DAVID SPEERS:
Arthur Sinodinos thank you for your time. Can I start with the latest IMF report out overnight; it says amongst other things that Australia's economy has performed favourably over recent years compared with other advanced economies, with a track record of sustained growth, inflation close to target, a resilient financial sector, public debt is still low, relative to other economies. That doesn't exactly sound like a budget or an economy that's in crisis, does it?
ARTHUR SINODINOS:
Look I don't want to downplay the IMF report, but in terms of what it says on that side. But if you look through the report it makes it very clear that we face important near term challenges in the transition of the economy to new sources of growth as resource investments come off. It highlights the budgetary challenge that we face, particularly over the medium term and it's really saying that we have to balance our near term growth prospects against taking medium term action to get the budget back under control.
DAVID SPEERS:
Sure and I want to get to that, but is it giving Labor a bit of a tick do you think for the way it managed the economy?
ARTHUR SINODINOS:
Well look I think we've been fortunate as we've said over a number of years, that when we had the Global Financial Crisis we had a really good starting point in terms of no net debt and a very sound regulatory system. We supported some stimulus during that period, but we didn't support the continued build-up of debt, while our terms of trade were at historic highs. So in that sense I am happy to take what's in the IMF report and build on it, but I wish some of the challenges were less than the ones that we appear to be facing or that we've inherited.
DAVID SPEERS:
It does of course back the case for spending cuts now. Part of the Coalition's plan here was always to reduce the size of the public service by 12,000 positions…
ARTHUR SINODINOS:
Yes.
DAVID SPEERS:
Through voluntary redundancy . Now that you've got a better idea of what Labor's efficiency dividend is going to mean for the public service, will some of those have to be forced redundancies?
ARTHUR SINODINOS:
Look I don't think we're quite contemplating that just yet. What we're doing though, is, because we've had the full implications of the Labor cuts coming to the fore, including overnight the Australian Tax Office announcing another 900 jobs to go this year. What it's made us think, is that in the context of the Commission of Audit, we've got to make sure that the size and staffing of the public service matches the roles and functions we envisage for the Government going forward. So we're actually going to approach it in a fairly rigorous and methodical way. We're still committed to making substantive staff reductions, but we're not canvassing involuntary redundancies or anything else. We want to see, first and foremost, what comes out of the Commission of Audit, so that we fit the staff that we've got to the functions the Government needs to undertake.
DAVID SPEERS:
So the cuts may not be as deep as earlier flagged?
ARTHUR SINODINOS:
Well look, I am not going to pre-judge the outcome of the Commission of Audit. There may be areas where you need more staff as opposed to less. There will be other areas where you can do more with less. But in broad terms, we are committed to the overall budgetary objective what was attached to the 12,000 staff reduction. So we still need to be able to engineer that reduction in budgetary terms or in terms of the cost of government attached to those numbers.
DAVID SPEERS:
Just one other question on the IMF, one of the other areas it also had concern about is the property sector and what we have seen in recent months and that is a bit of a spike going on, or a sharp increase in some cities in particular. I guess one of the benefits of low interest rates is it's easier to borrow, but do you share concerns about the risks some people are taking and some banks are taking that we could lead to a property bubble.
ARTHUR SINODINOS:
Well we'll keep monitoring the appetite for risk in the private sector. We're particularly concerned that even in a market of low interest rates, first home owners seem to be finding it difficult to get into the market as prices start to rise, particularly in markets like Sydney. But at this stage we're not contemplating macro-prudential controls or anything like that. We'll keep an eye on it and we're conscious that compared to some overseas markets we have had a quite a lag between demand and supply of housing in Australia for some time. So our focus is on, how do we, through reduced regulation, through the Building and Construction Commission, through better land use policies in cooperation with state Governments, we actually increase the relative supply of land. Because in the long run that's an important contributor to getting the supply demand balance right in housing.
DAVID SPEERS:
Now on the debt ceiling, Labor and the Greens are digging in, saying they will only agree to a $400 billion debt ceiling. The Government wants 500 billion. In the end, if you don't have the numbers, will you have to just accept the $400 billion?
ARTHUR SINODINOS:
Well before we get to that point we're going to continue to prosecute the argument in public about why it's better in one move now to move to 500. I don't know whether you were listening to the Senate testimony this morning by the Australian Office of Financial Management, which is a unit of Treasury. The Head of the OAFM said that the peak in debt of about 370, you add to that what we are contributing to the Reserve Bank, the 8.8 or nearly $10 billion there, he argued you need not only a $40-60 buffer, but you have to add another $30 billion for all sorts of potential contingencies. So he was talking about a situation where the 370 becomes 410. You then add 40-60 billion as a buffer and you're talking around 450 billion already.
DAVID SPEERS:
Well 450…
ARTHUR SINODINOS:
That is in contemplation, David, over the Forward Estimates. Now some people may say: well okay it's over the Forward Estimates, so you take one bite of the cherry now and come back later. What we're saying is, if we know now and we'll certainly know by the time of MYEFO that we're facing that 450-plus sort of range for the ceiling, in terms of certainty in financial markets it's best if we can to get an agreement now, rather than do a bit now, do a bit in the Budget and keep coming back. We're in this situation, arguing over debt ceilings, because Labor introduced the concept of a debt ceiling in 2008. It wasn't the practice before that and certainly wasn't the practice under the previous Howard Government or the Hawke Keating Governments. So we're in this situation because they introduced a concept of a debt ceiling. I'm saying if we have the certainty, through going to 500 now, the markets will be happy, investors will be happy. This morning, the Australian Office of Financial Management made the point that visiting London, they were asked about the cap and how the cap works and how it gets adjusted. So it's already creating interest and that potentially, in investor markets, can lead to uncertainty if they don't know the outcome.
DAVID SPEERS:
But you've been making that case and we've heard not only from the Office of Financial Management, but the Head of Treasury as well in Estimates yesterday and still Labor and the Greens aren't budging. So isn't the political reality going to be, you'll just have to accept what their offering: 400 billion now and then come back later?
ARTHUR SINODINOS:
David, the political reality is that the longer Labor and the Greens want to talk about debt, the more in the public mind it reminds people that we've got the debt we've got, because since 2007-2008 Labor increased the debt to get first of all to 300, which is the limit we reach in December, and in the Forward Estimates on their current policies and so on and so forth the debt would go further. So in a sense the political reality is, I think they lose with the public if we have to keep debating public debt.
DAVID SPEERS:
Sure, but the number they left with was a peak of $370 billion in debt. Now, yes things may have deteriorated since then, but now it's on your watch. So can you understand from their perspective they'll give you what you need now, but down the track you're going to have to own any further blow out in the debt?
ARTHUR SINODINOS:
What we are saying is, we do it once, it provides maximum certainty. We're into providing maximum certainty for the private sector, we do that by doing this once. If we have to keep coming back to it, it won't be to our disadvantage, it will actually be to Labor's disadvantage because we will take the opportunity to remind people that we're in this situation because debt was allowed to blow out during the biggest terms of trade increase in our history.
DAVID SPEERS:
But you're the guys who said you'd get debt down, why can't you get it down?
ARTHUR SINODINOS:
Yes David, by setting 500 we're not setting a target, we're not saying to everybody: here is the credit card, here's the limit, go out and spend. It's a limit, which provides certainty to people that, depending on any potential shock, we have a capability to deal with it without creating further legislative uncertainty but we will work…
DAVID SPEERS:
But surely a lower level will make you work harder.
[inaudible]
ARTHUR SINODINOS:
David I can give you this commitment: we will work very hard to restrain the growth of debt, to get the budget under control, in the way that the IMF describes we need to do, particularly over the medium term, so that 500 becomes academic in that sense. That is what we are working towards.
DAVID SPEERS:
Is there a middle ground here? 450 billion, would the Government contemplate a negotiated middle ground here?
ARTHUR SINODINOS:
Well the problem we have is that we're taking the responsibility and we will wear whatever criticism if there is a problem on our watch. But the point is we're willing to go to 500 now. Very transparent. We are the ones making the proposal and we wear the consequences of that. Going to 450…
DAVID SPEERS:
OK, but would you accept 450?
ARTHUR SINODINOS:
We will accept what we think is the right thing to do in the circumstances and that is 500.
DAVID SPEERS:
All right. Assistant Treasurer Arthur Sinodinos, thank you for joining us this afternoon.
ARTHUR SINODINOS:
Thanks very much David.