Senator the Hon Mathias Cormann

MATHIAS CORMANN: Good morning everyone. Today is the day when the Government is releasing the Commission of Audit report.

May I on behalf of the Government, right up front, thank Tony Shepherd and his fellow Commissioners and Peter Crone and the team at the National Commission of Audit for the hard work that they have done on behalf of the Government to identify opportunities for efficiencies and structural reforms in the Commonwealth finances moving forward. 

In the lead up to the last election, we knew that we had a Budget emergency. We knew that the Budget was in very bad shape. We knew that we would have to make some tough but important decisions to put our Budget back onto a sustainable footing. The Commission of Audit report you will see today shows that the spending growth trajectory that we inherited from Labor is unsustainable and needs to be addressed.

After the election, we found that we inherited $123 billion worth of projected deficits and debt heading for $667 billion unless we took some remedial action. What the Commission of Audit report will show you today is that spending growth trajectory in fact continues to deteriorate beyond the forward estimates. Unless we take remedial action, the Commonwealth annual spend would increase from $409 billion this year to $690 billion by 2023-24 or 26.5 per cent as a share of GDP compared to the 23.1 per cent in the last year of the Howard Government.

The Commission of Audit does make a whole series of recommendations for structural reforms and structural savings. The Government in the Budget will pursue structural reforms and structural savings which will build over time and which will put our Budget back on to a believable path back to surplus.

Of course, as invariably is the case with these sorts of reports, there are recommendations that the Government will be in a position to adopt very quickly in the Budget. There will be other things that will require more detailed work before final decisions can be made. And there will be some things that the Government will be quite clear, right up front, will not be able to be pursued.

We will not be providing a detailed response in relation to each recommendation today. The Government’s response to the Commission of Audit report will be the Budget on 13 May. Of course today is the next instalment in the very important conversation that we need to have about how to ensure that our Budget is put back onto a sustainable footing for the medium and long term.

Governments can’t keep spending money they haven’t got. Governments can’t keep spending more than they raise in revenue.

Good luck today. Enjoy the next few hours. I’ll be back with the Treasurer at 2pm. We will be answering the questions that you no doubt will have about some of the stuff that you’ll be learning over the next few hours.

See you then.

TONY SHEPHERD: Thank you very much Minister. And Minister thank you also for the great support from your Department. You should be really proud of the Department of Finance. You have got some very fine officers in there and they were wonderful. Thank you.

Well welcome everybody and good morning. What a beautiful morning here in Canberra. You will no doubt be given copies of the report, if you haven’t been given those already. We are very proud of this report. We are very proud of it. I must thank my fellow Commissioners who have been outstanding. Our Secretariat which has provided unparalleled support and assistance. And particularly Peter Crone who must have been working 7/24 for the last three and a half months to produce it.

The tight schedule we had to produce this report, I believe, has not impacted on its quality. Even though we had effectively three and a half months to do it I think we have still managed to produce a high quality report.  As this Minister said, we see this as a longer term problem, as a medium term problem in terms of getting the Budget back into a sustainable surplus.

When we started our examination, the thing that struck us was that the Commonwealth this year will spend about $409 billion. And of this, $350 billion is what they classify as administered. And by administered that means, these are payments that the Commonwealth makes to others, including the States which are virtually locked it, committed, legislated or what have you. And there is about $50 billion of it what is called administrative expense or departmental expense which really they have some flexibility over. 

So that when we went to look at our key terms of reference, our key terms of reference, which was: how do we get to a sustainable surplus of 1 per cent of GDP by 2023-24, we focused on the 15 biggest programs which contribute 70 per cent of the increase in Government expenditure over the next ten years.

We looked at the taxation side in terms of overall revenue. But taxation was not part of our remit. We understand that the Government is going to have a separate inquiry into tax, a tax White Paper and what have you. And quite correctly, we believe that there was no sense in us spending our valuable time on that. We concentrated on our terms of reference requires us to do, which is to concentrating on expenditure. So we didn’t really touch revenue. We just assumed revenue would head to its long term average of 24 per cent of GDP and we proposed that as a sensible cap on the size of government. 

With those sorts of assumptions in mind, looking at the next ten years, accepting reasonable projections from Treasury on growth, inflation, unemployment, take up rates and our ageing demographic, we worked out that the business as usual situation would put us in an ever increasing national debt which would reach $440 billion of net debt by 2023-24 and it would be heading north. In other words, there was no chance of getting out of that. 

The way we approached the problem was to look at these 15 major programs which were growing faster than the economy and faster than the Government’s revenue and recommend a course of action which is to act now, act incrementally, act fairly. Don’t have any sort of sudden shocks to people. Give people time to adjust.

So wherever we could in making a recommendation about entitlement or indexation or what have you, we tried to do it on the basis of doing it over time and not putting an immediate shock or burden on people. In this way, we have two impacts: one, we believe that it is much easier to bring the community with us, which is vitally important of course and we don’t have any negative impact on the economy. And the economy, I think we would agree, although recovering, is still relatively fragile and we wouldn’t want to do anything to destabilise that. 

The key messages I guess that I would like to give you immediately, but of course you will see this from the report which weighs 5 kilos not 6 kilos, and does speak for itself. Is that we must bring future expenditure and future expenditure commitments in line with our means. It is no good in signing up to stuff which we cannot afford and is only going to increase the level of national debt. If we kick the can down the road and leave it too late to make this correction, then the correction will be sudden, it will be difficult and it will be painful. And that has been the European and the UK experience. But we are a far more sophisticated country than they are and we usually plan for the future. So what we are suggesting is let’s take a longer term view of this. Let’s do this over time, let’s do it incrementally and let’s do it fairly.

Another key message out of our report, and we were asked to look at this specifically, is the state of the Federation, vertical and horizontal fiscal imbalance. This is a very serious problem. We got some excellent submissions from a number of the States. We did a lot of work reviewing the state of the relationship, the complexity of the administrative arrangements between the Commonwealth and the States, which is mind boggling. And the waste and duplication that occurs as a result of that.  I would say this is one of the great threats to the country, is resolution of this issue. This is something that can’t be swept aside. This is something that must be dealt with and must be fixed. And candidly, our solution is return to the Constitution. The States are sovereign in their own right. They should be given the authority and capacity to get on with their own job and let their electorates reward or punish them for their performance.  Let’s not have two levels of Government trying to deliver the same service. This will save a lot of money, it would give greater accountability and give greater transparency. 

The third key message I think coming out of our report is how did we get ourselves into this situation? And how can we ensure given again that we are a pretty well run country, that we don’t get into this situation again?

We have laid down simple and clear fiscal rules. We have suggested that when we are looking at the future, we take a ten year view on new programs. Because in some respects why we have ended up like this is that we can go through each of these programs, we can make a very strong case for them, morally, ethically and even economically. The trouble is when you add them up we don’t have enough money to pay for them. So let’s not get ourselves into that position again. Let’s make sure in the future that if we are looking at grand new schemes that we cost them out past the forward estimates and have a look at it in the overall affordability sense. So I think that is important: the fiscal rules and the forward look.

Also in terms of the Commonwealth’s expenditure, let’s get some real discipline into program evaluation. Evaluation of grants. Let’s have a look at the 900 Commonwealth bodies and see if we can do that with a few less. Let’s spend the tax payers’ money as though it is our money. Let’s spend it carefully, frugally. Let’s hold Ministers and departments accountable for the programs they administer in achieving their objectives. The failure I think to objectively measure outcomes has led to a lot of waste. I think that it is unfair to the taxpayer and it is unfair to the people whom we are trying to help.
As I said, the report I believe speaks for itself. We have a four hour lock up. I believe the embargo is lifted at ten to two. Peter Crone and I will be around during this period and happy to answer questions. We have members of the Secretariat available to answer any more technical issues that we can’t answer ourselves. We will be putting out a media release, which summarises much of what I have just said to you this morning.

Good luck and good reading. I am happy to answer any questions if you have them now.

QUESTION: Mr. Shepherd you were talking about thinking more carefully about taking on spending commitments, do you mean by that about programs like Gonski and the NDIS?

TONY SHEPHERD: Yes clearly, those major new programs of that nature. We believe one should in the future be very careful in the future before signing up to something in looking at the overall.

Thank you.