Senator the Hon Mathias Cormann

DAVID LIPSON: G’day welcome to Saturday Agenda, I’m David Lipson. You may not have liked last year’s Budget, broken promises and unfair cuts is the way it has been described. But this week’s Inter-generational Report demonstrates the 2014 Budget measures that have been passed so far have been effective in addressing a serious long term issue of debt and deficit. According the report the Budget has done half the job of avoiding $5.6 trillion of debt by 2055. The bad news, more cuts, higher taxes, and or more work will be needed to kill off the other $2.6 trillion worth of debt that has been forecast as the population ages to 2055. The question is how to balance those three, along with immigration and productivity. Earlier I spoke to the Finance Minister, Mathias Cormann about just that. 

MATHIAS CORMANN: What the Inter-generational Report shows is the challenges but also the opportunities we face in the future and that we need to continue to work to put ourselves on the strongest possible foundation for the future. Now the problem is that the previous Government put us on an unsustainable spending growth trajectory. Spending over the next four decades was going to ramp up to 37 per cent as a share of the economy, which is unprecedented. You have got to put that into the context of the highest level of Government receipts in recorded history which was 26.2 per cent back in 1986. So there is a big gap there. It would be completely impossible and inconceivable to increase taxes to cover Government spending of 37 per cent of the economy. If we were to do this it would hurt the economy, it would seriously damage the economy, it would make us un-competitive internationally, it would drive massive increases in unemployment. It is just not an option to try and chase that increasing spending growth trajectory that the previous Government put Australia on with ever increasing taxes. What we need to do is we need to stabilise our Government expenditure as a share of the economy so we need to ensure that Government spending is allocated in the most efficient and effective way possible. 

DAVID LIPSON: Sure but no one is really suggesting that increasing taxes should make up the whole area. Obviously it should be a mix. But for example, I suppose in the area of income tax, income is projected to increase to by almost 80 per cent. So is there not some room there for perhaps some higher taxes in the income space? Because such a huge increase in living standards there, perhaps people would be willing to pay a bit more tax to get the services that they are demanding. 

MATHIAS CORMANN: We ought to always aspire to lower taxes so we can strengthen economic growth and improve opportunity for everyone to get ahead and so that we can continue to create more and more jobs. Right now, our top marginal tax rate effectively is just below 50 per cent. We have got the 45 per cent top marginal tax rate, we have got the Medicare Levy which was increased in recent times to help fund the NDIS and we have got the Temporary Budget Repair Levy. There comes a point where if you continue to increase taxes, you actually provide a massive disincentive for people to work harder and that is bad for the economy. That is ultimately bad for our revenue and it would essentially drive more and more people to reorganise their affairs in ways that will actually have a negative impact on Government revenue. So it is a matter of getting the balance right. I think that when it comes to income tax rates in Australia, we really have reached the limit in terms of what we can sensibly do on that front. We ought to focus now on making sure that we can live within our means. You have to remember that we talk about expenditure as a share of GDP,. As GDP increases expenditure increases in the ordinary course of events, but we ought to stabilise Government spending as a share of the economy in order to ensure that we don’t become less and less competitive internationally and put ourselves into this vicious downward cycle where we become weaker and weaker and less and less resilient over time. 

DAVID LIPSON: So the only real alternative there that you are speaking about is cutting back further when it comes to services or making them more efficient, sure. But that’s not going to achieve the $2.6 trillion that we need to look at by 2055. So are you talking about just reducing the services that Government provides? 

MATHIAS CORMANN: No, what we are talking about is reducing spending growth. That is very different to imposing a cut. We think that we need to get spending growth under control. If you look at the progress that we have already made, we have been able to make significant progress. In terms of the debt growth trajectory, we were heading for about 122 per cent of Government net debt as a share of the economy over the next four decades if we did not take any corrective actions. As a result of the changes, the structural reforms that we have already implemented, we have been able to halve that. Cleary there is more work to be done and we need to continue to engage in a conversation about how that is best done. But there is no way that we can responsibly allow expenditure as a share of the economy and debt as a share of the economy to continue to ramp up as it was when we came into Government. 

DAVID LIPSON: The other thing that appears crucial is to get older Australians to perhaps work a little longer or return to the workforce. How do you plan to do that? 

MATHIAS CORMANN: That is exactly right. Part of the national conversation we will be having over the next few months is exactly about that point. Right now, we have 4.5 working Australians of the traditional working age, between 15 and 64 that are covering all those Australians 65 years and over. That is down from about 7.5 working age Australians in 1970 and it will head down towards 2.7 working Australians by 2054-55, covering all Australians over 65 years of age. That of course means that there is more and more pressure on working taxpayers to cover the expenditure for an ever increasing part of the population. It also means that our workforce participation rate continues to fall which is a drag on economic growth, at a time when the ageing of the population, which is a good thing, we live longer, healthier, that is a good thing, but that also puts upward pressure on expenditure. So it has an impact in terms of our revenue, it has an impact in terms of higher expenditure. So it is very important that we reassess how best we deal with this. Convincing Australians to work longer, convincing older Australians to work longer, convincing more women to join, stay and come back into the workforce after having children is a very important part of that. Business attitudes need to adjust. Our own individual attitudes have to adjust in terms of looking more flexibly at the way we might progress through a career, progress through a whole lifetime.

DAVID LIPSON: One area that was largely forgotten in the Inter generational Report is superannuation. Just 1.5 pages was actually devoted to it in this report, which actually less than that was given to climate change for example. They are costing the Budget concessions in superannuation about $6 billion in net costs and that is just this year, this is going to grow over time. Is there a case do you think for lifting the age at which people can access their superannuation in the same way that you are lifting the age in which they can receive the age pension? 

MATHIAS CORMANN: We have made a series of very firm commitments in relation to superannuation before the last election. We said we would not make any unexpected detrimental changes to superannuation in our first term in Government. We also said that we would have a conversation through the Tax White Paper review process on how our tax policy settings could be improved to set ourselves up for the medium to long term future. So that will be a conversation over the next few months. Whatever change we decide to progress or to proceed with we would take to the next election so that people across Australia can pass judgement before we go ahead with any of that. But in relation to social services, in relation to superannuation, in relation to our tax settings more generally, in relation to the way we structure healthcare financing, these are all areas where we do have to have conversations on how in the context of an ageing population, in the context of the structural challenges we are facing, how we put ourselves on the strongest possible foundation for the future.  

DAVID LIPSON: So just reading between that, we should expect to have some sort of policy when it comes to superannuation from the Coalition that you will take to the election in the next couple of months. 

MATHIAS CORMANN: You should expect us to have a conversation over the next 12 months or so and you should expect that I am not going to preempt what the outcomes of that conversation are going to be. But in the lead up to the next election, it is quite right that we will have policies that we take to the next election across all areas of Government and superannuation is a very important part of that. 

DAVID LIPSON: Senator Mathias Cormann, thanks very much for joining us. 

MATHIAS CORMANN: Always good to talk to you.