treasurer, in February this year I sat a similar distance away from you at the Self-managed Super Funds Association conference and you said this “one of our key drivers when contemplating potential superannuation reforms is stability and certainty especially in the retirement phase that is good for people who are looking 30 years down the track and saying is superannuation a good idea for me. If they are going to change the rules at the other end when you are going to be living off it then it is understandable they might get spooked out of that as an appropriate channel for their investment. That is why I fear the approach of taxing into the retirement phase penalizes Australians who have put money into superannuation under the current rules, under the deal they thought was there.” We all cheered at that point by the way. In May, it may not be technical retrospectively but it certainly feels that way is effective retrospectively, the tax technicians and superannuation tax technicians may say differently. In the Budget, you changed the rules, so I am wondering what happened to you in March and April of this year?

TREASURER:

Well, I stand by everything I said in that statement for the simple reason that the retirement phase accounts remain tax free and you know that. The retirement phase accounts of which under our proposals with the transfer balance cap will mean that 99 per cent of people who actually have balances less than $1.6 million will actually remain absolutely, in exactly the same situation that I have referred to. The changes that we have put forward which I hope, at least from my point of view as Treasurer, I never have to revisit, I certainly have no intention to revisit them, will ensure that those rules are now set for the future. Now, why do we have to change the superannuation system? Because we have an ageing population and we have a system that is frankly overly generous for large balances and the cost of having those large balances and the tax concessions that have existed for those which have only been there since 2007, by the way, they weren’t introduced by Henry Parkes or anyone else like that. It was actually under Peter Costello and John Howard in the final stages of that Government. Those arrangements were brought in when the Budget had a $20 billion surplus and there was $40 billion in the bank. Now, what we have chosen to do is make the superannuation system more sustainable in the future. We have targeted a higher rate of tax – true – at the whopping rate of 15 per cent of earnings on balances above $1.6 million. Now, that enables us to preserve the exact situation that I was speaking in favour of at the SMSF Conference. Where you have 99 per cent of people, people who have saved for their retirement being able to have the deal that I said they should have and that is to pay no tax on their earnings on what they have contributed to their superannuation over their lifetime. Now, I know there are those who sit with balances more than $1.6 million who are unhappy with that. I know that there are less than 100,000 people in the country who have already put more than half a million in superannuation after their pre-tax contributions. I know there are those on very high incomes who will be paying more on their contributions going into superannuation now than there was before. The alternative of that is for me to tell my kids you are going to have to pay higher taxes to support those concessions and I don’t think that is fair and I am not going to do it.

MODERATOR:

No doubt we have got several members from the superannuation industry in the audience here today. Does anyone have any follow up questions on that issue before we move on? No, you have obviously satisfied them with that answer Treasurer.

TREASURER:

I suspect not but…

[laughter]

MODERATOR:

Let’s move on. Clearly the triple-A rating is important. No Treasurer wants to be at the helm if the nation is downgraded but in this era of record low interest rates globally, what prevents the Government from borrowing more and then steadily rolling out infrastructure investment over a period of years to ensure that the money is spent efficiently and effectively?

TREASURER:

Well, that is a very good point but firstly let me just say this on the rating, it is true when the UK lost their triple-A rating, they are borrowing at lower rates today than they were when they had it. But the value of the triple-A rating is more so when the storm hits, if the storm hits, when the storm hits you are up the queue – we all know that. It is not just the Commonwealth that would be in that position, the states’ ratings would also be impacted as would the banks. As you know the banks are now on negative watch as well on those ratings. So, this is something that can impact the cost of capital in the current low rate environment. No one is expecting that would be immediate but under the sorts of scenarios we know that could represent then we would be in the pack in terms of getting access to the capital we would need in those situations. And funding the cost with obviously rising impact would be far worse. So, that is why it is worth doing everything we can to protect the triple-A credit rating, why it is important that we pass these measures through the Parliament. Now, that in itself would not absolutely guarantee what the rating agencies would do, they tend to have a mind of their own on occasions and they could make any other decision. What we have to try to do is ensure we are in the best possible position to ensure the best possible result but obviously they will make their own choices.

On the issue of debt we have got to be conscious of the overall levels of debt which is what my point was in terms of Australia being a net importer of capital. But it is true that the Commonwealth can play a role, particularly in greenfield infrastructure that improves productivity that can create assets that can be taken on by the private sector down the road - that if they were to do it now, the risk premium they would build in, to actually be doing it the first time around it would end up being cheaper for the Government to actually create the asset in the first place itself. So, I do think there is a role for that as does the Prime Minister. The issue is about project selection and how often you do it and how big the scope is to do that. All I am simply saying is our headroom to do that on debt is lesser than most other countries because of our current account position. But it is something important that we can do.  But it is also about mobilizing the private capital in the first place and the challenge is not so much the absence of capital, there is heaps of capital as I said it is sitting there, it has been given to the German Government for ten years to sit there and pay a premium for the privilege. The issue is the projects and the ready projects and projects with reliable income streams. That is what is needed to track those investments. So, I think the Commonwealth does have a role to play in that. But in order to free up the headroom to do that we have got to stop borrowing as much as we have to to pay for transfer payments and other things within the recurrent side of the Budget. That was the point I though Glenn was making in his final speech as well. You have got to be able to reduce what your liability is for that recurrent expenditure so you can free up some space to be able to do some of the more productive things we are talking about. So, as long as we don’t get spending under control then we will limit our ability to engage in exactly the sort of positive thing.

MODERATOR:

I think we have time for one more, one more question which we can probably throw over to the media as well.

QUESTION:

Just on the question of the national debt, I know we have had a lot of figures reported and I think I saw previously, I think we saw briefly on one of your slides that it would run as high as a trillion dollars. Is that correct – could you talk us through that scenario?

TREASURER:

Well, it is in the speech. Scenario three is where none of the unlegislated savings measures are passed and that there is a further deterioration in parameter estimates and there are additional sending pressures that come on the Budget in the order of about $8 billion to $10 billion. That is not a forecast, that is not something I am saying is going to happen. I am working very hard to make sure it doesn’t happen. But that is the do-nothing option. The scenario three option which takes us to a trillion in debt is if no one does anything. That is where it goes all by itself. Now, I don’t believe that is going to happen, I am not suggesting it is going to happen. What I am suggesting though is that we make sure that doesn’t happen by getting on with the things we are putting in place. Now I am not one who believes we will move into a downturn and there is nothing in my comments today which suggests that I believe we will go into a downturn. What I am saying is we need to avoid that becoming an inevitable result by doing nothing and pretending things can just go merrily as they are. So it is a warning but I remain optimistic and upbeat about the Australian economy absolutely and I think we all should be. I will approach the Parliament in good faith to seek their support and cooperation to ensure the scenarios whether it is one, two or three – because I don’t like any of those scenarios – all of those scenarios project higher levels of debt than we currently project in the Budget. Even scenario one - $23.5 billion of Budget measures passed gets us to a higher level of debt than currently projected in the Budget and a deficit that is headed the wrong way, not the right way back to balance. That is the context of those scenarios. I would urge people when they look at those scenarios not to overanalyse them. Not to extrapolate them. I’ve simply shared those scenarios with the Australian public and with you today to be honest and upfront. I’ve shared them with my Cabinet. I’ve shared them with crossbenchers. I’ve shared them with my colleagues. I’ve shared them with you.  

QUESTION:

The Government has also talked a lot about having a spending problem and today you’re sort of saying we’ve got an earnings problem, for those of us who may not be an industry expert, and are listening, why the change in language?

TREASURER:

It’s exactly what I’ve been saying for the last 12 months. I’ve always said we don’t’ have a revenue problem. A revenue problem is when you need to structurally change and boost your tax burden to increase your revenues. That’s what I believe that is. The reason that revenue fell over the last three years is because Australia didn’t earn as much as we expected it to do. That was because of terms of trade, lower real wages growth, lower levels of inflation – all of these issues which has seen nominal GDP now lower than real GDP. And so the earnings have been low, therefore the revenue has been low. How do we fix that? We have policies, and this will be the subject of my next address, which looks at how do we help Australians to earn more. One of the key things about that is when people talk about productivity in this country I think sometimes they recoil, they think, oh they’re just talking about me having to work for less. No. What I’m talking about when I talk about productivity reform, is I want people to earn more, I want them to be able to earn more for their efforts. But not because some union official did a deal, which can cost the business its future but because the productivity of that business and its earnings potential has increased and they are sharing in that outcome. That’s the sort of productivity change we need to go forward to deal with the earnings problem. On the Budget, the decisions we can make are about expenditure and too often the default setting is to say: that’s too hard, let’s just raise taxes. No.

MODERATOR:

Treasurer, thank you.