Senator the Hon Mathias Cormann

FRAN KELLY: Major changes to negative gearing versus a new round of spending cuts that is the key economic battlelines being formed ahead of this year’s election. Labor has promised to curb tax deductions on housing investments. While Treasurer Scott Morrison used a major address to National Press Club to warn spending will be targeted when he hands down his first Budget in May. We’re joined now in the Parliament House studios by the Federal Finance Minister, Mathias Cormann. Minister, welcome back to Breakfast.

MATHIAS CORMANN: Good morning Fran.

FRAN KELLY: The Treasurer’s philosophy espoused yesterday is basically we have to do more with less, which is not terrifically inspirational I guess. Will there be any new spending at all in the May Budget?

MATHIAS CORMANN: The discipline that we have imposed on ourselves ever since we came into Government is that wherever there was a need for additional spending, we pay for that by identifying spending reductions in other parts of the Budget. For example, since the Budget last year, we had to allocate $1.6 billion in additional funding for various cancer drugs and hepatitis C related drugs onto the Pharmaceutical Benefits Scheme. In the Mid-Year Economic and Fiscal Outlook, we were able to outline how we would pay for that from savings in other areas. That is a discipline that will continue.

FRAN KELLY: Okay, the Treasurer conceded that you will only be able to find enough money through spending cuts and tax changes for modest income tax cuts, that was the word he used, modest income tax cuts. So the burden of bracket creep on the economy won’t be relieved in this Budget strategy will it?

MATHIAS CORMANN: We will do as much as we can and as much as we can sensibly afford. If you had been able to sensibly pursue a broader tax mix switch, then you would have been able to be a bit more ambitious. But given that wage inflation is comparatively low, inflation generally is comparatively low, while the problem is there, it is not there to the same extent as it might have been in the past, as what it might have been if we weren’t in a changed environment. The truth is, in the current fiscal environment, we will do as much as we can sensibly afford. Our instinct is to deliver lower taxes to deliver personal income tax cuts to address bracket creep. But we will have to make judgements on what is affordable.

FRAN KELLY: But Minister, when you say if you had been able to sensibly pursue a broader tax mix switch, what do you mean? Are you talking about being able to bring in the GST there? Switch to indirect to direct taxes?

MATHIAS CORMANN: It is a matter of public record that we explored that very carefully. But in the end after having gone through the modelling, after having gone through a very thorough exercise, the judgement that we came to is that the economics of it didn’t stack up. So ... interrupted

FRAN KELLY: But that was your judgement, so you said, if we had been able to sensibly pursue, do you think it would have been sensible to have gone with a higher GST.

MATHIAS CORMANN: No. That is not what I’m saying at all. What I am saying, is that we explored one particular approach. The modelling indicated to us that it would not deliver the economic growth dividend that we were hoping for. As such, we made a decision to recalibrate our ambition, given the fiscal environment we are currently in.   

FRAN KELLY: Just back to bracket creep, because Joe Hockey as Treasurer and Scott Morrison as Treasurer has spent much of the past year warning us that bracket creep was a danger to economy, a drag on growth. Joe Hockey said it harms innovation and hinders efforts to workforce participation and makes Australia less competitive with other countries in the region. So now what we know is that the Turnbull Government’s first Budget will only be able to make a modest dent in that bracket creep, which is effectively a drag on growth and makes us less competitive.

MATHIAS CORMANN: Bracket creep is a problem. Bracket creep is a drag on growth. We would want to address it to the extent that we sensibly can. Now ... interrupted

FRAN KELLY: But that is only modestly.

MATHIAS CORMANN: The detail will be in the Budget to be delivered on the second Tuesday in May. If I might just make the point again. Given what is happening in terms of comparatively lower wage inflation and given what is happening in terms of comparatively lower inflation right now, bracket creep, to the extent that it is a problem and it is, it is slightly less of a problem than it was. That gives us a little bit of room to recalibrate in a more affordable fashion our ambition in this area.

FRAN KELLY: Okay, the Coalition did talk a big game Minister. It came to Government promising to end Labor’s debt and deficit disaster and yet we were told in the starkest terms by the Treasurer yesterday, the Coalition Government made almost no difference to that debt and deficit. He said we’ve saved $80 billion, spent $70 billion or quote, we are basically in the same position we were two years ago. Essentially you are no better economic managers than Labor is this what this tells us?

MATHIAS CORMANN: No. That is absolutely not what it tells us. Just to unpack that a little. There are three elements to this. When it comes to spending, firstly, unlike the previous Labor government, where spending was increasing without any appropriate funding, without any appropriate way to pay for it, every spending increase that we had to incur, like for example on increased funding for drugs for the Pharmaceutical Benefits Scheme, was more than offset by spending reductions in other areas. So we have halted the blowout in expenditure as a result of spending decisions. Secondly, deliberately, in our first and in our second Budgets, many or most of the savings decisions we made were structural savings decisions, which started deliberately low and slow and built over time. For example, the decision to put Federal funding for State schools on a more realistic and more affordable growth trajectory for the future, didn’t deliver savings over the forward estimates. In fact over the forward estimates we spent more than Labor, because we had to put $1.2 billion back into schools in Western Australia, Queensland and Northern Territory that Bill Shorten had taken out. Finally, the third element is that a significant proportion of the recurrent spending reductions were redirected into increased capital infrastructure investment to strengthen growth and over time increase our revenue generating capacity. So we are spending less. We are controlling expenditure, by not increasing expenditure in net terms as a result of decisions and we are improving the quality of the spend by redirecting recurrent savings that are available over the medium and long term into a boost in capital investment, infrastructure investment that strengthens growth and creates more jobs.

FRAN KELLY: You’re listening to RN Breakfast, it is 18 to 8, our guest is the Finance Minister Mathias Cormann. Never the less the Treasurer says there will be some cuts and they will be saved and not spent and there will be some tax changes, the GST is off the table. Has business lost all hope of a company tax cut Minister, is that still a first order priority for your Government?

MATHIAS CORMANN: Our focus is on doing the best we can to deliver stronger growth and more jobs. One of our focuses there is to ensure that our tax system is as growth friendly as we can possibly make it ...interrupted

FRAN KELLY: Does that mean yes to a company tax cut?

MATHIAS CORMANN: What it means is that the Budget will be delivered in May as the Treasurer very clearly indicated yesterday in his speech. The Budget is not delivered in February. The Budget is delivered in May. What he did yesterday, very eloquently, is to set out the context and the framework for our decision making over the next few months.

FRAN KELLY: Would you, as Finance Minister be hoping for a company tax cut?

MATHIAS CORMANN: On the Coalition side of the Parliament, our instinct always is to go for lower taxes, lower income tax, lower company tax, but you have to make judgements very carefully on what is affordable in the circumstances.

FRAN KELLY: What about negative gearing? We don’t know your plan but you are critical of Labor’s plan to shift it from existing properties and to limit it to new properties, yet that is exactly advice again to quote your former colleague and former treasurer Joe Hockey in his final speech to the parliament, quote ‘negative gearing should be skewed towards new housing’. Was he wrong?

MATHIAS CORMANN: He spoke as a backbencher ...interrupted

FRAN KELLY: He was the Treasurer though.

MATHIAS CORMANN: No well he wasn’t actually when he spoke in his final speech ...interrupted

FRAN KELLY: No, but he had been the Treasurer.

MATHIAS CORMANN: Let me say very clearly, what Labor is doing is a very bad idea because it will concentrate activity into one segment of the market. If you increase the level of competition for a particular class of property, you will have an impact on pricing and you will make housing, new housing for first home owners less affordable. That’s just an economic reality that if you increase demand, all other things being equal, you will push up prices and you will create a distortion in the market.

FRAN KELLY: So what is your preferred method for dealing with negative gearing?

MATHIAS CORMANN: We have not made a decision to make any change to negative gearing ...interrupted

FRAN KELLY: Do you have an idea?

MATHIAS CORMANN: We are working our way through all of the various options to improve our tax system, to make our tax system more growth friendly. If and when we make relevant decisions we will make these announcements.

FRAN KELLY: What about Capital Gains Tax – Labor has announced that in Government it would halve the capital gains discount from 50% to 25%. Is the Government also looking at paring back capital gains tax?

MATHIAS CORMANN: What we are hearing from Labor is that they want to tax more to spend more. What you are going to be hearing, continuing to hear from the Coalition is that we want to control expenditure, we want to tax less, we want to tax better, because we want to strengthen growth and create more jobs. Since coming into Government ...interrupted

FRAN KELLY: Does that mean you won’t need to pare back capital gains tax?

MATHIAS CORMANN: Again, you can ask me these sorts of questions whatever way you want. The Budget will be delivered in May. Right now we are talking about the context, the economic context, the fiscal context and the framework for our decision making. If you look at our past track record, in last year’s Budget we delivered tax cuts for small business, in Budgets and Budget updates before that we scrapped the mining tax and the carbon tax. Our focus has been on improving the growth friendliness of our tax system, to make us more competitive internationally and to strengthen growth and create more jobs. That will be our focus as we make decisions in the context of this Budget. What these decisions will be exactly will be revealed in the Budget in May.

FRAN KELLY: And we all await that with interest. Can I just ask you on another issue, because you will be sworn in as Special Minister of State later today as well to add to your duties, your responsibilities. You’re already talking with the Greens about reforming Senate voting. Will we see a deal done and legislation for Senate reform introduced in the next sitting fortnight?

MATHIAS CORMANN: I’m not just talking to the Greens. I am talking to a whole range of interested parties in the Senate. Clearly we have a report in front of us from a Parliamentary Committee that looked at the conduct of the last election and which made certain recommendations, unanimously I might add. It was a unanimous report with support from Coalition, Labor and Green Members of Parliament, recommending certain improvements. What I have been doing since being given this responsibility, is to consult widely. The Government continues to consider the issues. We haven’t made a decision on the best way forward. Again, once we reach a landing point, if we reach a landing point in relation to this, we will be making relevant announcements.  

FRAN KELLY: I think there is a huge element of interest in this issue though, do you think it’s fair for people to hope or expect that they might get this in the next few weeks?

MATHIAS CORMANN: The recommendations from the Joint Standing Committee on electoral matters are there for all to see. They were unanimous recommendations from Coalition, Labor and Green Members of Parliament. All Senators were able to participate in that Inquiry. Yet it was a unanimous report, unanimous findings, unanimous recommendations. What the Government has been doing, we are considering the findings and recommendations put forward. We are consulting widely. Yes I have spoken to the Greens, I have also spoken to Labor, I have spoken to independents , I have spoken to people outside the Parliament. Essentially helping me finalise my views so that I can make sensible recommendations and provide sensible advice to the Prime Minister and to the Cabinet.

FRAN KELLY: Minister thank you very much for joining us.

MATHIAS CORMANN: Always good to talk to you.