In the depths of Opposition I chose to climb my first mountain, Mt Kilimanjaro.
At nearly six kilometres high it is the tallest free standing mountain in the world and the tallest mountain in Africa.
Sure, it’s not Mt Everest, but it is much bigger than Mt Kosciuszko.
You learn lots of good lessons climbing a mountain.
Lesson number one is to be honest about the scale of the challenge.
And today the Government is being honest about the fiscal and economic challenges facing Australia.
This Mid-Year Economic and Fiscal Outlook I have released today, with the Minister for Finance, shows that Australia is now preparing to climb a challenging fiscal and economic mountain.
I want to emphasise that no challenge is insurmountable.
The Coalition went to the Australian people with a plan to get the economy and budget back on track. That is what we will do and today is the first step.
We will fix the Budget and we will deliver a stronger economy.
But it will need a response that has the support and active involvement of the entire Australian community.
Today we reveal the full impact on the Budget and the economy of six years of Labor Government.
Notwithstanding what the numbers reveal, the Government is determined to fix the problems that we have inherited.
The statement we are presenting is a realistic and comprehensive stocktake of the economy and of the Commonwealth’s books.
It has been prepared on the advice of Treasury and Finance with rigorous oversight by the Government to ensure it is an accurate assessment of the state of play.
Since being sworn in, every Minister has worked with their department to identify all the issues and all the risks in the Budget and across the economy.
We make no apology for asking the hard questions and challenging the usual assumptions.
As a result, this document shows the significant task that lies ahead of the Government and the community.
We have inherited from the Labor Party Budget deficits totalling $123 billion over the next four years and unless we take action the Budget will be in deficit for at least a decade.
And we have inherited from Labor gross debt that will reach $460 billion within the next four years. Unless we take very substantial budget reform, it will rise to $667 billion over the next decade.
This document also forecasts economic growth to remain below trend of 3% for the next two years as the unemployment rate continues to rise to 6¼%.
That is the truth about the starting point from which we begin our mountain climb.
MYEFO fiscal outlook
The forward estimates
Back in the August Pre-election economic statement the then Government again forecast a return to surplus in 2016-17 — the last year of the forward estimates.
Based on new more realistic assumptions and, our determination to bring hidden budget problems out in to the open, the cumulative underlying cash balance has deteriorated by $68 billion in just four months.
Since the May Budget, the largest deterioration is for the current financial year.
Instead of an original Budget forecast by Wayne Swan of an $18 billion deficit this year and then Chris Bowen’s forecast of a $30 billion deficit this year, the new more accurate forecast is a $47 billion deficit this year.
The medium term
The deterioration in the Budget is not just a short-term problem. In fact I am more concerned about the medium and long term challenges.
The previous government projected a sustained return to surplus from 2016-17 onwards. But this was underpinned by a false assumption that they would limit real spending growth to no more than 2% per year. 1
In reality, real spending over the life of the previous government grew almost twice as fast at around 3.5 % per year.
Without any substantial action by our government this massive growth in spending will actually increase to an average of 3.7 % per year beyond the forward estimates.
As a result, even if we have no personal income tax cuts for the next ten years to compensate for bracket creep, we still won’t reach surplus by 2024.
The implications of this are clear — the current budget outlook is not sustainable.
Doing nothing is not an option for Australia.
If we want a dynamic, modern economy that delivers ongoing rises in living standards, the heavy lifting of deficit reduction will have to come from spending restraint rather than from a raft of new taxes.
One thing is for sure, no country has ever taxed its way to prosperity.
Much of the projected growth in spending is from social programs — including welfare, education and health.
Spending reform will inevitably require difficult choices about the policies that Australians need now and in the years to come.
I want to emphasise that budget prudence is as much about resisting new spending as it is about the quality of existing Government spending.
In a softening economy there are many businesses under pressure.
There are also many individual taxpayers under financial pressure.
Our challenge is to lift the tide so that all boats will rise.
Taxpayers can no longer afford old government spending priorities.
Australians will now have to adjust their expectations of what government can sustainably provide otherwise our nation’s prosperity and our people’s quality of life will be at risk.
Reasons for fiscal deterioration since PEFO
There are a number of factors which have driven the recent fiscal deterioration.
Softer economic outlook
The first factor is a softer outlook for the Australian economy after taking into account the latest national accounts data.
The automatic impact of the weaker forecast has been a lowering of government tax receipts and an increase in government outlays.
While global economic conditions remain more subdued than expected, it is the case that the Australian economy’s growth transition from resources investment to the non-resource sector is also proving slower than expected.
There is cause for optimism.
The Australian economy is well-placed to emerge from its growth transition with a stronger non-resources economy. And, barring unforeseen circumstances, global growth is expected to pick up while domestic interest rates remain low.
The recent strengthening in consumer and business confidence, and a recent pick up in the housing market, give me confidence that, with the right policies, the economy has plenty of scope to strengthen.
Nonetheless, it is clear that the growth transition will not be easy.
Our economy’s adjustment to the large movements in the terms of trade has been, and will continue to be, challenging.
The softer outlook for the Australian economy is reflected in the growth forecasts — real GDP growth for next year is down a half of a percentage point to 2½ %.
In the resources sector, activity is shifting from investment to exports — which are continuing to rise — but the decline in mining investment looks to be sharper than expected. Ongoing cost-cutting in some parts of the resources sector is feeding into lower investment intentions.
From 2014 until 2016 the fall in mining investment could detract up to 2% from economic growth. It is therefore crucial that we do everything we can to facilitate new mining investments such as the Roy Hill iron ore project in the Pilbara and gas projects across the country.
Moreover, it is essential that we get rid of the carbon and mining taxes which are impediments to new mining investment.
It is also the case that we need to speed up mining approvals so that we don’t have delays that may cause investors to have second thoughts about projects, as in BHP’s change of heart on Olympic Dam.
In our first 100 days my colleague the Minister for the Environment, Greg Hunt has approved over $180 billion of investment projects. This is a good start.
Even more importantly, the Prime Minister just last Friday made significant headway in establishing a national one stop shop for project approvals to expedite the tortuous regulatory processes associated with major project investment in Australia.
Whilst investment in the non-resources sector is declining this year, the recent fall in the Australian dollar and generational low interest rates should ease some of the pressures being faced by firms outside of the resources sector.
It is frustrating, but hopefully temporary, that the slower transition to the non-resources sector is flowing through to softer job creation and wages growth. Both are weaker this year than previously expected, and both are well below-trend.
The silver lining is that slow wages growth is one of the mechanisms through which job creation will be supported as the economy transitions.
The combination of softer growth for real GDP and wages has dragged down the forecast for the nominal economy, which is now expected to grow by 3½% this year and next.
This is weaker than previously forecast- down by ¼% this year and by a full 1% next year.
This has translated into a significant write-down in tax receipts and higher outlays for government programs.
As a result, the softening economy has contributed to more than half of the deterioration in the Budget.
Revisions to forecast methodologies
The deterioration in the fiscal position since the election also reflects revisions to projections for key economic variables in the latter years of the forward estimates.
The terms of trade are now expected to fall more sharply over the next few years as the global supply of the commodities that Australia exports — particularly iron ore and coal — ramps up.
This change reduces nominal GDP growth in the projection period and contributes $2 billion to the deterioration in the budget bottom line.
We have also adopted more realistic assumptions for the unemployment rate.
As was revealed in the August Economic Statement, the unemployment rate is forecast to rise to 6¼% by June 2015.
To better align the projected unemployment rate with the assumption for economic growth, the unemployment rate is now assumed to remain at 6 ¼% in the last two years of the Budget period.
In recent economic updates a reversion to the trend rate of 5% has been assumed. This fed through to a misleading improvement in the budget bottom line through lower unemployment benefit payments.
It was a key factor upon which the previous Government was able to claim they would deliver a surplus at the end of the Budget forward estimates.
As a result the number of unemployment benefit recipients is expected to be higher and to contribute to the deterioration in the budget bottom line by $3.7 billion over the forward estimates.
These changes underscore the Government’s commitment to more realistic long term assumptions on the economic and fiscal outlook.
Essential government action
In addition to the parameter changes, the deterioration in the budget position reflects prudent decisions the Coalition has taken to address unresolved issues inherited from the former government.
While these entail additional spending or forgone tax receipts, they will provide greater certainty for investors, businesses and households.
All our decisions are driven by a desire to strengthen the Australian economy.
The single largest measure is the grant of $8.8 billion to the Reserve Bank of Australia to strengthen its financial position. This has already been well explained and the immediate benefits of having a fully resourced Reserve Bank are obvious.
The former government also left us with a raft of 92 announced but unlegislated changes to taxation and superannuation dating back to 2001.
Many of these measures were included in the budget bottom line every year even though they had not been formally legislated.
We have reviewed the measures and have decided we will not proceed with 55 measures costing $2.2 billion including many that were just poor policy such as the $1.8 billion hit to the car industry with FBT changes.
We will proceed with 37 measures as announced or amended, raising $10.2 billion over the forward estimates.
The great irony is that the Labor Party announced most of these tax increases and took them to the election as policy; now the Labor Party is blocking their own tax policies in the Senate.
This prevents the government from improving the Budget bottom line that we have inherited from our predecessors!
In addition to the tax measures, we have also reversed the cuts to school education announced by Labor just before the election
This $1.2 billion in additional education funds for Western Australia, Queensland and the Northern Territory is fully funded by new off-setting savings including the abolition of the Building Stronger Communities Fund ($528m) and the later rounds of the Trade Training Centres Program ($987m).
In addition to these measures the former Government also failed to properly fund its offshore detention network.
The Coalition has had to allocate an additional $1.2 billion to build and run the centres to house illegal maritime arrivals in Papua New Guinea and Nauru.
Further expenditure includes provision for the unfunded redundancies associated with the reduction of the Australian Public Service by 14,473 staff.
This was a decision taken but never announced by the previous government and of course it was never properly funded.
All of these measures, and others, are realistic and necessary to clean up the mess.
They provide a starting point for our plans to build a stronger budget and a stronger Australia.
Election commitments and initial savings
This mid-year report incorporates the full impact of our election commitments with one exception. We have not included the cost savings arising from our election policy to reduce the public service headcount by 12,000 over two years through natural attrition.
Given that the previous Government cut over 14,000 public service jobs without any announcement, our proposal will be reviewed in light of the findings of the National Commission of Audit.
The results will be incorporated into the next Budget.
All of our policies taken together, with potential savings from streamlining the Australian Public Service, will have a positive impact on the budget position.
There are some election commitments which are not separately identified while the detailed policy work is still being completed. They have nevertheless, been provided for in the Contingency Reserve and relevant heads of revenue.
These will be detailed in the May Budget.
We are, of course, angry that our attempts to repair the Budget and reduce the debt are already being opposed by the Labor Party.
For example, we have introduced legislation to repeal the former Government’s mining tax and to repeal or revise the spending measures that were to be paid for from the proceeds of that tax.
Overall, this will generate net savings of $13.4 billion over the forward estimates.
The failure of the Labor Party to support our election policy will cost an additional $728 million to the Budget this year as a new round of School Kids Bonuses goes out the door in January.
Together with other measures, the Labor Party is now blocking $15 billion of our savings that we took to the last election and for which we have a clear mandate.
Perhaps more bizarrely, they are blocking a further $5 billion of their own savings that they promised the Australian people at the last election.
These include $1.1 billion of Research and Development Tax Changes, $2.7 billion of Higher Education Savings, $1.5 billion from the cancellation of the 2015 Tax Cuts linked to the carbon tax, and $106 million from savings on the Child Care Rebate.
So far Labor is blocking in the Senate $20 billion of savings that will reduce the deficit and reduce the debt.
Equally importantly, policies that are designed to improve economic growth — such as repealing the carbon tax and re-establishing the Australian Building and Construction Commission — are facing strident opposition from the Labor Party.
The national interest requires a sustainable long-term budget position. The Coalition has a clear mandate to reduce the deficit and debt and the Parliament must respect that mandate.
Policy decisions since the election
Since the election the Coalition has methodically gone through every commitment of the previous Government.
In line with our determination to deliver the infrastructure of the future, so that Australia’s productive capacity can be at its best, the MYEFO includes almost $1 billion in funding over six years for a range of infrastructure projects previously funded from the former Government’s Regional Infrastructure Fund.
These productivity-enhancing projects will be funded without the failed minerals resources rent tax and will be co-funded by the States and Territories.
The Government has identified new savings measures that help pay for these commitments.
For example, a net saving of $1.1 billion over the forward estimates will be achieved from not proceeding with various uncommitted discretionary grants or spending commitments announced by the former Government. These are grants that a government in deficit cannot afford.
These savings are a down-payment on more substantial savings the Government will make in the May Budget.
The Answer
At this point I want to draw a line in the sand on the numbers that we have inherited.
As I said earlier, $123 billion of accumulated deficits and the $460 billion of gross debt are significant challenges.
But of even more concern is the trend towards a decade of deficits and gross debt of $667 billion.
Returning the Budget to sustainable surpluses will not be achieved by piecemeal savings here and there.
It will require a sustained and fundamental structural overhaul of expenditure.
Of course, our fiscal and economic objectives must be complementary.
Below trend growth and rising unemployment simply make it harder, not easier, to repair the Budget.
Our economic and fiscal plan is the answer.
Over the next six months we will continue to roll out our agenda, focused on building a stronger economy.
All options are on the table.
Some tools will be outside of our direct control. For example, as the Governor of the Reserve Bank has noted, a lower Australian dollar would help.
Other tools are more responsive to government and community control.
Productivity growth will become increasingly important in determining Australia’s national income and living standards.
Without a significant improvement in our productivity growth, the declining terms of trade and the ageing of our population mean that we are facing the slowest decade of national income growth since the National Accounts were first introduced in the 1950s.
That is not acceptable to the Coalition.
The Government took a comprehensive plan for raising Australia’s productivity growth to the election.
That plan is built around better infrastructure, deregulation, better competition policy, reforming the tax system, a fairer balance in the Fair Work laws, and improving the efficiency of government.
It is designed to grow the economy and help all Australians to get ahead.
Since coming to office, we’ve wasted no time in starting this comprehensive reform agenda.
From trade deals to tax repeals we are getting on with the job of governing for tomorrow.
But we need all Australians to be part of the journey.
The Budget
Over the next few months Australians will be asked to accept the decisions that help to make our quality of life sustainable.
The MYEFO document we are releasing today will now feed into our Budget preparation.
I want to assure Australia that the Government has begun work on preparing the next Budget.
We are doing the meticulous planning and preparation, and we understand the need for first class execution and perseverance.
Ministers are scrupulously reviewing their portfolios and getting on with the task of implementing the plans we took to the election.
The Expenditure Review Committee is already meeting and forensically examining every proposal to ensure it will achieve its aims.
We have put in place a Commission of Audit tasked with designing a program that helps government live within its means.
We have already started this process of change by abolishing over 20 government agencies, where activities are no longer needed or can be managed within existing departmental resources.
But there is scope for much more.
When it comes to both the Budget and the economy, doing nothing is not an option.
The purpose of the May Budget will be to put in place the program to grow the economy, deal with the deficit and debt, and put in place a sustainable fiscal strategy for the long haul.
Conclusion
The Coalition has known, throughout its last few years in Opposition, that the task ahead upon assuming office would be substantial.
It gives me no pleasure to know we were right.
And it certainly gives me no pleasure to know that the magnitude of the task has grown in the last few months as we have come to realise the true state of the books.
From a $29 billion blowout in the cost of the original NBN to an underfunded ACCC that has run at a loss for 3 years.
From 92 announced but unlegislated tax changes to an inadequately funded off shore detention network, every area of government has had its surprises.
Whether it is the Reserve Bank Reserve Fund or unfunded University superannuation, we will not leave budget issues for another day.
This document gives us an accurate picture of where we are now and what lies ahead.
Knowing the truth means we can get on with shaping our destiny. I want to say directly to the Australian people that, while the challenge is great and the mountain is tall, the new Coalition Government has the plan and the determination to get Australia moving again.
1 Build growing surpluses by holding real growth in spending to 2 per cent a year, on average, until the budget surplus is at least 1 per cent of GDP, and while the economy is growing at or above trend.
Joint questions and answers
with
Senator the Hon. Mathias Cormann
Minister for Finance
SUBJECT: MYEFO
KAREN MIDDLETON, SBS:
The Coalition has long said that repealing the carbon tax is necessary because of its economic burn, particularly on business. But your documents today indicate that repealing it will cost taxpayers $7.3 billion. How is that good policy when the budget is under such stress? Can I also ask you, your Government has committed to holding a referendum in the first term to recognise indigenous people in the Constitution. I am having trouble finding in your document where you funded that. Have you funded it? And if not, why not?
TREASURER:
Because his name is on the document, I will ask Mathias Cormann to deal with the second question, and then I will come back to the first one, if that is okay?
FINANCE MINISTER:
All of our commitments that we took to the last election are provided for in this Mid-Year Economic and Fiscal Outlook. A range of commitments - in fact most of the commitments - we have further detailed were as yet to be undertaken, are provided from the contingency reserve. Of course, once that detail is finalised we will be making further announcements.
TREASURER:
In relation to the carbon tax; as part of our election commitment our policies are fully funded, in line with what we went to the election with. The difference is made up by the tax cuts and the pension increases associated with compensation for the carbon tax. Our view was before the election and as it is after the election. To cancel those existing tax cuts and pension increases would have a negative impact on the economy at this particular time were absolutely right. So we are committed to those pension increases, committed to those tax cuts, without the carbon tax. Abolishing the carbon tax is going to increase economic growth. No doubt about it.
KAREN MIDDLETON, SBS:
[inaudible]
TREASURER:
No, it will not cost anything in the short term because it is fully offset with other savings.
MARK KENNY, SYDNEY MORNING HERALD & THE AGE:
You started off your address talking about being honest about the challenge and the transparency - talking about the virtues of that. I wonder if I can ask you about the Reserve Bank Reserve Fund? More than half of the roughly $17 billion addition to the forecast deficit comes from the $8.8 billion injection you made to the Reserve Bank Reserve Fund. Did the Governor of the Reserve Bank request that injection directly? If so, will you release that letter, that correspondence? And given that you slammed Wayne Swan for taking dividends out of the Reserve Bank will you guarantee that you won’t be doing that later on in the budget cycle?
TREASURER:
A cracker. The Labor Party has wanted to argue process, I want to argue policy. No one has actually pointed out to me why it is bad policy to make sure that the Reserve Bank has all the ammunition it needs to deal with whatever challenge lies ahead. No one has argued that toss yet. As you can see from that document that has been presented to you today, the Reserve Bank Reserve Fund has got down to alarmingly low levels. I asked the Governor of the Reserve Bank whether he had all the money he needs to be able to meet the challenges that are going to potentially come before us. He said, after consulting the Reserve Bank Board, that they required 15% in the Reserve Bank Reserve Fund, an additional $8.8 billion. I am very glad that we have done it because the Labor Party kept raiding the Reserve Bank for dividends when the Reserve Bank could not afford to pay the dividends. Now, we are replenishing the Reserve Bank Reserve Fund and giving the Reserve Bank all the ammunition it needs to do the job ahead. The Reserve Bank has traditionally always paid dividends. It was only when Labor took out a dividend in excess of $5 billion that it started to go awry. What we want is to have a regular stream of money. By the way, the grants to the Reserve Bank are still part of the public sector. It is not like giving it to a car company or anyone else. It actually is part of the public sector. Hopefully it will pay dividends. I would expect and [inaudible] that it pays dividends. So the claims from the Opposition are complete bunkum.
DAVID UREN, THE AUSTRALIAN:
Treasurer, until about 10 days ago you were seeking a ceiling on your debts of $500 billion. Are you confident that you can still keep government debt below that level given the forecasts contained today? Do you think that the budget repair task needed to lower the indebtedness can still be achieved without finding savings in health and education?
TREASURER:
There are two points in there. In relation to health and education; that does not mean we cannot spend money more efficiently. We can. But we committed to an envelope in relation to health, education, and defence. We remain committed to our election promises. That is hugely important, that we keep faith with the Australian people out of the commitments that came before the election. In relation to total debt; I hope we do not get to $667 billion and we are going to do everything we can to make sure that we do not. But this is what we have inherited from Labor. I say directly to Bill Shorten today. Now is the time to apologise to the Australian people for what you have left behind. Now is the time for Bill Shorten to fess up for what Labor has left behind - $123 billion of deficits and $667 billion of debt unless action is taken by the Coalition Government. I tell you what - we are going to do it. They can resist and they can oppose and they can block but we have to do it.
MARK RILEY, SEVEN NETWORK:
If Labor’s government spending growth of 3.5% over the past few years is spending like drunken sailors then surely the 4% growth rate in government spending under the Howard government meant that when you are last in Government you are spending like paralytic pirates.
TREASURER:
Paralytic pirates? That is pretty graphic.
MARK RILEY, SEVEN NETWORK:
Takes you back to your rugby days.
TREASURER:
I was never a pirate. Have I thrown you Mark?
MARK RILEY, SEVEN NETWORK:
No, no. I am just trying to see you with a patch over your eye. And a cockatoo. Quality spending and good policy - in light of what you revealed today, how is spending $20 billion on a Paid Parental Leave Scheme either of those things?
FINANCE MINISTER:
If you want to go back to the record of the former Coalition Government. Under the former Coalition Government, the economy was growing strongly, employment was growing strongly, we were paying off $96 billion worth of Labor debt. We were delivering income tax cut after income tax cut as well is delivering substantial tax reform to put the economy on a strong foundation for the future. Now, what we have inherited this time around is a budget that, of course, is again in massive deficit and debt heading for $667 billion. Of course, moving forward our plan is to do what we have done in the past. We have been here before. We are again committed to building a stronger economy, to create more jobs. A stronger economy will lead to stronger revenue, which will of course help us prepare the Budget. On the expenditure side, we took $42 billion worth of savings to the last election, all but one of them are reflected in this document. We have identified another $1.1 billion worth of savings in MYEFO by not proceeding with some of the discretionary grant spending that was initiated by the former government. But more importantly we set out trying to process through the Commission of Audit that will, in a strategic and structured way, give us advice and appropriate guidance on how best to achieve the savings required into the future. Our aim is to reduce the size, the scope, and improve the efficiency of government. To find ways to save moving forward that will still help with our agenda to strengthen the economy.
MARK RILEY, SEVEN NETWORK:
Sorry, paid parental leave?
FINANCE MINISTER:
I was going to get to that. The Paid Parental Leave Scheme is an important part of our agenda to build a stronger economy and create more jobs. As you would know from our election policy, it is an important economic reform which will help to boost productivity, which will help to boost participation in the workforce by women, which will help to boost population. If you would look back at our pre-election costings it actually left the budget better off, after you take the 1.5% levy into account and the various offsets, such as not proceeding with Labor’s inferior scheme and various other offsets that were related to it.
TREASURER:
It is still the case that it pays for itself.
LAURA TINGLE, AUSTRALIAN FINANCIAL REVIEW:
You said in your speech that no options are off the table now. I notice that you have also conceded that more than half of the deterioration since the Pre-Election Fiscal Outlook is due to the economy softening, not due to spending decisions. That includes $37 billion of deterioration in tax receipts and an $11 billion increase in outlays like Family Tax Benefit, which is up $1 billion dollars over four years. Childcare benefit which is actually $2.6 billion over four years. I have got two questions, one of them is - in those circumstances, given what you said about tax cuts, what is the realistic position for the Coalition to have, or were the government to have, going up to the next election about promising further tax cuts? And two, is your suggestion about all options being on the table suggest that things like family tax benefits and childcare benefits, which have been blowing out, should only be under review for the next budget?
TREASURER:
We are not in a position to give ad hoc responses in relation to the individual measures that you have mentioned. We are going through in a methodical, careful process here. Every area of government expenditure is being examined, not just for its immediate impact, but for its sustainability as well. I think that is a key issue. What is sustainable expenditure? What is the level of sustainable expenditure for the Australian people in particular programs? That is part of the work of the Commission of Audit. The most alarming table there is the budget never gets back to surplus, even if there are no tax cuts for the next 10 years. That is the most telling table. The previous Government was just assuming that if you just ride the income tax wave with trend growth sooner or later the lines will cross and you would have more income than you do expenditure. I think the most telling aspect of this document is that when you look at the growth in expenditure of 3.7% in the out years, no matter what changes you do to taxes, if they remain the same and you have bracket creep then you will never get back to surplus.
FINANCE MINISTER:
The next election is still a little while away. we have only just had one, so we will be releasing our next pre-election policies in good time before the next election.
TREASURER:
Well done, Mathias.
JESSICA IRVINE, NEWS CORPORATION:
I like big numbers and you have got a really big number in there, it is $667 billion, which is $1 billion more than the devil’s number, and you can have that the free.
TREASURER:
It was $666.66 billion I am told, but I am a little suspicious now.
JESSICA IRVINE:
You have spoken in Opposition about how unhappy you were with Treasury’s forecasting record and you even talked about whether you might, in government, incorporate more conservative forecasts into the numbers. This is a substantial write-down in Treasury’s forecasts for the economy, knocking half a percentage point of GDP next year and a full percentage point off nominal GDP. What I want to know is, are those the exact numbers the Treasury have presented you with or did they present you with a range and you thought we had better be prudent and better be conservative on those numbers? Are these Treasury’s numbers or yours?
TREASURER:
They are always the Government’s numbers. But I refer you to page 16 of the document that has the confidence intervals – which I applaud. Even there you have got a consensus approach where you have got information that relates to what appears to be private sector and others providing a consensus view about real GDP growth expectations, and as you can see, they have taken the middle line on what is the consensus view on growth. Also, you have got the middle line on the consensus view in relation to unemployment. That new technique - which to the great credit of Martin Parkinson and David Tune - they have actually put into the PEFO before the election. I think is a very good mechanism for properly identifying, that basically, of all the options – these are the more likely ones. That is why I think it has taken away the capacity to manipulate, if you like - which is what you might be insinuating - manipulate the parameters.
LATIKA BOURKE, ABC:
When will this government get back to surplus? You talked about sustainability in spending, can you still afford the National Disability Insurance Scheme as Labor proposed it? When this is all over, Tony Abbott has talked about wanting to be known as an infrastructure Prime Minister, what type of Treasurer do you want to be known as?
TREASURER:
I will let others write that. Clearly Australia has a growth problem. We have got to grow the economy faster than what is currently forecast. Part of that will be in infrastructure package. Overwhelmingly , it is our overall productivity package, but part of it is the infrastructure package that is going to be a key part of our Budget. We need to retool the nation, but we need to do it on a on affordable basis in partnership with the private sector and we will have more to say about that in the Budget. In the interim, we need to deal with the massive growth in recurrent expenditure associated with a whole lot of programs the previous government left behind. We want to deliver the services, we really do, but we want to deliver them in a more affordable manner and that is exactly what we are looking at. How we can improve the way we deliver services so that we can get more bang for the taxpayers very precious buck.
FINANCE MINISTER:
In relation to the NDIS, we are committed to deliver it, but we are also committed to deliver it in the most cost-effective and efficient way possible. So there is some work being done now by the Assistant Minister responsible for this, Senator Fifield, and of course we are having conversations with the states and territories as well on how the efficiency and cost effectiveness of this very important commitment can be maximised.
TREASURER:
We want to get back to surplus as soon as we can. I am not going to make the mistake Wayne Swan made 350 times.
DAVID SPEERS, SKY NEWS:
Just want to follow up on Jessica’s question about why these MYEFO forecasts are lower than some of those other recent forecasts on growth in particular, particularly when the range for nominal GDP growth has not changed much from the PEFO document at all - the range remains between 2% and 5% in both I think, and yet you have chosen a more conservative growth figure here. You used to say, often in Opposition, Treasury would give the Treasurer a range of numbers and the Treasurer would pick the one most convenient. Is that what has happened here or are you trying to be a bit more conservative here? Can I just ask a second one quickly - all options on the table, what does that mean for the GST?
TREASURER:
We stand by our commitment in relation to the GST. Two areas - and I refer you back to my National Press Club address after the Budget - where I identified two areas where I thought that the projections were not as realistic as they could be. Number one, was to go from an unemployment rate of 6.25% in 2014-2015, to what is known as a NAIRU. NAIRU is 6.5% - because you have the projections, obviously all the efforts were going into the forecasts. The projections were based on either trend or the previous NAIRU, which is the Non-Accelerating Inflation Rate of Unemployment, which was 5%, so there was a drop-off. Therefore the numbers for the bottom line looked a lot better than what they were really going to be. So Treasury, to their great credit this year, said look, we believe this should continue 6.25% for unemployment for the two out years. The second one was the terms of trade, as I said in my speech more detailed information and greater forensic examination, means that we now have a more realistic assessment of what the changes in the terms of trade mean for the Budget. The terms of trade write-down is $2 billion over the forward estimates. For example, with unemployment going 6.25% in the last two years, that is an increase in the unemployment benefit of $3.7 billion in the cost to the budget over the forward estimates.
FINANCE MINISTER:
It is a matter of record that the previous government invariably overestimated revenue and underestimated expenditure. They kept promising surplus budgets and kept delivering more deficits. Our core commitment with this budget update is to draw a line in the sand as the Treasurer said and to provide a believable set of figures. Part of that is to base those estimates on more realistic assumptions than has previously been the case. That was what we said we would do before the election and that is what we are delivering on.
TREASURER:
We identified those two areas in particular.
LENORE TAYLOR, GUARDIAN AUSTRALIA:
You said quite clearly that all the detailed spending cuts that you are going to make will be announced in May, but you have also said that you are going to keep the funding envelope for health and education, so clearly, in net terms, they are not on the table. Are transfer payments like Family Tax Benefit and Child Care Rebate on the table? Are superannuation concessions on the table? And what principles will you bring to bear when you are making decisions about what is on the table and what isn’t?
FINANCE MINISTER:
As you know, we have asked the Commission of Audit to look right across government with a view of making recommendations to us by the end of January on how the operations of government can be made as efficient as possible. We have not put any limitations on the work of the Commission. What we have said is that our response to the recommendations of the Commission of Audit will be consistent with the commitments we took to the last election. So the commitments in relation to health, education and defence spending are therefore - as the Treasurer said earlier - a commitment to the same funding envelope does not mean we cannot improve the quality of the spend with that envelope which we are committed to do. This is about going through a proper ordinary process. I do not suggest for one moment either that we have not yet implemented any savings. As I said earlier, we took $42 billion worth of savings to the last election, which was a significant savings package, all but one of those measures is reflected in the MYEFO document before you today. But we will build on that in the lead up to the Budget in May.
TREASURER:
And $20 billion of savings are sitting up there in the Senate being blocked by the Labor Party now. So if the Labor Party wants to reduce the debt, if the Labor Party really cares about the deficit that they have left, they can immediately pass $20 billion of savings that are sitting in the Senate - $5 billion of those savings they promised at the last election and now they oppose.
LENORE TAYLOR, GUARDIAN AUSTRALIA:
[inaudible]
TREASURER:
We have been very specific in what we offered before the election. We are keeping to our pre-election commitments. We are not changing that. I just want to emphasise that we are going through things methodically and carefully.
FINANCE MINISTER:
Just to pick up on a point the Treasurer just made, which is a critically important point. Labor, right now, is opposing $5 billion worth of savings that they banked in their Budget before the last election. They banked those savings, they did not do the hard yards to implement those savings. It is down to us to implement the savings that they banked in their budget.
TREASURER:
They challenged us to back those savings, and we did before the election, we did. Now they are opposing them.
Jennifer Rajca, Macquarie Radio Network:
Just in terms of the decision to redirect the money from the trade training centres, why the decision to target those centres and can you therefore guarantee that students will still be able to up skill to face economic challenges ahead that you have outlined today?
FINANCE MINISTER:
The first point to make year is that just before the last election, Bill Shorten, then the Education Minister, ripped $1.2 billion away from schools in Western Australia, Queensland and the Northern Territory. It was never sustainable for a national government forever and a day to discriminate against schoolchildren in those three jurisdictions compared to school children in other jurisdictions across Australia. National government has got to provide funding to the school system in a nationally fair and equitable manner, which is of course is what this government has done. That left us with a $1.2 billion funding challenge. Given that the Labor Party ripped that money out of the budget. What we have done here simply is applied budget process operational rules, if you have to increase spending for a purpose like this then you have to find offsets elsewhere and the government has reprioritised the spending in the education portfolio in order to ensure that we can provide funding to schools across Australia and a fair and even way that that is nationally fair and equitable.
PAUL OSBORNE , AAP:
I noticed in MYEFO, there is no mention of the word Holden, but there are cuts to two manufacturing assistance programs and there is also the $500 million cut to the automotive transformation scheme. Now, what is your plan for manufacturing? What is your plan for the non-resources sector, particularly the manufacturing part of that? And when will we see some incentive and so on for that industry?
TREASURER:
We have provision within the contingency reserve funds for the package the Prime Minister is currently working on in relation to the automotive sector and Holden in particular. So the money is there in the contingency reserve. It obviously depends on the shape of the package, but we provisioned for it. The best thing you can do to manufacturing today is get rid of the carbon tax and lower the cost of energy. That is the best thing you can do to help workers and families today. The Labor Party are opposed to it. They are blocking it. They were opposed to the carbon tax before the election and now they are the ones keeping it.
ANDREW PROBYN, THE WEST AUSTRALIAN:
Gentlemen, enjoyed the tag-team today. Can I ask you about the Clean Energy Finance Corporation? You booked a $760 million saving over four years by scrapping it. Now the document we have here today shows that in fact it will cost your government $439 million over the forwards to scrap it. Now would not an adult government in the face of this evidence say oh well, this is quite interesting. Maybe we could keep it. That it looks like direct action and you could still scrap the carbon tax and allow Jillian and co. to continue doing their work?
TREASURER:
The cost of funds are in the Budget. So the CEFC funding is not free. It is banked in the budget. With the abolition of the CEFC, the CEFC is a stand-alone entity lending out money, maybe it does make money but they do not have to account for the $10 billion that goes into it in the first place and the cost of those funds which were all borrowed. Our view is you should not be borrowing money to lend money and that is exactly what is happening to the CEFC in my opinion.
FINANCE MINISTER:
Just an additional point, the CEFC has been operating since 1 July 2013 and I have seen various claims about the returns that they have been able to deliver. Let us just say that we ought to be very cautious about making judgements on the medium to long term performance of an organisation that has only just started writing loans. As the Treasurer just said the CEFC was funded by the previous Government from borrowed money. Now the CEFC does not have to separately account for the cost of those funds, but it is ultimately a cost to the taxpayer. Abolishing the CEFC the way we said would leave the taxpayer better off. Of course it was something that we transparently took to the last election [inaudible].
PHIL HUDSON, HERALD SUN:
are you worried that today’s announcement of the doom and gloom budget outlook and mystery cuts ahead in May could be a risk to confidence on the eve of Christmas with only seven shopping days to go, that people may restrain some of their spending? You repeatedly ridiculed Wayne Swan, saying he would never deliver a budget surplus, will you ever deliver a budget surplus?
TREASURER:
Depends how long I live. But I really hope I will live long enough and I hope it is not too far away. I am not going to get into the timetable because as you can see there is much work to be done. You damned if you do and you’re damned if you don’t. Of course I wanted MYEFO to be later rather than earlier so that consumer confidence and business confidence would not be interrupted before Christmas. I had no choice about this timing. I was goaded into not delivering it in January, in fact by all of you, complaining to me that it was going to interrupt your holidays. Maybe not you, Phil, but others. I wanted to wait for the National Accounts, the September National Accounts, and thank goodness I did. There has been a tendency to release it earlier, in fact, the previous government always tended to release it in November, even October and they did not have the latest data. So it meant that their forecasts were inevitably going to be riskier and less likely to be accurate. So I wanted the latest National Accounts, which I have said consistently. Getting the latest National Accounts, they have fed into the updated figures, so this is the latest data. That is the prudent way [inaudible] I want to keep doing it this way.
FINANCE MINISTER:
The very important part of the story of confidence is presenting a set of numbers that is believable. Part of what caused the deterioration in confidence under the previous government was that nobody could ever believe that the numbers that they put forward. They kept changing, deteriorating, from one budget to the budget update to the next budget. So our effort here is, as part of our effort to restore confidence, is to put forward a set of numbers that is believable.
MICHELLE GRATTAN, THE CONVERSATION
Just to take up that last point, clearly these numbers have been made worse than they would have otherwise by your changes in methodology.
FINANCE MINISTER:
Realistic assumptions.
MICHELLE GRATTAN, THE CONVERSATION:
You have had a couple of questions on this and Mr Hockey made the point that Treasury, to its credit, had made changes in relation to the unemployment methodology. I just wonder whether you could enlighten us just a little further, Mr Hockey, about the details of that conversation with Treasury. Was Treasury happy with these various changes in methodology? Do they accord with standard accounting or financial planning practice? Or was it in the end that these changes were imposed by the government on the Treasury?
TREASURER:
It is clearly, and I am not saying that Treasury previously using NAIRU as the projection methodology for unemployment was necessarily wrong. In PEFO they recognised, by offering an alternative, in PEFO they recognised that it may be a little misleading. It is virtually impossible to see, and I refer you to the table on page 2 of the document, how, with real GDP at 2.5%, employment growth at 1.5%, how you can go from 6.25% unemployment rate one year to 5% the next. It defies logic. That is obvious. I said that at the National Press Club and Treasury agreed - Treasury recognised that. I do not think there’s any dispute there. In relation to the terms of trade - to take a more forensic approach. I understand that. To be fair, forecasting three or four years out is damn hard, I have always said that. But having benign assumptions that lead to the misconception that the bottom line is going to be better than what it is, leads you to make a realistic assessment about the numbers. I fully support the numbers. These are the numbers given to me by Treasury, but most importantly, I refer you to page 16, consensus forecasts the table on page 16 identifies that this is in the middle of the range of whether there is a group of people at, not just Treasury, but others as well.
CHARLES CROUCHER, NINE NETWORK:
Both yourself and the Prime Minister have made quite a bit of hay this week by saying he will draw a line in the sand under Labor’s debt and deficit. Given that line has now been drawn, can you guarantee us, moving forward, that any numbers will be your numbers and this blame shifting will stop?
TREASURER:
It is not blame shifting. This is the responsibility of the Labor Party. This is the true Labor budget. This is what they left behind. We stand ready to fix it. We stand ready to fix it. They are running around as if there was no six years of Labor government – well, there was. The legacy is $123 billion of deficit and up to $667 billion of debt and someone is going to have to pay that all back. Now, we stand ready to do the job. We knew that we would have a task before us. We knew that. We did not think it would be this significant, but we are not intimidated by the challenge. We relish the challenge - because we have done it before and we will do it again. We are not going to make ridiculous timetables, we are not going to make silly promises - we are going to get on with the job of fixing the budget and strengthening the economy. And that is what we owe to the Australian people.
STEVEN SCOTT, COURIER MAIL:
Can I just take you to the other half of how you are paying to your change of heart on school funding for Queensland, Western Australia and the Northern Territory. What is the reasoning behind getting rid of the building for stronger communities fund, which I gather pays for things around the country and you are thumbing that money into just three jurisdictions?
TREASURER:
We need the money. We need the money. It is as simple as that.
FINANCE MINISTER:
It is another reprioritisation of Government spending. As I said earlier, the Labor Party’s decision to reap $1.2 billion away from schools in Western Australia the Northern Territory in Queensland was never sustainable. It always had to be fixed. It would have been sustainable under Labor, but you cannot just take $1.2 billion from spending and not look for some offsets. This is an essentially a decision by the government to re-prioritise spending.
TREASURER:
Do you really think Labor would have proceeded in government cutting finding the schools in Western Australia, Queensland and the Northern Territory? Really? Does anyone really think that is the case? No. What we have done is we have said if we are going to make a promise we have to pay for it. If we are committing to any new expenditure, then we have to make the save.