Budget – Budget Lock-up Press Conference

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Budget; higher education; CSIRO; economy; Governor-General
May 12, 2003
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May 14, 2003
Budget; higher education; CSIRO; economy; Governor-General
May 12, 2003
Budget – Address to the National Press Club
May 14, 2003

Budget – Budget Lock-up Press Conference


Budget Lock-up Press Conference

Parliament House, Canberra

Tuesday, 13 May 2003

4.45 pm



Well the Budget Press Conference wouldn’t be the same without my charts, so

if you will indulge me, very briefly I will run through my charts and I will

stop on the one which I think will interest you the most and try and address

some comments to it.

The Budget forecasts a surplus in the forthcoming financial year – an underlying

cash surplus of $2.2 billion – with a somewhat stronger outcome for 2002-03

of $3.9 billion and forecasts surpluses across the forward estimates. This is

the Government’s sixth consecutive surplus, having inherited the Budget position

as you know, back there, and put the Budget in surplus over the first two years

of its first term.

This is pretty unusual by world standards, nearly all of the developed economies

of the world are in deep deficit. The United States is forecasting deficits

of about 4 per cent of GDP in 2004, which in Australian terms would be a Budget

deficit in Australia of $30 billion. If our financial position were the same

as the United States this Budget would be in deficit by $30 billion. If our

Budget position were the same as Japan it would be worse. If our Budget position

were the same as the UK it would be about 3 per cent of GDP, our Budget would

be in deficit by about $21-22 billion.

The OECD average is, as you can see in the current and forthcoming year, nearly

4 per cent. So although our Budget surpluses are what I would describe as moderate,

they are pretty unusual compared to the rest of the developed world.

Growth will not be as strong in the next financial year, as we got used to

in the late 1990s, we were averaging nearly 4 per cent per annum. In this year

growth is 3 per cent, that is principally a consequence of international events

and the domestic drought. We estimate that the drought has knocked about 1 per

cent off GDP in the current financial year. That is, absent the drought growth

would have been 4 per cent, with the drought it has been 3. Notwithstanding

difficulties in the international environment, we are forecasting growth to

be a little stronger than this financial year at 3¼ per cent compared to

3 per cent.

By world comparisons that is still strong. As you can see here it is stronger

than the United Kingdom, the Euro area, the US and Japan. And again next year

we expect to be stronger than the UK, Euro, US and Japan.

What is being a brake on Australian growth to some degree is what is happening

in these other countries. A US recovery would be good for world growth and Australian

growth. Japan is our largest trading partner, you can see Japan is still very

subdued, and Europe and the UK is weak.

So what are the challenges to the economy in the year ahead? A weak international

environment, geopolitical tensions, SARS. What are the domestic challenges that

we face? Well, although the drought has broken in some areas, it has not broken

completely. We are forecasting a big rebound in growth in the rural sector but

the drought is still very severe in some parts of Western New South Wales and

Victoria. And that will be a brake on Australian growth.

We say in the Budget Economic Statement, Statement 3, that there are more than

usual risks to the near term outlook for Australia. How they will play out,

let’s wait and see. Farm incomes as you can see were very, very subdued in this

financial year, about $2 billion, coming off $12 billion, admittedly this was

a high. Farm incomes were slashed to a sixth of their value. The downturn in

the rural sector was very, very extensive. We are forecasting a recovery but

not really that much above the medium term average, much better of course than

we had in 2002-03 but certainly not of the dimensions that we got in those years

around 2000-2001.

You know the jobs story. I will stop here for a while. Well, if you like I

could take you through it again. This is the Commonwealth net debt position.

This is where we were in 1990 with debt about 5 per cent of GDP, these are the

five Labor deficits accumulating up to $96 billion of Commonwealth debt, these

are the Coalition Budget surpluses and asset sales, one, two, three, four, five,

six. We expect that our net debt in 2003-04, after all of the measures, will

be 3.7 per cent of GDP. Now by world standards this is incredibly low. Here

is Australia’s debt to GDP ratio, the European Union, the United States, and

the thing about these countries of course is because they are running deficits

their debt is growing, because we are running surpluses our debt is falling.

Incidentally even if you held your debt constant it would fall as a ratio to

GDP if your economy was still growing.

Now, the reason I make this point is that if we were to run a bigger surplus

in the 2003-04 year, at the end of the day if you run a surplus, you have to

do something with the money. And what we have been doing over the last five

and six years is we have been retiring debt. If we run a surplus of $2.2 billion,

we retire $2.2 billion worth of debt. If we run a surplus of $4.6, we would

retire $4.6 billion worth of debt. At the end of the day if you have a surplus,

what you do with it is you retire debt. If you spend it, you no longer have

that surplus. You can spend a surplus in two ways, you can increase expenses,

you can reduce taxes.

We took the decision that with Australia’s debt to GDP ratio so low by international

comparison with the debt to GDP ratio at 3.7 per cent of GDP forecast in 2003-04,

that rather than run a $4½ billion surplus, we could run a $2.2 billion

surplus and return $2.4 billion of that to the taxpayer. The point I am trying

to make here is, if we hadn’t have cut taxes the surplus would have been larger,

we would have retired more debt. I took the decision, the Government took the

decision that it would be a better investment to cut taxes and to return some

of that surplus to the taxpayer. We could have increased expenses but we decided

to cut taxes.

The tax cut is done in two ways. One is by increasing the low income tax offset,

increasing the amount and increasing its applicability. So it applies to people

on higher incomes and it phases out over a long period of time. And that is

an offset against your tax liability. This low income tax offset is not a new

feature of the Australian taxation system, from memory it was introduced as,

by Treasurer Dawkins, as part of an attempt to get Senate support for the 2

per cent wholesale sales tax increase in the horror 1994 budget, ’94 budget

or was it the ’93 budget? The ’93 budget. Who could forget the ’93 budget? We

retained that feature as part of the New Tax System and as I said, we have increased

the amount of the offset by $85, so you’ve got another $85 to offset against

your tax liability and we have increased the area where it applies. So it will

now apply fully up to [$21,600] and partially to $27,475.

We have also increased tax thresholds. Those on the 17 per cent rate will be

able to stay on that to $21,600, those on the 30 per cent rate – up to [$52,000],

those on the 42 per cent rate – up to $62,500. And that’s why you get, everybody

in that range gets the same tax cut, everybody in the next range, up to $62,500,

gets the same tax cut, everybody above $62,500 gets the same tax cut – but in

percentage terms, compared to the tax they’re paying, it’s a lower percentage,

the more tax they’re paying, the higher their income. And because this is a

low income tax offset, these people are being compensated through an offset,

they get a much larger percentage reduction in their tax liability. If you’re

on $10,000, it’s a 16 per cent reduction in your current tax liability.

The reason you have a spike in this area here, is in that area there you get

the benefit because of the changes in the applicability of both the increase

in the low income tax offset and the movement in that threshold from $20,000

to $21,600. So the biggest beneficiaries here, the reason it spikes here, is

they’re getting the benefit of both of those changes. Now there will be a lot

of people, very low income earners, in that area. There will also be a lot of

part-time workers. I would imagine there will be a lot of married women, working

part time, who would be between $20,000 and $27,000, would get the benefit there.

Of course, if they’re married, their partner might be up here, both of them

will get tax cuts. This cuts tax for every Australian.

The other features of the Budget, very quickly, defence spending, you would

have seen this in the glossy, I talk about the layers of defence spending, the

underlying funding, the build up of the Defence White Paper, the East Timor

commitment and the continuing Iraq commitment and we are maintaining the funding

of the Iraq commitment for enhanced operational capability. And additional funding

coming out of this Budget in relation to upgrading of the expenses for special

operations commands and other things. Defence spending in the 2003/04 year will

top $15 billion. Security funding is also beefed up as you know.

Can I just say in relation to higher education, there are really three parts

of this package; there is an increase in operating grants to higher education

institutions, there is a reform package, which will give higher education institutions

new flexibility, including flexibility in relation to fees, and there is a new

loans program, with some people being eligible to get loans who’ve never been

eligible, including those that are full fee paying (inaudible)…

One last thing, all GST distributed to the States, as you know – $32 billion

in 2003/04. Queensland, Western Australia, Tasmania, ACT and the Northern Territory

are now in front of the guaranteed minimum amount. That is, they are now receiving

windfall funding from the GST. We guarantee a minimum amount of the taxes that

they abolished, to make up for the taxes that they abolished, [three] States

and two territories are now in front of that. Victoria and New South Wales not

yet, because they’re still subject to fiscal equalisation. But the States, much

earlier than predicted, have become net beneficiaries of GST revenue.

Can I just come back to the tax changes, which I think will be of most interest.

Why did we cut tax? Well we cut tax because our balance sheet is strong, we

can meet our expenses, it is right to return to the taxpayers in those situations,

and our view is, when your Budget is in surplus and you’re meeting your expenditures,

taxes should be as low as they can be, consistent with good economic policy.

That’s why we’re cutting tax in this Budget.


Treasurer, your tax cuts don’t amount to the extra amount of money the Australian

citizens are going to be paying in your GST taxes this year.


With what?


They’re going to be the same, they’re not going to be as high as the extra

amount of money that Australians will be paying in GST taxes this year, Commonwealth

GST taxes.


Well, that is wrong. The income tax cuts are $2.4 billion, from memory GST was

about $1 billion over the MYEFO. GST is an indirect tax which is 10 per cent

on goods and services, all revenues go to the States. We said at the time that

we reformed the Commonwealth-State Financial Relations it would produce a better

deal for the States. It has. And I think it was one of the long-term reforms

that have been good for this country and this economy and…


But people are still net out of pocket, through taxes, aren’t they?


No they do not.


Treasurer, can you please, I think, my understanding of the way the Budget documents

that Telstra has again been delayed for sale `till 05-06? Can you explain (inaudible)…?


The Telstra sale is put down in the Budget for 2005-06. It is neutral to the

Budget bottom-line, that is, it does not help the bottom-line, it does not detract

from the bottom-line, that is, if it goes ahead or if it doesn’t, the bottom-line

balances do not change. We have to make an assessment as to when the sale could

conceivably occur, and it is an estimation. Our assessment is that the Senate

is not likely to pass that legislation this year. If the Senate does pass the

legislation this year we’ll bring it forward if commercial circumstances are

suitable. But that is not what we believe to be a realistic assessment, that

it will not be occurring in the next year, in the 03-04 year, or maybe even

the 04-05 year. So, we just put it in there in the 05-06 year. The proceeds

of Telstra we have been very clear about, it will go to debt retirement. It

would allow us to extinguish net debt but if you were to take it out it does

not change the bottom-line.


Treasurer, income tax cuts are always considered very popular with the public

and with voters. Is this a signal the Government is starting to look at perhaps

an early election?


Well, an election is not due until 2004, from memory, November 2004, so it is

still 18 months off. I think we are now today, I think today we are precisely

at the half way mark of a 3 year term. I think it is 18 months from the last

election, 10th November, you know, whatever it is in May today…




Thirteenth of May, so, so, 18 months.


So the Government is not looking at an early election?


The Government is not proposing an early election, no it is not. The Government

is running economic policy with an aim in mind of funding our expenses, now

that we have retired $63 billion worth of debt, returning some of the surpluses

to the taxpayer. And I think that will be consistent with good economic policy.


Treasurer, it is three years since the last tax cut which came as part of the

GST package. How much extra revenue have you received as a result of bracket

creep in that same period?


Well Ian, not nearly as much as in previous Governments, and I will tell you

why. Firstly, inflation is low, we have lived through this period with about

a 2 per cent inflation rate. I think when Mr Keating was Treasurer he was benefiting

from an 8 per cent inflation rate. The second reason is under the new tax scales

between $20,000 and $50,000 there is no bracket creep and that is the vast bulk

of Australian taxpayers. Now we are taking that $50,000 and we are pushing that

up to $52,000. I think that is a sensible return of tax. Some people will say

it is too large, some people will say it is too small. But if you ask me how

did we fix on that amount the answer is this, consistent with running a surplus

and funding defence and security, I thought it was a responsible amount to cut

taxes by. That is how it was fixed.


If you take bracket creep out how much is the tax cut worth overall?


Well, when do you want to take bracket creep from? Let me give you this statistic…


The last twelve months?


No, I take bracket creep from when I became Treasurer.


I’d like to take it to twelve months.


Well I know why you would and you know why I would because let me tell you this,

the income tax cut scale, the income scales before this tax cut are lower than

the brackets indexed since when I became Treasurer…


So what is it over twelve months?


…so we have more than returned all bracket creep under the existing taxation

system and we are having a second round.


And in the last twelve months?


Well, for the last twelve months I haven’t produced any figures but I would

think it would be very low because inflation has been very low. You see it is

not like it was under Labor. Under Labor Mr Keating had an 8 per cent inflation

rate and he didn’t have a 20 to 50 (inaudible) band. That is the big difference

we are now in a 2 per cent inflation environment and you have the vast majority

of Australian taxpayers in that 20 to 50 (inaudible) band. But, you know, let

me put this point, consistent with running a surplus Budget, funding defence

and security, if you have a strong debt position, and we have now retired $63

billion of Labor’s debt, I think you should return the money to the taxpayers.

That is the decision we have made and I think it is a responsible way.


Does that mean we can expect another round of tax cuts next Budget?


Dennis, you’re a hard man to please, aren’t you?


Down payments?


Well, I will put this forward as a Coalition principle. If you had very large

surpluses and you had met all of your expenses and your balance sheet was in

the same position, that is what is motivating the Government in relation to

this. We are in surplus, we have met our expenses, we have a strong balance

sheet, we are returning some money to the taxpayer. Don’t ask me about what

is going to happen in the future, that is what is happening now.


What will the average taxpayer receive on a weekly basis extra in their pay



Well, we have got a table attached to…


I work it out as $4.


…the personal income tax cut press release, and if you are on $25,000 you

will receive a $307 tax cut. If you are on $30,000 you receive $208, if you’re



At $4 a week due you think that is substantial?


…$55,000 you will get $448, and if you are on $70,000 you will get $573.


Well, it ranges from around $3 to $10 a week. Do you think that is substantial?


I think it is better than tax rises which every State Government is currently

putting in place in their Budget, and I think it is better than no tax cuts.


Why not index the thresholds?


Well, I think this is better than indexation for low income earners. This gives

a larger tax cut to lower income earners. Now, bear this in mind, I still haven’t

been able to get last year’s Budget fully through the Senate and income tax

cuts will have to go through the Senate. And we have to always have an eye,

of course, to getting our programme into legislation. The Government does not

have a majority in the Senate, that is held by a coalition of the Greens, the

Democrats, and the Labor Party.


Treasurer, the Budget Papers still show income tax receipts are going to go

up quite a bit next year, is bracket creep just going to swallow up these tax



Well bracket creep occurs when you’re on say a 30 per cent rate, and in real

terms your income does not change and you go on to, say, a 42 per cent rate.

There would be very few people in that position, a 30 per cent rate, that is

the point I am trying to make, applies from $21,600 to $52,000. Now, it is possible

that if you were at $51,000, or $51, 500, on a 2 per cent inflation rate a small

part of your income would cut over that threshold. But not the balance of your

$51,500, this is the point I am making. Bracket creep occurs when the same real

income that was on one scale part of it goes on to another scale. When you have

a wide band where the overwhelming proportion of taxpayers fit it is only a

very small number of taxpayers and in respect of a small amount of their income,

particularly on a 2 per cent inflation rate.


So why are income tax receipts going up still next year?


Well income tax receipts can go up principally when more people get into work.

You are looking at absolute dollars, I think the figure is 235,000 new jobs.

235,000 people in the last year started paying income tax. Nobody pays a dollar

more, you know, if 235,000 people are paying $10, or $100 or $1000, some of

them may even pay $10,000, it is a large sum of money.


So Treasurer, what proportion of taxpayers are now in that band, new band?


Which band?




I think the precise figure is something like about seventy-five, seventy-six

per cent, something like that. It could be higher. I’ll get you the precise

figure for you.


(inaudible) handing back the surplus (inaudible), you don’t have much of a

buffer (inaudible)?


Well, my assessment is that the year that we have had has probably been one

of the toughest years for a while. Why? We have had an American down turn, we

had a war, we had the worst drought in Australian history and we have now got

a SARS outbreak. Could we have a worse year than that next year or the year

after? We could. Although, I am hoping we don’t get another one in a hundred

year drought.


What about another September 11, how do you pay for that?


Well in the last year we had an October 12. Now, can I just put the Budget

in context. The terrorist incident in Bali, a war, an American downturn, a one

in a hundred year drought, an American deep deficit, French, German, British

deep deficit. Japan’s in deep deficit. The fact that the Australian economy

still ran a surplus in 2002-03 makes Australia quite different to the rest of

the world. Now, you say could you have another year with a whole lot of unforseen

events, you could, but looking out I think we have been pretty responsible in

our forecasts. Three and a quarter per cent growth.


Treasurer, on your figures President Bush’s economic management doesn’t look

to flash, and yet you say that we are fairly dependent on American upturn, do

you have any faith on that?


Well you know that the US policy at the moment is incredibly stimulatory. Four

per cent budget deficit, official interest rates I think are 1 ¼, that’s

like rocket fuel in an economy.


It’s not working that way.


Well, I think sooner or later it will work and if it works that will be good

for us. The flip side will be at the end of that cycle, the American taxpayer

will have to re-pay the deficit. So, from an Australian point of view repaying

the US deficit is not as big a problem for us, but getting the stimulation could

actually be an advantage for us. So, am I, what’s my view on US stimulation,

well from an Australian point of view if it gets the American economy going

again it will be good and we don’t have to pay the bill afterwards.


Treasurer, in relation to the bond market, traders might say that there’s been

a change of heart in terms of the commitment to the bond market. Can you just

explain the reasons behind that?


Well, when we were elected, Commonwealth debt was $96 billion, and as we have

been repaying debt, our debt position has strengthened and bond traders have

been saying that they would like more Government debt out there. The bond traders

think that Australian Government debt is too low. And to keep the bond market

liquid, what we have done to date is instead of redeeming all of those bonds

we have left gross bonds out there and backed it up with an asset position.

That is why I talk about net debt. You have actually got some bonds on issue,

but they are covered with an asset position. So in net terms we have reduced

that $96 billion by $63 billion, but we have still got some gross issues out

there to keep the bond market liquid. If we were to sell Telstra, then we could

actually retire all Commonwealth debt and the bond traders of course want to

keep the market going for other reasons. We had a look at that, we have made

a report in this Budget which says that we think if the bond market were closed,

that is if all debt were redeemed, interest rates could be slightly higher.

And when I say slightly, it’s a fraction of one per cent but, they would be

slightly higher. So, given the fact that we don’t have the immediate prospect

of the Telstra sale, what we have said is that we will keep gross issues, of

bonds out there to keep that market liquid, we accept the fact that redeeming

all outstanding bonds would have a slightly higher interest rate, and so we

won’t be retiring all debt. Nor do we have the capacity to retire all debt in

the imminent future. If we had that capacity, if the Telstra sale were to go

ahead, we would look at building an asset position against some other Commonwealth



Mr Costello, how do you think the higher ed changes are going to down in middle

Australia, the deregulation of Uni fees, and do you think the gap between the

top Universities and the rest will widen as a result of these reforms?


Well, the changes in higher ed are really as I said three fold. We are increasing

money to the higher education sector. We are allowing new flexibility for the

universities to set fees up to a maximum of, or cut them, up to a maximum of

30 per cent of HECS. Or cut them. And we are introducing a new loans program.

For most Australian students I don’t think much will change. They will win a

HECS funded place, fees probably won’t change that much, they will pay back

their HECS, although on a more generous timetable. I think where there are high

demands on courses, its conceivable that universities will start varying fees

on high demand courses. And I think that the best students will be attracted

to the best courses and I think that what you will do is that you will get some

courses and some universities which will become centres of excellence. If a

university starts putting up its fees on a course that no one wants, or offers

no value, they won’t have any students. I think in relation to some of those

courses you will probably get price cutting downwards to maintain numbers. How

will it be received in middle Australia, well I think, that middle Australia

wants access to universities, and this will allow many more students to get

into universities, I think that they will welcome that, and I think that middle

Australia wants to know too that there’s a bit of competitive tension. That

this will lead to higher standards. That they’ll be getting something for, something

more valuable, and I hope they see it as a way of promoting excellence.


Treasurer, how will the tax cuts be presented to the Senate? Will they be a

separate Bill or will they be attached to something in a way that might force

the Labor Party to, against its previous statements, oppose the cuts?


Well who would know whether the Labor Party will oppose this or not. I can’t

read their minds…


Is it a separate Bill?


…but a tax Bill under the constitution has to be a separate Bill. So, it

will be a separate Bill. I hope it is passed obviously, I can’t imagine that

they could think it would aid their case by defeating it, but we’ll know soon

enough I guess.


Treasurer, superannuation contribution revenue is going up 13 per cent, what

do you say to Australians sort of trying to be financially independent in retirement

and taking your and the tax system such a schmozzle concerning citizens?


Well, no taxes are rising. People are putting more into superannuation. Contributions

are taxed at 15 per cent, so that if you put, which is concessional compared

to the normal income tax rate, so that if people put more into superannuation

at the same rate the effect is that the tax is greater.


It’s taxed three times for some people (inaudible).


Well, can I say at the end of the tax on contributions which is beneficial,

on earnings which is beneficial, compared to marginal income tax rates and on

pay outs the overall tax is still lower than the tax they would pay if they

took the money by way of wages. And that’s why they are putting it into superannuation.

Have you ever thought, it’s an obvious point isn’t it, why is more money going

to superannuation, because the tax is still less than if it is taken as income.

Thank you very much.