Lindsay Tanner, the federal minister for finance and Australia’s first minister for deregulation, tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz why he believes the budget can stay in the black and describes watching the financial crisis unfold as 'harrowing'.
Alan Kohler: Well, Lindsay, welcome to our Anniversary Video. What do you think of Business Spectator? Have your been using it?
Lindsay Tanner: I think it’s a great development and I think it shows that there’s a lot of richness emerging in new media in Australia and it’s great that you got your first anniversary and that obviously you’re moving onwards and upwards and I think a lot of people in the wider business and investment community will appreciate having a more timely and diverse array of information that will enhance what they do in their decision making and all of the choices that they face. So, congratulations. I think it’s a really good development and it can only improve the quality of debate and information that is particularly important, not just for people in business, but also for people like me.
AK: Well, thanks for that and just onto government matters, Lindsay, the budget’s going to go into deficit, isn’t it?
LT: Look, I don’t believe so. None of us can predict what will happen as a result of the global financial crisis. That’s obviously generating a ripple effect throughout the world economy. We’ve only seeing the early stages of that now, but we can’t be certain how powerful that ripple effect will be and there’s an awful lot of pushing back that’s been unleashed. We’ve seen in Australia substantial interest rate cuts. The fall in the value of the dollar has a stimulatory effect. Guarantees for bank deposits and bank wholesale lending also have a significant effect, particularly with business lending. That’s very important. And of course finally the Government’s stimulus package that has only just been announced, so although there are very powerful downward pressures hitting our economy, there’s also some pretty serious stimulus being unleashed to push back against that.
AK: Well, in fact some people and some economists are saying that the stimulus package itself, given adjusted forecasts of the economy and the GDP going forward, will already put the budget into deficit.
LT: No. That’s certainly not the case. Clearly we will have a lower surplus for this financial year than was projected in May given that we are spending something like $9.5 billion of what would otherwise have been the surplus on this one off temporary stimulus, but it starts from a projection of nearly $22 billion and although there has been some degree of erosion from that, we also need to keep in mind the dynamic effects of that stimulus which will again push back up on what otherwise would have been a significant erosion of the surplus as a result of the automatic stabilisers working. Time will tell. We’ll have the projections published within a matter of weeks in the mid-year economic and fiscal outlook but I don’t believe the budget’s going to go into deficit.
AK: Lindsay, if the commodity prices stay down and iron ore and coal fall and they stay down for a while, that’ll surely affect future revenues quite markedly.
LT: I would expect that the boom in company tax and to some degree the strength in income tax receipts which have increased by something like 24 per cent I think over the last three years would inevitably soften as a result of those things. Of course, what you’re seeing on spot markets in the last few weeks may or may not be reflected in longer term contracts as they come for renewal. I’m not in a position to know frankly. But I think the thing that will ultimately be very important is that it’s pretty widely accepted that most of the China story is about domestic growth and the Chinese authorities have already acted to inject some stimulus into the Chinese economy after a period where they were clearly seeking to dampen demand and activity to a degree because they were worried about inflation. We can’t really predict precisely what this effect will be like. I would expect thought that the strength of mineral exports, even though it may not be quite at the peak that we are just in the middle of, will continue to be pretty considerable over the next few years.
Stephen Bartholomeusz: Lindsay, given the global economic and financial context that all the stuff’s appearing in, would it concern you if we went into deficit? Are we too fixated with having surpluses?
LT: We’ve had a long established position of keeping the budget in surplus over the economic cycle and of course there are certain things that literally are beyond the control of governments. If you get a very serious global downtown, Australia’s not immune from those pressures and that in itself can have that kind of impact on a budget position. I think there has been a period of time and… where the emphasis being placed on budget surpluses in public commentary’s probably been excessive.
However, I’d have to say that if you look internationally I don’t think it’s a bad thing having a very powerful emphasis on budget surpluses in public commentary because it’s not that long ago in the United States that the dominant narrative on fiscal policy was having constitutional amendments at the state level and even floated at the national level to force balanced budgets. So there was a period of time only a decade or more ago where ensuring that you didn’t have unduly loose budget policy was a key theme in the United States. Now of course, over the past eight or so years under the Bush administration, that’s gone completely out the window and that’s one of the significant contributing factors that the crisis the US is now experiencing.
So although you could perhaps argue that that emphasis on the importance of budget surpluses had been a bit overdone in public debate, given that the pressures on budgets in the other direction are so powerful… This is a finance minister speaking, of course, so I’m a bit biased… I don’t think that’s a bad thing. I think we need reminding of how important it is to have the budget in good shape.
AK: Actually Business Spectator and the Rudd government are about the same age and we’ve all been … all of us including you guys have been watching this unfolding credit crisis basically for the entire term of being around. What’s it been like for you in government, particularly as finance minister to watch this credit crunch unfold? How’s it changed your view of what it’s like in government?
LT: Look, it’s difficult to describe. Clearly we’ve had a pretty harrowing few weeks, lots of unscheduled meetings and briefings and complicated choices. I think it was pretty obvious that something of this kind was coming, but nobody can predict when and nobody could predict of what magnitude and what shape, but everybody could see ... there was plenty of commentary on the imbalances in the US economy, those enormous current account and budget deficits, the imbalances that were partly a product of fixed exchange rates and the enormous increase in Chinese and other Asian countries’ holdings of US Treasuries and in effect financing the boom in the US and of course the subprime phenomenon has been there as a ticking time bomb for several years and people have, been conscious of it.
But the trouble with these kinds of things is that whether you’re a politician or a business person or a media commentator, you can identify the weaknesses, but it’s impossible to predict at what point they will manifest themselves in some of kind of downturn or crisis and it’s impossible to predict what that will look like and that’s why they generally don’t get avoided. We can learn from them, we must learn from them and in particular I hope that the new administration in the US learns from them because of course the problem here is that, you know, if these kinds of bad things happen in Australia, they have negative consequences for Australians; if they happen in the US, they have negative consequences for everybody.
Robert Gottliebsen: Are you still looking to cut expenditures or have you sort of eased up a bit in the light of what’s happening?
LT: Ah… No. That’s a very bad language you’re using there, Bob. Don’t spread that idea around. Some of my colleagues might get unfortunate thoughts. The answer is yes. But the key reason is that the second stage of the razor gang was never about wider fiscal policy. It was never about further tightening. It was always about just better priorities. It was always about saying, look we can do so much in terms of savings in the budget process, but we had a shortened a budget process because normally the budget process starts in November and of course we didn’t take office until the beginning of December and it takes a while to get into the saddle, so the decision we took was look, there’s going to be a set of things that realistically we can’t tackle in the budget process because they’re too complex and the risk of unintended consequences if we make snap decisions was too high and in some cases you can think that something looks like a saving and then you find that in fact if you take that away then an expenditure requirement bobs up over there.
But always the intention was that this would simply provide available finance for better priorities, you know, better spending priorities and there was no shortage of spending pressures. You know you will have noted that we’ve got a variety of quite substantial reviews that have reached maturity whether it’s paid maternity leave, higher education, innovation. There’s quite a lengthy list of spending pressure. You’ve got the defence white paper. So that process of seeking further efficiencies will continue.
I’ve said all along I’m expecting in any given year, certainly in the immediate term it’ll only produce hundreds of millions not billions, so in the current context that’s, you know, that’s modest amounts. But if we want to improve the quality of what government does, and there’s a lot of scope for improvement, believe me, then that process is actually really quite important.
SB: Lindsay, one of the more complex decisions that any government’s had to make in the last 20 years was that decision to guarantee bank deposits and term funding. How difficult was it for you and your colleagues to come to that conclusion, to have to do that?
LT: Look… Clearly this is an unprecedented situation and anybody who understands markets and economics knows that if you go around guaranteeing investments then that has a fundamental impact on how people behave, so clearly in anything approaching normal circumstances, any kind of government guarantee is a very, very difficult thing to do because it will potentially change behaviour in all kinds of adverse ways.
You know, moral hazard is a genuine phenomenon. In this instance, we were in a position first where we’d already decided to have a limited guarantee of bank deposits, up to $20,000, and in effect an insurance arrangement where the logic was more about the Government minimising disruption rather than stumping up money because the problem with an institution failing is that money gets frozen and when most people use financial institutions for transactional purposes rather than for investment purposes, that becomes a huge economic problem in… of itself even if as would typically be the case, people could be expected to get their money back eventually because they have first priority. So that was the original proposal. That reflected pretty much what occurs in various ways around the developed world absent this crisis.
What’s of course happened is that as you’ve seen particularly in Europe but also the US has increased its magnitude of its guarantee I think to US$250,000 and that creates a bit of a knock-on set of pressures and also, even though our banks are very strong and very well capitalised and other financial institutions are in good shape, any sense of uncertainty or fear about the strength of those institutions, even if they were in good shape, where that’s being driven from international forces in itself becomes a problem.
The guarantee of lending to our financial institutions, of course, is a more complex thing because whereas guaranteeing deposits has a reasonably lengthy history, it’s got issues but it’s got plenty of learning internationally over the time that you can draw on, guaranteeing borrowing by banks from wholesale financial sources is obviously much more complex. That’s why we’ve effectively taken the decision to make that an almost case by case basis. So the offer is there, the broad terms of the offer are there, but it’s up to the individual institution to decide whether or not to take that up and if so for what particular tranche you’re borrowing and then there’ll be what is in effect a commercial negotiation about the price and we can calibrate the price and the terms of that offer to reflect our assessment or Treasury’s assessment, APRA’s assessment of market conditions, so I would expect that as things normalise then you will see the need for that guarantee and indeed the conditions of that guarantee effectively ensure that it will cease to be being offered.
AK: Let’s leave it there. Thanks very much for joining us, Lindsay. It’s been great talking to you.
LT: Thanks very much, Al. My pleasure and good luck for the future. It’s great to be part of the First Anniversary for Business Spectator and it’s great to see that media diversification in Australia is moving onward and upward and that three guys who’ve been the leaders in their field in the traditional media have managed to succeed so far in the new media. I’m a great supporter of that and I look forward to further interaction.
AK: Certainly doing our bit for media diversity.
LT: Excellent.
SB: Thank you, Lindsay.
RG: Thank you.
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