Michelle Grattan:
The Reserve Bank has given homebuyers a small bit of good news this week – a modest quarter of a percentage point cut in interest rates. Welcoming the rate cut, Treasurer Jim Chalmers sees the fight against inflation as at last being won, or at least largely so. In this term he wants to turn to finding ways to promote productivity in Australia, where we’ve been losing that battle.
Meanwhile, most immediately, the Treasurer is fighting critics who are campaigning against his tax hit on those with more than $3 million in their superannuation accounts. The government plans to increase the tax on these accounts but, most controversially, to tax their unrealised capital gains.
Jim Chalmers joins us today to talk about these issues.
Jim Chalmers, we saw the Reserve Bank this week lower rates again. But the bank’s Monetary Policy Statement used the word ‘uncertain’ about the aspects of the future multiple times – many, many times. How are you planning for an uncertain economic environment to come?
Jim Chalmers:
First of all, Michelle, very good news that interest rates were cut for the second time in 3 months. That does reflect the progress that we’re making together on inflation.
But it does also recognise this very uncertain global economic environment. The language that the Reserve Bank Governor used yesterday and that the Board used in their statement is not dissimilar to some of the things that I’ve been saying for some time now. The escalating trade tensions, the weakness in the Chinese economy, conflict in the Middle East and Eastern Europe – all of these things are casting a dark shadow over the global economy, and that has implications for us as well.
But I think overwhelmingly this rate cut was about both kinds of inflation being within the target band. The Reserve Bank said that they were increasingly confident they were getting on top of things, that the upside risks to inflation were subsiding. And so that’s a very good thing. But also it recognises the international environment, as does the government.
Grattan:
Much of the uncertainty is coming from the Trump administration’s unpredictable tariff policy. The RBA has modelled 2 scenarios for tariffs, what it calls ‘trade peace’ and ‘trade war’, and Governor Bullock hasn’t ruled out a recession. What’s your reading of this?
Chalmers:
I think, first of all, the Reserve Bank is doing diligent work, looking at a range of scenarios from best case to worst case and central case, just like the Treasury does. We think through the various ways that this can play out.
And I think it’s helpful to remember if you look at the Reserve Bank’s forecasts and the Treasury’s forecasts, neither the bank nor the Treasury is expecting our economy to shrink. In fact, in both instances the forecasts say that the economy will grow more strongly next year compared to the financial year that we’re about to finish.
And so the bank and the Treasury expect our economy to continue to grow. Of course people think through the various scenarios. The international environment is casting a dark shadow over the global economy and our own economy. And that’s why it’s so important that the Australian economy has got the characteristics that you would want going into this volatility and unpredictability – the lower inflation, the higher wages, the low unemployment, the budget is in better nick than most countries around the world, we’re starting to see interest rates come down, the market’s expecting further interest rate cuts.
And so we’re well placed and well prepared, but it is good, diligent work by the Reserve Bank, by the Treasury and others to think through what the best and worst‑case scenarios might be. But our central case, our expectation and our forecasts all reflect some degree of confidence that our economy will continue to grow, not shrink as other countries have.
Grattan:
Parliament doesn’t meet until July, but obviously you’ll be thinking ahead. What are your priorities when it sits again?
Chalmers:
I think the Prime Minister has made it really clear that one of the things we’re really excited about legislating is the cut to student debt. That will take some of the burden off graduates but it will also provide some cost‑of‑living help to students or graduates repaying a student debt. So that’s going to be a big priority.
In my own portfolio, obviously we’ve got the changes to the super arrangements, we’ve got the standard deduction we announced during the campaign, we’ve got some payments reforms that we need to legislate. So it will be a really busy agenda, but I share the Prime Minister’s view that one of the big priorities when the parliament returns will be cutting student debt for millions of people.
Grattan:
On superannuation, you’ve had legislation which you haven’t got through to increase the tax on superannuation balances over $3 million. At the moment that’s 15 per cent, you want to take it to 30 per cent but also, and most controversially, you want to tax unrealised capital gains – that is gains that people haven’t actually cashed out. How is that fair?
Chalmers:
This is a modest change that we announced almost 2 and a half years ago now. We announced it at the beginning of 2023. We’re now in the middle of 2025. And what this change is about, it’s about making concessional treatment for people with very large superannuation balances still concessional but a little bit less so. And that will help us fund our priorities, whether it’s Medicare, the tax cuts and other priorities in budget repair. So it’s a modest change.
In terms of the calculation of unrealised gains, that’s actually not unique in the system. There are other ways in the super system and more broadly that unrealised gains are calculated. Now, we did, I think, 3 rounds of substantial consultation on these changes in the last 2 and a bit years.
And what we learnt throughout that consultation process is that nobody could propose to us a better way of making this calculation. Some of the alternatives would impose costs on everyone in the fund rather than just people over $3 million. And there are other options as part of that consultation as well.
And so Treasury advises us that this is the best, simplest way to go about it. I know that people have views about it. I know that there’s a campaign in a couple of our newspapers about it. But this is all about making sure that it’s still concessional treatment, it only impacts about 0.5 per cent of people in the super system with very large superannuation balances. It makes the system a bit fairer, and it’s important in terms of the sustainability of the budget.
Grattan:
Just on the practicalities, if you or I have more than $3 million in our superannuation fund, how do you actually calculate this unrealised capital gains, given that the fund could include a farm, it could include a small business?
Chalmers:
It’s the value at the start versus the value at the end –
Grattan:
Of the financial year?
Chalmers:
Yeah, allowing for withdrawals and contributions. And, again, this calculation is made elsewhere in the superannuation system, the way that a number of the funds have to report makes this calculation. So the calculation is not new. And if you make a loss you can carry the loss forward. There’s a whole bunch of appropriate arrangements made in the calculation.
Grattan:
It sounds very complicated. You’d need a good accountant.
Chalmers:
Typically people with more than $3 million in superannuation have got access to pretty useful advice, that’s the first point. But, secondly, we did consult on this for some years, and this is the way that we propose to go forward.
Grattan:
One of the critics, one of the strongest critics, has been Paul Keating. Now, he would consider himself father of the superannuation scheme, right? He says that the non‑indexation of the $3 million just introduces bracket creep.
Chalmers:
First of all, I mean I think you know – you and I have spoken on a number of occasions over the years – you know the regard that I have for Paul, and I do talk to him from time to time, including about this issue. And I respect him too much to kind of relay or convey those private conversations –
Grattan:
– it would have been a lively discussion, I’d imagine.
Chalmers:
I think there’s a range of views, and Paul’s views, I think, are relatively well known on this. When it comes to indexation, I understand the argument. There are so many instances in the tax system where thresholds aren’t indexed, and from time to time governments take decisions to raise those thresholds. I’m anticipating that that’s what would happen here. Some of these calculations about what people’s liability would be in 40 years assume that the $3 million threshold never changes.
Grattan:
So why not do it at the start?
Chalmers:
I think we’re making it consistent with other areas of the tax system where the threshold is not indexed. I fully anticipate that governments of either, if not both political persuasions at some point in the future will change the threshold. And that’s why a lot of the calculations that you see reported in the media are based on a pretty unrealistic assumption about what the next 30 or 40 years will look like.
Grattan:
Now, you’ve got a problem of getting this through the parliament, which, with the new Senate, means getting it through the Greens. What are the chances of that happening, do you think?
Chalmers:
I’m not sure yet. We haven’t had that discussion with the crossbench. I think the final makeup of the Senate is not yet clear, and the parliament is not coming back in the next couple of weeks and so we’ve got time to have those discussions. No doubt the new Leader of the Greens, Larissa Waters, no doubt will appoint a Treasury spokesperson and we’ll engage with them in the usual respectful way to –
Grattan:
– what’s the main sticking point there, do you anticipate?
Chalmers:
Last time they wanted a lower threshold, last time it was in the parliament.
Grattan:
And you’re not up for that?
Chalmers:
Not something that we’ve been considering. And they’ve talked about indexation as well, the question you asked me about a moment ago. But, again, we’ll see who we engage with. We’ve got a bit of time. They’ll have a view. They know our policy. But those conversations haven’t begun.
Grattan:
Let’s turn to productivity. You’ve said that this will be a key focus during this term. But you’ve also noted that you need more than 2 terms to really get major progress here. Why does it take so long?
Chalmers:
The point that I’ve made about productivity is that this is a challenge that hasn’t just been hanging around the last couple of years, it’s been hanging around the last couple of decades.
And if there was a quick fix for productivity, if there was some kind of switch that we could flick, somebody would have flicked it already. So it’s one of those economic objectives where there’s not the same kind of instant policy gratification that you might see in other indicators in our economy.
I’ve tried to be upfront with people and say productivity was a big focus in the first term. Some of the changes that we made around strengthening and streamlining foreign investment and competition and the payments system, the changes we make in human capital, the announcements we’ve made about abolishing non‑compete clauses and a national regime for occupational licensing – those are all substantial reforms and they’re all about productivity.
But what we’ve said is in the first term we focused primarily on inflation without forgetting productivity. In the second term we will focus much more heavily on productivity but being upfront with people that you don’t expect quarter‑to‑quarter, instant changes in the level of productivity in our economy from some of these medium‑term policies that we’re putting in place.
So I’m working closely with the Productivity Commission on the next steps in our productivity agenda. We think productivity and the future of our economy will come from the energy transformation, from human capital and giving people the skills to adapt and adopt technology, the artificial intelligence revolution. It will come from making sure we get value for money in the care economy. And it will come from making our economy more competitive and dynamic.
So on each of those fronts we’ve already done a heap of work. We’re looking for more reforms in those areas, working with the Productivity Commission to do that, but being upfront with people about how quickly we can turn around this problem that has been really one of the defining features of our economy now for decades.
Grattan:
There was, of course, in 2023 a Productivity Commission report which ran to some 9 volumes, I think, and had 70‑odd recommendations. And yet a lot of that hasn’t been done.
Chalmers:
There were 29 different reform directions in that report and we think that we are progressing in some form more than two‑thirds of them. And I know that’s not general accepted wisdom about that report, but more than two‑thirds of the 29 directives we are progressing in one form or another.
The other thing is, of the 71 specific recommendations, we think about half of those – around 36 of those – involve state and territory governments either partly or fully. And so a bit of perspective on all of that.
Specifically, we picked up and ran with some of their ideas on vocational education and training, cybersecurity, government data, skilled migration. So more of that report is being acted on than I think is broadly accepted. But if the point, the kernel of the question is, should we try to do more on productivity, I’ve already flagged that that will be a big priority.
Grattan:
The Productivity Commission has called for ideas from the public to improve productivity. And it’s now identified what it calls 15 priority reforms for further exploration. And one is to support business investment through corporate tax reform. Are you willing to even contemplate this? You’ve been quite shy about tax reform that’s robust.
Chalmers:
First of all, again, we actually progressed a whole bunch of tax reform in the first term – income tax reform, production tax credits, tax breaks for small business, tax breaks for build‑to‑rent –
Grattan:
Maybe it was the easy stuff.
Chalmers:
We changed the PRRT arrangements. That didn’t feel easy at the time.
Grattan:
Modestly.
Chalmers:
Multi‑national tax reform is no small thing. And so, again, a bit of perspective. We did half a dozen meaningful tax changes in the first term.
When it comes to the consultation that the PC is doing, and I think it’s terrific that they’re doing that consultation, and that consultation reflects some of the asks that are put to us from time to time from the business community in particular, and I welcome that, too. Let’s have a proper, national conversation about that.
When it comes to company taxes, I’m the only person in this, or Katy Gallagher and I are the only people in this that have to make it all add up. And so sometimes our constraints are fiscal.
We’ve got to work out what we can afford to do in a world where we’ve got to fund these priorities – strengthening Medicare, investing in the care economy, some of the big pressures on our budget, defence. We’ve got to fund all of that. And so some of these proposals on tax reform which are costly to the budget need to be seen in that light as well.
Grattan:
Yes, but that doesn’t really go to the fundamental question, and that is whether you think it would be a good idea to have this on the agenda.
Chalmers:
I don’t have an ideological view about company taxes. I have an economic view. One of the things that’s good that Danielle Wood and the PC are consulting on is we’ve got this challenge in productivity and the thing that the economists call capital deepening – whether or not we have a deep and robust enough capital base.
And so they’re consulting on whether tax has a role to play in that. I don’t have an ideological view about that. I’ve got a fiscal view about that, and I’ve got a view about where the productivity is going to come from in a modern economy like ours. I think it’s important that we don’t over focus on some of the areas that have been perennial parts to this conversation – scorched earth industrial relations, the headline company tax rate.
These are parts of the productivity discussion, but they’re not the whole thing. Energy, human capital, competition and dynamism, care economy, AI and technology. I’m trying to have a broader conversation about how we get more productivity in our economy because in some of those areas, that have not been central enough to the national conversation about productivity, I think that’s where we might find that we can make the most progress.
Grattan:
But isn’t company tax important when we’re trying to compete internationally for investment?
Chalmers:
Again, it does get raised with me from time to time by investors, but it’s not the whole story, and often it’s not the main story. When international investors are weighing up whether to invest in Australia, they care about the stability of our laws, they care about our skills base, our human capital. They care about access to cleaner and cheaper energy. They care about how long it takes to get approvals.
There are real areas here where there’s a productivity dividend if we get it right, where we become more attractive as an investment destination if we get it right. And that conversation, which I have relatively frequently with global investors and domestic investors, is not a conversation wholly and solely about company tax.
Grattan:
Just finally, Jim Chalmers, you like to indulge in some blue sky thinking from time to time, a bit of essay writing. You might have a little time over the winter break. What’s on your horizon in that regard?
Chalmers:
I’ve already had a discussion today with Katy Gallagher setting out what the rest of the year looks like and how that relates to some of these priorities that you’ve been kind enough to talk with me today about. I’m trying to do a bit more reading this term than what I did last term.
Grattan:
What are you reading?
Chalmers:
I just finished that Ezra Klein book called Abundance, which goes right to the core of some of these things you’re talking about. How do we think in a progressive way about making our economy more efficient and more productive. That Ezra Klein book called Abundance is a ripper. I am grateful to Andrew Leigh for suggesting it to me, and I’ve gotten through it now. So that kind of reading. I confess I’ve started the book about Joe Biden, the Jake Tapper book, as well.
Grattan:
About his health?
Chalmers:
About his health, yeah. And, like everyone, I send my best wishes to the Bidens after that news that we got earlier in the week about his health. So try to do a bit more reading.
But I’m really excited about a new term, a new opportunity working closely with Katy to make sure we finish the fight on inflation, we make our economy more productive, we think more expansively about the big opportunities from AI and energy and some of these things that we’ve been talking about today. And I have been finding inspiration in trying to do a bit more reading this term so far than what I managed last term.
Grattan:
Jim Chalmers, thank you very much for joining The Conversation’s Politics podcast.