The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

14 May 2011

Interview with Alan Kohler

Inside Business, ABC TV

15 May 2011

SUBJECTS: Budget 2011-12

KOHLER:

Well Treasurer the sensitivity analysis in the Budget papers this week showed that a 4 per cent move in commodity prices produces a $6 billion change in the budget balance. Now the RBA commodity price index moved 4 per cent last month in one month, and $6 billion is almost twice the budget surplus that you're forecasting for 2012-13. Doesn't that just show how wafer thin it is? How vulnerable it is?

TREASURER:

No, I don't think it demonstrates the point that you're making because the central forecast is to come back to surplus. The central forecast is based on conservative forecasts I believe in terms of commodity prices. As you know our terms of trade are high, at 140-year highs, and we are major beneficiary of that, but we don't think for one moment they will stay there forever, so we do bring terms of trade down over time, but what you are dealing with is sensitivity analysis. It is done on the downside as well as the upside, but it is not the central proposition which is put at the core of the Budget.

KOHLER:

But the point I'm making is that a 4 per cent move in commodity prices can happen overnight, which means that your budget can just get blown up.

TREASURER:

Yes, but the point I would make to you is our forecasts are not that dissimilar from the RBA's forecasts either, and they have the same expectations that we have in our central forecast for the terms of trade.

KOHLER:

The other forecast I'd like to draw your attention to is that the Budget papers forecast an increase in company tax revenues of 36 per cent over the next two years up to 2012-13, which is what your surplus in that year is built on. The consensus market forecast for company profit growth over the next two years is 25 per cent, 10 per cent less than Budget papers predict for tax receipts growth from companies, and the market's usually too optimistic.

TREASURER:

Well I certainly don't accept that at all. I don't think that our forecasts on revenue are that different from some of the forecasts from the major forecasters with the major banks for example, but I'm happy to go through and have a discussion about revenue, I think that is a really important topic to discuss today because our revenues are down by some $130 billion from 2008-09. That is the hangover if you like of the global financial crisis, and of course our deficits this year and next year are up substantially because of those revenue write-downs. But I'll just remind you of this one point, I think that it's been lost in the debate this week: that is growth in this year is down by one percentage point, but we've got growth forecast next year of 4 per cent. What that really means is that next year we are expecting the economy to be growing strongly, and we do expect revenue to recover with that. I don't think our forecasts for revenue as we go forward are too optimistic at all, and neither do most of the other forecasters who generally agree with our forecasts in terms of the deficits and the return to surplus.

KOHLER:

You rely on Treasury forecasts, Treasurer, you don't make them yourself of course.

TREASURER:

That's right.

KOHLER:

But incorrect forecasts, just six months ago, have resulted in an increase in the deficit for this financial year of 9 billion and an increase in next financial year's deficit of 11 billion. I mean how much confidence do you have in their forecasts?

TREASURER:

Well, I have an enormous amount of confidence in the forecasts because what you jus said completely ignores the impact of the floods and Cyclone Yasi. They were the biggest natural disaster in Australia's history, and combined with the natural disasters in both Japan and New Zealand at around the same time have had an enormous impact on growth this year. You see the whole world changed dramatically in January through February and the economy as a consequence has slowed. That is what you are ignoring when you make that point, and you can't say Treasury is at fault because they didn't anticipate a natural disaster of the magnitude that we have been through.

KOHLER:

Well okay that's a part of it, but what they did get wrong is the extent to which companies would use depreciation and write-downs to reduce their tax.

TREASURER:

Well certainly it has, and we predicted originally a write-down of something like $210 billion if we go back a couple of years. Now of course the economy began to grow because our stimulus was so effective. On top of the stimulus, the strength of our trading partners began to grow and we began to grow strongly, but there's no doubt, and the Budget papers make this really clear, that those accumulated losses are a hangover and they are impacting on the revenue, but I go back to the point that I made to you before. We are going to grow at 4 per cent next year. You can't ignore that fact on revenue, and that is reflected in the return to surplus, along with other factors in 2012-13.

KOHLER:

But do you accept that this week's Budget did not deal with the structural deficit at all, and that the forecast return to surplus in 2012-13 is entirely dependent on the increase in tax revenues forecast as a result of the forecast growth in GDP, and the forecast mining and energy boom?

TREASURER:

Not at all. I don't accept that for one second. We have made some substantial structural changes in our savings. Two thirds of our savings are savings on the spending side and a third relate to tax expenditures. If you look at what we've done on the tax expenditure side, they are all substantial structural saves, not just for the next four years, but for the next 40 years. What we've done with the Dependent Spouse Tax Offset, what we've done with the taxation of fringe benefits on cars and a number of other measures. You see we've also made substantial headway in this Budget with tax reform, through both dealing with those tax expenditures, but also making sure that the revenue is there, and it is from the Mining Resource Rent Tax, which will fund a cut in the company tax rate, which fund cuts in taxes, particularly through the $5,000 instant asset write-off for small business, so there's a lot of reform in this area in the Budget.

KOHLER:

I suppose what I'm talking about is the period up from now until 2012-13, which is when the budget is forecast to return to surplus, the Government's decisions actually have an impact of minus 2.5 billion.

TREASURER:

No, that's inaccurate, Alan. There's a net save and I'm happy to go through...

KOHLER:

No, no, there's not, I've got the figures right in front of me.

TREASURER:

Well you're looking at the wrong table. There is a net save of $5 billion. It is all there, I don't have the document in front of me, but I'm happy to send it to you, it's a save of $5 billion, that's what I'm most proud of, savings of...

KOHLER:

Well that might be over the whole forward estimates, but I'm talking about the period from now until the surplus in 2012-13. Government decisions in this week's Budget definitely represent a minus.

TREASURER:

No, there is a net save over the forward estimates of $5 billion, you might want to cut them around a bit, but the fact is, that a number of these changes we are making cut in at different times or produce more revenue because some of them are phased in, that's just a natural consequence of the policy process, it doesn't make them any less important than they are, but I do want to make this really important point: $22 billion worth of saves. We've only got an increase in real terms of expenditure over the Budget estimates of 1 per cent a year, each year, compare that to the increase for the last five years of the Howard Government of something like 3.7, 3.8 per cent every year, so what you're seeing is the impact of our 2 per cent real expenditure cap and that's where the restraint is coming from.

KOHLER:

Do you accept that there's a structural deficit which excludes the effect of the business cycle?

TREASURER:

Well I certainly accept and I've accepted this from day one that we do have to make structural changes in our budget....

KOHLER:

No, but do you accept that there is a structural deficit now?

TREASURER:

Well, I think that's in the eye of the beholder because you can measure it in a variety of ways. You can point to any sensitivity analysis using different assumptions from different people and come up with different figures. I mean the Treasury for example, produced a paper on this not too long ago, and at the lower end a very small one, but some people argue it's larger. What I do accept, and we've been doing this from day one, and we particularly did this when we put in place the increase in the age pension, we have been making structural saves in our budget, in those areas of the budget which have been growing faster than average, and if you want to pick an area which has been quite controversial this week, we have made some changes at the top end when it comes to family payments because that has been an area of the budget where expenditure has been growing at a very, very fast rate. That's one area and there are many others, for example, the other structural change, which has not passed the Parliament, is means testing the Private Health Insurance Rebate, that is another structural change we believe needs to be made in the Budget.

KOHLER:

The economists I talk to say that there is a structural deficit now of about $35 billion, and that after this week's Budget, it'll still be close to that level in two and three year's time.

TREASURER:

I certainly don't accept that and I don't accept that most economists have that view. The fact is that we've got in place a very strict fiscal regime, the likes of which this country has not had in many, many years. If you compare it to what's going on in other western countries, there's nothing quite like it. We put this fiscal discipline in place when we moved in 2009 in February to stimulate our economy in the face of the global recession, nobody much noticed it then, but we've been working away on it, we said that it would apply when the economy returned to trend growth and above, we've been doing that and will continue to do it consistent with our fiscal rules because we do believe in keeping our budget in good nick.

KOHLER:

Thanks very much for joining us Treasurer.

TREASURER:

Good to be with you.