The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 10/05/2005

Budget Lock-up Press Conference
Parliament House, Canberra

Tuesday, 10 May 2005
4.30 pm

SUBJECTS: Budget

TREASURER:

Ladies and gentlemen, if I could just briefly go through a power point presentation in relation to the Budget. This is the Budget for 2005-2006. The Budget proposes an underlying cash surplus of around 1 per cent of GDP. We are forecasting a surplus of a similar amount across the forward estimates. The forecast cash surpluses across the forward estimates do not include earnings from the Future Fund. If that money had been held by the Government the earnings would have come back to Budget. The fact that those earnings are excluded represents a tightening of fiscal policy.

As you can see when the Government was elected in 1996 the Budget was in deficit 2 per cent of GDP. We had a two year programme to balance the Budget and this will be the eighth surplus of the Government.

Unlike the OECD, where Budget balances are in significant deficit, whilst we drove our Budget into surplus and have kept it there since 1997, the OECD as a whole had a small surplus back in about 1999 and it has now gone back into deep deficit and of course that is principally lead by the United States which has a Budget deficit over 3 per cent.

Australia’s debt position is strong. Since 1996 we have not borrowed in net terms. We are forecasting that with Budget surpluses we would in fact eliminate net debt in a couple of years and as a consequence of a decision which we took last year to have Government bonds on issue rather than use future surpluses to retire debt, further future surpluses will be invested in Future Fund.

The Future Fund is destined to become a very large investment fund. It will build an asset position which will fund our liability. It will be this generation’s greatest contribution to the costs of the ageing of the population which we expect to hit in 10 or 20 years time.

As consequence of reducing net debt the Government now saves itself about $5 billion a year in interest payments which is represented by that red line. This is a comparison of 1996 to 2005-06. You can see that whilst our public debt interest costs have reduced by $5.7 billion per annum, as a result of debt reduction that has released further funds to invest in hospitals and schools. Back in 1996 our interest cost was about the same as our investment in hospitals and schools. Today it would be about a fifth.

The initial investment in the Future Fund will be of this year’s surplus, that is the current financial year, that is 2004-2005. Around $9 billion, plus accumulated holdings which the Government has at the Bank. We will put those together and we expect to make a payment in the Future Fund of around $16 billion.

The Future Fund will be a statutory fund. Earnings will be reinvested and no government will be able to draw down on it until such time as it has funded the unfunded liabilities that the Government now holds. What are these liabilities? These are liabilities particularly in relation to past superannuation. Past governments have not funded their employees. Those employees have entitlements, no money has been set aside for those entitlements. We are paying those entitlements out of general recurrent revenue. Once we fund those liabilities then that will release future generations from the payment of those liabilities. And it will happen we hope by 2020 at a time when the ageing of the population begins to bite very significantly. It is an investment in the future at a time when Australia will need this money because of the financial pressures that will be coming on us.

The Future Fund will be able to invest. It will be given an investment mandate, I expect that it will invest in things like equities, bonds, some of it may be overseas. The Future Fund will not be used to directly engage in projects. Of course if there are infrastructure funds, listed infrastructure funds that engage in infrastructure, the Future Fund like any other superannuation fund would be able to invest in that. But the Future Fund will not be conducting its own activities. It is there to build an investment against future government liabilities.

We are forecasting in 2005-06 growth of average 3 per cent of GDP. That is slightly stronger than this year which has been lower than what we got used to back in the low 1990s. Our unemployment rate will continue at 28 year lows which is around 5.1 per cent and because our unemployment rate is as low as it has been for 28 years, in this Budget we make a huge investment to try and encourage new people of working age to join the labour market. We forecast inflation to stay within the underlying 2 to 3 per cent target which has been set by agreement between me and the Reserve Bank Governor.

This is an interesting graph, this compares GDP per capita in Australia against the OECD average. Australia is blue, the OECD is red. You can see that we trailed the OECD in the 50s, in the 60s, in the 70s and the 80s. We began to turn around in the 90s and in the 2000s. Australia now outperforms the OECD average rather than falling against the standard of the developed world, now we are gaining.

As a result of more people being in work than ever before - the lowest unemployment rate in 28 years - revenues for individuals are strong. Because the company sector is more profitable than at any other time in Australian history, corporate receipts are also strong. If we had not cut tax in this Budget then the tax to GDP ratio would have increased. By cutting tax we can maintain or slightly diminish the tax to GDP ratio.

We are cutting tax in this Budget in two stages. The first stage will commence on 1 July. On 1 July the 17 cent rate will fall to 15 cents. The upper thresholds for the 30 cent rate will go from $58,000 to $63,000. The upper threshold for the 42 cent rate will go from $70,000 to $95,000. On 1 July of next year the second part of that income tax cut, the upper rate for the 30 cent rate will go to $70,000 and the upper rate for the 42 cent rate will go to $125,000.

This means that right across the forward estimates more than 80 per cent of Australians will have a tax rate of 30 cents in the dollar or less and by July of 2006, only 3 per cent of Australians will be on that top rate of income tax.

This is a very significant structural change to the Australian income tax system.

The blue bars represent the annual tax at various income levels, the red line shows the percentage tax cut. The percentage tax cut under this change is in greatest for lower income earners. The percentage is greatest for lower income earners. In nominal dollar terms it will not be as high as it is for upper, or middle or upper income earners, that is because lower income earners pay much less tax. I often say you can’t cut tax for people who are not paying it. But the percentage tax cut off a lower amount which they pay is much greater. Because we are adjusting thresholds rather than rates, the maximum tax cut plateaus and never moves beyond the amount that applies at $125,000.

This will put Australia’s taxation system much more in line with comparisons with other developed countries. This is work which has been done by the OECD to take what is called an average production wage across each of the countries of the developed world and work out where the top threshold cuts in as a multiple of that average production wage. You can see right down with Ireland for example, you go on the maximum individual tax rate in Ireland at the average production wage. Leave out Turkey because there is probably reasons for that, but in the USA you go on the top tax rate at about nine times the average production wage.

The yellow dots represent what the top tax rate is. You can see across the developed world that the top tax rate is around about 50 per cent on average. In some countries it is in fact much higher, it is around 60. But the average is somewhere around there, high 40s, around 50. And that is where Australia is, Australia’s top rate is not out of whack with the developed world. The rate is not out of whack with the developed world. But as you can see from that red bar it cuts in at a comparatively low threshold, a comparatively low multiple of the average production wage.

The changes which I announce tonight take Australia from a low multiple of the average production wage and put it better than average against the OECD. It is not the highest multiple, but certainly in the middle of the pack - on the upper side - of the pack. It takes us past countries like New Zealand and the United Kingdom. It puts us about where Canada is. The threshold is still lower than the threshold in the United States. But it will enhance Australia’s international competitiveness.

And that is why it has been done in that way. The area where we have not been competitive, it has not been on the rate but on the threshold. And that is why the threshold has been moved from the first red bar that you see there, to the second red bar. A little better than the average of the OECD.

I want to now show you the way in which the income tax system has been changed over time. This is a percentage reduction in tax paid, you remember I had the line on the previous graph. They were the percentage reductions in tax which were brought down in the New Tax System on 1 July 2000.

When we cut tax in the 2003-04 Budget, that is the percentages. When we cut them in last year’s Budget, they were the percentages. The first tranche of cuts in this year’s Budget does that, and the second tranche does that. What it means is that for a person on $120,000 they will have had a 20 per cent tax cut, for a person on $10,000 they will have had a 50 per cent tax cut. Now, they are coming off a lower base. Let me stress that. On $10,000 you do not pay that much tax. So the nominal dollars are not great but in percentage terms the distribution I think as you can see since 1 July has given about an average tax cut of about 20 per cent and weighted it to lower income earners.

Of course when you put in addition the Family Tax Benefits that the Government has introduced for families, particularly low income families, the disposable income increase has been much greater.

This Budget also has a huge package on encouraging more people to participate in the workforce. As you can see from that, Australia, although we have the lowest unemployment in 28 years, has a quite high proportion of jobless households. That is because in Australia there are significant income support arrangements which have no work requirements. If you are on the unemployment benefit you have got a work requirement, you have got to look for work. If you are on Single Parent Pension or Parenting Payment, you do not have to look for work. If you are on disability payment you do not have to look for work. There is no work test or obligation in relation to receiving those payments.

And as a result you get a graph that looks like that. As unemployment has come down, the unemployment benefit has come down. But as unemployment has come down, those on disability support pension in Australia have gone up. Those on Parenting Payment Single have gone up. The growth in these payments has been increasing as unemployment comes down. It is easier to get a job now but the growth in payments has been stronger. And we think that one of the prime reasons why this might be the case is there is no requirement to look for work if you are on one of these payments.

So we announced in this Budget a major and comprehensive reform of the welfare and work requirements. And the idea is to say if you are able-bodied and you are of working age - which is 15 to 65 - then you are expected to look for work if you are capable of it. These changes will come into effect on 1 July 2006.

And they will say to people on Parenting Payment when the youngest child turns six that they will be expected to look for part-time work, and if you are capable of part-time work you will not be eligible to go onto a disability pension but to go on to Newstart and you will be asked to look for part-time work.

The disability pension at the moment in Australia covers 6.5 per cent of the workforce. 6.5 per cent of the Australian workforce is not disabled. There are genuinely disabled people and they will keep their payments. But what we have got to do is we have got to make sure that these just do not keep growing at the rate that we have seen in recent years. If there are more people in work it will be better for them. They will have a chance of an increased income. It will be better for our economy. We need more people of working age as our economy ages. And it will be better for other taxpayers who to that degree will be able to enjoy lower taxes. That is what these changes are about. They involve changes to obligations, services, payments, compliance and employer demand.

I won’t go through them, but let me emphasise this point, they will not save money over the next four years. They will cost money. Because the services will be increased. What we hope is as the services are increased, as the obligations are put on, as fewer people go onto these payments you will begin to get savings down the track. We think a break even point will be eight years. But behind all of this Budget and all of these changes is the great demographic date with destiny that we know is coming in 10 and 20 and 30 years time, when the number of working age people has hardly grown and the number of retirees is doubled.

If we do not start taking the steps now we won’t be able to adjust. The future will be on us before we have made provision. This involves changes to the tapers particularly in relation to Newstart, to ease re-entry into work. As I said earlier, it will actually involve new outlays, higher expenditure over the four years of the forward estimates.

Child care places will be massively increased to help mothers that want to get back into part-time work when the youngest child turns six.

And I also just flag that there are very, very important changes in this Budget for business. The Tariff Concession Order scheme which taxes some business input which was put in place in 1996 when the Budget was deeply in deficit - has been abolished. And particularly for Australian manufacturers that represents a $1.3 billion tax cut. There are changes in relation to blackhole expenditures, international tax, and of course the superannuation surcharge is abolished on 1 July 2005.

This is a Budget which increases vocational education and training and announced 20,000 increase in skilled migration places to deal with getting skills into the Australian economy. It also continues significant investment in infrastructure.

This is a Budget for the future. Future participation of more people in the workforce. A Future Fund to offset liabilities which are growing. Future investment in training and skills. Future build-up in relation to infrastructure. A strong Australian economy to cope with the great demographic change. It looks out and it puts in place measures which will make our country better able than nearly any other country in the developed world to cope with those challenges.

JOURNALIST:

Mr Costello whose idea was the tax cut – yours or the Prime Minister - and who will get the credit for them?

TREASURER:

Well, you know, it is not a question of people competing for credit. This is a Budget which is brought down by the Government.

JOURNALIST:

Is this your best Budget would you say?

TREASURER:

You know if you get your Budget into surplus, if you get debt down, you can invest for the future, then it’s great to be able to cut tax. That’s, believe me, that for a Treasurer, cutting tax is something you really hope you can do and bequeath to your economy.

JOURNALIST:

What do you say to middle income earners, people earning $50,000 or less, they didn’t get a tax cut last year and this year they are missing out in dollar terms and percentage terms?

TREASURER:

Well middle-income earners are getting a tax cut.

JOURNALIST:

Not as much as everyone else.

TREASURER:

Everybody, well, everybody including middle-income earners is having their 17 cent in the dollar rate cut to 15 cents. The lion share of those middle-income earners would be families and as you know in last year’s Budget we increased those family payments by $600. And I want to tell you something, that $600 is going to paid again this year. It’s an annual payment. You know, there are some people in the Labor Party who thought it didn’t exist last year. They are going to get a big shock when it exists again this year.

JOURNALIST:

Isn’t it a sort of a budget you’d bring down before an election, rather than after?

TREASURER:

Well, you know, I actually think that by doing the right thing at this stage of the electoral cycle, maybe the press and maybe the public will give you additional marks, rather than cynicism.

JOURNALIST:

Treasurer, is this a budget that will enhance your leadership credentials and can you give an iron-clad commitment that you’ll be in this chair same time next year if your tilt for the Prime Ministership is not successful?

TREASURER:

Thank you for your try Steve but we’re not going there today.

JOURNALIST:

With the Telstra sale, Treasurer, does the Government intend for those proceeds to go into the Future Fund?

TREASURER:

Pardon, the Telstra?

JOURNALIST:

Yes, (inaudible).

TREASURER:

Yes, yes, the Government would intend that the proceeds of Telstra go into the Future Fund.

JOURNALIST:

Treasurer, how many people do you expect to move from welfare to work.

TREASURER:

We estimate that by 2008-09, they only start in 2006 these measures, but by 2008-09 we estimated that about 190,000 people will have moved from welfare into work. Let me put that in context. The unemployment rate at 5 per cent is around 500,000 so we’re looking at trying to get about 190,000 people in work. I’ll make this point, I’ve made this point in the Budget Papers, that one of the consequences of this is that it could increase the unemployment rate. We’re not doing anything to hide the unemployment rate, in fact, some people have said that the increase in disability has hidden an in fact higher unemployment rate. If we’re successful and people present themselves for work, it’s possible that you could get a minor increase in the unemployment rate, but we are looking to move about 190,000 into work by 2008-09.

JOURNALIST:

Treasurer, how confident are you that the tax cut won’t rebound as a rate hike?

TREASURER:

Very confident. Can I just make this point. How do you measure whether or not budget policy has been tightened or loosened? You measure it by whether or not your budget balance is greater or smaller. Let me show you those red bars there. Your budget balance in proportion to GDP is almost constant. What that shows you is at the end of these measures, you haven’t loosened fiscal policy. That’s what it shows you. Now let me tell you something that may in fact put pressure on interest rates, the blue bars. That might. That is what the OECD is doing. Have a look at where Australia is. Now, I would really like to say in the Australian context how different we are. Nobody actually debates in America or Britain how big a surplus should be. What they debate is, how large the deficit is going to be. The fact that we’re in surplus at all, have a look, shows you that your fiscal policy is thrashing the pants off the Americans and the British. Thrashing the pants off them. So, you know, it’s a nice debate to have with you as to how big our surpluses should be. I’ll make this point, before I was Treasurer, we never debated how big surpluses should be because as you can see the budget deficit was two per cent of GDP.

JOURNALIST:

Mr Costello, can I ask why you haven’t applied new rules to those on disability pensions now and whether this is the last word on welfare reform?

TREASURER:

We thought that our chances of getting break-through welfare reform would be strongest if we quarantined people who were already on benefits. Put simply, that if you tried to go back in and the fear campaign was able to take hold and say that disabled people would be thrown off benefits, that the chances of getting structural reform would be lessened. So we want to be able to say to people on a Disability Pension as of today, for a person on a Parenting Payment Single as of today, you won’t lose your entitlement. But the rules for the future are going to be tightened.

JOURNALIST:

But you are letting hundreds of thousands off the hook aren’t you? By applying it to 1 July ’06?

TREASURER:

Well, you know, this hook as you call it, has existed for what, 20, 30, 40 years, I don’t know. It’s existed for a very long time. I did have an attempt at changing it a couple of years ago in relation to Disability Support Pension and it has been rejected in the Senate, I forget how many times. This is not the first go at changes in relation to disability support. We did try that with our ‘Australians Working Together’ package. It is the first time we’ve raised this issue of Parenting Payment Single.

JOURNALIST:

Treasurer, do you think you’ve placated the ‘Ginger Group’ for now on tax reform?

TREASURER:

Oh, no Matt, I don’t lie awake at night directing a policy along those lines.

JOURNALIST:

Treasurer Costello, with the budget strength that you’ve described and $21 billion available for tax cuts, why was it necessary to break an election promise on the Medicare Safety Net?

TREASURER:

Well, the single area that is going to increase the fastest in funding over the next 10, 20, 30 and 40 years is health. For two reasons, the ageing of the population and scientific advance. Our estimates are that in 2040 this will open up a gap, a spending gap of about 6 per cent of GDP. In other words, unless we do something to put in place measures now to restrain the rate of increase, you’ll never cut it, to restrain the rate of increase, Australia won’t afford a first class health system in 2040, it will be whistling Dixie. If you intend to be alive in 40 years time, I hope you are and I do, you won’t be able to have a first class health system unless we start getting it on a sustainable basis today. And my point is this - we will get it onto a sustainable basis with small steps today or it will break in 20 or 30 years time. And since you and I have an interest in making sure it ain’t broke in 30 years time, let’s support the changes today. And I think it’s important we do it.

JOURNALIST:

(inaudible) are we losing that race?

TREASURER:

Well, world average by the way, is principally influenced by growth in China, in a developing country, which is about 8 or 9 per cent. Are we losing the race? No, actually we’re gaining on the competition. We were falling against the average in the ‘50s, ‘60s, ‘70s and ‘80s and we’re rising against the average in the ‘90s and the 2000s. But, let me make this point, we are a mature economy. When we compare ourselves as a mature economy, we compare ourselves to the US, or Britain, or France or Germany or Japan. China is a developing economy, it’s going through an industrial revolution. It’s coming out of communism. Now, however bad the Labor Party was, they never quite got us into that ideology. So, when it comes out of communism, China will grow much faster.

JOURNALIST:

Treasurer, what will these tax cuts…

TREASURER:

Last question.

JOURNALIST:

What will these tax cuts add to GDP this year and next? And will the Telstra proceeds all go to the Future Fund.

TREASURER:

Well it changes in relation to tax are about $3.5 billion this year, and a bit over $6billion next year. GDP is about $900 billion, so in a full year it is less that 1 per cent of GDP. That will give you some idea of the dimension.

JOURNALIST:

Treasurer, (inaudible), the total Commonwealth tax cut has increased by 12 per cent of GDP and yet the amount that the Commonwealth, that’s including the GST, and its announced the Commonwealth is giving back to taxpayers. Are you really just creaming it with one hand and only giving some of it back?

TREASURER:

No, and of course your figures are completely wrong.

JOURNALIST:

Treasurer could I just simply clarify, will all of the Telstra sale proceeds go into the Future Fund, or part?

TREASURER:

Well, these are decisions which will be made in the future but the object would be to have the full proceeds going to the Future Fund. In relation to T1 and T2, from memory, out of T1 and T2 there was some money set aside for the Natural Heritage Trust. I think it was about $1 billion out of something like $9 or $10 billion. But, the object is to put that away in a financial asset.

And can I tell you why? Let me make this point. If you sell up Telstra and expend the proceeds at the end of the year you have got no asset and you have got no money. You have sold the silver and you have spent it. If you sell off Telstra and you put it into a Fund which holds investments then you have maintained your investment. You have not weakened your balance sheet and the degree to which you spend that money is just the degree to which you are weakening your balance sheet in relation to future generations. Thank you very much.