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 10/05/2006

Interview with Jon Faine
774 ABC, 3LO

Wednesday, 10 May 2006
8.30 am

SUBJECTS: Budget 2006-07

FAINE:

Peter Costello, good morning.

TREASURER:

Good morning Jon, good to be with you.

FAINE:

You are by nature and by policy a conservative man but this seems to be a high risk strategy, why wasn't last night's Budget inflationary, the Reserve Bank just the other day warned that it is the biggest risk in our economy at the moment.

TREASURER:

Well we took the opportunity last night to do major tax reform, and the biggest superannuation tax reform ever, and it was a good opportunity to start long term changes to the benefit of the economy. It is responsible, at the end of the day we are still going to be budgeting for a surplus

FAINE:

Yes.

TREASURER:

and we have now repaid Labor's $96 billion debt so we have got the Government debt free and that puts it in a very a strong financial position.

FAINE:

I understand all of that but you have answered a question I didn't ask. I did ask you if last night's Budget was inflationary and the Reserve Bank has said that is the biggest risk at the moment to the economy.

TREASURER:

Well that is why I said that last night's Budget has a surplus, the Government is debt free and our forecasts for inflation are for 2¾ per cent which is the range that I have agreed with the Reserve Bank is the target for monetary policy - 2 to 3 per cent over the course of the cycle.

FAINE:

If you take Sydney out of the equation where growth is lagging the rest of the nation has growth at almost record levels and the sorts of stimulus that comes from tax cuts, superannuation booming and the rest of it could well mean we guarantee now another interest rate hike when the Reserve Bank look at it next, do you agree?

TREASURER:

No, Jon the Australian Government's finances are probably the strongest in the world with the exception of Norway and Singapore because they are the only other debt free countries. We have had nine surpluses in the last ten Budgets, we have repaid $96 billion of Labor debt. This is not America you know, in America they had a Budget deficit of 3 per cent of GDP, the Government is borrowing billions of dollars, hundreds of billions, trillions of dollars in American financial markets. In Australia, the Government does not borrow. We haven't borrowed since 1996, we save, we add to savings and to the extent that we add to savings rather than putting pressure on rates in the markets, we put downward influence on rates in the market.

FAINE:

Tax cuts, the richer you are the more you get. Why do people on $150,000 or more need such a big tax cut?

TREASURER:

Well, what we do is we reduce the rate from 42 cents to 40 cents for people in that range and we move the thresholds. Now, the reality is that the more income you have, the more tax you pay so that when you have a cut in tax because you are paying more, in dollar terms the cut is more. But in percentage terms, that is the percentage of the tax you are actually paying, the lower income earners get the larger percentage tax cut.

FAINE:

I understand that but people on more than $150,000 by and large are doing okay already in fact some of them are doing ridiculously well, whereas the people on struggle street as it is called and the Howard battlers are somewhat lower down, you could have given them a bigger cut and left the high income earners where they were and they wouldn't have really complained, would they?

TREASURER:

Well we have increased the thresholds of the 15 cent rate, you used to pay 15 cents in the dollar up to $21,600, you will now pay 15 cents in the dollar up to $25,000. And we increased the low income tax offsets, so in percentage terms the largest tax cuts go to the lower income earners. But when you take all of those matters into account along with our restructure of the tax system, it is true that in dollar terms as you move up through the tax system you get larger dollar amounts, yes, but that is because you are paying a lot more tax in the first place. On $150,000 you are probably paying about $60,000 worth of tax so that if you get a 10 per cent tax cut that amounts to $6,000 but only because you are paying $60,000 in the first place. If you get a 10 per cent tax cut at $50,000, for many families that wouldn't even amount to a tax cut because you are paying no tax if you are a family on $50,000.

FAINE:

But are you concerned about equity? Are you concerned about the gap between the rich and the poor?

TREASURER:

Absolutely, and one of the things Jon, that the Government's economic programme has shown over recent years is whilst the rich are getting richer, the poor are getting richer and the poorest in Australia have had the largest increase in disposable income through our family payments and other changes in recent years. Now, I am in favour of both getting richer. I want the poor to get richer as well and particularly with the changes that we have with the low income tax offset and those low thresholds, they are getting tax cuts and if they are families, family payments as well.

FAINE:

Malcolm Turnbull was dismissed by you when he said you could offer tax cuts and now you have delivered them. Nick Minchin said you could reform super and you dismissed it and said we couldn't afford to, you have done both the things that you said you couldn't do.

TREASURER:

You have actually got to look at what we have done, Jon. There are a lot of people for example that were saying you should change the contributions tax on super, we are not changing the contributions tax on super. We are doing something far bigger than that we are abolishing end benefits radical simplification. You are now no longer going to have to work out things like (inaudible) reasonable benefits, limits and aged based limits and pre-83 sums and post-83 sums

FAINE:

I don't think people ever did work them out, I think they just gave up.

TREASURER:

I think that is right. I think you are absolutely right. Well now I am saying to people you can give up because you don't have to work any of that out because it is all tax free.

FAINE:

The only thing we lose here are the publishers of all of those books and manuals that pretended to explain how it worked.

TREASURER:

I am sorry for them Jon, but I can't help everybody. What have got to remember at the moment is if you are in a taxed fund and nearly everybody is, that is your contributions are taxed on the way in and the fund pays tax no tax on your end benefits no tax, if it is a lump sum, no tax if it is a pension. Very, very simple. What you have got you keep from the age of 60.

FAINE:

Now is this going to lead to a boom, a massive boom in self-funded super, in particular do-it-yourself funds, people are going to divert money from any other source, any other form of distribution and put it through super now if it is tax free, aren't they?

TREASURER:

Well superannuation is a very, very good savings vehicle, there is no doubt about that. If you have some spare cash you might think of buying a share for example, or you might think of putting it into superannuation.

FAINE:

Well if you have got surplus cash flow, you can accumulate a massive tax free nest egg.

TREASURER:

Well superannuation is a very, very good investment and is designed to be a long term savings vehicle if you hold it to the age of 60. Now you have got to remember this of course, that if you put money into superannuation you will only get these benefits if you take it after 60. If you put it into something else you maybe able to realise your benefits earlier. So it has got to be preserved over a longer period of time in order to get those tax benefits. But it is a very, very good investment and I would say to people, some people say, oh, I might buy an investment property, some people say, well I might buy some shares. Well they may have their advantages but I will tell you this, I think you would go a long way to find a better tax effective vehicle than superannuation under these proposals.

FAINE:

I have a question for you about the baby boomers, but a text message expresses it better than I do, Peter Costello. Once again the Government steals from the young to fatten the coffers of the baby boomers, one correspondent says, when are they going to address the massive intergenerational inequity, which is putting it somewhat more harshly than I was going to but it is the same point.

TREASURER:

Well, I instituted the first Australian Government intergenerational report in 2002, to discuss these very questions are we being fair to future generations, and coming out of that we made a number of policy changes, one is that we cleared Government debt. Let me say this to that young person. That young person will become an adult in an Australia where the government owes nothing. Nothing accrued from previous generations, unlike our generation, and the generations before. The second thing that I have done is I have established the Future Fund and the Future Fund is now investing money for 2020 and beyond. So we are really beginning to set up financially for the next generation. And as I said in my speech last time with the Future Fund, with the clearing of government debt the next generation will be able to face the challenges of their time - of their time. They will not be paying for the failures of our time but they will be set up to face the challenges of their time.

FAINE:

Well we will be talking about whether or not there will be distortions in the investment market created by the shift of money into superannuation. What is going happen at auctions? I imagine you are going to get self funded retires bidding at auction against first home buyers and guess which one has got the deepest pockets? I do not know what it is going to do for first home buyers but we will look at that this morning.

TREASURER:

Jon look, you know that is probably the situation at the moment but the reality is in a house market, let's remember this, that rarely is the kind of home that an empty nester wants to buy the kind of home that a first home buyer wants to buy.

FAINE:

No, I'm talking about an investment, people bidding at auction as an investment through their new super boom are going to be bidding against people who are first home buyers and the self funded superannuants have got deeper pockets than the first home buyer.

TREASURER:

Yeah, but if they buy the house then that is in the tax system. The house will be in the tax system, the rent will be in the tax system, it is only if they are taking benefits out of their fund that it is tax free.

FAINE:

That is in incentive to build up your fund

TREASURER:

Sure.

FAINE:

so I think we are going to see a boom in do it yourself self funded super and people will be looking at how they invest that, anyway we will talk about that a little later this morning. A couple of quick reactions to other peoples reactions if I could please Peter Costello. Business say you have done nothing about the skills shortage.

TREASURER:

Well Jon, this Government has the largest investment in skills training that we have ever made. We are building Australian technical colleges for children at the secondary level to start skills training. You recall that one of the things that Joan Kirner and the State Labor Government did is they abolished technical schools, one of the worst decisions ever made in this country. We are now at the Commonwealth level, and it was never the Commonwealth's responsibility, starting to build technical colleges again. One of the things that businesses say to me

FAINE:

In competition with TAFE?

TREASURER:

Well these are secondary schools, these Australian technical colleges. One of the things that business has always said to me is if you can sharpen up the incentives in the tax system that will help with skilled labour because skilled labour tends to be higher than average income earners and we have attended to that so I think there is an enormous about that has been done in relation to skills.

FAINE:

Peter Costello, defence spending boosted at a time when they are I would have thought almost embarrassing the Government with the mismanagement of existing contracts, what are you doing to make sure the money is well spent?

TREASURER:

Well, I think that is a fair point Jon it has got to be well spent and there has got to be accountability and we have put a new head into this defence material organisation, who I think is starting to get on top of some of these contracts. Now these are difficult contracts I have had a look at them myself mostly with high tech defence hardware you are buying a product which is not yet invented that is the problem and you are generally buying it from a company overseas in the high tech area if it is a joint strike fighter or something like that. So it is difficult but you are quite right we have got to get value for money I agree with you and we looking to the new head of this organisation to enforce accountability.

FAINE:

Well that is something as taxpayers we can all look forward to. Just finally you did not do anything about fuel excise, people at the petrol pump, to say nothing of interest rates going up but at the petrol pump, people in great pain and you have basically, and the Prime Minister on AM this morning, are saying too bad put up with it.

TREASURER:

Well you know prices at the petrol pump do not help anybody, they do not help consumers, they are awful for consumers and they are awful for the Government. The Government does not take any more money out of higher fuel prices because the Government has a fixed excise regardless of what the price is. But unfortunately the price moves according to the world oil price and the world oil price we do not control.

FAINE:

But the rate of excise you control, you could reduce the rate at which excise is levied you could do that any time.

TREASURER:

Well we did. We reduced it to 38 cents and we abolished indexation so that it falls in real terms year after year, we did that let me remind you at a time when the petrol price was 90 cents and after we cut it we watched the price go to a $1.50.

FAINE:

Well that proves though you understand the need to do it why did you not do it again last night?

TREASURER

Well John the increase from 90 cents to $1.50 were factors that are beyond Australia's control. Can I just say this, there are some people that think that the petrol that goes into our car comes from Australian oil, it does not. We import oil, we import it from the Middle East and the petrol that is coming into Australia is governed by the world price, it is not governed by Australia or the Australian Government. I wish we could control it but we can no more control the world price of oil they we can control other international events I look for a time when that price comes down, it would be better for all of us, but unfortunately it is beyond the law of the Australian Government.

FAINE:

Peter Costello from the ABC's point of view we have done better than we have done for years and thank you for hearing our pleas and I look forward to speaking to you in the studio.

TREASURER:

I am pleased you mentioned that Jon because I have done a number of ABC interviews this morning and I have been hoping that the ABC did notice that there was increased funding.

FAINE:

It always seems to me to be self serving to discuss our funding with the Treasurer and I am not sure whether the audience share with the same passion that line in the Budget.

TREASURER:

Well anyway let me make the point I do not think that this is going to be publicised on any other radio networks so it might as we well be published on the ABC network and the fact of the matter is, and I get a lot of letters about this from Friends of the ABC, the ABC got an increase in last night's Budget for Australian production in particular, it was a new increase and we might as well tell the ABC listeners about it because they are not going to hear it on commercial radio.

FAINE:

It seems as if the lobbying of the Friends of the ABC in fact bore fruit?

TREASURER:

No I thought it was important that we invest in Australian production, I think Australian production is important for a knowledge of who we are and our own stories and so there is an increase in this as there was in defence I make the same point just as we are looking for accountability for expenditures in defence so too we will be looking for accountability in relation to the ABC and thank you for not lobbying me but thank you for mentioning it.

FAINE:

Peter Costello thank you and I look forward to seeing you in the studio.