29 October 2016
Transcript - #2016155, 2016

Interview with Alan Kohler, ‘Talking Finance’ podcast

SUBJECTS: Budget repair; infrastructure spending; tax mix; housing affordability

ALAN KOHLER:

What do you see your main task as; balancing the budget or reducing unemployment, or jobs and growth as you put it in the budget?

TREASURER:

Well, none of these are mutually exclusive, I think. These are all the objectives we have to pursue in actually driving the economy forward. Ensuring there's the growth that is driven by the investment is critical to the task of actually bringing the Budget back to balance. We must get expenditure under control, but if you look back to what occurred under the Howard/Costello Government, I mean, yes, there was significant reform on expenditure early on, but then the balances were achieved. And the surpluses were achieved by the strong growth that they were able to drive in the economy, obviously supported by improvements in nominal GDP and the revenues that flow with that, despite the fact that they were engaging in some fairly significant expansion of expansion of spending at the time.

KOHLER:

But there's different times now. I mean, we've got interest rates in Australia of one and a half per cent, and you know, virtual zero around the world. Central banks including ours are saying, "we can't go any further with monetary policy," and they're calling for fiscal stimulus to, to boost the economy. So, the problem, I would suggest to you, is different now to what it was when Howard and Costello were operating in the early years. And what we have now is something, we have a Budget deficit, and this is the same around the world, budget deficits, high debt, and the apparent need for fiscal stimulus.

TREASURER:

Well, I don't think the answer is higher debts and bigger deficits. The answer to, I think, our challenge is to get expenditure under control and make it sustainable so we can ensure the budget position can be maintained. But, the growth that will come from stimulating private investment by encouraging private investment, having the right settings for private investment. I mean, much is made of public demand, but what about private demand? And I think the end of that is always a thing that has driven economies. And I think the public sector shouldn't get tickets on itself in terms of the role it really plays in driving economies. Fundamentally, economies are driven by private investment, private capital, private business making decisions to invent, invest, employ, secure new markets. And that's what we need our economy to continue doing. And I'm optimistic because we have one of the highest, well, if not the highest growth rate in the advanced world today.

KOHLER:

So, you're actually saying no fiscal stimulus in Australia...

TREASURER:

What I'm saying is a continued…

KOHLER:

You're not going to do it, you can't do it.

TREASURER:

Well, I'm saying continued strong economic settings that drive productivity, that support infrastructure investment, both in the private sector and in the public sector. We have a fifty billion dollar rollout of infrastructure spending around the country. We've facilitated through our asset recycling program and supported the work, particularly being done in New South Wales, and that's flowing onto other states as well. So, there's plenty of infrastructure investment going in, and that has been facilitated, I think, by some, by some good policy at both state and commonwealth level. And we remain very open to innovative ideas as to how we can get further infrastructure underway, whether it's Western Sydney, or in Central Queensland, or wherever.

KOHLER:

Well, actually, the infrastructure spending is not, at the commonwealth level, but at the states, as you say. And it's...

TREASURER:

Well, that's always been the case though, Alan.

KOHLER:

Yeah, but it's currently, and it's currently very strongly funded, in New South Wales and Victoria, by the housing boom largely.

TREASURER:

Well, commonwealth investment in infrastructure, as a share, is higher than it was actually under the previous government. And, and these are, you know, figures that we think are important to drive productivity, but you've got to invest in the right projects. It's no good borrowing money at cheap rates to spend it on rubbish projects. Project selection is more critical now than ever because of the scarcity of opportunity we have fiscally. And so, you've got to get the projects right. They've got to make the difference. And that's where our attention is focused.

KOHLER:

Do you, do you think that there's a case for, because one of the problems, it seems to me, is that that commonwealth doesn't differentiate between capital spending and recurrent expenditure in your budget. Do you think there's a case for separating it so that you can actually possibly even issue infrastructure bonds, or at least separate capital expenditure in your budget so it doesn't actually add to the deficit in some way?

TREASURER:

Well ultimately it's money going out the door and your underlying cash balance actually tracks the money going out the door and the money coming in the door. And that's the practical way, I think, that these things are assessed externally too, by those who form judgments about our financial resilience. So, there's a pragmatism to all of this. That said there's a difference between good debt and bad debt. The problem I have at the moment is the debt overwhelming that has to be raised is going to pay recurrent expenditure, but we've been able to curve, significantly, the growth in debt. When we were elected in 2013, we were borrowing, on average, at the rate of three billion dollars a week. That's now come down to one point four and it needs to come down further. And that will be achieved by both the expenditure restraint and better targeting of our expenditure. And there is a lift in revenues which is coming, yes, through bracket creep. I acknowledge that, but as well, an improvement in nominal GDP, which we're starting to see. And the most recent figures had through-the-year growth on nominal above real for the first time in several years.

KOHLER:

Yeah, that was pretty encouraging. In fact, we're starting to see an uptick in the terms of trade thanks to the coal price...

TREASURER:

True.

KOHLER:

.... oil price...

TREASURER:

Some of those may not be sustainable at the levels we're seeing currently and we'll obviously take that into account, but at the same, and we welcome that, as you say, that curve, that line heading in, in the right direction in the terms of trade. But, we've got to be careful that we don't also get complacent about that. And that's no leave pass to not attend to the structural spending issues. They must be addressed to have a sustainable budget.

KOHLER:

But that point you were making about good debt and bad debt is an important one, it seems to me, because there is such a thing as good debt. So, you do acknowledge that.

TREASURER:

Of course I do. But, you're much better able to pursue that though when you're not racking up bad debt. And by that, what I mean is obviously debt which is going towards, you know, welfare payments, which is what is currently happening and we need to first arrest that growth in that debt, and then I think that provides you with the opportunity to maybe not technically create that demarcation, but certainly, in a policy sense, looking at how you're not seeking to raise debt in public markets to support what you're doing as a country. At the moment, far too much of it is trying to pay the recurrent bills.

KOHLER:

You've recently been talking about housing affordability in a speech, and then subsequently in interviews, and, and I suppose that raises the fundamental question of, firstly do you think there's a problem? And secondly, is it a problem that you need to solve?

TREASURER:

It's a problem that governments of all levels need to solve. And I'm acknowledging the fact that the commonwealth has a role to play in that. It's important that we first set out, though, what the problem is. My attention in my speech to the UDIA was not to set out all of those solutions at this point. This will roll out over a period of months and over the course of this term. But, it is really what often the government has been criticised of not doing, and that is setting out what the problem is you're seeking to address. Now, in that speech I stated and set out the stats which show very clearly that it's a lot harder to get into the market today than it was previously. It's always been pretty hard to buy a house in this country, even going back fifty years or even longer. But, today it's harder to get into that market. Now, if you're already in the market, you already have a mortgage, then obviously what's happened with rates since the GFC, has meant that mortgage is more affordable than it used to be. But, for those trying to get into the market, it's just as tough. And it's, in fact, tougher, particularly in markets like Sydney, and Melbourne, and Brisbane. You look further afield though, in South Australia and Perth, where actually prices are falling, or other parts of the country, and there's a different experience. And the point I was making is there's no single housing market. And so, you don't go and try macro prudential policy or tax policy to address an issue in Sydney that can potentially have the reverse effect in Perth. And you've got to be very careful about that. So, while I acknowledge there are demand issues in the housing market, APRA's very calibrated intervention in the housing market, on loan LVR, effectively LVR's on, on their 10 per cent rule that they introduced, and now introducing further ones on the mortgage serviceability criteria. These are the sort of calibrated, demand orientated macro prudential measures which can have an influence and they clearly did, otherwise the former governor, Glenn Stevens, would not have cut rates when he did, because he then had the confidence after APRA's measures to do so and not fear an overheating in the property market. So, demand issues exist, but I would argue that the measures that APRA have been taking and continue to take are the more calibrated and measured response that you can implement without getting into the sort of sledge hammer approach of what the Labor Party proposed at the last election. You don't crash your housing market to achieve affordability. There, you know, are plenty of cheap houses in Detroit.

KOHLER:

I'm not sure focusing negative gearing on new houses is going to crash the housing market, I think, personally, I think that's a ridiculous proposition.

TREASURER:

Well, you tell me you take one of the three purchases out the housing market, someone goes and buys a new house and they can negative gear, who are they selling it to? They're selling to the people who can't negative gear. That obviously has an impact on the market and on the purchase chain which underlines, underpins the investment and new projects for developers and others. So the question is – is it a very extreme response, and what I'm suggesting is the very calibrated response from APRA, I think, is being fair more measured and has been quite successful.

KOHLER:

Yeah, but you're talking about the need to encourage supply of new housing.

TREASURER:

Yes.

KOHLER:

Having negative gearing on new housing only would surely do that, obviously.

TREASURER:

Well, you're assuming that they can sell it to someone though, Alan. And that that house somehow doesn't have any impact on the initial investment equation. And, certainly, the advice that has come back from those who are engaged in these things every day is that it would have a very negative impact on that transaction chain that underpins in the initial investment.

KOHLER:

But, it gets down to the problem, I guess, which is, I mean, my son's a twenty-seven year old renter. He thinks the whole thing is a national emergency. He's terribly upset about it. And I, I mean…

TREASURER:

I don't disagree though, Alan. If you're renting at the moment, you're renting because often you can't actually get into the purchase market, but who owns the rental property that you're renting?

KOHLER:

I do.

TREASURER:

You do. And mums and dads do.

KOHLER:

Exactly.

TREASURER:

Whether it's the bank of mum and dad, or it's the mum and dad investor who's a police officer, or a nurse, or a teacher who was, is owning that flat or that unit, or that two bedroom house, or wherever it is. Our residential rental market is not owned by big institutions like it is in the United Kingdom because the yields on residential real estate in Australia are not what they are in those other markets, so our rental market is heavily dependent on mum and dad investors. Now, you take them out of the residential rental market, and if you think that's not going to have an impact on rental stock and rents, well, it's bad enough that it's hard enough to get into the housing market to buy a house, but you shouldn't have to pay more in rent because of the way someone's come up with a proposal to think they can solve that problem. I mean, you get hit twice.

KOHLER:

You've been talking improving and with good reason, of course, that Australia's successfully managing the transition from the mining boom to, to something else, to, you know...

TREASURER:

A more diversified broader based economy.

KOHLER:

But what's really been underpinning that is the housing boom, it seems, the construction of housing, and particularly apartments has been, you know, the sort of driver of the economy over the past twelve months.

TREASURER:

Net exports have contributed to Australia's economic growth in the last twelve months. Our export sector had its best quarter since the Sydney Olympics. And the diversification, particularly in the services sector, the growth in international education, in tourism, in financial services, and all of these industries are diversifying. We've also had good performances in some of our agricultural sectors as well, which has been very welcome. So, our economy is diversifying. Housing is critically important and we want to see the supply actually match the demand, and I just don't mean in volume terms. I think it's trite to say that when we talk about supply, they're talking about quarter acre blocks and land release at the fringe. Not at all, not at all. It's as much about the infill, it's as much about the composition of supply. If you're someone who's lived, living in a four bedroom house and the kids have moved on and maybe they're possibly still living with you, but if they're not and you want to downsize, where are you buying a place? Can you buy a place in the same place you've lived your life in the last twenty or thirty years? And is the market responding to those demands? And is the development approvals process moving quickly enough to ensure that that demand can be matched? Now, they're the questions about supply. I think it's very misleading to sort of trivialise the supply debate, saying it's just land on the fringe. I mean, that's nonsense.

KOHLER:

Just on a personal level, you've been Treasurer now for a year, or just a bit more than a year, I think, and it's, it's often struck me that you were successful as an immigration minister because you didn't say anything at all. You kind of didn't reveal anything, didn't have to say anything, and now it's, your job is, in a sense, the complete reverse of that. You have to provide kind of economic leadership and you have to say a lot. I mean, how have you found that transition?

TREASURER:

Well, different roles require a different ways of going about it and how to, the social services role in between, which also involved an enormous amount of stakeholder consultation and the social services role, I think, was a very good preparation for this one because that's where, when I helped the portfolio as it was constructed, it comprised more than a third of the countries budget and one of our biggest challenges going forward is ensuring that people are better off getting into work than remaining on welfare and they don't get caught in these welfare traps. And the work I commenced there, which Christian Porter is now continuing, in following the New Zealand approach of having more target interventions early which prevents people from going onto lifetimes of welfare, I think is incredibly important. If you want if you want to get the welfare budget under control, the best thing to do it get people into work. That was actually the lesson of the Howard/Costello period. The reason that the welfare budget eased in that period was that more and more people got into work. So, when you ask me - choose between unemployment or balancing the budget, well, getting people into jobs actually helps balance the budget. And that's why the two things are not mutually exclusive. But, whether it's the enterprise tax plan and highlighting the critical issue that I have particularly since the election, that unless we can drive private investment in our business sector, and to do that you need more competitive tax rates. You need less regulation. You need the encouragement, more generally, to actually get out there and invest in new markets and have the opportunities through trade and other initiatives in innovation, and science, and collaboration with the university sector. If these things don't exist then people don't invest. If they don't invest, businesses don't grow, and jobs don't come, and the wages don't increase.

KOHLER:

On the subject of taxation, do you think that there needs to be more of a shift towards consumption and land taxes and away from the more avoidable income taxes and volatile transaction taxes such as stamp duty. I mean, you're, you are trying to reduce income taxes on companies, and so on, but do you think, you know, because you have had, at some point, you did acknowledge there's a revenue problem as well as a spending problem.

TREASURER:

Well, I said there was an earnings problem, Alan, that's very different to a revenue problem. And earnings problem means that Australians, and companies, and wage earners have had very low growth in their wages. And when Australians are earning more, the Government's revenues increase. Now, a revenue problem is where you think you're not extracting enough tax revenue from everybody who's making a dollar. Now, I don't think that's the problem. That's what the Labor Party thinks the problem is. That's why they want to increase taxes. Our plan is to try to boost what people earn by providing the right environment for them to earn more. And that's how you actually address issues on revenue in this country. And that's fundamentally different to what others describe as a revenue problem.

KOHLER:

What about the mix, the tax mix between consumption, and land taxes, and income, and stamp duties?

TREASURER:

Well, some of those are internal arguments to states, I mean, whether people are making changes between land tax and stamp duties. They're matters that rightly should be pursued and discussed by states and they have different ideas about how to achieve it. A year or so ago we were having that discussion around the mix between consumption taxes and income taxes and that came to a conclusion. And we had that debate, and we worked through that issue, and I'm not intending to revisit that element of it. But, what is important is that when it comes to taxation and taxation reform, you never stop. You continue to seek ways to make the system more effective, more investment friendly, more growth-friendly, more job friendly.

KOHLER:

What do you think of the ACT replacing stamp duties with higher land taxes which are actually rates, what do you think of that?

TREASURER:

Well, it's not for me really to commentate on them. I think it's better for those jurisdictions to make their own calls. I mean, they've just been to election. They've put that to the, to the ACT people and it was linked to a particular infrastructure projected predominantly in the rhetoric. So, that was interesting of itself. But, they pay some pretty high land taxes in the ACT, they tell me, so in New South Wales your rates are a hell of a lot less than that, as they are in other state jurisdictions. But, they've got to get these balances right. I'm all for competitive federalism, not collusive federalism. So, I think the tension in the cord on that front is a good thing for productivity in the economy.

KOHLER:

You're a libertarian on the right hand, in the right of politics.

TREASURER:

I was interested in your description of that. I'm...

KOHLER:

Are you not?

TREASURER:

I'd describe myself as a pragmatist, actually.

KOHLER:

A pragmatist!

TREASURER:

I've always been someone who wants to see the economy grow. Obviously I'm on the conservative side of Australian politics, but I, I tend not to go for these sorts of labels. The ideology is not what Australia's interested in. Australians, you know, vote on results. And, as the Treasurer, it's my job to get results. And, particularly in a parliament like this one where you've got to work with everybody. You've got to deal with people who are keen to get outcomes and sit down with them, and that requires some give and take. And we've already demonstrated that, I think, already. It's a hundred days, and think about what we've been able to achieve. We've got income tax cuts through the parliament. We've got the ABCC bills and all of these now heading up to the Senate, and that's, that's an incredibly important reform for productivity in this country. We've been able to move through getting through our business tax cuts into the parliament and whether we get all of that through or not, time will tell, but certainly, I'm very confident for small businesses up to ten million dollars in revenue. The Henry Review said that should be lifted to five. And that was some time ago. We've taken that all the way up to 10 and the Labor Party thinks that a business of twenty-two employees is Microsoft. I think that's ridiculous. We don't. And we want to have them in a better tax environment.

KOHLER:

But even a pragmatist, an achievement-oriented pragmatist like yourself arguably needs an economic narrative. That was certainly something that Paul Keating found and he kind of maintained for his, for while he treasurer. He maintained this kind of over-arching narrative.

TREASURER:

Sure.

KOHLER:

And I, you know, obviously you have that. I'm wondering how you feel about the current sort of economic environment where central banks are, you know, are massively engaged in intervention in the markets

TREASURER:

Well, they have been, particularly since the GFC. And I've made public comments about, you know, those policies are largely exhausting themselves internationally. And they had their time and their place, and it's for the bank to make the judgments on where rates go from here. But I think what's important are the three things I've been talking about what we need to do. And the first is to continue to build our economic resilience, and financial resilience. A strong banking sector and financial sector is critical to that, as is a strong balance sheet, getting the budget back into balance. We have to drive earnings growth in this country, both company profits, what people can earn more. Real wages and the slow growth in real wages, I think, is what is causing real anxiety in the community. That's why it's really top of my list to ensure that we are doing things that enable companies to do better so they can pay their staff higher real wages based on creating value. And then we've got to stay the course when it comes to investment, and trade, and positive immigration in this country, which have always been key pillars for our economic prosperity and growth. So, every day the Prime Minister, I, the team are about doing things which we think we lift investment, which will drive growth, and support jobs.

KOHLER:

Thanks for joining The Constant Investor, treasurer.

TREASURER:

Great to be with you, Alan. And I've appreciated the opportunity. All the best.

KOHLER:

Thank you.