E&OE - PROOF ONLY
ALY: To talk about the state of the economy and put the Government’s case for its positive interpretation of what’s happened today, I’m joined in our Canberra studios now by the Finance Minister Senator Penny Wong. Senator, thanks for your time.
WONG: Good to be with you again Waleed.
ALY: The Reserve Bank says it’s doing this to foster sustainable economic growth. Isn’t that your job?
WONG: We have both monetary policy and fiscal policy and what we’ve seen today is the Reserve Bank choosing to cut rates. It recognises that public spending has been constrained, so that reflects what the Government has been saying; that our fiscal discipline – our sensible Budget strategy – obviously gives the Reserve Bank the flexibility to move and its chosen to do so.
ALY: I’ll come to that in a moment and the restraint of Government spending, but before that let’s just look at the economic data that’s around and the context of this. Spending has stalled, company profits are collapsing, total wages have dropped – which is very rare – the job market has shrunk, inflation is now negative – which seems quite extraordinary – the Reserve Bank has noted a weak global outlook and lower property prices. So doesn’t the decision to cut interest rates to emergency levels just reflect the state of the economy?
WONG: At the risk of suggesting you sound like Mr Hockey, and I think Australians are pretty used to the dramatic over exaggeration we see from the Opposition – let’s remember the carbon price was going to wreck the economy and wipe towns off the map and that didn’t happen. Let’s remember where we are.
The Reserve Bank itself has pointed to the fact that growth has been running close to trend over the last year. We’ve had the IMF say that we will grow faster than any major advanced economy. So, relative to other countries Australia has solid growth. Relative to othercountries we have low unemployment, contained inflation and now we have a cut in interest rates which obviously will be of benefit to those many Australians with loans.
ALY: It’s not contained inflation, it’s negative. I mean the target inflation rate is between two and three percent.
WONG: I’m not sure where you’re getting that negative figure for because –
ALY: I’m looking at the front page of the Fairfax paper today.
WONG: I think you should look at what the RBA has said about that, where they say quite clearly inflation outcome is consistent with the target which is two to three percent over time.
But the point I’m making is that there is no doubt there are risks in the global economy. There is no doubt we are an economy that continues to change. And part of the challenge is to make sure that you have a plan for the future; that you recognise that whilst there is a lot of mining investment occurring that you also have to plan beyond that, which is why the Government is so focused on things like productivity. On policies like the investment in education and skills and on ensuring Australians can make the most out of this in the Asian Century.
ALY: I think there will be a lot of people wondering, though, how we can claim that the economy is in such good shape when you have both company profits falling and total wages dropping. I mean that’s quite extraordinary data.
WONG: Sure. Waleed, I have never suggested and nor has anyone in the Government that it is ‘easy street’ for everyone in the Australian economy and we all know from talking to people, from speaking to businesses, the way in which the high dollar is affecting particularly the non-mining sectors of the economy. This is exactly the sort of thing the Government has been talking about for some time.
But I think it is also important for us to recognise relative to other economies where we are. And I don’t think it helps Australians, nor the confidence in the economy, to have the Shadow Treasurer making the sorts of ridiculous claims he’s making.
ALY: At the same time there seems to be a real contradiction at the heart of the way that our economy is currently playing out. These interest rates are historically extraordinarily low. As I mentioned this is the lowest level interest rates have been now since the height of the financial crisis, hence the term ‘emergency levels’. The whole idea of cutting them to this point is to try to stimulate the economy. And yet, at the same time, you are cutting Government spending in search of this surplus which is the way that you would stimulate the economy ordinarily in order to get inflation within the relevant band and not have interest rates at such low levels.
WONG: Okay, well let’s try to remember that we’ve got to look at a whole range of ways in which governments influence the economy. To suggest that we are in a situation like the Global Financial Crisis really ignores a couple of important factors. First, let’s remember in 2009 we saw the global economy effectively fall off a cliff – so the global economy decided to contract. We had governments, including the Australian Government, having to respondto the circumstances and to engage in very substantial fiscal stimuluses – so to put a lot of money into the economy – and we saw growth as I said affected.
Where are we now? Whilst the global outlook is not as robust as I would like it, it still is positive. We see the Australian economy still projected to grow faster than any other major advanced economy and we have unemployment, relative to other countries, at low levels at 5.4 per cent. No one is suggesting, Waleed, that you don’t always have to continue to look to the future and to try to improve the strength in the economy and in the future economy today, but I do think it’s important that we don’t get trapped into talking ourselves down.
ALY: No, but it’s not about talking ourselves down. It’s about being honest about the fact that interest rates are not meant to be this low in a healthy economy.
WONG: I don’t know that I’d agree with that because one of the whole points of the Government’s fiscal strategy – and we were very upfront about this a couple of budgets ago – is to change the balance between fiscal policy. So that’s budget policy and monetary policy – interest rates – and to bring the budget back to surplus and to have a much more constrained public spending to allow monetary policy, that is interest rates, to have more work to do. To have the capacity to do precisely what the Reserve Bank is doing today.
So it is about a different balance between the different arms of economic policy and, at the risk of getting into a long and detailed economic argument, it is actually quite consistent with the way the Government has dealt with this for some time.
ALY: Let’s look at this surplus. If company profits are falling and wages are falling; if both of those things are happening, basically that means a huge proportion of your tax intake starts to fall and your projected surplus assumes the opposite, that there will be a recovery. So it seems to me you’re left really with only the option if you wish to preserve this surplus, and I assume you do, of finding lots more cuts. How much more fat is there to cut?
WONG: We’ve got a pretty strong record of making the savings that are required to offset new spending. We did that in the last mid year review and we’ve done that for a number of budgets now. Now, you’re right, revenue is much harder to come by than it was in previous years. In fact if we actually took as much tax as Peter Costello did in his last year of being Treasurer we would have a surplus of some $24 billion.
ALY: The point is that your modelling assumes that this is going to increase whereas the current data suggests it’s going in the opposite direction.
WONG: What I’d say to you, Waleed, is that the best and most recent update is the Budget update the Treasurer and I handed down – the Mid Year Review – and that has us on track to return to surplus.
ALY: It’s not the best update we have because we’ve got new data –
WONG: It is actually, as opposed to hypotheticals. But I would agree –
ALY: It’s not a hypothetical –
WONG: I would agree with you –
ALY: I’m telling you, this is what the data says; that you’ve got reduced company profits and reduced wages which means reduced income tax being paid by individuals. That’s not speculation or me extrapolating. That is the most recent data that we have.
WONG: The most recent data is the Mid Year Review that the Government handed out. What I would say is you are right to point to there being much less revenue than there was under the previous Government and this really puts pay to one of the quotes that you played of Joe Hockey who says we’re a big taxing Government. Actually, we’re taxing less than Peter Costello. We’re taxing less than John Howard and Peter Costello.
ALY: Well partly because wages and profits are falling which is the circular argument that we’re having. I might come to another issue just in taxes just briefly before I let you go because I know you’ve got a TV interview to do. Last week Australia’s –
WONG: Also with the ABC, you’d pleased to know Waleed.
ALY: Yes, yes which as I’m sure you should be. Last week it was Australia’s Assistant Treasurer David Bradbury and today it’s authorities in the UK naming popular multinationals – Google, Starbucks, Amazon – for legal minimisation for the tax they pay – tax avoidance rather than evasion. But now, both in this country and in the UK, they’re working within the law. Is it time we stopped shaming them and started closing loopholes?
WONG: That’s precisely what the Assistant Treasurer David Bradbury is proposing to do and he’s put out an exposure draft of amendments to our tax laws to deal precisely with this problem.
ALY: Alright, I’ll look forward to seeing what those are. Penny Wong, thank you for your time.
WONG: Good to speak with you.