SENATOR THE HON PENNY WONG

MINISTER FOR FINANCE AND DEREGULATION

TRANSCRIPT

12 July 2012

THE ECONOMIST BELLWETHER SERIES AUSTRALIA CONFERENCE, ‘IN CONVERSATION’ WITH CHARLES GODDARD

TOPICS: BUDGET, CARBON PRICE, ECONOMY, GLOBAL ECONOMY

E&OE - PROOF ONLY

WONG: I just wanted to start with a few thoughts – and I hope that it’s been a good conference thus far and that this is reasonably on-point.

Obviously we are living through a transformative change in terms of the global economy; a period that will be looked at as a very substantial change point in human history. And it’s also a time when we’re seeing a long-run change, which of course is the shift towards Asia as the driver of global economic growth and the substantial force of greater geopolitical influence. At the same time – concurrently with – the after effects of the global financial crisis, which has had such an effect on most of the world’s advanced economies. So, I thought it was an interesting way in which you phrased the topic – ‘Victory by default’ really encapsulated both of those propositions.

The global outlook at the moment – as I’m sure people in this room understand very deeply – is one categorised by, certainly, a lot of risk and a substantial amount of volatility, particularly looking at Europe. We do believe, I think with a fair deal of evidence, that Australia is better placed than almost any other advanced economy to face this volatility. A lot is discussed about our reliance on resources, and certainly they’ve been a substantial driver in terms of Australia’s economic position. But there is strength in sectors of the economy beyond resources, and if you look at the recent national accounts data you’ll see that consumption is in fact holding up well over the last year. We’ve seen a broad-based lift in other data sets such as housing improvements and retail sales.

I would end on this point: my view about where Australia is at the moment is that we can’t rest on past success. We have to be restless in our pursuit of future success. And the key public policy question that faces this generation of leaders, whether they be political or business or thought leaders, is how it is that we maximise the opportunities for this nation in the Asian Century, and that will require good economic policy settings. But, even more than that, I think it will require continuing to change our mindset, our attitudes and our capability and engagement with Asia.

GODDARD: Thank you, Minister. I do want to come a little bit later to the Asian Century question, important question as it is. I do feel, I think, duty-bound to start with something that is close to your own hand, at least in the earlier iterations of –

WONG: You’re going to talk about carbon, aren’t you? (laughs)

GODDARD: I’m sorry. I’m sorry. (laughs) I do apologise.

GODDARD: (laughs) I’m duty-bound, partly because The Economist itself has a leader – and you can pick up the issue outside… it has a leader on that this week –

WONG: You were almost complimentary, in an economist kind of way (laughs).

GODDARD: (laughs) It says that there are both defects and … it praises the Australian Government in many ways and says that actually there’s part of (inaudible) interesting merits of this program. And it says it shifts the tax burden from hard-earned wages and profits to unearned rents and uncompensated harms. From an outsider’s point of view I must say that I’m very intrigued to see the level of vocal opposition to this, and I just wondered whether you could… I mean, foreign businesses, I understand, will be quite supportive of this, and I notice (inaudible) most vocal in supporting the move towards cleaner emissions for Australian businesses. What is behind all this?

WONG: That requires a very bold discussion of the political change around the concept of pricing carbon over the last decade in Australia. This was, as a policy proposition, reasonably uncontroversial, certainly in terms of partisanship, at the 2007 election, where both major parties went to the election committing to price carbon.

Obviously, as a result of the legislation that I was involved in developing and worked very closely with a lot of businesspeople in developing and changing to try and ensure it did achieve the outcome we wanted but with appropriate transitional assistance – that legislation failed in the Senate after Mr Turnbull, who I think spoke to you today, was deposed as Opposition Leader. And we’ve entered a period over the last few years where this has become a highly partisan and aggressive policy debate.

I understand that we are seeking to tax something which has previously been free, which is the amount of carbon that people can put into the atmosphere, and that does mean that some business models will have to change. I think the policy argument for it is clear. For the same reasons that John Howard thought a price on carbon was sensible, I think a price on carbon is sensible.

If you assume, first, that the globe will continue to pay a premium for low-carbon goods and services, and you live in the advanced economy which is the most carbon-intensive in the world, then you need to work out how you develop the capability to compete in those markets. The cheapest way, the most cost-effective way to do that, is to price carbon.

So that’s the first point. The second is that, as you say, the package that we now have also combines within it a tax reform element whereby we are also reducing the tax burden, particularly on low- and middle-income Australians, through an increase in the tax-free threshold. And I think that is a very good mix of tax reform policy that’s taken up in the package.

It’s been the subject, as everyone knows, of a pretty vocal campaign. And we can talk about why it’s become so controversial. I’m more interested in talking about what we now do. I think people will see or have seen that it hasn’t had the effect on the economy that some people have been asserting. And I don’t think it will. I think it will continue to give the right signal for investors and the right signal for business over the years to come.

GODDARD: One of the possible effects of it, though, might be that we will see, as polluters pass higher costs on to consumers, might be a shift in higher inflation. And, particularly as the Government gives money out to voters to compensate for higher energy costs, are you worried? I mean, the RBA of course has discounted that; it hasn’t actually put up interest rates in the recent decision in July. But are you worried about that?

WONG: No. First, the CPI impact we anticipate, in terms of the Treasury modelling, is about 0.7 per cent. That’s substantially less than the GST impact, which I think was 2.5 per cent. So that’s the first point, in terms of the inflationary impact, it’s minor. The second point is the RBA itself has made clear that they will look through any one-off shocks, one-off temporary increases to inflation, just as they did in terms of food prices when we had natural disasters and our inflation figures reflected the cost of bananas skyrocketing. So, they’ll look through that, and that’s the way in which they’ve approached past introduction of similar policies. I think the negative effects are, again, an overstatement. There will be price passed through. We’ve made that clear. And that’s been the basis of the way in which we have structured assistance through the tax and benefits system to Australian households.

GODDARD: I don’t want to belabour the issue, but just one final question. Obviously it’s not a popular tax, and it’s not something that’s gone down well with businesses, or indeed the Australian public. Tony Abbott of course stands a decent chance of coming – or at least his party stands a decent chance of coming – into power at the next election, says he’s going to repeal the legislation. Is there a sense that the Government itself might be open to adjustments, amendments, and changes, or essentially is it off the table?

WONG: I think we’ve withstood a fairly ferocious fear campaign. I don’t think we’re going to start wilting after the introduction of the carbon price itself. I think let’s try and get back to sound public policy. Is it a sensible thing to repeal a price on carbon once it’s already in fact in? That prospect simply brings uncertainty to the business environment, which is not a good thing for investment.

It’s also not sensible public policy – and you raised Mr Abbott – to have a policy which has the same environmental outcome at a higher cost to the economy. That is what the Coalition’s policy is, and you only have to listen to Malcolm Turnbull’s explanation of it to understand how true what I’m saying is. Same environmental outcome, higher cost to the economy. And I don’t think that’s a sensible thing for business and for consumers.

GODDARD: It is a politically interesting time in Australia, and I know the Government has just delivered a surplus for 2012-13. A small surplus, it looks like a wafer-thin surplus, but nevertheless, a surplus. And that was fulfilling the Government’s promise to get away from deficit spending, post-crisis. How sustainable really is this as the globe turns down again and as we start to look at a more gloomy outlook? Can you really sustain this? Particularly in an election year?

WONG: There are a number of facets to that question, so I’ll try and deal with them in sequence. The first is ‘why the surplus’? And I think it’s important to remember we said we would do what we did, in terms of the intervention in the economy; the fiscal stimulus which I think most people would agree, most reasonable commentators would agree, certainly had the right outcome in terms of Australia’s current economic position. But we said that the deficits that were entered into at that time would be temporary, and that we would ensure we came out of deficit. So that’s the first point.

The second is that we anticipate the Australian economy to continue to grow at around trend. And in those circumstances it’s sensible to make sure you bring fiscal policy back to a more normal setting. Which brings me to the next point. I think the person who most well communicated the rationale behind the surplus was a particular Australian journalist, who described it as a ‘return to normalcy’. Because what he understood is what the Government is trying to do, and that is to put fiscal policy and monetary policy… bring them back into a more normal balance than had been required during the global financial crisis. And that is, obviously monetary policy, run by an independent Reserve Bank, that fine-tunes demand in the economy, but fiscal policy that looks to the medium term rather than tries to deal with the shorter-term demand issue. So, I think it is a sensible balance, given where the economy is at.

In terms of how sustainable is it? We have factored in, I think, pretty reasonable assumptions around the global economy, and also the terms of trade which was obviously the subject of discussion on the previous panel. The first point I’d make is that our projections around Europe are probably more pessimistic than a number of the international institutions, forecasting a contraction of around three-quarters of a per cent. So that was already factored into our budget. We also assume a decline in the terms of trade over the budget forecasts. So, I think both of those things probably go to your ‘is it sustainable’ proposition.

GODDARD: And how far does China figure in that consideration about the decline in the terms of trade?

WONG: That leads to whether you are a China pessimist or a China optimist. I’m a China optimist, notwithstanding that there are going to be various challenges China has to address. I think they have both the policy capacity and the firepower to do that, and I think that’s been demonstrated to date. Having said that, I do agree with some of the comments that we can’t assume that commodity prices, and therefore Australia’s terms of trade, will remain at the levels that we have seen, which is why we have anticipated a decline in our budget assumptions.

GODDARD: There’s been a great deal of discussion, as you might imagine, today about the Eurozone, and we had a discussion around this last night I know, on the impact of the GFC, the Eurozone crisis, and the global, I suppose, recession – or at least the recession in the European countries and the slowdown in America – on Australia. And I suppose the prevailing view, if I’m not misconstruing this, the prevailing view here is that, not withstanding a European or a Euro collapse, is that Australia is pretty much alright, thank you. And it’s banking sector is pretty well managed, its prudent, resilient, it’s got access to funds, it’s got capital. Even though there are, I suppose, temporary withdrawals of wholesale funding to some degree of European banking capital and funding here, but nevertheless, despite the need to keep a weather eye on what’s happening in Europe, things are pretty much OK here. I just wonder… I mean, that struck me as being possibly quite a complacent view. Do you share that, or not?

WONG: A Finance Minister should never be complacent. I think there are two key propositions. No country is immune from elements of the global economy, but we are fortunate to be in a position to face those developments with a great deal of confidence. I do think our banking sector is in pretty good shape, and I think you’ve heard from people today on that front. We obviously have a pretty good set of figures in terms of where our growth is, where our unemployment rate is, we’ve got contained inflation, and a very large pipeline of investment coming into this country, which is a tick of confidence.

But, you’re right, you shouldn’t be complacent, which is where I started. You can’t look to the future by simply resting on past success. You have to think through what it is that needs to be done today and tomorrow to ensure prosperity and success for Australia in the decades to come.

The Prime Minister, as you know, has commissioned the White Paper on Australia in the Asian Century. I think that and the attendant discussion around the directions in that and what policy propositions flow out of that is a very important discussion for this country in terms of the future.

GODDARD: Let me just talk a little bit about some of the policy decisions that might need to be taken in terms of one of the big issues that seems to be clouding Australia’s success is the perception that and indeed this was highlighted too by Glenn Stevens, the Reserve Bank Governor – that Australia is running a multi-speed – a two speed really – economy, that mining and resources is somehow squeezing out the other sectors by drawing away their capital and by pushing up the exchange rate. I mean, this is obviously a structural issue that has been recently introduced. What are the kind of policies that the Government will put into place to ameliorate this structural issue ….

WONG: A few things I want to say about that. One, there is no doubt there is a lot of change going on in the Australian economy driven in part by, or primarily by, what you were describing, which is the high dollar. And that’s making life very difficult for some parts of our economy. And there may be people in this room who are a lot more familiar at a first hand level than I am of that, and certainly that isn’t easy for some sectors. So, you have to think through what is it that Government can and should do at a time of this structural change.

I think the first, and almost as close to a ‘no regrets’ policy as you can have in a time of change, is the investment in your people. So if there’s been one priority that you could identify that this Government has placed at the top of its list, it wouldn’t actually be the carbon and mining taxes – despite the fact that they’ve got a lot of press – it’s the investment in education and skills. We’ve almost doubled funding to schools. We’ve increased funding to universities, increased funding to research and innovation, and the VET sector.

And that is because in a time when we know your economy is changing, you may not know every job which will be created in the next ten years, but you certainly know you need to skill your people for that and you need to also bring more people into the workforce. We’ve done a fair bit around participation and the tax reform package we referred to earlier will also help on that front. You also can do things such as we’ve done in the tax system which is the loss carry back regime, which is to try and give a bit of flexibility in the tax system to assist those businesses who are trying to change their business model to reflect the changing business environment.

But I think in many ways the most important thing is to recognise what you can change and what you can’t change. And this isn’t a time in Australia where political leaders should be pretending to Australians that nothing ever needs to change, because that’s wrong and it’s a false assertion if people are making it. We are at a time of change. It’s a change which can bring with it enormous opportunity. The question is what is it that we have to do to bring it down to realise those opportunities. How do we maximise our linkages into China, into India, into South Korea and the other countries of our region? What are the goods and services over the next decades that we want to be able to provide, and how do we position ourselves and improve our capability to provide them? Those are the key questions.

Finally, and we touched on this last night, I think in terms of the change and particularly the ‘engagement with Asia’ challenge, in part it is a question of hard policy, absolutely, and we should have a good discussion about that. But in part it is also a question of our collective mindset and our capacity as a nation to ensure we not only develop the obvious things around Asian literacy, Asian languages and so forth, but the way in which we think about our future, the way in which we think about our prosperity, and the way in which we think about our national identity; that we make the shifts needed to recognise how close we are with those in the Asian region and how we are part of it.

GODDARD: I am tempted to follow up on that but I do want to give the opportunity out to the audience to see if you have observations or questions for the Minister.

AUDIENCE MEMBER: I suppose this is a bit of a challenging question and I apologise in advance. We heard a bit from Paul Howes earlier about the grim outlook for Australian manufacturing under the current conditions. And I want to return to the idea of fiscal policy because I wonder if there isn’t a bit more to this than was discussed earlier. The Treasurer Wayne Swan announced a target for surplus before the global economy weakened materially in the second half of last year. Yet, rather than concede that perhaps the export industry is suffering from the high Australian dollar and weak external demand, the Government chose to cut further and deliver a surplus that’s so small it’s almost theoretical. I’d like to hear a bit more about that basically because I’m not sure of the validity of that.

WONG: First, I don’t think that it is be sensible to suggest that the savings that we took in order to achieve our budget strategy were a bad thing for the economy. I don’t know if that was implicit or explicit in your question. And in part that is also some of the decisions about what sort of savings measures we took, and some of them were, for example, we deferred the introduction of various initiatives until we anticipated revenues recovering, given that revenues have obviously been very substantially hit in this economy, as in others, by the global financial crisis and its aftermath. So I think there’s a presumption in your question that I don’t agree with.

There’s a second point, I suppose, which is perhaps tangential, which is ‘what is the role of Government at a time of change’? And I tried to go into that in my previous answer, which is the closest thing I could think of to a ‘no regrets’ policy is investing in your people. There are times when we do have to, as a Government, assist industry with the transition in different ways and preserve certain capabilities, support development of greater capability. But you can’t prevent any change occurring if business models aren’t sustainable, and we shouldn’t pretend to people that we can.

In terms of the surplus, I think I outlined that in an earlier question. I think there’s a strong macro economic argument given where the economy is for that surplus strategy which obviously isn’t just the 2012-13 year, it’s over the budget period, the forward estimate period. I also come to this, I suppose, as a Finance Minister which is I don’t just see the surplus as a point in time. With an ageing population, with health costs and aged care costs increasing as a share of GDP out to 2050, you should be trying to do what you can at this point to continue to improve the structural health of the budget, and I think we are doing that.

GODDARD: More questions please.

AUDIENCE MEMBER: Minister, can I just put a few numbers around the previous comments? The (inaudible) into deficit was 3 per cent of GDP, which is the biggest that we’ve ever seen in the history of Australia. There was a 4.5 per cent cut in real terms in expenditure in 2012-13. They were some fairly big movements. The market has not been able to work out the impact on growth. We have estimates of between three-quarters of a per cent and 1.5 per cent on GDP but it seems to be a contractionary Budget. The lead up to the Budget was that we haven’t seen growth above trend for four years. The market was expecting the Reserve Bank to cut rates by 100 basis points, which implied that there was a general view that growth wasn’t looking particularly strong. So it seems to be a fiscal tightening at a time when the other – and of course the world is a very dangerous place – it seems to be a very substantial fiscal tightening at a time when other signals around the world suggest that possibly we should have had fiscal stimulus. Could you sort of enlighten me as to why the fiscal stance was so substantial in the Budget?

WONG: Of course since that time we’ve also seen the more recent national account figures. I accept that they included a quarter with output or production coming back on-stream post the natural disasters, but it was a very strong quarterly result. So, I’m not, possibly, as negative, if that’s how you were, about the outlook for the domestic economy.

I make two points. The first is – and I think the Treasurer’s had this discussion as well, certainly publicly and possibly with you – that you shouldn’t equate the proportion of GDP that the surplus turnaround represents, in a linear sense, with the effect on the economy. For example, and this is only an example, one of the decisions we made was to defer our achieving our Millennium Development Goal commitment in relation to foreign aid. I appreciate that some people didn’t like that decision, but that is not a savings decision that is going to have a substantial impact on the Australian economy. And I think there are analogous decisions in the Budget for that reason.

I think it also depends, and I’ve read some of what you’ve written, but I think it depends also on where you think fiscal policy should be vis-à-vis monetary policy. And, as I described earlier, the Government’s view was it was time to return to a more normal set of settings in terms of which policy goals do we want, and to enable monetary policy to play the role that it should at times when economic growth is at or around trend. And, thus far, I think that has been the case.

AUDIENCE MEMBER: Minister, you’ve been talking today a little bit about the future of Asia and the Government’s White Paper coming out. There’s been a global discussion going on between Treasury and Finance Departments around what a green economy looks like both internationally and within countries. That debate has not – other than pricing carbon – has not really played out here in Australia much. But Australia’s doing some very interesting things and I do think it provides some vision and an alternative to where we’re going, you know, in an economic sense. I just wanted to hear your thoughts a little bit about that…

WONG: I tend to prefer thinking about this as a 21st century economy rather than as a green economy or a brown economy or whatever, because I think they’re fairly, may I say, old terms. And also, probably, value label terms, which gets you into a not necessarily helpful debate. I don’t think in this century we can be a 21st century economy without having made sure we’ve made certain changes. One of them is greater investment in and a greater proficiency in and a greater capability in low-carbon goods and services and clean energy technology. Our primary mechanism for that is pricing carbon but it’s not the only one.

I also think that the investment in the NBN – and I know The Economist has had different views on this, but leaving aside that argument – I think it’s a fairly strong proposition to say that if you want to be a 21st century economy, you don’t want infrastructure which was built in the middle of the last century. That infrastructure is not going to support the sort of innovation that we do want to leverage from the private sector.

So, to my way of thinking, the ‘green economy’ is actually just a way of talking about where, increasingly, I think smart economies will go.

GODDARD: One more question?

AUDIENCE MEMBER: Minister, just a general question about perception. It used to be said that as long as economies were coming along strongly that governments really didn’t have much to worry about. And the Australian economy by world standards is doing very well. And yet your Government is not doing well in opinion polls. The same thing happened in a different way I suppose to the Howard Government in its last year – the economy was strong but it just lost all public support, probably for different reasons.

But we’ve heard today from experts praise the way the Government responded to the global financial crisis. Yet we’ve also been told that one of the Government’s problems is this apparent inability to sell a narrative to the country on, you know, where it’s going. What’s your take on this disconnect between a strong economy and a Government that’s struggling?

WONG: I’m glad you mentioned the Howard example because I think that is a good reminder that the fact that you have an economy that’s doing well doesn’t necessarily translate to political popularity.

I’d make a few points. First, I think you probably would have had a discussion about confidence today and what’s driving some of the lower levels of confidence than you would otherwise anticipate in Australia. I think there are a number of reasons for that. One is Europe and the recent memory of the GFC. The second is what’s happened to asset values, particularly people’s houses. So I think those factors particularly are impacting on confidence. And the third, I think, is the state of the political debate. I think that it is easy to say, ‘it’s all the Government’s fault’. But I think the truth is always more complex than that.

I would make the point that this minority Government has passed some very substantial legislation through the Senate, most recently our Budget, the mining tax, the carbon price. These very significant reforms, highly contested, have come through the minority Government and minority Parliament.

I don’t think that the current rancour and aggression in the tone of national political debate is a good thing for the country. And people can choose to lay that blame where they wish, but I don’t think it is a good thing. I don’t think it is a good thing that we have political debates which are so far removed from sensible policy debates – and carbon I think is one of them.

And I think if we are serious about dealing with some of the longer run challenges, which I’m sure you discussed today, then political leaders across the political spectrum, media leaders, and business leaders, need to lift the level of debate. We’re not going to find neither the policy answer nor the will to implement them if we simply keep having the situation where people are shouting at each other and pointing the finger.

I think that we’ve always had – and we had a long discussion about this last night – but there’s always a difference or a disjunct between electoral timeframes and the timeframes around the policy horizon that you have to deal with. And, in Australia, over history, we’ve managed to bridge that gap in different ways; bipartisanship is one of them, political or broad policy consensus, even if it wasn’t bipartisan, is another, and an attempt to have a sensible dialogue around key things, such as floating the dollar, opening up our markets, reducing tariffs, financial services reform et cetera, et cetera. As a nation, I think we need to lift the tone of the debate and perhaps return to something that’s a little more sensible around the way forward.

GODDARD: The election timeframe is rapidly coming upon us and I do hope in that sense the level of debate and dialogue – certainly very high today, and certainly very high in this session – I hope that can somehow be reversed, or put back into a good state. Please join me in thanking Penny Wong, the Minister for Finance.

ENDS