Address by Senator The Hon Mathias Cormann
Minister for Finance
Thank you very much for that introduction Warwick and thank you so much to all of you for supporting this breakfast in support of Anglicare. Anglicare is a great organisation which does some wonderful work across the West Australian community. And indeed, Ian Carter and I, we have known each other for many years. I think he just started at Anglicare when we met and I had just migrated to Western Australia when we first met. Ian, I have always admired your passion, your commitment, your effectiveness and your absolute dedication to improving the quality of life for those most in need of our support across the community.
I have been asked to talk to you about the Budget and how it has gone down and where we think it is heading and with your permission I will do that from a Finance Minister’s perspective, talking through some of the numbers, essentially about where we are, where we were heading and where we think we need to go in order to ensure that we can protect our living standards and build opportunity and prosperity for the future. I suspect that there will be some questions and I will be very happy to go through some of the specifics that you may want to talk about in the question and answer session.
When we came into Government in September, we inherited an economy growing below trend, rising unemployment, low consumer confidence, business investment which had plateaued and also a budget in very bad shape with a spending growth trajectory at a federal level which was manifestly unsustainable.
Contrast that with the situation the previous Government inherited in 2007, when we had a strong economy and a strong budget. No government net debt, a $20 billion surplus, more than $50 billion in net Commonwealth assets and the Government at that time collecting, collecting, more than $1 billion a year in net interest payments.
The alternative government of Australia would argue that we have had a GFC which is true. We did have a GFC. But the GFC, whatever anyone might want to tell you, did not impact on Australia the same as it did in Europe or across North America. The reason principally is because for most of the period of the previous Government, we also had the best terms of trade that we have ever had in 140 years. The prices for our commodities were at record highs and of course when you are an economy like ours, which is trade exposed, which hasn’t got a significant domestic market like Europe and the United States, we really, in the years that we have got high terms of trade, high commodity prices, we need to put away for a more challenging, rainy day and that didn’t happen.
So when we came into Government, the situation that had gone before us was $191billion of deficits in Labor’s first five budgets. Another $123 billion of projected deficits in their last budget. Government debt heading for $667 billion within the decade and growing beyond that. That $667 billion is based on an assumption that there was not going to be any correction whatsoever over that period to take into account the effects of bracket creep, which would mean more and more middle income earners would progressively end up in the highest tax brackets.
Right now, at the end of all of this, we are forced as a Government, to spend, not collect but spend about $1 billion a month in just paying for the interest to service the debt that was accumulated so far as a result of decisions made by the previous government.
Clive Palmer will say the debt situation in Australia by international standards is not that bad. And it is true that the debt situation in Australia is not as high as it is across countries in Europe and the United States. But the only reason is because we had a stronger starting position. Because the most concerning thing from our point of view when we came into Government and as we were working on putting the Budget together was the trajectory that we are on. Our spending growth trajectory at a federal level is one of the fastest in the world. Our debt growth trajectory that we inherited is one of the fastest in the world and that has been reported by the International Monetary Fund in their relevant reports but it is also the information that we found when we came into government.
I am going to use some stats and numbers to explain exactly where it is that we were heading and what that means in terms of economic opportunity and our lifestyle into the future. The last year of the Howard Government spending as a share of GDP was at 23.1 per cent. This year it is 25.9 per cent and we are heading for spending as a share of GDP of 26.5 per cent within the decade. To put that into context, in terms of the revenue that we have raised, tax revenue right now as a share of GDP is below 22 per cent and the long term average is 23.7 per cent, tax revenue as a share of GDP. Why is that important? Because obviously if you want to balance your Budget, if you want to live within your means as a Government, those figures have got to be in balance. So if we are heading for Government spending as a share of GDP of 26.5 per cent the only way you can balance your budget if you don’t want to reduce that spending growth, if you don’t want to reduce your level of spending is by lifting your revenue up to that same level. Now for us to increase tax revenue as a share of GDP to 26.5 per cent, would significantly damage the economy. It would cost jobs, it would put us on a downward spiral that would not be to the benefit of low and middle income earners because it would lead to less opportunity for people across the board and it would lead to a more challenging situation at the lower end of the demographic spectrum.
Some people will say, why do you need to balance the Budget at all. It is very important that we always remind ourselves, that this is not some ideological obsession, because right now, so this years Budget is about $49billion in deficit. What does that actually mean? It means that we are borrowing money in order to underwrite our lifestyle today. We are currently borrowing money in order to fund consumption. Now at some point that has to be paid back. If you borrow money to invest in infrastructure, which will benefit this generation and future generations, it is quite appropriate that future generations contribute to the cost of that. But for us to borrow money in order to fund our lifestyle today, to fund consumption today, what we are doing is reducing opportunity for our children and grandchildren, because we are forcing them to pay back the cost of the lifestyle that we have enjoyed today, with interest. The longer that we stay in deficit, the longer we kick the can down the road, the harder it becomes to sort that situation out in the future, because you continue to add the interest on top of it.
From our point of view, we think and we believe that it is only fair and appropriate that our generation today, when it comes to funding our lifestyle, when it comes to funding consumption, that we ought to be living within our means so that rather than to reduce opportunity into the future we actually focus on increasing opportunity into the future.
Now if you want to repair the Budget as we believe we must, there are two aspects to this. You can increase your level of revenue on the back of stronger economic growth and we are certainly very focused on that. One of our criticisms of the period of the last government is that, to be honest, we took our past prosperity for granted. We started targeting important industries for our economic success with ill thought out new taxes, like the carbon tax and the mining tax. We started to believe that no amount of additional red tape would have an impact when it comes to improving opportunity into the future. There was a lot of attitudinal issues with government essentially suggesting that people should feel bad if they were pursuing success. Of course all of that combined at a time when there were some global economic challenges at the same time, made for the economic situation that we found ourselves in at the end of that period in Government.
So what do we think we need to do on the economic growth side? We have said and it has been a matter for debate in the lead-up to the last election, we were working on implementing that agenda now. We will get rid of the carbon tax and the mining tax because it is holding our economy back. We will be reducing red tape costs for business by about $1 billion a year because that will help us strengthen growth, which increases opportunity, which also increases revenue for Government so we can invest it in important services that Government ought to provide and we are also investing in productivity enhancing infrastructure right across Australia and we are pursuing improved trade opportunities across the world. The Prime Minister is again overseas this week pursuing trade opportunities for Australia in various places around the world.
On the spending side though, a spending growth trajectory which is taking Australia from $409 billion a year in federal Government spending this year to $690 billion in spending by 2023-24 or 26.5 per cent as a share of GDP is not affordable, is not realistic, is not sustainable. On one of the many trips backwards and forwards to Canberra, I happened to watch the interviews that Kerry O’Brien did recently with Paul Keating and it struck me in that in one of those interviews Paul Keating was focusing on what he felt was one of his major achievements as Treasurer, which was to bring government spending at a federal level back to a more sustainable 24 per cent. That is what Paul Keating said was an important economic achievement in the Hawke/Keating years and of course in those days the Labor Party understood that you couldn’t just continue to ramp up spending without getting yourself into trouble more importantly without getting our children and grandchildren into economic trouble down the track.
Once you accept the proposition that there is a need to reduce spending, to reduce the spending growth trajectory so that you get yourself onto a more realistic, affordable, sustainable trajectory, then there is no easy way to do that. Because you’ve got a whole range of individuals, organisations, States and Territories who all were left with the belief, courtesy of promises that were made to them by the previous Government, that payments to them would increase at a particular rate and when you’ve got a new Government come in and say “Well, sorry but we can’t actually afford these. We can’t keep borrowing more money to give more money away”, then inevitably that is not going to be a popular judgement to make.
It was a very difficult process for us putting the Budget together. These are very difficult decisions and it doesn’t give us any joy having to make some of the decisions that we’ve had to make, but at the end of the day, we can’t keep spending money that we haven’t got and while we’ve sought to spread the effort as fairly and equitably across the whole community as possible, inevitably when you reduce the level of government payments, when you reduce the level of growth in government payments, inevitably it will impact on those that receive payments from government, be they individuals, organisations or States and Territories. We have sought to spread the effort as fairly and equitably as possible, which is why we’ve also introduced the Budget Repair Levy, which increases the top marginal tax rate by 2 per cent for a three year period. People say, well hang on, you’re trying to reduce spending growth forever and you’re imposing this additional tax just for a three year period. What I would say there is a number of things. Firstly, higher income earners already do most of the heavy lifting when it comes to income tax revenue generation for the Commonwealth. Somebody who is on $180,000 a year, which is where the top marginal tax bracket kicks in, will already pay about $60,000 in tax. We’ve asked people in that highest income tax bracket to make an additional special effort in order to help us get our Budget back into a stronger starting position as we try and get back into a situation of surplus. But the truth is if you don’t get that balance right, if you go too hard on the taxing side, in the end it does have an impact on economic growth and it does have an impact on our capacity to generate opportunity for everyone, including opportunities for more jobs for people in the lower end of the income scale.
So you’ve got to be very careful on how you balance all of these things up and in the end, spending at 26.5 per cent as a share of GDP is not affordable and there is only one way that you can bring that spending growth trajectory down and that is by making some of the decisions that we’ve made.
Just quickly some comments about the areas that people have particularly focused on.
Yes, we have initiated a $7 co-payment for visits to the GP and various diagnostic services. The reason we are doing this is because we are committed to ensure that our world-class healthcare system remains affordable and sustainable over the medium to long term. We want to ensure that patients across Australia can continue to have affordable and timely access to high-quality healthcare. To suggest that the only way that you can have universal healthcare is by making sure it is available for absolutely free is not realistic. When it comes to the Pharmaceutical Benefits Scheme for example, people across all income brackets have been making co-payments for a very long time. These services are not provided for free and to have a small contribution in order to access a service does assist with making sure that people value that service in a different way and it does help ensure that funding for our healthcare system continues to be affordable for patients but also for the taxpayer.
At the end of the day, healthcare is not free. It’s going to be paid for by a combination of taxpayers and patients accessing the service. We think that $7 a visit with appropriate safety nets for people on concession cards or children under the age of 16 is the right balance there.
What we’ve said is that up to $20 billion of the revenue and the savings generated from efficiencies in the health system would be invested into the Medical Research Future Fund, which will help generate additional investment in medical research, which will help deliver better treatments and hopefully more cost-effective treatments.
Now some people say, well hang on, why are you taking money away only to spend it? Well it’s not what we’re doing. It’s very important for an audience like this to really understand what we’re doing in terms of the way all of this is structured. So we are achieving efficiencies in the health system by reducing the recurrent spending growth trajectory, by generating recurrent revenue, we are putting that into a fund that builds up capital up to $20 billion. The reduced spending growth trajectory is going to be a structural reform into the future helping to make the system more affordable. We are not going to spend that $20 billion in capital, we’re only going to spend and invest on additional research the earnings that are generated by that fund. So in 2015-16, that will start with $20 million in additional investment in medical research and that will build up to $1 billion in additional investment a year in 2022-23, which will double the level of investment in medical research over that period. So it is a genuine structural reform, it is a reform designed to improve the quality of healthcare, but also to make access to healthcare more affordable into the future.
In relation to welfare, about 35 per cent of our Budget is spent on welfare payments and welfare payments are growing at a rapid rate. You can’t put your Federal Government spending growth trajectory on a more sustainable footing without looking at what is happening in the welfare space. What we’ve sought to do with the changes that we initiated in the Budget is to ensure that spending on welfare payments is genuinely targeted at those who are most in need. That’s what we’ve sought to do.
We believe that in the context of the Budget position as we inherited, some of the things that were being done, some of the payments that were being made were just not affordable. These are decisions that don’t give us any joy, these are not ideological decisions, they are decisions about trying to make sure that we can cut our coat to fit our cloth.
Higher education is another area where there has been a lot of debate and a lot of discussion. We’ve got a very generous taxpayer funded support system in place in Australia, quite unprecedented around the world. I don’t think that there is another example quite like it. It’s a very egalitarian system that we’ve got in terms of ensuring access to higher education for everyone, irrespective of their social background, because in Australia, anyone wanting to study at university is able to borrow 100 per cent of the cost of that course from the taxpayer through what used to be the HECS system and what is now the HELP system. They only have to pay back the cost of that degree once they earn above a certain income and at a discounted interest rate at that. So that is a pretty fair arrangement.
What has been happening until recently, higher education services were our third largest export, they are now our fourth largest export. It is still a very important part of our economy, in particular here in Western Australia, but universities across Asia are rapidly making up ground. We’re rapidly losing the competitive edge and part of the reason for that is that universities in Australia, who are heavily regulated, are having to compete with their arms tied behind their back. We thought it was important to deregulate what universities could charge and how they could organise themselves so that if they are particularly good, there is an incentive to be better and better and better. We would like to see at least one Australian university in the world’s top 20 and we wold like to see more Australian universities in the top 100, because we want to continue to ensure that students here in Australia can have access to the best possible education and we’ve got to find a way to sustainably fund that and our higher education reforms will do that.
I’m mindful of the fact that I think I was told to talk 15 to 20 minutes before taking questions. I know that once I get a excited about things like numbers in the Budget I can just keep talking and talking! I hope that I’ve given you a bit of a flavour of what some of our thinking was at a macro level in terms of where we are and where we would be heading as opposed to where we think we should be heading and some of the specifics that we’ve looked at.
Just a final point. From our point of view, this is the Budget that Australia needs. There is no other plan on the table right now from anyone. There is a lot of noise. There is a lot of political attack, but there’s actually nobody that has come up with an alternative plan to get our Budget back onto a sustainable track, where we’re not handing to our children the burdens of paying for our lifestyle today. There is no other plan. Individual people might have different views about different aspects in the Budget, but unless somebody can come up with a better way of trying to get us back into a stronger more sustainable position into the future, where we are protecting our living standards and building opportunity and prosperity for the future, then our recommendation to those represented in the Senate very much will be that this is a Budget that you should pass. Thank you very much.
ELENA DOUGLAS: Thank you. Thank you very much, Senator Cormann for giving us your insight into the framing of the Budget and the big issues that the country is facing and the reasoning behind some of those strategies were employed. Now we’ve got a chance to ask a couple of questions, so I’m going to ask one then we’ll have that one over there. My question to you Senator, in the last week or so, the editor of The Economist, Adrian Wooldridge has just released a book with John Micklethwait. The book called The Fourth Revolution and it’s all about the worldwide move to reinvent the welfare state and reinvent the way governments do business. So I wondered if, having been so close to the Commission of Audit and your remarks about the reformation of welfare here, if you might make some remarks and also if you’ve kept abreast of the work that’s been done here in this State where we’ve sort of been on that agenda for quite some time now, ever since Peter Shergold did the Commission of Audit here. So that’s my complicated question.
MATHIAS CORMANN: Thank you very much for that question. The best way to increase opportunity for everyone is to grow the economy more strongly. Having said that, we’re very mindful of course that at any time there are going to be people across the community who are doing it tough and it is very important that we have a strong safety net for people that are in genuine need and that is certainly where our focus has been as we’ve put our Budget together.
We also have got to be very realistic and this is where organisations like Anglicare and others like it play such an important role. Government is very bad at doing everything that needs to be done in order to provide the appropriate levels of support to people across the community, who are not doing so well at a particular point in time. Community organisations and organisations like Anglicare are very good at helping to fill those gaps in government support where they occur.
Clearly from the Government’s point of view, we need to ensure that the limited resources that are available are deployed to maximum effect, are deployed in the most efficient, well targeted way and of course the reason why governments, State and Federal, contract organisations like Anglicare is because it does help take that dollar just that large bit further.
At the end of the day, it might sound like very cold-hearted Finance Minister's talk, but nobody is helped by allowing the Government’s Budget to stay on a trajectory where ultimately we have to make even tougher decisions to get ourselves back onto a sustainable trajectory. One of the reasons why we think we need to make the decisions that we have put forward in the Budget this time, is to ensure that the important support for welfare recipients in need of support across Australia remains available into the future. We need to make the decisions we’re making to ensure welfare support continues to be affordable over the medium to long term and the trajectory that we’re on did not guarantee that.
QUESTION: My name is Ganesh, I’m from PricewaterhouseCoopers. Great speech, first of all and thanks for clarifying the event of the Budget. I’ve got a very specific question where on one side we see a lot of deep cuts to welfare systems. Is there strategic thought for raising the Defence Budget from 1.6 per cent of GDP and the Labor government to almost 2 per cent, which is a significant amount; what is the strategic thought behind that sort of spending increase?
MATHIAS CORMANN: Thank you very much for that question. You’re quite right, one of the things that happened over the last 6 years was that defence spending across Australia was cut significantly and there comes a level where it becomes dangerously low. The previous government at various times, they spent too much on a whole range of areas but they were using our defence budget like a bit of an ATM to plug holes left, right and centre. Two per cent is not very high I’ve got to say. We think that getting to 2 per cent - not today, not tomorrow – over a period of time is the appropriate balance in terms of having a realistic investment in our national security.
The previous government when Kevin Rudd was Prime Minister, he initiated and released a Defence White Paper which was a shopping list of all sorts of very high aspirational objectives when it comes to our defence strategy into the future, but there was no funding for it. Essentially you’ve got to make a judgement on, okay what is it that we need and how much is it going to cost us and what we’re trying to do is essentially have a more realistic balance between the two. Protecting our prosperity into the future, part of that sadly requires an investment into defence as well.
QUESTION: (inaudible) Joyce. Thank you very much for your very interesting and forward looking view of the Budget. It is your first Budget and in light of the various analysts’ analysis from both experts and non-experts post-Budget are there any areas particularly that you particularly would look at going forward that maybe you feel you could have done a different way?
MATHIAS CORMANN: That’s a very, very good question. It is my first Budget and it’s the first time that I’ve been involved in this very, very thorough process. So essentially, since about October/November last year the Prime Minister, the Treasurer and I together with the Deputy Prime Minister and the whole ERC met on a regular basis. From February/March/April onwards several times a week, sometimes from 9am in the morning until late at night. We had a whole week in April where actually the whole Expenditure Review Committee was based here in Western Australia because we had a Cabinet Meeting on the Monday and the Malaysian Prime Minister was due to come down on the Thursday because of events surrounding the disappearance of that aircraft out of Malaysia and we literally had Expenditure Review Committee meetings here in Perth from early morning to late at night every day.
The reason why I tried to paint that picture and put that context around it is that we have been able to review a lot of information, we’ve been able to review a lot of advice about different options on how to deal with the situation that we’re in and it takes a very long time to get to the point where you feel comfortable that you can make a decision and that you’re making the right decision.
Part of the challenge I guess, people will say that after the Budget comes out on 13 May at 7:30 when the next day not everyone loves or understands everything that’s in the Budget, well in a way how could they possibly, because people across Australia haven’t had the benefit of literally going through all of the information, going through all the options, weighing it all up and similarly really having to struggle with making judgements on the right and best way forward.
Our belief is that we did make the right judgements. We always knew that a lot of the judgements that we had to make, that we felt we had to make, were going to be unpopular. We also know that we’re never going to convince our critics. There are always going to be people in the political environment that whatever you do, they are always going to be critical about what it is you’re trying to do.
What we are quite hopeful about though is that the reasonable silent majority, while they might have queries, while they might appropriately test and scrutinise and question, that on reflection and after the dust has settled will come to accept that we generally have sought to do the best we can to put Australia on a better, more sustainable trajectory for the future.
Obviously the Budget is a point in time, there will be another Budget next year, some people will worry there will be another Budget next year maybe, but there’ll be another Budget next year and so on, and there’s always capacity that depending on how certain measures are impacting, when you make your best judgement you let it play out and if there are some outcomes that are not working our quite the way you thought they might or they should then you make adjustments in future Budget updates or in future Budgets but from where we sit right now we can put our hand on our heart and say we have put forward the best possible Budget for the times.
QUESTION: Hi Mathias, John Bouffler from Community Employers WA. Thanks very much for your thoughts. Question for you, Ian mentioned that Anglicare’s funding is over 70 per cent funded by Government and understand sustainability from the Government’s perspective. How do you see sustainability for non-for-profit service providers, in particular against for-profit service providers where the need is growing at 7-8% per annum for people needing support out there in the community. How do you see that transpiring over your term and how do you see policies of the Government continuing to support the work that non-for-profit service providers do?
MATHIAS CORMANN: Thank you very much for that question. First thing I would say, not-for-profit providers do provide a very important service as I’ve mentioned in my opening remarks. Clearly from the Government’s point of view, providing services in partnership with not-for-profit providers does help stretch that dollar that bit further. But having said that, the challenge that Government faces is the exact same challenge that not-for-profit providers in this sphere of work face and that is that there is a seemingly un-limited demand and limited resources. Ultimately, all of us, whether it’s a not-for-profit organisation or indeed as the Government, we’ve got to make judgements on how we can fit unlimited demand into limited resources and that’s when you’ve got to prioritise I guess. As hard as that might sound, in the context of the important work that Anglicare does. I’m sure that an organisation like Anglicare along with other not-for-profit organisations you’ve got to make these judgement every day. We have to make these judgements every day, because at the end of the day you can’t keep spending money you haven’t got.
ELENA DOUGLAS: I’m sure the Senator will be available for the next few minutes for those of you who have some more questions but it falls on me now to thank the Senator and ask you to join me in thanking him for his remarks. It was a very insightful address, thank you so much, and I know my colleagues in the Press Gallery, it’s quite a phenomenon for a Liberal Senator to have the high regard of the Australian Press Gallery but the more they have seen of Mathias, the more highly they’ve regarded him and I’m sure we all experienced the same today. So we’ve had a really insightful and interesting morning, thank you for your contributions in the auction, those of you who have your pledge forms or would like to fill them out, please do put them in the red bags and all of us at Anglicare are supremely grateful that you’ve joined us this morning and we hope to see you again, so thank you.