Budget, Higher Education Fund, Tax cuts, Climate change – Interview with Kerry O’Brien, 7.30 Report

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Budget, Higher Education Fund, Tax cuts, Climate change – Interview with Kerry O’Brien, 7.30 Report

Interview with Kerry O’Brien

7.30 Report

Tuesday, 8 May 2007
8.10 pm

SUBJECTS: Budget, Higher Education Fund, Tax cuts, Climate change

O’BRIEN:

The Treasurer joins us now.  Peter Costello in your first Budget eleven years ago, you absolutely slashed university funding, and they have been struggling in many ways ever since.  Suddenly in the shadow of Kevin Rudd’s education revolution, you have burst out of the closet as the super education Treasurer.  There is no politics in this by any chance is there?

TREASURER:

Well of course in 1996 we had a Budget deficit of $10 billion, we owed $96 billion.  We were paying interest payments of $8.5 billion a year.  We did not have money.  And now we have got no debt.  We are saving $8.5 billion in interest and our Budget will be in surplus for the tenth time.

O’BRIEN:

You’ve been doing it pretty well in the intervening years and you’ve hardly called them education Budgets.

TREASURER:

It is completely academic when the Budget is in deficit and you have got $96 billion of debt to say, what will we spend more on.  What we have been able to do is we have been able to get the Australian economy strong.  If we lock in the gains now, we can invest for the future.  This is the best investment we have ever seen.  It is not just spending.  This is the important thing.  This is a capital sum which will last forever, forever. 

O’BRIEN:

Forever that is a very long time.

TREASURER:

It is a perpetual fund and it is the earnings that will fund the first class institutes. 

O’BRIEN:

So is there a limit to how big this Fund can get?  Or will it just keep growing like topsy depending on the size of the surplus?

TREASURER:

I don’t think there is a limit.  Until you come to a point where you say, our higher education system needs no further investment, that is when you would close the Fund.  There are funds overseas, particularly in the United States, which are very large.  This will make Australia, this will double Australia’s endowments and next year we would intend to put another downpayment into this, and we will continue to do that by saving and investing.

JONES:

Okay, Treasurer you say you can continue, can you give an absolute guarantee that once you’ve paid down what you need to put in the Future Fund, that all surpluses after that in a Costello Government will actually go into the university Fund?

TREASURER:

That would certainly be our intention.  Yes. 

JONES:

You can guarantee it?

TREASURER:

Once we get to the position where the Future Fund has funded all of the liabilities, we are well on our way. 

O’BRIEN:

Inaudible

TREASURER:

We are well on our way.  We are not quite there, but we are well on our way.  Then we can start investing in this Fund.  I think it will be a magnificent thing for Australia, it will build first class institutions.  Why am I keen on this?  Because we have got to get smarter, we have got to get better to remain ahead of the pack.  Here is a way which can fund it forever.  No Government in Australia ever thought of doing this before and they never had the capacity to do it before because we were burdened with debt.

JONES:

You said in the press conference actually it is your idea, so I am just wondering is there no one else that can take credit for this, except for Peter Costello?

TREASURER:

Well, the idea of setting up a fund was my idea because I thought we could invest.  I did not want to get into a situation, Tony, where, you know, we just went out and spent a Budget surplus.  What I want is to put a fund there that will be there for generations.  This Fund will be here long after we have all left the political scene, and hopefully future generations of young Australians will say, gee, that was not a bad idea back in 2007.

JONES:

Can you also just guarantee this for us, and that is, this Fund won’t simply take over existing education funding.  Will it be used to funnel into existing education funding?

TREASURER:

Absolutely.  I think that is a very important point.  This is not being set up to claw back somewhere else.  It is being set up to add.  Now, the only guarantee that I can give, while I am still in Government but if anyone decides to raid the Endowment Fund, like people are trying to raid the Future Fund, it will not be there.  You have got to make it politically untouchable, and I am trying to make the Future Fund politically untouchable because otherwise you will get cheap opportunists who will try and raid this for their own election bids.

O’BRIEN:

I don’t know who on earth you could be referring to.  You are giving another tax cut of $5 billion next financial year.  $31 billion over the next four.  Is that really a tax cut or is it simply handing back bracket creep?

TREASURER:

No, I don’t think so, Kerry, because when you actually look at how we moved thresholds, they have moved well in excess of indexation.  We have a table in our glossy here which shows that the cut in tax over the last three years to somebody on $30,000 is 45 per cent.  They would be paying 45 per cent less tax than they were in 2004.  These are very significant changes.

O’BRIEN:

I suppose the reason I related it to bracket creep is because in the last Budget you boasted that 80 per cent of taxpayers would be paying no more than 30 per cent tax rate and in this Budget, for the next, over the next four years, you are saying the same thing.  In other words, the same proportionate thing (inaudible) that suggests bracket creep.

TREASURER:

That is why I do not want any bracket creep.  In order to make sure that we have got 80 per cent across the forward estimates, we are going to change that next year, next year, not this year.  But the further down the income scale you go, the bigger the percentage tax cut has been.  These are tax cuts which are squarely directed at $30,000, $40,000, $50,000.  Average earnings in this country is about $47,000.  And that is where the tax cuts are the biggest.  Now, why do we do that?  Because not only do you want to give relief to average earners but of course you want to boost capacity.  The people that are earning $30,000 are most likely to be part-timers who are doing a few days a week.  It might be married women doing 2 or 3 days a week.  Maybe they want to do a few more hours.  Maybe somebody who is on a part pension thinks they can come back into the workforce.  So this is designed to build capacity.  Our economy is at near full employment, 4½ per cent unemployment, it is near full employment.  If we want to grow further, we have got to get more people to join the workforce.  There is not a big pool of unemployed any more to pull back into the workforce.  We have got to get more people who have not been looking for work to actually join the workforce.  They might be mature age workers, they might married women, they might be people who are pensioned off on a disability pension.  More people in to the workforce.

O’BRIEN:

How many of them fall into marginal Coalition electorates that you have to defend….

TREASURER:

I don’t know.

O’BRIEN:

You don’t think that way?

TREASURER:

I think this; that the stronger you make the Australian economy, the more opportunity you give people, then you do not have to worry about those things.

JONES:

You gave a brand new definition, as far as I know anyway, in your press conference today about the inflationary impact of tax cuts.  You simply said there isn’t any.  Now, some economists will question that.  Chris Richardson has already done so.  Did you run it past, this notion, did you run it past Ken Henry, your Treasury Secretary?

TREASURER:

Of course, we discuss all of these things.  The point I made is this.  At the end of the day, the Budget surplus in 2007-2008 will be 1 per cent of GDP, 1 per cent of GDP.  Last year’s Budget, we were forecasting the Budget surplus to be 1 per cent of GDP.  There is no movement. 

JONES:

Define your theory about tax cuts though, because essentially there you are saying that tax cuts don’t really exist?

TREASURER:

No, no, no.  I was taking objection to somebody who said you are spending money and including a tax cut as a spend.  So I am saying tax cutting is not spending.  Tax cutting is very different.

O’BRIEN:

But if you are not getting it, they are spending it in the economy. 

JONES:

It is coming out of your Budget.

TREASURER:

The point is this Tony: the Australian Budget in 2007-08 will be a surplus of around $10 billion.  One per cent of GDP.  Now, let’s think about this for a moment.  What other country in the world will have a Budget surplus of one per cent of GDP?  Will America?  No.  Britain?  No.  France?  No.  Germany?  No.  Japan?  No.  Can we think of another western industrial country that will be in a position as strong as this?  Not many.  And you know, there is a funny argument in Australia.  In the United States they run Budget deficits of 3 per cent of GDP.  We run a Budget surplus of 1 per cent of GDP.  It is a funny argument to say that is a loose fiscal policy.  You wouldn’t get anybody around the world, anybody around the world that would look into Australia and say, ‘gee, that is a loose fiscal policy.’ 

O’BRIEN:

But they are all higher than us and you want to be the education Treasurer, they are just about all higher than us in terms of education spending. 

TREASURER:

Well, you see, take the United States for example, the United States doesn’t spend that much government money in its higher education sector.  It is mostly private.  And these institutions like Harvard and Yale, they have got huge endowments.  Harvard’s endowment is about $28 billion.  Up until now, the whole university sector in Australia had $5 billion.  As of tonight they have got $10 billion.  If we are re-elected it will be a lot more than that.  You are suddenly starting to put Australian universities on the map. 

O’BRIEN:

That is not for the actual education.  That is not for the teaching.  That is not reducing the ratio of students to lecturers and so on. 

TREASURER:

Well of course, we have recurrent funding that does all of that. 

O’BRIEN:

But you’re not boosting that.

TREASURER:

(inaudible).  Well, we are, Kerry.  It is a $3.5 billion package.

JONES:

But if this goes up to $100 billion at some point why shouldn’t you spend it on professors?  Why shouldn’t you spend it on keeping HECS low or one of the things that students want?

TREASURER:

Well, let’s hope we have that problem, Tony.

JONES:

What, you would like to have that problem and you would like to be able to use it for these other purposes, is that (inaudible)?

TREASURER:

Let’s hope we are sitting around here at some future point where we say, ‘what do we do with $100 billion?’  This is a problem I would like, Tony. 

JONES:

Let me just, let’s go back one step, because we were talking about Ken Henry and you know what he said in his speech about expansionary fiscal policy and I just want to know, will you take personal responsibility if there is, in the wake of these tax cuts, before or after the election or soon after the election, an interest rate rise?

TREASURER:

Well, this is not a fiscal stimulus.  This is not a fiscal stimulus. 

JONES:

Some people are going to disagree with that.

TREASURER:

Well, what were we saying last year?  That the Budget surplus will be 1 per cent of GDP.  What are we saying this year?  It will be 1 per cent of GDP.  Measured from year to year, the Government is still saving the same amount. 

O’BRIEN:

But you said the last one wasn’t putting interest rates in jeopardy but the Reserve Bank differed with you.

TREASURER:

Well, Kerry I think you will find that what happened during the year in relation to inflation was primarily affected by things like oil prices and other international pressures. 

O’BRIEN:

But didn’t the Reserve Bank finger government spending and tax cuts as part of the reason why interest rates went up?

TREASURER:

Never.  Never. 

O’BRIEN:

Well we will have to go back…

TREASURER:

In fact I will direct you to the testimony by Ian Macfarlane who said, when he went to international meetings, his fellow Central Bankers used to say to him, ‘we wish we could be as lucky as you.’  You know why?  Because when Ian Macfarlane went to Central Bank Governors meetings there was Alan Greenspan or Jean-Claude Trichet from the Bank of France, they are all sitting around saying, ‘what do we do about a 3 per cent budget deficit?’  And he said, ‘I don’t really know, because we have got a 1 per cent surplus.’ 

JONES:

Peter Costello, let’s change course a bit, on climate change, nothing earth shattering in this Budget, nothing that reflects in fact that the planet might be in serious danger.  So I am wondering are you actually keeping the big ticket items for after your taskforce on carbon trading returns at the end of this month its report. 

TREASURER:

Well, we have a suite of measures here.  We have measures in relation to the Low Emission Technology Demonstration Fund.  We have measures in relation to water.  We have measures in relation to solar panels on houses.  You know, practical stuff, real stuff.  But having said that, yes, we are getting a report shortly in relation to am emissions trading scheme and we will announce our position on that after we have got it.  Tonight was not the night to announce our response on emissions trading.  So we will do that when we get it.  Tonight was the night to fund the Murray-Darling Basin, the waterways, the Natural Heritage Trust, photovoltaics, Low Emissions Technology Demonstration…

JONES:

But, a final question on that because we know from what Ken Henry said in his leaked and then finally published speech that the Treasury was saying for quite some time it wished people has listened more attentively to their climate change policy ideas.  And I am wondering was a carbon trading scheme one of those ideas way back in 2003?

TREASURER:

No, I think that they were saying on water and I think that was in relation to the Murray-Darling…

JONES:

On water and climate change, actually, and we never heard your answer on climate change but we heard your answer on water. 

TREASURER:

Well, let me go on climate change.  We have a taskforce doing climate change, in fact the person that is doing a lot of the input is ex-Treasury, from Treasury, on secondment from Treasury.  And look, I think a trading scheme has got a lot going for it…

O’BRIEN:

No, no, the question was…

TREASURER:

No, but the…

O’BRIEN:

…was Ken Henry advising three or four years ago to go for a trading scheme?

TREASURER:

Let me tell you that Ken Henry’s advice to me is always sound and consistent and I think you would find that results in all areas of economic policy would have exceeded his expectations…

O’BRIEN:

I think you are not going to answer the question.

TREASURER:

No, no, no, that is the answer.  If any Treasury Secretary, can you imagine if a Treasury Secretary of the 80s or the 90s was told you could have a balanced budget with no debt, they wouldn’t have believed it was feasible…

O’BRIEN:

You still haven’t told us what his advice was on carbon trading. 

TREASURER:

Well, I have told you…

O’BRIEN:

(inaudible).

TREASURER:

…no, no, I have told you, I have Kerry, with all due respect, I have told you that the Government has commissioned a whole of government report in relation to emissions trading which the Treasury is part of and which the Government will announce its response to.

O’BRIEN:

The point is, did the advice come from Treasury three or four years ago, in which case, why did it take you so long to act?  That is the point. 

TREASURER:

Well no, no, the advice is yet to come.  Treasury…

O’BRIEN:

(inaudible) you as Treasurer, in 2003 or 2004…

TREASURER:

I can go over it bit by bit.  The advice is yet to come. 

O’BRIEN:

Righto.  You are flush with money now, last question, but what happens when the resources boom comes off, you have made all the spending on tax cut commitments which of course are on-going?

TREASURER:

Well, I think Australians should have lower tax and I will make no apology for cutting the taxes.  I have cut taxes for five Budgets in a row.  Our Budget is balanced, we have no debt, we should reduce our tax burden.  It will make our economy stronger.  Let me make the point…

O’BRIEN:

Very briefly.

TREASURER:

…yes, sure, most of the employment which is generating tax at the moment is not in the mining sector.  Mining, employment in mining is 1 per cent of employment in this country. 

O’BRIEN:

It is the whole flow-on effect.

TREASURER:

Most of it is actually in places like retail, wholesale, building and that of course goes to a balanced economy.

JONES:

Okay, Peter Costello, we are going to have to wrap it up there.  Thanks very much for coming to join us straight after your speech and we will move on.

TREASURER:

Thanks Tony.