Senator the Hon Mathias Cormann

PETER VAN ONSELEN: To continue talking tax and all things economic we are joined now by the Finance Minister Senator Mathias Cormann live from Perth. Thanks very much for being there Senator. 

MATHIAS CORMANN: Good to be here. 

PETER VAN ONSELEN: Can I just start by asking you about the whole issue of tax reform. It seems like the Federal Government is trying to tread as softly as it can, perhaps mindful of the difficult politics behind this at a particularly difficult political time for the Government after the last 18 months. But I want to ask about it in the context of there are very few people in the context of politics who are regarded as giants on both sides of the political divide. Peter Walsh, the Finance Minister who passed away this week was one of them. He used to say that reform is always tough, no one should argue otherwise because if it wasn’t tough, it would have already been done by now. Why not just accept the toughness of it and just get on with the necessary reforms?

MATHIAS CORMANN: You’re right, Peter Walsh was a giant of Australian politics. He was an outstanding Finance Minister and news of his passing on Friday was very sad news indeed. I make the point and I think I have made the point on your program, that pursuing important economic reform is a marathon not a sprint. If it was easy, anyone could do it. I totally agree with the sentiment that Peter Walsh expressed. That doesn’t make it less important of course to stick with it. All of us in politics, all of us in the Australian Parliament have a responsibility at all times to do everything we can to put Australia on a stronger foundation for the future to ensure that we are as resilient as possible in the face of global challenges coming our way from time to time and in the strongest possible position to take advantage of any of the opportunities that present themselves to us.  

PETER VAN ONSELEN: But I guess what I am asking Senator is put it in that context of the heady days of reform in the 1980s because it strikes me that we are in that position again where there is some pretty necessary reform around the Federation and around taxation. Now yes there was a lot of bipartisanship in some macro and micro economic reforming spaces but not universally around industrial relations, not entirely, certainly not around tariffs as well. Why not just push through even though you are facing a pretty obstructionist Opposition?  

MATHIAS CORMANN: Peter, we are persisting. The thing is that the temptation sometimes can be when looking back to look at how things happened 20, 30 years ago with a sense of nostalgia and romanticism and say that it was all very easy then and why is it so hard now. The truth is if you were to speak to Bob Hawke or Paul Keating, I am sure that they would say that it was hard in the 80s. And if you speak to John Howard and to Peter Costello, despite some of the assertions in recent times about how easy it was then, that they would say that reform was tough then. And reform is tough now. That doesn’t mean that we won’t persist. Of course we will persist and hopefully in 15, 20, 30 years when you and I sit on our back porch in a rocking chair reflecting on the glorious days back in 2015, we will be able to say didn’t we make significant progress then for the benefit, the long term benefit of Australia, putting Australia on a stronger foundation then. The truth is that while you are at it, reform, important reform, difficult reform, necessary reform is inevitably difficult and appropriately people will ask questions and scrutinise and test and probe and be a bit sceptical of Government motivation and it is incumbent on us to explain what we are doing and why, patiently and persistently. Over time, I am confident that we will continue to make progress. Indeed over the last 18 months we have made significant progress heading in the right direction but there is more work to be done.  

PAUL KELLY: Minister, can the idea of a diverted profit tax work for Australia, imposed before there is any global action and agreement?  

MATHIAS CORMANN: I heard your introduction there. Firstly, all of us agree that businesses generating profits in Australia have to pay their fair share of tax consistent with our laws. Now we already have one of the toughest anti-avoidance regimes in the world. We are looking at strengthening this further through international fora like the G20 in particular and working with the OECD. But we never stand still. We always are looking for better ways to ensure that Australia receives its fair share and its appropriate share of revenue from profits generated here in Australia. We are having discussions internally at present on how that can best be achieved as the Treasurer has flagged. In terms of the specifics you will have to wait for the Budget on the second Tuesday in May.  

PAUL KELLY: Alright, the comment by the Treasurer this week was very strong. That Australia would do whatever was required as soon as it could. 

MATHIAS CORMANN: That’s right.

PAUL KELLY: So let me ask you again, does this lead to the idea of unilateral Australian action? 

MATHIAS CORMANN: What it means is that we will do as much as we can as soon as possible but one doesn’t exclude the other. Australia always preserves the right to protect its revenue base unilaterally as we have in the past, as we will in the future. But that doesn’t mean that we won’t continue to pursue strong and effective action in a coordinated fashion through the G20 as we must.  

PAUL KELLY: Okay well what’s your response to what a lot of commentators would say and that is that this issue is driven very much by politics and that a unilateral Australian tax law would not likely be very effective ahead of any global agreement? 

MATHIAS CORMANN: It is a matter of balance Paul. Any Australian Government of either political persuasion will always work to protect its revenue base. When there are developments in the market, when there are changes in market dynamics, when technology and opportunities for people to restructure their tax affairs change then any Australian Government has to be vigilant to protect its revenue base. But we are very conscious of the fact that in a global economy, in circumstances where we are dealing with multinational companies that have lots of opportunities around the world, that the most effective way to deal with this on top of having strong and effective tax anti-avoidance laws in place here in Australia, the most effective way to deal with this is in a coordinated way through the G20, as we are doing. The Treasurer led the charge during the Australian Presidency in pushing this ahead internationally. But that doesn’t mean that we shouldn’t also, at all times, look at our laws here domestically to protect our revenue base. 

PAUL KELLY: Look can I just ask you are you satisfied with the activities of the Senate Economics Committee on this tax avoidance front? Do you think that they are doing a useful job highlighting the problem and how do you feel as Finance Minister about the revelation that Australian related earnings are being accountable in tax terms in Singapore? 

MATHIAS CORMANN: I am not going to get into the specifics. I am actually not the Minister responsible for the tax system. It is the Treasurer and the Assistant Treasurer. The Senate Economics Committee is entitled to do what they want to do. I won’t take responsibility for Labor and Greens Senators doing what they think they have to do. Look, in the end I can only speak for the Australian Government. The Australian Government is committed to ensure that businesses generating profits here in Australia pay taxes consistent with our laws. Where there are developments in the market, where there are changes in market dynamics, which undermine our revenue base then we will seek to take effective action against that. 
  
PETER VAN ONSELEN: What’s the better way to go Senator in your view? I realise that it is not always a binary choice like this, but there is the argument that on the one hand you need to close loopholes because it is incumbent on any business or on any executives within a business to minimise their tax. I mean their first preserve is to look after their shareholders, do so legally as you say. You can either try to close those loopholes but presumably tax lawyers will find ways around them as quickly as your legislators find ways to close them. Or you can look to reduce taxes such as company tax for example to make Australia on a global stage a more interesting place to try to ensure you don’t get around it. Which way do you philosophically go? 

MATHIAS CORMANN: You walk and you chew gum at the same time. It is a matter of balance. If your question is do we need to continue to focus on are we as competitively internationally as we can be, yes. Does that include a focus on making sure that our taxes are as low as they can be, as efficient and the least distorting they can be to the economy, yes of course. But do we also need to make sure that within that system which is as efficient and as fair as possible, we ensure that everybody does their bit consistent with our laws, yes of course. So one doesn’t exclude the other and you have got to do all of it at the same time. 

PETER VAN ONSELEN: But I am interested in, as a follow up to Paul Kelly’s question to you earlier about whether Australia is getting ahead of the rest of the world in sort of trying to deal with some of this. If we are, and it seems like we are at least trying to lead on this, it feels a little akin to something your side of politics criticised the Labor party for where Australia was getting ahead of the rest of the world on climate change. Very hard to do anything without global support.  

MATHIAS CORMANN: Peter, I don’t agree with any of that. The truth is should we be leading the charge or should we have been leading the charge when we had the Presidency of the G20, of course. Should we be doing what we can domestically to protect our revenue base, of course. Should we be working to ensure that our tax system is as competitive internationally as possible, of course. We can do all of these things at the same time and they are not mutually exclusive. In fact, they are complimentary parts of an overall strategy to ensure that Australia is on the strongest possible foundation for the future. 

PAUL KELLY: Minister, Treasurer Hockey reached agreement with the State Treasurers this week for the application of the GST in relation to the downloading from offshore of a range of entertainment products. Doesn’t this equate to an expansion of the 10 per cent GST? 

MATHIAS CORMANN: In my mind this is sensible housekeeping. As the Treasurer said, it is in a way an integrity measure. The truth is that the market dynamics have changed significantly since the GST was introduced back in 2000. The online purchasing market has massively increased since then. It was hardly present in those days, its increasingly significant today. When Bill Shorten was the Assistant Treasurer, he flagged that this is something that Australia needed to deal with. As I understand it the Labor State Treasurers are in favour of dealing with this as well. So the way I would look at it is as some sensible housekeeping, recognising and acknowledging that there are some changed dynamics in the market that we need to respond to. 

PAUL KELLY: Would you expect Bill Shorten to support this?

MATHIAS CORMANN: I’ll let Bill Shorten talk for himself. But again, the way I would look at this, and given that State Labor Governments appear to be supportive, given what Bill Shorten has said in relation to this in the past, I would suspect that this is not going to be that controversial and I would suspect that there is some opportunity for some broad consensus across the Parliament in relation to any proposal to make improvements here.  

PETER VAN ONSELEN: Alright you’re watching Australian Agenda. We’re speaking to the Finance Minister Mathias Cormann. We need to take a quick break, but when we come back we’ll look specifically at some of the issues affecting his home state of Western Australia. The Senator has an opinion piece in the Sunday Times newspaper today talking about some of those issues, we’ll explore them in greater detail when we come back.

[BREAK]

Welcome back you’re watching Australian Agenda, where Paul Kelly and I are speaking to Finance Minister Mathias Cormann, joining us out of Perth. Senator let me as you about, you wrote an op-ed today as I said in the Sunday Times newspaper about whole issue of the GST and position with WA. We’ll get to some of those details in a moment. But the South Australian Treasurer wade in in recent days on the whole issue of what’s going on with Western Australia’s concerns over not getting enough equalisation of its GST receipts. He said that Western Australia actually has a spending problem, not a revenue problem. Do you agree with that?  

MATHIAS CORMANN: I saw that contribution by the South Australian Labor Treasurer. It was a rather juvenile contribution I’ve got to say. Western Australia right now, at a state level, is confronting massive falls in revenue from iron ore royalties. At the same time as that is happening the Commonwealth Grants Commission recommendations would have the effect of driving down the revenue from the GST for WA from this year to next year by another 16 per cent. 16 per cent. So to say there is not a revenue challenge there is just not serious. To put that into a broader context, Western Australia’s growth in recent years, driven by strong demand out of China for our iron ore, with iron ore prices going to record levels, $180 a tonne at its peak, down to about $43 a tonne now. But the massive increases in export income on the back of that have been good for the country as a whole, have been good for all of the states. All of the states right now are better off as a result of the national economic growth effect, as a result of the increased GST pie. That has benefited South Australia as well as any other state. So for the South Australian Treasurer to turn around and say a 16 per cent drop in GST revenue for WA and a massive drop on the back of falls in iron ore prices doesn’t cause a revenue problem for Western Australia is just not serious.

PETER VAN ONSELEN: And it’s hard to disagree with you about that. So he’s wrong when he says that WA doesn’t have a revenue problem. I can see your point strongly on that one. What about the idea though that the do have a spending problem? Do they have a problem on both sides with revenue and spending? 

MATHIAS CORMANN: I’m going to be responsible for the Australian Government’s Budget, together with my good friend and valued colleague Joe Hockey. I’m going to let Colin Barnett and Mike Nahan explain the spending side of the West Australian budget. But just to say, these observations in response to my opinion piece by the South Australian State Treasurer today is just ridiculous,. It's not serious.

PAUL KELLY: Minister, this is one hell of a mess. So the first question is, did the Grants Commission get it wrong? Is there a problem with the methodology of the Grants Commission that needs to be addressed?

MATHIAS CORMANN: You can’t really blame the Grants Commission, because the Grants Commission is essentially playing with the system as it was set up. But I don’t think that the system ever envisaged such massive, and they are massive, swings in revenue in relation to one particular revenue source. In the five, six, seven years to 2012, significant increases both in price and volume when it comes to our iron ore production, which had the effect of over time reducing WA’s share of the GST and now the swing the other way. But because of the lag, while Western Australia is on the receiving end of significant falls in the revenue from iron ore, they are still being penalised for high iron prices from a couple of years ago. It is essentially something that I think is beyond the Commonwealth Grants Commission to resolve. I think it is a political issue where really around the country we’ve got to pull together and say what’s happening here is not fair. It's a matter of balance and let’s come up with a sensible way to sort it out. 

PAUL KELLY: But Minister, look, you talk about pulling together, I mean all the reports from the meeting the other day were that apart from Joe Hockey all the Treasurers dumped over WA. They had no sympathy, they had no time for the WA position at all. So my question to you is, what are the options now facing the Commonwealth Government to resolve this problem? How do you best resolve it?

MATHIAS CORMANN: I would like to think that what happened last week at the Treasurer’s meeting was the initial reaction and that on reflection and looking at the facts and looking a what actually is happening, looking at the whole country and every single state has benefited strongly in recent years from growth out of WA and that what is happening now is manifestly unfair and needs to be addressed. I’d like to think that on reflection and as the leaders come together this week that there might be more constructive conversation about the way forward... interrupted

PETER VAN ONSELEN: But that’s just too optimistic isn’t it Senator, that’s just too optimistic.

MATHIAS CORMANN: I’m optimistic, I’m optimistic.

PETER VAN ONSELEN: In a horse race you always put your money on self interest and states that are going to lose revenue share for WA to get out of the ridiculous space of only getting less than 30 cents in the dollar return on the GST, are going to put their interest first. There’s only government where self interest dictates what you’re suggesting and that’s the Commonwealth Government, because it looks after all Australians. Don’t you have to act unilaterally?

MATHIAS CORMANN: Peter, I’ve always prided myself on focussing entirely on the national interest. I’ve been under pressure domestically, dare I say, in Western Australia for some time in relation to what was happening on GST sharing arrangements and I was very focussed on what was fair nationally then, as I believe I am focussed on what is nationally fair now. I believe that with the most recent recommendations from the Commonwealth Grants Commission, a line has been crossed. It is now proposed that the share of GST for WA would fall below 30 per cent. Below 30 per cent. I don’t think that is a sustainable situation in a federation. How do I think this could be addressed? I think we should freeze the GST relativities for next year at the same level as this year, so that nothing changes in terms of the relativities. That would actually leave every single state better off to the tune of about 5 to 6 per cent in terms of additional GST revenue next year compared to this year. Yes, some states instead of getting 10 per cent more, or 7 per cent more would get 6 per cent more, but it that would mean ... interrupted 

PETER VAN ONSELEN: Will you do that?

MATHIAS CORMANN: Sorry?

PETER VAN ONSELEN: Will you do that, is that something that the Commonwealth will foot?

MATHIAS CORMANN: That is what I am suggesting would be a sensible way forward. Let’s see what happens ... interrupted 

PAUL KELLY: But Minister, that has already been rejected. I mean that’s the whole point. The whole point of this week’s meeting was to position that you’ve just advanced has been rejected, so that’s where we are now.

MATHIAS CORMANN: We haven’t reached the end of the process yet Paul. That’s my point. I’m putting forward my view that this will be the right way to resolve it. Ultimately it is up to the states to resolve the best way forward. What I am saying though to everyone is this is now a question for the Federation. This is a question of what is fair and what is unfair. We have reached a point where this is now seriously out of balance, particularly in the context where what has caused the massive drops in GST revenue in the past is actually now also becoming a problem to the extent that revenue from iron ore royalties is dramatically falling over the forward estimates.  

PETER VAN ONSELEN: But is there something that the Western Australian Government can do to try to advance its case in a better way. I notice in your opinion piece today, you point out that they should be privatising more, that they should be privatising things like the TAB and a host of other state assets because other states have been doing the same. This is something that New South Wales raised at that particular meeting. I know already that the West Australian Premier Colin Barnett has decoupled the two issues. He thinks it’s ridiculous to bring privatisation into a debate about the GST. But in your view is this something that could help them, if they were prepared to show a willingness to reform in that space?

MATHIAS CORMANN: There is absolutely no doubt in my mind that the West Australian Government has to do better in the pursuit of economic reform in Western Australia. In particular, when it comes to the sale of government owned assets that could perform better in private hands and where the capital released could be reinvested in productivity enhancing infrastructure to boost economic growth in the future. I don’t agree with Colin that the issues aren’t linked, because if Western Australia was a bit more ambitious, a bit more proactive and had a bit more of a sense of urgency around pursuing asset sales, what it would also mean is that they could access billions of dollars potentially, in Federal incentive payments through the Asset Recycling Fund. The fact that they don’t seem to have more of a sense of urgency around that, in my mind weakens their argument somewhat in relation to GST distribution and I would like to see the West Australian Government come out to be more ambitious, have more of a sense of urgency around pursuing important micro economic reform, asset sales, but also in relation to other matters like deregulation of trading hours and the like, to show that they’re serious about putting Western Australia on the strongest possible foundation for the future in the wake of significant structural adjustment caused by falls in iron ore prices. 

PAUL KELLY: Minister this then raises the question as to the extent to which some form of promise or reform commitment from the WA Government along the lines of the issues you’ve just been talking about could play a role or be a catalyst in helping to resolve the issue. What’s your view of that?

MATHIAS CORMANN: Again, if Western Australia is seen to be serious in pursuing economic reform that is good for WA but it would also be good for the national economy and I’d like to think that that would be another sign of goodwill from Western Australia, which should be well received by other States. Ultimately it will be a matter for the States to sort the medium to long term arrangements for GST distribution out between themselves. But the final point that I would make here, because some of the State Treasurers including the State Treasurer from South Australia at various times have mentioned that WA should stop whinging because WA used to be a beneficiary over many years from the fiscal equalisation arrangements and that is true. But since 1981, since the fiscal equalisation arrangements since 1981, no other State has ever fallen below 81 per cent, whereas now Western Australia is now looking at a share of less than 30 per cent. What I would say to State Treasurers, just reflect on that sort of exposure to volatility that has never ever been faced by anybody else and the uniqueness of that circumstance and what it means in terms of the decisions that we should be making moving forward.

PETER VAN ONSELEN: But Senator in terms of your argument that they would be better placed as a State essentially were they engaging more in reform around privatisation, deregulation of shopping hours and so forth to be then able to mount their case on the GST and the lack of equalisation. Wouldn’t  the opposite be the case, wouldn’t they be in a position where other States would say well they’ve got all this extra revenue now, as a result of these economic reforms they don’t need to continue to cry poor to the Commonwealth and to other States over their share of GST?

MATHIAS CORMANN: No, I don’t agree. There is an opportunity to access Federal incentive payments to invest in increased infrastructure for the future, to boost economic growth which over time will help …interrupted

PETER VAN ONSELEN: That’s the point isn’t it? That they would then be able to say ‘well you’ve got the extra money’?

MATHIAS CORMANN: I disagree, if you bear with me, then it would help increase the size of the pie to be shared around for everyone. But also in relation to the GST, there is more of a structural issue at play that needs to be resolved. Investment in infrastructure is available in the short term as a way to be helpful through the transition, but it doesn’t fix the fundamental problem on its own. 

PETER VAN ONSELEN: Can I ask this though. What is going on in WA with their reticence about being prepared to engage in asset sales like Liberals right around the country are doing, particularly in New South Wales with the most recent New South Wales election being around electricity poles and wires. What’s going on there? The Treasurer Mike Nahan is a former head of the Institute of Public Affairs. I find it hard to believe that he wouldn’t be a strong advocate for these strong liberal principles of privatisation and deregulation. 

MATHIAS CORMANN: I’m not a commentator. What I suggest you do is you get Colin Barnett or Mike Nahan on your program and you ask them that question. 

PAUL KELLY: Minister, the debate in recent times has been very much focused about tax, witness the events of last week and a lot of our discussion in our interview with you today. A number of new taxes are being proposed, some of them being proposed by the Government. To what extent are we seeing a change here in Government fiscal and budget priorities, is the Government still committed to fiscal adjustment primarily on the spending side, or is this now changing?

MATHIAS CORMANN: That’s not changing. We are absolutely committed to making sure that our spending is put on a sustainable foundation for the future. When we came into Government, we inherited a spending growth trajectory that was going to take us to 37 per cent government spending as a share of the economy within the next four decades as was shown in the IGR. We’ve been able to significantly reduce that over the forward estimates. We’ve been able to reduce spending growth above inflation to 1 per cent on average per year which is down from about 3.6 per cent growth in spending growth on average per year under the first five years of the Labor Government. Over the medium term, we’ve been able to bring spending growth down from 3.6, 3.7 to about 2.7 per cent in real terms. We’ve got to go further. We are conscious of that. It’s just not realistic that we would allow spending to go to the levels that the previous Government put us on in terms of the forward trajectory, and that was …interrupted

PETER VAN ONSELEN: But spending is going up as a percentage of GDP on what it was during the Labor years. I accept your point that they had a trajectory that was higher than years according to the forward estimates, but nonetheless, your spending as a percentage of GDP is higher than the spending was during the Labor years as a percentage of GDP.

MATHIAS CORMANN: It’s lower than what it would’ve been if we’d stayed on the same trajectory that Labor put us on. When you say Labor put us on this trajectory, Labor locked that trajectory into legislation and into agreements and all sorts of things. You’ve got to remember, towards the tail end of the previous period of the Labor Government, when they already were confronted with falls in the terms of trade and revenue coming in lower than anticipated, at exactly that point, they made the decision to increase, ramp up significantly spending growth into the future permanently and structurally through things like the National Disability Insurance Scheme, very meritorious cause of course. But if we want to ensure that we’ve got the space to absorb spending on high priority areas like the National Disability Insurance Scheme, then we’ve got to make sure that in other parts of the Budget, we are able to achieve that space for that by bringing down expenditure growth in other areas. 

PAUL KELLY: Minister, if you’re so committed to spending controls and restraint, can I ask, will there be new structural saves in the Budget on the spending side?

MATHIAS CORMANN: The Budget will be announced on the second Tuesday in May …interrupted

PAUL KELLY: No that’s a very fair question. You’ve spent a few minutes talking about the spending credentials, it’s a very simple question in principle, will there be structural saves on the spending side?

MATHIAS CORMANN: The Budget will be our plan to continue to take us to surplus as soon as possible, to continue to reduce the deficit as a share of the economy until such time as we get to surplus as soon as possible in a way that is economically responsible. In terms of how there will be additional effort on the spending side if that is your question, we are still dealing with some of the structural reforms that we put forward in last year’s Budget and that will all have to be settled down. The very important structural commitment that we’ve got in the context of spending is that wherever as a result of circumstances we have to spend more on comparatively higher priorities in the current circumstances such as in relation to national security or the like, we will be fully offsetting any additional expenditure by reductions in expenditure in other parts of the Budget and beyond that, I’d really have to refer to the Budget on the second Tuesday in May. 

PETER VAN ONSELEN: Alright fair enough, we’ll wait for it with interest. One final question before we let you go though Minister. Something that I struggle with here is, how can you on the one hand have a narrative of spending restraint in a broad sense, if you like in a macro sense, yet all the discussions that are being talked about, certainly by the Prime Minister and other Ministers as well, seem to be ‘just wait, watch this space, when the Budget comes around we’ve got a big spending package for business, small business in particular, we’ve got a big spending package for families as we look to restructure family payments, so don’t you worry there’s lots of money flowing your way’. I just don’t understand the consistency?

MATHIAS CORMANN: I don’t think that the Prime Minister puts it in those terms that you’ve just put it Peter. I think what the Prime Minister is saying is that we will have a families package to help families and we will have a small business and jobs package in order to help drive further economic growth into the future. The way that will be funded will be by reallocating various priorities. You would remember that the Prime Minister has already indicated that we’re not proceeding with the Paid Parental Leave Scheme that we took to the last election, that frees up some space in the Budget. We will be redirecting and reprioritising that space for example into facilitating more affordable access to childcare in an effort to help boost workforce participation, help boost economic growth …interrupted

PETER VAN ONSELEN: Will it be dollar for dollar though?

MATHIAS CORMANN: Really? I’m not going to be releasing the Budget to you today. What I’m saying to you is that we are focused on making sure that we continue to repair the Budget, we continue to put ourselves on a trajectory, a believable and credible trajectory back to surplus as soon as possible, to continue to reduce the deficit as a share of the economy year on year and all of the detail will be revealed very soon. 

PETER VAN ONSELEN: Alright Mathias Cormann you’ve been generous with your time as always here on Australian Agenda, appreciate your company thank you.