Transcripts → 2014


The Conversation with Michelle Grattan

Senator the Hon Mathias Cormann
Minister for Finance


Date: Tuesday, 16 December 2014

Mid-Year Economic and Fiscal Outlook

MICHELLE GRATTAN: Hello, this is The Conversation’s politics podcast, I am Michelle Grattan. The Government yesterday released its Budget update showing a grim outlook on the revenue front and deteriorating deficit prospects. We caught up with Mathias Cormann to discuss the new figures. Mathias Cormann, the Budget update defers a return to surplus to the financial year of 2019-20. That is two elections away, isn’t it purely theoretical to talk about what’s going on so many years ahead? 

MATHIAS CORMANN: What we said in the lead up to the last election and what remains the fundamental task at hand is that we would repair the Budget mess that we have inherited. That we would bring the Budget back to surplus as soon as possible and of course what the half yearly Budget update which we released yesterday shows is that we remain on track, on a believable and credible pathway and a responsible pathway back to surplus. Yes, we inherited a challenging situation. Yes we have faced some additional challenges along the way, global economic headwinds, some delays and the effect of negotiations in the Senate. But if you look at the fundamentals, we have made significant progress. We are in a much stronger position than we would have been if we had not made some of the difficult but necessary decisions to repair the Budget.

MICHELLE GRATTAN: But the dates you’re talking about for a surplus is actually beyond this whole Budget period. So, given people are very sceptical about what politicians say and given all that we heard under Labor about returning to a surplus which never happened, why even make that projection?

MATHIAS CORMANN: What we are presenting are the numbers the way they fall. And what we are saying to the Australian people is that we are making a very serious effort to get spending back under control, to put our spending growth trajectory back on an affordable, sustainable pathway. If you look at the numbers and they are there for all to see, we have been able to keep spending growth in real terms over the next four years to one per cent. We have been able to keep spending growth over the medium term to 2.7 per cent. That is down from 3.7 per cent under Labor and as we move forward, instead of heading for $667 billion worth of Government debt and growing, we are now forecasting the debt position to fall by nearly $170 billion over the next decade. 

MICHELLE GRATTAN: Now the decline in terms of trade which have been worse than expected have really hit revenue. Why not make a bigger effort now on the savings side? What are the economic arguments against doing that?

MATHIAS CORMANN: We are continuing to keep spending under control but we think it would be irresponsible if we were to chase down falling revenues, because it would have an additional impact, a negative impact, on economic growth moving forward. It is a matter of balance. We are focused on implementing our plan to repair the Budget, but also to build a stronger, more prosperous economy moving forward. We are keeping the discipline. So wherever we have added to the spend, we have more than offset additional spending by additional savings on lower priorities in the circumstances. But we are not going to be chasing down the falling revenues. Based on an assumption that over time, as economic growth continues to strengthen, revenue will pick up and we will over time, with the automatic stabilisers kicking in, we will over time be able to get the Budget back in balance. As long as we remain disciplined on the spending side and as long as we remain disciplined with making sure that our spending growth trajectory is more affordable, is more sustainable than what we inherited from our predecessors. An important point here is, Michelle, the previous Government when they were faced with falling revenues, they decided to ramp up expenditure by more, in particular in the period beyond the forward estimates. So they were looking at falling revenues after a record boom period, record terms of trade, looking at falling revenues and instead of being a more cautious, instead of being more careful, they locked in, permanently, massive additional increases in particular in the period beyond the published forward estimates. And that is what we are now dealing with. When you look at short term targets and the like, our focus is the medium to long term trajectory. We want to bring Australia back onto a sustainable foundation over the medium to long term while all the way continuing to implement our plans to build a stronger, more prosperous economy.

MICHELLE GRATTAN: Are you a bit surprised that the economy is as fragile as it is at the moment? That business confidence in particular is not better? That consumer confidence is not stronger?

MATHIAS CORMANN: The Australian economy has actually performed quite well in 2014 and we expect it to perform even better in 2015. But there is no doubt that there have been significant global economic headwinds in recent times. At the beginning of the calendar year, the iron ore price was at about $120 a tonne, it is now down to somewhere in the $60’s. Nobody foresaw this. When export income from iron ore represents 20 per cent of our overall export income, obviously that is going to have an impact. To a degree that will flow through in terms of perceptions in the broader economy. The key here is we have a plan to repair the Budget. We have a plan to build a stronger, more prosperous economy. Over time, we are very confident that it will deliver dividends for the Australian community.

MICHELLE GRATTAN: Your colleague Joe Hockey last week talked about having a conversation with the Australian people next year or stepping up the conversation. What form will this take? What can you say more to people that you haven’t said already?

MATHIAS CORMANN: It is a continuing conversation and you’re quite right, obviously this year, we have been talking about the fact that we are focused on protecting our living standards, focused on building better opportunities for the future and that as part of that effort, it is important to get our spending under control. But early next year, the Treasurer will be releasing the Intergenerational Report. That will show very clearly to the Australian people where we are at, what the medium to long term outlook is for Australia and why it is that we need to ensure that our spending is in line with our revenue over the medium to long term. That our spending growth is affordable and sustainable.

MICHELLE GRATTAN: Mind you, this is not a new point is it because Peter Costello started these Intergenerational Reports quite a while ago?

MATHIAS CORMANN: Sure. The key here is we inherited a very challenging situation because of the Budget position that Labor left behind. On top of that, we do have structural challenges in the economy, structural challenges that come related to the falls in the terms of trade, but also in the context of the ageing of the population. Now all of these things flow through in terms of the revenue we are raising and in terms of the expenditure that we have to commit to. It is very important that people across Australia have a very good appreciation of the medium to long term trends so that there is a better appreciation of why it is that we need to get ourselves back on a believable and responsible track to surplus.

MICHELLE GRATTAN: Coming back to a specific measure in yesterday’s figures, one of the relatively few savings you’ve made has been a big hit to the aid budget. $3.7 billion over four years. Is this just an easy target because voters won’t care all that much about foreign aid?

MATHIAS CORMANN: No it isn’t. We would have rather if we didn’t have to. But in the circumstance where Labor is opposing more than $5 billion of their own savings, in circumstance where they are opposing more than $25 billion in savings currently before the Parliament, essentially we didn’t have much choice. So the decision that we’ve made is to take our foreign aid investment back to the same level as that in the last year of the Howard Government, adjusted for inflation. That is where the additional saving over the forward estimates comes from. An important point to make here is that despite being in deficit for every single year of the Labor period in government, the previous Labor Government increased spending on foreign aid by 55 per cent above inflation, 82 per cent in nominal terms. In circumstances where we are facing very significant fiscal challenges, in circumstances where Labor is opposing even their own savings, the savings that they took to the last election, in our judgment given some of the other pressures on the spending side, we didn’t really have any choice and so reluctantly we’ve had to make that decision.

MICHELLE GRATTAN: Because at one stage this was a bipartisan policy, wasn’t it?

MATHIAS CORMANN: You see there is a world of difference between being in a very strong surplus position. The Howard Government left behind in 2007/8 a Budget surplus of $20 billion. They left behind a situation with no government net debt. The Government at the time was collecting, collecting more than $1 billion in net interest payments on the back of a positive net asset position. In that context, the Howard Government made certain commitments in terms of the medium to long term outlook. However, given where the Budget is at today, given the attitude of the Labor Party to savings before the Parliament, in the end we’ve got to make judgments on what is affordable for Australia in that context.

MICHELLE GRATTAN: In the second Budget, can we expect more rigorous cutting?

MATHIAS CORMANN: Right now we’ve provided an update on the 2014/15 Budget. We have started with the 2015/16 Budget process. Obviously I’m not going to making any announcements today about what may or may not be in the 2015/16 Budget. Suffice to say that we remain focused on the important task of repairing the Budget. We inherited a challenge. We’ve made good progress. But there is still much more work to be done and we remain focused on what needs to be done.

MICHELLE GRATTAN: You’ve only got one more Budget to do that because by the time you get to the third one, you’ve got to be a bit more generous.

MATHIAS CORMANN: Our commitment to the Australian people is to focus on the important task of repairing the Budget in order to help economic growth to strengthen and in order to help increase opportunity for all Australians.

MICHELLE GRATTAN: The mid-year review does build in provision for income tax cuts. Can you explain that? Is that one round or two rounds going out to the end of the forward estimates?

MATHIAS CORMANN: That is not new in the Mid-Year Economic and Fiscal Outlook. We said in the Budget in May that we put a tax cap at 23.9 per cent as a share of GDP into our modelling and that as such all of the projections when it comes to the government debt outlook over the next decade in the budget they were based on an assumption that the tax share as a share of GDP was not allowed to go above 23.9 per cent. The important point here is that the projection that under Labor government debt would have headed for $667 billion and grow beyond that was based on an assumption that there was not going to be any adjustment for bracket creep and that bracket creep was allowed to continue to run and push more and more middle income earners into the higher income tax brackets. What our economic action strategy and our budget strategy is based on is an assumption that we will not allow that to happen. That we will make adjustments to recognise bracket creep and that there will be income tax cuts at some point. In the Mid-Year Economic and Fiscal Outlook, the likely year that that is likely to be affordable is going to be around 2020.

MICHELLE GRATTAN: That’s a very long to wait, not before then?

MATHIAS CORMANN: We’re being candid with the Australian people as to what the likely scenario is going to be over the medium term, given the situation we find ourselves in. Obviously our objective is always to do even better, but right now we are clearly dealing with a pretty challenging situation.

MICHELLE GRATTAN: Well given the extent of that challenging situation and also that we’re probably going to have a pretty robust debate about tax reform as opposed to tax cuts in the next couple of years, do you think that the Government really has the capacity to try to reform the federation, which is another aspect of its agenda? Or is it really biting off more than it can chew there?

MATHIAS CORMANN: These are all very important and interrelated reform agendas.


MATHIAS CORMANN: Indeed they are. That is why we are taking our time and that is why we are going through a proper process. Part of reforming the federation involves reforming federal-state financial relations obviously. An important part of reforming our tax system, to make it simpler and more efficient, clearly will involve a conversation about the interaction between federal and state taxes. Ultimately what is our objective? Our objective is to ensure that our policy settings across tax and other areas facilitate stronger growth, facilitate building a stronger more prosperous Australia where everyone has the opportunity to get ahead. It has got to be very important for these reform agendas to be pursued in parallel. In contrast to the way the previous Government pursued tax reform, for example, we will do it in a consultative way in an open and transparent process, not just drop a report on people five months after it’s been finalised.

MICHELLE GRATTAN: So as a Western Australian, you’d be a pretty strong federalist?

MATHIAS CORMANN: I am a pretty strong federalist who is part of a national Government focused on the national interest.

MICHELLE GRATTAN: That is a very diplomatic answer.

MATHIAS CORMANN: That’s the truth.

MICHELLE GRATTAN: I noticed that your fellow sandgroper Julie Bishop yesterday was very much a Western Australian when she was asked about whether your backbenchers from WA should be able to put forward a submission to the tax review on their views on the carve up of the GST. She said yes they thought they should. What’s your view on that?

MATHIAS CORMANN: Backbenchers of course ought to represent the views and aspirations of their constituents. All of us in the Government believe that. The Prime Minister believes that, the Foreign Minister believes that…interrupted

MICHELLE GRATTAN: He told them not to.

MATHIAS CORMANN: I don’t think… interrupted

MICHELLE GRATTAN: But he comes from Sydney… interrupted

MATHIAS CORMANN: I think you should not always believe what you read in the newspapers Michelle. All of us in the Coalition Government, all of us in the Liberal and National Parties, absolutely subscribe to the very strong view that all backbenchers should represent their constituents to the best of their ability and indeed that is what the Liberal and National Members and Senators do. From our point of view as a national government, our job is to consider the diversity of views and aspirations from across Australia and to make judgments in the national interest and that is what we are doing.

MICHELLE GRATTAN: The carve up of the GST though is a very intractable issue isn’t it, for any national government, because some State is going to be unhappy?

MATHIAS CORMANN: As I’ve just indicated, the job of a national government is to consider the legitimate views and aspirations from right across Australia and to ultimately make judgments on what is the right way forward in the national interest. There will be a Tax White Paper review process over the next year. There will be an opportunity to have a national conversation on these matters and I’m sure that people in Western Australia and people in other states around Australia will actively participate in that conversation as they should.

MICHELLE GRATTAN: And it will be a challenging one. Mathias Cormann thank you very much for talking with us today.

MATHIAS CORMANN: Always good to talk to you.