BAGWELL:
Treasurer, good morning.
TREASURER:
Good morning Sheryle.
BAGWELL:
Now, will the $7 billion in spending cuts in this Budget this coming year, can you say this is going to head off another interest rate rise?
TREASURER:
Well, it certainly takes the pressure off the Reserve Bank that has been there because the previous government didn't see fiscal policy as playing any role in fighting inflation. And, indeed, as we know from the FOIs that have been released, they were advised some time ago – the previous government – that their spending sprees would put upward pressure on inflation. And indeed, they did – eight interest rate rises as a consequence in three years. Our cuts of $7 billion in 08-09 are very big cuts. And in terms of our new spending, every single dollar of new spending is matched by program cuts.
BAGWELL:
So, you're confident it will head off an interest rate rise?
TREASURER:
I'm confident that we can do everything we possibly can to take pressure off the Reserve Bank. The Reserve Bank takes the decisions, Sheryle, about interest rate rises, and they are independent. What we can do is have fiscal policy play its role – a role that hasn't been played in the past few years, and the consequences being eight interest rate rises in three years on the back of elevated inflation – the highest in 16 years.
BAGWELL:
But what happens if interest rates do rise this year? And that's what economists are still saying could happen. Does that mean the Budget will have failed in (inaudible) inflation?
TREASURER:
Well, if you look at the Budget forecasts, what they are reflecting is the impact of eight interest rate rises in three years. The Budget forecasts are also reflecting a slowing world economy, and the increase in borrowing costs which is flowing through to the corporate sector, as a result of the US sub-prime crisis. These are all the impacts. What we had to do in this Budget was strike the right balance between international uncertainty on one hand, elevated domestic inflation and a rising terms of trade on the other.
BAGWELL:
But you realise that's how the electorate is going to judge your first Budget, because that's what you promised – that it would take the pressure off inflation and therefore interest rates? Aren't you a little bit worried that you've raised expectations perhaps too high?
TREASURER:
No, I'm not. We've called it as we saw it. You see, we have been criticised very strongly by the Liberals for saying there's an inflation problem. We have the highest inflation in 16 years. It must be dealt with. Inflation is the enemy of growth. It erodes living standards. And what it really does, in the longer-run if it's not dealt with, is push up interest rates and push up unemployment. We're determined to do everything we possibly can, in the circumstances we find ourselves, to put downward pressure on inflation. We have an uncertain international environment, and that complicates that decision-making process, and we've made no bones about that.
BAGWELL:
It does complicate the process. But business, for example, the Business Council of Australia, they actually wanted a spending freeze. And despite your cuts, overall government spending is still growing by more than one per cent a year. There's still a lot of middle class welfare out there untouched. Could you have cut further if you wanted to?
TREASURER:
Well, I'm sure some people would have thought we should have had a surplus of two and a half percent of GDP. But I think that would have been really slamming on the brakes, and that wouldn't have worked either. Look, we've tried to strike the right balance. We have put the structural changes in the Budget with the means testing. We have abolished whole programs. That's how we got to $7 billion worth of savings in 08-09, and $34 billion worth of savings over the Forward Estimates. We think we've got the right balance with our cuts. But the other thing is, we created the room in this Budget to deliver every one of our election commitments, and there's not been a government in this country in a long period of time that has delivered on every one of their election commitments – and we're particularly proud of that – and proud of the fact that we did that by cutting spending.
BAGWELL:
Now, the Opposition doesn't think you got the balance right. Malcolm Turnbull has called this a high taxing, high spending Budget.
TREASURER:
Poor old Malcolm's lost his way. He was saying that there was no need for spending cuts a few weeks ago. Now he's saying that spending cuts should have been bigger. Mr Nelson was saying that inflation was a charade, now he's saying we haven't done anything about it. I mean, they've just lost their way.
BAGWELL:
You've described this as a Labor Budget for the nation, but it's not really for all Australians is it? It tips the scale in favour of working families but it does hits the rich: luxury car taxes, means testing of some family payments. Is this 'Robin Hood' approach really appropriate?
TREASURER:
Well, it's not so much a 'Robin Hood' approach. It is an approach that reflects the needs of all Australians. Because you see, people at the top end of the income distribution have done very well in recent years. They've done very well in terms of income growth. They've done very well in terms of government benefits and tax cuts. We've asked them to bear a little bit more of the burden, given the circumstances that we're in. But we celebrate the fact that people in this country have done well and that they receive high incomes. But in this Budget we had to strike the balance, and we have tipped the scales back to working families because they have been left behind for a long time under the previous government.
BAGWELL:
Means testing of the baby bonus actually breaks an election promise of the Labor Government. Is this one that you felt you could (inaudible)?
TREASURER:
No, our promise in the election campaign was to keep the baby bonus and to increase it to $5000. What we've decided to do is to means test it and to pay it in thirteen instalments. That's a far more responsible way to do it. You see, do people on incomes of millions of dollars a year need a baby bonus? Do they really deserve government transfer payments? I don't think so. And that's the sort of choice we've got to make. Because on the other hand you've got pensioners who we've given bonuses to in this Budget who argue that there needs to be a change in the aged pension. We as a country have to decide whether on the one hand, we can pay transfer payments and family payments to millionaires, and on the other, not necessarily provide the level of support that we would wish for people on the lowest incomes.
BAGWELL:
Can we just turn to the surplus for next year? You kept downplaying the likely size of this surplus in the lead-up to the Budget, yet it came in above expectations: nearly $22 billion, 1.8 per cent of GDP. Why did you downplay it?
TREASURER:
I wasn't downplaying the size of the surplus. What I was talking about was the fact that we weren't getting the upward revenue revisions that Mr Costello had in the previous four Budgets, where it was simply raining money on the eve of the Budget. We didn't get that this time because of the impact of the US sub‑prime crisis. And as a consequence of that, that's why we had to cut so hard. That's why we did cut so hard. Because we didn't have the benefit, if you like, or the luck of the previous government in getting those massive upward revisions of revenue, they simply didn't come through this time. And that's why this surplus and its size is so remarkable.
BAGWELL:
You borrowed an idea from the previous Howard government, you're dumping the surplus into three new funds.
TREASURER:
No, we haven't borrowed an idea from a previous government at all. We've had a policy for a Building Australia Fund for a very long period of time. It's a Labor idea. It's a Labor nation-building idea.
BAGWELL:
When will we see this money being spent, though? When will we see real change in infrastructure?
TREASURER:
We will spend it responsibly. We have to go through a rigorous evaluation process. We've got that process in place now in terms of road, rail and port, through Infrastructure Australia. We're setting up those processes for the Health Fund and the Education Fund. And we will get it going as soon as we can. But as we do that we have to be mindful that when we spend it, we take into account its overall economic impact. And we will do that on a yearly basis in our Budgets.
BAGWELL:
Just finally, Treasurer, we're running out of time. You've said this is just the first stage of the Government's spending cuts program – more on the way. I mean, will you attack middle class welfare? Will that attack continue?
TREASURER:
Well, we are going to look for further savings in the Budget. We are a young Government. We've only been in the budgeting process for four months or so. There is much more to be done. We are serious about our fiscal conservatism. We've applied it in is this Budget and we will continue to apply it in the future because it provides us with the basis for us to invest in the future and to protect the long-term economic health of the country.
BAGWELL:
Wayne Swan, thanks for your time this morning.