Senator the Hon Mathias Cormann

PETER VAN ONSELEN: As mentioned off the top of the program our first guest today is the Federal Finance Minister, WA Senator Mathias Cormann. He joins us now live from the great state of Western Australia. Thanks very much for your company Senator.  

MATHIAS CORMANN: I am actually joining you from Canberra.

PETER VAN ONSELEN: Ah of course. Sorry how could you be in WA, firstly thankfully for you with the hour of the day, but you have got a Budget to continue to put together. Let me go straight away to a story that was in The Australian as the splash yesterday about quarantining the Future Fund over the next decade and possibly beyond. Is that because you’re planning for the likelihood or possibility of a Labor government and you don’t trust them. Or is it because you don’t trust yourselves in terms of wanting to raid it? 

MATHIAS CORMANN: If you look at the Future Fund, the way it was originally legislated, it provided for two events in which Future Fund monies could be drawn down. The first was once the outstanding and unfunded public sector liability had been covered, which has not yet occurred. The second was after 1 July 2020. With 2020-21 coming into the forward estimates that was a live decision for our Government to make in the context of this current Budget forward estimates period. The decision that we have made, given that the outstanding, unfunded public sector liability has not been fully covered yet with the funds that have been accumulated in the Future Fund, that we should continue to preserve the Fund in full. The Fund is returning about seven per cent on average per annum in terms of investment returns. The cost of borrowings for the Government is significantly less than that. So it makes sense for us to do what the Treasurer set out we would do. 

PAUL KELLY: Minister, the Government and you in particular have been telling the Australian public for years that debt is bad thing. Now you are going to change the accounts fundamentally in this Budget to draw the distinction between good and bad debt. How are you going to sell this different message to the Australian public? 

MATHIAS CORMANN: I don’t agree that it is a different message. You will find that we have always made the point that what is really undesirable is to borrow to fund day to day living expenses. That what is deeply undesirable is to borrow to pay for recurrent expenditure. Whereas in the right circumstances, for the right type of infrastructure, borrowing to invest in infrastructure has always been appropriate. What we are doing in this Budget and again, the Treasurer has set this out in some detail in a speech a few weeks ago, is make that even more explicit by drawing that information out and the implications of that out in the Budget papers. In simple terms, we should absolutely be able to fund our day to day expenses, including the cost of depreciation of past capital investments, but when it comes to new net capital investments in good quality infrastructure it can be appropriate to fund that through borrowings. That has always been the case but we are making that very explicit in the context of this Budget. 

PAUL KELLY: So the Budget will have a significant increase in debt for infrastructure?

MATHIAS CORMANN: I am not going to deliver the Budget for you here today. But what the Budget will do, it will spell out very clearly the component that relates to recurrent expenditure, that is all of the expenditure on things like welfare, education, health, schools, you name it and separately the expenditure as it relates to new net capital investments. When you look at your recurrent expenditure that does also, in that circumstance include appropriate allowance for depreciation of past capital investments, which is the way that this is appropriately done.

PAUL KELLY: Okay, well you’ve made the point about infrastructure and when it comes to recurrent spending you have also made it very clear that the Government is committed to restraint in terms of recurrent spending. Will this therefore be a tough budget on the spending side?

MATHIAS CORMANN: I will leave the commentary on what the descriptor of the Budget is to commentators like yourself and analysts and experts that pass judgement ... interrupted 

PAUL KELLY: But surely you are going to describe the Budget for us. I mean you know, that is the Government’s Budget. You are the Finance Minister, what I am saying is what brand are you putting on it? 

MATHIAS CORMANN: The brand that we put on it is that the Budget is about making the right decisions today to put Australia on the strongest, best possible foundation and trajectory for the future. In the Budget, we will continue to work to successfully transition the Australian economy from the mining investment driven growth to broader drivers of growth. We will continue to ensure that all of the important services that Australians expect are guaranteed in the Budget, are affordably and sustainably funded in the Budget. We will continue to ensure that we live within our means by bringing the Budget back into balance as soon as possible. These are the things that we are doing, but what commentary you want to put on it in the terms that you have just proposed, that is going to be a matter for others.  

PETER VAN ONSELEN: There is a lot more for us to get through in terms of the Budget Senator, in a broader national sense but if I can I wouldn’t mind delving into this story that is in The Sunday Times today about a deal that has been struck essentially between the Federal Government and the new State Labor Government led by Premier Mark McGowan when it comes to infrastructure spending. I am talking about something in the order of more than a dozen road and rail projects. There has been a bit of give and take each way by the Labor Government on Roe 8, by your side on the Perth Freight Link, which appears to be no more. And we are talking about billions of dollars and almost $2 billion of Federal money tipped into it. Can I start by asking this question I guess, is that what we would call, or what the Treasurer would call good debt? 

MATHIAS CORMANN: In the Budget for some time, we had a $1.2 billion allocation for the purposes of building the Perth Freight Link project in Western Australia. We have previously announced a $226 million GST top up payment to WA for this coming financial year in order to ensure that WA’s share of the GST is effectively maintained at the 2014-15 level and doesn’t continue to fall. There is about $211 million worth of underspends in jointly funded projects in Western Australia which we have agreed to be reallocated to new projects. So all up the Turnbull Government and the McGowan Government in Western Australia have reached a very significant agreement on a $2.3 billion road and rail infrastructure package. It does involve the reallocation of $1.2 billion in that Perth Freight Link money to a series of other road projects. Also significantly to the Metronet project, which WA Labor took to the last State election. From the Federal Government’s point of view, we remain committed to the Perth Freight Link as a significant infrastructure project of national significance, which would boost productivity, which would reduce congestion and would improve road safety. It was one that was identified by Infrastructure Australia independently as their highest infrastructure project nationally not already under construction. But having said that, we recognise the priorities of the WA Government and we have worked constructively with the WA Government to come up with a package of infrastructure projects that can be delivered over the next four years, given that clearly over the next four years the Perth Freight Link project will not be built. Should a future WA Government want to build the Perth Freight Link project the Federal Government remains available and committed to it. 

PETER VAN ONSELEN: May I ask, that is a bit of a shift though isn’t it, the rhetoric between the State and the Federal Government, on both sides, this isn’t just one side back flipping it is both sides, it was a lot stronger before the State election, was that just politics?

MATHIAS CORMANN: As an Australian Government we have to recognise that the people in Western Australia elected a Labor government in Western Australia. We have to work with the government that the people of Western Australia have elected. It was a very constructive process that we were engaged in. There was as you say, a bit of give and take on both sides. That is what people across Australia would expect us to do, to focus on the outcomes, to focus on delivering the best possible outcomes, in this case for the people of Western Australia.

PETER VAN ONSELEN: Is Western Australia now getting, as a result of this injection of infrastructure spending and some reprioritisation as well, is it now getting a better deal than other States? Or is this just getting it up to a point where it is getting as good a deal as other States?

MATHIAS CORMANN: We are working with all States across Australia to ensure they get the best possible deal for their respective economies and their respective populations that we can possibly accommodate in the context of our Budget settings and their respective budget settings. 

PETER VAN ONSELEN: Alright, we are talking to Senator Mathias Cormann, Western Australian Senator Mathias Cormann, and also Federal Finance Minister. We are going to take a quick break. We will continue the discussion focussing very much in on the national implications of Tuesday’s Budget.

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Welcome back you are watching Sunday Agenda. We are talking to the Federal Finance Minister Mathias Cormann live out of Canberra, the nation’s capital. Let me ask the first question Senator Cormann if I can, right into the space of tax increases, will you rule out any tax increases in the Budget, or would it be more accurate to say that the overall tax burden is something you can rule out increasing? 

MATHIAS CORMANN: Peter, you wouldn’t be surprised to hear me say that the Budget will be delivered at 7:30pm on Tuesday night. Not much longer to go. So I will refer you to the Budget on Tuesday night. 

PETER VAN ONSELEN: So no guarantees that taxes won’t go up?

MATHIAS CORMANN: Not much longer to wait. There has been a lot of speculation in the lead up to this Budget, as there is in the lead up to any Budget. Not much longer to go. 

PAUL KELLY: Is this Budget more about politics than finances?

MATHIAS CORMANN: No. This Budget is very much, as I said earlier, about making the right decisions today, to put our country on the strongest possible foundation and trajectory for the future. It is about making sure that the Government can sustainably fund the important services that Australians expect their Government to deliver. It is about making sure that we can live within our means by bringing the Budget back to balance as soon as possible. It is all about making the right decisions today, doing the right thing by our country, making sure that we can have the best possible opportunity for people across Australia to get ahead and to receive the high quality services across a whole range of areas that Australians expect. 

PAUL KELLY: In his pre-Budget outlook, the economist Chris Richardson said that Australia had chosen to become a high spending, low tax country and that was unsustainable. Do you agree?

MATHIAS CORMANN: We have worked very hard to address the high spending, spending growth trajectory that we inherited from Labor. When we came into Government, spending as a share of GDP was heading for 26.5 per cent and rising beyond that by 2023-24. You will have seen in past Budgets and Budget updates that we have started to bring that down in. In fact, if you look at the half yearly Budget update before Christmas, we were able to bring that down to about 25.2 per cent. Still slightly above the long term average of 24.8 per cent but nevertheless we are heading in the right direction now. By any measure, we have been successful in better controlling spending growth and bringing down the spending growth trajectory. We are in a much better position now over the medium to long term than we would have been if we had kept Labor’s policy settings in place. 

PETER VAN ONSELEN: Are we really though Senator, because I know that growth forecasts which hit the long term trends in the out years, often makes it look like we are doing better than we are in a multitude of senses, but we never seem to get there because these days growth is a lot slower than those long term trends. 

MATHIAS CORMANN: Paul was actually asking about spending. For example spending growth year on year when we came into Government was running at 3.7 per cent above inflation over the medium term. Even though Labor had quite dishonestly imposed an assumption on the spending side onto their medium term forecast that spending growth would be controlled to 2 per cent. We were able to bring that down quite significantly in recent Budgets. We have been able to pass, this is implement, this is not stuff that is just proposed and still stuck in the Senate, we have been able to implement more than $250 billion worth of net Budget improvements on the spending side of the Budget since we came into Government over the current medium term. That is $250 billion that we will not have to borrow. It is $250 billion that once we get into surplus will contribute to paying down debt. 

PAUL KELLY: In a wide ranging interview with The Australian yesterday Paul Keating said that governments in the western world had to recast their approach to economic policy and that the priority now had to be public sector lead investments for infrastructure. Is that really the essence of what the Government is now on about? 

MATHIAS CORMANN: I think that is sort of putting things the wrong way around. The priority has to be private sector driven growth. Overwhelmingly, jobs across Australia and across the world are created by successful, profitable businesses. But there is a case, there is an important contribution that public sector investment in infrastructure, in productivity enhancing infrastructure can make and has to make towards setting the right framework, the right conditions, the right environment within which private sector businesses can be as successful and profitable as possible. This is one aspect of it. From the Government’s point of view, we have an overall economic plan which focuses on helping businesses have the best possible opportunity to be successful so they can hire more Australians and pay them better wages over time. That includes our effort to make our tax system more growth friendly by bringing our businesses tax rate down to 25 per cent for all businesses over a ten year period. It involves our focus on getting better access for Australian exporting businesses to key markets around the world through our export trade deals. It involves an ambitious infrastructure investment program including a public sector drive. infrastructure program, but also seeking to leverage additional private sector investment. It involves our focus on ensuring we can have reliable and affordable access to energy supplies into the future. It involves a whole range of policy initiatives across a whole range of areas and infrastructure is an important one of those. Ultimately the objective has to be to facilitate stronger private sector driven growth and stronger private sector driven employment growth. 

PAUL KELLY: Are you confident that the Government can maintain the AAA credit rating? 

MATHIAS CORMANN: The judgement in relation to the AAA credit rating is ultimately a matter for the ratings agencies. The Government values our AAA credit rating. We always work to ensure that our Budget is in the best possible position and on the best possible trajectory for the future. I would just note that in the lead up to the last Budget update before Christmas, Labor was just about hankering for Australia to lose its AAA credit rating. Various senior economic Shadow Ministers on the Labor side were egging the credit ratings agencies on to take the AAA credit rating away. What I would note is that after the most recent Budget update, within a few hours all of the three major credit ratings agencies had confirmed that Australia’s policy settings remained consistent with that of a AAA rated economy. We look forward to their judgement once the Treasurer has delivered the Budget on Tuesday night. 

PAUL KELLY: How confident are you that in changing the accounts to separate good debt and bad debt that you will still protect the AAA credit rating overall and that you will not undermine that position with this new accounting approach? 

MATHIAS CORMANN: The first point to make is that the same information in relation to the underlying cash balance that was available in the past will continue to be available. What we are saying and what the Treasurer has said is that we will be providing some additional information to clearly spell out that part of the Budget balance that is related to net operating expenditure, including the allowance for the depreciation of past capital investments and that which relates to relevant capital investments. That is not something unusual. That is something you will find is done by organisations around the world. It has not been done in the past in that way by the Australian Government, but we believe that it provides some additional relevant information to people for them to be able to assess the true state of our public finances. 

PETER VAN ONSELEN: Why the pejorative language around so called bad debt? That was the choice of words that the Government deliberately have taken. 

MATHIAS CORMANN: It is not desirable for us to keep borrowing to pay for our day to day living expenses. What I have said over the last three or four years on many occasions is no parent would put their grocery expenses and their electricity costs and their various day to day living expenses on their credit card for their whole life and hand over their credit card to their children …interrupted 

PETER VAN ONSELEN: Sure but, but let me just take up that analogy …interrupted

MATHIAS CORMANN: Please let me finish. However, it is not inappropriate for a mortgage to be taken out when you invest in a house or when you invest in an income producing asset. These are two different circumstances. All we are saying is that for one there is an appropriate space for one and we should get ourselves out of the situation as soon as possible where we are paying for our day to day living expenses by increasing levels of debt. 

PETER VAN ONSELEN: But just to use that analogy, I think parents would rather than not feed their family put it on the credit card as they try to work their way towards how to better manage their finances over time. I guess what my question really is, is why do we use the pejorative language when it comes to things that fund health, education, welfare, some of which are arguably good debt anyway with the productivity enhancing side as you would well know of some education and health spending. But calling it bad debt almost suggests that there is something wrong with funding these sort of programs when the Budget can fall on tough times. We know from history the Great Depression and elsewhere that sometimes those are the sectors that most need help during the tough economic times even if they are brief patches of debt funding. 

MATHIAS CORMANN: There is something wrong with paying for your day to day living expenses on an ongoing basis with borrowings, because as you increase the level of debt in order to pay for day to day living expenses today, what you are doing is you are forcing future generations of Australians to either pay higher taxes than they otherwise would have to, or to accept deeper spending cuts. That means that we would be funding our living standards today on the back of increased sacrifices made by our children or grandchildren. So what we are saying, yes we are in deficit right now and we are getting back in to surplus in a responsible trajectory, but what we are saying is we have to get ourselves out of the situation where we are borrowing for our day to day living expenses as soon as possible. But separate to that, what we are also clearly saying is that for the appropriate quality infrastructure it can be appropriate for that to be funded by borrowings. 

PAUL KELLY: Treasurer Morrison keeps saying this will not be an academic Budget. What does that mean? 

MATHIAS CORMANN: This is a budget that is very much focused on the Australian people. It is focused on making the right decisions today that will help deliver a better future for Australians. It focuses on very practical issues. It will focus on housing affordability. It will focus on energy security. It will focus on a whole range of issues that people across Australia expect us to focus on. 

PETER VAN ONSELEN: How does housing affordability as one example get helped by people, graduates needing to pay back their HECS debt sooner rather than later under those reforms? 

MATHIAS CORMANN: It enables them to clear their outstanding debts sooner and gets them in a position where they may be able to borrow to invest in a home sooner. 

PAUL KELLY: Minister, do you think that governments can make much of a difference to housing prices? 

MATHIAS CORMANN: I have said many times and that is true that the price of anything is a function of supply and demand. When demand exceeds supply, prices go up. When supply exceeds demand, prices will go down. There are elements of public policy that will have an impact on these sorts of dynamics. We have made that point many times. You will find out in the Budget on Tuesday night the policy work that the Government has done on how we believe we can best put downward pressure on housing affordability. 

PAUL KELLY: Will this Budget increase the demand side of the equation? 

MATHIAS CORMANN: I will again point you to the Budget on Tuesday night. We will be able to have a conversation about these things on the other side of the Budget. 

PETER VAN ONSELEN: I am very interested to get your thoughts on the New South Wales Premier’s speech during the week at the National Press Club where she talked about a desire for State governments to have more autonomy on the proviso that they can prove before getting it that they have a sort of almost requisite competence. She did not word it like it, that is my phraseology. But what do you think about that? The Liberal party was always once upon a time, the preserver of principles of federalism and this idea of defusing power between the Commonwealth and the States almost as a conservative check on too much power. But that has adjusted in recent years. There is much more of a centralist bend to Government in the modern era than there once was. What do you think about what Gladys Berejiklian is talking about?

MATHIAS CORMANN: I do not agree with your characterisation of what we are doing now as opposed to in the past. I am a very strong supporter of strong, effective and competent State governments. I am a strong supporter of our system of Federation as enshrined in the Constitution. You are right, it is an important part of our system of checks and balances on government power. I am a great supporter of Gladys. I think it was a great speech and all power to her. 

PAUL KELLY: You have been telling us over and over again in this interview on the need to restrain recurrent outlays, yet a couple of days ago the Government announced an extra $18.6 billion for schools over the next ten years, which by any measure is one serious spending commitment. How do you reconcile that with the fiscal strategy? 

MATHIAS CORMANN: This has been a debate that has been going on for some time. We have made what we believe is an affordable, sensible judgement on what additional investment into our schools is required in order to deliver genuine needs based funding. Labor in Government made promises that were unfunded, that were unaffordable, that were pie in the sky unsustainable promises into the future. The reason Labor’s approach was so costly is because of the Gillard Government’s 27 special deals, which created a lot inefficiencies and a lot of inequities and a lot of additional fat in the system. What we have come forward  with is what we believe is required to essentially give certainty to schools over the medium to long term to provide for genuine needs based funding, but also provide for a system that is genuinely equitable across all school sectors. 

PAUL KELLY: Will you admit the obvious that this is a massive reversal from the 2014 Budget?

MATHIAS CORMANN: It is additional funding compared to the 2014-15 Budget. I would remind you though that since we came into Government in 2013, we restored $1.2 billion in funding to schools in Queensland, the Northern Territory and Western Australia, which Bill Shorten as Education Minister had ripped out in the dying days of the Rudd Government. We put an additional $1.2 billion into schools in last year’s Budget. We have put an additional $2.2 billion into schools over the upcoming forward estimates and a total of $18.6 billion over the medium term as you have indicted. So what you will find is that we have made judgements all the way through to ensure that schools have the resources they need. 

PAUL KELLY: But isn’t this Budget going to be based on the judgement that the 2014 Budget was a major error of judgement? 

MATHIAS CORMANN: Again, I will leave the commentary and characterisation to you. What I would say is that since the 2013 election we have passed a lot of very important structural Budget repair measures both on the spending and the revenue side of the Budget. It is true that we have not been able to pass everything that we would have liked to have passed. We have already made announcements in relation to a number of key initiatives out of previous Budgets that have been recalibrated. You have mentioned higher education, you mentioned school funding arrangements, these are things that the Turnbull Government has recalibrated in recent times. There have been others, that is all a matter of public record. We will continue to make judgements on the best way forward talking into account the information and the evidence in front of us. 

PAUL KELLY: Now the Catholic sector is in a degree of revolt about this education funding announcement. How should the Government respond to this? Does the Government need to stand firm and brush these criticisms aside or is the Government prepared to make some financial concessions? 

MATHIAS CORMANN: I am not going to pre-empt anything here. What I would say is that Simon Birmingham as the Education Minister, who incidentally has done an outstanding job both in putting the package together and also in selling it over the last few days, Simon Birmingham continues to talk to all stakeholders in the sector. What I would say though is that our commitment is genuinely to stop all of these special deals, to put in place a genuine needs based funding formula which is fair and equitable across the board, which is sector-blind if you like, which essentially provides funding to all schools in relation to all students on an equitable, rational needs based basis. That is what Simon Birmingham has laid out in recent days. That is what he will continue to talk to all relevant stakeholders about in the days and weeks to come. 

PETER VAN ONSELEN: You talk about all relevant stakeholders, has Simon Birmingham or anyone else in the executive spoken to the former Prime Minister Tony Abbott? Because he was horrified on Twitter and elsewhere when talking about these changes to Catholic school funding. 

MATHIAS CORMANN: We have put in as has already been suggested, $18.6 billion in additional funding compared to the 2014-15 Budget over the medium term in this upcoming Budget period. There is some more work to be done to explain all aspects of that. The Catholic education sector overall is receiving increased funding as well on a per student basis. These things are things that will continue to be worked through including through all of the internal processes of the Coalition parties.

PETER VAN ONSELEN: But do we know if anyone has spoken to the former Prime Minister? He has expressed his concern about this. He has been public in doing so. He has got a regular slot now on a very prominent radio station in Sydney that broadcasts into other areas as well. He is clearly horrified by it, surely someone should be charged with that responsibility. 

MATHIAS CORMANN: I am not aware of what conversations may or may not have occurred in relation to this. This is the Sunday before the Budget. I am sure that Simon Birmingham is talking to all key stakeholders including Tony Abbott as appropriate. 

PETER VAN ONSELEN: Finance Minister Mathias Cormann, you are always generous with your time for us on Sunday Agenda, we really do appreciate it. Thank you very much for joining us today. 

MATHIAS CORMANN: Always good to talk to you.