Senator the Hon Mathias Cormann

PETER VAN ONSELEN: As mentioned off the top, our first guest is the Finance Minister. There has been continuity and change in relation to the Budget. Mathias Cormann thanks very much for your company.

MATHIAS CORMANN: Good to be here.

PETER VAN ONSELEN: The continuity of course is yourself. You have been there since 2014. Your colleague Scott Morrison will be delivering his first Budget. The change that we have been reading about in the papers today Senator, is in relation to education funding. There will be more money there. Is that an admission that the Coalition got it wrong in 2014?

MATHIAS CORMANN: In 2014, we put in $1.2 billion in additional funding for schools that had been ripped out by Bill Shorten as Education Minister in the dying days of the Rudd government. This time, we made judgements as more information becomes available. We have reviewed the evidence. We have identified this need to provide an additional $1.2 billion worth of funding for schools for the years 2018 to 2020. The important point here is that we are paying for this increased expenditure on schools by reducing expenditure in other parts of the Budget instead of doing it as Labor is proposing to do, paying for it with increased taxes, which hurt economic growth.

PAUL KELLY: But on this point Minister, it still means there will still be a pretty significant gap between what Labor is proposing for schools, which is about $4.5 billion extra across the forward estimates and what the Government has been proposing in the Budget. So you are in a situation where you are actually offering less for schools. So how do you manage the politics of that?

MATHIAS CORMANN: It is not all about money. Our increased funding for schools is tied to important reforms to boost performance, boost outcomes, to ensure that we do have a needs based distribution model in place. If you look at the evidence around the world there are a number of countries which spend less than us per student and which achieve much better outcomes. There are also countries which spend more than us per student and which achieve worse outcomes. So it is not just about the money. The money is an important factor but it is not the only factor. Our commitment to parents across Australia is that we will be tying this increased funding to the sorts of reforms that are required to boost performance and boost outcomes and ensure that kids across Australia genuinely have the best possible school education. 

PAUL KELLY: But in terms of community attitudes and public opinion, do you think that the Australian public is now at the point where it is prepared to accept the sort of argument that you have just made? That is that less, if it is quality spending, can actually be better.

MATHIAS CORMANN: We have got to make a judgement on what is affordable. We have also got to recognise that increased spending is not the only answer. You do need to ensure that you pursue the necessary reforms to boost outcomes, to improve performance. Funding is part of that. But you always have to make judgements, given our commitment to live within our means, you have always got to make judgements on what is genuinely affordable, sensibly affordable. That is what we have done. The Prime Minister and the Education Minister, Simon Birmingham will have some more to say about all this in due course.

PAUL KELLY: Well tell us how you would characterise the Budget? You have been sitting there. You have been privy to all the decisions, all the debates. What is the headline that you would put on the papers on Wednesday morning about this Budget?

MATHIAS CORMANN: The Budget is about making sure that the Australian economy continues to successfully transition from resource investment driven growth to broader drivers of growth in a strong and diversified economy. It is about jobs and growth. It is about making sure that we back Australians to be the most successful they can be, making sure that our Budget is on a sustainable foundation for the future.  

PAUL KELLY: Now we saw an analysis this last week from Deloitte Access Economics, economist Chris Richardson, just arguing once again that the Budget bottom line is under continuing pressure in terms of the revenue side. How significant are those pressures, and to what extent can the Government in this Budget bring down a bottom line where it is showing over time an improvement in the deficit? 

MATHIAS CORMANN: Our focus has been on improving the Budget position over time in a way that is sensible and responsible. That is what the Budget will show. It will show that we have continued to control expenditure growth. That we have continued our focus on bringing down expenditure as a share of the economy. That we have continued to ensure that the Budget position doesn’t go backwards as a result of policy decisions. In fact what the Budget will show is that the policy decisions of the Government are improving the Budget bottom line. That is the fiscal discipline that we have imposed on ourselves. That is the fiscal discipline that we have been able to deliver in the Budget. 

PETER VAN ONSELEN: So in other words, you will be saving more than you spend, is that going to be a significant number?

MATHIAS CORMANN: I will leave it to Scott Morrison to deliver the numbers on Tuesday ... interrupted

PAUL KELLY: I didn’t ask you the number. I didn’t expect you to actually give us the number. But I thought you might... 

PETER VAN ONSELEN: But feel free to though, if you are inclined to Senator.

MATHIAS CORMANN: I will let you come up with the observation on whether it is significant or not, once it has been released. 

PETER VAN ONSELEN: Can I ask you a question Senator in relation to forecasts and assumptions. I spoke to Jan Harris during the week on News Day on Sky News. She is of course a former deputy secretary of the Treasury. And she confirmed what a lot of people have wondered about which is whether they are ultimately Government numbers or whether they are Treasury numbers. She confirmed that it is the Government’s Budget not the Treasury’s, so those forecasts, those underlying assumptions are ultimately the Government’s. But that is not the case for PEFO, the pre-election fiscal outlook that the Treasury will put out, literally in a matter of weeks with an early election. Would you be blown away I suppose if those underlying assumptions were different between PEFO when the Treasury gets to do it independent of Government and when the Treasurer hands them down on Tuesday? 

MATHIAS CORMANN: I don’t expect there to be a significant variation between the Budget and the Pre-election Economic and Fiscal Outlook. You are right, the Budget is the Government’s document. We take responsibility for what is in the Budget. The Pre-election Economic and Fiscal Outlook is under the Charter of Budget Honesty is released independently by the Secretaries of Treasury and Finance. There is not going to be that much time elapse between the delivery of the Budget and the Pre-election Economic and Fiscal Outlook. As you would expect us to do, when we put the Budget together, while it is our document, while we do take responsibility, we do act on advice, we do act on the advice of Treasury and Finance and other departments across Government. 

PETER VAN ONSELEN: But it is an interesting one though isn’t it Senator. I am talking in particular about the economic growth forecasts are, or for example what the unemployment forecasts are. If there is a distinction between PEFO and the Budget that gets handed down on Tuesday, we will only have a few weeks between them, but it will tell voters and the commentariat that the Government is perhaps more bullish or more bearish on these fronts than the Treasury if there is a difference.  

MATHIAS CORMANN: I don’t expect that to happen to be honest.

PAUL KELLY: If we could just look at the economic outlook for growth and employment, unemployment now is 5.8. Do you think the economy is going to be able to grow sufficiently strongly to maintain unemployment at that level, or even improve it? 

MATHIAS CORMANN: Our most recently reported 12 month period showed three per cent economic growth, which is strong by international standards. It is stronger than any of the G7 economies. It is above the OECD average. Indeed the unemployment rate is well below the OECD average. It is certainly well below what had previously been anticipated for Australia. Employment growth in Australia has been very strong. In part, that is a reflection of our economic transition, our successful economic transition from resource investment driven growth to broader drivers of growth, in particular, the more labour intensive services sector. Certainly, in terms of our outlook, as long as we continue to implement the Government’s economic plan for stronger growth and more jobs, we would expect employment growth to remain strong. If the country were to opt for Labor’s tax, borrow and spend type of approach, then we think that jobs growth, employment growth would be at risk and the unemployment rate would be likely to rise again. In particular, given Labor’s promises so far to increase taxes by more than $100 billion over the next decade and their promise to bring back the carbon tax which will be bad for jobs and bad for growth.    

PAUL KELLY: You think you could maintain growth of three per cent, which was a pretty good number?

MATHIAS CORMANN: Again, the numbers in terms of the economic parameters and the Budget numbers will all be revealed on Tuesday night. You will see what our expectations are then. What I can say, is that our complete and total focus is on doing everything we can to strengthen growth, strengthen job creation and to ensure that Australia continues to successfully transition from resource investment driven growth to broader drivers of growth in a strong and diversified economy.   

PETER VAN ONSELEN: I know you’re not going to give us the numbers Senators but it would be political suicide wouldn’t it not to improve on the deficit position from last year’s Budget or indeed from the Mid-Year update.

MATHIAS CORMANN: What I can tell you is that the policy decisions taken by the Government improve the Budget bottom line. That is something that I have previously indicated. Indeed any requirement for increased expenditure has been more than offset by spending reductions in other parts of the Budget.We have been able to keep the discipline of keeping spending growth under control.

PAUL KELLY: If we just move to tax, I appreciate that clearly in an overall macro sense you’re not increasing the tax take, but there is a tax crackdown in a number of areas and taxation will go up, or tax concessions be removed in a number of areas. Is there a risk do you think that the Budget in certain quarters might be depicted as a taxes up Budget?

MATHIAS CORMANN: No, because as you quite rightly point out, we have been very focused on making sure that we don’t increase the overall tax burden on the economy but that we raise the necessary revenue for Government in a better, more efficient, less distorting way in the economy. Our focus is on making sure that our tax system is as growth friendly as possible, detracts from future growth opportunity the least possible and that is what people will see reflected in the Budget on Tuesday. 

PAUL KELLY: What is the thinking behind giving income tax relief to people on $80,000 and above. What’s the thinking behind that particular income level and what’s the strategy?

MATHIAS CORMANN: I’m not going to confirm pre-Budget speculation. I assume that you are referring to a story which appeared in The Australian yesterday. What I can say in a general sense though, as we’ve said for some time, we have been committed to doing as much as we can sensibly afford to ensure that average wage earners don’t move into a higher tax bracket, into the second highest tax bracket. That is something that we have carefully assessed as we reviewed the numbers and reviewed all of the pressures and the position pressures on the Budget, the position of the Budget. We made a judgement on what we could sensibly afford to ensure that average wage earners don’t move into the second highest tax bracket. Now in terms of the specifics, that will be revealed on Budget night. 

PETER VAN ONSELEN: But you are on the record Senator as having made the point that the low wage growth environment that we’re in makes bracket creep less of a problem than it perhaps might otherwise be. Is now really the right time to be doing that?

MATHIAS CORMANN: If you review that particular interview, which I did on Radio National, which is quoted widely, I actually made the point in that interview that bracket creep is a problem. It is a drag on growth, but it is less of a problem to the extent that it is and it is, less of a problem because of lower wages growth at present. But in that same interview I also said that we would do as much as we could sensibly afford to address it. That is the position that the Government has been pursuing all the way through.

PETER VAN ONSELEN: Can I ask you on a separate subject to the Budget, can I ask you about the Federation White Paper. It was confirmed I think, through the committee process during the week that that has been formally junked by the Government. Millions of dollars have gone into it, but the Prime Minister has made the call not to go any further. Why not, given his idea for federation reform was rejected by COAG. Why not just bring out the Federation White Paper? It was after all Senator an election promise by the Coalition at the 2013 election to do so. 

MATHIAS CORMANN: We remain committed to improving the working of the federation. The Prime Minister with the State Premiers and Territory Chief Ministers continues to pursue sensible reform where that can be achieved. 

PETER VAN ONSELEN: But wouldn’t that be easier with a white paper process? It’s something that you argued for ahead of the 2013 election, it was an election promise. The previous Prime Minister told us it was going to happen. The Prime Minister now tells us he’s committed as you just have to federation reform, but wouldn’t it be easier to argue the case with a white paper?

MATHIAS CORMANN: I think that what people across Australia are interested in are the outcomes that can be achieved rather than which process you use. There was a process that had been initiated. That process certainly brought forward a lot of information and a lot of potential ideas that can be pursued. But from here the focus will be on how we can best achieve outcomes when it comes to improving the workings of the Federation. The Prime Minister will continue to pursue that with State and Territory leaders. 

PETER VAN ONSELEN: I agree with you, I think that people are more focused on outcomes than process, but given the outcome from the last COAG where the Prime Minister got sat back down on what he tried to do in relation to Federation reform, wouldn’t the process of a white paper be a better way to go?

MATHIAS CORMANN: As you have just said you agree with me. This is work in progress. What matters is the outcome, not the specific process that you use.

PAUL KELLY: How confident are you that through measures in this Budget that you’ll be able to crank up more private sector investment in infrastructure?

MATHIAS CORMANN: That is one of the very high priorities of the Government. There is a need for additional investment in infrastructure. Budgets at the Federal and State government level are constrained. So we are not able to meet all of the investment needs when it comes to infrastructure from Budget based grant funding.  So what we are committed to do is to explore innovative ways of infrastructure financing involving the private sector, seeking to attract private sector investment. The Prime Minister made an announcement in relation to this as part of his Smarter Cities agenda a few days ago.  That is going to be one of our very central planks in our economic plan moving forward. 

PETER VAN ONSELEN: We are talking to the Finance Minister Mathias Cormann. We’re going to take a quick break here on Australian Agenda. A little bit later in the program we will talk to the Greens leader Richard Di Natale, but we will continue our interview with Mathias Cormann when we come back.

[BREAK]

Welcome back, you’re watching Australian Agenda where Paul Kelly and I are speaking to the Finance Minister, Senator Mathias Cormann. Senator, I want to ask you about negative gearing, the battle lines on this one have been drawn, it is a very black and white debate now. We have got a Labor scheme and we have got the Government opposed to any changes to negative gearing. Why is that when just in February the likes of Alex Hawke, Steven Ciobo, indeed the Treasurer himself all talked about the need to or the value perhaps in looking at tackling excesses in negative gearing, yet now, the Government is committed to doing nothing on that front?   

MATHIAS CORMANN: Firstly, Labor’s ill-thought out approach on negative gearing will drive down the value of established homes, it will push up the cost of rental accommodation, it will be bad for mum and dad investors who are trying to get ahead. The truth is, what is described colloquially as negative gearing is nothing else other than the principle that you can deduct from your gross income relevant costs incurred in generating that income to determine your taxable income. People are able to leverage their existing income and their existing asset base in order to expand their own income and as such, be successful and get ahead. That is a well established principle. Our judgement was that in an economy that we want to continue to grow strongly, that established principle shouldn’t be thrown overboard.   

PETER VAN ONSELEN: I can see the problems with Labor’s specific scheme, but the essence of my question is why does the Government not want to tackle some of the excesses? For example, limit the number of properties you can negative gear so that we don’t have a scenario where Labor is attacking the Government by saying your side of politics are defending the right of people to negatively gear say, 12 properties? 

MATHIAS CORMANN: The truth is that Labor is preventing people from negatively gearing one established property. That is the first point. The second point is you can’t be half pregnant here. Either you agree with the principle that in order to attract investment and in order to facilitate growth, you allow people to deduct relevant costs incurred in generating an income from that income to determine the taxable income, or you don’t. We think it is an important principle because that is what enables a lot of people across Australia to leverage their existing income, to leverage their existing asset base to pursue additional income for themselves and their family.

PETER VAN ONSELEN: But can I just jump in there. You say you can’t be half pregnant on this issue, but what’s the distinction between limiting for example concessional payments into superannuation versus not limiting the ability to negatively gear? On the half pregnant concept, surely you wouldn’t then limit people’s ability to save for their retirement?  

MATHIAS CORMANN: They are entirely different concepts Peter. Negative gearing is not a concession. Negative gearing is the principle that you can deduct relevant costs incurred in generating an income from that income before you determine your taxable income. Whereas when it comes to superannuation, yes there are certain tax concessions designed to encourage people to save more, so that they can have an income in retirement which either replaces or supplements the age pension. It is a very different concept where we say there is a lower tax on income that is directed into superannuation savings, to a point, because it can’t be open-ended. A very different concept from saying on the other hand, that when you invest in property, in shares, in a business, you are able to deduct relevant costs incurred in generating an income from that income, to determine what your taxable income is.  

PAUL KELLY: In relation to its proposed Royal Commission, Labor has said that it wants the structure, the business model of banks, so-called vertical integration on the table along with the culture of the banks. What’s the Government’s view on this? Does the Government think there are potential risks in significant changes to the bank business model? 

MATHIAS CORMANN: Bill Shorten is being very political in a pre-election environment. He is being quite reckless with a central part of our economic infrastructure. The truth is, we have had several very comprehensive reviews into our financial system, including into the banks. There have been Senate inquiries. There has been of course the Financial Systems Inquiry, which we initiated on coming into Government, which only concluded not that long ago and which the Government is responding to by implementing a whole series of their recommendations. Our banks in Australia are very well regulated. There is always room for improvement. The Government is focussed on making those improvements wherever that is advisable, including in relation to ASIC incidentally, where the Treasurer made some significant announcements a week or so ago, in relation to both increased resourcing and increased powers for ASIC. 

PAUL KELLY: Do you think though that this Royal Commission has got the potential to damage the reputation and operation of the big four?

MATHIAS CORMANN: Clearly Bill Shorten does not have confidence in our banking system. Given that he aspires to be the Prime Minister of Australia that is quite an extraordinary position. He is doing it for political purposes, which should give people cause to pause and reflect on the sort of person that is trying to become Prime Minister. We have a very good banking system. There is always room for improvement. That is why we initiated the very comprehensive Financial Systems Inquiry, which made a whole series of recommendations, which we are now in the process of implementing. That is the responsible way to go about these things. 

PETER VAN ONSELEN: Isn’t it a case of you reap what you sow though Senator in terms of these highly politically charged Royal Commissions? Ahead of the 2013 election the Government committed to Royal Commissions into the pink batts program as well as into the union movement, and here we see the Labor Party doing something similar you could argue, in relation to the banks.  

MATHIAS CORMANN: In relation to the union movement, there was a lot of hidden activity that needed to be brought out into the open. When it comes to the banking system, we do have regulators already in place with significant powers. Powers as strong as the powers of a Royal Commission. We have ASIC, APRA, we have the Reserve Bank, which has got certain responsibilities when it comes to oversight of our banks. ASIC, not only is ASIC able to investigate and find out all of the information they need, they can also take action and prosecute. When it comes to the unions in particular that are active in the construction industry, we used to have such a regulator. We used to have such a regulator in the name of the Australian Building and Construction Commission. Labor abolished it. We believe that regulator needs to come back. That is one of the arguments that will be settled at the next election.   

PETER VAN ONSELEN: Maybe I should ask it again then excluding the union Royal Commission and focussing on the one that John Howard was critical of which was the calling of the pink batts Royal Commission. When you have a highly politically charged Royal Commission called for like that, don’t you reap what you sow when Labor chooses to do something similar on the banks?

MATHIAS CORMANN: Again, when it comes to pink batts, you have to remember people died. People died because of the actions of a government. There was some information that needed to be brought out into the open. The families affected, the families of some of the victims were very keen for that information to be brought out into the open. The Government made a decision in that context. But when it comes to the banks, what is the problem that Bill Shorten is actually trying to address here? What information are we not able to receive using current processes and current institutions and current regulators? This is just a political pre-election approach, which he believes will win him some votes.    

PETER VAN ONSELEN: Don’t you need to then talk to up to six or seven of your Coalition colleagues now who think that a Royal Commission into the banking sector is a good idea? I could rattle off the names not just National Party personnel, but Liberal such as Warren Entsch as well. 

MATHIAS CORMANN: The Government has a clear position. We do not believe that a Royal Commission into the banking system is warranted.  

PETER VAN ONSELEN: On another issue, the emissions trading scheme that was announced during the week by Bill Shorten, isn’t this a case of, there’s not a lot to fear from this because frankly, the heavy lifting doesn’t happen until the second half of the 2020s? And even if Bill Shorten is successful at this election this year, he is unlikely to still be Prime Minister by then anyway.   

MATHIAS CORMANN: So Bill Shorten gave us a version of, there will be no carbon tax under a government I lead. I think that people across Australia know exactly what that means. It means that Bill Shorten if he became Prime Minister would bring back a carbon tax. It would be a worse carbon tax than under Julia Gillard because he has just promised to double the emissions reduction target. How else would he achieve that then by whacking increased electricity prices on families and business, undermining our successful economic transition. This is the worst possible time to come back with a tax which would reduce our international competitiveness, which would make it harder for us to be as successful as we can be economically while doing nothing to actually to help reduce emissions, because all it will do, is shift emissions to other parts of the world where for the same amount of economic output, emissions will be higher. 

PETER VAN ONSELEN: Mathias Cormann you have been generous with your time as always here on Australian Agenda. Thanks very much for joining us on the eve of the Budget. 

MATHIAS CORMANN: Always good to talk to you.