Senator the Hon. Mathias Cormann
Minister for Finance
Hon. J.B. Hockey
TREASURER: Thank you everyone. I apologise for the delay for obvious reasons. I think all of our thoughts and prayers are with those people in Sydney in the Lindt Café – somewhere I am very familiar with around the area. What we propose is to read a bit of a statement and then Mathias will say a few words and then we will go to questions. I would ask if there’s any of the more technical questions, we can address them offline if you want, given the circumstances today.
Over the last twelve months the Australian economy has continued to strengthen despite significant offshore headwinds. Economic growth has increased over the last twelve months from 1.9 per cent to 2.7 per cent. Export volumes have increased significantly. Job creation across the economy is running at around 15,000 new jobs a month. This is three times larger than the average of around 5,000 jobs a month last year.
Despite many challenges, the Government has made a good start on Budget repair. There is more work to be done but we are on the right track. As a result, we have better jobs growth and greater prosperity, and a more resilient Budget helps us to better cope with unexpected adversity. So, we need a strong Budget to help us have a strong economy.
In the last six months, unforeseen events have hit the Australian economy. In particular, we are now witnessing the largest fall in the terms of trade since records were first kept in 1959. This has been faster and deeper than anyone expected. Our nation’s export income has not been what we expected. For example, iron ore, which is one fifth of our nation’s export dollars, has fallen from $120 a tonne at the beginning of this year, to around $60 a tonne today.
The price of wheat, which is one of our largest agriculture exports, has fallen 20 per cent since the Budget. In agriculture and resources, Australians produce far more than we consume. So, we use the export of excess produce and services to build our nation’s income. Income volatility from exports can, however, have a negative impact on our economy and on the Budget bottom line.
When external events turn against us, our domestic Budget strength needs to cushion the blow. As a result of these recent events tax receipts are expected to fall by $6.2billion this year and a total of nearly $32 billion over the next four years. Company tax receipts are expected to be $2.3bn less this year. Income tax is expected to be $2.3 billion less this year.
To try and recover these falling revenues now through new or higher taxes would unquestionably harm the Australian economy. Falling wage growth has also had an impact on both revenue and expenditure.
Means tested payments such as Family Tax Benefits and income support payments have had larger than expected increases as families remain in lower income thresholds and therefore claim more benefits. Child care payments have also increased on the back of more parents looking to participate in the workforce. We will announce a comprehensive families’ package in the new year, including child care and parenting leave initiatives. This package will deliver greater workforce participation opportunities for parents.
Although the Senate has passed the great majority of the Government’s Budget, there are still a number of outstanding structural savings. These initiatives in health, education and welfare are essential for the medium and long term benefit of the Australian people.
Negotiations in the Senate this year for the repeal of the Mining Tax package have cost $6.6 billion over the next four years but the costs are more than recovered by the end of 2023. The failure of the Senate to accept all the Government’s policies has cost the Budget $10.6 billion. There is a further $34 billion still to be legislated including $5 billion of savings announced by the previous Government.
Where the Government has made new spending decisions we have more than offset the costs with new savings. In particular, Defence and national security commitments totalling $1.3 billion are more than offset by savings in our foreign aid Budget of $3.7 billion. Where we have made savings we have worked hard to ensure that there will be no negative impact on the Australian economy.
So ladies and gentlemen, The Commonwealth Budget is stronger today than it was last year. This is despite a fall in expected revenue of around $100 billion since the 2013 Budget. Debt is projected to be almost $170 billion less than expected one year ago. This means $6,000 less Government debt for every man, woman and child in Australia within ten years.
Rather than never ending deficits, the Budget is on track for a credible surplus. Deficits will decline each and every year at the same pace that we expected in the May Budget.
We continue to be disciplined on spending with real spending growth limited to just 1 per cent per year over the next four years. Our response to the current economic challenges is not to spend more money but to spend what we have carefully. 2014 has been a better year for the Australian economy than last year. We have more jobs and we have greater wealth.
We need to lift economic growth to 3 per cent and beyond to create more jobs and reduce unemployment. We need to pursue structural reform to lift our growth rates to levels that Australians expect. 2015 will be a better year for the Australian economy. Lower energy prices, a lower Australian dollar and interest rates at historic lows continue to facilitate stronger economic growth. Massive investment in new and upgraded roads, and in transport and business infrastructure, will strengthen the productive capacity of the Australian economy.
In addition new trade deals with Korea, Japan and China will deliver broader and deeper market access, particularly for Australian small businesses. We also expect housing construction to strengthen, which will further boost economic activity.
I say directly to the Australian people that whilst we have faced many challenges we have made a good start fixing the Budget. There is still much work to be done but we are on the right track. Over the months and years ahead, we are determined to strengthen the Budget and the economy so that all Australians benefit through more jobs and greater prosperity. I will ask the Minister for Finance to say a few words and then we will go to questions.
MINISTER FOR FINANCE: Thank you Treasurer. The most important point out of our Budget update here today is that our plan to repair the Budget and to strengthen our economy is on track. There is much more work to be done of course, but we are on track. Yes, we inherited a challenging situation. Yes, global economic headwinds have added to the challenge. Yes, delays and negotiations in the Senate have also added to the challenge. But we are in a much stronger position today than we would have been if we had not made the difficult but necessary decisions to repair the Budget and to put Australia on a stronger foundation for the future. Specifically, as the Treasurer has said, we have been able to keep real spending growth at just one per cent on average over the next four years. Over the medium term we have been able to keep real spending growth at 2.7 per cent per year, the same as at Budget time. We have been working to get spending back under control, to get our spending growth back onto a more affordable and more sustainable trajectory. And that is why as a result of our actions, Government debt will be nearly $170 billion lower than it would have been within the decade and it is expected to fall further beyond that time. That is why Government debt within the decade will be about $6,000 lower for every Australian. So, despite additional challenges along the way, we fundamentally remain on a believable and responsible pathway back to surplus. The economy will continue to strengthen if we continue to implement our plan to repair the Budget.
REPORTER: Apart from foreign aid, what are the main big new spending cut decisions, and with the 175 bodies abolished or merged, how much new saving is that because the $250 – the $500 million includes old decisions?
MINISTER FOR FINANCE: I might just take that last question. As you would be aware, since we were elected to Government in September last year, we have been pursuing a Smaller Government reform agenda. Today we are announcing the third phase of that agenda, which includes decisions and updates since the Budget in May. All up, all three tranches taken together have improved the Budget bottom line over the forward estimates by $539.5 million.
REPORTER: And the last tranche though? The new tranche?
MINISTER FOR FINANCE: All three tranches together so far have improved the Budget bottom line by $539.5 million. It is one agenda, and it is one that we are updating today.
REPORTER: Mr Hockey, could you answer the first part of the question?
TREASURER: The cut in foreign aid is by far the largest reduction. Another reduction is a minor change to depreciation of software from four to five years.
MINISTER FOR FINANCE: Just a final one on that, as a result of delays in passing the social services reforms in the Senate, we have also extended the freeze on some of the threshold changes for Family Tax Benefit payments and the like. You will find the details in MYEFO.
REPORTER: [Inaudible] The cost of lost duties from the Japanese free trade agreement. I can't find anything on Korea or China. Are they in there and if not why are they not in there?
TREASURER: Korea has effectively already been incorporated; it's actually started, and in relation to China, we're still yet to finalise the detail – the absolute detail.
TREASURER: We will provision for it appropriately. We have been provisioning in the contingency reserve for the impact of these free trade agreements and bring them to fruition when the i's are dotted and the t's crossed.
REPORTER: Can you just quantify please, the impact of this 20 per cent reduction in the wheat price on the national books?
TREASURER: I'll need to come back to you with the precise figure.
REPORTER: Page 49 says there is a reduction in public hospital spending of some $941 million over four years; is that a broken election promise?
MINISTER FOR FINANCE: No, not at all.
REPORTER: Just secondly: tax cuts are built in to 2020-21; is that correct?
MINISTER FOR FINANCE: Just in terms of hospital spending, firstly, wherever there is a change in spending as a result of decisions that we have made as opposed to the methodology put in place by the previous government flowing through, that is kept within the health funding envelope and being directed into our Medical Research Future Fund. What you are talking about is a change in estimates variation, that is, the methodology that was put in place by the previous government is working its way through the system. At various times, you will have adjustments up, you will have adjustments down, that is not something that is the result of a decision that we have made that is a result of the system at work.
TREASURER: In relation to tax cuts, we have, in the last Budget and this one, assumed that when tax receipts get to the average long-run level, there'll be pressure on whoever's in government to have tax cuts. As middle-income Australians go through into higher tax levels, the bracket creep will need to be [inaudible] in one form or another.
REPORTER: Do we know how many jobs will be lost as a result of the 175 bodies being abolished or merged?
MINISTER FOR FINANCE: If I could just refer you back to the Budget papers. At Budget time we announced that we expected the staffing levels across the public sector to reduce by 16,500. We are still on track for that. Our objective is to bring staffing levels across the public sector federally back to the same level as back in 2007– 08. There will be further efficiencies as a result of the announcements reflected in MYEFO today, but there is a process now to be gone through. Our objective ultimately, as it should be, is to ensure that the administration and the operations of Government at a federal level are as efficient and as effective as possible. Some of the decisions of course to merge bodies, to abolish bodies, to consolidate various functions and the like will lead to further opportunities for efficiencies, but they will be quantified as we go through those processes in a proper, orderly and methodical fashion.
REPORTER: Just on your iron ore and coal forecasts: you are saying that those levels will flat line from here on; are you calling an end to the decline in those prices especially iron ore and coal?
TREASURER: No, but we are taking a [inaudible] price $60 a tonne – a little bit less than what it is at the moment and we are continuing that and thank goodness we have been taking a more conservative approach to commodity prices.
REPORTER: Treasurer, two questions: Do you accept first up that these results were a bit of a shock to the Australian people because they were led to expect that things were going to improve and now they have dipped back into deeper deficits over the next four years. And a related question: do you think that the current settings are actually going to get the nation’s finances out of deficit and are you comfortable to leave the current settings, or do you think the message out of today has got to be that there must be further work on tax increases or spending cuts?
TREASURER: Work has not finished. There is much work to be done. We are off to a good start, but there is much work to be done. Having the terms of trade fall at double the rate that we expected in the May Budget has been a challenge – it has been a very significant challenge. But if we hadn’t strengthened the Budget in May, it would be much harder for us to withstand that challenge. I want to go back, because you have invited the question. Previously governments have chosen, in these sorts of circumstances, to spend more money; we haven’t. What we have chosen to do is to allow the revenue to take the hit but continue with our path of fixing up spending – having structural saves that over the medium-term deliver a sustainable surplus and a believable surplus. That is exactly what we are doing. This is a reminder – a stark reminder, as I said in my statement, you need to have a strong Budget to be able to take the hits of unexpected external events on the economy. Because we have strengthened the Budget – and there is more work to be done, because we have strengthened the Budget, we are better able to withstand the biggest fall in the terms of trade in more than half a century. Now, we are getting on with the job. Our plan is working. You are always going to face challenges but we are determined to keep going ahead with our savings and that is why it is all the more important that the Senate understands that we need to strengthen the Budget in order to strengthen the economy.
REPORTER: Treasurer, given the events in Sydney today, are you worried about a hit to consumer confidence and what are your words to shoppers as they go about the last few days before Christmas?
TREASURER: I don’t want to pass immediate judgment on what has happened in Sydney but just say look, we cannot allow these events to shut down our country, to shut down who we are as Australian people. We will not be intimidated, no matter how horrific these events can be, we cannot allow ourselves to be intimidated by people that try to bully us and threaten us.
REPORTER: Treasurer, you show that there has been about a $7 billion hit to the Budget bottom line as a result of negotiations – decisions taken and negotiations with the Senate. I take it those are permanent – that is a permeant deterioration in the Budget bottom line. So, my question is why has there not been offsetting savings for decisions which you have made in those negotiations?
MINISTER FOR FINANCE: David, that is actually not quite right. That $7.2 billion, most of that, in fact, $6.6 billion of that, comes as a result of our deal to repeal the mining tax and of course what we said at the time, and I invite you to go back through the record, that cost of $6.6 billion is recouped, is fully offset by the end of 2023 by our decision to delay the increase in the superannuation guarantee by a further three years. So at the time, we were very keen to lock in about $10 billion in savings over the forward estimates, $50 billion in savings over the next decade as a result of getting rid the Minerals Resource Rent Tax. The cost of that negotiation is fully offset in the period beyond the forward estimates.
TREASURER: We are just going to take two or three more given what else is happening.
REPORTER: The document shows that levels of uncertainty around the forecasts and particularly a high-level of uncertainty around receipts; you were always quite critical of how the former Government approached the forecasts issue. So, can you just describe how you approached the forecasts in this document? Did you err on the side of caution and what would you say about those measures of uncertainty.
TREASURER: I don’t want to be political today, but you have invited the question in your observation. I think Chris Richardson summed it up well today when he said, ‘the previous Government locked in permanent spending against temporary revenue increases’. That is the challenge we have faced. I have been open about the fact that I have chosen to be as conservative and realistic as possible about assumptions. Thank goodness I was. I was heavily criticised by my political opponents for doing so but the problem was I wasn’t conservative enough, if that is the best way to describe it. No one could have picked, within six months, iron ore would drop to $60 a tonne given that consensus was around $94 a tonne at the Budget. We are being cautious but realistic in relation to our underlying assumptions. There is no massaging the numbers here, none at all. None at all.
REPORTER: One of the biggest cost blowouts since the Budget has been the childcare rebate and the benefit and you said yesterday in your press conference that the new package next year is going to have to be both flexible and targeted. Can we assume that is an end to non-means tested childcare rebate?
TREASURER: You shouldn’t assume anything.
REPORTER: Treasurer, the surplus is now going to be delayed till 2019-2020; given what we have seen in the last six years in terms of surplus targets being delayed and delayed again, how confident are you of actually hitting that target. Secondly, how can the Australian people be confident that that target will be met.
TREASURER: We are the only people that have a plan on the table to get the Budget back to surplus. We are the only political party that has a plan. We are rolling out that plan. You are seeing that the fiscal consolidation is continuing – it is credible. As for targets, there was a story in your paper – and I know you didn’t write it so I am not going to suggest that – there was a story in your paper saying somehow that we promised a surplus in a particular year. I have been at pains not to do that having witnessed the ugly episode of my political opponents in trying to do that. We want to get to surplus as quickly as possible. On current settings, the trajectory is there in MYEFO. Maybe we can do better, maybe we can do better –maybe we can’t, but if we don’t get back to living within our means, then we are going to saddle Australians with more debt and a weaker economy. Getting back to living within our means is exactly what we are going to do. Any final questions?
REPORTER: Given the RBA’s proximity to Martin Place, have you spoken to the Governor at all?
Yes I have. I have spoken to him on a number of occasions today. The Reserve Bank is operating normally. Backup procedures are in place. Operational matters are being appropriately taken care of and yes, the Reserve Bank is right next door to the Lindt café, and yes I have certainly been in contact with the Governor today about that.
REPORTER: Treasurer, is ‘sustainable debt’ a concept Australians should get used to and not be afraid of?
TREASURER: Paul, no, because we are an importer of capital and because we are a medium-sized open economy and we import money to facilitate our growth – we are not a self-funding nation – the more debt the Government carries, the greater the exposure we make for the Australian economy to global volatility. If we want to reduce our exposure to global events, the best way to do that is to be self-funding, like a household. A household that doesn’t rely on borrowed money is strengthened and it has got options. There are many such countries in the world. Maybe one day we can be one of them and if we are, it makes us stronger and it gives us more control of our destiny.
MINISTER FOR FINANCE: The problem with the debt growth trajectory that we have inherited is that it is largely to fund recurrent expenditure growth. Every family across Australia would know that it is not a good idea to keep funding a significant proportion of your day to day expenses on your credit card and that is the same situation for the Commonwealth.
TREASURER: Absolute last question, I am sorry Stephanie.
REPORTER: I was just going to say: do you have a message for the crossbench – anytime you haggle new legislation, the pattern seems to be that you have to give away something and it costs, whether it was the migration laws, the Mining Tax; what does this document say to the crossbench?
TREASURER: I would say to the crossbenchers, I would say to Labor: we all have a duty to try and strengthen the Australian economy. If we strengthen the economy, we can deliver more jobs and greater prosperity to the Australian people but you cannot take it for granted. You cannot take prosperity for granted. We are in our 24th consecutive year of economic growth. We cannot take for granted another decade of economic growth, we have to earn it. I know it is hard, I know it is hard but as a nation we have little choice. We have to earn our prosperity; we have to earn our future. There have been difficult measures that the Senate has been grappling with, but if they have an alternative plan, tell us what it is. Tell us what it is, but please do not stand in the way of a plan that is going to help to strengthen the Australian economy if you do not have a better option and the Labor Party and the Greens and other Senators are not laying down a comprehensive plan that is going to help to strengthen the Australian economy and at the moment, sadly, they are trying to weaken our ability to do deal with some of the unforeseen circumstances that we face. Thanks very much.