Budget Lock-Up Press Conference

Committee Room 2R1

Parliament House, Canberra

Tuesday, 8 May 2006

4.35 pm

SUBJECTS: Budget 2007-08

TREASURER:

Ladies and gentlemen, let me give a brief overview of the key parameters of the 2007-2008 Budget. And let me begin also by thanking the Assistant Treasurer, Peter Dutton, the Parliamentary Secretary, Chris Pearce, and Nick Minchin, the Minister for Finance for all of the work that they have put into this. A Budget begins in October of each year and tonight is the culmination of pretty heavy work for over six months.

Our Budget will be in balance for 2007-2008. The second of those red bars, a Budget surplus of about 1 per cent of GDP. If you think in round terms, GDP is about a trillion dollars and $10 billion is one per cent of that. This will be the tenth surplus Budget that I have brought down, starting from 1996-1997 where the Budget was in deep deficit. We clawed it back over two years and it has produced 10 surpluses.

I am often asked whether I think this is a prudent surplus, whether I think spending measures in the Budget will put pressure on inflation or interest rates. I think one useful way of answering that is to compare Australia with other countries. The red in this graph is the budget position of comparable countries in 2007-08, the blue is the current year. You will see, whilst Australia runs surplus budgets of about 1 per cent of GPD, the Europeans, the OECD, the United Kingdom, the United States and Japan all run deficits of comparable size meaning that our budget position is at least 2 per cent of GDP stronger than those countries – and in fact probably one of the strongest positions in the world.

Over the last 10 years we have paid off all Commonwealth Government debt and as you can see in this year, we will be building an asset position – that is the assets held in the Future Fund will exceed the debt liabilities that the Government has and the reason why that comes down in 2007-08 is that the Future Fund matures and diversifies out of cash, the fixed interest into equities, the measure of net debt changes.

The consequence of paying off all Commonwealth Government debt is that our interest bill – and that is the red line there – has reduced to zero. In fact, shortly we will be coming in receipt of net interest payments rather than a payer of net interest payments and that is giving us a recurrent saving of $8½ billion a year.

The Government, after reducing debt to zero, is now beginning to fund its liabilities. You will see on this graph here that current liabilities, which are around $100 billion in respect to superannuation, are projected to grow to about $200 billion over the next four years.

Public sector superannuation schemes have been closed to new entrants so the grey and the red is declining and will gradually disappear. The only superannuation scheme that is still open – the blue one that you see there is the Defence Superannuation Scheme – and that is still a Defined Benefit Scheme. I was asked why the Commonwealth hasn’t closed that. We have not closed the Defence Scheme because we are trying to attract new people into Australia’s defence forces. We have a suite of measures to do that and to make the scheme less generous at time when you are trying to attract recruits would be counter-productive.

The yellow line that you see is how the Future Fund is now positioning us in relation to those liabilities. It is our aim to get that yellow line up to the blue line, that is to fully fund all our liabilities by 2020. You can see we are well on our way. The accumulation plus the earnings is that yellow line.

I make this point: if anybody takes earnings out of the Future Fund or capital out of the Future fund, it doesn’t grow like that. And we will not remain on track to meet those liabilities. And of course you know who I am talking about when I talk about ‘anyone.’

But because we now have a grip on those liabilities we can now begin another investment and in a moment I will talk about that other investment – the Higher Education Endowment Fund. Out of this year’s outcome we will invest $5 billion in the Higher Education Endowment Fund. And the other part of the Budget outcome will be invested in the Future Fund after the end of the financial year when we take a decision in relation to that.

Unemployment as you know, is now at 30 year lows of around 4½ per cent, our inflation rate is averaging 2½ per cent per annum and has over the last 10 years and for an economy which has had such a long period of expansion, which has low unemployment at 4½ per cent, the fact that inflation is as low as it is indicates that we are in pretty good shape. By this stage in previous cycles inflation would have been blowing out very badly. You can see for example under the Whitlam Government and the latter part of the Fraser Government, inflation was as high as 14 per cent. You can see the next time that unemployment came down at the end of the 80s, inflation was up around 8 per cent. You can see inflation dive when we went through the recession that we shouldn’t have had, but you can see that this is quite unusual that inflation is low with unemployment being as low as it is at the current time.

Australia has very high business investment going on at the moment – around about 15 per cent of GDP – and this will add to the capacity of the economy in years to come. Engineering and construction work is strong, and work yet to be done which is in the pipeline is extremely strong at the moment which will all add to increased capacity in the economy in the years ahead.

Having got to the position where we have now eliminated Commonwealth debt, where we are now well on our way to fund our liabilities, we decided that the time was right to make a new investment in Australia’s institutes of higher education. And in this Budget we established the Higher Education Endowment Fund.

The university sector in Australia combined today holds about $5 billion, a little over $5 billion in investments and endowments. That is the blue side of the graph. We are going to establish a new fund with a $5 billion contribution out of the outcome of this financial year. We will add to that fund out of the outcome of the next financial year and subsequent financial years with the aim of building a perpetual fund, the earnings of which will rebuild first-class institutions right around the country. You want me to put that in perspective, the largest university endowment fund in the world is Harvard University. It has about $28 billion in its endowment. The Australian total sector has about $5 billion, but after tonight’s Budget it will go to $10 billion.

We make two other offers in relation to this Higher Education Endowment Fund. The first is, if the universities wish us to manage their endowments, we will take that over for them and manage it. Take over the investments, give them economies of scale, of course the endowment would continue to belong to that particular university and would be dispersed in accordance with directions from that university. If private individuals want to make a contribution to this endowment, it will be tax deductible. It can be earmarked for a particular university and can be managed along with that endowment. The earnings on the Government’s endowment will be disbursed by an expert committee which will advise the relevant Minister. The earnings on the Government’s endowment of $5 billion should be $300-400 million per annum. The disbursement of that which will commence in 2008, the financial year 2008, after this has been set up and the earnings have been received, will be in accordance with an expert committee. If you get $400 million of earnings on $5 billion, it stands to reason that it will be $800 million if the fund goes to $10 billion, $1200 million if it goes to $15 billion. This endowment fund is bold, innovative. This is an endowment fund which will invest for the future. This is not spending, this is investment. The capital can not be touched. Only the earnings can be distributed between the Australian university sector and those earnings are in addition to recurrent funding. This is not a way of using earnings from the fund to cut other recurrent funding, in fact other recurrent funding is increasing. This is setting up forever a fund which is bold, which invests in the future, which will be Australia’s greatest ever educational endowment and which will set Australia up for generations.

In addition to that, in this Budget, we introduce a new reform of Australia’s education system. That reform is called ‘Realising Our Potential’. It involves building the universities, reforming literacy and numeracy in schools, improving apprenticeships and training better teachers. Some of the measures, which I’m sure you have seen in the documents are completely new. Summer schools for teachers that want to improve their skills. Vouchers for students who are falling behind in literacy and numeracy. And additional payments of course for apprenticeships.

The vouchers will be available to students who do not meet national benchmarks in Year 3, 5 or 7. You can see from this graph that 90 per cent, this is the blue line on writing, 90 per cent of Australian students hit the benchmark in Year 3, it is higher at Year 5 and a little lower again in Year 7. You can see for example, in relation to numeracy whilst 95 per cent of Australian students hit the benchmark at Year 3, it falls away by Year 7, only 80 per cent of Australian students hitting the national benchmark of numeracy in Year 7. Those students who do not hit the national benchmarks in Year 3, 5 and 7 will be entitled to a voucher. The voucher will be redeemable with private providers. The private providers will be able to give intensive and specialised tuition to those students to help them overcome, and to improve, and to catch up. This is a way of getting services directly to parents and students. You know the Commonwealth invests a lot of money by making payments to states. We have conditions on those payments but this is a way of cutting through state bureaucracies and going direct to parents and students.

We have provisions in this Budget to grow the number of apprentices in traditional trades to around about 160,000 in 2006.

The changes in relation to education, the changes in relation to apprenticeships, the changes in relation to literacy, numeracy are all about updating the skills of the Australian workforce and building productive capacity. This is a Budget to build the capacity of the Australian economy.

The second way in which we want to build capacity of the Australian economy is by giving sharper work incentives for people to join the workforce or maybe to increase their hours in the Australian workforce. This is done by, again for the fifth Budget in a row, cutting income taxes. In this case, in particular, cutting income taxes for people on average earnings of $30,000, $40,000 and $50,000. All Australians get a tax cut but that is where the benefits are greatest.

That is the current tax rates and thresholds. This Budget changes the rate on the 1^st of July 2007 by increasing that 15 per cent threshold from $25,000 to $30,000, so you will not pay above 15 per cent top marginal tax rate until your first dollar over $30,000. That applies to everybody of course. But for middle income earners who are down closer to those brackets, the percentage tax cut is greater. And for a person on average earnings in Australia, this is a tax cut of $16 a week. For those lower, it can be higher and under proposals to come in, from 1 July 2008 for those higher it can also be greater. On 1 July 2008, we will move those two upper thresholds so you will not go on the 40 per cent rate until you are above $80,000 in income and you will not go on the 45 per cent rate until you are above $180,000 of income.

Now there are some people that say, oh, well look, if I earn above $80,000 that means that all my income is taxed at 40 per cent. That is not right. Above $80,000, your first $6,000 is not taxed, your next $24,000 is taxed at 15 per cent. After that, at $30,000 you go onto the 30 per cent rate. It is only the dollars over $80,000 that are taxed at that 40 per cent rate.

Just to compare it another way, this is the tax system that the Government inherited when it came to office. Between $5,000 and $50,000 you would pay rates of 20, 34, 43 and 47. Between $5,000 and $50,000 now, you pay a rate of 15 and 30. All rates have been cut, all thresholds have been increased. And we illustrate how the benefits go mostly to people at middle incomes. In 2004, if you were on an income of $30,000, you paid tax of $5,172. If you were on $40,000, you paid tax of $8,172. Under the changes announced in this Budget, if you are on an income of $30,000, this is three years later in 2007, your tax bill has been cut from $5,172 to $2,850. A tax cut of 45 per cent in three years. At tax cut of 45 per cent in three years. At $40,000, a tax cut of 24 per cent in 3 years. At $50,000 a tax cut of 14 per cent in 3 years. This is all about sharpening work incentives. People who are working part-time, most people of $30,000 or less are working part time, to do additional work, to put in some more hours to build the capacity of the Australian workforce. The percentage cuts in tax which you see by that red line are greatest for lower income earners and although larger in dollar terms for upper income earners, in percentage terms less. I think you are quite familiar with that.

So this is a Budget which is designed to lock in the progress that we have made, it is designed to make sure that we keep living standards up. We share the benefits with some of those that are outside the workforce, particularly pensioners with a $500 bonus. We deposit some savings into the superannuation accounts of low and middle income earners. We heighten work incentives, particularly for middle income earners and bring more people back into the workforce, and we invest for the future. This is strong on economic management – strong on economic management to make Australia fit to face the challenges of the future from a position of strength.

JOURNALIST:

(inaudible) in terms of market based education revolution is going to completely take the cap off who’ll be accepted in universities, why do that? What protections are there inbuilt in this for student fess both full fees and student (inaudible)?

TREASURER:

Well what it says is that universities can offer more fee paying places; that is quite right. If they think that they can take in students and they can generate income from doing that, then we don’t see a problem with that. In relation to the bands however, of Commonwealth Government grants we are rationalising the bands, most of them are increasing. That is the Commonwealth is paying more money for most of the clusters, there is one I think that there isn’t, but for most of them more money. And the Commonwealth Government is increasing its investment. These are big changes for education. We haven’t seen changes like this for a long time and with the Higher Education Endowment Fund this will dramatically improve Australia’s education system.

JOURNALIST:

Education revolution perhaps?

TREASURER:

This is education reform which will make Australia’s education system 21^st century.

JOURNALIST:

You have delivered ten surplus budgets, why has is taken so long to throw the big bucks at education? Have you been spooked by the Rudd so called “education revolution”?

TREASURER:

The answer to the second part is no. Let me make this point, when the Australian budget was deep in deficit and when we had $96 billion of debt we didn’t have the capacity to do these things. These are the benefits you get from good economic management. People say well, what’s the point of good economic management? Well, the point of good economic management is that you get people in work and you can make big investments. Nobody in Australia has ever invested in a Higher Education Endowment Fund before. I don’t think anybody has ever thought of it before. And it couldn’t have been done before, because we were in debt. We were borrowing just to pay the welfare bill, now we are out of debt we can invest and we will invest.

JOURNALIST:

Mr Costello do you see the future of this Endowment Fund taking over from the Future Fund once the Future Fund becomes self sustaining? Are future Budget surpluses all going to be go into this Higher Education Endowment Fund?

TREASURER:

Yes it is our aim to get the Future Fund to a position where it can fund all of those liabilities. When it is in that position there won’t be any further investment in the Future Fund. We will have provisioned for the liability. From then on we will be building the Higher Education Fund and the earnings of the Higher Education Fund will go into the university sector.

JOURNALIST:

Aren’t you in effect lowering the Future Fund (inaudible)?

TREASURER:

Well I think I showed you Paul that the Future Fund is well on track to meet its liabilities.

JOURNALIST:

(inaudible)

TREASURER:

No, no, no Paul once you touch what you put into it you open the box up for all purposes.

JOURNALIST:

How (inaudible)?

TREASURER:

Let me make this point Paul, it is a very important point once the paw goes into the honey pot it claws all of the honey out. I’ve put the honey in there and I’m locking the honey against the paw.

JOURNALIST:

Is all of the balance of the available current surplus going into the Future Fund or (inaudible)?

TREASURER:

No, no some money is required for in-year financing. No, no I hear cynical laughs. By in-year financing what I mean is HECS loans. The Government lends money to HECS students. The Government also has to in-year finance because it makes a lot of payments out before it receives taxes in. The Government has very lumpy receipts and payments so it always has what is called

in-year financing. So the Government has its own financing requirements which is why by the way you’ll see people make wrong assumptions about monthly finance statistics from time to time. They don’t take into account that payments in and payments out are quite lumpy. So the Government has in-year financing. The Government also lends, it lends to particularly, the biggest lending is to HECS students, which is an interest free loan. So you set aside money for in-year financing, for HECS lending, $5 billion into the Endowment Fund and the remainder into the Future Fund.

JOURNALIST:

Does your Treasury think this is good policy?

TREASURER:

I think the Treasury wouldn’t have imagined this was possible in its wildest imaginations. Anybody in the Treasury who was working on Australian budgets back in the days when we were running budget deficits of 3 or 4 per cent and had $96 billion worth of debt and no provisioning for superannuation liabilities and no conception of a Higher Education Fund would think that this is an economic outcome which they couldn’t have imagined.

JOURNALIST:

How (inaudible) was China (inaudible)?

TREASURER:

Well the emergence of China has certainly increased commodity prices which have led to increased profits for mining companies and therefore that has been felt in relation to company taxes. But I see ridiculous figures bandied around about the effect of that by the way. I think company tax receipts are a little over $60 billion and the profits sector of the Australian economy which is contributing probably more than any other to company profits is the finance industry – the banks. Sure the mining companies are contributing but they are not the only contributors. There are companies like Safeway and Woolworths and Orica and manufacturers that also pay company taxes. If you listen to some people you would think that the only companies that pay tax in this country are mining companies. That’s not the case.

JOURNALIST:

How does this budget rank against previous budgets? Do you think it is the best ever?

TREASURER:

Well there is always something round about the full dozen and this rounds off a full dozen.

JOURNALIST:

(inaudible) this is day one of your re-election campaign? Is it not?

TREASURER:

You know I have always believed that if you get the economics right the politics will follow. If you get people in jobs, if people can afford their houses, if business is profitable, if you are investing in education and health and aged care, all the things you should be, the politics will look after itself. That is why I concentrate on getting the economics right. If you get the economics wrong, if people lose their job or people go about creating a recession we had to have, the politics can’t reconcile the situation and this is all about getting the economics right.

JOURNALIST:

Have you done enough in this budget to stop the momentum of Kevin Rudd?

TREASURER:

Look I’m not focusing on political momentum, I’m focusing on what’s right for the Australian economy. Let me make this point, long after I am gone the Future Fund will be there to meet the liabilities which we never had the wit to fund. Long after I am gone we will have a Higher Education Fund which will be building a sector in this country that we can all be proud of. These things will be around for generations if you can stop politicians getting their paws on the honey. These things will be around for generations long after all of us have gone. This is huge reform you are talking about here, and you know I wish when I had become the Treasurer somebody had presented the Future Fund for me and said all superannuation is now covered, or an endowment fund which said that the whole university sector is now covered. Nobody was doing that. These are huge reforms and I want them to be around long, long after I have left the political scene.

JOURNALIST:

Do you see the future of funding for programmes or problem areas, like can we expect to see, for example, a future fund for health, if not why not?

TREASURER:

The thing about health is getting your programmes right; your Medicare Benefits Schedule; your Pharmaceutical Benefits Schedule. The Commonwealth doesn’t run hospitals. But the things that we do run I want to get right. The thing about health is going to be getting it on a sustainable footing for the next four years.

JOURNALIST:

Treasurer, you have got about $70 billion in new spending – are you confident that this will not put pressure on interest rates and secondly for the history books – are you claiming to be the inventor of this higher education fund?

TREASURER:

Well, unless you are going to point me to some other piece of literature that I inadvertently read and dreamed about, I think it was my idea, but I am willing to share it with you if it was yours. You know, you said something then – $70 billion in spending?

JOURNALIST:

That is right.

TREASURER:

I presume by that you include $30 billion in tax cuts? I think there is a difference – this idea that is getting around that when you cut tax it is spending – it is not spending. It is not taking in. Spending is taking something in then spending it. This is tax cuts. The funny situation getting around if you say $30 billion of tax cuts is somehow spending – it is not. It is quite different. And, by the way, I do not even know where you get the other 40 from, so, let me just move on from there.

JOURNALIST:

Treasurer, you have got a hold on (inaudible) but how is that anything other than a vote buying exercise?

TREASURER:

Well, there is a $500 bonus for pensioners and a bonus for carers – those that are on the Carer’s payment and those on the Carer’s Allowance for the fourth year in a row. I have done that the last three years, by the way…

JOURNALIST:

(inaudible)

TREASURER:

Well, I will come back to superannuants in a moment. So, I have done that for four years, I think it has been well worth it. And if you know anybody who is a carer I think you would say that it is a bonus for them for caring for somebody who needs them and who might otherwise be in an institution; it is good policy. Now in relation to a bonus for pensioners let’s put this in context. The Age Pension is about $13,000 a year. We have had strong economic growth. The pension has grown with wages. And I think reaching out to an aged pensioner with a $500 payment is quite responsible. If anybody wants to say that they do not think that pensioners should get a bonus let them say so. Let them vote against it in the Parliament. I will be very surprised if anybody does incidentally…

JOURNALIST:

Treasurer…

TREASURER:

I was then going to say something about superannuation. I think the good thing about the superannuation is that it helps lower income earners but it does not spend money. It saves it. What you are in fact seeing here is the Government is taking $1 billion, and by putting it into the accounts of lower and middle income earners and into their savings – you are moving it from Government savings to private savings but it still saves. And the savings is there preserved until they are 60.

JOURNALIST:

Treasurer you are cutting tax, income tax, again and massively at a time when the economy is running full speed and to capacity – how does that not put upward pressure on interest rates?

TREASURER:

Well, it is true that we are cutting tax, I think we are cutting tax for the fifth year in a row. It is actually a good thing. You know, keeping your tax burden as low as is responsible is a good thing. This idea that somehow it is good to have high taxes – we actually believe in low taxes. I think Australia is the eighth lowest taxing nation in the OECD. So if we are the eighth lowest taxing nation in the OECD how do we balance our Budget? You know what – we are the second lowest spending Government in the OECD. Now let me give you an interesting statistic, people do not know this – spending to GDP in Australia is lower than it is in the United States. We are a lower spending Government than the United States. Now, you say ‘oh well, if you cut taxes won’t that put pressure on inflation?’ – well, after we cut tax the Budget is still in surplus. It is in surplus by

1 per cent of GDP. After we cut tax. And if you think that is irresponsible let’s look at international practice. The United States cut taxes and their Budget is 3 per cent in deficit – that is a 4 per cent difference. 4 per cent in the Australian economy of GDP is $40 billion. So after we cut taxes our bottom line is $40 billion better than the United States.

JOURNALIST:

You’ve done relatively little for the greatest economic challenge that is facing Australia on global climate change – do you intend to do any more about this?

TREASURER:

Well Dennis can I say in answer to your question – the Government will be receiving the report of the taskforce on emissions trading, I think next month, and then obviously we will be doing more on that. There is no doubt about that because we have not got that report. But, when you say what have we done I would direct you to this table in the green book – Protecting Australia’s Future, the appendix on page 22 – the environment measures and they are not all greenhouse related, but they are all environment related, over four years is $19 billion and in 2007-08 $4.3 billion. And we have got our Australian Greenhouse Office programme, we have got our Asia Pacific Partnership on Clean Development, we have got our Global Initiative on Forests and Climate, we have got, in this Budget, the Natural Heritage Trust, our low emissions technology demonstration fund, our Solar Cities programme, our photovoltaic rebates, our carbon sink forests. Pretty big suite of measures. Our new climate adaptation centre. New money to the CSIRO to do climate change work. I think it is a pretty extensive programme.

JOURNALIST:

(inaudible)

TREASURER:

Too much (inaudible)

JOURNALIST:

(inaudible)

TREASURER:

Yes, Fran first.

JOURNALIST:

(inaudible)

TREASURER:

No, we don’t…

JOURNALIST:

(inaudible) funding for Iraq and Afghanistan falls dramatically (inaudible) withdrawal (inaudible)?

TREASURER:

No. The way it works is that the Government decides on rotation – every time rotations come up the Government decides on rotations – and at that point we add the funding in. So that if our commitment is still going we will add the funding in then. It is just that the decisions that have been taken to date for the rotations that we have agreed are only out to that date. Fran?

JOURNALIST:

Treasurer, I was wondering $40 billion (inaudible) tax cuts is not necessarily right for the new spending, what is?

TREASURER:

Well Fran I will go through all the measures and then I will give it to you.

JOURNALIST:

I thought you might (inaudible)

TREASURER:

Well I can take you through all of the measures document yes. It is in Budget Paper Number 2, it is in the table of expenses starting at page 29, and if you add all of those up, you can do it over one year or four, that will give you the forward expense total – but these are expenses, these do not include revenue and I said to you – the total impact of expense measure is 6.3, 7.9, 10.4 and 11. These do not include revenues.

JOURNALIST:

Isn’t that spending taking investment away from other sections of the economy?

TREASURER:

I do not think so, no.

JOURNALIST:

Your Treasury warned you beforehand?

TREASURER:

I do not think that is quite a proper reading.

JOURNALIST:

How much do you assume will be a drought turnaround in this Budget?

TREASURER:

The Budget assumes a return to normal seasonal conditions. Which means that it would rain at average levels, it would not entirely break the drought. But it would improve the drought – if we got above average rain you would get a bigger improvement, if we got less than average rain we would get a detraction.

JOURNALIST:

So how does that affect your costings and (inaudible) turnaround at all?

TREASURER:

If we do not get a turnaround then drought assistance, rather than being about $680 million in

2007-08 will be larger, it would… you know I think that is my fade out music. Thank you all very much.