Transcript No. 2001/058

TRANSCRIPT

of

THE HON PETER COSTELLO MP

Treasurer

Budget Lock-up Press Conference

Parliament House, Canberra

Tuesday, 22 May 2001

4.40pm

SUBJECTS: BUDGET

TREASURER:

Well ladies and gentleman, perhaps, as per previous years, I’ll start with the

charts first. This is a Budget which has been framed against a slow-down in the Australian

economy in the current financial year but which forecasts a rebound in the economy in

2001-2002. We are forecasting in the current financial year growth of about two per cent

on average and three and a quarter per cent in 2001-2002 and I think most private sector

forecasters would probably be within the range.

It’s a Budget which is forecasting continuing low inflation, if anything with

inflation to decline in 2002. We’ve had a one-off impact from the new tax system,

which will wash itself out of the system and we expect that underlying inflation will be

low in 2002 for a number of reasons. One is that the Australian economy, in my view, is

now incredibly price competitive. We’ve said that petrol, which has been contributing

to the CPI, will not be contributing; we expect that tax deductions will be subtracting

from the CPI in the year ahead, in particular, the reduction in Financial Institutions

Duty.

This is a Budget which is in surplus for the fifth consecutive year in a row. As you

know the Government was elected in this year, in March of 1996, the last five Labor Party

Budgets had been five deficits, totalling $80 billion of deficit. We have programmed to

put the Budget into balance over two years, one, two. This will be the one, two, three,

four, fifth surplus, consecutive surplus, in 2001-2002 and you’d have to go back

pre-Whitlam to find five consecutive surplus Budgets. The surpluses that the Government

has been running in previous years and this year have been directed towards paying off

Government debt.

As we moved into the new tax system, we had transitional differences between what we

call the fiscal balance and how we report the Budget on an underlying cash basis. The

reason for that is essentially when we moved to PAYG for, that is Pay As You Go for

companies, you had the delay from the system they were on, and they moved into the PAYG.

And in accrual terms, two sets of liabilities became payable in this particular year

2000-2001. We gave companies two and half or five years to actually make those payments so

they don’t actually make the double payment in the one financial year. But because

it’s shown as accruing in that financial year, correspondingly revenues are low in

the following two years. The actual cash position is that they pay over time, but that is

the explanation for the variance between the fiscal position and the cash position over

those years. And as you go through the transitional system you should expect them to move

back into harmony.

With five consecutive surpluses we have now paid debt. The Commonwealth had a net asset

position pre-Whitlam, the Commonwealth moved into a debt position through Whitlam. It

built up in the early years of Keating, was brought back in the late 1980s and then we had

the five Labor deficits accumulating $80 billion, one, two, three, four, five. The

Coalition was elected in 1996. We’ve had the five consecutive Budgets in surplus,

one, two, three, four, five, and we estimate that we will have paid back $60 billion of

Labor’s debt over our six Budgets. And we will have the debt to GDP ratio back around

five per cent. Not quite as low as it was before Labor began the debt build-up of the

1990s, but back to five per cent. Forecasting future surpluses and the proceeds of

privatisation would actually eliminate Commonwealth debt in future years. That depends of

course on whether the privatisation proceeds and on the position of the accounts.

Put that into international perspective, Australia is paying it’s debt down to

about five per cent of GDP. It’s good by OECD standards, good by US standards,

although the Clinton administration had a program to eliminate net debt by 2010, so they

would probably overtake us at some point in the next decade, but if we were able to

maintain our fiscal position we would beat the United States in terms of debt position.

I’m often asked by colleagues and other people, ‘What’s the point of

paying down all of this debt, what’s it actually do for you?’ What it does for

you is it gives you the chance to invest in more important things. And if I could leave

you with one thought, I’d like to leave you with this one. Before I became Treasurer

we used to raise about $8 billion to service our debts. We spent as much servicing our

debt as we spent on hospitals and schools. That was in 1995-1996. Because we’ve

repaid our debts, we now need $4 billion less per annum, we need $4 billion less per

annum; and we’ve got $4 billion more to invest in other things. And what I

particularly would like you to see here is now our investment is hospitals and schools is

about double our public debt interest payments. Before we came to Government it was about

the same. So as we paid off debt, as we freed up resources, we’ve been able to invest

in more important things. And the way I like to think of it is that public debt interest

servicing past debts – that’s just paying for the past; investing in hospitals and

schools and families and children – that’s investing or the future. And

we’ve changed the focus of our fiscal policy from the past to the future, and I think

it is something that this Government can be proud of. In relation to this particular

Budget, I see this Budget as very much a continuation of the prudent economic management

that the Government’s had in place since its election in 1996. On 1 July the big tax

changes continue to roll with the reduction in company tax from 34 to 30 cents, the

abolition of Financial Institutions Duty, the abolition of stamp duties on shares, the

introduction of refunding for imputation credits, and a new measure which is announced in

this Budget and wasn’t even guessed by any of you, I’m pleased to say, the bring

forward of full input tax credits for business on motor vehicles, and that includes

trucks. That was going to be introduced on 1 July 2002, it has been brought forward to

midnight tonight. That will be a stimulatory measure, and that’s the reason why

we’ve done it. And a stimulatory measure which won’t build in a structural cost

for the Budget because it was factored into the Budget in the years ahead. A bring forward

which will be stimulatory.

In relation to others measures in this Budget, we propose to pay pensioners and

part-pensioners $300 tax-free before 30 June. We will be introducing the legislation

tonight with the view to getting it through the Parliament by Thursday so we can make the

payment to pensioners next month. It is something that will give them additional spending

power and that will be consistent with a good economic outcome, and it is something that

the Budget can afford, but most of all it is something they deserve. I think this time

last year many of you said to me, well you’ve got a budget surplus of $2.6 billion

and the spectrum sale of $2.6 billion, and some of the newspapers were unkind enough to

headline the budget ‘dial a surplus’, well, as you know, the spectrum

didn’t realise anything like $2.6 billion, it realised $1.1 billion but the surplus

was still as strong, in fact stronger. And that is because the receipts, the revenue

receipts, particularly from companies were stronger than we’d forecast and out of

that dividend we are now paying a one-off bonus to pensioners, to Prisoners of War, to the

widows of Prisoners of War, to internees of the Japanese under Second World War and to

their widows as well.

We are also cutting tax for older Australians from 1 July of last year. This is a

retrospective tax cut. Their tax is cut as from 1 July of last year and they will be

eligible for a tax refund once they file their tax returns after the end of the financial

year on the 30th June. The increase in the tax-free threshold, the increase in the

Medicare levy means that an older Australian, a qualifying older Australian, and this has

a phase out, it doesn’t go to unlimited income earners; a qualifying older Australian

pays no tax on their first $20,000. They have a tax-free threshold of $20,000 – no tax, no

Medicare levy. And in addition to that if they happen to be couples, and it depends on

whether you’ve got equal income or not, if you happen to be, it changes is what

I’m saying, if you happen to be a couple you’ll get a saving on last year’s

tax of $75 a week. These are very large tax reductions for older Australians and they

compliment the pensioner bonus.

In addition to that the Budget introduces the biggest overhaul in welfare reform ever

and commits an additional $1.7 billion over four years to that, which we expect and hope

will deliver savings in the long run, as we encourage more people into work. It is a big

up-front investment. The Budget makes our biggest investment in defence in twenty-five

years, it makes our biggest investment in quarantine in response to foot and mouth

disease, and it makes a very large investment in health. This is a huge Budget. There are

measures in here for war widows, there are measures in here in relation to superannuation

for over 55s. It is unquestionably the biggest Budget in terms of measures that’s

been done at the Commonwealth level. It is a Budget which is directed, in my view, at a

strong economy, at a just society, from a prudent Government which is continuing good

economic management.

QUESTIONS and ANSWERS

JOURNALIST:

Treasurer, how confident are you that you will achieve that growth forecast of three

and one quarter per cent given recent history?

TREASURER:

Well, I think most private sector forecasters are in the range of three to three and a

half, and I think that’s probably, three and a quarter, is probably the average of

the private sector forecasters, it wouldn’t be above average, could be marginally

below average. We think that fundamentals of the Australian economy are sound. We have got

a good Budget position, we have got a good debt position, we have got low interest rate

regime, we have got a competitive tax system. We have had the transitional effect in

relation to housing, which I believe, in the quarters to come will power growth, and we

have had a growth in exports. A very significant growth in exports, partly a result of the

New Tax System because we don’t tax our exports anymore, and partly the result of a

super competitive exchange rate. So, I think that growth forecast is eminently achievable.

JOURNALIST:

Treasurer, you’re saying it is a big Budget, is it an election winning Budget and

if you have your doubts how much more of the surplus would you be willing to sacrifice

before the poll?

TREASURER:

Well, I don’t see, I think there was a feeling in some quarters that the

Government was spending huge amounts of money. The Government, in this Budget, makes very

sound investments but still produces a surplus. It cuts taxes but still produces a

surplus. I guess one of the biggest measures that we have done recently was cuts in petrol

excise and indexation. But, I think it is a prudent Budget and we are now able to share

some of the dividends of good economic policy. That is the point I make. Why is it that

now when you pay a bonus in relation to pensions, why is it that now we can cut the tax

rate for self-funded retirees? Why is it that we can now abolish Financial Institutions

Duty? That Financial Institutions Duty is paid by everybody that puts money into the bank,

everybody who makes a payment on their credit card, everybody who pays a monthly mortgage,

and we can do that because we are starting now to get the benefits of good economic

policy, and I think the Government wants to continue its reputation for good economic

policy.

JOURNALIST:

(inaudible) an acknowledgement that certainly the self-funded retirees and pensioners

have been neglected by the Government in the past? Is that why you are focussing on them

now?

TREASURER:

No, it’s not, because, I actually see that we have been building for self-funded

retirees in the past. We have been putting bricks in place and off a solid base we have

gone further. The bricks we have been putting in place, do you know before we were elected

the tax-free threshold for a self-funded retiree was $5,400? And it was in my first Budget

that I increased it to $11,100 and something – doubled. We were thinking about self-funded

retirees then. We are now taking it to $20,000, another doubling. We introduced the

private health insurance rebate, predominantly goes to older Australians, a 30 per cent

rebate. Before we were elected you got not a dollar back on your private health insurance.

When we were elected, to get that Commonwealth seniors health care card you had to have an

income of, I think, below $21,000. We increased it to $40,000 and tonight we take it to

$50,000 for singles, or $80,000 for a couple. Can I say that again. If you are a retiree

the income test now is $80,000 for a couple to get that Commonwealth health care card.

That is a very, very high level. But, is it a change of policy? No, it’s a

continuation because it was $21,000, we took it to $40,000, tonight we take it to $50,000.

I think we have been building bricks in the past and now we have come along and we have

put another storey on it, but we were building bricks in the past.

JOURNALIST:

Is the pensioner bonus a compensation for the GST?

TREASURER:

What I would say about the pensioner bonus is this. It will be good for the economy

because it will stimulate the economy. The Budget can afford it and pensioners deserve it,

and when you have the conjunction of those three things it’s good policy, and it is

deserved, and we can afford it, that’s why you do these things.

JOURNALIST:

Do you regret that you didn’t give it to, give them more last time?

TREASURER:

Look, what we did on 1 July of last year was we increased the pension by 4 per cent,

and we have maintained it above where it would have been by 2 per cent at all times. And

if we hadn’t have done what we did on 1 July of last year the pension would be 2 per

cent lower than where it is at. So, we increased it and I think that is good. Now we are

paying a one off bonus of $300. Some people will say, I’m sure some pensioners, you

know, will say $300 – why not something else? But we can afford $300 and that is why

we are paying it. I think it’s, and I also think it will be good for the economy. My

picture of the economy is, at the moment, it’s probably more subdued than we have

known it in the last 4 years, but we have come off 4 years of very good growth, and in the

future it will be stronger again and it won’t do the economy any harm to have a bit

of stimulation right now. But, you don’t want to build stimulation in structurally

for years to come when the timing is wrong. That is why I think it is a good way to do it.

JOURNALIST:

With the, what you describe as the generous arrangements for self-funded retirees and

pensioners, someone has to pay. Aren’t you unfairly burdening future generations of

the payer – PAYE – taxpayers, younger Australians to fund these arrangements, in

perpetuity?

TREASURER:

No, I don’t think we are. You have got to remember this, Tony, that on 1 July last

year we cut income tax by 12 billion dollars per cent. If we hadn’t have done that, a

person on average earnings today would be paying a marginal rate of 43 cents in the dollar

and they are now paying 30 cents in the dollar. That is a third, and they don’t pay

more than 30 cents in the dollar until they go above $50,000, which is 80 per cent of

Australian tax payers. So, for young people, for the whole of their working life they now

have the prospect of never moving beyond a top marginal rate of 30 cents. Whereas, on

Labor, they stuck at 43 cents. I think that has been of enormous benefit. We increased

family assistance on 1 July, and we increased pensions. Now, I think, for a tax reduction

of, for self-funded retirees, I think that will be warmly welcomed by them. I hope it is,

but don’t see it as unfair, no I don’t, and if it encourages more people to be

self-funded in the future the tax payer won’t lose from that either because remember

this, for each person that looks after themselves in their retirement the Government

actually gets a saving, it doesn’t cost the Government money.

JOURNALIST:

How will this Budget affect interest rates?

TREASURER:

Well, as you know in Australia we have an inflation targeting regime, underlying

inflation of 2 to 3 per cent. We are forecasting continued low inflation which is

consistent with accommodative monetary policies. And other than that I won’t say any

more.

JOURNALIST:

Mr Costello, the Shane Stone memo described the Government as mean, tricky and out of

touch. Do you think this Budget will help overcome some of those perceptions and how much

more scope is there for election spending, given that you now have a fairly slender

surplus of $1.5 billion?

TREASURER:

Well I think the Budget is right for the economy in the year ahead. That’s why we

budgeted it. During an election campaign, I guess people will be campaigning not for the

year ahead, will they, they will be campaigning for the year after that or the year after

that, or whatever it is. And we have laid down a plan which will mean that there will be a

surplus. I want to make this point, if you were to become Treasurer in a year’s time

with the accounts in the current position, you would be $10 billion in front of me.

Because when I became Treasurer, we didn’t talk surplus, the accounts were then $10

billion in deficit. And in debt terms if you were to become Treasurer after me, you’d

be $60 billion in front. You’d only have to service $20 billion of the $80 billion

that I had to service when I became Treasurer. So you start a long way in front. But I do

want to make this point, (interjection) oh no, I’ll tell you this, that’s why I

want to be the Treasurer to take advantage of it….

JOURNALIST:

This is not an admission that you won’t be Treasurer next year?

TREASURER:

Nobody should think that I’m sitting around here trying to give the benefit to

future Treasurers. That’s not my plan at all. But I’m just saying, you know to

Steve, because I know he follows these things very closely, he’s saying oh future

Treasurers, there’s only $1 billion in the kitty, that’s $11 billion in front of

where we were in 1996, that’s $11 billion in front. And I say this, it’s a very

important point, and I think, I think people have got to be a bit more searching in

relation to Mr Beazley. Mr Beazley says oh well he can’t tell you how he’ll fund

roll back. You can fund the whole abolition of GST by simply undoing what we did on 1 July

last year. You can abolish it, all you have got to do is introduce Wholesale Sales Tax,

Financial Institutions Duty, double the Capital Gains Tax, increase the company tax rate

and put income taxes up $12 billion. But the fact that he won’t do that tells you all

along he has agreed with us on tax reform. If he really thought that GST were bad for the

economy he would be in favour of reversing it. And he doesn’t need to know what the

state of the accounts are because it all self-funds. You put up Capital Gains, company

tax, income tax and you bring back indirect taxes, that’s all you do. And I think

it’s about time that somebody has a very, very careful interview with him and ask him

why…

JOURNALIST:

The GST is obviously here forever like the written word…

TREASURER:

Well no, why do you say that Mr Bongiorno, why do you say its here forever because I

thought the Labor Party was opposed to it in principle.

JOURNALIST:

But I don’t think he’ll offer to abolish it as you’ve very effectively

point out.

TREASURER:

Well why did they oppose it Mr Bongiorno, if they don’t want to abolish it?

JOURNALIST:

Treasurer, my question is GST is here forever, how long will the $300 bonus last as

compensation for older Australians?

TREASURER:

Well again Paul, look, if the Labor Party was genuinely opposed to it they could

abolish GST, they could reduce the pension by 4 per cent, they could abolish the one off

payment. Pensioners would not be better off. I mean at the end of the day, the 4 per cent

increase, the 2 per cent increase in real terms, the $300 bonus, I think has been a good

measure, I think has been a good measure. But what I can’t fathom is on the one hand

this Labor sort of line that the worst thing that could possibly have been done to the

Australian economy was tax reform and it is so bad that we want to get elected and take

advantage of it. We want to slip into office and we want to take advantage of everything

the Coalition has done. I’d say to people stick with the authors, stick with the

authors. We had the courage to do the tax reform. The benefits are now starting to come

about, the fact that the Labor Party now accepts them indicates that they had to be done,

they were right for the economy and the important thing is to stick with the people that

have the economic management credentials on the board. And there will be a big part of my,

that will be a very big part of the pitch at the next election.

JOURNALIST:

Is this the sort of Budget that sets the Government up, to get Government up, should

the Prime Minister decide to go to the people early?

TREASURER:

Should he decide to what?

JOURNALIST:

Is this the sort of Budget that sets the Government up should the Prime Minister decide

to go to the people early?

TREASURER:

Look I think this is a Budget which is pitched by a prudent Government, at a strong

economy for a just society and I won’t say anymore than that.

Thanks a lot.