HAMISH MACDONALD:
Good morning to you, Treasurer.
JOSH FRYDENBERG:
Nice to be with you, Hamish.
HAMISH MACDONALD:
Donald Trump says that China wants to make a deal; trade talks will soon restart. Do you believe him?
JOSH FRYDENBERG:
Well, we welcome these comments and any de-escalation in the trade tensions between China and the US which have hovered across the global economy and had a negative impact on sentiment. So, we've encouraged the key protagonists here to come to the table, to negotiate their differences, resolve them, commit to a rules-based trading system because ultimately, it's not just China and the US who are impacted by these trade tensions, but its also bystanders including Australia.
HAMISH MACDONALD:
We have been here before, though. The Presidents claimed a breakthrough only then to announce even higher tariffs on Chinese goods. Is there anything you can see in what he has said overnight that would indicate things are different this time? That this is a real cessation of hostilities, potentially.
JOSH FRYDENBERG:
Well, I don't think we should jump to any conclusions here and I think we have to be realistic about the differences the US and China have on some of these issues. They're real and the issues are also very complex. So, let's see how it plays out but certainly, those comments from the President were encouraging.
HAMISH MACDONALD:
Okay, the trade turmoil is hurting businesses and shareholders here in Australia, we all know that. Another $26 billion wiped off the stock market yesterday. Is this really an appropriate time for you to be laying down the law to corporate Australia to slow down their dividends and share buybacks?
JOSH FRYDENBERG:
Well, Hamish, the speech was focused on Australia's productivity challenge being mindful of the fact that lifting our productivity is key to lifting wages and household incomes. I pointed to what the Commonwealth Government is doing and can do in terms of industrial relations, deregulation, competition reform, $100 billion infrastructure pipeline. But also how we're working with the states on a number of shared responsibilities like health and education. Now, when it comes to corporate Australia, I pointed out the fact that over the last twelve months, there's been $29 billion worth of share buybacks and special dividends and this compares to an average of $12 billion over the last four years. And talking to people in corporate Australia, there seems a tendency to go down the route of share buybacks as the default option, whereas companies like Cochlear and CSL and Atlassian and Seek have all re-invested in research and development, looked for opportunities to grow and that's not just in the long-term interests of their shareholders but also in the long-term interest of the economy.
HAMISH MACDONALD:
Do you acknowledge, though, that those share buybacks and special dividends themselves help stimulate the economy?
JOSH FRYDENBERG:
Look, ultimately, it's going to be up to the individual corporates to take the decision…
HAMISH MACDONALD:
That wasn't the question though. Do you acknowledge that they also help stimulate the economy by pushing cash back into it?
JOSH FRYDENBERG:
Well, what they do in the case of a share buyback is they reduce the number of shares on offer and therefore maybe increase the value of each share. I'm focused on the medium and the long-term, Hamish, and that's where I think if companies are growing, investing, creating more jobs, that's what is what is good news for Australian consumers, that's what's good news for Australian workers…
HAMISH MACDONALD:
It's just that this has all received a pretty frosty response from a lot of people in the business community, although not all. I know that Kate Howard from Fidelity International said that in some way you've missed the point. The dividends are a way of recirculating capital which the market needs currently.
JOSH FRYDENBERG:
And I saw that Paul Bassat who was the founder of Seek which is a great Australian success story said these were really encouraging comments and this is actually becoming a real issue for corporate Australia. So, you're right, the views have been mixed but sometimes some of these home truths are uncomfortable for people.
HAMISH MACDONALD:
Mike Kane from Boral has said that he doesn't wait to be told by politicians what we are suppose to do. He said what we're doing is what's in the best interests of Boral and shareholders in the long run. So, they're also talking about the long-term, aren't they?
JOSH FRYDENBERG:
And, look, absolutely companies, whether they're the executive management team or the board of directors, they're accountable to shareholders. But what I was doing was pointing out the fact that we have seen a jump in the number of buybacks and the size of those buybacks and how some other companies, like the growth companies of CSL and Cochlear have gone down different routes. I also point out that the Reserve Bank Governor about five years ago actually made a similar point about how investing in the growth strategy is sometimes more important than simply a share buyback or a similar approach.
HAMISH MACDONALD:
Do you think you made a mistake by going in the way that you did? Clearly a lot of business leaders don't appreciate the way they feel you're telling them what to do.
JOSH FRYDENBERG:
Well, firstly, I'm not. What I'm doing is pointing out some realities in the financial system and that is my job to be on the side of your listeners, to be on the side of workers, to be on the side of growing the Australian economy. I've actually been quite heartened by the response that I've had from a number of corporates. I was talking to, for example, the Chairman of CSL and that is an amazing success story and they keep reinvesting in their business and that's made them a world leader in their field. So, not every company is the same, certainly in terms of the product and the services it produces. But when it comes to capital allocation, I've just pointed out the fact that growth options are sometimes better than share buybacks.
HAMISH MACDONALD:
Your Government has cut $4 billion from Research and Development in the last two budgets, which has pushed government investment in R&D to among the lowest levels in the OECD, we are now below Slovenia and Greece, for example. Isn't a drop off in R&D incentives one of the key reasons why productivity is down?
JOSH FRYDENBERG:
Well, we have a strong R&D tax incentive and $2.8 billion, Hamish, went out the door in '17-'18, it's a demand driven program and it discriminates or distinguishes between companies based on their turnover. But what we've also done is we've conducted a review led by the chief scientist and also the then Secretary of the Treasury, John Fraser and Bill Ferris who has been involved in innovation all his life and they've made recommendations to us about different approaches to go down in order to spur further innovation and investment because that is absolutely critical for Australian companies but also for the Australian economy.
HAMISH MACDONALD:
So, you'll be returning more money in that direction towards investment in R&D?
JOSH FRYDENBERG:
Well, we've got some reforms on the table and we continue to talk to all the key stakeholders. But for the Government, R&D and encouraging it is absolutely critical. We use the tax system, we also use grants, as you know, Medical Research Fund is over $5 billion and that's helping to spur Australia's leading edge researchers in the medical field and certainly they have become a hub of activity and a hub for success.
HAMISH MACDONALD:
Just to be clear. You do acknowledge that you cut $4 billion from research and development in the last two budgets?
JOSH FRYDENBERG:
No, we continue to invest significantly in R&D, we're not looking…
HAMISH MACDONALD:
Do you acknowledge that cut or not?
JOSH FRYDENBERG:
There is a demand driven R&D tax incentive so that will depend on overall what is happening in the economy…
HAMISH MACDONALD:
So you're saying there is not demand there?
JOSH FRYDENBERG:
What I'm saying is we're encouraging more demand but $2.8 billion of taxpayers money went out the door in 2017-'18. This is a real focus for us. What we want to do is ensure that the companies get these tax incentives, not for what they would do anyway because that wouldn't be a good use of tax payers money, but for adding value to the research and development task.
HAMISH MACDONALD:
At the weekend, the former Prime Minister, Kevin Rudd, warned that Australia is at risk of recession next year. He says there is a real risk that this country will face a recession due to the softness of the global growth numbers. Can a recession be ruled out in your view?
JOSH FRYDENBERG:
Well, both the Reserve Bank Governor and myself have pointed out that the fundamentals of the Australian economy are strong. So, we're confident about the future growth prospect of the economy, bearing in mind that our employment growth levels are more than double what you see across the OECD and around three times what we inherited when we first came to government. Our AAA credit rating has been maintained and we're in our record 28th consecutive year, Hamish, of economic growth. But most importantly of all, our net debt to GDP levels are about a quarter of what you see in the US and the UK and about one seventh of what you see in Japan and we are going to bring the budget back to surplus because it's important to ensure that we have prudent financial management.
HAMISH MACDONALD:
I'm sure out listeners heard that you didn't really answer the question of whether a recession can be ruled out.
JOSH FRYDENBERG:
Well, what I'm saying to you is we're confident as I just said, we're confident that the Australian economy will continue to grow and we're putting in place the right policy settings for that to happen and yesterday's speech which focused on productivity and the reforms that the Commonwealth, the states and corporate Australia can make are important.
HAMISH MACDONALD:
Can I offer you one more opportunity to rule it out?
JOSH FRYDENBERG:
Well, I don't think the economy will not continue with its strong record of economic growth and economic growth is not producing the same result as Kevin Rudd was speculating about.
HAMISH MACDONALD:
Half a dozen Ministers have been up in Port Moresby for talks. PNG wants help refinancing it's $12 billion in national debt. Given its willingness to turn to China for financial support if we don't chip in, are you seriously entertaining this direct budget assistance?
JOSH FRYDENBERG:
Look, there were six Ministers who participated in this 27th Ministerial Forum and Mathias Cormann as the Finance Minister was there and he said subsequent to that meeting that we are absolutely open to ways to help the Papua New Guinean Government resolve some of it's financial issues. In fact, I just met with my counterpart from Papua New Guinea just a few days ago. What we do in Australia is we provide over $600 million of aid support and we want to help them resolve their issues, whether that is at a multilateral level or a bilateral level, we'll continue to do that.
HAMISH MACDONALD:
Big gap between $600 million in aid and $12 billion in national debt.
JOSH FRYDENBERG:
Well, they do have a major debt challenge and they're very conscious of that and Australia is a good friend of Papua New Guinea and a near neighbour and we'll work with them. I do point out, Hamish, that our aid program which hasn't been focused on budget support per say, has been focused more on the education, the infrastructure and the health outcomes and what we've been doing through that aid program is improving the literacy and numeracy of more than 140,000 Papua New Guinean children and protecting over 3 million children from the Polio outbreak. So, that's a real practical thing that we're doing as a near neighbour and friend of Papua New Guinea.
HAMISH MACDONALD:
Josh Frydenberg, thank you very much for your time this morning.
JOSH FRYDENBERG:
Good to be with you.