Senator the Hon Katy Gallagher

LAURA TINGLE, HOST: Financial markets are increasingly optimistic that there may be a cut to official interest rates next month after new inflation figures were released today. The real test will come when the more comprehensive quarterly data comes out later this month, but today’s numbers have once again stirred the debate about the impact of government spending on inflation, particularly after the announcement of a $7.2 billion funding package for the Bruce Highway. I spoke to the Finance Minister, Katy Gallagher, earlier. Katy Gallagher, welcome back to 7.30.

SENATOR THE HON KATY GALLAGHER, MINISTER FOR FINANCE: Thanks for having me on, happy New Year.

TINGLE: Happy New Year to you too. The bond market’s certainly thought today’s inflation news was good news. It’s now pricing in a 68 per cent chance of a rate cut next month, up from 60 per cent. Interest rates are obviously the Reserve Bank’s business, but if you were just looking at the factors that you’d think are worth noting about the outlook for inflation, what would they be?

GALLAGHER: Well look, I think today’s results showed continued and welcome progress on the inflation challenge that we inherited when we came to government. We had inflation with a 6 in front of it, it’s now got a 2 in front of it. We’re seeing some welcome progress on trimmed mean as well coming down, and the trend is clear that inflation is much lower than it was when we came to government. And that’s welcome, obviously, for a range of reasons, including the prices people are paying for things and impacts on household budgets. The Reserve Bank, obviously, makes the decisions about interest rates and the markets obviously have their own view as well. We – Jim and I and the government – we’re focused on the things that we control, the decisions that we control, and that’s why some of those measures that we’ve had – cost-of-living measures, tax cuts – we’ve all been looking at that through the eyes of looking at cost-of-living pressures but not adding to the inflation challenge.

TINGLE: Well, on that, the IMF said last month that the government should consider delaying some government spending to ease inflationary pressures. Is that something you have thought about doing?

GALLAGHER: Well, we’ve certainly been careful when we’ve been considering our investments. The timing of those investments, when they come in, and I think you’ve seen that with some of the decisions we’ve taken. Making sure we’re not adding to the inflation challenge in the short term, looking at some of those infrastructure pieces about, particularly, when there’s supply constraints. So, we’ve certainly – not in responding to the IMF, but we’ve certainly been considering, as we take those decisions, the impact of our decisions on the broader economy. And the Reserve Bank has made it clear that government spending isn’t their main focus as they’ve been trying to wrangle with the inflation challenge themselves. But we’ve been very clear in our decisions not to add to the inflation challenge in the economy, but also, importantly, provide cost-of-living relief, tax cuts, investments in Medicare, investments in those key services that people rely on, just to give people a hand at the moment.

TINGLE: Well, it was reported this morning that the government has put almost no money aside for a rise in public service wages, which we know is coming over the next 3 years. Can you just explain why that is?

GALLAGHER: Well, the EBA wage increases are factored into departmental budgets. You know, that is a requirement as we settled all the bargaining. Departments are indexed for increasing costs over time. And there’s a range of factors that feed into the budget forward estimates, obviously, but the Treasury – you know, we haven’t done anything differently in the MYEFO that previous governments haven’t done. This is a matter that departments manage. They live within their budgets. Their budgets are indexed. And they have staffing costs as part of those.

TINGLE: But it does seem to suggest that the number’s not going to change from $28 billion in the next 3 years. It just doesn’t seem to make sense to the casual observer.

GALLAGHER: Well again, in those departmental expenses, there’d be a range of different factors in that. Not all staffing costs – not all programs are ongoing, for example. And so, some of those costs will change over time. But in terms of EBA, we didn’t supplement the first pay increase over and above the indexation that departments get. And we think that indexation meets those staffing costs.

TINGLE: The other big spending – or the big spending decision we’ve heard this week is the $7.2 billion commitment to the Bruce Highway. Now, that involves Canberra putting up 80 per cent of the money for projects instead of the 50/50 share that was brokered I think last year or perhaps the year before with the states. When was that decision taken and will it actually involve any change in the budget bottom line?

GALLAGHER: Well, the cost for that will be reflected in the next budget update, as they come into those forward estimates years. So, that decision was taken in the normal way through the Cabinet and our own internal processes –

TINGLE: It’s included in the MYEFO bottom line at the moment?

GALLAGHER: Well, I think the funding will be coming outside of those forward estimates years, because it’s a long-term project. The 80/20, I think the issue there is somebody needed to step up and solve the Bruce Highway problem. We needed to get the job done, it needed to be completed, the Prime Minister himself was very keen on making sure this job got done. It’s a priority for him. And so, we’ll assess these projects on a case-by-case basis. The normal process is 50/50. There’s a sharing of responsibility, a sharing of governance of the project, a sharing of milestones and all those kinds of things. But I think the Bruce is different. You know, and certainly its fatality record is very concerning. You know, there’s been a lot of lives lost on that road and I think it needed the federal government to step up and make sure the job got done.

TINGLE: So, you mentioned that a lot of the spending will be beyond that 4-year period. Now, a lot of these individual projects have already been identified and assessed by Infrastructure Australia. The Queensland premier told us last night a state government body would decide where the money should be spent. Whose decision will it ultimately be on when and where the money will be spent?

GALLAGHER: Well, that will be negotiated with the state. Obviously, they are the delivery partner. We are primarily the funder, but as the majority funder, we will have a view about the timing and staging of that project. And I would expect the Infrastructure Minister, Catherine King, to be working with the Queensland Government on that. You know, obviously, you have to work with the state government, but I wouldn’t say that it’s entirely in the responsibility of the state government – where we’re a big funder, we would have a say.

TINGLE: But you won’t be able to say between now and the election, well this part of the road is going to be funded next year or the year after – it’s going to take a lot longer to sort those things out?

GALLAGHER: Well, I imagine there will be some planning and design work that needs to be done before the final stages and we would work with the Queensland Government on that.

TINGLE: Katy Gallagher, thanks so much for joining us tonight.