Transcript No. 2000/97

Ladies and gentlemen, the Finance Minister and I are releasing today the Final Budget

Outcome for the financial year 1999/2000 that is finishing on the 30 June 2000. The Budget

outcome for the year ending June 2000 shows the Commonwealth Government surplus was $13

billion, the largest surplus in Australian history and in percentage terms, 2 per cent of

GDP, the largest Government surplus since 1971. The surplus outcome is larger than we

forecast at Budget time in May of this year by, in cash terms, around $5 billion. That,

principally, relates to the fact that the economy grew stronger and company tax was

stronger. There were some one off factors in the transition to the New Tax System as

people did not defer payments, which they were entitled to do, to the extent that we

expected, and expenses were around $2 billion less than we expected at Budget time, and

the Finance Minister will be saying something about that in due course. The total Budget

surplus will be used to repay debt, and by the 30^th of June 2000 we had repaid

$43 billion of Labor’s debt. In its last five Budgets, as you know, the Labor party

ran up $80 billion of debt.

By June of this year we have repaid $43 billion of it. And by June of this year the

debt to GDP ratio was 8.4 per cent, and by the end of next year, according to the

Government’s Budget projections, we’ll have the Government debt to GDP ratio at

around 7 per cent. To put that in an international context, the United States debt to GDP

ratio is about 40 per cent, Europe is about 40 per cent, it will mean that Australia has

one of the strongest fiscal positions in the OECD. When we came to Government we forecast

that by 2000/2001 we wanted to halve the debt to GDP ratio from 20 per cent to 10 per

cent. We will meet and exceed that goal and put Australia in a strong position, in a

strong fiscal position amongst the developed economies of the world. This outcome is

consistent with the Government’s economic management. When we came to office the

Budget was in deficit by $10 billion, after 4 years of Budget repair we have turned that

around, and it is now in surplus by $13 billion. And that money goes to pay down the Labor

debt and to set Australia up for opportunities in the future. The outcome will enable

Australia to be in a strong position, to have a strong economy, to create better job

opportunities for our people in the future, and it’s an outcome which is consistent

with strong economic management, which has been the hallmark of this Government. Now

I’d like to invite the Finance Minister to say something about the expense side.

Well as the Treasurer has indicated, the result has with it some lower than anticipated

expenditure as stated in the 2000/2001 Budget in May. That consists of lower than

anticipated, across the board, a number of, in fact in most agencies, lower than

anticipating expenditure and a number of slippages, that makes up the $2 billion there. I

should point out that when it comes to slippages, that they will, of course, come into the

current year, and therefore can’t be carried forward. But, broadly speaking,

expenditure has been about $2 billion less than was estimated and forecast in the Budget

in May.

Any questions?

Treasurer, can you explain in lay person’s terms, what is the benefit of a

surplus? What opportunities does it set you up for?

When we came to office we used to have to raise around about $9 or $10 billion of

people’s taxes to pay the interest bill. That is, the first $9 or $10 billion of your

tax didn’t go to a school, or a hospital, or a road, it went to paying for the

mistakes of the Keating/Beazley Labor Government, the $80 billion. As we bring that debt

down, we’ve halved the interest bill. As we halve the interest bill, that means that

peoples taxes go on roads, schools and hospitals. Whilst we’ve halved our interest

payments we’ve been able within the same amount of money, to double our spending on

health and education, as a proportion of GDP. So, instead of paying for the mistakes of

the past, now we’re investing in the opportunities of the future – looking after

families, spending a higher proportion of our taxes in education, building a better health

system. So, the benefit for the lay person of producing a surplus, living within our

means, retiring our debt, means that their taxes now go on building the future, on

important things like health and education, rather than paying for the mistakes of the

past.

(inaudible) embarrassing the riches given the pain that is being felt now in the

transport industry, the fuel costs, and the Government’s refusal to reduce excise?

Are you a little bit embarrassed by the riches you now face?

Well, let me say, the surplus goes to paying debt and reducing the amount of tax that

has to go on servicing. Consistent with the surplus outcome in the previous financial

year, we were able to deliver additional benefits this financial year with cuts in taxes.

Don’t forget that. In this financial year the Government has cut taxes by a net about

$5 or $6 billion dollars. If we hadn’t have produced a strong fiscal outcome, we

couldn’t be cutting taxes. What taxes have we cut? Well, we’ve cut income tax.

From 1 July every Australian paying income tax had an income tax cut. We’ve cut

company tax, from 1 July it came down from 36 to 34, and it’s going to 30. We cut

capital gains tax. Capital gains tax in this country has been effectively halved for the

taxpayers of Australia. And when we come to fuel, in important areas of the Australian

economy we have cut fuel tax. A point I made the other day, your truck driver, your owner

driver truck driver is today paying 24 cents a litre less in tax on diesel than they were

on the 30^th of June. They are paying 24 cents a litre less in tax on diesel

than they were on the 30^th of June. So it was producing these kinds of strong

results which has actually enabled us to cut taxes, and those cuts in taxes are now

flowing through into the Australian economy.

(inaudible) remains very high, and you’ve run the argument previously that you use

protective surplus by not cutting it, and the excise paid is (inaudible) car drivers.

What’s got to produce the result today (inaudible) cut that?

The Government’s policy is to continue to run surpluses while economic growth

continues. And we are going to run surpluses in the next financial year and each financial

year thereafter while economic growth continues. That is the Government’s fiscal

policy. In relation to this outcome today, what implications does it have for the current

financial year? Company tax was stronger because the economy grew faster. And that will

give us a base, a higher base, to go off into the current financial year 2000/2001. The

Finance Minister said, part of the result was the fact that expenses slipped out of last

year and into this year . . .

Yes, I take your point . . .

TREASURER:

. . . so expenses . . .

. . . about that Treasurer . . .

. . . will be a little bit . . .

(inaudible)

. . . I’m just going to finish the point because . . .

. . . if you could get . . .

. . . it’s important . . .

. . . to the point of the question (inaudible) . . .

. . . no, no, no, I think it’s a very important economic point. That is, that

you’ll have a higher tax base starting point, but as the Finance Minister said, in

relation to expenses, you’ve had some slippage of expenses out of last financial year

and into this financial year, so they will appear as expenses in the 2000/2001 financial

year. So, we would say, in relation to the current year, as a result of this result not

much has changed. That the forecasts in relation to the current year would be pretty much

in line with what we were expecting at Budget. I don’t see any downside risk I must

say, but, we wouldn’t say that you would expect from this result any dramatic change

in the current financial year. Now, can I come to excise. Excise doesn’t increase

with the price of petrol. This is a very important point. People, I have seen some comment

that if the price of petrol goes up excise has gone up. Excise is a fixed cent amount.

Excise is 38 cents a litre. As the price of petrol goes up, the excise rate does not

change. It is 38 cents a litre. What is driving up the price of petrol has got nothing to

do with excise. Excise is a fixed cent amount per litre. What is driving up the price of

petrol is the world price of oil. And the world price of oil I would like to be much

lower. And we are making every effort in every international forum to lift supply and to

bring that price back. The one bit of good news that we’ve had in the last week or so

was the announcement by the Americans that they were releasing their strategic reserve,

which has brought petrol prices back a little bit. But until we can get the world oil

prices – oil prices back a little bit I should have said – until we can get the world oil

price down, you are going to see it reflected it in the Australian bowser. The price at

the bowser is not a tax point it is a world oil price point.

Mr Costello, one of your backbenchers says that, Senator Crane, says that the formula

used for parity pricing is flawed, that it is one of the highest in the world and that it

should be reviewed. What’s your comment on that?

Well the Government is not reviewing that policy, which from recollection came in

during the period of the Fraser Government. So I think (inaudible) . . .

But the formula itself?

Well I think it’s been in place now for about 30 years, and the essence of it is

this, that oil is a world commodity. If you forced Australian producers to get a lower

price in Australia than they could by selling overseas, they would just sell it overseas.

They would sell it into the international market. You wouldn’t actually get your oil

at a lower price. Australian producers would sell where they got the world oil price, and

there would be nothing on the Australian market, and you’d be back buying on the

world oil market 100 per cent of your needs, rather than part of the needs from the

Australian producer in the balance from international producers. You can’t run what

is governed by a world price and is global commodity, a two-stage market. It just

can’t be done. That’s the first point. The second point is this. That if you

somehow forced Australian producers into a lower oil price than every other producer in

the world, the one thing I can assure you of this, that nobody would be out there finding

more oil or producing more oil than Australia, they’d be out finding oil or producing

more oil in Saudi Arabia, or maybe in Indonesia, but they wouldn’t be doing it in

Australia. It would be a misconceived policy on a long-term basis. The reason why parity

pricing was introduced 30 years ago was for a good reason, and it’s a good reason

today. And the Government believes that all of the reasons which led to its introduction

still apply and will continue it.

You say there’s no downside risk to this current year’s surplus, but

you’ve identified here revenue, tax deferral which you thought was going to happen

but it hasn’t, plus the slippage. Doesn’t that actually put significant pressure

on this year’s surplus?

The tax deferral is this, if I can explain it, and it’s rather a technical answer.

When we introduced the New Tax System we brought Australian companies on the Pay As You

Go. That is, that you would file your Business Activity Statement at the end of the

quarter, pay your GST, and your company tax. Companies were, prior to the 30^th

of June, paying arrears. So when you brought forward that first PAYG statement, they could

get a double company tax instalment, the arrears from last year, plus the actual quarter

from this year. So we said, well, that would be unfair, we would allow companies a five

year grace period to make up that arrears payment and to go immediately on to Pay As You

Go. So you could, as it were, defer that arrears payment over a period of five years. It

appears that not as many companies as we thought decided to actually take that option.

That is, they said, presumably because it was a good year, we will pay the arrears payment

and the PAYG. And so in cash terms what you got was more than we expected making a double

(inaudible) required to make a double payment. In accrual terms, we had always reported in

accrual terms that money as coming in without the deferment, because all of the deferment

affected, was not an accrual, it was still accruing as liable but not in cash.

So what that meant is that the cash and the accrual which at Budget time were expected

to be quite different outcomes moved together. But in accrual terms nothing has changed,

and accrual terms in the future there will be no differences.

Mr Costello, do you think . . .

Just on the slippages, and you did ask again on the slippages, go to page 2, 3, I think

on page 4 of the (inaudible) Budget, on the Budget Outlook document that you’ve got,

and I’ll give you a little detail. If I could just, for example, give you one

indication on those slippages. There’s a slippage in Defence on the training

programmes. That came about because the training programmes were deferred as a result of

East Timor. On the other hand there has been greater capital expenditure in Defence and

the figures are something like $600 million. In the training area, a little bit of

recruitment, not as fast as was anticipated. And about $400 million in capital expenditure

on plant, equipment, as you’d expect in Defence. So they flow through, they in fact

have an adverse effect. But in broad terms there has been, across the board, underspends

in a range of programmes. Again I’d suggest to you that probably a fairly neutral

effect there, certainly not a negative effect on this current Budget, this current Budget

year, in a similar way to which the Treasurer’s explained the revenue.

Mr Costello could I ask, with the downside risk again in this current year, is there

any concern about the revenue you will be able to raise from the spectrum (inaudible)

given the state of our Telcos?

No. I, in fact, didn’t say that I saw any downside risks. I said, if I saw a risk,

I saw an upside risk in relation to next year. I don’t want to (inaudible) a

statement, but the point that I was making was this. Company tax revenue was stronger than

we expected in May, and the principal reason for that was that the economy grew faster and

company profits were high. And even allowing for that one off, the company tax revenues

were substantially stronger. Now that gives us a higher base to go into next year, and

ordinarily from a higher base you would work through into higher revenues. The big unknown

in the revenue picture in 2000/2001 is GST receipts. I must say to you, we have no

experience in collecting GST. It’s never been done before in Australia. And we have

not yet got the first quarterly return. The quarter ends, what’s today, the 30^th

of September, today or tomorrow. And companies, most companies, will file their first

quarterly GST return, I think, by the latest day is the 10^th or the 11^th

of November. And I think by the end of November we will probably have the first indication

of what that is likely to raise. But, in the Budget we’ve got GST down at about $24

billion, a tax which we have no experience at forecasting. If you say we got within 10 per

cent, which would be extremely good forecasting, that could shift $2.5 billion either way.

So, the largest single item which will be affecting the Budget in the forthcoming year

will be revenues coming out of the GST. And I won’t be in a position to give any real

hard and fast forecasts until the end of November. In fact, we’ll probably put them

in our Mid Year Review, which will be the first hard and fast take on that. But I must say

to you, as I said earlier, the revenues were stronger in the last year, we would expect

that to flow in subject to the caveat on GST on which we have no firm fix.

I don’t see a downside risk. I think at this stage our Budget estimates are the

best estimates as to what the situation will be in 2000/2001. If I saw a risk I would say

probably a slight upside risk, but I certainly don’t see a downside risk.

You talked of continuing surpluses that the Government claims as long as the

economy’s growing. If the economy peaks at say above 3 per cent, do you have a

benchmark for the Budget surplus in terms of GDP, as a percentage of GDP, that would be

ideal in terms of fiscal management?

Well, the forecast we’ve got in the 2000/2001 year is 3 – per cent so we would

expect the outcome on a 3 – growth to be as forecast, subject to the variation on the,

I’m not trying to make a political point on the GST, I’m just trying to say,

that is a large item. We have some experience in forecasting income tax and company tax,

and you can still get variations. Nobody in Australia has ever collected a GST before. No

one. So you’ve got no previous experience to go by. And if you got within 10 per cent

of that you’d be doing a jolly good show. Now, the truth of the matter is that higher

growth doesn’t ordinarily work into higher revenues, it really depends on where the

growth is. If higher growth is on the income side, that is because incomes rise, yes, you

get higher revenues. But if higher growth is on the demand side, it may not necessarily

work out that way. I mean, ordinarily you expect strong growth to work out in more

revenues and weak growth to work out in less, but it’s not a one for one. You get

some of these people go on the radio and run these one for one arguments, it’s not

nearly as straight forward as that.

So should this help the dollar, this big fiscal surplus you’ve produced?

Look, there’s been extreme volatility in world exchange rates. And I don’t

think that volatility relates to fiscal circumstances . . .

It might catch their attention.

. . . because Australia has one of the strongest fiscal positions in the world. Let me

make this point. When you run a surplus Budget, there’s only one thing to do with

that surplus, that’s to pay off debt. You can’t do anything else, as you know.

You can’t spend it, because if you spend it, it’s not a surplus. This is the

argument I hear from the Opposition every now and then – oh, run a bigger surplus so

you can spend it. No, I’m sorry, the surplus is what’s left after you’ve

spent. The only thing you can do with a surplus is pay off debt. We’ve now paid off

$43 billion of Labor’s debt, and our debt to GDP ratio at the end of this year will

be about 7 per cent. If we run stronger surpluses than forecast, it might go to 6.8 or

6.5. Over the forward estimates, I would hope we can get it to zero, that is, to wipe out

all Commonwealth debt. But as an illustration of how strong that fiscal position is, the

United States is at 40 per cent, and Europe’s at 40 per cent. They would have to run

huge surpluses and pay down huge amounts of debt to get to where we are.

In international terms, Australia is in a strong fiscal position. Now, that’s why

volatility in exchange rates, I don’t think is a fiscal question, it’s got a lot

more to do with international currencies which I won’t go into now.

Just on that international currency issue, in terms of the international picture at the

moment, the weakness in the Euro dollar, the Euro, sorry, as investors go into the US,

high oil prices, now some US companies are starting to find their earning surplus has been

downgraded, just how vulnerable are we internationally at this point?

Weak Australia? The Australian economy is in a strong position. Our last quarter showed

growth at 4.7 per cent, we have grown above 4 per cent for 13 quarters, which is something

that’s not been recorded before. We’ve recorded growth above 4 per cent, but

we’ve never recorded above 4 per cent for 13 consecutive quarters. Today our fiscal

surplus is the largest ever in dollar terms, and in percentage terms the largest since

1971. Now we’ve gone pre-Whitlam here. If you think as I do, that a great deal of the

damage in the Australian economy began in 1972 with the Whitlam Labor Government, this is

pre-Whitlam, we’ve recovered. Our inflation is low. Our debt to GDP ratio is at about

8, which in European or American terms is an incredibly strong position. Now, the

Australian economy is in pretty good shape, and I think at anytime since Whitlam if

you’d have asked the Treasurer, you know, for a consecutive 4 per cent growth,

inflation in the two’s or the three’s, a Budget surplus, a debt to GDP ratio of

8 per cent, they would have not thought it possible. Adding to that, we’ve now come

in to tax reform, we now have a pro-export tax system, we’ve cut our capital gains

tax, we’re cutting our company tax, we’ve cut income tax. Now, that doesn’t

mean the work’s finished, that, you know, we can all pack up and hand the economic

management off to a pack of economic vandals. But it means we’re in a strong position

and we’ve got a good base to continue the work from.

But despite all that (inaudible) news Treasurer, we’ve still got the markets

putting a value on the Australian dollar, which poses a threat to the sort of outcome that

you’re talking about. How concerned are you (inaudible) discrepancy?

If you have a floating exchange rate, as we do, the exchange rate will move in

accordance with sentiment. But over the long term, exchange rates are made to be flexible

so that they can take particular pressures. It’s something that we fronted up to in

1983, and our policy since then has been to run a flexible exchange rate. One of the

pressures is that you get caught up by international events. And the big story in the

exchange rate market over the last couple of weeks has been the rise of the US dollar and

the fall of the Euro. And Australia has been caught in that movement, not because anything

has happened in Australia in the last couple of weeks or months, except that the

Australian economy which has been growing strongly has continued to grow strongly.

It’s rise of the Greenback and the fall of the Euro and we were caught. Now, if you

run a floating exchange rate you do get subject to that (inaudible) from time to time. But

the only thing you can say is over the long run, exchange rates are more likely to reflect

fundamentals. And in the short run, a floating exchange rate is better than a fixed rate.

Mr Fahey, can I ask you as the shareholder representative in Cabinet, the shareholder

representative of Telstra, did you put forward the three names on behalf of the

Government? And is Mr Chisholm’s role meant to be as someone who can talk to both the

larger media proprietors in relation to the joint venture?

Well, firstly let me say I welcome the nominations of Mr Chisholm, Mr Fletcher and Ms

Livingstone for the appointment to the Telstra Board. That is a matter for the

shareholders to determine at the Annual General Meeting on the 17^th of

November, and the Government will consider those nominations and advise the Chairman of

the Board which of the nominees we will support for that meeting on November 17. In the

context . . .

(inaudible)

. . . in the context of those nominations, there is ongoing dialogue, as you would

expect, between the Board, the Chairman, and the major shareholder, and I can’t put

it any clearer than that.

Mr Fahey, just a question on the Olympics. There’s been some fears from some of

the coaches that the Government will now that Sydney’s over, will cut back on elite

sports funding. Can you give any guarantee that will not happen?

Well, I’ve seen some speculation on that. I can certainly indicate to you that

firstly the Olympics have been an outstanding success, and I commend and congratulate all

of those that have played a role in the organisation of it. I believe that they will do

wonderful things for this nation. I’m obviously, very, very proud of the success as

every other Australian is of our Australian athletes. In the context of funding, I think

we need to wait there, but we are conscious of the success we’ve achieved and we

certainly won’t ignore that when we look at our budgeting in the context of

delivering one for May of next year.

Thank you so much. Thank you. Have a good day. Good luck to Australia.