Interview with Kerry O’Brien

8.10 am

SUBJECTS: Budget 2006-07

O’BRIEN:

Peter Costello, this is the third straight year of Budget handouts with another election Budget next year, isn’t there a danger in planting an expectation that every time there is a surplus there will be a tax cut? In other words, a hand back mentality rather than a mentality of bolder investment for the future or a mentality of safeguarding for the bad times?

TREASURER:

Well, we have bold investment for the future. There is the biggest national highway programme that Australia has ever had including a dual carriageway between our two biggest cities…

O’BRIEN:

We have been building that dual carriageway for some time now.

TREASURER:

…and now we are going to finish it. That is nation building. Murray water, the biggest river system in Australia, the biggest injection of capital to get environmental flows. So there is huge investment going on here. You talk about…

O’BRIEN:

Not comparative to your other spending.

TREASURER:

Well you talk about putting something away for a rainy day, we have cleared government debt. The Government doesn’t owe a dollar. We have put away $96 billion compared to where we were in 1996, so…

O’BRIEN:

But you have sold an awful lot of Government assets to achieve that.

TREASURER:

Well Kerry, that doesn’t include Telstra – the Telstra 2 – it doesn’t, and back in the Keating days of course what they used to do is sell the assets, spend the money and run up a debt as well. So we have done that and we have now put together the Future Fund. This Future Fund, which is going to invest for a rainy day, will be up around $30 billion quite shortly, so there is investment and there is investment for a rainy day. Now, I believe that if you can manage your finances, balance your Budget, repay your debt, then there has got to be a return to the taxpayer and that is why we continue to cut taxes.

O’BRIEN:

Your tax and family benefit giveaways clearly favour relatively high income single people and single income families over the families where both parents are working, why?

TREASURER:

Kerry, we have been cutting taxes now more or less continuously since 2000 when we began tax reform. And in the earlier Budgets what we did is we cut the lower income tax rates. So we cut the 20 per cent rate, we cut the 34 per cent rate and we took people out of those rates. Now it is time to come back and cut the upper rates as well. Now we will have cut all the rates and…

O’BRIEN:

It is just that …

TREASURER:

…adjusted all of the thresholds, but you have got to see it all together and when you do, lower income earners have much bigger percentage tax cuts than higher income earners.

O’BRIEN:

But what I am talking about is where a single person on $100,000 a year getting $2,700 next year from this Budget, a single income family with a stay at home Mum or Dad and two children gets the same, a two income family with two kids gets $1,000 less, why?

TREASURER:

No, because you are not comparing like with like. You are comparing somebody who (inaudible)…

O’BRIEN:

(inaudible) the same payment…

TREASURER:

No, no, no, no, Kerry, I have been around a while, I know how you do these things. You are comparing a single income family on $100,000 with two incomes, two income earners at $50,000 each. So if your two income earners of $50,000 each, of course the tax cuts are less because they are paying less tax. But the Family Tax Benefits increases their positions.

O’BRIEN:

Okay, a huge surplus, big tax giveaways but only $10 million extra for childcare next year despite evidence that there is a huge shortfall in childcare places around Australia. What does that say about your commitment to families today, not families 18 months from now if you increase it further, but today?

TREASURER:

We are uncapping childcare places, that means anyone who wants to set up a childcare place can do so and…

O’BRIEN:

And you are providing $10 million towards it this year.

TREASURER:

Kerry, if there are more, we will pay more towards it. It is a totally demand driven programme. Anyone that wants to set up an eligible childcare facility will attract Federal funding and if there are more, if churches want to set them up, or the private sector wants to set them up we will be happy to pay out more. There was a great figure in that speech – by 2009, 700,000 childcare places, 10 years ago, 300 – a big difference.

O’BRIEN:

The question will remain whether that will be enough. The bulk of these giveaways seem to be based on a commodity boom that you say yourself might only last another 2 years, yet these tax cuts and extra family benefits are set in stone, they are a bill to be met into the indefinite future. How responsible is that?

TREASURER:

Very responsible because I have taken a reasonable assumption which is that the commodities boom will begin to unwind within the next two years or so. I have factored that into the bottom line and structured tax cuts which still keep that bottom line in surplus by about one per cent of GDP. So this is very responsible and I have been the voice of moderation here Kerry. You and I are on the same team for once…

O’BRIEN:

I am glad you see me as a moderate person, Treasurer.

TREASURER:

…I have been the one that has been saying that the commodities boom won’t last and I have got an assumption in here factoring it down. Now, would we be upset if it did last? No, we would not but I think it is prudent that you say to yourself that you cannot run at record levels forever and as world supply increases, prices will come back. We actually want that to happen in some commodities like oil for example.

O’BRIEN:

You also project a current account deficit of 6 ¼ per cent at a time when the terms of trade are highly favourable. That is not exactly a situation to boast about is it? I mean what happens when the terms of trade inevitably become less favourable?

TREASURER:

Well of course if the terms of trade were less favourable, the dollar would be lower. And you know the last time we ran a current account surplus we had a dollar at 47 cents.

O’BRIEN:

But you can’t be happy with a current account deficit running at 6 ¼ per cent of GDP…

TREASURER:

One of the reasons why you run a current account surplus is that the dollar has been as high as

76, 77 cents.

O’BRIEN:

Are you happy with that figure of 6 ¼ per cent?

TREASURER:

Look, I think it is important that we boost our exports and I always say that – but you are saying what happens if the terms of trade came back. Well if the terms of trade came back that would actually probably improve the current account, because it would have an effect on the exchange rate.

O’BRIEN:

On superannuation Mr Costello, I notice you describe these as the most significant changes in superannuation in decades. More significant than the compulsory super scheme brought in by Labor…

TREASURER:

Sure.

O’BRIEN:

… which has helped set Australia up for very substantial savings?

TREASURER:

Yes and that is what complicated the whole system. That is when they brought in, you recall, the contributions tax. So what they did, they pulled forward tax, tax was on end benefits and they pulled tax forward so you paid on entry, on investment and on exit and that is what has been complicating the system. So what we are saying now is if you pay it on entry and on earnings, no tax on exit.

O’BRIEN:

What they introduced for the first time was a system of compulsory superannuation saving which has produced hundreds of billions of dollars towards people’s retirements that otherwise would not have been there. Surely that was very substantial…

TREASURER:

It was a good decision, yeah it was a good decision…

O’BRIEN:

But you have sought never to expand it?

TREASURER:

Well we did. Well that is not quite right Kerry, it was about five or six per cent when we came to Government and it expanded up to nine per cent.

O’BRIEN:

That was…

TREASURER:

We expanded it. Now having said all of that was it a good decision to introduce it? Yes, which is why we kept it. Can it be made better? Yes. If you get tax off end benefits. Let me make this point to anyone who is listening – if you are thinking of saving, put some money in superannuation. When this plan goes through it will be the best way of saving. We have got a country which needs more saving. We are going to make it much more attractive to save in this country as a result.

O’BRIEN:

Why won’t these tax cuts add to consumer spending, why won’t they contribute to higher interest rates?

TREASURER

We will still be in a surplus position after everything is in place, about one per cent of GDP, it is a strong position to be in. The increase in tax is principally coming from companies and the dividend is that the reduction in income tax is principally going to individuals. So people often say to themselves when I see all these high company profits what is in it for me? Well what is in it for me is some of those increased taxes that are being paid by companies, particularly in the mining and financial sector are now being shared with Australians. That is a dividend if you like of a strong economy.

O’BRIEN:

Peter Costello thanks for talking with us.

TREASURER:

Thanks Kerry.