3 August 2017
Transcript - #2017148, 2017

Interview with Business Insider Podcast

Subjects: Australian Dollar; global economic data; inflation data; tax cuts; HILDA data; RBA statement on monetary policy; Amazon; FinTech; open banking; Labor’s proposal to smash the housing market and drive up rents; same-sex marriage.

PAUL COLGAN:

Hello, you're listening to the Devils and Details Podcast from Business Insider Australia. I'm Paul Colgan. I'm here as always with global markets and economics correspondent David Scutt.

DAVID SCUTT:

Pleasure to be back, Paul. Thank you.

COLGAN:

And our guest this week is the Federal Treasurer, Scott Morrison. Welcome back, Scott.

TREASURER:

Great to be here, Paul and David. Thank you very much.

COLGAN:

Look, one of the good things about having the Treasurer on the show is that, I think, in contrast to some his more recent predecessors, he's been attempting to explain some of the complexities facing the Australian economy through things like commodity price volatility, our levels of trade exposure and low levels of global inflation. What he says on those subjects may not always hit the headlines, but it's great to get him on the show and get a chance to ask about some of the issues we talk about regularly on this show like wages, growth, inflation, housing prices and the new and emerging component parts of economic output that are so important to the current and future state of the economy and, of course, the Federal Budget. Treasurer, let's get straight to it. Do you think the level of the Australian dollar is a bit high at the moment?

TREASURER:

It's not something treasurers should speculate on. I won't on this program. We have a floating exchange rate for a reason. It's not for the Treasurer to jawbone it one way or the other. But we're obviously aware, as everyone else is, that if it's too strong, that obviously makes that very difficult for our exporting industries and there's been a lot of commentary on that, but I noticed that things have eased off a bit, but we'll see where the rest of the day goes.

COLGAN:

Yeah, absolutely. David, we got well above 80 cents during the week thanks to some strong Chinese data.

SCUTT:

Correct and more so the bigger news to do with the US dollar. That's the major driving force behind it. While Scott won't go and speculate on the Australian dollar, I will. My perspective at the moment is that, no, the Australian dollar is not overvalued and its current level. First and foremost, the US dollar has weakened 10 per cent or so over the course of this year so far, so that's obviously helped a lot with commodity prices. It's helped with inflows into Asia. It's helped with risk appetite around the region. When you put those things together, it's hard to argue the Australian dollar shouldn't be a little bit higher. But of course, being a former currency trader myself, that once you get the Australian dollar in a certain trading range, it's often very difficult to go in there and pull it out of it. If it stays elevated for a long period of time, then obviously that's going to go and have some impact on our trade exposed sectors and that's why the RBA chose the opportunity this week to go and do some very subtle jawboning of the Australian dollar and just told what the impacts would be on economic growth, inflationary pressures and also employment growth. For the time being, no, I don't think it's obviously too high, but if it stays there for a prolonged period of time and we see commodity prices come off, then it may become an issue.

COLGAN:

So, Treasurer, a big part of this is the global trade picture. We are seeing some pretty good signs. The global data, particularly global manufacturing in Europe and the Chinese economy is looking okay. What is the impact that we're seeing on the government side, in terms of receipts and activity, for the Federal Budget?

TREASURER:

Well, the budget, as the data that has been released shows, it is tracking well, but I'm just never complacent about these things. One thing I'm sure your listeners will have observed is the volatility around these issues, so you don't get too far ahead of yourself on this. There's the update that we're working to at the end of this year and that will bring all that to book, but the point you make about global trade and the global economy is right. This is the basis for why I said in the Budget “better days ahead”. That wasn't a hope. That was actually a codification of an emerging consensus, which has really, I think, been coming since the beginning of this calendar year and it has just been building. The data points continue to point to this. Whether it's the G20 meeting I was at earlier in the year or the one the Prime Minister was just at, these signs continue. So long as they keep connecting, then I think we can continue to be optimistic. Now, I'm optimistic by nature, but it is an informed optimism, I think. We've seen that flowing through in some of the business confidence data, even in the consumer confidence data and I know that, on the weekly basis, it's quite volatile, so I don't want to read too much into that, but people are increasingly seeing the better days ahead that I've spoken of, but you just can't take them for granted.

COLGAN:

That's right. One of the obvious questions, and there's been a lot of talk about it through all sorts of data that keeps coming our way, whether it's through the official inflation data, which shows headline inflation still running a bit ahead of wages growth. While there is this mounting sense that the global economy is looking okay, back here in Australia people just aren't maybe feeling that it is flowing through to the household budget.

TREASURER:

That's true.

COLGAN:

And to their pay packet.

TREASURER:

That is both the perception and, in many cases, the reality. The HILDA data that was released this week confirmed that, that household incomes, however you measure them, and there was a range of different measures and they're all important measures, whether you take into account tax and transfer payment systems and so on or just looking at gross data or on wages and so on, household incomes have been flat and that is something that has been concerning me from the day I stepped into this job. We need to see people earn more in this country and that needs to flow from a growing and expanding economy and improvements in what companies are able to earn and driving investment. That's where people's wages are going to go up from. You're not going to make your wage go up by taxing someone else more. Your wage will stay the same. That's a zero sum game. We're not interested in a zero sum game or flat earth economic thinking. You've really got to grow the economy and it has to be a growth first agenda, not an envy first agenda.

COLGAN:

With these signs picking up that there's a bit more of a brighter global outlook, one of the things that you can do to help household budgets is income tax relief. Are you starting to think about that?

TREASURER:

We've already done it. Taxes are actually lower today than they were when I became Treasurer. So there already has been income tax relief and there has certainly been corporate tax relief to small and medium sized businesses, but we remain in a difficult fiscal environment. We are moving the Budget back towards balance and these things have to be done where the Budget can support it, but my first inclination will always be, wherever possible, to make people's taxes lower. As a government, we have what I call our tax speed limit, which is our tax-to-GDP cap of 23.9 per cent. It was earlier this week, actually, Chris Bowen confirmed that a Labor government would abolish the tax-to-GDP cap and they'd just let it rip. Now, what happens when you follow that type of policy in your budget is the economy will eat itself if you allow taxes as a burden on the economy to get too great. It's like that rather disturbing image of a snake eating itself from its tail, but that's what happens if you take the speed limits off tax and we won't do that. We subject ourselves to the discipline of a tax-to-GDP cap and that means that if you're in danger of breaching that, then obviously the things you need to look to first is those levels of personal income taxation and the taxes you're putting on businesses.

COLGAN:

Because I think one of the things that for middle income households, that's one of the issues at the moment is even if there is a small wage rise, the ATO is still skimming off a fairly significant amount of it, particularly if you're a middle to high income earner, say, you're on over $100,000, the ATO is taking a significant chunk of any extra wage growth.

TREASURER:

Well, as you know, the deficit levy came off as promised on the first of July of this year, as it should, and it should not be put back on. It is the Labor party's policy to put up the top marginal rate of tax by 2 per cent, and that would mean, combined with the Medicare levy, getting up to about 49.5 per cent. Now, that's not a competitive position for your economy to be in any more than having a corporate tax rate of 30 per cent 10 years from now is a competitive position to be in. Having a competitive tax ratio is a critical objective of the Government. We already moved the threshold from $80,000 to $87,000 and I was very clear at the time in saying I'm not pretending this is a big tax cut, it's not, but it was a clear statement of faith to the Australian taxpayers that when we can and where we can, we will. I did not want to see us cross a Rubicon here, where those on full time ordinary earnings at $80,000 were going to go onto the second highest tax bracket. I thought that would have said something very bad about the direction of our personal income tax system. But let's not forget also that 40 per cent, or thereabouts, of households pay no net tax after the transfer system comes into it. The top 10 per cent pay 50 per cent of personal income tax. We have a very progressive tax system and transfer system in this country, so I wasn't surprised to see in the HILDA data this week that while household incomes have been flat, the progressive tax and transfer system has actually protected against rises in inequality and that's its job. That's what it's supposed to do. But to suggest that it should be made even more progressive and more pernicious on those sectors of the taxpaying community that drive the growth, which lifts incomes, I think is very negative economic thinking. But that's what Labor are proposing. They're wrong about that, but they're playing to a sentiment. They're seeking to seduce Australians with this rather honey-filled talk of making others pay more so you'll get more, but it's a lie. It doesn't play out that way. You end up eroding growth in your economy, reducing people's ability to build up their own wealth and, as a result, cost jobs and cost people's incomes. It's a very seductive, but very poisonous pill.

COLGAN:

I must say I was a little bit exasperated with some of the way that some of the HILDA data was presented in certain corners. We saw, I think, Professor Wilkins, who runs the study, I've got a quote here from him. Since the GFC -- he's talking about the progressive taxation system and more low income people gaining employment and he said that it hasn't translated into increased inequality and incomes and it's very much because we've done a very good job of keeping the employment-to-population rates quite high. Basically, with the migration programme that we have that we've got the number of jobs and the types of jobs being created are managing to balance that out, so it's a pretty good result. I will point out that that's by successive governments now.

TREASURER:

Yeah, I'm not making a political point about it from that perspective. I'm just saying that the progressive tax and transfer system has a role to play. It has played it. The thing that concerns me in the HILDA data is that incomes are flat and so the question is well what do you do about that? Well, what you do about it is you grow the economy. That's what you have to do about it. You don't then just focus your policy on how you carve up a diminishing pie, because that just makes the pie diminish even more. You've got to grow the pie. We're now, I think, in a very traditional political economic discussion. The Labor party wants to have a debate about how you carve it up and we want to have a positive discussion about how we make it bigger. It's one of the oldest economic debates there is and it's nothing new under the sun.

COLGAN:

Let me ask you about one specific thing that Bill Shorten has been talking about recently is applying a 30 per cent tax rate to distributions to adults from family trusts.

TREASURER:

Yeah.

COLGAN:

So where do you stand on this?

TREASURER:

Well, first of all, it's just another whack on small business. That's the bottom line. He's already admitted it's going to hit 200,000 small businesses, so when you add that to the fact that they're going to reverse the legislated tax cuts for small businesses up to $10 million in turnover each year and for medium sized businesses up to $50 million. When you add to that the fact that they will pull the rug out from the improvements to the competition laws for small business up against big business, they're backing big business in that discussion, and then you add to cutting off at the knees what they want to do with trusts, it'll be whacking day for small business if a Bill Shorten government is elected and small business know that. It's not just this measure in isolation which demonstrates a real either deliberate, which is the worst, I suppose, perception you could put on it, or an ill-informed view from the Labor Party about what the role of these trusts are and how they work. Now, what I find puzzling about what Labor are doing on this is why won't they release the PBO costings on this? I'll tell you why, because to do that they would have to say, well, have they made a discount to their revenue estimates on the basis of how people would change their arrangements to get around this. I mean, people can form partnerships, people can do distributions through traditional unit trusts, there are even things they can do through [inaudible] trusts. For those who want to minimise their tax, I've found, whether it's those who want to get around the immigration system when I was Immigration Minister or get around the Social Security system when I was Social Services Minister or get around the tax system as Treasurer, those who are intent on doing this have a great enthusiasm. You've got to be careful when you're trying to ensure that you're seeing the integrity of the system undermined that you just end up punishing people using things for legitimate reasons to grow their wealth. These instruments are often used to boost the capital position of these companies, to reinvest in their companies and to grow their businesses, which is what puts people's wages up and grows the economy. So I think they should release the full PBO costings because it will also highlight, I mean they backed down and said it won't apply to farms. Well, what's a farm trust? I mean, if you're a very high net worth individual and it's not currently a “farm trust”, what, are they just going to go buy a hobby farm and it's a farm trust? If it's fair enough for a farm, as a small business, not to be hit by this, why is it fair enough to hit the corner shop? Why is it fair enough to hit a small technology company or an agribusiness company as opposed to a farm? The inconsistencies go on and on. They just hoped this would be a lightning rod for their envy campaign and I don't think it has proved to be that, because it's got more hairs on it than a dog.

COLGAN:

Let me move on to something that's happening in industry. The RBA statement on monetary policy this week mentioned some of the dis-inflationary pressures for the retail industry. We're recording on Thursday morning and Amazon has just announced or confirmed its plans to set up a distribution centre in Dandenong South in Melbourne. But the RBA was referring to competition from overseas retailers putting downwards pressure on prices, which is squeezing people's margins and we're actually seeing the retail sector, which is a very important employer, shedding jobs at the moment. Now, it's massive deflationary for some sectors, these big companies coming in. What are your thoughts on these companies which can gear up, they have huge amounts of revenue because they're in so many markets, they're big scale players and they're able to come in and cause this much disruption to the way industry is set up here in Australia?

TREASURER:

Let's sort of go back to first principles. The first issue is that the consumer always comes first. The consumer always comes first. And what we have seen in April and May is an improvement in the retail sales figures over that period, and that's welcome. The commentary we've already had about what's happening with incomes is linked to that and that's why we want to see incomes improve because that will, obviously, support consumption and that's all good for the retail sector. As a government, we've already taken action and we legislated this just before we broke for the winter recess and that was to ensure that the low value threshold on GST was removed, which put some of our main street retailers on the same footing as those selling from overseas. So we'll continue to take those actions. But at the end of the day, it's not the government's job to effectively remove competition from the retail sector. In the same way we've acted on things like multinational tax, and we have some of the toughest, if not the toughest, multinational tax avoidance laws anywhere in the world today. Our Diverted Profits Tax came into being on the first of July this year, which I outlined in my first budget. Our Multinational Anti-Avoidance Laws were the product not just of our own work, but working with other countries because, across the G20 in particular, we understand the pressures on all of these countries' tax bases. Whether it’s the digitization of the economy or the disruption we're seeing from large players, you need a coordinated and concerted effort across economies to get a clear set of rules, which says to these guys, "Well, you exist, but don't think you get to just work around everybody's tax systems and regulatory systems because you're big enough and ugly enough to do that”. Now, I think what we're now seeing in this space is a discussion will emerge about how you deal with competition policy internationally, globally, with other countries about how you deal with these sorts of forces as well. You can't assume they're all negative. There are certainly some things that would cause concern for retailers here and people who work in the retail sector. I understand that. And so just like with multinational tax avoidance with a lot of these big players, now some of these players are verging on bigger than countries and they have a great deal of agility to move around and how they operate.

COLGAN:

Yeah, Amazon was US$138 billion in revenue last year.

TREASURER:

These are big companies. So I think it's not just an issue for Australia. It's an issue that we will have to engage through the G20 with other likeminded countries about how we align, I think, some of our regulatory and competition law systems, antitrust systems, things like this to make sure that there's a fair and level playing field for everyone. But at the end of the day, I always assess competition policy by what's best for the customer. Look, if they win, then that's good for your economy.

COLGAN:

One of the other areas that technology is going to, I think, probably introduce some downward pressure on prices and fees, but also increase competition is FinTech, which I know you're very passionate about. Now, a pretty important development recently, open banking. You've got this independent review underway. Talk to us about that. What's involved and what do you envision as being the end result of this inquiry and the impact on the banking sector?

TREASURER:

Well, we want, obviously, a banking system that's unquestionably strong and you saw it in the most recent requirements to come out of APRA, which we think is a good move and that has been well received in the sector, so that's obviously a key goal for us. It's also important that banks be unquestionably fair and we've got the BEAR, as it's now known, the Banking Executive Accountability Regime, coming in. I'm always amazed how quickly people move to acronyms on these things, but nevertheless that's coming in, with a number of other measures we've got designed to improve accountability and fairness in the banking system. That's important, but the other area that I'm very passionate about is unquestionably competitive. Now, there are two particular areas we're working on that. One is ensuring that the FinTech advances continue to be encouraged, fostered, nurtured, because that not only provides the great opportunity, I think, for greater competition in the banking system, but very important productivity improvements right across the business sector, particularly for small and medium sized businesses. That is, I would argue, very high on the list in terms of what can produce the next big productivity boost in our economy is these types of technological applications. You just think about real time payments, real time accounting, cloud accounting. All of these things mean that you're spending more time growing the business, less time running around filling out paperwork for the tax office or other people. RegTech is another huge opportunity in this space. The time gift it will give back to the economy I think is hard to estimate. We're now the fifth ranked in terms of FinTech and we've had 90 per cent growth in investment in these FinTech operations, more than $650 million. These are good achievements, so we want to see that continue and we've done regulatory changes to support that.

The second area is, whether it's challenger banks, new entrants, smaller players being able to call themselves banks, to open that up more and how data is used and the consumer data rights agenda is critical to that. Scott Farrell, I've asked to take on that job of giving us advice about how we can move to that open banking regime by the end of the year. What does it mean at the end of the day? What it means is I would hope to see a banking system with more options available for customers where they're competing on the quality and price of services which they're offering, not on trading away credit integrity in the system. If we're just going to produce a system where people are going to compromise their credit management to grow their market share, well that's not good for system stability and that's where, I think, you'll find APRA being pretty attentive. But where it is about a very customer facing, improve service cost tailored option, which can be done by a very small operator or very large ones, innovation in this sector is what we want to see happen. I think more entrants can achieve that.

COLGAN:

So one of the issues is the data that's held by the banks, particularly the large ones, is very valuable. They're able to leverage it in different ways.

TREASURER:

Correct.

COLGAN:

Not just on the credit side, but in terms of understanding customers, projecting spending patterns, being able to predict what kind of offers you might be more interested in, so attempting to prize or reduce their grips on some of that data, they're not going to like it. This year, through the banking levy etc, relations between yourselves and the major banks, particularly, haven't exactly been warm. What's their reception been like to this?

TREASURER:

Well, I've got to say, on this issue I think it has been constructive, because we've been having discussion for some time. My FinTech advisory group, which is led by Craig Dunn and, as you know, Craig is on the Westpac board. He carefully manages his FinTech passion for the smaller players and he's role more broadly, I think, he's very dextrous on that. They have been obviously pushing the envelope on this, but we have representatives also from some of the other big banks on that group as well. It has been a good, positive dialogue. The Productivity Commission report on open data I think has also been very useful in carrying the discussion forward. I think banks do get where this is heading and it's in their interest to adjust to where that's heading. I think sticking their head in the sand and holding back the tide and all this sort of stuff, I don't think they think is good for their business either. I suspect they don't think that's sustainable. But you'll be pleased to know that, since the Budget, I've caught up with most of the banks since then and I bumped into Ian Narev at the Boris Johnson dinner the other night in Sydney and close to an embrace for a show of all those around to let people know that, while we have our differences from time to time, it is a very professional relationship. I caught up with a number of the chairs the other day. Look, the bank levy, it's law, so that's done and dusted. We move on to dealing with all the many other challenges and we'll have some major legislation coming to the Parliament when we come back on a lot of those issues.

COLGAN:

And do you foresee this now collecting the amount that you've got projected?

TREASURER:

Yeah, I've had no advice to suggest anything different to that.

COLGAN:

Okay. So just very quickly, I've got two more quick questions. One is we're seeing some continuing strong growth in the property price market, particularly on the eastern seaboard. Dave, this week what have we seen?

SCUTT:

CoreLogic had their latest house price index come out and a 1.5 per cent increase across the nation's capitals, leaving the year-on-year growth at 10.5 per cent. No surprise, the south-eastern capitals were the ones that were the most frothy, if you want go and call it that, in terms of price growth. You see Melbourne in excess of 15 per cent, Sydney and Canberra in excess of 12 per cent, so pretty strong rates of growth as well.

COLGAN:

Treasurer, obviously, we're looking at credit growth still at around 10 per cent?

SCUTT:

That's the APRA cap for investors. In terms of what we saw, the RBA released some data earlier this week on housing credit running just above 6 per cent. Investor lending is still running at a hotter rate than owner-occupier. I just wanted to go and ask you about the regulatory side and I was seeing that APRA has made a lot of changes recently, particularly focused on the investor side also towards interest-only lending. I wanted to go and ask you, the 10 per cent cap on investors, in particular, say we continue having this very strong price growth in the moment, particularly in these capitals on the east coast, whether there would be potentially some sort of further regulatory macroprudential tightening that may ensue if we continue down this path?

TREASURER:

Well, there's no move to change those settings now. We only just had the changes on interest-only loans a few months ago and that's still working its way through the system. Month-to-month data, you can't read too much into that. The other months we've seen different responses. You've had an impact more recently of some of the changes that came in on stamp duty concessions and things like that, and while clearance rates are high, the volume, I don't think people would say is strong at this point, but we're coming into spring and then obviously real estate agents get a few more hoardings out when you come into spring. So, look, no, the settings we've got at the moment, I think it's ultimately for the Council of Financial Regulators and APRA in particular to calibrate that.

I've always had a very strong view that having the calibrated approach through the macroprudential response is the right way to go. You take the sledge hammer of abolishing negative gearing and then putting a 50 per cent increase on capital gains tax, if you want a hard landing of the housing market, well do that, just do that. If we had a different result in last year's election, then that's what would have happened. For those who think that that would be a good idea, having a hard landing in the housing market, well, you might not have a job if that were to happen in Australia.

Some of the biggest risks, I think, to the Australian economy are obviously what we started out talking about, what was happening overseas, globally and particularly in China. That outlook at the moment, I'd say over the medium term remains positive and that's welcome news and improving, but when it comes to household debt and the level of gearing, when it comes to what is happening with the potential risks of a hard landing in the housing market and what that means for consumer confidence spending and so on through the economy, you just can't play games with that stuff and you've got to be very, very careful and calibrated, which is, I believe, what we've done and we've seen a tempering in it. But the fundamental response to housing is obviously on supply and there was some good data on that yesterday, but that has to flow through into work being done and commencements.

COLGAN:

Just with the housing growth, would you like to go and see house prices just slow a touch further? I don't think anyone in Australia honestly wants to see the property market crash. That will obviously wreak havoc in employment and the economy, but would you like to see it slow just a slight fraction from what its current rates are?

TREASURER:

Well, what I'd like to see is supply increase. That's what I'd like to see. The fundamentals in the market are about supply and demand and the under-supply then can be exacerbated by credit arrangements. Now, we've taken action on those credit arrangements, I think to temper how the growth in interest-only loans was exacerbating an under-supply problem. We've taken action there. We're taking action on the supply front through what I announced in the Budget and for state and territory governments to get on with housing targets and deliver that on the ground, particularly in the eastern states.

But the other thing we ought to be careful of, I was in Perth earlier this week. I was in South Australia last week. They're not places where they're worried about rising house prices. If anything, in Perth it's the reverse of that. We're a Government that exists at the national level and we have to take into account how these things fall on the ground right across the country. I know it's a very important issue in Sydney and Melbourne, but at the same time, we can't do things which will punish people in the west or in the south.

COLGAN:

I've got to wrap up, but I can't let you go without asking you about same sex marriage and what's going to happen.

TREASURER:

You can.

COLGAN:

I can't. I know you hate this, but what's going to happen next week?

TREASURER:

The Government will stick to its policy.

COLGAN:

And if there was a free vote on the floor, would you vote in favour of a change to the Marriage Act?

TREASURER:

Well, I'm in favour of the Government sticking to its policy.

COLGAN:

You've been listening to The Devils and Details podcast from Business Insider Australia. Our guest on the show this week has been Federal Treasurer Scott Morrison. Treasurer, thanks so much for coming on the show.

TREASURER:

Glad to be with you guys.