Q&A Session

National Press Club

Wednesday, 10 May 2006

1 pm

SUBJECTS: Budget 2006-07

CHAIR:

Thank you Treasurer, as usual our period of media questions today and the first one is from Laura Tingle.

JOURNALIST:

Laura Tingle from the Financial Review, Treasurer. On superannuation you have announced this is a plan which you want to consult on, could you clarify the sorts of issues on which you are prepared to consult and in particular would that encompass some sort of transitional arrangements for people who may be about to retire and also people who had retired who may feel that they are missing out on this largess that starts in July next year and what would you say to them about the fact that they don’t seem to be getting any part of this?

TREASURER:

Well people who are in retirement after 1 July 2007 will get the benefit of not paying tax in relation to their benefits. I suppose if it is a lump sum it is gone but if they have a taxation liability in respect to superannuation they will get the benefit. Can I come to the question on which we are prepared to consult, you put your finger right on it, Laura, transitions would be the area where we would be quite prepared to consult. Now, I know this is eye glazing stuff but just try and bear with me if you can. At the moment if you are under 35 you can put $14,600 roughly into superannuation, if you are 35 to 49 you can put $40,560 into superannuation and if you are 50 to 69 you can put $100,587. These are aged based limits. I don’t know if anybody actually knows all of this stuff but this is the law just out of interest.

What we are proposing to do instead of having these aged based limits is just say anybody, any age, $50,000. Okay. Now obviously that is much more generous for younger people in the current system. But it is less generous for people who are in that 50 to 69, right? Now, they may say, oh well, I was really gearing up for a big contribution in the last years of my life and now you are limiting it to $50,000. So you would have to have a transition for them and we put in our proposal a proposed transition and we are prepared to consult in relation to that. But other than that we are not consulting on the principle of no end benefits tax, that is policy, that is going to be introduced, that is the simplification, that is the reform, that is happening, we are not consulting on the date, that is happening, that is going to be done on 1 July 2007, we are not consulting on the core of this proposal but we are open for really, really difficult and technical and transitional issues to some discussion and we will give people a fair hearing before announcing the final nature of transitionals and the like.

CHAIR:

Thank you. The next question is from Mark Riley.

JOURNALIST:

Mark Riley, Treasurer, from the Seven Network. Quite an achievement in your Budget last night, I think the forth consecutive year that you have delivered income tax cuts and with an election next year we expect there will be a fifth and so do the voters. And I guess that brings on a rather virtuous problem which

TREASURER:

(Inaudible) on their behalf.

JOURNALIST:

I do, on the voice of the voters, Sir, the voters I represent, say that there may be a virtuous problem in this for you that now there is an embedded belief that Peter Costello the Treasurer delivers income tax cuts every year and that they will be expecting them not just in your eleventh and twelfth but your fifteenth and sixteenth that I know you dearly want to deliver yourself. What you know in your forward estimates, for how long can you keep continuing to deliver income tax cuts? How many years?

TREASURER:

Well you see the principle here I think is to get the taxation system to a structural shape which is full of incentive, raises the required revenue and is internationally competitive. Now, if we got to that situation we could stop. We could say, well there it is, it is now in the final form, it is state of the art, it will last for a long time and we could stop and at that point we could say to people well we don’t need to reform anymore. Will we ever get to that stage? I don’t think so. You have heard the expression Mark, haven’t you, two things are certain in life, death and taxes and you know, I warrant Mark, when you are here covering your 35 th Budget in 20 years time somebody will be standing here and they will still be talking about tax reform. I will warrant and it won’t be me. Somebody will still be standing here talking about tax reform because it is as certain as things are in life. Now, if we’d have just said, oh well, take the system as we find it and index it, it will be vastly worse than it will be on the 1 st of July. If you were really confident that that is the ideal tax system, I suppose you could index it and say that’s it but we have always got to keep an to what is happening internationally, what the opportunities are and when you get the opportunities you take them. You may not have opportunities to continue doing this in the future, that is why you do it when you can and that is why we have done it.

CHAIR:

Thank you, the next question is from Andrew Fraser.

JOURNALIST:

Treasurer Andrew Fraser, Canberra Times, when we were last chatting in this forum we touched on succession theory as practised at your football club Essendon, at that time they had just elevated the very talented leading goal kicker Matthew Lloyd to the captaincy albeit with the old captain in the side with him. Since then Lloyd began the season magnificently, a win over the premiers but he has now been struck down by injury, out for the year. Initially the club reinstalled the old captain to great popular acclaim but to no victories and now they changed their mind again and gone for an even younger captain, perhaps one of the youngest in the league. Treasurer is there ever a point in football or elsewhere, where some players however great and gifted just have to accept that perhaps a fair crack at the captaincy is beyond them?

TREASURER:

You know Matthew Lloyd who is tried and proven and a star and a wonderful goal kicker and had led the team to many victories and became captain and was struck down by injury, when he did his hamstring and I want to say to you Andrew before I present a Budget I always stretch my hamstring.

I am never going into that chamber without a proper warm up.

CHAIR:

Question from Shane Wright, sorry it is Michael Brissenden.

JOURNALIST:

Michael Brissenden, ABC television Treasurer. I am just wondering, and you picked up yourself on the fact that the commodities boom has been going on for some years and it is going on for another couple of years. In your quieter moments do you ever reflect on the fortune that history has delivered to you or has it all been skilful management to get to this point?

TREASURER:

Well Michael, you see we have been in a commodity boom in recent years since, what would you say there, since about 2003. Have a look what would you say, the long term average of that index is about 100. Maybe we have been in a commodity boom in the last year or two. I have been Treasurer now for ten. And let me tell you before we had a commodity boom we had a commodity dive. Nobody thought I was lucky at that point, in fact most of you were writing that I was complacent, I was backing the old economy when we should get into the new.

I will never forget Bill Gates being out here at the World Economic Forum in Melbourne when they had the siege at the Crown Casino. The Australian dollar had gone through 50 cents. The Sydney Morning Herald headline was Australia Hits the Wall. The Age wrote Recession Looms sorry to remind you of these things. You know, nobody was forecasting a commodities boom. We were the people that had missed the whole new economy. No, our fortune was not good then, nor was our fortune good during the Asian financial crisis, when we had the greatest economic threat to the region, nor was our fortune good in 2000 when the US went into recession and there was a global downturn. These were tough times. Now it is true that commodities have been very strong in the last year or two. But that is not the story of the last ten, far from it. And let me make another point, even in a commodities boom and it is good in the sense that it brings income into the country, there are flip sides you know.

One of the flip sides to this is an extraordinarily high exchange rate and that is making life difficult for manufacturers, I acknowledge that. Now let me take you back to 2000 when Australia had hit the wall according to some newspapers. We had an exchange rate of 47 cents back then. That was good for manufactures, that was really good. They were good days, it was bad for mining, so I have got to say to you there are challenges out there and they keep coming. Another flip side of strong commodities is higher oil prices. High oil prices in a way is just a sub set of strong commodities, so what is good for us on gas and coal is bad for us on oil and that is creating its own problems. So you take things as you find them and I would say we found some terrible, terrible challenges, particularly the Asian financial crisis in the early days, it is not as bad now but Michael, other challenges will come and the most important thing for Australia is we prepare for them.

Let me just put another thought into your mind, look at the last time. We had better terms of trade than this, back in the mid seventies and again high oil prices are always part of a commodities boom. Remember how the mid seventies ended? It ended in the chaos of the Whitlam Government so you can mark an economy up on high terms of trade that does not take much ability at all, it can be quite easily done and it has been in the past and the most important thing is to make sure it does not happen now.

CHAIR:

Next question is from Shane Wright.

JOURNALIST:

Shane Wright from Australian Associated Press. One of the forecasts in last nights Budget was the current account deficit increasing. When you talk about challenges facing the Australian economy is that one of them considering the benefit that is flowing from commodities prices and I noted that S&P over night said net debt, debt, despite debt being held in private hands there was a contingent risk to the Government because of the continuing high current account deficit?

TREASURER:

The current account deficit is high and we acknowledge that and we are looking to export growth to narrow it. When was the last time we had a current account surplus? Back in 2000, 2001 when the Australian dollar was at 47 cents. Now what this is illustrating is a big exchange rate effect, because the exchange rate is high your imports are becoming cheap and it is one of the reasons why you run a deficit. But I have learnt and I learnt in 2000 nothing fixes a trade imbalance like a currency adjustment.

That was generally considered a very bad thing in 2000 where we are going through the flip side effect now and that is one of the reason why you are seeing it where it is. But I am also very confident that as we lift production in our export industries with the huge investment that is now going in to our export industries particularly in the mining industry we will start lifting capacity, and when we start lifting capacity that will be positive in relation to the current account.

CHAIR:

Andrew Probyn

JOURNALIST:

Treasurer, Andrew Probyn from the West Australian. On superannuation you described the 1988 decision by Paul Keating to put the 15 per cent contribution tax as a bad one and yet in the same breath you are saying that it is too complex to access. Given that you are always reminding us of the complexity of the tax system and the fact that we should be fixing it are you simply ruling out tackling this complexity or are you saying that it will have to be tackled eventually.

JOURNALIST:

No if we take tax off end benefits as we will it will stay on contributions, that is a quid pro quo. You will not be taking it off both. You will either take it off contributions or the end benefits but you will not be taking it off both because at that point because it will be totally untaxed. Now, the decision to bring the contributions tax in, in 1988, was a decision to move the taxing point which, up until that point had been wholly on end benefits, in part on contributions and in part on end benefits. And I have always been very fair to Mr Keating about this. I have never claimed that it was a new tax, it was a bring forward. Up until then, the whole of the tax was on end benefits and they brought part of it forward and they put it on contributions. Now, having that being done there were two things you could do: you could go back to where it was, take it off contributions and increase the tax on end benefits, or you could say leave it where it is and take the tax off end benefits. After looking at this very carefully I came to the conclusion that if you took it off contributions and put it all back on end benefits, that is lower rate or no rate on contributions but a much higher rate on end benefits, you would only make the system more complex. You would still have, if I could go to my lump sum chart, all of those things. But, you would have new treatment now. Treatment of pre and post 2006 contributions. Because some of the money in your superannuation account would have borne contributions tax and presumably money after 2006 would not have. So rather than just having sort of eight tax treatments you would now have to have ten tax treatments. The complexity would have got worse. You would not have got rid of that, you would have just increased it, and so we believe that the only way to cut through all of that was to take the taxes off the end benefits. That decision having been made in 1988, the egg having been scrambled, we did not want to scramble it further, we did not want to move from scrambled eggs to an omelette, what we wanted to do was we wanted to go back and simplify things, and that is what we have done with this proposal.

JOURNALIST:

Malcolm Farr from the Daily Telegraph Treasurer. A $30 a week tax cut is worth more to somebody in Adelaide than to somebody in Sydney because Sydney is a more expensive place to live in. How much of a factor is the Sydney economy in shaping the national economy, is there any way that is can be isolated in terms of its treatment by the Federal Government?

TREASURER:

Well look, Sydney is Australia’s largest city. It therefore, as a city, has more influence on the national economy than any other city. New South Wales is the largest state it therefore has more influence on the national economy than any of the other states. But, Malcolm, in a national economy and in one country, you cannot really run one economic policy for one state and another for another. Let’s suppose we never federate, you know, we still had the colony or the country of New South Wales and the colony or the country of Victoria, now suppose we had these different countries, which by the way would be as big as or if not bigger than New Zealand, suppose we had New Zealand North and New Zealand South, you would then presumably, if they had not had federated, have two central banks. You presumably could then be running a monetary policy for New Zealand North, which would be New South Wales, and one for New Zealand South, which would be Victoria. You could do that and you could actually run a separate economic policy, you could actually run a separate tax system. And, would it be more attuned to the particular city or the state? Yes it would. But it would go against the national economy. Let’s go to Europe for example in Europe they have just multiplied this figure, they have got one central bank with one interest rate, which applies to Italy, France, Germany and a whole host of other countries. Is the Italian economy different to the French economy? Yes. Is the German economy different to the Spanish economy? Yes. But, they have decided in the interests of free trade and a common economic block they will have one interest rate. Now, that means it is an average. It might be better for Italy than it is for Germany or better for France than it is for Spain, but that is what happens. It is the same in Australia, the colonies federated, they are part of a national economy, we only have one monetary policy, we only have one tax policy, it is got to be pitched at an average which is good for the whole, but it will have different effects on the different economies. And you cannot get away from that. This dye was set at the time of Federation and it cannot be undone. We cannot run an official cash rate for New South Wales and another one for Victoria. Nor under the Constitution can we run an income tax rate in New South Wales and another in Victoria. It cannot be done. That is nationalism and you have got take the good with the bad.

JOURNALIST:

Treasurer, Greg Turnbull from the Ten Network. It is easy to see what would have appealed to you about the numbers you have arrived at in the tax reforms that you announced last night, there is the rates at 15, 30, 40 and 45 and the thresholds at roughly 25, 75 and 150, they are a symmetrical, even beautiful, set of numbers. But, I wonder if in what you have picked up in symmetry you have lost in progressivity and equity and my question to you is this: given that I think you must accept that someone on $74,000 a year’s income has a higher living standard than say someone on $26,000 a year income, why should they have the same marginal tax rate?

TREASURER:

Well, they do have the same marginal tax rate, but bear in mind, even though it is the same rate they pay different amounts of tax. The person on 30 cents of $24,000 pays is it, correct me if I am wrong here, three times 2.4? 7.2? $7,200? The person on $74,000 pays 74 times 0.3 which is roughly, maybe 20. So, even though they are on the same rate they are paying vastly different amounts of tax, same rate but different income yields different amounts of tax. Thirty per cent of $24,000 compared to 30 per cent of $74,000. Now on your other point, it is true that reducing the top tax rate does reduce the progressivity to some extent. That is true. But if you wanted a more progressive system and if you think it is a weakness to have somebody on $24,000 paying 30 cents and somebody on $74,000 paying 30 cents, you would really favour a tax system that had a 30 per cent rate at $24,000 and 31 at $25,000 and a 32 at $26,000 and whatever it is. You would favour multiple rates moving at small thresholds. That is what you would favour. And what is the downside of that? Well, you may say equity, but the downside of that is every time there is pay raise you would have massive bracket creep as people move into different rates. And so the general thinking in tax policy, and it has certainly been my thinking, is that we should have fewer rates and that they should be lower, rather than multiple rates and that they should vary. And that has been the direction of the Australian taxation system probably from the 50s and the 60s.

You see, if you were right, Greg, we shouldn’t even have a top rate of 45 because you could say why should a person on $150,000 be at 45 and a person on $1,000,000 be at 45? And you would argue that we should go 45, 50, 55, 60. We used to do that in Australia. Our top tax rate in the 50s I think was 66 per cent. The British used to do that post-war. I think in the Scandinavian countries in the name of progressivity, they got top marginal rates up to about 98 per cent at one point. And that was the post-war thinking and then people began to realise that what you gained on equity through progressivity, you began to lose in incentive, in economic development and it was much better to try and have fewer rates and have them flatter and that is the direction that we’ve been moving.

CHAIR:

Given our time constraints the next question might have to be the last and it is from Scott Murdoch.

JOURNALIST:

Treasurer, Scott Murdoch from News Limited. From last night’s numbers the average worker in Australia gets a direct income tax cut of about $10 a week. As fuel prices go higher, will that amount be absorbed by that and how confident are you on a micro-economic situation with households doing something sensible with their tax cuts rather than buying Ipods or plasma TVs like they have done with family tax benefits?

TREASURER:

Buying TVs did you say? Well, Scott, you know, I am sure you wouldn’t approve of them buying TVs but if they used their money to buy newspapers Look, the good thing about this Budget is it puts money back in people’s pockets, through tax cuts and through family benefits. I know costs of living have gone up. And I know that fuel is one area where it has gone up a great deal and the best thing you can do I believe is put money back into people’s pockets. That’s positive. Now will people spend this money or will they save it? Well, I am trying to make it attractive for people to save it through superannuation, and I think superannuation got a whole lot more attractive last night.

So if they had the capacity to put some aside, I would encourage them to do so. If they don’t have the capacity, well, obviously they need it to meet the bills. But I come back to really where I started, Scott, and that is this, people will meet the bills better in a growing economy where they have got jobs, where they have got jobs. And that is the overall focus of economic policy, to make sure that those who that want to work, can find work because at the end of day, nobody was ever helped to pay a bill when they were out of work. And with unemployment now at a 30 year low, conditions are better than they were five years ago and ten years ago and they are better than they have been for a very long period of time. Good economic policy brings those kinds of results and that is what we are dedicated to continuing. Thank you very much.