Senator the Hon Mathias Cormann
Minister for Finance
JANINE PERRETT: Welcome back. Well as you’ve heard it was MYEFO day and I spoke with Finance Minister Senator Mathias Cormann in Perth a little while ago about it all.
Welcome Senator, you say that this puts the Budget on track, that we’re all on track. What does on track mean out of MYEFO in your view?
MATHIAS CORMANN: Our economy is going through a transition from significant resource investment driven growth to broader drivers of economic activity. We have faced a series of additional global economic headwinds since the Budget and we’ve had to deal with another significant fall in the price for our key commodity export, iron ore, down to in the 30s now. In that context, the fact that our Budget position continues to improve over the forward estimates is the result of us having a focus both on strengthening growth and on controlling expenditure. Expenditure in MYEFO is about $13.3 billion less than what was anticipated at Budget time. We have been able to comply with our self-imposed fiscal discipline to ensure that policy decisions, the things that the Government controls, policy decisions of the Government overall are actually slightly improving the budget position.
JANINE PERRETT: I’m trying to work out what on track means because it’s obviously not what you had forecast in the Budget in May. There’s a lot of external factors so I’m just trying to understand how we can be on track when there are just so many variables and where each statement every six months, we seem to have to adjust.
MATHIAS CORMANN: Well this is the budget update, it is not the Budget. The objective in this budget update was to ensure we didn’t go backwards as a result of policy decisions of the government. At any one point in time, there are a whole range of external factors beyond our control and it has been like that on this occasion. The global economy has been growing slightly less strongly than what had been anticipated. The terms of trade have been deteriorating further. So revenue across the forward estimates is nearly $34 billion less than anticipated because of factors outside of the Government’s control. In those circumstances, what is important is that the Government maintains its fiscal discipline, that you don’t make the problem worse by the policy decisions that we make. Indeed, overall, the policy decisions taken by the Government since the Budget have slightly improved the Budget bottom-line and indeed all additional expenditure that has needed to be incurred since the Budget has been more than offset by spending reductions in other parts of the Budget. On the back of [interrupted]
JANINE PERRETT: I was just going to say. Is it frustrating for you though that every time you try and get ahead of the problem, that iron ore price collapses, tax revenues go down, do you constantly feel like you’re catching up with the deterioration, be it for outside reasons. Again, it must be frustrating to ever get ahead to get rid of that deficit.
MATHIAS CORMANN: No, we are not frustrated at all. We are focussed on making sure that Australia is on the strongest possible economic and fiscal foundation for the future. We are a trading nation. What happens in the global economy matters to us and our focus is to ensure that we’re in the best possible position to take advantage of opportunities and in the most resilient position possible to deal with economic headwinds. That continues to be our focus in this half-yearly budget update. There is much to be positive and excited about. Employment growth is stronger than had been anticipated, the unemployment rate right now is lower than previously anticipated and certainly is forecast to be lower than previously anticipated moving forward. Our focus continues to be as it has been as we transition from resource investment-driven growth to broader drivers of growth, it is to support economic growth, to support jobs growth and to get the Budget back into balance and surplus as soon as possible in a way that is economically responsible.
JANINE PERRETT: Okay, I’m not going to ask about the iron price because nobody knows and there’s a lot of different prices. Let’s look at another problem for you. The drop in tax revenues, both company and personal income tax. One of the issues for you and business is the low wages growth, which should be a positive, that you’re keeping wages under control. But that is also a problem for lack of growth too. How do you work out that problem that you want low wages growth, but you also need growth in the economy?
MATHIAS CORMANN: It’s true, lower commodity prices have led to lower than expected tax receipts and lower inflation and combined with that lower wages growth, means less personal income tax receipts than otherwise may have been able to be achieved if wages were growing more strongly. Also population growth is slightly less than had previously been anticipated. All of these things are interlinked. They're all a feature of our economy being an economy transitioning from resource investment driven growth to broader drivers of growth. We are transitioning through that reasonably well. Our economy continues to grow where other commodity-based economies in the world face much more significant challenges than we are. Our automatic stabilisers are working. The lower value of the Australian dollar, the historically low interest rates, combined with the reforms by the Government to make our policy settings more growth-friendly.
JANINE PERRETT: Okay, another area where there is an estimate of a loss of revenue is from tariffs. The short term impact of the Chinese FTA is going to be negative. How long do you estimate until you offset the loss on the tariffs for the growth and promised outcomes of an FTA?
MATHIAS CORMANN: Part of a free trade agreement, by definition, is to remove tariffs that are otherwise imposed on imports into Australia and exports out of Australia into China. There is a benefit for Australian exporters which will have them be more successful in China, which means that they have to pay less tax, in effect, in China on exports from Australia to China, and Chinese exporters will pay less tax, lower tariffs and no tariffs on some items moving forward into Australia, which means that consumers will be able to benefit from lower prices. All of that together will be able to help strengthen growth.
JANINE PERRETT: I’m just wondering when your Budget bottom line you should hope to see the advantages. We are seeing the downside of that $4 billion lost. When do you think that you’ll get that offset? Will that take years, two years, five years, 10 years?
MATHIAS CORMANN: Well a couple of points. The cost of the China Australia Free Trade Agreement was previously provisioned and has been provisioned in the Budget since the 2014-15 Mid-Year Economic and Fiscal Outlook. So the effect of that on the Budget bottom line is actually budget-neutral. There is an accounting treatment issue, because it was provisioned in the heads of revenue before, now being recognised as a policy decision. Consistent with the requirements in the Charter of Budget Honesty, we don’t cost second round effects when it comes to these sorts of measures. That means that no economic growth effect coming from the China Australia Free Trade Agreement has been factored into those numbers but we’re very confident that there will be an economic growth dividend from that agreement moving forward.
JANINE PERRETT: Now speaking of growth numbers. I spoke to you immediately after the Budget in May and there was a lot of suggestions that perhaps your growth figures were overly optimistic. You denied it at the time and obviously you did them based on the figures at the time in best faith. The problem is you’re doing the same thing now, but so many successive governments have been hit by these external factors we talk about. It is difficult, the public generally, as well as economists tend to be sceptical, not because you’re deliberately fudging the numbers, but because outcomes just overtake you.
MATHIAS CORMANN: The thing is that it’s always been thus. You always need to make your estimates based on the best available information at a point in time. That's what we’ve done earlier this year and that’s what we’ve done today. From time to time, there are changes in global economic conditions, there are changes in domestic economic conditions, which have a flow through effect both on the revenue and the expenditure side of the Budget. As the information available to Budget improves, you make adjustments and update your forecasts. That’s always been thus.
JANINE PERRETT: Okay. I’m just going to ask you, it’s a turbulent week for stock markets this week. We’ve seen that commodity price bloodbath and now we’re going to have the added factor of Feds lift off on Thursday. Firstly I’d ask you whether you’re expecting them to lift interest rates, and secondly what impact will that have for Australia?
MATHIAS CORMANN: I’m not going to provide a comment on what the US Reserve may or may not do. There has been a level of speculation in the market for some time. I’m not giving advice to our own Reserve Bank here in Australia, let alone give advice to the US Federal Reserve. That is entirely a matter for them.
JANINE PERRETT: Okay, but given that there is speculation and markets are volatile of it. I’d assume even if there is lift off or if there is volatility in the market, you would be more looking at things like the iron ore price and commodity prices then what happens in the short term vis a vis a Fed decision on US interest rates, or do you factor that in?
MATHIAS CORMANN: The US Federal Reserve will make judgments on the official cash rate in the context of the American economy dependent on judgments in relation to the American economy, in the same way that the Australian Reserve Bank makes judgments independent from Government in relation to their assessment of where the Australian economy is at. Yes, these sorts of decisions, the same as the future growth of China and these sorts of decisions in the United States do have implications for broader global economic growth and we will continue to adjust as appropriate depending on how all that works its way through.
JANINE PERRETT: Just quickly, I know you’ve been asked a lot about it today, about the politics of getting the spending cuts through the Senate. I’m assuming in the new, more conciliatory mood that we’re trying to see in Australian politics, that you for some reason have more confidence that these kind of spending cuts to things like welfare will have more success than in the 2014 Budget. I’m just wondering why you think this time they’ll have a better chance, or are you not sure?
MATHIAS CORMANN: I’m very confident. If you look at our past track record, nearly 90 per cent of Budget repair measures have passed through the Parliament, including the Senate. Including the measures that were somewhat controversial initially ultimately passed the Parliament. A number of them with the support of the Labor Party. For example, the fuel excise indexation measure. For a long time people said that there was no way that this would go through the Parliament and in the end it did. There are a number of measures like that which have all contributed to improving our Budget bottom line now and into the future. In this Budget update, we have included a series of savings measures focused on making sure that payments across Government are as consistently applied as possible, that the arrangements have integrity and are efficient. In particular, across the welfare sector, there is a particular example there where we believe we can realise about $2 billion worth of savings by ensuring that people get the payments they are entitled, consistent with the rules. That is by better income data matching. Now $2 billion helps us improve the Budget position but in the context of more than $660 billion worth of expenditure on social security and welfare over the next four years, it is just 0.3 per cent of that. So we are entirely confident that is something we would be able to achieve over the next four years.
JANINE PERRETT: And it would seem a difficult time to be delivering this MYEFO, but would you say that perhaps it’s no better time to be the Finance Minister today?
MATHIAS CORMANN: I love my job. I love working with Scott Morrison as I very much enjoyed working with Joe Hockey before. There is a job to be done and every single day I do the best I can to help put Australia on a stronger economic and fiscal foundation for the future.
JANINE PERRETT: Excellent, it seems like a successful delivery so far. Good luck for the future, Senator Mathias Cormann.
MATHIAS CORMANN: Thank you. Thank you Janine.