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 09/05/2007

Address to the National Press Club

Wednesday, 9 May 2007
12.30 pm

SUBJECTS: Budget 2007-08

CHAIR:

Ladies and gentlemen, on behalf of the National Press Club, welcome to the Great Hall here at Parliament House and welcome back Peter Costello.  A dozen Budgets, more than twice that number of Press Club appearances, and he is still going strong,  Please welcome the Treasurer, Peter Costello. 

TREASURER:

Thank you very much Ken and it is great to be back here at the National Press Club today for yet another address and I can say, I have always enjoyed it and I have always enjoyed particularly the feisty reaction that I get from journalists here in Australia and I look forward to answering all of your questions if I can at the conclusion of this.

But I thought I might begin by just putting the economic context around this Budget – how we framed it, why we framed it, why we are investing in the way we are and what we hope to achieve coming out of it.  A Budget is a statement of about $240 billion and these days we don’t just outline a statement for the year ahead but we do forward estimates over four years and sometimes packages that are even longer.  Budget starts in November of the year before when we ask Ministers to put forward proposals and we begin culling those proposals which we think have merit and those which we think don’t.

Ministers start working over the Summer on those proposals that we have decided should go forward and by the end of January we have before us a full suite of proposals for the Budget.  The ERC meets throughout – that is our Expenditure Review Committee – meets throughout February and March and April and in April the Budget is finally rounded off by the Cabinet.  With a little bit of licence for the Treasurer and the Prime Minister thereafter.

And so as we began working on this Budget in November of last year we wanted to think to ourselves particularly about those measures which would boost the Australian economy.  As I will show in this presentation today, the unemployment rate is low, it is at a generation low.  In Australia our economic growth has been strong.  So we had to think about those things that we can do to actually boost capacity in the Australian economy.  Particularly by boosting those people that participate in the labour market. 

And a strong economy really is the base for everything else that we want to achieve in social policy.  You won’t be able to achieve good healthcare on a weak economy.  You won’t get good aged care on a weak economy.  You won’t invest in education on a weak economy.  You won’t be able to meet climatic and environment challenges on a weak economy.  Look around the world, developing countries don’t have advanced health or aged care or even environmental responses.  Meeting those challenges will come from a position of strength and it is a position of strength that we want to build in relation to Australia’s economic capacity. 

Now I believe that it is important whilst our economy is growing that the Government balance its Budget.  That is the principle which I laid down in 1996.  Over the course of an economic cycle the Government would ensure that it was meeting its expenses.  That we would balance our Budget in times of economic growth.  And I think you will see from the Budget papers that we have managed to do that more or less continuously since the Government was elected in 1996. 

When we were elected in 1996, of course the Budget was in deep deficit.  And the first Budget that I brought down narrowed that deficit and since then we have been able to keep the Budget in surplus more or less – with the exception of one year in 2001 – ever since. 

This second red bar that you see there will be the position for 2007-08.  The first red bar is what we anticipate the outcome to be in this financial year at the 30th of June.  The second red bar is what we are budgeting for in 2007-08.  You will see we are budgeting for a surplus around about 1 per cent of GDP or about $10 billion. 

I show you that to illustrate the first point.  But you will have heard chatter around since the Budget has been brought down that will say, oh, is this pumping too much money into the economy?’  ‘Are you cutting taxes by too much?’  ‘Are you spending more than you should?’  ‘Are you putting inflationary pressures into the economy?’  And the point that I would make is you see there our Budget outcome in 07-08 is projected to be more or less the same as 06-07.  More or less the same in 08-09.  You don’t see any huge change in the fiscal circumstance but continuous surplus budgeting from year to year.

Another way of actually looking at the fiscal position is to compare us to other countries around the world.  Are we being loose compared to America?  No, the United States is forecasting budget deficits.  Are we being loose compared to the United Kingdom?  No, the United Kingdom is budgeting for deficits.  Are we being loose compared to the developed countries of the OECD?  No.  Or the Europeans?  No.  Or Japan?  No.  These are all countries budgeting for deficits this year and next and compared to them you will see that Australia is in a very strong position.  It is a point that Ian Macfarlane the former Governor of the Reserve Bank made.  When he goes to international conferences and there is a discussion of fiscal policy, his colleagues would say to him, you are so lucky in Australia.  They would be running monetary policy in a fiscal climate of deficit, quite substantive deficit.  Whereas he was running monetary policy in a situation of surplus and indeed reasonable surplus.  That is the point he made I think in the last testimony that he gave before the House of Representatives Committee.

Of course 10 surplus Budgets has enabled us to reduce the Commonwealth’s net debt from about 20 per cent of GDP to zero.  And in fact with our Future Fund having eliminated net debt we will build an asset position.  I would call it an asset position.  You see that blue bar below the line there, the Treasury calls that a negative net debt position.  So our negative net debt is increasing.  If that sounds bad, it is not actually as bad as you think it is.  A minus-minus equals plus.  Good news.  Negative net debt is increasing in Australia and you can see that we have actually retired all Commonwealth Government debt.  We have no net debt.

That means the interest payments represented by the red line which used to be about $8½ billion a year back in 1996 are now zero.  And you will see that red line go below the axis in 2007-08, so we then get into the position of negative net interest payments.  A negative net interest payment means you actually get something back and I am sure our bankers would understand how you engage in negative net interest.  We will actually be receiving more marginally than we are liable for but we are saving $8½ billion a year in interest payments. 

Having retired Commonwealth debt it was then time to start addressing our unfunded liabilities.  Our biggest unfunded liability is superannuation.  Public servants were guaranteed a proportion of their final salary for life and no money was ever set aside to fund that.  It would just be funded out of future revenues.  So, just as today we might be funding retired public servants who retired 20 years ago, in 2040 they would be funding the public servants who have retired today.  There was never any funding of superannuation.  Now, a normal employer puts money aside into an accumulation fund which becomes the retirement savings of an employee but the Commonwealth never did it.  We never actually provisioned.  The theory always that future generations could pick it up. 

We are getting our public service liabilities under control as you can see from that graph.  We have closed that scheme and we are now funding new employees with an accumulation scheme.  There is one scheme which is still open – it is the Defence Scheme – which is for our military personnel – soldiers, sailors and air men – that is not a closed scheme, that is continuing and the liabilities will continue.

But our Future Fund is beginning to fund those too.  You can see the yellow line.  You will see that that started about two years ago, it has built to around about $50 billion against current liabilities of $100 billion and if you leave the capital in that fund and re-invest the earnings you can see we are starting to get well on our way to meeting those liabilities.  That is the yellow line.  And we will put more into that fund which will enable it to meet the unfunded liability as long as the earnings accumulate.  But if you want to pull out the earnings or the capital, that yellow line won’t exist.  That yellow line will not exist. 

If you let a bear put its paw into a honey pot, the honey will diminish.  And there are politicians in Australia who want to put their paws into the honey pot.  One in particular.  And I make this point: that the moment you open up that fund for one so-called good purpose, politicians of Australia will find hundreds of good purposes.  Because there are 150 electorates in this country.  If you think you can open it up and just put it on your pet project, you are wrong.  It wouldn’t be allowed in the private sector, it shouldn’t be allowed, this should be untouchable and yet there are irresponsible people who think they know better and they can raid a Future Fund and put it off to their own pet projects.

Well I don’t think the Australian people will stand for it and our Government will thoroughly oppose any opportunity or intention to start raiding the Future Fund. 

The Opposition didn’t have the wit to fund superannuation liabilities, they didn’t have the wit to set up a Future Fund and they have no right to start raiding it.  And if you start raiding it and taking money out of that Future Fund now, future generations will have to pay for it.  We are about taking burdens off future generations not increasing them. 

If you think I feel strongly about that principle, I do.  Let me make this point.  All of the States to some degree are engaged in an enterprise like this to fund superannuation.  And no State Opposition has been irresponsible enough to suggest a raid on a State superannuation fund.  Not in Victoria, New South Wales, Queensland, Tasmania or anybody else, this is a first.  This is a first.  Not one State Opposition or Territory Opposition has had the audacity to propose this.  And it is a very, very important principle. 

So if we can maintain our Future Fund without it being raided we can begin to meet those unfunded liabilities.  We will then be in a position where we have no net debt and we provisioned for liabilities. 

I said earlier, the focus of our government is to increase economic capacity.  As you know unemployment is now low at 4½ per cent, about the lowest that it has been in 30 years and inflation is quite stable at around 2½ per cent which we were never at that rate at around 2½ per cent over the last 30 years except in recessions.  The difference this time is we are at that rate at a period of growth and that is quite different.

Our business investment is strong with business investment now at record levels as a proportion of GDP heading up above 15 per cent of GDP and nominal engineering construction done and to be done is very strong.  Now, this will increase capacity in the economy in the years which lie ahead.  There is a lot of investment going in.  Some is yet to work out in production but a lot of investment which will lift the capacity of the economy and so we’ve decided at this time that the Government should be doing some investment all of its own. 

What would be a way of investing or increasing capacity in the Australian economy.  We announced a program in this Budget to lift capacity by increasing investment in education, skills and apprenticeships.  Primary education, apprenticeships at the secondary level and tertiary education and we are going to try something which has never been done before in Australia at the tertiary level. 

We are going to set up an Endowment Fund.  An Endowment Fund which will generate earnings.  The earnings of which will be available to Australian institutes of higher learning, to build first class facilities for a first class sector hopefully for first class students, students who, in turn, will add to the Australian community.  The Endowment Fund will double the current endowment held by the Australian university sector. At the moment investments in endowment, the accumulated sums held by the university sector are about $5 billion.  Last night we doubled that.  And from future Budgets we will continue to increase it. 

The Endowment Fund will be managed by the guardians of the Future Fund, a separate fund.  There is no point having two sets of guardians.  It will also be open for universities, who wish to do so, to place their monies for management, so they won’t have to all run their own management funds, they can place it with that.  Still owned by them.  It will also be available for private benefactors who may wish to make an endowment, to make their endowment part of that fund.  Might be an ex-student who wants to endow a particular university, they will be able to give an endowment to guardians to manage it.  It will be for a particular university, they can earmark it for a particular university.  They won’t have to manage it themselves.  Quite often at the moment they do.  They might set up a prescribed fund or they might give it to the university.  We will offer to do that for the sector, still tagged for a particular institution and their earnings would be available for distribution in accordance with their wishes.  The Government’s endowment earnings will be available for distribution upon the recommendation of a committee of experts.

The idea was that instead of spending money out of this Budget, we would invest for the future.  Invest in the capacity of the tertiary education sector.  This should be a fund, which is here for 10, 20, 30 or 100 years.  One hundred years or more as long as there are institutes of learning in Australia.  Long after the current political cycle.  Long after the current players have left the political scene there will be an Endowment Fund for the benefit of future generations building capacity in our higher education system. 

Now, endowments are not a new concept.  Universities have them at the moment.  But it is a new concept for the Government to invest in an endowment of that dimension.  And I think it is one of the most far-sighted reforms we’ve seen in Australia for a long time.  Some people have said to me, ‘why didn’t you do this before?’  The answer to why we didn’t do it before is we didn’t have money to invest because we were net debtors.  How could we invest in a fund like this before if we were net debtors.  We would have had to borrow the money to invest.  We would have to get the earnings to pay the interest bill.  These are the kinds of things you can do when you clear your debt and clear your liabilities, you can invest for the future.  And in fact, this goes along with an increase in recurrent funding for schools, for vocational education, for apprenticeships and indeed for universities. 

It is not a question here of using this fund to somehow pull back in other areas, the other areas are increasing and the fund goes over and above and on top of that.  And I think these are really, really important measures that we put in place in order to improve education at all levels. 

One of the things we are going to do is for students who don’t meet national benchmarks, offer them vouchers for extra tuition outside of school.  Give the voucher to the parents.  Allow the parents to redeem it with private tutors.  A voucher of $700 to ensure that those children that are falling behind are picked up and these graphs show you that 90 per cent of children in Year 3 are meeting national benchmarks in writing and reading and that more or less continues all the way through.  But in numeracy, there seems to be a drop off in meeting the national benchmark - 95 per cent are meeting it in Year 3 but by Year 7 it is down to 80 per cent.  That’s a problem for us.  It’s telling you that something is not quite right in the primary education system and we want to pick up those kids and give them something and take them forward.  Pick up their skills before it is too late. 

We want to reward good teachers.  There are good teachers all through the education system who are striving their hearts out and getting good results and not being properly recognised.  And we want to recognise them. 

We want to recognise schools that are doing well and there are going to be bonuses for those schools that are able to lift standards.  A recognition of schools that are putting the inputs in.  They will be eligible for bonuses up to $50,000 when they marked improvements in literacy and numeracy. 

And there are teachers who want to improve their skills and so the Commonwealth is going to offer for those teachers who want to improve their skills in maths and science and English and Australian history and numeracy and literacy a bonus upon completing a summer school where they are upgrading their skills because they are serious about their profession and they want to do better and they want to increase the capacity of our economy.

We want to break through the bureaucracies.  As some people say, ‘why don’t you just give more money to the States so they could spend it in their education system?’  We want to break through bureaucracies.  Go to parents, teachers, schools and make sure that we get results.  Now this is important stuff.  This is big reform.  This is huge investment.  But it is only the kind of investment you can do once you’ve got a strong economy - paying off debt; provisioning for liabilities; investing in endowment payments; building education.  This is investment for the long term.

Now, the second big announcement in this Budget that I will just touch on today, of course, is the changes that we’ve put in place in relation to taxation.  Now there are two reasons to cut tax.  The first is to help people with the expenses and costs of daily living.  The second of course is to sharpen work incentives for people who you want to upgrade their skills or maybe who are part-time and they want to take up a bit more work, to give them some sharper incentives and better reward for efforts.  And after the tax cuts in last year’s Budget, the thresholds and tax rates looked a bit like that.  You don’t pay any tax on your first $6,000 of income, 15 cents in the dollar between $6,000 and $25,000, 30 cents in the dollar between $25,000 and $75,000, 40 cents in the dollar between $75,000 and $150,000.  From 1 July, that first threshold will quite substantially increase so that you will only pay 15 cents in the dollar up to $30,000.  You will only pay 15 cents in the dollar tax from $6,000 to $30,000.  And, of course, this is where most of part-time workers will be, below $30,000.  The average wage in Australia is between $40,000 and $50,000. 

Some people have said to me on the radio this morning, oh, well I get more than $30,000, I don’t get a tax cut.  Everybody gets a tax cut.  Everybody gets the benefit of that change.  Even if you are on $100,000 you will get the benefit of having your tax rate cut from 30 to 15 on $5,000 and from the 1st of July 2008 we will shift those upper thresholds again so that you won’t go above 30 cents in the dollar until you are over $80,000 and you won’t go above 40 and onto the top rate until you are above $180,000 which will provide a second round of tax relief. 

Now, that is quite substantial progress in terms of tax relief.  That’s where we were back in 1996.  There was no 15 cent rate, the lowest rate was 20.  And the top rate was 47.  And in 1996 you paid 47 cents in the dollar on every dollar over $50,000.  That’s where we were back then in 1996.  So we’ve cut that 20 per cent rate to 15.  Instead of paying rates of 34, 43 and 47 per cent between $20,000 and $50,000, you now only pay only 30.  We’ve now cut all the rates and increased all the thresholds.  And instead of paying 47 cents in the dollar for each dollar over $50,000 at the top rate you’ll pay only 45 cents for each dollar over $180,000.  There are some people who say, ‘oh well, you haven’t indexed thresholds.’  Well, of course, if we had indexed thresholds, the thresholds would be much, much lower than those.  Much lower.  In fact, if we had indexed that $50,000 threshold, it would be $68,000 on 1 July of next year rather than $180,000.  So don’t let anybody say, ‘I would rather have had indexation of thresholds.’  Indexation of thresholds would mean that people would pay a lot more tax than they currently are and, of course, it’s not just the thresholds that have changed, it’s the rates as well. 

But I want to come back and focus on those changes that are applying from 1 July.  Three years ago - three years ago - on $30,000 that you were paying tax of $5,172.  Today you are paying tax of $2,850.  A 45 per cent tax cut in three years.  At $40,000, a 24 per cent tax cut in three years and at $50,000, a 14 per cent tax cut.  Have a look where the benefits go right down at the bottom of the scale, a 54 per cent tax cut at $15,000.  Now this is all pro-employment.  Who would be earning down to $15,000?  People on part-time work probably.  This is encouraging people to come into the workforce.  Maybe work another day.  Maybe increase their skills.  Maybe increase their hours.  Coupled with childcare changes to encourage those mothers who’ve had children and want to come back into the workforce for a day, a week or two days a week. 

That kind of work is available now because unemployment is low.  In many areas of Australia there is also labour shortage.  This kind of work is available and so what we are trying to do is we are trying to grow the Australian economy.  Trying to increase its capacity.  Increase its capacity by heightening work incentives.  Increase its capacity with investment in skills and apprenticeships and in education.  Increase its capacity with investments in road and rail.  And match the superannuation liabilities with the Future Fund.  Endow education with the Endowment Fund. Start to set ourselves up for the challenges of the future.  We know what some of those challenges will be, they will be challenges like the ageing of the population, they will be challenges like climate change.  My message is you will cope with them better with a strong economy.  We will do better from a position of strength. 

If we lock in the benefits and economic growth we can go out and we can meet those challenges and we can deal with those challenges.  But if you think by throwing away economic management somehow you will cope better with climate change you are wrong.  Or somehow you’ll cope better with the ageing of the population you are wrong.  These things are best done from a position of strength.  In having come from where we were in 1996 we are now much stronger today. 

That’s why we must lock in the changes, lock in the benefits, lock in the Future Fund and make it untouchable.  Lock in the Endowment Fund and make it untouchable so that we can strengthen the capacity of the Australian economy and make sure that all of that strength gives us a position to go out and face the future. 

This is what we have been doing in this year’s Budget.  You can’t see any one Budget in isolation.  This is really the culmination of a lot of work over a long period of time.  We wouldn’t be here if we hadn’t done the hard work of the Budgets that have gone before.  It comes together and it gives us opportunity.  This investment, I think, is investment which will last the test of generations.  The Future Fund will last the test of generations.  The Endowment Fund will last the test of generations.  And our structural reform, I believe, will give opportunity to future generations; you put all that together we are looking at great challenges but great opportunities with great confidence.

Thank you all very much.

CHAIR:

Thank you Treasurer, a question (inaudible) that you were so looking forward to, the first one from Jim Middleton.

JOURNALIST:

Treasurer, Jim Middleton from ABC Television News.  I’d like to go to the honey pot question.  As I understood it when you introduced the Future Fund you earmarked the entire proceeds of Budget surpluses to go into it, now we’ve got the Endowment Fund for universities.  Why is that not in effect a raid on the Future Fund given that it will slow down the rate at which the Future Fund now becomes fully funded itself?  And also, will there be other funds of this type, other areas of need?

TREASURER:

Well Jim when we established the Future Fund we said at the end of every Budget year we would make a contribution to the Future Fund and we will.  The reality is that we can keep the Future Fund on track to meet its targets and will as long as all of the capital and earnings stay in there and establish the Endowment Fund as well.  It’s not raiding the Future Fund because we are taking nothing out of it; we are not touching any of that $52 billion in that Fund, in fact we will be adding to it.  But the people who are proposing to raid it are proposing to raid what is already in it for their pet investment projects.  The point I make is if you can do that for one pet project you can do it for all pet projects.  That’s the risk, that’s the risk.  Now you say well will you be able to establish other funds?  Jim that depends very much on economic management over the forward estimates and beyond.  Give a guy a break, I’ve done two and if I’m still around maybe we could even better ourselves but I don’t think we’ll have much chance if we don’t keep economic growth strong and economic management strong - you know what I mean.

JOURNALIST:

Mr Costello, Clinton Porteous for the Courier Mail.  Yesterday you talked about the tax cuts being for low and middle income earners, today you have just argued very strongly it is also about lifting the participation rate.  Now, last year in 2006 there were tax changes at the top end, the top rate was cut, and now in 2008 the thresholds for the top rate will go up as well.  My question to you is why are you making these changes in 2007 and what’s your response to the accusation that this is a bribe to battlers in the run up to the polls?

TREASURER:

You know I’d say if you can cut tax to people on average incomes why wouldn’t you?  To help them, to improve work incentives.  I don’t subscribe to this view that says if you keep your tax burden low that is somehow bribing people.  You have got to remember after all it is their wages and salary and why would you make people pay more tax than they need to?  There is a very funny argument that says if you cut tax, if you give people more incentive somehow that’s bribing them, there is something wrong with that.  What I think Clinton I think because we have had Governments in Australia, particularly State Governments, which have been increasing taxes for so long that a tax cuts looks unusual.  It’s quite a good thing you know, its quite good for the economy, its quite good for them as long as you can balance your Budget as long as you can build your investments you should keep your tax burden low and I make no apologies for doing that.  I make no apologies at all.  I cut tax in 2003, 2004, 2005, 2006, 2007.  If you keep the Australian economy going, let’s hope that we can continue with good economic policy in the future.  You know I read in the newspaper, I think the week before the Budget, “Costello Warned Against Big Tax Cuts” and I though to myself, that’s funny nobody ever used to warn the Labor Party against big tax cuts, nobody warns State Government against big Stamp Duty Tax Cuts or big Land Tax cuts.  Nobody ever warns them about tax cuts at all, they never do it.  Maybe they don’t need the warning.

JOURNALIST:

Treasurer, David Uren from The Australian newspaper.  Every Budget night since 2004 you’ve been unveiling Budget surpluses before new policy spending that are between 50 and 100 per cent bigger than have been forecast by your own Treasury Department only a few monthly previously in their mid-year forecast update.  I guess I am wondering why, to what you attribute the last minute improvement in your Budget condition year after year and do you expect there will be another one in the PEFO statement ahead of the election maybe this year?

TREASURER:

Well, can I make this point, I think most people who were writing were actually anticipating a larger surplus from what I read in the press before Budget Night and the surplus for 06-07 and the surplus for 07-08 is $10 billion.  The prospects for the future, David, depend very much of the course of our economy.  (inaudible)  If we are going to continue our economy growing and getting more people into the workforce you’ll have up side outcomes.  If you economy turns down and you can’t get more people into the workforce you will have down side outcomes.  Employment growth has surprised us with its strength, over the course of the last year.  You are talking in the last year something around about a quarter of a million new jobs.  The economy was putting on jobs at nearly 1,000 a day (excluding weekends) that surprised people.  When you put jobs on at that particular rate you get a saving because you are paying less in unemployment benefits, a saving on the expense, and you get a boost in revenue on the other side because they are now starting to pay tax.  So if you can keep the economy growing, if you can get more people in jobs, if you can bring new groups into the labour market you’ll get up side; that’s what we ought to be trying to do.  If you take the view that at 4.5 per cent unemployment, you’re practically at full employment, you don’t have the capacity to bring many more people into the labour market, or if you take the view that the drought won’t break, that we will still have depressed agriculture, you might see down sides but we try and steer a middle course and do the best estimates that we can.. Now, I’m pretty attuned to what economists say and I listen to the good economists, and there are a few good economists that you hear on the radio and on the TV and as far as I can tell most of them think our forecasts are reasonable. 

I don’t think there is anybody saying that our forecasts on growth or on employment is either too high or too low.  I think you would agree with me, I don’t think anybody is saying that they are too high or too low, if they are right, and they are the best estimates now, these will be the outcomes.  But, you have got to remember now, I’m always amazed that they are as accurate as they are, to be frank.  You are trying to forecast where the economy will be on average, at the conclusion of the next year, in June of 2008.  Now, tell me this – what will the crude oil price be in June of 2008?  How much rain will have occurred between now and 2008?  Where will commodity prices be in 2008?  How many cyclones will affect the banana crop between now and 2008?  There are a lot of imponderables in there and we found, did we not, that cyclones wiped out a banana crop, increased the price of bananas, lifted the CPI to four per cent.  Who would have predicted that last year?  And there will be some more unpredictables in the course of next year. 

JOURNALIST:

Hi, Mr Costello, Phil Coorey from the Sydney Morning Herald.  Can I just follow up Jim’s question on the Future Fund and your answer to that.  In that context would it therefore be alright, would you have a problem if Kevin Rudd to fund some of his promises, such as broadband, chose to take money out of the surplus that otherwise would have gone into the Future Fund, rather than take it out of the Future Fund itself?

TREASURER:

Well, it would be a less-worse principle.  If Kevin Rudd wants to use taxpayers money to build infrastructure for Telstra and other telecommunications companies, he could always put in as an expense, he could just spend it.  It would go on the bottom line of the Budget.  There will be another $4 billion of outlays.  For whatever he intends to spend on it.  And then I assume you would all say that this is a huge boost to expenditure and inflationary.  I trust you would say that because even when I produce $10 billion you are prepared to say that, so, suppose he had another $4 billion to expend – that would be a less-worse principle.  It’s still a bad principle because he is essentially subsidising the telecommunications companies.  But that is less-worse because it is not raiding the superannuation fund.  That’s why it’s less-worse.  But you see, he wants to look as if he’s not engaging in that new spending – he doesn’t want to put it on his bottom line.  He doesn’t want to take all of that aggravation so he has decided he will raid superannuation.  You see, anybody could do that.  I could announce I’ll raid everybody’s superannuation fund here and put your money into all sorts of things and it would never appear on my Budget bottom line.  That is what he is trying to do.

JOURNALIST:

Treasurer, Mark Riley from the Seven Network.  I know today is about selling the Budget, but I think it’s the first time that I’ve seen campaigning slogans on the lectern at the National Press Club, and certainly the first time I’ve seen one in a (oh, it’s there)…

TREASURER:

What – National Australia Bank?

JOURNALIST:

Oh, yeah, yeah – well, actually there’s a problem, I think it may be in our sponsor’s competitors colours, but anyway.  That aside – I saw it there yesterday in the Budget lockup for the first time, today the Prime Minister has been in the studio here for two and a half hours with that bunting around the walls  - where did that idea come from?  Is it yours, does it work and how long before we see Government MPs in sandwich boards investing their future in their electorates?

TREASURER:

Listen, I’ve seen Government MPs singing on television advertising television shows.  I forget which network it was, so I don’t know that television networks would be complaining about promotional activity.  Is it a good sign, does it work – look, I think that it looks nice, ‘Locking in the gains, Investing in the future,’ I think it is just part of branding and I think you will see a lot of that kind of thing from all sides of politics and, I think, we are all mature enough to make up our own mind about it.

JOURNALIST:

Laura Tingle from the Financial Review Treasurer.  If we could go back to the honey pot again, last year’s honey pot you said that $5 billion from the current year’s surplus will go into the HEEF Fund, I was wondering if you could tell us today what commitments you can make about the rest of it, will all the rest of the money go into the Future Fund and also the Government is due to hand down its response to the Emissions Trading Taskforce in about a months time, do you anticipate that response will have a large Budget cost or will it be primarily a regulatory issue?

TREASURER:

On the first one the Government has to attend to the in-year financing costs, that is payments are made out by the Government on a regular basis and receipts are received on a very lumpy basis.  So there are periods during the financial year where the Government has paid out much larger sums than it has received, even though over the course of the financial year it will be in balance or in surplus.  Throughout the year it will pay out more than it receives and then it will give a big lumpy payment and you have got this lumpiness.  So, we have to keep financing in order to attend to that and also financing to attend to other loans that the Government makes.  The Government makes loans, in particular, to HECS HELP students.  So that is a loan not an expense, an interest free loan.  So, in any one year you’ve got to attend to your cash management flow and those loans.  That would only be a small amount of money, my estimates would be $1 or $2 billion would have to be retained, that’s our best advice at the moment apart from in-year financing yes, the remainder will be deposited in the Future Fund.

JOURNALIST:

And the Emissions (inaudible).

TREASURER:

The emissions stuff will be – we’ll be having a report which I think it is coming out shortly at the end of the month – after the Government has considered that we will announce our response.  This is a response that will look at whether Australia will move to a trading emissions scheme and, if we do, what form it would take.  And, of course, you would have to actually make decisions about limits and all that kind of thing, and tradability and all that kind of thing, that will be the substance of it.  It is essentially a scheme which deals with macroeconomic consequences.  Now, I’m not saying that some of that won’t take some financing to set things up, but that is not the focus of that report. 

JOURNALIST:

Treasurer, Andrew Probyn from the West Australian.  My question actually goes to the question that you just talked about – if you are to assume that a national carbon emissions trading scheme would have some cost to the economy, generally speaking Treasurer, how could a Government protect low and middle income earners from the flow-on effect of having a carbon price penalty?

TREASURER:

See, that’s the point.  None of this is cost-free.  In Australia if you were going to dramatically reduce carbon emissions tomorrow then people would pay more for electricity.  Bills would go up.  Probably petrol prices would go up.  In Britain, as you know, you’d be paying a litre of petrol well over $2.  They tax it a lot more and one of the reasons they give for taxing it a lot more is to protect their fossil fuels.  So, you have got to bear in mind none of this is cost-free.   There are going to be costs involved, depending on how far you want to go, how quickly you want to go.  And that is why when people come out and say ‘oh well, we’ll cut emissions by 60 per cent by 2050’, you say ‘well all right, what would the price of electricity be’, ‘I don’t know’; ‘what would the cost of the economy be’, ‘I don’t know’; ‘how many people would it put out of work’, ‘I don’t know, but we’ll do it anyway’.  It’s not very responsible.   The whole thing here will be how far you move and over what time frame because there will inevitably be costs and you would want to minimise the costs, most definitely want to minimise the costs – for the poor who would bear the heaviest burden.  So how you would do that, there will be various ways you could approach it but I won’t go into that in advance of anything we may have to say later on. 

JOURNALIST:

Michelle Grattan, The Age.  Mr Costello two questions – firstly on the parentage of the Education Fund, you mentioned last night that it was your idea, there has also been some speculation about Julie Bishop’s role, can you just clear up who thought of what and did what?  Secondly, you were talking about the difficulties of forecasts and estimates into the future and the way that Budgets have changed and they’re now over four, five, even ten years – in that context doesn’t it make promises that stretch over that time a bit meaningless because their circumstances change and because governments change?

TREASURER:

Well it’s a fair point Michelle, if the Government changes then you can’t be assured any of this will happen.  If the Government changes I don’t think there will be a Future Fund.  That will be raided.  If the Government changes I don’t know what would happen with the Endowment Fund.  All I can tell you is what I am setting up I will defend whilst I have breath in me and political life in me.  But, if the Government changes well, unfortunately, the country is exposed.  That is the nature of democracy.  In democracy you get what you pay for and you would get what you voted for if the Government changed.  Now, what would happen I can’t tell you.  Now, on the Higher Education Endowment Fund, I think I said last night that I had thought up the Fund, which I had.  But you know, success has many fathers, so I’m willing to go father and Julie can go mother.  And we can both claim parentage. 

JOURNALIST:

Treasurer, Rob Taylor from Reuters.  To come back to the honey pot again, I just wondered how much does the Future Fund actually need to meet its liabilities and you just said a moment ago that surpluses would continue to go in to the Future Fund, for how long?

TREASURER:

Well they would go into the Future Fund until it meets its target or 2020, which ever is the earlier.  The liability at the moment is $100 billion, the assets at the moment are about $50 billion.  So, every year we have an actuary, and I think as I showed you the liabilities are still climbing, although only climbing in respects of the Defence scheme, it is projected to be $200 billion by 2047.  So we’re not, as you can see, at the liabilities at the moment but if you accumulate interest you actually get there closer.  But the moment will continue on until we have got a yellow line that meets all of those blue bars out into 2047.  Was there a second part to your question?

JOURNALIST:

No.

JOURNALIST:

The target figure is…

TREASURER:

Oh, the target figure is, well you can see what the target figure is in 2020 it is around $140 billion.

JOURNALIST:

Treasurer, Colin Brinsden, AAP.  A wide spending Budget but no additional assistance for the housing market or rental assistance – is that because you think the housing crisis is a myth and secondly Alexander Downer in his Australian Story said that he’d like to be Treasurer, is that a worry for you or have you got him pencilled in for when you become Prime Minister?

TREASURER:

Oh dear – what was the first question again?  Housing, oh yes – look, it is plain to me that outside of say Perth or maybe Darwin the housing prices are not growing as fast as they were.  Certainly are in Perth there is no doubt about that, Darwin, yes, some evidence that they’re pretty stable if not declining a little bit in Sydney, and it is true that the capacity is nearly all used up and there are very few rental vacancies but I think that with rental vacancies as low as they are this will start encouraging people to increase the stock again.  That is, build more houses.  I wish we could have land release policies which would help that and stamp duty policies which would help that but I do think an increase in construction will be the natural response to low rental vacancies and I think that will bring rents back somewhat in the housing market.

JOURNALIST:

Treasurer, Karen Middleton from SBS television.  If I could follow up from my colleagues question, one of your colleagues, Don Randall, this morning described Kevin Rudd as a sparkler and in contrast he described the Prime Minister as the eternal flame.  He said he was (inaudible) constant and always there.   I was just wondering after 12 Budgets do you think the Prime Minister is the eternal flame?

TREASURER:

Well what did he call me?  A penny bunger?  Thank you all for your time.

 

Address to the National Press Club - Slideshow [.pps, 254KB]