COMPERE: As mentioned of course, all eyes on which of the big banks are going to be the first to follow suit with the RBA's decision to raise rates; and perhaps some of them may even go higher by as much as 0.3 percentage points.
Let's now join, from Canberra, Finance Minister Lindsay Tanner - or actually, he's in Melbourne today - normally in Canberra.
Minister, good morning to you. Thanks very much for coming on.
LINDSAY TANNER: Morning.
COMPERE: Let's just ponder this fact that, you know, it's a matter of probably when, if not if, if we're honest about it, you know, the banks are going to raise. I mean what, by how much are you expecting?
LINDSAY TANNER: Oh, I can't predict how much the banks will raise. All we want them to do is to take into account the pressure that a lot of Australian families are under as a result of increasing rates, and to do everything they can to minimise the flow through of the US arrangements to make sure that the burden that individual families carry is kept to an absolute minimum.
COMPERE: You've talked in the past, and very recently, about reforms that the government's going to look to get through to make it easier for people to vote with their feet if they're not happy. I mean, when are those reforms likely to actually go from, you know, propositions into cold hard, you know, action?
LINDSAY TANNER: We've already made some changes that ensure that the process of switching is easier, because of the direct debit arrangements for example, and we are working on the other issues, in order to ensure that the disincentives to shift are minimised, particularly exit fees.
But there's, the market pressures are working too, so there's at least one bank that's put out a no exit fee product as a result of the pressure that has been brought to bear.
So, we believe that these things will improve in the very near future.
It's important to put as much competitive pressure on the banks as we can to ensure that people, if they do believe their bank has done the wrong thing in its response to these international pressures, can find it as easy as possible to move to another provider.
COMPERE: Do you accept though that of course in this climate of tight lending and increased wholesale funding costs that the banks have their hands tied, and to simply say really to consumers just go somewhere else is really not acknowledging the business reality that banks are facing?
LINDSAY TANNER: We do accept the business reality, but there's more to it than that. For example, some banks are much more exposed to those pressures than others, and some banks have effectively decided to absorb some of the pain themselves where others are seeking to pass pretty much all or the vast bulk of it onto their customers.
So it's more than just the question of, is there a problem? Yes there is a problem, but the detail of exactly how individual banks respond of course, is something that's much more nuanced than that. And so we're keeping a very close eye on how individual banks behave; and as you've seen in the past, we've been critical of some banks for doing what we think was the wrong thing.
COMPERE: You've mentioned some have more exposure than others, are you prepared to actually state which ones they are, because we're only talking five banks here.
LINDSAY TANNER: Well there's, there's one that has a significantly stronger deposit base than the others, and therefore has less of a need to go overseas for funding in order to service its mortgage book...
COMPERE: And that would be the Commonwealth? Yes?
LINDSAY TANNER: And that's the Commonwealth.
COMPERE: Right.
LINDSAY TANNER: But, they're, none of them are identical of course. There is a degree of variation across all the banks, but Commonwealth stands out as one that has less of a dependence on the overseas funds markets than the others.
COMPERE: Yeah. I mean, the bottom line though, of course, okay accepting that, spending is very much a worry. People are confident that they'll have a job though. They're still though getting themselves in debt. We can't ignore that can we?
LINDSAY TANNER: Oh look, there is mixed data. You mentioned earlier on in the program we've got data suggesting there may be a degree of softening occurring. It's too early to tell.
But the critical thing that we are focusing on is trying to make growth sustainable.
The Australian economy has been pumped up by things like excessive government spending in recent times passing through the impact of the minerals boom; and not enough spending being dedicated to investment, to building economic capacity so that we've got a sustainable economic growth that will benefit Australians in the long-term as a result of the mining boom.
That's the switch we've got to make. That's not an easy thing to do, particularly when you've got the interest rate environment that we have, and the inflation problem that we have. It should have occurred two or three years ago.
We have been talking about this at great length in Opposition, and we are committed to making that switch so we've got a more sustainable base for future prosperity.
COMPERE: To deliver that sustainable base for future prosperity, why not target the tax cuts into infrastructure, as you've acknowledged that's where the, that's where the hole lies; you could fill it with the tax cuts.
LINDSAY TANNER: The tax cuts are already factored into the budget bottom line, and they have a significant economic benefit in participation by reducing the extent to which effective marginal tax rates discourage people from entering the workforce.
COMPERE: Yeah.
LINDSAY TANNER: They also will help a lot of struggling families cope with rising prices in a period when inflation has hit a higher level than it has for many many years. And if the tax cuts were removed, that would accelerate wages pressures, it would feed into risks of a wage price spiral. So, we're strongly committed to delivering the tax cuts. They're already in the budget bottom line.
Where the problem is with government spending. Government spending is increasing in the current financial year at four and a half per cent in real terms, that's much too high, and a lot of it has been on rubbish - $457 million on government advertising in the last 16 months of the former government, that's not only a disgrace politically, a misuse of the democratic process, it's also a giant waste of money.
They're the kind of things we've got to tackle.
COMPERE: So you are, on that basis, happy to accept a potential rise in unemployment, in that case, to offset spending?
LINDSAY TANNER: No, we don't accept that there needs to be or has to be a rise in unemployment. Labour markets are very tight in most parts of Australia, but not all. We want to maximise employment, but it's got to be sustainable. That's the key thing, is there's, there's a real challenge here for us as a nation to make proper use of the benefits of the mining boom so that we get sustainable growth and sustainable strong employment into the future.
The Australian Government, over the past few years has been a bit...
COMPERE: Those two do go hand in hand then, if you cut spending that you're not going to; it’s going to put people on to the dole queue.
LINDSAY TANNER: We don't believe that there's going to be a significant increase in unemployment as a result of getting spending back under control, because what we are also doing is redirecting spending into more productive activities.
So we will have more spending on skills, more investment in infrastructure, so that will have a positive impact for employment. It's about making a shift from an unsustainable economic picture, where you've got too much government spending pushing up demand but not in a sufficiently productive way, to a position where you've got a more sustainable growth picture that will enable us to benefit from the mining boom into the medium term and the longer term.
That's what the shift is about. That's the focus of our economic policy.
COMPERE: You've said that the tax cuts have been factored into the budget, and yet at the same time respected economists and analysts are saying, really, it's only going to put more pressure on inflation, like it or not, it's just going to encourage more spending, when, as you've said, you want to in a sense pull people back from really being so profligate as they have in the past.
So, I mean, how, how sort of fluid is your budget, or are you completely now locked in place with it?
LINDSAY TANNER: Some respected economists and commentators are saying that, but other equally respected economists and commentators are saying different things, so there is a debate about the tax cuts.
One of the points that's often missed about the tax cuts of course is that although it looks like a very large number on an annual basis, they hit peoples’ wallets and purses on a weekly or a monthly basis. They don't all hit the economy in one hit.
And it's important to bear in mind too that a proportion of those tax cuts inevitably will be saved. We don't know how much individual households, individuals themselves, families will save, how much they for example will pay down their credit cards with the tax cuts; but we do know that that will happen to some degree.
So, there's been a lot of breathless ill-informed commentary about the tax cuts. They're already in the budget bottom line. They've got a significant positive effect on participation. They will help to hold down excessive wage demands, and they will help a lot of struggling families protect themselves against the consequences of rising rents, rising fuel prices, rising grocery prices.
COMPERE: Presumably though your former Reserve Governor, you wouldn't define him as being breathless and ill-informed, and he's saying if anything put the tax cuts into super. That's Bernie...
LINDSAY TANNER: He's entitled to his point - Bernie Fraser is entitled to his point of view, and he's got a lot of respect on our side of politics, but people who respect each other can disagree.
And, there's various suggestions floating around about optional superannuation for example, where automatically the tax cuts go into your superannuation account, unless you opt to take them out and to use them yourself.
Now, the weaknesses in those kind of analyses are that it may ultimately only have a very minor difference between the voluntary saving that's involved there, versus the voluntary saving that is likely to occur anyway as a result of people taking the opportunity to repair their balance sheets.
I would expect there's an awful lot of families out there looking at their credit cards at the moment, thinking, hey, this is carrying a fair whack of money on a pretty high interest rate, we need to make it a priority to push that down a bit, and the tax cuts will give at least some families the opportunity to do that, that otherwise they won't have.
So, a proportion of those tax cuts are going to be saved, we just can't predict how much.
COMPERE: I'd just like to get finally Minister from you a, some insight into the May budget. Are there, as reports in the paper suggest, there going to be incentives for States specifically, in your drive to get them to improve services.
Are we going to see that in the budget - some incentives?
LINDSAY TANNER: Look, I can't comment on whether or not these things will be in the budget, obviously, but, certainly we are examining a different way of dealing with State governments...
COMPERE: Yeah.
LINDSAY TANNER: ...in particular areas like health spending, so that we'll have a different structure where there are incentives, additional payments that reward good behaviour, that reward improvements in efficiency, improvements in outcomes in the health system, and in other areas of Commonwealth payments to the States.
And there's also a possibility this may occur with regulatory change. I'm in charge, along with Craig Emerson, of a major project to get regulatory harmonisation across all the States in areas like occupational health and safety laws.
There, it is possible we could see some kind of incentive payments, relatively modest I expect, in those areas.
So the answer is yes, but, you shouldn't assume anything in particular about the budget in this context. This is a bigger picture thing than just a given annual budget.
COMPERE: You said relatively modest, but the figures being mentioned is two and a half billion.
LINDSAY TANNER: Look, I think anything of that kind is entirely speculative, and we are talking about a very major restructure of the financial relationship between the Commonwealth and the States, where instead of the Commonwealth micro-managing and interfering in the fine detail of how a State health system is run or a State school system is run, you would have a base funding structure with additional payments that are related to outcomes, to performance, so it would give the States greater freedom to make their own managerial decisions, but also incentives to get better outcomes.
That's the broad philosophy of what's being pursued, of the idea behind the reform that Wayne Swan and the various key Ministers are pursuing in discussions with the States; but, it is way too premature to speculate about particular amounts of money.
COMPERE: Okay. But notwithstanding you will give a definite yes that in the budget there will definitely be tax cuts? You'll be specific on that, but not prepared to be specific on this one?
LINDSAY TANNER: The tax cuts are already in the budget. This is the important thing that needs to be emphasised again and again. They're already in the budget bottom line as a result of the mid-year economic and fiscal outlook papers published by the government last year, and we would expect, and commit, we are committed to keeping them there.
So, this will simply...
COMPERE: But the State incentives are not in the bottom line, is that by extension what you're saying?
LINDSAY TANNER: The State incentives are a restructure and reform proposal that have not yet been agreed to; specifics have not yet been negotiated, so there is no particular reason why anybody should assume that there will be a, a manifestation of that process in the budget one way or another. It may happen, it may not. It is not, it is not something that needs to be speculated upon, because the budget obviously is a focus on a single year. These agreements, that we're talking about here, are in many cases four year or five year agreements. So they effectively have a life of their own.
COMPERE: Okay.
LINDSAY TANNER: Decisions that are made about these agreements have to be reflected in the budget, but they don't necessarily have to form part of an annual budget strategy as such.
COMPERE: Finance Minister Lindsay Tanner, we do appreciate your time. Thanks for coming on.
LINDSAY TANNER: Thank you very much.
COMPERE: Okay.
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