Transcript No. 49

Hon John Fahey MP

Joint Press Conference

Monday, 10 August 1998

2.00 pm

SUBJECTS: Budget, tax, football

TREASURER:

Preliminary Budget estimates for the year ending 30 June 1998 indicate that the underlying Budget was in surplus, much better than expected.

It was believed at Budget time that the outcome to 30 June 1998 would be a deficit of around $1.2 billion. In fact, preliminary outcomes indicate that the outcome was a surplus of about $1.2 billion in the year to 30 June 1998.

This represents an outcome nearly $2.3 billion better than expected at Budget time and the better than expected outcome was driven by higher revenue than was expected at Budget time and also by underspends in relation to outlays which the Finance Minister will be addressing shortly.

In relation to revenues, higher tax collections were driven by stronger company revenues of about $600 million and other individuals about $460 million of tax receipts. Now bear in mind that the Budget which was brought down in May was brought down before the end of the financial year and was still at that stage having estimates for the actual outcome in relation to 30 June 1998.

These are the preliminary figures after the event. We would expect them to be confirmed when the final statement will be put out in accordance with the Charter of Budget Honesty by September of 1998.

What this outcome indicates is that within two years of its election the Government was able to put the Australian Budget back into surplus. When we came to office in 1996 the Labor deficit was $10.3 billion and in two years it was turned to a surplus. That is thoroughly consistent with the commitment we made to the Australian people that we would achieve a Budget surplus during our first term of Government. In addition it means that we have a stronger starting point in relation to forecast revenues for the current and future years. It is too early at this stage to say how much of those better than expected revenues will flow through but we would expect a very substantial amount, certainly more than half of them, will flow through as a starting point in increased revenues making this and future years somewhat stronger than expected in the light of this actual outcome.

This is a good result for Australia. This means that after five cumulative deficits which totalled $80 billion this Government was able to turn around the budgetary position to put our Budget back into the black, to get it back on track. It means that we are well on track in relation to current and future years and it means that the Government has within its sights its cherished objective of reducing the debt to GDP ratio by the turn of the century to half what it was when we were elected to office.

This is a good result, it is the result of expenditure restraint, hard work by the Government to make sure that we repaired Australia’s finances, the path that we took upon our election two years ago, not knowing then the extent of what would become an Asian financial crisis but taking the right decision in advance to cope with what we thought could be unexpected events and turned out to be the same.

I’ll pass across to the Finance Minister.

Thank you Treasurer. As the Treasurer has said the reversal indicates that the Government has achieved its surplus one year ahead of time. At the commencement of the Coalition Government, the very early days, it was announced at that time that in our first term we would bring the Budget into balance. That process of fiscal consolidation has now been achieved.

I just simply want to stress this, that the hard work has been done on the outlays side. That translates of course into some of those figures which the Treasurer has already given you in terms of debt servicing. For example, in the last financial year, debt servicing was reduced by 10%. In the last year of Labor, debt servicing increased by some 14%, in the second last year of Labor it increased by some 24%. And those benefits that flow through from reduced public debt interest payments allow the Government to in fact deal with those areas of greater priority in the area of health, education and welfare.

The outlays side has shown an underspend, or reduction, of some $800 million in the figures which we have given you today. And that broadly speaking represents better than expected economic conditions, that is the reason for the effective underspend on the outlays side, and of course the Treasurer has already pointed out that there has been a better than expected return on revenue in both the area of company tax and in the case of some individuals.

Do those figures mean that you maybe cut harder than you needed to in the first two Budgets and now mean that you can loosen the purse strings a little?

I think it’s a vindication of our fiscal strategy. We came to office and we said we will put the Budget into surplus in our first term. We’ve done it. We are now in the black. And that was from a $10.3 billion deficit. This Government produced a surplus, not by increasing taxes. There was no increase in income tax, no increase in company tax, no increase in wholesale sales tax, no increase in the petrol excise. This was done by getting expenditure under control.

Now two years ago, we didn’t predict an Asian financial crisis, nobody did. The IMF didn’t, the OECD didn’t, APEC didn’t, the Asian nations themselves didn’t, but we said that unless we got our house in order we could be subject to adverse international developments. They came. They came worse than anybody forecast or expected and one of the measures that have put us in a strengthened position was dealing with this Budget position. I can tell you this – I would not want to be standing here today in the midst of the Asian financial crisis with a Budget deficit still at $10 million and having racked up another $20 billion of Commonwealth debt, which would have been the case had we not rectified the Budget. So it shows the prudence of those decisions, the foresight of those decisions. Those decisions proved the basis for coping with adverse external developments. They proved the basis for keeping inflation low, they proved the basis for having low interest rates which has given domestic strength to the economy, at a time when the external environment has got as difficult as we have ever seen it.

So Treasurer, are you in a better position now to fund the tax cuts that you are unveiling on Thursday?

Look, the fact of the matter is that the preliminary Budget outcome shows stronger revenues in the 1997/98 year than we thought. That means that we have a higher starting point in projecting the revenues for 1998/99 and future years. This provides, if you like, a little bit of buffer on our Budget forecasts in relation to the Commonwealth’s financial position. Now, at the same time there will be other factors which will be working the other way. But this is one thing which is working very positively in favour of the outlook for this year and the years to come.

Does that answer the question Treasurer?

I think it does Mr Bongiorno. You are welcome to have a supplementary if you like. Repeat the question.

Does this surplus give you more scope to fund your tax cuts that you will announce on Thursday?

Oh, you were asking about tax cuts? Well, I am not going to speak about tax cuts today, that’s Thursday’s press conference Mr Bongiorno.

Mr Costello, the aspects on the other side, you said that nobody forecast the events in Asia, and your Budget certainly didn’t, it predicted I think, a tripling of growth in Japan, and other South East Asian countries….

No, it didn’t.

I think it predicted 1.5% growth in Japan.

It is misleading to say it predicted a tripling of growth.

But nonetheless, the growth as predicted in South East Asia in your Budget, hasn’t materialised. How will that effect the Budget and when will you be factoring that into account?

Well, I think, as we said at the time of the Budget, and I have just got it here, we had a great deal to say about the east Asian crisis and regional outlook…. “the concern in Japan…heavily exposed….a weak consumer and investor confidence” and we say “…a prospect of little or no growth in Japan in the year ahead.” So I think it is wrong to say we were forecasting a tripling of growth, but having said that, Japan remains a worry.

Look into the region today. Apart from Australia, what are the growing economies of Asia? You have got Japan which could be in recession to the extent of 5%, you’ve got Korea in an IMF program, you’ve got Thailand in an IMF program, you’ve got Indonesia which is contracting by 12 –15%. You’ve got a recession in Hong Kong, the Prime Minister of Singapore says that he expects a recession in Singapore and you have had, I believe, a negative quarter in New Zealand.

Australia is the growth economy of Asia at the moment. That is true. We are possibly the only economy with the exception of China, in the Asian region that is growing. Principally that is as a result of low interest rates and domestic demand, and if we hadn’t been able to get the low interest rates we wouldn’t have been able to have that domestic demand. But having said that this is an adverse external climate. We didn’t create it, we can’t fix it, we’ve got to live with it. But the important thing is that we do what we can in relation to our economy to weather the storm. What did that involve – getting the Budget back into balance, reducing debt, keeping inflation low with a new agreement with the Reserve Bank, getting domestic interest rates down, which we did.

But, the final point I would make is this – that people would be wrong if they think we have done everything that has to be done to meet the Asian financial crisis. There is still more work to be done in Australia and now is not the time to sit back and say, “its all fixed”, this is as adverse a climate as we have ever lived through in our region. And that is one of the reasons why we have got to continue to strengthen the Australian economy. It is one of the reasons why we need tax reform in this country. To sit back and say we don’t need to reform our tax system would be to ignore the challenges that are out there at the moment.

Are you saying that despite getting the Budget back into surplus and the good news that that obviously is, that the Asian economic crisis could still exert further downward pressure on Budget growth forecasts.

Nobody knows, Jim, when the Asian financial crisis will end and it would be a brave person that would say that it’s bottomed. I think some countries have bottomed. And some countries have turned up. But what I am saying to you, is that the best means of coping with this is to strengthen the Australian economy. And just coming back to the tax reform point – and I think this is an important point in relation to tax reform. Tax reform in this country is not about more revenue. We don’t need more revenue, the Budget is in surplus. Let me make that point again, we don’t need more revenue, the Budget is in surplus. We are doing tax reform from a totally different position. This was not the case in the mid 80s when Hawke and Keating were talking about tax reform. It was not the case in the early 90s when John Hewson put forward a tax reform policy. This Government can say to the Australian public the one thing tax reform is not about is more revenue. The Budget’s in surplus. And having done the hard work we can now from a position of strength say that tax reform is not about more money but about raising existing revenues in better ways which will help the economy. And for those that are hard pressed under the current taxation system, tax reform is about tax relief. That’s the point here.

… some of the Budget surplus continue to fireproof you against Asia, which you have just conceded you don’t know has bottomed yet.

I don’t think I agree with any of your presuppositions in that question.

I’m relying on your presuppositions. One, that some of the surplus is there to pay for tax cuts. Two that we don’t know …

I don’t know that I’ve said that. Have I?

(inaudible) in answer to Paul’s question.

I read, George, I read the front page of The Australian, you’ve got a new tax story a day. You seem to know more about this than me.

Well Mr Costello are you more inclined to bank the surplus …

Can I finish this question. In response to Paul’s question earlier you seemed to indicate that some of the surplus was available for tax cuts. And the separate point that you made was that only a brave person would also forecast that the Asian crisis has bottomed and that things could look up. Putting those two thoughts together, is there ever a safe time to give up some of the surplus if you don’t know that Asia’s bottomed?

Look, let me make a couple of points. If your Budget is in surplus and you’ve got a path to reduce your debt and you maintain both, then you do have options in relation to tax which wouldn’t otherwise open up. Don’t forget this, Keating and Hawke were talking about reforming tax when we were deeply in deficit. In the Fightback days of 1993 what was the Budget then in deficit by? This is when Labor was trying to pad the figures out by reporting headline. I don’t know, it was probably about $15, $16 billion I would have thought in 1993. Now, we go into tax reform, one, with a Budget surplus; two, with a path to reduce debt to GDP by half by the turn of the century; and three, with a very strengthened position in relation to future years. Now, the reason I’ve sort of disputed your propositions is I’m not talking today, and haven’t in the past, about how the package will be funded because, you know, I’ve always followed the rule that you never scoop yourself in relation to news stories. So I didn’t agree with those propositions. But having done the hard work on the Budget this gives us opportunity in relation to tax that we wouldn’t have otherwise had. Now, I’ll just give you the figures, because strangely enough I happen to have them here. The Commonwealth underlying balance in 1985/86 was 2 per cent of GDP, which in today’s terms would be, what, $10 billion plus. And in 1993 it was 3.9 per cent of GDP, which in today’s terms would be, what, a $20 billion deficit. Just think about that. When Hawke and Keating were talking about tax reform, 2 per cent deficit. In 1993 it was nearly 4. Now …

How much …. of the 12.5 billion you’ve turned around since ….cyclical?

Oh I wouldn’t think, look there will be some that’s …

Not some, a fair bit.

Well, when you say cyclical, in 1996 we were by then four years out of recession. Don’t forget that. And in 1998 we had two positive years of growth. Now this is not all cyclical at all. You see ….

I’m not discounting it, I’m not saying it’s not you know real …

It’s not all cyclical, a lot of it is structural.

A fair bit of this improvement is cyclical.

No, a lot of it was structural. Look, you want to go back through the revenue figures, and I just happen to have them here, we’ve, the revenue figures indicate that revenue to GDP has remained constant under our Government and on the forward estimates at around about 25 per cent. What is changed and what’s changing dramatically is the outlays. The outlays were 27 per cent to GDP when we came to office. They’ll be down below 25 in 1998/99, and on Budget projections by the turn of the century down to 23. This is pre-Whitlam levels. This is a turnaround on the outlays side that is generational. Now, your point is that some of this is cyclical, that’s right. But an awful lot of it is structural too and we could go through the programs.

Isn’t this also Treasurer a classic case of Treasury giving an incoming Government a fairly sort of pessimistic outlook for the Budget and convincing it to cut spending accordingly?

No. Because it wasn’t a projection. This is an outcome. I read some …

It was a projection two years ago.

No, no, no. I read some journalist saying the $10.3 billion deficit, in inverted commas, that was an actual outcome. That wasn’t a projection, that was an outcome of $10.3 billion. That’s what it came out at in June of 1996. That’s where it was going to finish, as everybody knew, in March of 1996. In relation to the next year after we had put in place our first Budget that $10.3 billion was halved down to five. Why, because of our Budget measure, it didn’t just happen. When we went through all those programs for which we took considerable flack, there’s the benefit. And then we thought it would come off by another $4 billion the next year, as it happens the outlays measures were five and revenues were a little better than expected. But this idea that all you had to do was sit around and Budget deficits would have fixed themselves. This is the new sort of doctrine which is being put out by the Labor Party. They had sat around. They sat around for 5 years and the Budget deficits had just been in the double figure mark all that period. This took work.

Mr Fahey you say in the statement that the hard work has been done on the outlays side that we have been talking about here, I wanted to ask you, the underspending since the Budget that’s produced this surplus, what’s been the main reason for that underspending, particularly considering it is on areas such as welfare and education and health. Why has that been there. And now that we are in surplus are you ruling out any more spending cuts?

Well I’ve indicated to you that the broad reason for the result that we have achieved is better than expected economic conditions, there’s been a reduction since the forecast in the Budget papers of some $800 million in outlays. That covers a number of areas: communications, it relates to social security, to welfare, it goes across areas like transport, etc. But the broad reason is the better than expected economic conditions. My comment in respect of the hard work being done in the outlays side relates to the past 2 years, and the Treasurer has already adequately explained that by running through the figures, the first Budget, the savings that were achieved at some considerable political pain ultimately gave us the base that led to the result that shows last year coming in on preliminary estimates. It’s better than expected, putting us back into surplus a year ahead of schedule.

What about no more cuts?

On the contrary, look this Government is not in the business of looking for cuts other than of course when, I can simply say …..

In the first two Budgets you did ear mark…

Well we had no choice, we had no choice.

You are not going to do that again?

I mean heaven forbid if we didn’t take those steps right now, the condition that the economy would be in would be catastrophic in view of the external influence that we since from our regions. In that context we’re able to say that there is still growth in this economy, it has occurred because we went through that period of fiscal consolidation, we made the hard decisions and we did it on the outlays side. We did not increase taxes. And I can say that we did it simply because there was no other choice. It is not the wish to ever, ever have cuts and I can say this that as each year goes by and public debt interest reduces, I gave some figures on last year, 10 per cent, that gives us that opportunity to go into those areas of priority which Governments should be about, the area of welfare and education and health.

Sorry Michelle.

Mr Costello you said earlier that more measures needed to be taken to protect the Australian economy in the current international situation, apart from tax reform what other areas would you point to as needing more action?

Well I could go through others but in that context I really was speaking about tax reform. Look the importance of tax reform is this; in an economic sense is broadening the tax base. Now, it doesn’t matter whether it’s the IMF or the OECD or whoever whenever they do a report on the Australian economy they will always recommend broadening the tax base. And the reason for that is that our indirect tax base is in an area of the economy which is shrinking. That is by doing nothing revenues to GDP automatically shrink and just to hold the indirect tax to GDP ratio constant on this declining base, you would have to increase WST rates by 2 per cent every four or five years. That’s why Labor did it in 1993. If we don’t broaden the base after…..and tax reform if it were defeated and Labor re-elected, Labor will increase the rates again. It will have to. The 12, 22 and 32 will go to 14, 24 and 34. It has to, not to increase revenue but to keep the revenue to GDP mix constant. Now there’s an alternative and that is to broaden the base, so that your base is not shrinking in proportion to the economy. If your base keeps up with the economy on the one rate your indirect tax to GDP ratio remains constant. Right. So you either have a broad base and one rate or you have a base that shrinks in relation to GDP which means that your rates have to go up and up to keep revenues constant.

Shouldn’t you be convincing the Labor Premiers of that?

The Labor Premiers?

Well the Premiers aren’t here today, you are trying to convince your friends that this is a good idea but maybe they are not the ones that actually need convincing…..

Oh well look it is funny you know. I think that if you have private discussions with Labor Premiers they do agree with this. I mean the only reason I’ve heard really from Labor Premiers is that they have to oppose tax reform to show loyalty to Mr Beazley. Which is not a very good reason to oppose tax reform. And I make this prediction that after the, if the Government were to be re-elected and introduce it’s new tax system you would find all of the Labor Premiers would be diving in so quickly, you know quicker than saying States rights. They would all be in there. Now they are going to maintain this air of opposition. But the other point I make is, that there have been plenty of people in the Labor party, before Beazley wrong-footed himself on tax reform, who were prepared to engage in tax reform. Now you remember, go back and if you can’t find the quotes we’ll find them for you, even Gareth said, well a broadening of the tax base, you know as long as you could look after the poor, might be a good thing for Australia. You had George Campbell out there saying that kind of thing. And we now know that the Labor Party is now trying to clamp down on people who’ve expressed those views. But there have been plenty of people in the Labor Party, in fact if you want to go back far enough you’ll find Beazley and Evans themselves in 1985, who were then honest. But you see the point is this, if you leave them without leadership. You see what the Labor Party now lacks is leadership. When they had leadership back in the mid 80s they were prepared to take these issues on. Now they have no leadership, they have no serious economic thinker. Name a serious economic thinker in the Labor Party today. You know, with all due respect probably the best you could do would be Latham. You won’t find a serious economic thinker in the leadership. When there was leadership they were prepared to engage these issues.

Now you have somebody who is leading the Labor Party who never took a tough decision in 13 years of a ministerial career. You’ve got an ACTU President who runs the economic line and you’ve got a Shadow Treasurer who wants to be a Foreign Minister. And I notice that Mr Beazley was commenting the other day on why Mr Evans shouldn’t be sacked as Shadow Treasurer. And the reason was that he had great international experience as a Foreign Minister. That was the reason, that was the best that could be dragged up. This is not a serious outfit and so they run around trying to out-Hanson Hanson on economic policy, and so convincing them is not the easy thing that you make out. Sorry for firing me up.

Mr Costello can the Bombers go all the way?

Actually they are coming good at the right end of the season and I expect that they’ll have a very good year.

Phillip, Phillip get to Centabet on the Swans.