31 August 2017
Transcript - #2017166, 2017

Bloomberg Q&A, Sydney

SUBJECTS: Address to Bloomberg – the Economics of Opportunity; Turnbull Government achievements; enterprise tax plan; Turnbull Government ensuring Australia’s AAA credit rating maintained with all three major ratings agencies; restoring the Budget to balance

QUESTION:

You have been almost two years in the job now, in brief what would you rate as your biggest success and what has been the biggest disappointment in that time?

TREASURER:

Well there have been many successes. We were incredibly pleased to see the small and medium sized tax cuts pass through the Parliament – businesses  up to $50 million in turnover, lifting the small business definition from $2 million to $10 million in turnover, which not only gave them a lower tax rate and take it down to 25 per cent ultimately which is now legislated – but also the extension of the pooled depreciation, GST done on a cash basis which is critical to small businesses’ cash flow, and the instant asset write-off which we continue to maintain. We’ve been able to keep spending under control in a very tough environment, I nominate that as well, less than two per cent real growth in expenditure and two years ago, in my first MYEFO, I said we projected a balance in 2020-21. That hasn’t changed. Hasn’t changed, and we’ve had to maintain that on the basis of very difficult decisions, a difficult Parliament and in doing so, the AAA credit rating has been maintained over those two years when it was under significant strain, predominantly because of the difficulties faced in the Parliament passing savings. But when you can’t get there one way, you’ve got to go another way and that’s what we’re able to do.

QUESTION:

And the biggest disappointment?

TREASURER:

I’m still going on achievements. I’m just getting warmed up. But for Australians, 240,000 jobs last year – that’s what matters. Our opponents like to mock us about jobs and growth, well, 240,000 jobs is not a slogan, it’s a reality, particularly for those 240,000 Australians. I’ll stop there for now. I’m sure you’ll give me another chance for a few more later.

QUESTION:

Disappointments?

TREASURER:

Disappointments I think is the better way to put it. The disappointments I think have been the frustrations in the Parliament and I hope there are not more. One significant disappointment would be if the Parliament fails to live up to its responsibilities on the NDIS. We have sought to fund the NDIS through savings which they had rejected and we cannot allow that very significant program to go unfunded and the means we have chosen to do that, I think is fair, I think it is responsible, it mirrors what the Labor party did when it was first introduced with bipartisan support and their choice to not support that I think is just frankly despicable and I hope that the balance of the Parliament does not fall in line with that approach.

QUESTION:

The Coalition’s traditionally the party of business, the party of capital, but you seem to have had a bit of a tension with business of late – from springing the banking tax to…

TREASURER:

Not for small business. I can assure you of that.

QUESTION:

I know, I know. But for large businesses, let’s talk about that. The banking tax to the clean energy target they’re crying out for, to certainty on power costs. There are a range of little things. I mean, you seem to rub each other up the wrong way at the moment – is that a fair assessment?

TREASURER:

Well, let’s think about the sectors you’ve talked about. The banking and financial system, the energy sector, these are not sort of free market nirvana sectors. I mean, it’s not like those sectors are operating in a regulation-free environment. They’ve been built on regulation, frankly, and over time large businesses, who live in and depend on the regulatory environment, can get very good at seeing those regulations worked to their advantage and the balance between those businesses and customers can get out of whack. So, the actions I’ve been taking and the Prime Minister – whether it’s in the energy sector or whether it’s in the banking sector – are really about trying to restore greater competitive pressures in these markets by increasing the power of the customer. Fundamentally, competition is about the power of the customer in a market and that is the thing we’re seeking to boost, whether it’s what we’ve done on Section 46, which passed through the Parliament now, another achievement which small businesses are particularly pleased with, or it’s what we’ve done in the Banking Executive Accountability Regime, or even sitting down yesterday in this very building with the energy retailers and working on how we can get Australian households onto better deals. Complexity and inertia in highly regulated markets is big businesses’ profits’ best friend and often the consumers’ worst nightmare – hi, Anna, we’re meeting later.

QUESTION:

You’re the party of the consumer now, not the party of capital?

TREASURER:

As I’ve just said, the strong customer is the guarantee of a strong market and so I see that as a completely pro-market point of view. Let’s not kid ourselves, these sectors are based on regulation. They are highly regulated sectors for very good reasons and, over time, you need to recalibrate that regulation to ensure the customer is at the centre of the universe.

QUESTION:

One more from me, then I’ll go to the floor. In the wake of the banking tax, one of the concerns that has been mentioned is that you might spring some more surprises on the financial and other industries, can you reassure them on that?

TREASURER:

Well, we’re certainly done on super, I can assure you of that. And as I’ve said about the bank levy, we set it at the level we thought it should be set at. Hopefully what people have noticed from my time as a Minister is that I’ll go in and I’ll deal with an issue and that will be that. I don’t go and revisit it. I try and get the solution right the first time, and in the cases where I’ve done that – whether in social services, on disability support pensions or retirement incomes, or in immigration and border protection, people are very well aware of what I did in those portfolios, or here whether we’ve been dealing with our housing affordability package that we brought down on the Budget which was incredibly comprehensive and we put a lot of work into it because it wasn’t our intention to go back and just add to it, it was to get a comprehensive package out there and legislate it. So, the work we’ve done in the areas where we’ve done it, we believe we’ve done well on. Where we’ve been frustrated is in the legislation process and when you have to resort to the revenue options we did in the Budget, the reason for that was because the Parliament was not supporting savings. Now, the alternative was either have the deficit extend longer – which no doubt would have led to the loss of the AAA credit rating – or you move on the revenue measures that we did and we sought to do that in a way that we thought would have the least impact on the economy.

QUESTION:

I’ll open the floor. Has anyone got any questions there?

QUESTION:

Don Hamson, managing director of Plato Investment Management. Treasurer, seem most pleased with your small to medium sized tax cuts. As an owner of a medium sized business and as a professional investor with a focus on after-tax investing for Australians, particularly retirees, I actually disagree with the benefits of the tax cuts because under our Australian franking system, at least for Australian investors in Australian companies, any reduction in tax is a reduction in franking credits so whether it’s my business or my clients they are not better off. It’s an advantage for foreigners but, particularly for service companies like my own, I see no benefits.

TREASURER:

The businesses I have visited down in my electorate in southern Sydney are making things and family businesses with 20 employees, they’re not distributing too many dividends to foreign companies. What they’re doing is retaining the earnings and investing in their businesses, and that’s why we unapologetically started the tax cuts – and not just the 27.5 per cent down to 25 per cent but lifting that threshold from $2 million to $10 million which gives instant asset write-off, pooled depreciation, GST, all of these things –  all of that is designed to support small and medium sized businesses and particularly those who are employing lots of Australians, making things and participating in the economy in that way. That’s where we started, that was our priority. And we know that is having a big impact for those small and medium sized businesses who are engaged in that side of the economy. Your business may be different, you are entirely entitled to your opinion on these things, but I hope that doesn’t mean that you suggest we should be putting taxes up.

QUESTION:

I didn’t say that…

TREASURER:

I didn’t think you did.

QUESTION:

But it does add complexity.

TREASURER:

Well, the alternative is higher taxes and that’s not something I support.

QUESTION:

Hi, Nick Bishop from Aberdeen Standard Investments. Other than bragging rights at the G20 table, in this era of low interest rates, what is the economic advantage of the AAA credit rating? Why so sacrosanct?

TREASURER:

It’s a fair question. It obviously has an impact on confidence in our economy. I think maintaining the AAA credit rating also poses a strong discipline on governments to ensure they’re managing, particularly on issues not just about its own debt but, I mentioned before, household debt issues and you will be aware of what we’ve been doing through the regulators in relation to the housing sector. We’ve been pleased that the objectives of those policies, which has been to take the heat off the top end of the investment market in real estate by trimming the growth in interest-only loans, and we’re actually seeing now a transference back to principle and interest. That not only takes one of the stimulants out of bidding higher prices but it also starts getting people to think about actually paying off debt, not just increasing it and so, we’re pleased about that. I think seeking to continue to strive to maintain that AAA credit rating does provide a very good discipline on governments and it plays very significantly into the thinking of crossbenchers when we are passing key measures through the Parliament. But no doubt these things also have an impact on the flow-through ratings not only of our major banks, and we saw that soon after the Budget, where the major banks actually retained their ratings because we retained ours. But those who are un-impacted by the impact of our regulatory system or less impacted by it and protected by it, we saw their ratings fall. That can have an impacts on cost of borrowing. In the short-term those things are not as great for the reasons that you said, but when winter comes, it matters, because you’re higher up the queue.

QUESTION:

Treasurer, Richard Alcock, Vice-Chairman Bank of America Merrill Lynch and Chairman, Western Sydney Local Health District. The contribution that the health sector was a very strong thematic in your speech and could I ask you to just elaborate a little bit about how you see the role of the health sector in job creation and you have the important Western Sydney City deal under consideration by many arms of government. I think there is a lot of interest in the job creation opportunities but also quite importantly about the containment of the incidence of diabetes.

TREASURER:

I think you have actually just said that pretty well in terms of the areas we are focussed. I deliberately wanted to put that focus on health this morning to highlight the contrast between the productivity agenda of several decades ago and the one that is critical now, for a more human services orientated economy going forward. That has two important insights into it. One is that because it is more about everybody working that creates our productivity that they need to be healthier and our economy needs to support a healthier workforce. But equally, the technological opportunities, the intellectual opportunities that we have in our people lend themselves very heavily towards this side of the economy – the health and human services area. So, we need to be thinking about health not just as a social policy, an important social policy of course, and that is why we guaranteed Medicare in the last Budget and the PBS and set up the fund and so on. But also, because this will be a key economic driver for our economy and we need to think in terms of health industry – not just health services. This is an important distinction that we need to continue to make. While I go around when I was visiting businesses that were benefiting from our tax cut up to $50 million, many of those businesses were medical businesses. And I don’t mean they were medical practices – they were building medical equipment. They were exporting them overseas and the knowledge and know-how that we are building up in this country and the opportunity to establish this around hubs, whether it is in Western Sydney, as you are talking about, or indeed in Southern Sydney where I know in my own electorate there is a natural hub that has been emerging around our hospital infrastructure there and we are seeing new investment going into new facilities. One of the most significant compounding chemists now operates out of one of our cancer treatment centres in our part of the world down there in Southern Sydney and these were significant investments. I am seeing money going into it. Smart money going into it both to drive a return but it is also delivering great services and giving some good advantage. I talked about the ageing issue being both potentially an accelerator and a brake. Now, the whole world, particularly the developed economy, is ageing. Some of those economies are ageing a lot more quickly than we are. That I think says that there is a massive opportunity out there for us to be the leading provider of ageing services in the world. We have got a great domestic population upon which we can develop that expertise and develop our business models and become a world leader. So, I think it can cut both ways for us and health is one area we need to focus on, not just being a public services delivery, but a private sector opportunity.

QUESTION:

You talked about the importance of the knowledge economy and the high value added services in answer to the previous question. And yet, one of the biggest losers in the Budget was universities and higher education. How do you reconcile that?

TREASURER:

Well, I don’t agree with the assessment for a start. The biggest winners out of our innovation and science agenda which was one of the first initiatives of the Prime Minister just under two years ago, was to significantly recalibrate how we invest in our universities, but not just in the old fashioned way of just piling money in there for people to do interesting things in backrooms and universities. One of the key things we have to see change in our university sector is that the investments we put in there need to link up to what is happening more broadly in the private economy. It is the reason the US I think has done so well in innovation and science because there is a very different culture of collaboration when it comes to innovation and research. That is something we are trying to change in the way that we make these investments. Too often the debate about higher education is just about fees and things like this. I understand they are important issues but our university sector has to be one of the drivers of our economy, not just something that is funded by it.

QUESTION:

I might just pop in with a quick question. Peter Costello, we just talked about interest rates a moment ago and it just jogged a memory. Peter Costello this month urged the RBA to lift rates.

TREASURER:

I don’t remember him doing that when he was Treasurer. Does anyone else?

QUESTION:

To avoid households taking on more debt. This is the important part, he says, contributing to massive imbalances in the economy. Do you have sympathy with that assessment? Do you agree with that assessment?

TREASURER:

For the same reason Peter never used to speculate on interest rates and which way they should go when he was Treasurer, as a mentor of mine I intend to follow his practice, the RBA makes these calls. I meet with Phil and his team and Guy every month and have done so ever since becoming Treasurer to get a good insight and understanding of how they are making their decisions and they continue to get it right as they have over a long period of time and I think they do a stellar job. So, I will leave Phil to his and I have no doubt Phil continue to leave me to mine.

QUESTION:

The Costello point, just more broadly though, I noticed it also in some of the commentary around [inaudible], that when you have got such low growth, low rates, it is so easy to just put your money into assets and inflate them rather than putting it into productive investments in the economy. Is that a problem we are seeing as well?

TREASURER:

It is also a great opportunity as we are demonstrating as a government to distinguish between good and bad debt as we did prior to the Budget. From 1 July next year we will no longer be borrowing money through new Commonwealth securities to finance everyday expenditure, recurrent expenditure of the Government. The borrowings that will be undertaken from 1 July next year, new borrowings, will be to support our defence procurement program, to support our infrastructure program and to ensure that we don’t draw down on the Future Fund. So, that debt program at a gross level has a very specific purpose and it is also matched off by assets which is why gross debt as a share of the economy falls. That is why the net operating balance is getting to positive territory more quickly that the UCB and I think it is important to understand the distinctions between all of these numbers. So, yes, we are in a low interest rate, low inflation environment. That has been the case now for some time. I describe it as the post GFC funk and the discussion about rates, these days, isn’t about are they going down but when they are going up. I think that is an obvious insight. We all just have to work to the economic environment we are in. We will seek to take the opportunities we can. The Future Fund decision is a good example of this. We just had our 1000th bond tender earlier this week, four times oversubscribed. I got to hit the finalise button, very exciting. To be able to borrow at those rates means that we have made the decision not to draw down on the Future Fund which is earning at 6 – 8 per cent. Why would you draw down when it has that cost to your returns when you can do it on this other level, maintain the Future Fund for another 10 years to ensure your unfunded superannuation liabilities are covered off. So look, there are swings and roundabouts.

QUESTION:

Treasurer, good morning, my name if Fred Woollard from Samuel Terry Asset Management. Before you were elected, you and your colleagues often spoke about a so-called fiscal emergency. Barnaby Joyce once said that if our debt wasn’t fixed we would follow Greece down the toilet. You promised when you were in power you would fix the deficit within your first term. We have now got deficits till at least 20-21. Was there ever a fiscal emergency and if there was why is it taking till 20-21 to fix it?

TREASURER:

Well, you mustn’t have been watching what has been happening in the Senate for the last four years. We did have a plan to pass large numbers of savings and they were rejected by the Senate. So, we had the plan but you have got to respect the Parliament that is elected by the Australian people and when that plan was frustrated we have found other ways to get there. As I said, for the last two years our projection of a fiscal balance in 20-21 hasn’t shifted . And expenditure growth is at less than 2 per cent. That is the lowest rate of expenditure growth, particularly when you take it out to the end of the Budget and forward estimates period, of any Government in the last 50 years. So I’ll take that.

QUESTION:

Treasurer Ben Bucknell, On-Market-Bookbuilds. You mentioned the importance of agricultural exports, and how important that is at the moment. No doubt you saw the Four Corners program on the Murray Darling Basin and what’s happening with the water market. What are you planning to do about that, or do you have any comment on the water market?

TREASURER:

Firstly, I think you’re right on what’s happening with Ag. You go to Tamworth, you go to Toowoomba, you go to places like this. One of the frustrating things that a lot of my Liberal and National regional and rural colleagues have is that while it is very true that there are many parts of Australia and regional areas that are going through real hardship, that is not the general story. What’s been happening with Ag has brought some real prosperity back to a lot of our rural towns and regional areas. That’s tremendous, for all of us who spend more of our time in cities, than out there, I would encourage people to take another look at that story. It’s not universal, but there are some exciting things happening in rural and regional Australia. I was up in Bourke last week, as part of the Clontarf program, some of you may know about it. I suspect some of your support it. Good on your for doing so. It supports young Aboriginal boys in rural and regional communities throughout Australia. But I was up in Bourke where we’re investing in a small meat abattoir project up there. There’s about $60 million of investment, we’re putting in $10 million. This is the biggest investment project in that part of New South Wales in 20-30 years. Because things are happening. There’s a market for that. It will largely be goats. We’re seeing those opportunities emerge in rural and regional areas, but that same part of New South Wales is also heavily impacted by water issues. So our answer to that is we’re implementing the plan. I think that we have a strong bipartisan commitment to the implementation of this plan, water reform is as hard as aged-care reform, and many other areas. In both of those areas at least up until now there’s been some commitment across the aisle on these things. I wish there was more commitment across the aisle on other issues, but I certainly hope at least that one will retain. 

QUESTION:

Brett Le Mesurier from Velocity Trade. Can you give us your expectations of the outcome of the prudential inquiry that APRA is going to undertake on Commonwealth Bank?

TREASURER:

No. I can’t. Nor should I. It’s important they do it. And I’m very pleased that they are doing it. I think it’s important. I’m pleased Commbank has welcomed it and are funding it, and cooperating with it. I think this is very important. This is a very serious set of issues that have occurred not just the matters that AUSTRAC are bringing before the courts, but a series of events, so it’s important that the regulator just goes and does its job, which is what it’s doing. That’s what we’ve been doing now for some time. I mentioned the executive accountability regime, the increased resources for ASIC, the increased powers, right across the board, particularly the new financial complains authority. We’ve taken action. I think it was someone from the shareholders association the other night I saw commenting on this issue, and they went through the series of things that are happening right now in relation to the banking issues and they went, `that’s what we need’. We don’t need another three year lawyers picnic, what we need is just taking action now, which is what the Government is doing through all the appropriate channels, and APRA has been one of those. So, I look forward to them getting into it. It’s not going to take three years, or five years, they’ll get it done in six months, and I hope to see an interim report sooner than that, and then they’ll be able to take action. They won’t be recommending things, they’ll be doing things. Just like with ASIC, the result of their investigations they’re conducting. When they find something they’ll take action.

QUESTION:

I just want to follow up on that, you’ve said that all options are on the table when it comes to Commonwealth Bank and the AUSTRAC allegations, with so many probes that you’ve mentioned already underway what further options are there?

TREASURER:

I think the actions that have been taken now are the appropriate ones that are needed in relation to the events that we have seen. I think that APRA’s announcement earlier this week was the right one. Let’s let them do that job and let’s let everyone else in the banking sector get on with their job. They have banks to run, they have customers to service, they have loans to issue. They have confidence to build and it is a tough gig but that is their business to manage and I think it is important to underscore as I often do when talking about these issues that we have a strong and resilient banking system. It is one of the key strengths of our national economy and it has been for decades and that is not under threat I believe by the events that we have seen. These go to other matters of practice and behaviour which are appropriately dealt with by very strong regulatory agencies and the system is working to address it.

QUESTION:

Changing to the topic of energy Treasurer. You just joined a couple of dots in which you highlighted, rightfully, the productivity benefits from a healthier workforce and secondly not looking towards the nostalgia of the past but current solutions. So, my question to you is, when can we see the Government move forward with the likes of moving on from so-called clean coal to a clean energy target providing policy certainty to drive investment in the energy centre again.

TREASURER:

There are five things we are doing on energy. The first one is making sure that Australian gas is available here for domestic use. Second one, is we are working with the retailers to ensure that Australian households and businesses can get on the best possible deal and we had those meeting yesterday. Thirdly, we are working to make the regulations across the network more efficient. The abolition of the limited merits review is a key action in that respect and we are doing more work with COAG on that front. Fourthly, we are both directly investing, financing, as well as facilitating in investments in generation and storage and transmission in the energy sector. The Prime Minister, as you know, was down at Snowy earlier this week. But that extends agnostically right across the resource base. And we want to see more investment, particularly in the resilience in the system and particularly the baseload capacity of the system and people need to make decisions around that. Hence, the importance of the point that you have made. That is why it is important to come to a landing on those key regulations that will provide the right signals for investors over the next 20 – 30 years. That remains a very important priority of the Government as we work over the back half of this year. Fifthly, it is investing in low emission technologies which we do through the Clean Energy Finance Corporation. So, in each of those five areas we are moving forward. In every single one. You have got to get a durable landing – particularly on the one that you have mentioned. Because if it is not durable it won’t last and the same problems that you have highlighted will continue. So, that is why we are taking the time to work with all the stakeholders, both politically and within the sector to make sure this can land and stick the landing. That is very important. So, patience, strategic patience, is necessary and I would hope that there would be some bipartisan support, but we will see.

QUESTION:

The Commonwealth said yesterday they think the Aussie dollar is going to go to 85 cents, which is obviously not so good for our economy and your friends at the RBA aren’t going to be very happy either. Will you ever take the opportunity to jawbone a bit? To tell the market they have got it wrong?

TREASURER:

I am a very timid soul. I could never be accused of jawboning anybody, surely. That’s never been my practice.

QUESTION:

Is it too high?

TREASURER:

Again, I don’t speculate on exchange rates or interest rates. It is not appropriate practice for a Treasurer to do. The markets will work out what the dollar is and Phil will set the cash rate.