Budget Lock-Up Press Conference

Committee Room 2R1

Parliament House, Canberra

Tuesday, 9 May 2006

4.40 pm

SUBJECTS: Budget 2006-07

TREASURER:

I think what I will do is just very briefly go through my overheads and then take questions. You would be disappointed if I didn’t go through the overheads I am sure.

The Budget is in surplus for the ninth time out of the last ten years. You can see that the surplus is a little over 1 per cent in that second year, a little lower than we are forecasting this year but not by much and certainly stronger than we have seen in most of the previous years. Strong surpluses have allowed us to eliminate net debt. The Government is debt-free and our interest payments have now fallen practically to zero, giving us an annual saving of $8 billion per annum.

You can see that in 1996-97 we used to spend as much on interest as we did on hospitals and schools – that is the blue graph – we now do not have to pay any interest and we can spend a lot more on hospitals and schools and families. Our unemployment is at 30 year lows and importantly we are forecasting inflation in this Budget to remain within the 2 to 3 per cent band. In fact our forecast for the Consumer Price Index is a year average of 2 ¾ per cent and coming down towards the end of the year.

Australia has experienced a very strong improvement in its terms of trade, you have heard me speak about that before. We are at near 30 year highs, back where we were last, where we were in the mid-70s, but the Budget is predicated on this increase plateauing and returning to more normative levels in later years and I think that is a prudent assumption, certainly no un-wise or over-reliance on extreme terms of trade across the forward projections.

This is a Budget which has major tax reform in three parts. In personal income tax, in business tax and in superannuation. These are enormous changes to superannuation, more than anything we have seen certainly in the last 20 years, and possibly even before.

From 1 July, these are the current rates, the thresholds will change for lower tax rates, you will pay 15 cents in the dollar up to $25,000 instead of $21,600 at the moment, you will pay 30 cents in the dollar up to $75,000 instead of $63,000 at the moment, you will pay 40 cents, a new lower rate, up to $150,000 and you will pay a top marginal tax rate over $150,000. I have said this before, there are some people that think if they are on the top rate they will pay 45 cents on all of their income, you only pay 45 cents on each dollar over $150,000.

We reduced the tax rates at the lower end of the scale in previous Budgets, in fact in last year’s Budget I took that 17 cent rate down to 15 cents in last year’s Budget. We have previously reduced middle income earners who are on 41 and 43 and 47 cents down to 30, and we have taken this opportunity to adjust the upper rates in this Budget. Eighty per cent of Australians are in that range up to $75,000, 80 per cent of Australians have a top tax rate of 30 cents in the dollar, 98 per cent of Australians are on incomes up to $150,000, so 98 per cent of Australians will not be on the top tax rate, 2 per cent of Australians will be on the top tax rate.

If you want a comparison as to where we were in 2000, in 2000 you were paying the top tax rate on every dollar over $50,000. After these changes, six years later, on 1 July 2006, you will only pay the top rate – it will be a lesser top rate – on each dollar over $150,000. That is an enormous change, and will build a lot more incentive into the Australian tax system.

Some people have asked me what the distribution of these tax cuts are – this appears in the glossy at Page 7, the glossy Budget Overview. In percentage terms the largest tax cuts go to the lowest income earners – if you are on $10,000, you get a 100 per cent cut in your tax rate – and the higher income earners are getting about a 9 per cent tax cut. In dollar terms of course that 9 per cent, because upper income earners pay a lot more tax in dollar terms, 9 per cent works out as much higher in dollar terms, but that is because people on lower incomes are not paying that much tax, and in fact under our proposals tonight a person on $10,000 will pay no tax. So if you are a low income earner you don’t pay any tax until you go above $10,000. Families are paying no net tax as you know unless they are over about $50,000 and if I can use this laser, which I am not sure I can, in this range of middle income earners between $40,000 and $50,000, they have got about a $10 tax cut but changes in Family Tax Benefits mean that with two kids you have got $30 a week and with three kids $40 a week. That is, they are made up through family payments, you can’t make it up much more with tax because they pay very little tax. And the distributional table appears in the glossy at Page 28, with all of those distributional tables taking into account both tax cuts and family payments.

The reason we chose to take the top tax rate down from 47 cents to 45 is that with Medicare levies and comparing us with other OECD countries, that puts us right on the average of the OECD, that without this reform we were above the average – that is what our international benchmarking showed – we were above the average of the OECD and by moving that threshold up we also make ourselves competitive on the threshold, we are better than the average on the threshold where that top tax rate cuts in.

So we have a higher than average threshold and we are on the OECD average rate and our international benchmarking shows that and I believe it is important that we use that to benchmark the Australian taxation system.

Increased family benefits are essentially done by increasing the threshold by which you get the maximum amount – the maximum amount is $4,200 per child. If you have three children the Family Tax Benefit is $12,600. It tapers out from $40,000 and this distributes more income to people through that $40,000, $50,000, $60,000 – and you will get a Large Family Supplement if you have three children now. So, those of you that have one for Mum and one for Dad, you will get a Large Family Supplement if you have one for the country, that gives an additional $250 per annum to families that have three children.

More childcare places, the maternity payment increases and of course the childcare tax rebate becomes payable so for families with children there are tax cuts, family tax benefits, childcare places improvement and childcare rebate improvements.

This delivers squarely to middle income Australian families.

There are one-off payments to older Australians and carers, the utility allowance, which is designed to help older Australians with their utilities such as water and gas, there is an additional annual payment for them and also to self-funded retirees.

I won’t go through in detail the second limb of our tax plan which is business tax reform. It is not a return to accelerated depreciation. We moved to an effective life, we are staying with effective life. It is the diminishing value of that effective life. If your effective life is four years rather than depreciate at 1.5 over 4, you will be allowed to depreciate at 2 over 4. So you can write down the business asset 50 per cent in the first year and 50 per cent thereafter. There is a graph in here which illustrates how that benefits business, I hope, Page 12 gives the example of the way in which you will be able to depreciate a computer, this is not just for business of course, that would be for people who have business use of a computer carrying on business. That is a major reform to the Australian business taxation system which will make Australia much more competitive. Again, our international benchmarking showed our rate was good, our depreciation arrangements were out of kilter. We have moved.

The third limb and perhaps the biggest limb of all in this Budget is superannuation. This is a super proposal. Superannuation has become one of the most complex areas for people who are trying to make decisions at a time of their life when they need to make important financial decisions. As we show in this book a lump sum at the moment can have eight different taxation treatments – pre ’83 concessional, undeducted, post ’94, capital gains, non-qualifying, post June ’83 or excessive. And you have to allocate to all of those ways to work out the taxation treatment, the same with income streams. People are trying to make these decisions at a time of their life where they are retiring, it is too complex. Now with superannuation, and I have thought about this for a long time, you could either try and change the taxation system on entry or change it on exit.

If you changed it on entry you would make the system more complex, because then you would have to start trying to work out for someone’s superannuation in twenty years time, how much has been subject to super contributions tax and how much has not, you would have a whole new grandfathering of all of this different treatment. So the proposal is just to cut through the complexity.

To say that if you are in superannuation where your contributions have been taxed at 15 per cent, where the earnings are taxed at 15 per cent, there will be no tax on exit from 1 July 2007 if you are older than 60, 60 years or older. You can still take your sum at 55 but you will pay current tax, if you stay on to 60 you can take it tax free. This will encourage people to stay in the workforce because they will be able to take their super tax free. If they do part time work that will be taxed at normal rates. At the moment with taxation on their superannuation they will be taxed on superannuation and any additional income they get, generally at upper marginal income tax rates.

This is a proposal which will make superannuation simpler, attract savings, encourage people to stay longer in the workforce. It is the biggest change to superannuation we have seen in decades and it will cut through all of this business of reasonable benefits limits, age based limits, pre ’83, post ’83, complying, allocated, unallocated, eligible termination payments and all the rest of it.

This proposal is radical, it just cuts through all of the problems and it is the next great area for reform of our taxation system. These are the current taxation treatments you can face, that will be the taxation treatment for those over 60 under the new system. These are the current taxation arrangements. Taxation of pensions, current marginal tax rates less deductions for personal contributions, plus the pension offset for a maximum of 15 per cent. (Next Slide) That will be the tax under this proposal.

I will not go through all of the areas of new spending other than to note there is a major decision in the out years for spending in defence, 3 per cent real increase from 2011. Again a huge run up in National Security measures shows it coming off but the reality is, if the security threat is around, that will continue.

A major increased investment in roads and rail in this Budget, which you have seen and of course continuing investment in health. This is a Budget which invests for the future, in road, in rail, in water, in families. It is a Budget which will lead to increased productivity with a better tax system and a better savings system. It is a Budget which lays down the first debt-free plan that we have had in Australia since the 1970’s when we were last debt-free and it is a Budget which is pitched very much for future opportunities. Are there any questions?

JOURNALIST:

Treasurer, for a single person on $100,000 a year, going from this Budget has twice as much as a dual income family on $100,000 a year with two kids. How does that mesh with the Government’s claim that its priority is with families?

TREASURER:

Well, can I say for a dual income family on a $100,000 there are tax cuts for both mum and dad. Both of them are on $50,000 presumably, on $50,000 – additional family payments and if they have a third child an increase in Large Family Supplements. A new child care rebate system which will give them 30 per cent rebate on out of pocket child care costs of $4,000. So I must say to you Malcolm this is pitched through the tax and families system squarely at middle income earners, squarely at their benefits and it reforms the income tax system as well.

JOURNALIST:

What is the use of returning all this money to households, Treasurer, if the net result is an increase in interest rates?

TREASURER:

Let me take you back to where I started. The Australian Government runs possibly the strongest Budget in the world. Outside of Norway, Singapore, perhaps Korea, not sure about Korea, we run the strongest Budget in the world.

JOURNALIST:

Is that a guarantee interest rates will not rise?

TREASURER:

We are debt-free, and we now have our ninth surplus. This is not America you know. We do not run a three per cent Budget deficit, we do not borrow money. If we were running a three per cent Budget deficit in this country we would be out borrowing $30 billion dollars this year. You know what the Australian Government will be doing, it will be saving $10 billion. The net effect of Australian Government action, because it is saving rather than borrowing, is to put downward pressure on interest rates, rather than upward.

JOURNALIST:

So you do not think this is going to have, this is not going to over stimulate the economy? You are not concerned that $36 billion in tax cuts is going to be a green light for the Reserve Bank to lift interest rates?

TREASURER:

Well no I am not, not in the slightest. As you can see the Budget surplus this year will be 1 per cent of GDP and that is excluding the Future Fund. Bear in mind here if you included the Future Fund it would actually be more than that but let’s exclude the Future Fund as we do in our bottom line, one per cent of GDP. Now you have got me every way, I’m sure if we did not reduce taxes you would be complaining that we are sitting on surpluses which were too large – if we do return taxes you can complain that we are sitting on surpluses that are too low, so you got me both ways Steve. But let me make this point – this is a surplus Budget, this is the ninth surplus in ten years. We are debt-free. This is an opportunity to reform tax and we have taken it in a responsible way and this is a big reform. On the income tax side certainly the biggest since 2000, but when you put together business tax and super tax, you would have to go back a long way to find anything of this dimension. Yes?

JOURNALIST:

Treasurer, you are talking about the super changes as epoch making, why is it a plan and not a measure, and is the cost of this completely included in the forward projections?

TREASURER:

The cost is included in the forward projections in the bottom line and the cost is outlined in this book here “A plan to simplify and streamline Superannuation” at page 26. The reason I call it a plan is that it is not going to take effect until 1 July and we are willing to consult, sorry it is not going to take effect till 1 July 2007 and we want to consult over some of the technical details, particularly transitional arrangements. In this area you have got to be very, very careful when you move from one system to another and people will throw up unusual cases. We are willing to consult about those transitional arrangements and we will use the next 12 months to do that but this is a plan to take effect on 1 July 2007.

JOURNALIST:

If the industry gives it the thumbs down, will you scrap the plan or modify it?

TREASURER:

No.

JOURNALIST:

Treasurer…

TREASURER:

But, well when I say I won’t scrap the plan, but if industry says, here is an unusual case that could be adversely affected unless for example you had a longer transition or in this particular area the maximum contribution wasn’t the right amount, I would listen to that.  Yes, I would certainly listen to that.  But would we scrap it?  No.

JOURNALIST:

Treasurer, you say that taxes…

TREASURER:

I don’t think the industry, well-advised, would want to scrap this proposal if I may say so.  I would be very surprised if they did.  And, you know, this has been an area crying out for reform for a long time and I think they will welcome it.

JOURNALIST:

Treasurer, you say the tax cuts…

TREASURER:

With two arms and two legs.

JOURNALIST:

Were delivered squarely to middle income Australian families.  How are those families being affected at the moment by petrol prices and the rate rises?

TREASURER:

Well those families are affected by petrol prices.  I make no bones about that.  Petrol prices are hurting motorists and that hurts families.  And I wish that world oil prices would come down because that is the only thing that is going to bring petrol prices down in Australia.  We have lived with these high prices now for months.  We thought they might be a temporary phenomenon.  They are proving to be much more enduring unfortunately, and we hope that at these sorts of price levels, two things will happen.  One, new producers will come on stream which will lessen prices and two, alternative fuels will become more competitive and that will also lessen prices.

JOURNALIST:

What has this Budget done for alternative fuels to become more competitive?

TREASURER:

We have an energy statement which has set out taxation treatment which gives concessional taxation to biodiesel; LPG.  We have had grants for biodiesel plants as part of our incentive to try and lift production by 2010, I think it is.  And what is making alternative fuels more competitive all the time is the higher price of oil and the high price of petrol.  Can I make this point, you know, I won’t make that point, Paul, I know you understand already.

JOURNALIST:

You say the superannuation plan is factored into the bottom line.  Can you tell us where in the bottom line it is factored in?  It’s not listed in your revenue measures or your expense measures.  If it continued for it to go ahead, (inaudible) something like $6 billion over the time frame, why isn’t it listed as a line item?

TREASURER:

Well, Karen, if you go to the Budget bottom line on page 1.3, you see the underlying cash balance.  It is factored into that like five hundred other programs which are not entered as line items.  It is a line item in a book all of its own.  That is why.

JOURNALIST:

Treasurer, the resources boom has maybe two years to run.  We are not going to have the record company tax take that we’ve had now forever.  The Budget Papers show that with an ageing population and a participation rate that is structurally trending down, so how can Australia afford this from medium to long term, budget cuts, tax cuts at this magnitude?

TREASURER:

Well I think we have taken a prudent view of the terms of trade.  Our view is that they are probably at a peak.  They will plateau, then they will turn down.  We have set out our assumptions here.  And I refer you to them in Budget Statement 3 on page 3-31.  Now, there are some people that say I am too cautious.  There are some people that say this boom will last three years.  I’m the one that has been the voice of caution here.  I’m the one that’s saying that we are not going to factor in increased prices beyond that and our bottom line is predicated upon a return to more normal levels in about two years.

JOURNALIST:

Mr Costello, if people are now able to blow their lump sum on a car and an overseas trip and then go back on the pension, what was the point of superannuation in the first place?

TREASURER:

Well, I’m not sure many people do, to be frank.  And the evidence of that is not great.  The idea that people would spend $50,000 or $60,000 in order to get the pension; the pension is not a lot of money, you know.  And if you have got $50,000 or $60,000 or $100,000, people would generally speaking, it seems to us, rather invest their $50,000, $60,000 or $100,000 rather than try and get onto the pension.  You don’t live that well on the pension and it has been said for years and years and years that taking lump sums allows people to blow them and get on the pension.  I have got to say to you as the lump sums are getting bigger, as people are becoming more aware of their retirement incomes, I think that is becoming less and less.  And of course it happens under the current system.  It could happen under this system.  But the technical advice is that it is not that prevalent and of course we do have some deeming rules which is designed to make it even harder.

JOURNALIST:

Treasurer, a year ago you told the National Press Club it would not be smart politically to reduce the top marginal rate because it would be portrayed as a gift for millionaires, what has changed?

TREASURER:

Well, we have cut all the other rates so I think it is fair to have an adjustment to those rates, that is the first point.  The second point is that our international benchmarking said we were above international practice.  That was the use, I think, of the international benchmarking study.  It didn’t say we were a long way outside of international practice but it showed that we were higher than the average and given the fact that we were higher than the average, I think that provided to me a very persuasive argument to bring us down to OECD levels.  We had the opportunity to do it and we’ve done it.

JOURNALIST:

Treasurer, the Prime Minister heads overseas on Friday.  Are you happy to do the selling of this Budget on your own?

TREASURER:

Sure, look, I have been involved in a few Budgets now.  I’m used to your curly questions and, you know, I’ll struggle manfully on in trying to answer them.

JOURNALIST:

Treasurer, Treasurer, given the…

TREASURER:

I know you are getting better year by year but I have also got a little bit of experience here.

JOURNALIST:

Treasurer, given the size of the surplus, do you think you could have been more encouraging than just $5 a week to people to have ‘one for the country’?

TREASURER:

Well, you see you have got me both ways because either the surplus is too small or it’s too big.

JOURNALIST:

Treasurer…

TREASURER:

You know, you are now saying somebody over here is saying it is too small, you have cut taxes by too much and you are saying, well, you could have given out benefits a bit larger.  So, you know, this is the point about these things, isn’t it.  Surplus is always too small unless it is too big.  But it is my job to actually, to try and decide what is sensible and reasonable in the circumstances.  The benchmark that I have tried to adopt is one per cent of GDP.  That, by the way, as you look back over the last nine years is better than average.  It is not the biggest we have ever had by the way.  People say this is the biggest surplus you have ever had.  It is not true.  The biggest we had was two per cent in 1999-2000.  It is miles in front of international practice and I think it is responsible.

JOURNALIST:

Treasurer, anyone over 60 would be silly to retire before July 2007.

TREASURER:

How old are you, Matt?

JOURNALIST:

I wasn’t thinking about myself.  I was thinking about the Prime Minister.

TREASURER:

Matt, you have got to read the fine print because these changes are for taxed superannuation funds.  MPs are on an untaxed superannuation fund.  So this wonderful thing doesn’t encompass them.

JOURNALIST:

So there’s no incentive for the Prime Minister to retire?

TREASURER:

So there is a small, comparable measure for untaxed superannuation funds but certainly I would say to anybody over 60, stay in the workforce, Matt.  Stay in the workforce if you are over 60.

JOURNALIST:

Mr Costello, in terms of your own future, you flagged the Essendon option, the Essendon option this morning you jokingly referred last week that you might return to the law.  Do you now expect that you will go to the 2007 election as Treasurer and would you commit to serving out a full term as Treasurer during that Government (inaudible) if there’s no change at the top?

TREASURER:

Sam, I am not going to do anything to promote any speculation.  I’m just not going to enter into those questions.  You know my views.  We are about to deliver a Budget and I don’t want to overshadow that in the slightest.

JOURNALIST:

Well Treasurer this Budget has been described as your love child.  Are you going to have another one for the country or (inaudible)?

TREASURER:

Well, I think I will leave it there.  I have had my one for the country and the rest is in the lap of the gods.  Thank you all very much.