Interview with Fran Kelly

7.45 am

SUBJECTS: Tax cuts

KELLY:

Good morning. 

TREASURER:

Good morning Fran. 

KELLY:

$34 billion worth of tax cuts.  How many votes is that worth?

TREASURER:

Well it will give Australia an internationally competitive tax system and that will build the capacity of the Australian economy.  It will do it in two ways.  First of all for low income earners coming back into the workforce, in three years’ time you won’t have to pay any tax until you earn more than $16,000 and our goal is to get that to $20,000.  And particularly for part-time workers coming into the workforce – mostly married women and we need more people to come into the workforce – they won’t go above a 15 per cent top tax rate until they earn about $37,000, which very few do because they are working part-time.  So this is going to build a great capacity in the Australian economy and that will grow our economy faster. 

KELLY:

So that is why the economy needs this round of tax cuts, rather than just people like to get a tax cut.  It is all about workforce participation. 

TREASURER:

More about workforce participation and building the capacity of the Australian economy.  Look, the small business survey that came out recently – the Sensis one – when they asked small business the greatest problem that they had, it was finding employees.  That is, unemployment is now so low that businesses are struggling to find employees.  Now, we have to build the capacity of the economy, get more people entering the workforce by cutting taxes for the really low income earners, so that they don’t have to pay any money, and by lifting thresholds so that people on part-time work don’t go above a 15 cent tax rate.  You are going to build that capacity. 

KELLY:

When you ask a lot of Australians what the biggest issue for them at the moment, they say their mortgage or their rent.  Being able to afford a house.  It is housing affordability.  One of the big concerns in voter land.  Upper pressure on interest rates is potentially the very big downside of this tax cut package, isn’t it?

TREASURER:

Well of course if people are having trouble with cost of the living pressures, one of the best things you can do for them of course is to cut tax and put more money back into their pockets and that is a big part of this as well.  That is why we cut taxes for everyone. 

KELLY:

But an interest rate rise, if and when there is one, will just wipe it out. 

TREASURER:

Well Fran, this is a three stage reform of the Australian tax system, the first stage of which takes place in July ’08.  So economically it can’t have any effect until July ’08.  And of course that is just the first stage and if, so for anybody to say this would have an effect before July of next year would be completely wrong.  And of course even in July of next year at the end of this radical reform, very positive reform, of the Australian taxation system, the Budget is going to be still in a surplus of a dimension that hardly any other country in the world would have.  Certainly not America or Britain or Japan or Europe.  We will be so far ahead of those countries in terms of fiscal policy after this tax cut that we will probably still have one of the strongest budget positions in the world. 

KELLY:

So are you saying we are in different economic territory than we were at the last election?  Because in August last year the outgoing Reserve Bank Governor, Ian Macfarlane told the House of Reps Economics Committee that in fact the Government has misrepresented him over the big tax cuts in July last year.  He hasn’t endorsed them, he said you had tried to ‘pour a bit of cold water on the idea of having really big tax cuts and a big fiscal expansion.’  What has changed between then and now?

TREASURER:

Well I have been through all of what Ian Macfarlane said at great lengths and after he was interpreted to that effect, you will recall that he also made a clarifying statement saying that he hadn’t seen anything in the tax cuts that the Government had put in place – and we have put in place three rounds of tax cuts in fact, since 2004 – that was inflationary.  So I think you have got to look very carefully at the totality of what Ian Macfarlane said.  But we are in different territory today in this respect: that as the Mid Year Review shows, the number of people in work in this year – 2007-08 – will be about 100,000 more than we expected at Budget time.  What happens as you get more people into the labour force is instead of drawing down  unemployment benefits they start paying tax.  It saves the Government payments and it adds to government revenues.  If you can take those revenues and cut tax further and bring more people into the workforce, you start getting a virtuous cycle.  More people in the workforce, lower tax.  More people in the workforce, lower tax.  More people working, lower taxes across the board.  And this is what this tax plan is all about.  And this is a tax plan not just for participation effects, and we showed yesterday that these tax cuts will – on Treasury modelling – put 65,000 additional people into the workforce.  But of course by also shaving those top rates you start getting Australia much more competitive with other countries around the world.  And that is our plan, to get the top income tax rate down to 40 cents in the dollar. 

KELLY:

Treasurer with the virtuous cycle, the thing that might threaten that is up against capacity contraints in our economy.  Constraints caused by you know, lack of skills in our workforce, perhaps we haven’t put the money into education, skilling that would be needed.  Wouldn’t we be better off spending some of this money, rather than just handing it out as a tax cut, $20 a week to people, $30 a week to some, into our hospitals, into our education, into our welfare system, into our dental care.  Maybe people would prefer free dental care for their kids, dental checks for their kids rather than $20 a week. 

TREASURER:

Well you are quite right: one of the things we are experiencing in Australia at the moment is capacity constraints, the greatest of which is shortage of labour.  That is the big capacity constraint that Australia is facing at the moment.  So what are we going to do to get more people into the workforce?  We know we have got unemployment at 4.2 per cent now.  We have got 2.2 million more people in the workforce than when Labor was in office.  How are we going to get more people into the workforce?  Well by cutting tax, particularly raising tax free thresholds and cutting the number of people that have to pay above 15 cents in the dollar.  This is one way you can bring people into the workforce.  People, you know, maybe it is Mum who has been doing one day a week, she is thinking of going two or three.  But she says: ‘why should I go two or three days a week if I have got to pay 30 cents in tax?’  You to say Mum: ‘well you would only pay 15 cents in tax,’ or: ‘maybe if you go one day into the workforce you won’t pay any tax at all, you won’t come above that tax free threshold of $16,000.’  This is a way of addressing the capacity constraint.  This is absolutely about capacity constraint.  People who say: ‘oh well we don’t want to reform the tax system’, really don’t have an answer to the biggest capacity constraint in the Australian economy at the moment which is labour. 

KELLY:

Well I am not sure who is saying they don’t want to reform the tax system but Labor has certainly been saying for a while it does want to do something about the participation rates.  Are you (inaudible), would you be happy if Labor basically come out and said: ‘we will match this.’  Or would that be in danger of neutralising your big promise?

TREASURER:

Well I want to hear Labor say something about tax. 

KELLY:

Is that is a big tick to yours?  Would you be happy?

TREASURER:

Well if Labor is interested in good tax policy, they will support this tax plan.  There is no doubt about that.  In fact, they would have done it yesterday.  But the longer it goes on, the more they try and hide on this issue, the more you begin to wonder about them.  They have no tax plan, that is obvious.  The biggest, boldest tax plan that we have seen in a long time is presented yesterday.  It deals with participation, competitiveness, building capacity in the Australian economy and what does Kevin Rudd say?  Nothing.  Now, you know, he better have an answer today, I hope his answer is that ‘me too’, because that is what he normally does.  He normally ‘me toos’ on economic policy so I hope his answer today is the ‘me too.’  But the longer he takes to ‘me too’, the more people are going to wonder whether Mr Rudd really is an economic conservative and what he would actually do if he wasn’t given the lead.  Because here is a lead that has been given, all he has got to do is ‘me too’ it.  But imagine the situation if there were no lead.  You wonder what he would be doing in those circumstances. 

KELLY:

Treasurer, the number most people care about at the moment really is their mortgage interest rate.  Last night the PM didn’t know it.  He had trouble with that figure last night.  Are you surprised the Prime Minister didn’t know, perhaps the most important economic figure in Australia right now?

TREASURER:

Well no, look, you know, you can ask figures all of the time and I think he was actually asked about the cash rate which is in fact not the mortgage rate.

KELLY:

But then feeds into it, doesn’t it?

TREASURER:

So…

KELLY:

You would have got it right, wouldn’t you?

TREASURER:

Well, he was asked about the cash rate which is as you know, it is 6 ½ per cent – a lot lower than the 17 per cent interest rates we were paying under Labor. 

KELLY:

Treasurer Peter Costello, thanks very much for joining us. 

TREASURER:

Thanks Fran.