Senator the Hon Mathias Cormann
Minister for Finance
Deputy Leader of the Government in the Senate
Senator for Western Australia
The Hon Scott Morrison MP
Date: Monday, 19 December 2016
TREASURER:I'm pleased to be joined here today by my friend and colleague Mathias Cormann, the Finance Minister, to present the Mid-Year Economic and Fiscal Outlook for this year and to run through the information. Many of you have already had the opportunity to look over the documents in the lockup. The Mid-Year Economic and Fiscal Outlook we release today confirms that the Government's plan to restore the Budget to balance remains on track. In MYEFO, once again, the Budget is projected to return to balance in 2021. The underlying cash deficit is now expected to narrow from $36.5 billion, or around 2.1 per cent of GDP in 2016-17, and that is down on the $37.1 billion in the Budget and the Pre-election Economic and Fiscal Outlook (PEFO) to $10 billion or half a per cent of GDP in 2019-20. The average annual pace of fiscal consolidation is 0.5 per cent of GDP over the Forward Estimates period. That is consistent with previously-reported trajectories. Since PEFO, the total effective parameter and other variations has been to negatively impact the Budget by $12.8 billion. This includes a $30.5 billion downward revision to revenue, driven principally by weaker wage and profits growth and weaker tax collections offset by reduced payment estimates.
Importantly, the net impact of policy decisions made by the Government including fully funding all election commitments has been to improve the Budget by $2.5 billion over the forward estimates. With net improvements of more than $2 billion in payment savings and just under net $500 million in increased revenues. In each and every year of the Budget and the Forward Estimates, net policy decisions of the Government have improved the Budget bottom line including net payment savings in each and every year. Once again, the Government has demonstrated we do not spend more than we save. And that the predominant mechanism for restoring the Budget to balance is by getting expenditure under control. By contrast, the net effective of Labor's policy decisions at the last election was to increase the deficit by $16.5 billion. This means that, under Labor, this statement would have been at least $16.5 billion worse off today and as much as $19 billion worse off when you take into account the improvements the Government has made of some $2.5 billion on our net policy decisions.
Despite the many global and domestic challenges we face in our economy, and accumulated deficit of $94.9 billion over the Budget and Forward Estimates means Australia's fiscal outlook in this MYEFO is in a better position today than it was a year ago in last year's MYEFO when it was $108.3 billion, and three years ago when it was $122.7 billion. Government payments will be $18.5 billion less than set out in the Budget and PEFO. In fact, payments in 2016-17 will be nominally less than projected in the 2013 PEFO. Government payments as a share of GDP has been reduced from 25.8 per cent of GDP for 16-17 in the Budget to 25.2 per cent and is expected to remain stable over the Forward Estimates. Real growth and payments over the Forward Estimates has also reduced to 1.9 per cent since PEFO. Net debt is projected in MYEFO to peak lower at 19 per cent of GDP and one year later in 2018-19 and then decline over the medium term to around 10 per cent.
Our debt remains less than a third of what the average of advanced economies are experiencing on both net and gross terms and is less than all G7 economies. MYEFO also includes a revised estimate of the total value of Budget repair measures legislated since the election at more than $22 billion. It also contains a revised estimate of the value of unlegislated Budget repair measures at $13.2 billion which includes $12.5 billion in payment savings. This means, in just 6.5 weeks of sitting, the Parliament has legislated almost two-thirds of the Government's Budget repair measures. The ability to secure passage of Budget repair measures has been a consistent issue raised by ratings agencies with reference to their assessment of our fiscal position. There is more work to be done, as the Finance Minister and I know well enough, and the Government is committed to continuing to work with partners for Budget repair in the Parliament in next year's autumn sittings.
Turning to the economic outlook, this remains positive notwithstanding a downward revision to real GDP growth forecast partly due to the negative result in the September quarter national accounts. Real GDP growth is forecast to be half a percentage point less at 2 per cent in 16-17 and growth is then expected to pick up to 2.75 per cent in 17-18 as the detraction from mining investment eases. Exports and household consumption are expected to support growth with dwelling investment growth higher in the near-term and a modest recovery expected in non-mining business investment over coming years. In terms of the nominal economy, there have been significant developments in commodity prices over recent months that have affected our forecasts for nominal GDP. The strength and volatility of commodity prices have presented a particular challenge in framing the forecasts and projections. Iron ore prices are around a third higher than they were at the Budget, which I note were criticised at the time as being heroic. While metallurgical coal prices are roughly three times higher and thermal coal prices have almost doubled. Australia's terms of trade rose by 4.5 per cent in the September quarter following a rise of 2.3 per cent in the June quarter. Extensive liaison with industry contacts by Treasury reveals substantial uncertainty around the drivers of the recent price movements and widespread expectation that current price levels will not be sustained and no clear view as to when they will fall.
Accordingly, Treasury have adopted a more conservative approach and departed from the usual practice of adopting the four-week moving average. Metallurgical coal prices are assumed to be 200 per tonne free on board in line with recent quarterly contract prices before declining through the September and December quarters of 2017 to $120 per tonne free on board in the March quarter of 2018. Iron ore prices have recently averaged $68 per tonne free on board and are assumed to decline from this level through the March and June quarters of 2017 to reach $55 per tonne US free on board in the September quarter of 2017. This is the average price that has prevailed since PEFO. Thermal coal prices are assumed to remain at $62 per tonne free on board over the forecast period and this is consistent with recent averages before the recent sharp price increases that we saw and the current Japanese fiscal year annual contract price. As a result of this, nominal GDP growth is now forecast to be 5.75 per cent in 2016-17 but then moderate to 3.75 per cent in 17-18. Nominal GDP growth has also been revised down in the projection years in 18-19 and 19-20 from 5 per cent in each year to 4.25 per cent and 4.5 per cent, respectively.
To support economic growth, the Government will continue to implement our national plan for jobs and growth that I outlined in the Budget. This plan is not only necessary to increase living standards for all Australians but to underpin revenue growth for the Australian Government, by supporting increased earnings for employees, companies and their shareholders. This will support returning the Budget to balance and to paying down debt thereafter. The medium-term projection for the underlying cash balance in MYEFO sets out a consistent trajectory to that reported in the previous Budget, as I have already noted. Just in wrapping up, this statement supports a growth-friendly economic set of policies and, notwithstanding the reasons for optimism that exist, it reminds us of the need to clear any fog of unreality about the scale of the fiscal and economic challenges we face as a nation and the need for partners in the Parliament to support Government efforts to restore the Budget to balance. When we look at particularly the issues of Australia's international standing on debt and our performance vis-a-vis other countries, with growth rates at 2 per cent, at the top end of the scale for advanced and AAA-rated economies and an improving global outlook, as the statement sets out, and continuing evidence that the Australian economy is successfully transitioning from the mining investment boom, there is reason to be positive and optimistic.
It is not surprising that despite the deficit and debt legacy which was left to us by the previous government, that in the advances we have been able to make, we continue to stand strongly in international debt markets and we continue to perform well in meeting our external financing commitments. This is evidenced by the success of our bond offerings including our highly successful recent 30-year issuance and the performance of our Treasury bonds. Australia continues to be well supported and rated by international debt markets re-enforcing our global reputation and standing as a secure place to invest.
This statement provides a responsible, conservative and transparent update of the Australian Government's fiscal position. An optimistic but very realistic outlook on our future economic performance.
I will hand over to Mathias.
FINANCE MINISTER: Thank you very much, Treasurer. Our half-yearly Budget update again shows that despite further global economic headwinds, despite further revenue write downs, our Budget trajectory continues to improve over the forward estimates because of the work we continue to do to control expenditure growth.
As the Treasurer has indicated, overall Government expenditure over the current forward estimates is now $18.5 billion lower than anticipated at Budget time. In fact, spending in each one of the four years of the current forward estimates is lower than anticipated at budget time. Since last year's Budget, the 2015-16 Budget, total payments have reduced by about $32.5 billion over the respective forward estimates period.
Spending as a share of GDP is now down to 25.2 per cent in each year of the forward estimates period. The very important context here is that the Government inherited an increasing government spending as a share of GDP trajectory from Labor. Labor's spending growth trajectory was taking us to 26.5 per cent spending as a share of GDP over the then medium-term. That spending as a share of GDP was expected to continue to go up and up and up to eventually take us to beyond 30 per cent into the future.
Overall, the net effect of savings measures implemented, not just proposed, savings measures, measures implemented by the Government so far since the 2013 election has delivered a net improvement to our Budget bottom line over the medium-term of more than $250 billion. This is money the Government will not have to borrow or which can be used to pay off debt once the Budget has returned to surplus. In this Budget update, again as the Treasurer has indicated all decisions to increase spending, including all of our election commitments and those decisions made in the context of Senate negotiations have again been more than fully offset by spending reductions in other parts of the Budget. Policy decisions overall have improved the Budget bottom line by about $2.5 billion over the forward estimates with $2 billion of that achieved through net spending reductions.
Going through some of the specific measures since the Budget, decisions to increase expenditure principally relate to the commitments we made at the last election. Such as our commitment to invest about $2.2 billion in funding into the infrastructure investment program and for important infrastructure projects across Australia and other commitments in the infrastructure and regional development portfolio.
We are providing funding certainty for Commonwealth water functions which has been funded initially for a 10-year period by providing additional funding of $400 million over the forward estimates.
Consistent with an agreement reached to facilitate passage of the omnibus savings bill, we are restoring $800 million in funding for the Australian Renewable Energy Agency over five years.
On the savings side, as announced during the election, we are expanding the Department of Human Services fraud prevention and debt recovery capability, which is expected to deliver $2.1 billion in net savings over the forward estimates. Importantly and as we indicated during the election campaign, this is a very realistic additional saving given it represents just about 0.3 per cent of total social services expenditure currently estimated at $682 billion over the current forward estimates period. As also indicated during the election campaign, we are redirecting about $2.2 billion in uncommitted infrastructure funding to pay for infrastructure related election commitments. We also expect to achieve $225 million in net savings from closing the Green Army program to new projects. That is over the current forward estimates period. Importantly, the value of this net saving will grow to about $830 million over the medium term.
The Government has also decided not to proceed with the establishment of the asset recycling Fund announced in the 2014-15 Budget given infrastructure related funding commitments under the asset recycling initiative are able to be delivered without it.
Finally, as part of this half-yearly budget update, the Government is announcing that we will not proceed with the commercialisation of the ASIC Registry services. This is because the thorough evaluation of final private sector bids received showed that it would not deliver net financial benefit for the Commonwealth.
In closing, Labor today at various times made comments that we needed to drop the company tax cuts in order to repair the Budget. What I would say in relation to this, just remember that Labor actually in the election campaign spent all of the money that was allocated to the company tax cut as part of our plan for jobs and growth. They spent all of that money and more to the point as the Treasurer says that, under Labor, the Budget bottom line over the forward estimates would be about $19 billion worse off.
QUESTION: Treasurer, the widening of the deficit if you like is $10 billion over four years, which isn’t as large as last year, it’s about a third. You have been very conservative with your commodity forecast as a nominal GDP and so forth. Do you think it would be rough to get a downgrade on the back of these figures?
TREASURER: That's for others to assess when they go over these numbers that I have presented today but I made particular reference in my opening statement to the way that international debt markets are already assessing Australia. I mean, in our most recent issuances, we are getting three to four times coverage on our debt and if you look at the movement in yields of Australian Treasury bonds versus US Treasury bonds, you actually see a bit of a narrowing of the gap which means we are getting better prices. How long that is lived, we will see, but the point is that when those who actually make the purchases on Australia's debt; hedge funds, sovereign wealth funds, the central banks of other countries and others – when they are making their own independent assessments of Australia, they are buying. They're buying.
QUESTION: Treasurer, how can you be so confident of a return to surplus when the figures are so volatile and the commodity prices are so volatile and the projections are unreliable in the 2019-2020 year the deficit since just six months ago has changed from $6 billion to $10 billion?
TREASURER: What we don't do, that predecessors in the former government under Labor do is we don't go around making these sorts of promises. What we do is we say "these are the projected outcomes on the cash balance based on the information that is currently before us and the best assessments we can make of that". This is a projection. Wayne Swan was the one who stood up in the Parliament and said the four years of surpluses we deliver tonight – you haven't heard that from me, you haven't heard it from the Prime Minister or the Finance Minister. It was the Labor Party who overegged on these things. What we do is, I think very prudently, and I think as you see in this document, very transparently, is set it all out. In the document you will find assessments of the sensitivities that sit around the commodity price forecast. I remember this time last year when we struck the commodity price where we did, people said it was too high and then it rose to 55 on a four-week average by the time of the Budget. Then we said it was 55 at the time of the Budget and people said it was heroic. Today it is over 70. Look, that's why in a statement such as this, you are careful to set out all the information so people can make their judgements. On the best information we have available to us, the Government's plan to return the Budget to balance is projected to be in 2021 and that is something that says our plan remains on track.
QUESTION: Budget repair ambitions are optimistic enough, are you spending too much on the spending side and not enough on the revenue side? If you looked at the revenue, wouldn't you be able to repair the Budget a lot quicker?
TREASURER: Revenue as a percentage of the economy is actually higher than the long-run average. It is higher than the long-run average. That is also true for expenditure as a share of the economy. So, I don't think it is a good plan to overtax the economy, undermine growth and, therefore, undermine the revenues that would come from that growth. In the medium-term projections in this document, there is a 23.9 per cent tax to GDP cap which is built into those medium-term projections. The reason that's there is to ensure that governments over the medium-term are given the room to ensure that they don't overtax the Australian economy and drive down growth. What's interesting is that at the last election, Labor abolished their commitment to a tax-to-GDP cap despite the fact they actually introduced it when they were last in government. They did it for only one reason – because they knew they couldn't keep the tax-to-GDP cap and whack another $100 billion in extra taxes on the Australian economy. Something had to go. Either they walked away from higher taxes or they signed up to the tax-to-GDP cap. Labor will always sign up for higher taxes because they always want to sign up to even higher levels of expenditure.
FINANCE MINISTER: The important point here is the policy settings we inherited from Labor when we came into Government in 2013 were taking us to spending as a share of GDP of 26.5 per cent by 2023-24, rising beyond that to in excess of 30 per cent. If we were to chase that level of Government expenditure with ever increased taxes as a share of GDP, it would damage investment, it would damage the economy, it would drive increases in unemployment. That is not something that the Government is prepared to do. We have to ensure that we can live within our means and we can live within our means in a way that is sustainably affordable for the economy.
QUESTION: That may be true but you have an impasse in the Parliament on Budget repair. You have talked about getting partners in the Parliament to fix this problem. Would you be willing to compromise with Labor on revenue measures if they compromised with you on spending cuts?
TREASURER: I will let Mathias make comment on this as well but I remember before the last election and the Labor Party was talking about zombies and then they brought those zombies to life on the other side of the election and they let them walk through the Parliament and they were passed. Now, that was a very dangerous mixed metaphor but the point is Labor is always saying that and we have seen them play wrecker and sabotage in all of this. I assume for their own political ends. We have always been, and particularly the Finance Minister, has been very engaging – not just with the Labor Party but with all members of the crossbench. In the last six months we got things through with the cross-bench, with the Greens and with the Labor Party. So, I think that demonstrates how we get things done in the 45th Parliament.
FINANCE MINISTER: This is exactly right. You need to look at what we have actually been able to achieve so far. As I have indicated in my opening remarks, the net effect of savings measures implemented, implemented not just proposed, but implemented is a $250 billion plus improvement to the Budget bottom line over the medium-term.
QUESTION: Is that medium-term?
FINANCE MINISTER: That is the medium term to 2026-27. That is to the medium-term 2026-27. $250 billion net improvement to the Budget bottom line. That is $250 billion we do not have to borrow or we can use to pay down debt once we are in surplus. Since the election, since the 2nd of July we have been able to legislate, or implement through regulations or appropriations more than $22 billion worth of savings measures. As the Treasurer has indicated, that is about two-thirds of what was left to be done at the time of the last election. Look, we will continue to work with everyone in the Parliament. We will continue to work with everyone in the Senate to complete the Budget repair program but we have made significant progress, we are heading in the right direction, yes, but there is more work to be done, that is true.
QUESTION: Just to clarify that how many years is that medium term? When did it start?
FINANCE MINISTER: We are in the 2016-17 budget year, so the medium-term goes to 2026-27. It depends where you are. But in the 2016-17 budget year, the medium-term goes to 2026-27.
QUESTION: Can you explain the $330 million cut in wages subsidies for workers over 25 and the $120 million skills fund that's been axed? How does that accord with your job creation policies?
TREASURER: The first measure you referred to was actually previously announced and is incorporated into these statements so I'd refer you to those statements. That was all part of actually the funding of the PaTH program which is actually focusing on getting long-term unemployed people into work which I announced in the Budget and there were savings that rationalised some other programs to ensure they were fully funded. On the issue of the industry skills fund, let me be clear about this measure: the fund has been underutilised to date. It is in response to a broader Australian Government agenda with funding being re-directed within the Education and Training portfolio to programs which include the VET student loan programs, businesses that have an industry skills funding agreement in place will not be affected by this closure. The fund is funded until 2018-19 with $41.8 million over the next three years. Applications for the fund will remain open until 31 December 2016 to allow any businesses that had previously inquired about funding to submit an application so we continue to provide support to business and individuals to train through a range of skills programs including the Australian apprenticeships incentives program, trade support loans and the VET student loans program. The Australian Government's single business service also offers a range of grants and assistance to Australian businesses. The fund was not targeted at apprenticeships, I should be very clear. It was more at up-skilling or re-skilling of existing workers and there are alternative programs available for those.
FINANCE MINISTER: We are spending the money better.
QUESTION: Treasurer, since the 2009-10 Federal Budget, four Australian Treasurers have forecast in MYEFOs and in Budgets a return to surplus at a particular point in time – the dates have changed but the forecast has been there – why should Australians have any more faith in your forecasts today of a return to surplus in 2020-21 than for the previous three Treasurers?
TREASURER: First of all, it is a projection for 2021. I'd note that. Second of all, what are the things that a government controls? What a government controls is what it spends and what it taxes in decisions of its own making. As the Finance Minister and I have made clear today, we have, in this statement, as in the other statements we have handed down together, increased the bottom line position for the Government when it comes to net policy decisions. You see, the demonstration of the Government's resolve to take the Budget forward. The 2021 projection was first made a year ago at last year's MYEFO. It has remained constant over not just the Budget but PEFO and now this statement as well. But I made a comment in my opening statement about nominal expenditure. What has happened since the 2013 PEFO and, indeed, the 2013 MYEFO, is what we are spending as a government even in nominal terms today is less than what was projected for 2016-17 all the way back then. We have continued to get expenditure under control and, in fact, reduced it in terms of what was projected all of those years ago. That has been the critical contribution of this Government since 2013 is slowing the rate of growth in expenditure and we continue to do that in this statement today. What has changed since then has been, obviously, a difference in the level of revenues that were then achieved. There has been significant changes from the Budgets that were handed down under Treasurer Swan with some very optimistic arrangements, including, I should say, over the medium-term, assuming expenditure growth would be no greater than 2 per cent a year which was a nonsense. I mean, this is a government that is actually achieving that in our figures. They just wished it and never had the capacity to deliver it. To come to the point: what we are saying is we're keeping expenditure under control. What we have put before the Australian people in this document is a very transparent and, frankly, a very conservative assessment. If we had just simply taken the four-week average on commodity prices and just rolled it out across the forward estimates, nominal GDP would have been $100 billion more. Now that is not something that we thought was reasonable, that was something that was defendable and, as a result, we took a more cautious approach and realistic approach, listening to those engaged in the sector particularly in this area to ensure we had the most robust set of numbers to put before you today.
QUESTION: When you said had you used the old inflated nominal GDP, the four week average…
TREASURER: That was a rough estimate.
QUESTION: Did you say $100 billion more in revenue?
TREASURER: No, the size of the nominal economy.
QUESTION: Firstly, on this $19.5 billion loan to NBN. I know that we knew about that. You talk about it being privately refinanced in 2020-21, does that mean mums and dads could take a share in NBN? Secondly can I ask about the Assets Recycling Fund? It was a rather miserable end for Joe Hockey's centrepiece for 2014. What are you going to do? What leverage are you going to use on states to privatise and the like?
FINANCE MINISTER: Just in relation to the second question. The asset recycling initiative was a roaring success. What has turned out to be the case is that because the Senate was not prepared to legislate the establishment of the Asset Recycling Fund, the decision we have made is not to establish the fund, given that we are actually able to fulfil all of our commitments under the asset recycling initiative without setting up a specific fund. I would not agree with your characterisation there.
In relation to the loan for the NBN, it is indeed the Government's expectation that by 2020-21 that NBN would refinance that loan on external markets. That would be in anticipation of a future privatisation of NBN, which is already provided for in the NBN Act. It does foresee a future privatisation. Decisions in relation to how such a future privatisation of NBN might be conducted are decisions for a future day. These are not decisions we have made in the context of this half-yearly Budget update. But if a future privatisation of NBN is conducted in a way similar to past such privatisations then you would expect mum and dad investors would be able to invest in NBN at some point down the track.
QUESTION: I anticipated that was going to be your answer.
FINANCE MINISTER: Why did you ask the question?
QUESTION: Because of this: The NBN privatisation in 2020-21, is that critical then to the return to surplus in 2020?
FINANCE MINISTER: You are misunderstanding two different concepts. The NBN rollout is funded through a combination of a Government equity contribution which is capped at 29.5 per cent and a loan in order for NBN to be able to complete the rollout of $19.5 billion. NBN could have secured finance in external markets today in order to complete that rollout, but the Government made a decision that the best value for taxpayers was achieved by the Government providing that loan as indicated in our relevant statement at the time. That is what is happening. But by 2020-21, NBN is expected to go out on to external markets to refinance the loan. 2020-21 is not the target year for the privatisation of NBN, which is quite a different proposition.
QUESTION: But you wouldn’t do it unless it was beneficial?
FINANCE MINISTER: What is expected to be the case by 2020-21 is that the NBN rollout will be substantially complete and it will be cash flow-positive and approaching profitability. At that point in time the expectation is that the terms on which financing on private debt markets can be obtained will be even more advantageous.
QUESTION: Is it reasonable to say the path back to surplus in 2020-21 is off the back PAYE taxpayers who will inevitably pay higher taxes through bracket creep?
TREASURER: The revenue mix includes the bracket creep as you say and that's why in this year's Budget we sought to make a move to start to reverse some elements of that bracket creep with the modest cuts we made in shifting the threshold from $80,000 to $87,000. We appreciate that that is a very modest change. We never sold it as anything really different to that. That is an acknowledgement of that. Wherever possible in the future, we would seek to alleviate the impact of those measures in the future. That also, frankly, goes to the issue of the tax-to-GDP cap over the medium-term as well. That's why it exists – to give governments flexibility over time to change their tax arrangements. It is also true in this MYEFO that you can see that the revenue downgrades are a function of what's happening with wage price index and what's happening in profits growth and what we need to see is actually see people earn more, continue to get more hours, see people and companies in particular profit more and invest those profits back in their businesses. That's why we are pursuing the enterprise tax plan as strongly as we are. We have this competing challenge. We must get the Budget back to balance to ensure that we put Australia in a more resilient fiscal position to deal with what can be external threats and shocks in the future. I set that out in speeches I gave in September and October of this year but, equally, at the same time, you need to pursue economic policies for our own investments in infrastructure and innovation and in science and in technology and in all of these areas and in the tax system to make it more competitive to ensure you are growing the economy at the same time. We can make the policy decisions to get expenditure under control but to actually pay down debt over the medium-term, that requires a strong-growing economy. So these two things need to work together. That's what I believe we are seeing in this document today and in the Budget I handed down in May.
QUESTION: You are making savings through cutting pensions supplements for people who travel more than six weeks overseas. You are extending the threshold pause again for family payments.
QUESTION: Why do you say that this statement meets the fairness test?
TREASURER: On the latter measure you refer to, that was actually subject of the agreement we came to with the Labor Party when we took through the Omnibus Bill. So there is agreement on that matter across the Parliament. On the other measure, Mathias might want to comment on this as well, but you've got to do what you can afford. Now, we are basically saying someone is not going to get a supplement payment when they go and live overseas. For pensioners who live in Australia, you will continue to get that. If you want to go live overseas, we are saying we will be changing that arrangement because the Budget needs to be affordable and the country needs to live within its means.
FINANCE MINISTER: The pension supplement payment is to deal with cost of living expenses in Australia. If you permanently depart or depart for an extended period, in the context of the competing priorities, this is not seen as an appropriate item of expenditure.
QUESTION: In the context of changes, though, that are coming into effect on 1 January, what do you say to pensioners who look at this and say "you are hitting us again and where is the hit on the high income earners?".
TREASURER: The changes that we are making in January are being made with tri-partisan support. With the Labor Party support, with the Greens support and of course with Government’s support. Those changes are going to increase the pension for 170,000 pensioners with low levels of assets. That's what it's going to do. 170,000 pensioners with low levels of assets are going to get a pension increase above and beyond what the two-yearly increases they get each year which uses exactly the same increase formula that was run by the previous government. You need to ensure whether it's in your pension system or your superannuation system that your payments and your incentives are sustainable over the longer-term. We have an ageing population. These changes which this Government has been able to take through the Parliament has been able to set Australia up structurally to meet these expenditures well into the future. That is a structural reform to deal with a structural challenge. It hasn't been easy to pursue but we have been able to pursue it in the national interest in the longer term. They are the sort of policies, the policies trying to set up Australia for the future to ensure that our expenditure lives within its means and doesn't saddle future generations with the debt burden of paying for current welfare payments.
QUESTION: In that context, are you or Senator Cormann getting anywhere with the crossbenchers on the extension of the aged pension to retiring age to 70?
FINANCE MINISTER: We have got a list of outstanding measures and we are working our way through them one by one. When we are in a position to make an announcement, we will make it.
QUESTION: Treasurer, you nominate $2.1 billion in welfare savings over the Forward Estimates, roughly, how many people will be kicked off welfare? How will this be achieved? Secondly, what is the size of the surplus that you are actually projecting?
TREASURER: Mathias you can add to that first and then I will make a comment after.
FINANCE MINISTER: The $2.1 billion savings is not actually new. It is not a matter of kicking anybody off welfare. Everybody who is entitled to receive welfare payments will continue to receive them. This is a compliance measure. It is a fraud detection and compliance measure which we announced in the election campaign so it has previously been subject of public discussion and it represents 0.3 per cent of the total social services spend. That is an eminently realistic assessment of what can be achieved through better data matching, better use of technology and better use of a whole range of capabilities. It builds on a program we have previously initiated. It is a very conservative estimate. In terms of the projected surplus in 2021, projected surplus if you look at the graph that is in the MYEFO document. It will show you that it is about 0.1 per cent of GDP which is just over $1 billion.
QUESTION: Several hundred thousand pensioners are also going to have their payments reduced, part-pensioners have their payments reduced on January 1st. It is always difficult politically to take money off people. When you were formulating the policy, did you ever consider grandfathering existing recipients or was it too difficult and expensive?
TREASURER: The challenge was to get the Budget under repair. The decision was taken to do exactly that. That's what the measure has achieved and it has been legislated with the support, as I said, from the Greens and the Labor Party and I think it demonstrates that the Government is prepared to take on some of these very difficult decisions and we will continue to do that. It is important that we have a welfare system not just for today but one for tomorrow, that a welfare system can provide a reliable safety net for your kids and my kids and not just our parents or not even ourselves and the only way you do that is if you make this thing sustainable. The adjustments we have made to the assets test, which was originally introduced by the Labor Party, simply reversed the decision that was made late in 2007 and so that hadn't been around a terribly long time. So, it was a difficult decision, but it was a decision we were able to secure the support, actually, of the last Parliament for. When you combine it with what we have done in superannuation, we have ensured a retirement income policy that is far more sustainable, far more resilient to the future than the one that we inherited. On that note, can I thank all the Treasury and Finance officials for their work in pulling together these statements over this time of year. Ok, last one.
QUESTION: Part of the projected growth is actually going to come from household consumption but they won't be saving as much. Given that we have very low wage growth and interest rates are quite low and probably only going to go up over time, I know you want them to spend, is that the best advice? Should they be saving or should they be spending?
TREASURER: They are decisions they will make themselves as their own households and we don't provide that advice. What we have seen though for some time, are Australia's savings rates are actually quite high compared to other advanced economies. We have seen that coming down after it spiked up in recent years. There has been a displacement between reduction in the savings ratio and the support of consumption. When you think about that, if you look particularly in the household sector and particularly in building and those areas, whether it is in renovations or things like this, people are actually prepared to make consumption decisions is actually a re-enforcement of their confidence in the direction the economy is heading. When people start taking money out of the cave it means they feel that it might be time to come out of the cave as well. That is not a bad thing. I think it is an expression of confidence. On that note, I can say, as we look at this document as a whole, what it says is that the Government is delivering in this term of delivery. We have delivered the election commitments and we have done it with a net improvement to the Budget position in terms of policy decisions. We have been able to keep our commitment to keep the plan to get the Budget back into balance on track. The projection remains at 2020-21. We will continue to do that by getting expenditure under control. We have measures before the Parliament, some $12.5 billion, which need the support of partners in this Parliament to ensure that we don’t saddle future generations with higher and needless debt – bad debt. Bad debt paying for welfare payments of today through higher taxes on people in the future. That's not the way we want to go. So we are delivering on those commitments. We will continue to do that in the New Year as we work towards next year's Budget. On that note, can I wish you all a very merry Christmas. Tina Arena I don't think has a Christmas CD out this year, which is a great disappointment to me, I will just have to go back to some of the old ones. I hope you and your families have a safe and happy and Merry Christmas. Let's look forward to a very prosperous year for working Australian families and all Australians.
FINANCE MINISTER: Merry Christmas.