CHAIR —Is there an opening statement?

Mr Vos —No, I have no opening statements.

Senator CONROY —I asked some questions at the last estimates round about costs; I have not received answers to them yet. I understand the committee has indicated that we have not received them either. Are they available to be tabled?

Mr Vos —They were presented and, as I understood it, were lodged through Treasury as a combined—

Senator CONROY —No, they go into the Treasurer's office where they sit until the Treasurer releases them, but from your end, as far you are concerned, they have been signed off and presented.

Mr Vos —Yes, I gave them, within ample time, to the Treasury liaison people and my understanding was they would have then gone to the Treasurer's office, and I do not know what happens after that.

Senator CONROY —No worries. As we have not received them, I was just wondering if you could table them yourselves.

Mr Vos —I have not got them with me.

Senator CONROY —Are you able to answer that?

Senator WATSON —Minister, should you intervene?

Senator CONROY —Stop prompting the minister.

Mr Vos —Unfortunately, I did not bring the numbers with me, but I can make sure that you have got them first thing in the morning.

Senator CONROY —Thank you very much. I am not actually blaming you for the delay, Mr Vos.

Mr Vos —No, that is fine, but I will make sure you have got them first thing in the morning. That will not be a problem.

Senator WATSON —Minister, is that appropriate, or should they be released from the Treasurer's office?

Senator Coonan —Obviously they have to be cleared.

Senator CONROY —No, they do not have to be cleared. I can ask Mr Voss the question in the morning and he can tell me the answer.

Senator Coonan —You most certainly can ask him, but I will see where they are up to in terms of whose office they are in.

Mr Vos —I was not offering to give the Treasury material, let me say, just to answer the specific question on my—

Senator CONROY —No, you were just going to answer the questions. I understood the distinction, Mr Vos. I think Senator Watson perhaps didn't, but I do not mind—

Senator WATSON —I just wanted to follow protocol, that is all.

CHAIR —I think it is very unlikely that Senator Watson did not understand something you understood, Senator Conroy.

Senator CONROY —That is normally true.

Senator WATSON —I just wanted to ensure the appropriate protocol was adhered to.

Senator CONROY —The appropriate protocol is asking a question and Mr Vos kindly giving me an answer.

CHAIR —Move on, Senator Conroy. I am very worried that you are wasting your own time.

Senator CONROY —You released the terms of reference on ATO's administration of GST refunds and small business debt collection practices on 31 March 2004.

Mr Vos —Yes, that is right. Actually, the GST refunds were released on 31 March. I think the small debt collection terms of reference were released some time towards 21 April.

Senator CONROY —What instigated this review?

Mr Vos —Following the scoping study I did last year with the accounting, tax, legal and business community, we came up with a list of 60 systemic issues, and from that 60 we narrowed it down to 10 through consultation in January. From that 10, through the process of identifying the most urgent against those 10, I chose the GST refunds and the small business debt collections as being matters that ought to be examined as soon as possible. It was on my own initiative following consultation with the peak private sector stakeholders in January.

Senator CONROY —Who would that be? Who did you chat to or consult with?

Mr Vos —It would have been accounting bodies like the Institute of Chartered Accountants, CPI Australia, the National Institute of Accountants, the Law Society, a number of the chambers of commerce of New South Wales and ACCI—the Australian Chamber of Commerce and Industry. It was those sorts of organisations.

Senator CONROY —Did you talk with the tax office as part of that consultation?

Mr Vos —We had a briefing session with the tax office to table the 10 systemic issues. They had no specific comments on that, but to get to the terms of reference in respect of both the GST refund review and the small business debt collection review, we had a detailed session with the tax office to get a background understanding of the issues so that we could then put together the terms of reference in a fashion that was both meaningful and easily understood by the community, as I understand it will be.

Senator CONROY —Did you consult the government?

Mr Vos —No.

Senator CONROY —In your press release announcing the GST refunds review, you stated that 110,000 refund claims every year are not processed within the time frame. This must be causing significant cash flow issues for small businesses.

Mr Vos —At this stage, I have not got an understanding on the amount of tax that is in the 110,000 business activity credits that are held up. Suffice to say the advice that we are getting from the private sector is that it is significantly more than the six per cent of the total GST credits that are processed by the tax office each year.

Senator CONROY —Are you aware of an Audit Office report released in early March on the Australian Taxation Office collection and management of activity statements?

Mr Vos —Yes, I am. We have taken that report into account in the process of our terms of reference.

Senator CONROY —Specifically the ANAO report found that one in five, or 2.66 million business activity statements, cannot be processed mechanically and must be hand checked. Is that a systemic problem?

Mr Vos —It is a processing issue rather than a compliance issue.

Senator CONROY —Are you also aware that the ANAO report found that 37 per cent of small businesses continue to have major difficulties filling out their BAS form almost four years after the implementation of the new tax system?

Mr Vos —There are a couple of issues that came out of the report. One is the material that is compiled by business to prepare the business activity statement itself and then there is the actual filling out of the boxes in the business activity statement. I think most of the issues are found to be in the former where businesses are not getting the information together to get the right fields completed. I think there are some areas of process occurring in actually putting the numbers into the box, some transcription errors and the like, but it is more getting to the point of understanding what information is required to go into which field for GST, FBT and the like.

The issue for the GST refunds goes to a different point. The issue for the GST refunds is to be satisfied that the balance between the protection of the revenue and not paying out money that is being claimed on a fraudulent basis is being matched against the need to pay refunds that are legitimately due to be paid. Both big business and small business are having refunds held up for periods of time while various things are happening—either the tax office is undertaking a compliance review of that taxpayer to be satisfied that they have got their systems in place to meet their tax obligations or, in other cases, the refund is being put in from what is known as a business activity statement credit to a running balance account credit. Under the laws, a running balance account credit is only required to be paid by the commissioner if requested by the taxpayer.

In many cases the tax office has not been notifying the taxpayer that the credit has been allocated to a running balance account credit because the taxpayer has other debits of tax owing which have eaten into some part of the credit but have not totally given rise to an outstanding debit. In that particular case, I recall the commissioner saying in the last month at a conference that he was speaking at that the tax office will be proposing to enter into an email system later on in the year to notify taxpayers that their BAS credit has been allocated to a running balance account credit so that the taxpayers will be aware that they have to then seek that refund as it currently applies under the act. There is a bit of a strange quirk in the tax administration act there.

Senator WATSON —What takes precedence?

Mr Vos —As the law is currently worded, if there is any debit in the running balance account then it automatically transfers the BAS credit into a running balance account credit and that overrides it.

Senator WATSON —But what gives the authority to the tax office to transfer it to the running account balance?

Mr Vos —The Tax Administration Act.

Senator WATSON —So this is at the heart of a lot of small practitioner concerns?

Mr Vos —Correct, and if a tax agent is involved in the process he or she may be regularly checking the balances through the tax agents' portal. But if they are not regularly checking their clients' balances in the running balance account, it could sit there for quite some time until the taxpayer wonders where the money is and contacts the tax office, and the tax office will say, `It's sitting in the running balance account; you've got to ask for it back.'

Senator WATSON —What is the date on which the tax office will issue this advice about the credits?

Mr Vos —They are saying that later on in the year they will be automatically notifying taxpayers as soon as they allocate it to a running balance account. That is just a process arrangement that they are proposing to introduce as a service to taxpayers to let them know that the money has been allocated to a running balance account. That is only one issue that we have to look at in the course of our review. It is one issue that has already arisen. Another one will be when a refund has been checked from the month before—it is just about to be paid but the next month's refund comes in, a credit business activity statement, and it immediately puts a stopper in the computer to process any other credits, so then they have to manually override it. That manual override might be a simple exercise but sometimes it causes that problem and it just keeps rolling over month after month after month.

Senator CONROY —I will go back to the ANAO report which I was chatting to you about before Senator Watson jumped in. I was asking you about the ANAO report that found that 37 per cent of small businesses continue to have difficulties, and you responded. Do you think it is satisfactory that, after all these years, we still have 37 per cent of small businesses having difficulties filling in their forms?

Mr Vos —We have as one of our issues the review of systemic issues dealing with the business activity statement. We have been told by a large number of practitioners that businesses are happier to leave the business activity statement as is—`Let's not change it; let's not do anything else; let's get to better understand the process of training up small business people, in particular, to better understand their obligations under the tax legislation.' It seems as though the information we are regularly getting is that businesses just need to have the time to come to grips with their responsibilities. Most have done so—

Senator CONROY —This is four years into the process.

Mr Vos —Yes. As an accountant—and I cannot speak for business people generally—I found it quite easy to come to grips with the business activity statement. I suppose some people who are not as well versed in playing with numbers find it a bit harder. But it is a process whereby, once you have implemented the system, the system normally looks after itself, and I guess the business people have to come to grips with developing their own checks and balances within their accounting structure to get this right—get it right once and get it right for all time.

Senator WATSON —The tax office advise in their latest statistics that the average time is about three hours. Is that your figure?

Mr Vos —We have not been given the business activity statement as being a focal point to concentrate our time on. There is a lot of anecdotal evidence that people are saying in the press and the like that the business activity statement is a disaster. It is not something that we are being told. People do not like filling out any type of form, I suggest, and probably do not want to fill out a business activity statement because it will identify a commitment and a liability to pay tax. But I gather that they are being filled out in less time now than they were being filled out 18 months ago. That is the message that came out in the press article that I think you are referring to. That is all the information that I have, as well, at this stage.

Senator CONROY —Is it of concern—and this is according to the ANAO report—that the ATO has no way of actually telling what its processing systems that handle the BAS forms actually do because they never bothered to actually write down the full list of specifications which run the equipment?

Mr Vos —That is a process issue that comes to running an organisation like the ATO, and I am not sure that that is the type of systemic issue that is going to be something that I can or should look at. It is more an issue that will be for the ANAO to look at.

Senator CONROY —It just seems to me like this is a systemic issue about the handling of BAS forms.

Mr Vos —The BAS forms are completed by taxpayers, and the tax office have systems to process those BAS forms. My understanding is that we are one of the few countries in the world where a number of the BAS forms are lodged electronically. Again, my understanding is that the tax office proposes later on in the year to encourage and allow as many taxpayers who want to lodge electronically to do so. We would have to be one of the few countries in the world where that is so. Most GST or VAT returns globally are still lodged by paper.

Senator CONROY —From the sound of what ANAO have found, are you confident in the administration of BAS forms?

Mr Vos —My approach thus far has been to take all of my input from the sector or sectors that are responsible for either meeting tax obligations or meeting tax obligations on behalf of others, and I keep on making the point that they are not raising with my office that the completion of business activity statements or the lodging of business activity statements is a problem. That is not necessarily to mean that there is not a problem, but it is not being raised with me at this stage as being something that is requiring me to contemplate that I have to look into it as a matter of some urgency.

Senator CONROY —You have got an ANAO report which seems to indicate it is a shemozzle. What more do you need, or do you just listen to the loudest voice?

Mr Vos —No, I do not. Although one organisation has raised with me the need to review the form of business activity statement lodged by small business in particular, almost all remaining tax, legal, accounting and business organisations have not raised with me that a revision of the business activity statement is something that we must take on as a matter of some urgency. I certainly will take on board your comments and revise the view within our office as to whether it is something that I should look at as a matter of urgency but, as I say, it has not been something that has been raised by others.

Senator CONROY —I just wanted to move on to the small business debt collection processes. On 21 April you released terms of reference for another review—as we discussed, the ATO's small business debt collection processes. Some would say that was very overdue.

Mr Vos —It is an interesting issue here. The tax office manages taxpayers in different sectors, and the particular sector I am looking at here is what they call the microbusiness sector—turnovers of less than $2 million per annum—and my understanding is that the majority of those have actual turnovers of less than $200,000 per annum, and yet they owe at the present time some 60 per cent of the total collectible debt to the tax office. I am told that that is not different to what it has been as a general proposition for many years, but I noticed in the commissioner's report that that had blown out in the 2003 year by 25 per cent, presumably from the previous year.

Certainly, the accounting sector in particular, the tax agents, raised with me with some great concern that this is an area that could actually become a problem were the tax office to become super aggressive in seeking to collect these debts and, in so doing, seek to wind up businesses prematurely. It is not that there is an actual problem at the moment; it was raised more as being potentially a problem if some of the early signs were to come to pass. So I took the matter on as a project, as a review, to be satisfied that the underlying systems within the tax office were robust enough to distinguish between those cases where a time to pay ought to be given versus where sufficient time had been given and it was now time to pull the plug on that particular business.

Senator CONROY —Okay, I just wanted to quote from your press release. You stated:

Last financial year, the total overdue collectible debt managed by the ATO increased by 25% to $6.9 billion. About 60% of that debt comes from a number of unspecified business in the micro-business sector. This sector comprises 2.5 million businesses with annual turnovers of under $2 million. Given that this sector only contributes 10% of the total Commonwealth revenue and remits 16% of all employees' PAYG and superannuation withholdings, 60% of collectible debt is an extraordinarily disproportionate amount.

What do you think is causing this disproportionate treatment of small business?

Mr Vos —That is what we need to find out. At this stage I have only those statistics as provided by the tax office. I want to understand why that debt is there and how it has arisen. I am not wanting to look into the background of the debt, I am not wanting to look at whether it is GST or FBT or income tax. It is going to be tax that is owing, but it is the sector of the community that I am concerned about because they are microbusinesses, 2.5 million of them, and obviously not all of that 2.5 million owe the tax. I have got to find out what proportion of that 2.5 million are the actual current debtors. That could well be a moveable feast from time to time, but there could well be a hard core of those microbusinesses that are the perennial debtors of the tax office. There are a number of issues we have got to look at. What is the nature of those people? How have they fallen into debt? Are they getting out of debt quickly, or are they continually, on a permanent basis, in debt with the tax office?

Senator CONROY —Have you uncovered, in your view, any systemic bias from the ATO towards big business? Is it easier for them to pick on smaller businesses or more convenient to reach settlements favourable to big business than to pursue them through the courts? Are you able to form a view on that yet?

Mr Vos —No, I have not. I think there has been quite a bit of material around of late in the press on that score. It has been my understanding for many, many years that big business will seek to continually remain debt free of the tax office unless they are in dispute. That is a different issue to normal debt, but my understanding is that big business is continually striving to keep a clean slate with the tax office. It seems as though small business probably land themselves into debt with the tax office because they are one of the few unsecured creditors that are potentially able to blow out. They may be mortgaged up to their eyeballs and they may be paying a lot of their raw materials and purchases of stock on a COD basis. They have to pay their wages, they have to pay their gas, electricity and telephone bills, they have to pay their rent, otherwise they are not going to have premises, and it would seem at times that tax is one of the few areas that can become a debt blow-out where they are undercapitalised. Big business seems to be better able to manage their capitalisation of their business and, therefore, do not finish up in these types of problems, as a general rule. As I say, the only time big business might be in debt with the tax office is if they are in dispute with the tax office over an unsettled matter.

Senator CONROY —Your press release highlighted the level of small business debt. The penalties that are levied on small business are also of some interest. For example, in 2002-03, the ATO compliance program collected $234.3 million in GST revenue from big business and levied $9,000 in penalties and collected $323 million in additional GST revenue from microbusinesses with $15 million in penalties—again, a significant disparity and disproportionate.

Mr Vos —I do not know where those numbers came from. I seem to recall the other day that the commissioner reported that the average penalty imposed on big business was 30 per cent. I think there is some selective reporting of numbers that give an impression that small business are being slugged harder than big business by the tax office, but that is certainly not any intelligence that has been given to my office, and in the time that I have been in this role there has never been any claim to those sorts of bias that you are suggesting.

Senator CONROY —The application of the general interest charge has been of major contention for some time. Can you outline the general concerns?

Mr Vos —Most of those were dealt with in the discussion paper published by Treasury in March. As a general proposition, the general interest charge is designed to be a cost of money to government by not having had the money in the year in which it should have been paid. If the tax office makes a debit adjustment four or maybe six years after the year that it relates to, the primary tax could be subject to a 25 per cent penalty, but then there could well be between a 60 per cent and 80 per cent general interest charge imposed to bring the total tax liability, with the 25 per cent penalty, to over 200 per cent of the initial primary tax, and it is perceived that the longer the period of adjustment that is involved the general interest charge becomes a significant proportion of the primary tax.

The purpose of it is as a cost to government of not having had the money. It is a time value of money issue, but it has got a penal-like impact on taxpayers, and most of the concerns seem to be in that context. It becomes at times a disincentive to settle a matter that could be a disputable matter, simply because we are now up to a figure that could be 150 per cent to 200 per cent of the primary tax that is in dispute. I think it is in that context that most of the issues arise.

There is a provision in the legislation to enable the commissioner to remit the general interest charge in whole or in part, and there is a general policy that came out through the parliament—I guess you would say that, because this is in the extrinsic materials associated with the introduction of the general interest charge in 1999—that says that you should only remit it in exceptional circumstances. They are the general observations that have been coming out. It is an issue of matching the intention of parliament with its introduction in 1999 and its application by the tax office in only remitting it in exceptional circumstances. Our review of the remission of the general interest charge is looking at that so-called contradiction.

Senator CONROY —Is it of concern that groups of taxpayers that get caught up in similar problems with the ATO seem to have a greater ability to receive relief from the general interest charge when there is a group of them?

Mr Vos —There is no doubt that the deal that was offered to the so-called mass-marketed tax effective investments was a relatively generous one: no penalty, no interest, two years to pay and a deduction for cash outlay. In the case of the film investments, they got a tax deduction for their interest outlay. That was, in my view, a quite generous deal that was offered by the tax office to that sector. And let me say that seven per cent of the taxpayers still did not think that it was generous and were prepared to rely on the courts to settle their outcome.

Senator CONROY —Could this in some way be similar to the difference in treatment by the ATO of big and small business? If you are without a voice, we will treat you as we please; if you do have a voice, we will give you some leeway.

Mr Vos —I think that they are mutually exclusive issues, to be honest with you. Small business are not saying to us that big business are getting a sweetheart deal with the tax office. Certainly, big business are saying to us—I will put the inverse position—that they are not getting a sweetheart deal and, in fact, are getting a pretty tough deal from the tax office. So big business are suggesting that they are getting a fairly tough deal from the tax office, and it is not small business coming to us complaining that big business are getting a better position than they are. The voice coming from both big business and small business is fairly consistent as to the tax office's conduct in dealing with them.

Senator CONROY —With this review that you are doing, did you talk to anyone in the government?

Mr Vos —Which review is that?

Senator CONROY —The small business debt collection process and the general interest charge.

Mr Vos —On small business debt collection, no, I did not talk to the government on that one.

Senator CONROY —General interest charge?

Mr Vos —On the general interest charge: I had a request from the government to do that review and, of course, in the context of that I had discussions with the government.

Senator CONROY —Your press release announcing—

Mr Vos —As I said, that was to take a briefing from them as to the direction in which they wanted me to look at it. I set the terms of reference myself, taking into account the direction in which the government wanted me to look at the matter in general.

Senator CONROY —Your press release announcing the review indicates that the Minister for Revenue and Assistant Treasurer requested the review, asking you to especially consider general interest charge remission in relation to participants in employee benefit arrangements. That is right?

Mr Vos —That is correct.

Senator CONROY —Has she requested any other reviews?

Mr Vos —No.

Senator CONROY —Has she elaborated on her reasons for requesting this review and, if so, what were her reasons?

Mr Vos —The matter had been raised by us as part of my scoping study. We were going to do it anyway. The minister requested me to undertake the review at or around the time that I would have sought to have done something about it anyway. So it was somewhat of a coincidental exercise of being requested by the government at the time that I was contemplating doing it of my own volition.

Senator CONROY —I was asking why: what were the minister's reasons?

Mr Vos —I have no idea. I was just given the request. I know from talking to many people impacted by this issue that they had been bashing her door down for quite some time.

Senator CONROY —Oh no, she had been swanning around at the yacht club; we know that! She must have given you a reason why she asked you to do this.

Mr Vos —It was of significant concern to the government that there were a number of people impressing on the minister that this was a matter of a systemic problem in tax administration. I took her on her word that it was. I did not need to seek any collaboration of understanding, because I was already made well aware by the participants in these arrangements that they were far from happy with where they were at in dealing with both the tax office and the minister's office.

Senator CONROY —She asked you to do this one. You are saying that you were aware that lots of people were knocking on the government's door and the minister's door about it?

Mr Vos —Correct.

Senator CONROY —Should we get the impression that the minister is only concerned with this issue, that there is no other issue she has asked you to deal with?

Mr Vos —I cannot speak for the minister but, in the way that the government has set up the role of the Inspector-General of Taxation and how the Senate made certain amendments, I have been given an independent role. I have been given virtually the sole authority of setting my work program. I can be directed by the government to undertake a review but, even then, I must do it within the time frame of what I believe is my competing work program. When I am requested by the government, or by either or both houses of parliament or a committee of either or both houses of parliament or by the Commissioner of Taxation, I can choose not to undertake that review if I wish. I chose to do so in this particular case; I chose to do the review because it was on my priority list.

Senator CONROY —Why was it on your priority list?

Mr Vos —Because it had come out in the scoping study as being one of the significant issues that were more important to look at than others.

Senator CONROY —The squeaky wheel selection process?

Mr Vos —No. If you look at the issues paper that we published identifying how we prioritise matters in setting my work program, you will see that it is based on things like the number of taxpayers affected, the amount of tax involved and the perception of relative urgency to particular parts of the community.

Senator CONROY —But by definition the concept of a mass-marketed tax scheme will have a lot of participants—by definition of the words `mass-marketed'. Is that a criterion that is relevant?

Mr Vos —It is very easy for me to say that the squeakiest wheel is going to get the oil first. I have gone to great pains to ensure that I do not become a role that just deals with those who squeal the—

Senator CONROY —We have got to make sure you do not become just a patsy for the government when they have got a political problem and there are electoral implications.

Mr Vos —I have gone to great pains to demonstrate, whenever I have had the opportunity to do so, that I believe that I was appointed as an independent person. I do not believe that I have by my conduct been seen to be a patsy of the government. Quite frankly, I take some general exception to being even thought to be the patsy of the government. I am my own person doing my own thing. I have certainly had a request to do the review—

Senator CONROY —Surely taxpayers who do not have a direct line to the minister deserve your attention as well.

Mr Vos —They have been getting that. I have been travelling around the country meeting with taxpayer groups, groups of taxpayers, taxpayers' representatives, and have been doing that unceasingly since taking on this role.

Senator CONROY —I would like to be able to say, `Yes, I know, because I've seen your travel itinerary.' I have been chasing it, but I have not got it yet. However, I am not doubting for a moment that you have been.

Mr Vos —The private sector stakeholder groups have been universal in saying that they acknowledge that I have been out there listening—and listening requires you to be out there and to listen—and they are quite comfortable with the material I am putting out and that I am articulating their views. It is their views—not my views—that I have to champion and advocate change for. Certainly I am doing that as an independent public office holder, doing it with as much zeal as I can, saying it as it is, not being—to use your term—a patsy for the government.

Senator CONROY —So the parliament should take confidence in the fact that, just because the Prime Minister intervenes in a tax dispute with the minister and the minister goes to a yacht club in Perth, these are not things that are going to bear on whether or not you pick up a reference that you are given by the government. It is the only one you have received; it is just a coincidence that there has been so much political activity around it. You are going to weigh all these matters carefully before you decide to proceed with it—because, as you said, you can say no.

Senator Coonan —Senator Conroy, you are mixing up a whole lot of different transactions there. The mass-marketed schemes are not part of this reference, and it is entirely inappropriate to suggest that they are.

Senator CONROY —I am glad to see you are awake, Senator Coonan.

Senator Coonan —Absolutely awake, riveted by every word.

Senator CONROY —I am just acknowledging Mr Vos's proposition that he is indicating he is completely independent and will not be influenced by the government's political problems of the day. I think that is what Mr Vos said.

Senator Coonan —I think that is what he said.

Mr Vos —I have. What I can say to you, Senator, bearing in mind the rules of contempt and the like that relate to Senate committee inquiries, is that I have not had any contact with the government directing me, encouraging me, inciting me, to take a position. I have not had any direct or indirect approaches from them and, quite frankly, would take some exception if I did.

Senator CONROY —Pleased to hear that.

Mr Vos —I can look you in the eye and say that; that is the truth.

Senator CONROY —I am not for a moment doubting you, Mr Vos. I just wanted to get it on the record.

Mr Vos —That is fine, and I am prepared to express it as bluntly as I can so as to move on.

Senator CONROY —I know you are chasing up information on those questions you have already answered. Could I add a request for an update of all those figures for the period since I last saw you. Effectively, if I can get all that information to do with travel and expenses and—

Mr Vos —I will not be able to get that to you by tomorrow.

Senator CONROY —No, I am adding to my request. I am about to finish, so you will not be here tomorrow to give me that information. You are welcome to pop along and drop it off but, at this stage, if you could take on notice—

Mr Vos —I have just received some information for you. Would you like me to table it?

ACTING CHAIR (Senator Fifield) —As there is no objection, we accept the information to be tabled.

Mr Vos —Unfortunately, Senator, I cannot get you the information regarding the travel from February to now so quickly.

Senator CONROY —I am happy for you to take that on notice, and hopefully we will see it prior to the next round of estimates.

Mr Vos —You certainly will, subject to it being through the—

Senator CONROY —Hopefully it will be Senator Coonan asking you the questions by then, but thank you very much.

ACTING CHAIR —Thank you, Senator Conroy. We will take from your comments that you are in no way impugning the integrity of the Inspector-General of Taxation.

Senator CONROY —No. As I said, I was very keen to ensure that people would not regard him as a patsy.

ACTING CHAIR —As there are no more questions for the Inspector-General of Taxation, we will adjourn until 8 o'clock, when we will move on to the Board of Taxation.

Senator CONROY —The board recently completed consultation on the government's exposure draft of the charities definition bill. What were the concerns raised by the charities?

Mr Paine —The board did recently—actually it was late in 2003—complete consultations on charities, and it delivered its report to the Treasurer. In fact, on budget night the Treasurer released that report concurrently with the budget, and that report is placed on the board's web site, so it is publicly available—the information of what the views of the various respondents to that inquiry were.

Senator CONROY —The board's recommendation seemed to indicate that the problems raised by charities in relation to their ability to lobby government and comment on public affairs were more perceived than real. Is that an accurate interpretation?

Mr Paine —Senator, I might just explain the staffing of the board secretariat. I joined the secretariat early this year and Mr Kooymans on my left has been there slightly longer—for most of the time of the charities review, but not the whole time. So I will ask him if he can add anything, although you should be mindful that the board's report really stands for itself—they were the board's views. But I will ask Mr Kooymans if he wants to add anything.

Mr Kooymans —As my colleague indicated, the submissions from the review are all available publicly on the board's web site, and the board's report quotes liberally from submissions throughout. So essentially this information is all there. The board's recommendations related to its terms of reference, of course, and essentially come down to its recommendation that there needs to be greater clarity in the draft bill. The government, of course, subsequently decided to withdraw the draft bill and rely on the common law definition of a charity, plus some statutory extensions relating to particular new areas.

ACTING CHAIR —Is there a message from the chairman? Was he unable to attend tonight?

Mr Paine —Senator, our understanding is that previously the chairman of the board has not appeared before this committee. I am not aware that he has ever been specifically asked to appear before this committee, and on this occasion he was not asked to appear before the committee. You might not be aware that it is all a completely part time board, the seven private sector members.

Senator CONROY —Who is the chair at the moment?

Mr Paine —The chair is Mr Dick Warburton.

Senator CONROY —But you will understand that we are asking about the policy, and you are public servants. So it is a little hard to engage you in a robust discussion of this because you cannot really answer, because you cannot offer your own opinions, for fair enough reasons, and it just makes it a little hard to follow through with the questions.

Mr Paine —Could I also perhaps just flesh out a little on the board's role. We are the secretariat to the board. The board in turn provides advice to the Treasurer, but the Treasurer essentially takes his advice after taking into account the board's and many other views, including, of course, advice from the Treasury, our Treasury colleagues. For example, the government's response on charities was embodied in a press release that the Treasurer issued on budget night, so it was not a Board of Taxation press release. It was a government decision, obviously

ACTING CHAIR —Do not diminish the role of the board please, Mr Paine. It is a very important position.

Mr Paine —I think it is, Senator.

Senator CONROY —I think he is being modest, to be fair to Mr Paine. What I was asking you about was that there were a lot of concerns raised by charities in relation to their ability to lobby government. And the board seemed to indicate that those concerns were more perceived than real. So I was just trying to get the flavour of the board's view on that.

Mr Paine —I do not want to add to or take away from what is in the board's report, and the written views of all the respondents are on our web site for everyone to see.

Senator CONROY —What benefits would have come from a definition of charities being cemented in legislation rather than having to continue to rely on a common law definition?

Mr Paine —Senator, I do not think I can really—

Senator CONROY —It sort of highlights the problem. Minister, would you like to answer that?

Senator Coonan —Well, I would not, but I will have a go. It is a matter, I suppose, of there being pluses and minuses, which clearly was encapsulated in the board's report. To begin with, it is always advisable if you can capture something, I suppose, in a piece of legislation if it is going to have the required intent, but if you have unintended consequences, sometimes it can be worse than not having something where people are much more familiar. My understanding is—although this is something that was specifically a Treasurer-driven government decision—that people were able to operate perhaps with better understanding and clarity with their old definition, where every one pretty well knows what we mean, and add in a few of the statutory classes that clearly needed to be included, because that was a bit uncertain. That is the best explanation I can give you.

Senator CONROY —I appreciate that, Minister, thank you. Do you think it is a bit ironic that a measure that was designed to increase certainty for the charity sector actually created widespread uncertainty and panic out there in the sector?

Senator Coonan —Well, when you move from the familiar to the unfamiliar, sometimes you get that outcome.

Senator CONROY —Has the board received any government feedback on why it did not accept your recommendations to fix the draft bill and instead shelved it? Has the government communicated with the board?

Mr Paine —No, Senator, the—

Senator CONROY —You read it in the newspaper, did you?

Mr Paine —No, Senator, we were aware shortly before time that a government press release was issued, and that is the totality of the government's response, which of course is completely public. The Treasurer's press release says in part:

The Government has taken advice from the Board of Taxation that the draft legislation does not achieve the level of clarity and certainty that was intended to be brought to the charitable sector.

And then it goes on to explain the reasons for the government's decision.

Senator CONROY —Has the board had any discussions about this? Has it just noted, `Well, that work we did just hit the fence'?

Mr Paine —I think it is probably reasonable for the board's deliberations to remain within the board rather than being broadcast more widely.

Senator CONROY —I did not ask what they were. I said: have they had any?

Mr Paine —They have had a brief discussion.

Senator CONROY —I would press you further, but I do not see that there is any point. I am not sure it is reasonable for taxpayers' money to be expended on a board that then will not answer any questions about what it is thinking. I do not think that is actually a reasonable position, but that is a fight for a different day, Mr Paine.

Mr Paine —Perhaps another point to note is that the board is an advisory body to the Treasurer.

Senator CONROY —It is still paid for by government money.

Mr Paine —Yes, that is correct.

Senator CONROY —Do you think it is a bit of an overreaction by the government just to kill the bill entirely?

Mr Paine —I think I will leave the government's response to the Treasurer's press release, and that will be it.

Senator CONROY —A wise answer, Mr Paine. You may not have this available, but I was wondering if I could get a breakdown of the annual resourcing provided to the board, including a breakdown of employee expenses and board members' expenses, including travel et cetera. I would not anticipate that you would have that right now.

Mr Paine —Senator, in the board's annual report, the last one of which was for 2002-03, there is a public document, again on our web site, and the orders of magnitude and the breakdown have not changed. This year is not much different from last year, but we are quite happy to—

Senator CONROY —Does it list the travel for the individual members, the chairman and that sort of thing?

Mr Paine —No, not in that—

Senator CONROY —The sort of detail I am after is the next level down, I guess—what makes up those numbers, if I could.

Mr Paine —The 2002-03 year?

Senator CONROY —I would actually like it to be as up to date as it is possible to be.

Mr Paine —Yes, that is fine.

Senator CONROY —Thank you very much.

ACTING CHAIR —Thank you very much for appearing, Mr Paine, on behalf of the Board of Taxation.

[8.20 p.m.]

ACTING CHAIR —I now call the next witnesses from Treasury. The committee will now examine output 1.1, macroeconomics. and the Department of the Treasury. Welcome to Treasury officials.

Senator CONROY —Welcome, Dr Parkinson. For the Treasurer's most recent address to the National Press Club I understand three plasma TVs were hired for the exercise. I was just wondering who ordered them.

Dr Parkinson —Senator, I am afraid you have got the wrong people. Firstly, I do not know whether there were any plasma TVs—

Senator CONROY —Weren't you watching? Weren't you not there? I cannot believe that.

Dr Parkinson —And you are right, there were flat screen TVs, but I just assumed—

Senator CONROY —You did not order them?

Dr Parkinson —I personally have no knowledge.

Senator CONROY —Who should I ask in the Treasury?

Dr Parkinson —I would suggest that you take it on notice, or we could—

Dr Parkinson —No, you are not going to take it on notice.

Dr Parkinson —Maybe direct it to Mr Murray. I suspect he will not know, because I suspect it is not the sort of thing that will have been brought to his attention, but—

Senator CONROY —Well, I am sure that by the time he appears before me he will know—

Dr Parkinson —Which could well be later tonight. I think we would have to check with our corporate services people in the morning. We are quite happy to find out and get back to you tomorrow.

ACTING CHAIR —After that earth shattering question, macroeconomics.

Senator CONROY —No, there are a whole lot more that follow up from that one. Dr Henry is not here. I am feeling snubbed.

Dr Parkinson —It is nothing personal, Senator. The Reserve Bank board is meeting in Brisbane today.

Senator CONROY —Okay. Will he be here tomorrow?

Dr Parkinson —No. He has actually got a speech in Brisbane, I think, tomorrow.

Senator CONROY —Thursday? Any chance of him appearing before budget estimates? I know he enjoys it so much.

Dr Parkinson —I could ask him. Would you like me to ask him?

Senator CONROY —I would love you to ask him, Dr Parkinson. It would be good of the Treasury secretary to turn up to the budget estimates.

ACTING CHAIR —I think it would be unreasonable to expect him to come here before—

Senator CONROY —No, I accept that the Reserve Bank board is a perfectly legitimate and appropriate thing for him to be skipping us for. It is a pity, because I am going to ask about Dr Henry's speech, so I guess you will just have to struggle on, Dr Parkinson, without him. I would like to explore the government's current fiscal stance. On page 3 of his recent speech, Dr Henry asked the following:

The question is this: Just what sort of surpluses would you expect this strategy to deliver in the 13th, 14th, 15th and 16th years of economic expansion with growth at or around trend and general government net debt staying at less than 3 per cent of GDP?

If the government's objective is to balance the budget over the cycle, what is Treasury's view of the implied surplus we would expect at this stage of the economic cycle?

Dr Parkinson —I do not have anything to add to what the secretary has put on the public record, Senator.

Senator CONROY —He was asking that question. Nobody in Treasury has any idea of what it should be?

Dr Parkinson —My understanding is that the government is pursuing a policy of budget balance on average over the cycle.

Senator CONROY —I got the impression it was a rhetorical question from Dr Henry, so I was just hoping that someone in Treasury might be able to talk to us about it.

Dr Parkinson —We do not have a target.

Senator CONROY —No target?

Dr Parkinson —We do not have a target.

Senator CONROY —Okay. What would the policy that Dr Henry is referring to—of budget balance over the cycle—imply for now, in terms of surpluses?

Dr Parkinson —It depends where you want to start the cycle. The government was the one that adopted—

Senator CONROY —We are in the middle of the cycle, surely. Are we at the beginning or the end of the cycle? You tell me, Dr Parkinson. Which part of the cycle are we in?

Dr Parkinson —Well, the government adopted a medium term fiscal framework when it came into office, so one could say that from its perspective it is still in the positive part of the cycle and it is running surpluses. It has not seen a complete cycle.

Senator CONROY —When will the cycle be complete?

Dr Parkinson —The cycle will be complete when there is an economic downturn, and when you come out of that downturn the economy starts to grow again. We attempt to forecast the economy to the best of our ability, but we are not anticipating a downturn.

Senator CONROY —Does Treasury have an estimate of the structural budget balance?

Dr Parkinson —I think we have addressed this question for almost as long as I have been in the department, Senator, when we come to Senate estimates, and the answer has not changed.

Senator CONROY —I am sorry it is such a tedious process.

Dr Parkinson —No, the answer has not changed.

Senator CONROY —And the answer is? Just refresh my memory. I have missed the last couple, as you would know.

Dr Parkinson —I do not think I have addressed it in the last couple. The issue is that we think it is quite difficult to estimate structural budget positions, particularly in an economy that has been through very rapid structural adjustment, such as this one.

Senator CONROY —So it is just too hard?

Dr Parkinson —There are numerous methodologies out there, but we do not have—

Senator CONROY —You are the premier economic modeller in the country, and it is too hard for you?

Dr Parkinson —I appreciate the compliment.

Senator CONROY —But it is too hard for you? Isn't that what you do every day?

Dr Parkinson —We can make estimates using different methodologies that other people have developed, but we do not endorse any methodology.

Senator CONROY —I refer to table 4 in Budget Paper No. 2, page 2-9. The budget impact of policy decisions since MYEFO has been $4.3 billion in 2003-04, or about 0.5 per cent of GDP, and $8.3 billion in 2004-05, or about 1 per cent of GDP. Does that sound about right?

Dr Parkinson —You are looking at 2003-04, 4,255, and then 8,271. Is that what you are looking at?

Senator CONROY —Yes, which works out at about, for 03-04, 0.5.

Dr Parkinson —A bit over half of 1 per cent of GDP and a bit over 1 per cent of GDP.

Senator CONROY —The International Monetary Fund world economic outlook of April 2004 suggested that Australia's cyclically adjusted balance, again prior to the budget, was also in deficit—a deficit of 0.6 per cent of GDP in 2003 and 0.8 per cent of GDP in 2004. Does Treasury have a technical problem with the IMF estimates?

Dr Parkinson —You have me at a disadvantage. I do not have the IMF estimates in front of me and I do not have the IMF methodology. I am aware of the fact that we have looked at that methodology, as we have looked at others, including that by Blanchard and numerous other people, and we do not endorse any methodology.

Senator CONROY —What? Do you think the IMF are a bit flaky on this?

Dr Parkinson —Are you asking me to pass judgment on the IMF's approach to fiscal policy or—

Senator CONROY —No, on their technical capacity to calculate it.

Dr Parkinson —The IMF, I am sure, have excellent—

Senator CONROY —You used to be with the IMF, didn't you, Dr Parkinson?

Dr Parkinson —I am sure the IMF has an excellent technical capacity to run a particular methodology.

Senator CONROY —But you are unaware of what it is at this stage?

Dr Parkinson —I would have to have a look at it. Dr Gruen, are you?

Dr Gruen —No, I am not aware.

Dr Parkinson —We would have to go back and have a look.

Senator CONROY —Okay. The OECD Economic Outlook of May 2004, page 69, suggested that Australia's cyclically adjusted surplus for 2004, prior to the budget, was 0.4 per cent of GDP. The Access Economics Budget Monitor, page 64, released just prior to the budget, suggested that Australia's cyclically adjusted surplus was about 0.5 per cent of GDP for 2003-04 and 0.4 per cent of GDP for 2004-05.

Given the impact of the policy decisions contained in the budget—that is 0.5 per cent of GDP, as we say, in 03-04 and 1 per cent in 04-05—the cyclically adjusted budget is now in deficit. Isn't that a fair statement?

Dr Parkinson —You wish to accept the starting point estimates and then you wish to add policy decisions to that? If you wish to reach that conclusion, that is your decision, Senator. You are asking me to make a conclusion based on a methodology I have not seen, on figures I do not have in front of me, on reports I do not have in front of me.

Senator CONROY —You have been to the IMF, have you not, Dr Parkinson?

Dr Parkinson —That is a rhetorical question, Senator, or—

Senator CONROY —I am just double-checking. There was a slab of years when you were not here to entertain us. Were you at the IMF then?

Dr Parkinson —I was.

Senator CONROY —You were. That is what I thought. Did you notice many flaky or sloppy technical problems with their analysis then?

Dr Parkinson —There is analysis in every organisation that could be better than it was actually carried out at the time.

Senator CONROY —Have you spent time with the OECD?

Dr Parkinson —I have not worked at the OECD.

Senator CONROY —I remember particularly a conversation about some very good people being over at the OECD. I think you passionately defended an officer.

Dr Parkinson —I actually passionately defended the current executive director of the IMF, not of the OECD. But I am happy to defend the qualities—

Senator CONROY —I am sure we have got someone at the OECD that you could equally passionately defend at the moment though.

Dr Parkinson —I am sure I could do something

Senator CONROY —Who is over at the OECD at the moment, Dr Parkinson.

Dr Parkinson —Mr Comley.

Senator CONROY —Of course. I had forgotten. Well, we all hold Comley in high regard, and I am sure he is contributing to the technical expertise of the OECD. Would you then say that the budget is in cyclically adjusted surplus?

Dr Parkinson —Senator, we can go around this question numerous times. I do not have anything else to add to what we have said in the past—

Senator CONROY —Treasury has not got a clue what the structural situation is?

Dr Parkinson —We are aware of numerous methodologies for estimating—

Senator CONROY —Would any of them have us in surplus or any of them have us in deficit or would they all be pointing in one direction, do you think?

Dr Parkinson —I have not gone and put the numbers through them, Senator.

Senator CONROY —Dr Parkinson, you are being too modest. You are an acknowledged expert in this field.

Dr Parkinson —Senator, I have sat here for many years under different governments and have made exactly the same comment, as has the secretary, as has the former secretary. I do not see that anything has changed.

Senator CONROY —I guess the parliament will just have to live with the disappointment that Treasury is unable to calculate such a thing, but we have been getting used to those sorts of disappointments, so we will just continue to be disappointed. We will live with the disappointment. Does Dr Henry's question suggest that fiscal policy can afford to be looser because of our level of net debt?

Dr Parkinson —I am sorry, could you explain?

Senator CONROY —Well, I can repeat the question, if you like.

Dr Parkinson —Can you explain what the nub of the question is?

Senator CONROY —I will repeat the question for you. Does Dr Henry's question suggest that fiscal policy can afford to be looser because of our level of net debt? He is suggesting less than 3 per cent of GDP—given our level of net debt.

Dr Parkinson —I would not have put that interpretation on it, Senator. I would interpret it as a question of what sort of surpluses would you expect after 13 to 16 years of economic expansion in an environment where you have used past surpluses and asset sales to reduce net debt. The way I would interpret that—but this is purely my interpretation; we would have to ask Dr Henry what he meant—

Senator CONROY —Well, we would like to.

Dr Parkinson —What I would suggest is that, if you were looking at a situation where you had 60 per cent of GDP as general government net debt, you might want to run tighter surpluses, higher surpluses, than you would otherwise, even at this stage of the cycle. But as to what he had in mind when he wrote that, I was not inside his head, so I am afraid I do not know.

Senator CONROY —He did not consult you, you were not a contributor, he did not bounce any ideas about this off you?

Dr Parkinson —He did.

Senator CONROY —He did, and you still do not know what was in his head.

Dr Parkinson —I do not know what is your head, Senator, and we are having a conversation now.

Senator WATSON —A win.

Senator CONROY —Please! What? Refusing to answer any questions at all, do you define as a win? I define it as—a little different to that, Senator Watson. So 3 per cent of GDP—

CHAIR —Stop harassing, Senator Conroy. We do not want to provoke any pique in Senator Conroy. And, Senator Conroy, you proceed and do not let Senator Watson tease you.

Senator CONROY —Thank you for protecting me from Senator Watson. I do appreciate it. So, 3 per cent of GDP net debt, does that mean we should run lower surpluses? Is that the implication?

Dr Parkinson —Than what?

Senator CONROY —Than we currently are.

Dr Parkinson —I do not read that into it. What I would read into that is that, relative to a situation where you had massively high levels of net debt, in a situation where you were concerned about your debt sustainability, then you would want to run significantly larger surpluses. But the way I interpret that is that you do not have a question of debt sustainability so you would not be that concerned to be targeting particular levels of the surplus.

Senator CONROY —Should they be lower than the balance over the cycle?

Dr Parkinson —Should?

Senator CONROY —The surpluses be lower?

Dr Parkinson —Be lower?

Senator CONROY —Yes.

Dr Parkinson —Than balance? Sorry, are you suggesting—

Senator CONROY —This concept of balancing over the cycle. You have tried to avoid answering where we were in the cycle. You have tried to avoid answering every question I have asked so far, Dr Parkinson.

Dr Parkinson —Senator, if you want to say that, what you are saying is that the Treasury has attempted to avoid every question that has ever been asked on this topic.

Senator CONROY —In the last 30 minutes, I would have to say to you, yes, that would be an accurate statement of fact.

Dr Parkinson —Then extend it and suggest that we have avoided answering every question that has been asked on this issue for as long as I can remember, irrespective of which party was in government. I have not changed anything that we have said—I have not changed from anything that we have said in the past, irrespective of who was in government. Now, going back to your question, are you asking me whether I believe the fiscal strategy should be changed so that we aim for something other than surplus or balance on average over the cycle?

Senator CONROY —No, I am trying to understand the point that Dr Henry was making, and I am hoping that someone who helped contribute towards the speech—and, as you have acknowledged, you were involved in discussions, bouncing ideas around—will have some idea of what the Secretary to the Treasury was on about. Do you agree with what Dr Henry said?

Dr Parkinson —I will go back to what I said a moment ago, which is that, if you were worried about debt sustainability, irrespective of the stage you were at in the cycle, you would probably want to run higher surpluses. What this is saying to me is that we do not have an issue around debt sustainability, so then the question is, `Well, what sort of surpluses would you expect to run after 16 years of expansion, after nine years since the government adopted the medium term fiscal strategy?' You are still in the situation where you are running surpluses, and the objective is budget balance on average over the cycle, and, as I said earlier, we have not seen the end of the cycle.

Senator CONROY —Can I get a simple explanation of something in relation to the budget. If, after you spend on delivering better services, you have a balanced budget and then decide you want to give more tax relief, that would take the budget into deficit, would it not?

Dr Parkinson —Sorry, are you saying that, given where you are now—

Senator CONROY —No. You spend on services and you then have a balanced budget. You then decide that you want to give more tax relief. That would suggest that you are—

Dr Parkinson —If you are already in a situation where revenue equals expenditure and you reduce revenue, by definition, you are in deficit.

Senator CONROY —Thank you. The reason I ask is that the Treasurer has outlined his fiscal strategy in the following terms, and he has said this on half a dozen occasions. The Treasurer says that his fiscal principle is as follows:

If our budget is balanced after paying for defence, security, health, age pensions and the like then we should try and work at lowering the tax burden in Australia.

So the Treasurer of the country appears to believe that, from a position of budget balance, you can then cut taxes but then not go into deficit. And he has repeated this over and over again, so I am a little confused. After the Treasurer has outlined this approach—and I know that part of the Treasury's role is to watch what the Treasurer is saying, and he has repeated this on a number of occasions—did the Treasury provide advice to his office at any stage about this description he has been using?

Dr Parkinson —I would not be able to answer that off the top of my head, Senator. But I think—

Senator CONROY —Are you aware of the statements?

Dr Parkinson —I am aware of the statements—

Senator CONROY —The 3 March 2004 press conference.

Dr Parkinson —But the way I would interpret that is that what the Treasurer has in mind is that, after you have attempted to improve service delivery, if your budget is better than in balance—that is, the words he has used are, `If our budget is balanced'—

Senator CONROY —Yes.

Dr Parkinson —Effectively he is saying that if there is anything left over it is to be returned.

Senator CONROY —Well, it is good of you to speak on behalf of—

Dr Parkinson —No, I am simply attempting—

Senator CONROY —I am just quoting him, and I know that you will take my words and say I am not quoting him other than exactly:

If our budget is balanced after paying for defence, security, health, age pensions and the like then we should try and work at lowering the tax burden in Australia.

And, as I said, he keeps saying it. I just would have thought by now someone in Treasury might have pointed out to him that there is a little inconsistency there in how he is expressing himself at least.

Senator Coonan —I have heard him say that if there is something left over it should be returned.

Senator CONROY —Thank you, Senator Coonan. I appreciate that. I was just wondering whether Treasury has done what they normally do—as most departments do if their minister has got something just fractionally wrong; they get in touch and explain, give them a bit of a briefing about it. Are you aware of that happening, Dr Parkinson?

Dr Parkinson —I am not aware of that happening, but that does not mean that it has not happened.

Senator CONROY —You said you were aware that he had made this statement. You said that earlier when I was reading it.

Dr Parkinson —I have heard words along those lines and I have interpreted that as being not a strict definition of balance but really a definition that says, `if we have got something left over'. But, Senator, at the end of the day, all I can do is ask the Treasurer on your behalf what it is he really meant.

Senator CONROY —So when you heard that you were not concerned—you did not give him a ring, give his office a ring, did not have a chat to Dr Henry and ask him to give him a ring?

Dr Parkinson —Look, when I have heard that I have thought the context for reasonable people was fairly clear. He was not saying that when we have absolute budget balance—there is a deficit of zero, there is a surplus of zero—then one would turn around and deliver tax cuts. What I thought he was saying was that he would be looking to see what he could do to lower the tax burden. So, if it is at zero he cannot lower the tax burden. If it is above, if he is in surplus, he can lower the tax burden, or he can attempt to lower the tax burden.

Senator CONROY —So if he had said instead, `if our budget is absolutely balanced', that might have been a cause for concern?

Dr Parkinson —If he was that strict in terms of his definition, it may well have at the time caused me to clarify the situation with him. But the context of such, when I have heard it, is that I have not put the interpretation on it that you have put on it.

Senator CONROY —I have just read his words. Maybe I am more narrow-minded than you, Dr Parkinson. The budget papers forecast exports to increase by 8 per cent in 2004-05 and imports to increase by around 9 per cent. If these forecasts are realised, we would not see any improvement in the trade balance over the year, would we?

Dr Parkinson —Sorry, could you repeat the question?

Senator CONROY —The budget papers forecast exports to increase by 8 per cent in 2004-05 and imports to increase by around 9 per cent on a year-average basis. I was just wondering, if these forecasts were realised, would we see any improvement in the trade balance over the year?

Dr Hagan —I am from the Domestic Economy Division, Treasury. I just want to be clear about what you are asking. In our forecasts we have got—

Senator CONROY —Exports to increase by 8 per cent.

Dr Hagan —Yes.

Senator CONROY —And imports to increase by around 9 per cent. That is on a year average. Have I got the wrong figure, Dr Hagan?

Dr Hagan —No. And the question?

Senator CONROY —If that occurs, that forecast is delivered, we will not see any improvement in the trade balance in 2004-05?

Dr Hagan —We are expecting to see an improvement in the trade balance in that time. What we have got is a change in the relative growth rates of imports and exports. And there is also a terms of trade effect that is in there as well.

Senator CONROY —Sure. Treasury are aware that we have now recorded 24 consecutive monthly trade deficits—

Dr Parkinson —Sorry, Senator, you can actually see the forecast for the trade balance on chart 10, page 3-27.

Senator CONROY —I have looked at it, but I just wanted to make sure.

Dr Parkinson —That shows that there is an anticipated improvement in the trade balance.

Senator CONROY —And you are confident that that is going to occur? I mean, we got another big current account today.

Dr Parkinson —Are you talking about the trade balance or the current account balance?

Senator CONROY —No, trade was yesterday, or the day before. Current account was today.

Dr Parkinson —Yes, but are you concerned about the trade balance or the current account balance?

Senator CONROY —Or the trade balance, which we had an improvement in yesterday or the day before. I just wanted to know what your thinking is, based on those figures

Dr Parkinson —Well, we have a degree of confidence around all of our forecasts, but they are forecasts.

Senator CONROY —Good. I will hold you to that.

Dr Parkinson —You are welcome to do so, Senator.

Senator CONROY —Excellent. The budget acknowledges that increases in oil prices reflect geopolitical tensions in the Middle East. I think it is Budget Paper No. 1, 3-8. What are the geopolitical tensions that the Treasury is referring to?

Mr Kennedy —I am from the International Economy Division, Treasury. We would see risks around, for example, oil infrastructure. We would see that some of those risks around, for example, terrorist attacks around oil infrastructure would be one way that security issues or tensions could directly impact on the supply of oil, and if the supply of oil were impacted that would have a flow-on effect to the price.

Senator CONROY —So does this include the war in Iraq?

Mr Kennedy —I am not sure I understand.

Senator CONROY —Do the geopolitical tensions that you are referring to include the war in Iraq?

Dr Parkinson —Iraq is a relatively small supplier of oil globally at the moment. This is a more general comment. As we have just seen with the attack in Khobar in Saudi Arabia, there are groups out there that are attempting to undermine particular regimes in various parts of the world. There have been tensions in Venezuela, in Nigeria, and now you have a situation where the largest oil producer in the world has had a number of attacks on Westerners and particularly now on people in the oil industry. It is a more generic comment than anything with respect to Iraq, because Iraq as a contributor to the global supply at the moment is relatively minor.

Senator CONROY —So is the situation in Iraq a potential threat to the global oil prices, direct or indirect?

Dr Parkinson —I would not have thought the situation in Iraq changed the outlook for global oil prices. I think the issue more generally, in terms of where Iraq is now, is that to the extent people anticipate a deterioration or an improvement in Iraqi production and that does not eventuate it would have some impact on prices. But I am not under the impression that anybody expects a dramatic recovery in Iraqi output. I think the real issue here is, as I said, you have a range of regimes that are being buffeted by forces. If there were a major and successful attack on Saudi Arabian production, that would have a significant impact on global oil prices. Were there to be a disruption to existing Iraqi production, I cannot see that it would have any particular impact, given the degree of disruption that is already occurring.

Senator CONROY —So the situation in Iraq is not a key determinant of the broader Middle East situation, in Treasury's view?

Dr Parkinson —I do not think that Iraq is responsible for al-Quaeda-like groups attacking domestic Saudi oil production facilities.

Senator CONROY —We will have to get you over into the Department of Foreign Affairs. They could have used you a few months back.

Dr Parkinson —Senator, I would ask you to retract that comment please.

Senator CONROY —I am not quite sure why.

Dr Parkinson —Well, I do not understand some of the comments, either. But I am quite happy where I am. I do not need to go to the Department of Foreign Affairs and Trade.

Senator CONROY —They should use your sage advice, Dr Parkinson.

Senator WATSON —Making remarks—

Senator CONROY —Are you going to continue to let Senator Watson badger away?

CHAIR —Have you been badgering Senator Conroy again, Senator Watson? I chastised you about that before. I ask you to leave Senator Conroy alone. Senator Conroy is not capable of handling both the witness and your badgering at the same time, and I feel very sorry for him.

Senator WATSON —That is nice, something to be applauded.

CHAIR —I thought Dr Parkinson was mocking Senator Conroy and that is why I sprung to Senator Conroy's defence. I do not think Senator Conroy can handle both Dr Parkinson's mockery and your teasing simultaneously.

Senator CONROY —It is just too much for me.

Dr Parkinson —Senator, if the chair feels I have spoken inappropriately to Senator Conroy, I would withdraw.

CHAIR —I do not.

Senator CONROY —You would have to withdraw your entire testimony so far, Dr Parkinson, but we will proceed any way.

Senator Coonan —We do not want to start again.

Senator CONROY —No, let's not.

CHAIR —Everybody leave poor Senator Conroy alone.

Senator CONROY —Thank you, chair.

Senator CONROY —On radio 6PR on 17 May, the Treasurer said:

I cannot see the world oil price coming down until the problems of the Middle East are resolved to some certainty.

He further said:

... until the situation in the Middle East is resolved people unfortunately are going to be paying more for their petrol.

So the Treasurer clearly believes the situation in the Middle East will be an important determinant of oil prices. Is that a fair interpretation?

Dr Parkinson —On the basis of what was said, yes.

Senator CONROY —But Treasury feels Iraq has no influence on the broader Middle East problem?

Dr Parkinson —No, Senator. With all due respect, I think we are being a bit disingenuous here. The situation in Iraq is only affecting, in a direct sense, oil prices to the extent that Iraq's supply is increasing or decreasing relative to what it has been. Total Iraqi production is something in the region of two and a half million barrels a day, and it has been, as I understand it, in that broad ballpark for quite some time. I am unaware that anybody thinks that Iraqi infrastructure is in a sufficiently good state that Iraq would be able to dramatically increase its production and hence lower global oil prices. To the extent that what is happening in Iraq is a manifestation of pressures throughout the Middle East, then obviously Iraq is not isolated, but do I think Iraq is responsible for what is happening in global oil prices?

Senator CONROY —So Treasury's view, just to be absolutely clear, Dr Parkinson—because I do not want to verbal you—is that the war in Iraq is not an influence in the politics of global oil prices?

Dr Parkinson —The politics of global oil prices?

Senator CONROY —That would be the Middle East situation. Iraq is irrelevant to the Middle East situation—that seems to be your hypothesis at the moment?

Dr Parkinson —Sorry, I am now confused, so I would like to get the question clarified.

Senator CONROY —On the politics of oil producers, Iraq is irrelevant?

Dr Parkinson —Let me try to rephrase the question.

Senator CONROY —Feel free to ask the question you want to answer. I will get around to asking my questions in time.

CHAIR —Could I just counsel you. You and the other officers at the table have been asked to give evidence in relation to the outcomes in the Treasury portfolio. If you feel—and I am not saying you do—that the questions that Senator Conroy is directing to you trespass beyond your field of expertise or specialisation, or the purpose for which you and the other officers are here to give evidence, you should indicate that. It does not seem to me that you are here to give evidence as an expert on Middle Eastern politics.

Dr Parkinson —Thank you, chair. That is why I was about to ask whether I could rephrase the question, because I thought that was what I was being asked to speculate on.

Senator CONROY —You are being asked to justify your statement in the budget papers, Dr Parkinson. That is what you are being asked to stand by—what you said in the budget papers.

Dr Parkinson —Senator, observers of the oil market suggest that there is a risk premium sitting in global oil prices. There are various estimates of that that range between $4 to $8 a barrel, and that is reflecting concerns about what might happen in the Middle East. You asked me earlier whether Iraq per se was influencing oil prices. I was simply responding in terms of Iraq's contribution to global supply and indicating that, to the extent that that was not changing, it was hard to see how that was going to be influencing either global supply or global price. It now seems to me you are asking a question about the politics of Middle East oil powers, and that was what I was attempting to clarify if that was the question, because then it is outside my area of competence.

Senator CONROY —We will try again. Is the situation in Iraq an influence on the politics of global oil prices? You have made a statement in the budget papers. I am asking you to explain it, and I am asking you questions about it. Global oil prices are a key economic parameter—and Treasury makes estimates and calculations.

Dr Parkinson —Clearly to the extent that there is continuing uncertainty over the future path of developments in Iraq, that will have an influence over the extent to which people might believe Iraq can improve its production and, hence, contribute to global supply. To the extent that people are concerned that there may be spill-over effects into over countries, you could imagine that would have an impact. I cannot go any further than that.

Senator CONROY —Has the situation in Iraq added to the risk premium?

Dr Parkinson —I would have to go back and have a look at what people have suggested. I am not an expert on the global oil market. All we are doing here is reporting the risks around the global outlook.

Senator CONROY —But it factors into the calculations that you make.

Dr Parkinson —Absolutely.

Senator CONROY —You raised the risk premium. I am asking you to give me a breakdown.

Dr Parkinson —If we go back to previous discussions in here, we have talked about risk premium coming from civil unrest in Venezuela. We never attempted to calculate the extent of that risk premium. We have talked about tensions. I might be wrong about this, but there have been times when we have been concerned about tensions in Nigeria. We have been concerned about, before the invasion of Iraq, what might actually happen. That was reflected in our concerns at the time in the discussion we had. To the extent that there is ongoing turmoil in Iraq and that that poses issues of concern for players in the global market and that leads them to build up their own stocks, obviously that will have an impact.

Mr Kennedy —Can I just add to that. In thinking about oil prices going forward, we do not in fact forecast oil prices; we take oil prices as they are and take the futures curve. So we take as given what is coming out of the market. As Dr Parkinson was saying, what we are trying to do in this part of the budget statement is reflect those things that might be driving the price and what could see that futures curve shift up or down over time. Apart from a risk to supply, there is the strong demand, for example, that exists at the moment which should also be going a large way to driving the price up.

Senator CONROY —I want to clarify this, Dr Parkinson. Has the situation in Iraq got a negative impact on the risk premium?

Dr Parkinson —Could I attempt to clarify what we have been discussing. I am happy to provide this.

Senator CONROY —Hansard will not have the graph, but I can just see it.

Dr Parkinson —We can provide you with a copy, if you wish. This chart shows oil price futures. It shows how futures prices have risen for the period out through to 2006. It shows that futures prices have risen such that, at budget, the futures price was suggesting oil would be around $30 a barrel—this is for West Texas intermediate—by June 2006. That has gone up—

Senator CONROY —I was coming to that.

CHAIR —Before you go on, Senator Conroy, we should formally receive that document.

Dr Parkinson —I am happy to table that.

CHAIR —Is the committee happy to receive the document as part of the record? There being no objection, it is so ordered.

Dr Parkinson —All this is showing is the actual price of West Texas intermediate crude in US dollars per barrel up to the time of the budget. It also shows where the futures curve was going at the time of the mid-year economic and fiscal outlook, where it was at budget and where it was—this would have been the end of last week—in the last few days anyway. It shows that since the budget the curve has risen noticeably. As to what has contributed to that risk premium increase, I think you can suggest there is a range of factors. The most obvious is what happened in Khobar with, presumably, the sorts of tensions that we saw—

Senator CONROY —I guess when they did that forecast they did not know Khobar was going to happen. They did know Iraq was happening, so I just want to come back to this issue of the risk premium. Are you suggesting there is no impact from the Iraq situation in the risk premium?

Dr Parkinson —I am sure that there has been some Iraq impact on the risk premium. The question is whether it has changed recently as against where it was a year ago.

Senator CONROY —I appreciate you have asked the question that you wanted to answer and you have given an answer to the question you asked, but I actually asked a different question to the one you wanted to ask yourself. But I appreciate your help. So we agree that Iraq is a factor in the risk premium? I am not asking you to quantify it, just like I did not ask you to quantify the Venezuelan impact in the risk premium.

Dr Parkinson —If it is contributing to concerns about the geopolitical outlook in the Middle East, then one would be forced to conclude it is a factor. The question is whether it is a factor that has changed.

Senator CONROY —I was going to come to that. You seem fairly optimistic. This graph shows it is falling away.

Dr Parkinson —I am sorry, let me just clarify that. That is the futures market price. As a technical assumption, we take the price where it is at the cut-off for budget and then use the futures curve going forward. That says that that is the expectation of the futures market.

Senator CONROY —How accurate have future estimates of oil prices been historically?

Dr Parkinson —I would have to go back and have a look.

Senator CONROY —So, with the assumption that world oil prices will fall gradually to $32 per barrel by June 2005, which is in Budget Paper No. 1, 3-13, we should not assume that that is a Treasury assumption?

Dr Parkinson —It is a technical assumption. It is the same sort of assumption that we make when we say a technical assumption is that the exchange rate will remain around the levels it has been or that we will have a return to normal seasonal seasons.

Senator CONROY —I see that making technical assumptions is not too hard after all.

Dr Parkinson —I am sorry, Senator, was that a question?

CHAIR —I think it was a wisecrack.

Senator CONROY —The key risk to the economic outlook relates to developments in the housing sector, particularly the future private house prices and the associated wealth effects on consumption. You and I have had some celebrated discussions about house prices, Dr Parkinson. I am sure you remember them. The budget paper states that increasing levels of household debt also present a potential risk and that household debt-to-income ratios have increased over the past decade. Is that a fair statement?

Dr Parkinson —We have no reason to walk away from what we wrote in the budget paper.

Senator CONROY —What was the household debt to income ratio in 1996?

Dr Parkinson —You can see it on page 3-16. We cannot see where 1996 is exactly, but it is a bit below 80 per cent.

Senator CONROY —Is that 80 per cent?

Dr Parkinson —That is 80 per cent.

Senator CONROY —What is it now?

Dr Parkinson —It looks like it has increased to something in the region of 140 per cent. So one could suggest that it has perhaps doubled, which is probably what it did between about 1983 and 1996.

Senator CONROY —And why do you pick those figures, Dr Parkinson? Why did you pick that time frame?

Dr Parkinson —In 1982? Because that is when the chart starts.

Senator CONROY —Isn't that lucky! In the past, Treasury has argued that household debt has been more than offset by rising housing wealth. Is that still the Treasury's view or has that position changed?

Dr Parkinson —The broad picture remains unchanged.

Dr Hagan —It still remains the same. There is approximately $6 of household assets to every dollar of debt. It has moved slightly and you can look at the graph. It has a bit of a slope, but it is basically flat. It looks very stable.

Senator CONROY —Is it fair to say that household debt on the back of housing wealth that appears increasingly fragile—there are a lot of concerns—has underpinned strong consumption and growth?

Dr Hagan —I will clarify it. I think it is true that a large part of household wealth comprises houses as assets. Are you asking me to confirm a view that I think that that wealth is fragile?

Senator CONROY —No. I will rephrase it. Has the risk associated with the housing market increased in the past few months?

Dr Hagan —Just so I can understand the question better, how are you defining the risk? Is your concern here about a change—

Senator CONROY —Housing prices.

Dr Hagan —A change in—

Senator CONROY —House prices. The last time I checked, all the newspapers—

Dr Hagan —It is important to make that clarification, because that is not how we talk about the risk in the forecast.

Dr Parkinson —But it is important to go back and acknowledge the point that you made a moment ago, which is that we have talked about this issue for quite some time. The bank has expressed its concerns. You have had great fun at my reference to terms such as `speculative excess' and my comment that I would not touch certain parts of the housing market with a 30-foot barge pole. That suggests that we believe there were risks around the outlook for housing for quite some time. There are still risks around the outlook for housing.

Senator CONROY —What I am trying to ascertain is whether or not the risks for both the economy and the household have got greater, particularly in recent months.

Dr Parkinson —No. Actually, I do not believe they have got greater. I think we are seeing that some of the risks we were talking about are beginning to eventuate. So the much-anticipated downturn has begun to occur in both prices and activity. So risk has not changed.

Dr Hagan —One way of thinking about how the housing sector is evolving is that we are seeing evidence that the housing sector is cooling—it is not collapsing but it is cooling—and we are seeing evidence that some prices—

Senator CONROY —Is what you are calling cooling that the increase is slowing or has the increase turned to a decrease?

Dr Hagan —We are seeing some changes in growth prices. We are seeing evidence of price falls in some parts of the market. We are seeing a slowing in the rate of, say, approvals. So aspects of the housing market are showing signs of slowing down.

Senator CONROY —And the evidence of that cooling or slowing down—whichever phrase you want to use—has been greater than a few months back. Is that fair? You just have to pick up a newspaper to read those sorts of observations. I am asking the acknowledged experts—Treasury.

Dr Parkinson —My recollection is that we have been suggesting at previous discussions here that the market has been weakening. It was up to other people to decide whether or not they believed us. What we are seeing now is a range of price series confirming that prices have softened, have fallen. The picture remains mixed. It is hard to interpret just exactly the extent of the fall. But in one sense what you are seeing is that the data for the March quarter is confirming what we have been saying in the past. The data turns up with a lag.

Senator CONROY —As you are aware, Dr Parkinson, I have not been able to attend the last couple of hearings, so I have unfortunately missed your discussions over the past 12 months. I hope it will not disappoint you to know that I have not rushed off to read the Hansard to check out whether or not the discussions have been consistent with my discussions with you of 12 months ago. So what I am trying to establish—and I am not quite sure why it is so difficult to establish this—is whether the evidence of the cooling is stronger now than it was, say, a few months ago.

Dr Parkinson —I think we can agree that the evidence is stronger because we now have a range of price indices that support the conclusions we were drawing on the basis of anecdotal evidence. Clearly, because it was anecdotal evidence, we had to be very careful in terms of how we interpreted it.

Senator CONROY —Thank you for that. I would have assumed, given you have been very cautious in your preparation, as you have just described, that this would confirm your concerns going forward.

Dr Parkinson —I am sorry, I do not understand.

Senator CONROY —Your earlier concerns, which you were being cautious about, are now realised.

Dr Parkinson —Our concerns are being borne out. The risks—

Senator CONROY —Borne out. So this would increase your concerns going forward?

Dr Parkinson —The risks we identified are still there as risks. We have to see how this plays out. But at this stage the market is doing much as we would have expected.

Senator CONROY —Coming back to where we started, we were talking about household debt on the back of housing wealth having underpinned strong consumption and growth in the past. Does Treasury expect to see this pattern continue?

Dr Parkinson —Of increasing wealth?

Senator CONROY —Household debt.

Dr Parkinson —I think we have indicated in the budget statements that we expected wealth to be broadly flat. We are seeing, on the basis of the Reserve Bank's latest data, that there has been a marked slowing in credit growth for housing. We will just have to wait and see how that plays out, but we think the housing sector is playing out in the way we had anticipated. We do not anticipate wealth growth. Hence, we anticipate that consumption will moderate accordingly. That is the sort of picture that we would hope to see. We hope that this unfolds in a measured way.

Senator CONROY —The budget papers also state that high levels of debt have increased the vulnerability of households to adverse shocks.

Dr Parkinson —Absolutely.

Senator CONROY —Does that ring a bell?

Dr Parkinson —And I think we—

Senator CONROY —What sort of adverse shocks are we talking about here?

Dr Parkinson —A dramatic and unanticipated increase in interest rates.

Dr Hagan —A significant change in income.

Dr Parkinson —A significant change in employment and, hence, in income. Again, that has not changed. But the type of risk that we are talking about is the sort that we have talked about before. At least my recollection is that we have talked about it before. I may well be wrong.

Senator CONROY —The current cash rate is about 5.25 per cent. The OECD economic outlook of May 2004 argues that the cash rate in 2004 and 2005 will be around 5.5 per cent to six per cent. That is at page 115 of their report. That would seem to imply that the OECD thinks there is a 25 to 75 basis point increase in interest rates ahead of us.

Dr Parkinson —That would be the conclusion I would draw—that that is what the OECD believes.

Senator CONROY —Where does Treasury believe the OECD analysis is wrong?

Dr Parkinson —Without seeing what the OECD has based its analysis on, I think I would hesitate to answer that question.

Senator CONROY —Are you familiar with it? They toss the OECD report on your desk and you do not have a look?

Dr Parkinson —The OECD report was released at 7 o'clock on budget night.

Senator CONROY —It has been three weeks or so since then, Dr Parkinson. I know you have had a heavy workload or, more hopefully, actually, you have had a break to allow you to refresh yourself tonight. But you have not had a chance to have a look at the analysis yet?

Dr Parkinson —I will fess up and say I have not actually read the OECD economic report.

Senator CONROY —Anyone else had a chance to look at the OECD analysis? Dr Hagan, you have not had a chance?

Dr Hagan —No. In terms of thinking about the outlook, I do not attempt to forecast interest rates. I assume that they are fixed for the purposes of making a forecast.

Senator CONROY —I am just asking you to comment on the OECD's analysis. I am not asking you to forecast interest rates. I am asking you to give me an answer—

Dr Hagan —I have no expertise in forecasting interest rates.

Senator CONROY —I never suggested you have.

Dr Parkinson —The forecasts in the OECD Economic Outlook and in the IMF's, when they are released, are based on the situation a number of months previously—that is, they have a cut-off date that is considerably before their release date. I am not sure what the exact cut-off date is for the OECD Economic Outlook, but we were in the midst of preparing the budget forecasts using, I think, far more up-to-date information.

Senator CONROY —So Mr Comley is out of date?

Dr Parkinson —Mr Comley is Australia's representative. He is not a member of the OECD secretariat or the OECD professional staff. The OECD professional staff are—

Senator CONROY —So is he not keeping them informed of the latest thinking?

Dr Parkinson —The OECD professional staff are well able to make their own forecasts. Whether they are right or wrong will be judged by history in the same way whether we are right or wrong will be judged by history.

Senator CONROY —Are there any significant differences between Treasury's and the RBA's view on interest rates going forward?

Dr Parkinson —I am not a member of the RBA board. All I can go on is what the RBA has said publicly in the most recent statement on monetary policy. As I have said in the past, the RBA is responsible for monetary policy. My views, to some extent, are irrelevant. I have the greatest respect for my colleagues in Martin Place.

Senator CONROY —Dr Parkinson, we have had many discussions in the past about the RBA's view on the housing market and interest rates and those sorts of things. You have never been quite so bashful before.

Dr Parkinson —I am sorry, I have never been quite so?

Senator CONROY —Bashful before. We have had lengthy discussions where I have quoted to you sections and asked you for your view on them and you do not normally just say, `I have the utmost respect', and then say nothing.

Dr Parkinson —Actually, I think if we go back and look at Hansard, on at least one instance I recall having said that the governor and his colleagues' views were views that I looked at and greatly respected. So I think there is not much difference between what I have just said and what I have said previously.

Senator CONROY —So you would endorse the RBA's views on interest rates going forward from that document?

Dr Parkinson —It does not really matter what I think. The RBA is responsible for monetary policy.

Senator CONROY —No, I am not asking you what they think. I am asking you what Treasury thinks, actually, Dr Parkinson.

Dr Parkinson —Well, actually, it is quite irrelevant in one sense what Treasury thinks. The board of the Reserve Bank is responsible for setting monetary policy, not the Treasury.

Senator CONROY —So Treasury have no view on monetary policy, no view on structural deficits. What do you guys do in between making the budget? Anything at all?

Dr Parkinson —I take it that is another rhetorical question. If it is not, I am more than happy to—

Senator CONROY —I wish it were.

Dr Parkinson —Well, we could discuss—

Senator CONROY —Have you no views on anything? I am just wondering why we employ you.

CHAIR —Senator Conroy, just ask questions.

Senator CONROY —No, I am. I am actually making a quite serious point. It appears Treasury do not have any views on anything to do with the economy other than preparing budget papers. I just wonder what they do with the other six months of the year.

CHAIR —This is a question and answer session. Just ask your questions.

Senator CONROY —I am. I am asking what Dr Parkinson does the rest of the time.

Dr Parkinson —Senator Conroy, I am more than happy to help by answering questions that you would like to put to us. You are asking me whether I endorse the RBA's views on monetary policy. I said I am not a member of the Reserve Bank board. I am therefore not privy to the thinking of individual Reserve Bank board members. I do not know where monetary policy is going to go over the period ahead. I am not going to give anyone a blank cheque by saying I endorse their views irrespective of what happens.

Senator CONROY —Given the high levels of household debt, the impacts of an increase in interest rates would be severe. Is that a fair statement?

Dr Parkinson —I do not believe that a 25 basis point increase would be severe. We have had two of those in recent history. We have had 100 basis points since—

Senator CONROY —I was trying to avoid identifying a figure for the very reason that I would not want to be accused of trying to lead you into a discussion about any particular size. I was just asking about an increase.

Dr Parkinson —And you asked whether it would be severe. I think I would need to know what sort of increase you were talking about.

Senator CONROY —Given that you have invited it, I will ask.

Dr Parkinson —If you let me finish, what I was saying was that we have had two 25 basis point increases since October and a 100 basis point increase since 2002, since the bottom. It has undoubtedly had some impact, particularly given where we were when that tightening phase started. Has it been severe? I would not have thought so.

Senator CONROY —You have invited the question, so I hope you are prepared for this. You have been quite happy to answer your own questions. I am hoping you will be after an invitation from me. So 25 basis points, in your view, would not be severe? Would 50 basis points be severe, given the level of indebtedness?

Dr Parkinson —It depends what you mean by severe. Are you asking me would a particular—

Senator CONROY —A moment ago, you were prepared to tell me 25 per cent was not severe.

Dr Parkinson —No. What I said is that we have had 100 basis points to date and it is not obvious to me that there have been significant or severe impacts, however you want to define it. If one looks at the situation confronting us at the moment, you will see we have a reasonably good macro-economic outlook. We have a good inflation outlook. From the sorts of increases that the bank might reasonably envisage, I find it hard to believe that they would be severe in their impact. If the bank were to tighten, it would undoubtedly have an impact. Whether it would be severe would depend upon the magnitude and over what time period.

CHAIR —Dr Parkinson, on that note, we will take a short break.

Senator MURRAY —There is a discrete area I would like to cover, Dr Parkinson. I do not know if it will be you that should respond. I am referring to statement 4, which broadly covers lower unemployment in Australia. I will just take a quote. It is typical of the theme. The quote I take is from 4-21 from Budget Paper No. 1. It states:

The improved performance of the economy over recent years, of which the lower unemployment rate is an important dimension, has been achieved through a long-term and comprehensive package of reform measures.

Further down it states:

The reforms have been extremely diverse and broad based, including: trade reform; deregulation of financial markets; wide-ranging tax reform; enhancing competition across many areas of the economy; increasing the flexibility of the labour market; the development of skills and capacities; reforms to welfare arrangement; and creating a transparent medium-term framework for fiscal and monetary policy in order to enhance economic stability.

I think that is unexceptional; it is just a straightforward statement of reality. But you would accept, would you not, Dr Parkinson, that Treasury has made its contribution to the thinking processes and the policy outcomes that have resulted in those reforms and those effects. That is right, is it not?

Dr Parkinson —We would hope so.

Senator MURRAY —When you look through that, as I do, you would find that nearly all of them represent macro-Australian, if I can use that term, rather than state based reforms. That would be true, would it not?

Dr Parkinson —Some of the reforms—for example, changes to government business enterprises and electricity, water and gas reform—have been predominantly state based.

Senator MURRAY —But driven by a national policy and structure?

Dr Parkinson —Exactly. Again, similarly, a range of areas falling under the broad heading of national competition policy would also be things that have occurred at the state level but, again, through a joint Commonwealth-state process.

Senator MURRAY —But driven again through a central federal determination with the states at times, such as the GST, for instance, which results in national welfare effects?

Dr Parkinson —I think that is a reasonable conclusion.

Senator MURRAY —It is also unexceptional, is it not, and perfectly reasonable to say when you view a package like that it is very difficult to assess or disaggregate the effects on the economy of particular reforms simply because they are all happening at the same time and it is a complex issue, is it not?

Dr Parkinson —Yes. And there is additional complexity not just because they are all happening in a reasonably similar period of time but the interactions between them—for example, the interactions between efforts to improve productivity and efforts to increase flexibility in the labour market—actually work together. So you get an interaction effect, which probably means you get a bigger bang for your buck than if you had done each of these quite separately and spaced apart over time. So if your point is that it is very difficult to unpick the individual impact—

Senator MURRAY —Yes. You cannot say this was 0.6 per cent and gave you X billion economic growth?

Dr Parkinson —No. Indeed, the way the Productivity Commission and others have attempted to estimate the benefits of these things in the past has been to take a snapshot of the economy, assume everything else is frozen, and change one part and then get an estimate. But ex post, or after the event, you cannot actually go back and unpick and have great confidence about how much you are attributing to each factor.

Senator MURRAY —I think it is a perfectly true statement to say that the Wallis reforms, if I can broadly describe them as that, both impressed and were well supported by the coalition, the Labor Party and the Democrats. I think the consequence of those has been very favourable for Australia—a broad band of reforms to the financial markets and the financial services markets. But a characteristic of that, for me, was taking functions away from the states which should probably be national. You are as aware as I am that for the first time in 100 years credit unions finally fall under one coherent national set of laws. That is true, is it not?

Dr Parkinson —Yes.

Senator MURRAY —Where I am going to with all this is industrial relations laws. I have previously asked on notice of the government if they can tell me what economic effects, the general contribution to efficiency and productivity, have resulted from the referral of Victorian powers to the federal system. I was not surprised when they could not, for the very reasons we have just discussed. I have also explored this issue with various participants in the economy, including representatives of the Victorian government at the relevant committee hearings. You might not know, or you might, but they do not want to have their powers back at all. In other words, regardless of the colour of the government, it is now accepted in Victoria that having one set of industrial relations laws is a great contributor to efficiency, equity and productivity. Were you aware of that?

Dr Parkinson —Just through anecdotal reports, but I have not been in any of those conversations myself. And those issues fall to other parts of the department, so there are other parts of the department that are expert in these areas. But I am aware of the general sentiment. Indeed, that has been a mantra of the OECD EDRC reviews in Australia over a number of years—the need to have a coordinated, coherent approach to industrial relations across jurisdictions, ideally a national jurisdiction but, if not, some sort of uniformity.

Senator MURRAY —Are you aware that I commonly refer to the 1996 Industrial Relations Act reforms as the second wave because I regard the 1993 reforms of the Keating-Brereton reforms as being the first wave?

Dr Parkinson —I was not aware.

Senator MURRAY —What I mean by that is the 1996 reforms were in the same direction as the 1993 reforms, particularly with respect to enterprise bargaining and making the labour market more flexible. Would you agree with that?

Dr Parkinson —Yes. Again, I caveat the fact that I am an amateur in this field.

Senator MURRAY —We are talking here in macro terms, you see. I will get you to where I am going. In my view, the broad direction of federal law, give or take a bit less flexibility or a bit more flexibility, is roughly in the same direction whether it is a coalition or a Labor government in that both are committed to enterprise bargaining and the freer market circumstances that the act now exhibits. So where I have gone to with this question is this: why is it that in your statement there is no observation of, commitment to or expression of the absolute necessity and desirability of one industrial relations system for Australia and, getting rid of the state systems? To me, it is no different to the financial reforms of Wallis in many respects. Why is there no structural initiative or emphasis in your overview of further reforms that are needed?

Dr Parkinson —No particular ulterior motive.

Senator MURRAY —I am not suggesting that. I am just wondering why you have not thought about it.

Dr Parkinson —I think we are of the view that enhanced coherence would be very valuable. However, the states have had the opportunity to refer their law to the Commonwealth and only one of them has chosen to refer their powers to the Commonwealth. You would have to talk to my colleagues, Mr Murray and Mr Tune, but I am not aware that there is any sense that it is likely to happen or that the Commonwealth has any particular levers at the moment that might be able to encourage such an outcome. We have said, though, on the bottom of page 27 that workplace relations law remains complex and we could actually improve the role it plays in reducing unemployment. We refer to the 10 bills that are currently before the Senate and the value of amending the Workplace Relations Act. On the second last paragraph on page 28, we go on to say there may be scope to further refine the awards system, including through reductions in its complexity and breadth as well as changes in the responsibilities of the Australian government and state government jurisdictions. So we are saying there may be scope but it is not something that we have a lever that we can use at the moment. On that, I would really have to defer to my colleagues who are the experts in this area.

Senator MURRAY —But I want to stay with the macro approach. On a broad kind of historical generalisation, the first swipe at a national tax system probably was fairly successful when we got the Income Tax Act. The next great success was the New Tax System with the GST system because finally you had Commonwealth-state finances properly integrated. It took 74 years for the first national competition law. As I said, it took 100 years to get the credit unions in place. But it takes a long time in a federation. It has not stopped Treasury or governments advocating uniformity. What I have seen is a withdrawal from this area. What I am asking you is why, really. I know it was mostly driven from former minister Peter Reith, because he put out a discussion paper on a unified system and all that in 1997, I think. But why would we stop, even though it is difficult because of the federal structure, as a national government, as a Treasury, pushing hard for a unitary system in this area which we know would deliver efficiency and productivity gains, even if we cannot measure or quantify them accurately?

Dr Parkinson —The question you pose is a very good one. My response would be that we actually have not stopped aspiring to that. It is just that there are a range of things that we can do within the Commonwealth jurisdiction that need to be done or that there would be value from doing. In a sense, they are fruit that we can pluck relatively easily and we need to keep pushing on the benefits of a unitary system but recognising it may take a very, very long time to achieve. Just to reinforce your point, the complexity of labour law is a major issue here. We have something like 4,500 awards in Australia.

Senator MURRAY —And we reduced them by two-thirds federally through the 1996 act.

Dr Parkinson —Absolutely. That is right. For somebody who goes in to be an employer, this is still a pretty complex system. Indeed, think about the issues that are serious problems for us. As a country, we have lowered our unemployment rate to under six per cent. We have been under six per cent now for around about 18 months. This looks really quite different to anything we have achieved in a very long time. As this paper points out, we are actually at levels that we have not achieved on a sustained basis for 23 years. We actually have the capacity to lower unemployment further and at the same time bring back into the labour force a whole pile of people who currently have limited attachment or no attachment to it. We have 2.8 million people in Australia on welfare. We have more people on the disability support pension than we have on the unemployment benefit. To me, that says there is something terribly, terribly wrong with—

Senator MURRAY —Well, it is easier to get on there. That is why.

Dr Parkinson —That is exactly right. But part of what we need to do is actually work on welfare reform but equally work on reform in the whole industrial relations area. This is not an area that we have suggested that we should step back from.

Senator MURRAY —Except I have been watching your documents for some time. I get no sense of that structural drive in this area, which I have had a sense of in other areas, such as competition policy. I may have disagreed with some of the outcomes and some of the directions of what we would call economic rationalism excesses, but nevertheless the concept, the idea and the mechanism were very effective. As I understand it, Treasury were heavily involved in the design of that. That is correct, is it not?

Dr Parkinson —Well, competition policy actually is a portfolio responsibility of the Treasury. Industrial relations is not.

Senator MURRAY —Was it back when it was set up? I was not here at the time, but I am pretty certain that Treasury was heavily involved. My point is that, at that time, the Keating government—I think it was a Keating initiative—realised how hard it would be to prise reform out of or into the states, whichever is the right expression. What they provided through the National Competition Council was incentives, such as, `If you deregulate this or do that, we'll give you money.' Has that been thought of as a mechanism to try to get people to give up these ridiculous, complex and conflicting laws that they have in the labour area?

Dr Parkinson —I would have to defer to my colleagues who work in this area for an answer to that question. Let me just clarify a comment I made a moment ago. I said that competition policy issues were probably in Treasury. They would not have been at the time of Hilmer. My recollection is they probably were not within the Treasury portfolio. But I think you are raising a very genuine and substantive point that we are going to have to tackle when we think about the next wave of major reforms, be they in industrial relations, competition policy or an expanded range of issues, and that is the interface between the various levels of government.

Senator MURRAY —Let me interrupt you. This relates to something from a different direction that Senator Conroy was saying earlier. I am told that in Europe now, for the members of the European Union, the national parliaments, 60 per cent of their legislation comes from the European Union, from the commission as ratified by the European Parliament. A large body of that regulation is not necessarily designed to lower costs but it is first of all designed to get consistency and harmonisation of regulation so everybody is playing to the same tune. Once you have that, you can lower the costs. They are driving very hard to get common labour laws and regulations and common practices. I see it from a competitive point of view, from the Australian point of view, that our productivity and efficiency is held back by having six sets of industrial relations laws in a country of 20 million people.

Dr Parkinson —I agree with you entirely. I would go further and say it does not stop with industrial relations issues. We have a whole range of areas where state jurisdictions and the inability to gain coherence across jurisdictions imposes significant constraints on our economic performance. This is a particular example you are citing and it is a very important one, but I can think of a number of others that fall into the same sort of category.

Senator MURRAY —But you would agree with me, would you not, that in respect of, for instance, statement 4, which is specifically concerned with job creation and unemployment, we are simply not getting that flavour of objective advocacy from Treasury in the manner in which we have just discussed?

Dr Parkinson —I concede that we could have been stronger on this issue. We drafted this in a way where we were trying to cover a wide range of areas. In particular, we were focusing on things that could be achieved in the sort of shorter to medium term. We could well have given more prominence to this issue without having done any damage to our overall objective of the statement. I probably agree with you on that.

Senator MURRAY —That is all I have.

Senator CONROY —Is it correct to say that mature age Australians are significantly over-represented relative to other groups in the population in the stock of the long-term unemployed?

Dr Parkinson —Mature age Australians? Just to clarify, they are proportionately more of the long-term unemployed? Mature aged people are a larger proportion of the long-term unemployed than they are of the relative cohort—

Senator CONROY —Relative to other groups in the population. I think Senator Murray is defining it possibly as an hourglass type situation.

Dr Parkinson —I am afraid I do not have the numbers in front of me. Are you keying off something in the budget statement?

Senator CONROY —No. You were discussing these sorts of issues with Senator Murray so I thought would I just jump on in.

Dr Parkinson —Actually, the answer is I honestly do not know. I would not be surprised if that were the outcome, put it that way.

Dr Gruen —As a stylised fact, the unemployment rates of older—

Senator CONROY —Mature age.

Dr Gruen —Sorry. I am entering that age group myself. The unemployment rates for mature age people tend to be lower than other groups. For older age groups, there is the choice of retirement if you become unemployed, so that—

Senator Coonan —You can retire when you are ready.

Dr Gruen —You can. I do not know the statistics on long-term unemployment, but overall unemployment rates tend to fall and they are really quite low for the 60 to 65 age group.

Dr Parkinson —Let me just step back. I think Dr Gruen is right because one of the stylised facts is that mature age people tend to migrate off unemployment into other forms of welfare more easily. There is no work test, for example, or activity test after 50. The tests to get on the DSP may well change marginally. So it could be that a more accurate response is to say that mature age people disproportionately are represented in the welfare system rather than necessarily in long-term unemployment as a particular component of that. But if you are interested, we are more than happy to dig out the numbers. It is just that we do not have them here.

Senator CONROY —I am particularly talking about the long-term unemployed. The proposition you put is that they ultimately give up and move on to other forms of welfare, for whatever reason. I use the words `give up' in a broad sense; I am not trying to be pejorative. But that is the long-term unemployed rather than the general unemployed. I will move on.

Dr Parkinson —Again, Mr Murray and Mr Tune would be in a better position to actually discuss the detail of that if you are interested.

Senator CONROY —No. I appreciate that very much. I want to talk about intergenerational policy in a bit more detail. The Intergenerational Report of 2002 points to a fiscal gap of five per cent of GDP by 2042. I think we will all be mature age by then, Mr Gruen.

Dr Gruen —Some more mature than others.

Senator CONROY —There are a number of possible ways to respond to this concern, some of which have been canvassed by Treasury. Is Treasury aware of a November 2003 OECD publication entitled Policies for an Ageing Society: Recent Measures and Areas for Further Reform? Does that ring a bell?

Dr Parkinson —It rings a bell. Again, this is something that you might want to direct to Mr Murray.

Senator CONROY —Is he just your hospital handpass for the entire night? I tell you what—he is going to be hunting for you tomorrow. That is the third handpass to him tonight.

Dr Parkinson —I just hope he does not catch me. Quite seriously, we are quite happy to talk about the macro-economic aspects of demographic issues, but when it gets to the specifics of policy, be it about participation or productivity enhancement, they fall to—

Senator CONROY —I am probably staying at the macro level rather than drilling down. Bear with me.

Dr Parkinson —I am vaguely aware of there being a number of studies, but I am not aware of the detail.

Senator CONROY —It looks like a range of policy responses to an ageing population. Mr Comley is beavering away merrily over there with all these reports.

Dr Parkinson —He is actually currently in Sydney.

Senator CONROY —He is currently in Sydney. It contains a table on page 62 headed `Main Conclusions from EDRC Country Reviews of Ageing Policies'.

Dr Parkinson —I am not aware of that.

Senator CONROY —As Treasury, are you aware of what the recommendation on fiscal policy is for Australia? It makes a recommendation.

Dr Parkinson —No. I am not aware of what the recommendation is.

Senator CONROY —Under `Australia', one of the recommendations is that Australia should accumulate a fund to finance future outlays. What is Treasury's view of this recommendation? What do you think it means?

Dr Parkinson —I am not aware, as I said, of that particular report and why they may have reached that conclusion. I think it is, though, worth drawing a distinction. One of my colleagues has used the term that Australia faces a demographic challenge, not a demographic crisis. I think that is actually a very important distinction for us to keep in mind. We have four options, essentially, in front of us. We could raise our tax to GDP ratio. We could raise our expenditure on ageing related items but offset that by cutting outlays in other areas. We could increase debt to meet that five percentage point gap. We could attempt to grow the economy more rapidly. Were we facing a situation that was a significantly larger difficulty—so we were in a demographic crisis, not demographic challenge, position—you might want to both try to grow your economy faster and engage in some other form of expenditure smoothing. But we do not believe it is necessary to do that in Australia given the situation we confront. Let me be very clear on that. I am now talking about a situation where, to build up that fund, you would essentially be raising tax rates today. You would be raising the tax to GDP ratio today in order to deal with that problem over the period ahead.

Senator CONROY —I am confused. You seem locked into only four options. There are not any other options?

Dr Parkinson —The four broad category of options.

Senator CONROY —What about putting aside surpluses?

Dr Parkinson —Well, that is fine. You could put aside surpluses, but—

Senator CONROY —You have not had to raise taxes to do it.

Dr Parkinson —No. You could put aside the surpluses you have today. In a sense, then, you run down your existing stock of net debt or you begin to accumulate other assets or you hypothecate them off to other areas, such as the unfunded superannuation liabilities.

Senator CONROY —They are options as well?

Dr Parkinson —Yes. They are all options.

Senator CONROY —Has Treasury looked at any of those? You seem to be saying that there are only the four. I have mentioned some others and you say, `Oh, yeah. I think they are options too.'

Dr Parkinson —On the issue of whether or not it makes sense to raise the tax to GDP ratio and impose a higher tax burden today, we do not see that that is actually sensible. It is not growth enhancing. In terms of raising debt in the future, we are not sure that that is actually beneficial either. But that is a matter for governments of the day to decide. In terms of cutting other forms of outlays in order to provide scope for ageing related outlays and, in particular, health related outlays, which are technologically driven, not so much age related, that is basically saying that the outlays we are making in some of those areas now may well actually be wasted, in which case we should cut them out anyway. I suspect that that is not what the consensus view would be. In terms of hypothecating surpluses off to other areas, you will recall the Commonwealth government securities review where the government suggested that if it found itself in a situation where its surpluses were leading to an accumulation of financial assets in the Reserve Bank, it would consider whether or not to go down that route. It does not find itself in that position, so that is not an issue for it at the moment. My interpretation of where we are is that both the government and the opposition—I am just saying this on the basis of things I have heard from Mr Crean—have since committed to the pro-growth strategy being a core of any such approach to dealing with it.

Senator CONROY —Bear with me for just a minute. Is Treasury aware that the International Monetary Fund describes New Zealand's superannuation fund as an important step to address some of these pressures confirming New Zealand's reputation for innovative and far-sighted policy making?

Dr Parkinson —I have not read the IMF article 4 for New Zealand. Let me say that it was a situation like New Zealand's that I was implicitly drawing in a distinction with Australia by saying a demographic crisis as against a demographic challenge. The reason is that—I probably will get this wrong—my recollection is that the fiscal challenge confronting New Zealand is something like double that confronting Australia. Whereas, for example, our pension expenditure as a share of GDP is likely to rise by about 1.9 percentage points, in New Zealand it is more like six percentage points or that sort of ballpark.

Dr Gruen —It is certainly a lot more.

Senator CONROY —I was not going to try to compare.

Dr Parkinson —Let me be clear. What I am saying is that we think, given the situation Australia confronts, the preferable approach is to rely on a pro-growth strategy. I think the secretary may well be saying more about that in the near future.

Senator CONROY —Tomorrow even. So you do know what is in his mind. In its assessment of the Intergenerational Report, the IMF considered four possible responses to the fiscal gap: do not adjust and run increasing budget deficits over time; adjust as you go to maintain balanced budgets; make an ongoing adjustment to annual budgets to fully cover costs to 2042 using an intergenerational fund; and making an ongoing adjustment to annual budgets to partly cover costs to 2042 using an intergenerational fund. The OECD, the IMF and a number of other commentators have suggested this sort of intergenerational fund option, but Treasury just dismisses it.

Dr Parkinson —No. We do not dismiss it. Let me step back. Note that, of those four approaches there, none of them is actually going to contribute to a better growth performance. Indeed, there will be a G20 workshop on demographic issues in the beginning of July that Dr Hagan will be participating in. At the G20 deputies meeting in Leipzig in April, I was struck by how in a sense almost Eurocentric the thinking to date has been. The approach we have adopted in terms of thinking about this is that the three Ps framework—population, participation and productivity—comes across as something pretty innovative to a lot of other countries, particularly the emphasis that we are placing on participation and productivity. In part, that is because we do not face the same sorts of crisis that other countries do.

Indeed, not only is the magnitude of the problem for us much smaller, but we have a significant lead time before this really begins to bite. A lot of the thinking that has occurred internationally, until the very recent time—I think these IMF and OECD reports that you are citing may well reflect that consensus view—has been very much driven by a sense that Japan is already in crisis. The Japanese labour force has been shrinking since 1998. The Japanese population is forecast to shrink from 2006. Many of the European countries will find themselves in that situation within the next four to five years. Age dependency ratios in Italy and Germany hit 60 to 70 per cent. They are truly staggering numbers. We have seen that they have a history of being unable to grow very strongly anyway because of the structural inhibitions in the economy. It is just unrealistic for them to expect that they can get out of this problem.

We, on the other hand, have an economy that is delivering, because of 20 years of reform, very, very good growth rates. With continued emphasis on structural reforms to raise participation and raise productivity, we think we can actually get out of this with much less angst than many other countries. The work that has been done to date seems very much to reflect the enormity of the problem confronting Western Europe and Japan. Dr Gruen has done quite a lot of work on this. Is there anything you want to add to that?

Dr Gruen —Not at this stage.

Senator CONROY —There is no disputing the productivity and participation elements. What we are talking about is whether we need to do more.

Dr Parkinson —Would we need to do more?

Senator CONROY —Whether you need to do more. You seem to be arguing no, it is not a crisis, it is a concern and, therefore, there is not the need for an extra step.

Dr Parkinson —It depends on how much we are prepared to do. If we were to achieve an increase in GDP per capita of around half a percentage point relative to what we were anticipating in the Intergenerational Report, we would essentially close the gap or that sort of ballpark. Something in the region of half a percentage point increase in GDP per capita relative to what we were anticipating in the IGR. In other words, still an easing back in GDP per capita from what we have achieved over the last 40 years probably fixes the issue for us.

Dr Gruen —It goes close.

Dr Parkinson —It goes very, very close. Let me also pick up a point. There are different types of intergenerational funds. There is the sort that says, `I'm going to raise my tax to GDP ratio today and put that aside' and there is the sort that says, `Well, if there's windfall gain, I'll put that aside but making sure I don't raise the tax to GDP ratio' from whatever your target might be. I am not aware that the IMF or the OECD was drawing any distinction between them. In fact, my understanding is that when they have talked about this they have been actually implicitly talking about raising your tax to GDP ratio today. In other words, that is taxing the current generation in order to pay for expenses in the future.

Senator CONROY —That may be why there is some confusion. I want to move on to that being maybe the difference—that we are not getting enough definition in the debate. I am hoping we can tease that out. I want to move to Dr Henry's recent speech to business economists. In it he presents two of the options to deal with future fiscal pressures as increasing taxes and cutting spending. Dr Henry quotes Ross Gittins, who says:

... you might have thought he'd—

the Treasurer—

want to salt away any surplus revenue he came by—as the New Zealanders are doing—so as to ease the pressure later on.

It should be clear from this statement that Mr Gittins is clearly talking about what you do with surpluses we have today. Is that a fair representation? Certainly that is my reading of Ross Gittins's comments.

Dr Parkinson —We are on?

Senator CONROY —Sorry, but I do not have a page reference, Dr Parkinson.

Dr Parkinson —So what the secretary says is this:

The first approach is to lift the average tax burden over time to fund higher public spending as it emerges. There is also a more extreme version of this approach, which `front-loads' the tax burden. It would hold the average tax burden higher than it needs to be to fund current spending, in order to build up a `war chest' to fund future budgetary pressures.

Senator CONROY —Thanks, Dr Parkinson. What I am just trying to do is get to Dr Henry's quote from Ross Gittins. Have you got that there?

Dr Parkinson —Yes.

Senator CONROY —What I am confused about is what Mr Gittins is referring to directly when he says `salt away any surplus revenue'.

Dr Parkinson —That is ambiguous because it does not explain where the surplus is coming from. I would defer to others. My understanding is what the New Zealanders are doing is actually running a primary budget surplus all the time in order to be able to put money away. In other words, they are adopting what we are referring to as the non-pro-growth approach to an intergenerational fund, which is to increase the tax burden today and use it to build a fund.

Senator CONROY —I can understand why Dr Henry might take that interpretation. I have a slightly different one. Given what you have explained, I can understand that. Does necessarily putting funds aside from a surplus require higher taxes today?

Dr Parkinson —Well, it depends what you do, in a sense. We have put funds away from the surplus every time we run a surplus because we are reducing net debt. But my understanding—again, I am open to correction on this—is that New Zealanders have decided that, irrespective of what they think the outlook is for the economy, they are going to run policy that much tighter in order to generate a chunk of revenue that can go into their intergenerational fund.

Dr Gruen —Yes, that is true.

Dr Parkinson —So essentially—

Senator CONROY —So they are not running a budget balance over the cycle?

Dr Parkinson —No. Essentially, they are running a budget surplus over the cycle. I am not sure of the exact detail. I do not know whether it is a surplus on average or whether it is a budget surplus in a structural sense every year.

Senator CONROY —If you accidentally end up with a budget surplus every year rather than the stated objective, what does that mean? What is the difference?

Dr Parkinson —I think it depends what the criteria you want to use around setting your fiscal policy. If you start from a position that says, `I don't want to increase the tax to GDP ratio' from whatever number it is and you end up with an accidental surplus and the tax to GDP ratio has risen, it sounds to me that, in a sense, you are pre-committed to trying to give that money back. If it turns out that you run a budget surplus because you are surprised that you have more revenue but you have not actually gone above your tax to GDP peak, again, you can give that back or you can do something with it.

Senator CONROY —So on the one hand you can say, `Right, we're going to run the surplus. We're not aiming for balance over the cycle. We're just going to run surpluses for 10 years,' or whatever?

Dr Parkinson —You could do that.

Senator CONROY —So that has a particular implication to you and Dr Henry. But if you just say, `We're going to run a budget balance over the cycle,' and you end up running surpluses every time, there is a difference?

Dr Parkinson —Let me try again, because I think we are getting a little confused here. Let us make this as simple as possible. Let us start from a situation where revenues equal outlays, so outlays to GDP are the same. You make a commitment that you did not want to run a tax to GDP ratio higher than what you have already got. If you were then to run surpluses into the future and use those surpluses to fund an intergenerational fund, the only way you can do that is to cut outlays as a share of GDP. Now you could then find yourself in a situation where you are cutting outlays as a share of GDP because you have made a conscious decision to cut outlays. I was saying earlier that there is a political economy about that that people would want to think about. In a sense, it implies that potentially some of the outlays being made before you started on this policy might actually be less than optimal. You could find yourself in a situation where, as the economy grows, revenues grow in line with it but outlays grow less, which would give you surpluses which you could then do something with because you have not violated your tax to GDP ratio. Then it is a question of whether or not giving those surpluses back or using them in some other way would generate faster growth and give you greater scope than you would get from putting them aside into some intergenerational fund.

Senator CONROY —Right now we have a surplus. You do not have to increase taxes at all to put funds aside right now.

Dr Parkinson —No. The way the funds are being put aside is—

Senator CONROY —That is not what I am asking. We have surpluses forecast over the entire forward estimates. So you do not have to raise a single tax to put money away into an intergenerational fund.

Dr Parkinson —You could do that. You are not raising the tax to GDP ratio. The question you would want to ask yourself—

Senator CONROY —Well, the government is not doing that, is it?

Dr Parkinson —No.

Senator CONROY —It has surpluses into the next three years. It is not raising the tax to GDP ratio in achieving these surpluses over the next three years.

Dr Parkinson —No. That is what I am saying. If you have decided that you do not want to raise the tax to GDP ratio, you have decided that that is one of your binding constraints, then you actually have surpluses being accumulated. One of the issues that any government would need to consider carefully is whether you could use them in such a way as to generate faster growth in the future and thereby help address the future fiscal gap or put that money aside.

Senator CONROY —So I have not increased taxes and I have not had to cut expenditure and I have still been able to put aside money away from the surpluses. There were no tax cuts and no expenditure.

Dr Parkinson —That is what you are saying.

Senator CONROY —What are the options?

Senator MURRAY —There is one other method by which you can generate greater income, and that is by moving real rates towards nominal rates.

Dr Parkinson —The real rates of?

Senator MURRAY —Of taxation towards nominal rates. The unused capacity for taxation is the area of tax avoidance. As you know, the Treasurer has invested considerable sums of the ATO in the belief that an expenditure, I think, of $300 million will generate, I think from memory, $1.5 billion. Now that is exactly that process. There are other mechanisms going on in the economy to ensure that the spare capacity is realised by greater taxation efficiency methods and greater enforcement. If I may interject, that is another way you can get several billion more without altering the rates.

Dr Parkinson —That is without altering your tax rates. But you would end up with a higher tax to GDP ratio.

Senator MURRAY —You will get a higher tax ratio. That is exactly right.

Dr Parkinson —But it depends on what you decide. This is all predicated on deciding to have a binding constraint.

Senator CONROY —I cut you off as you were going to, as always, jump ahead of me with your answers before I have asked my questions, Dr Parkinson. What are the options with the surplus currently? What do we do at the moment?

Dr Parkinson —We can return it through tax cuts, we can use it to pay down additional debt or it can be used to increase outlays. Remember that when we find a surplus in actuality it is history; it has happened. The question is: where do you go? What do you do with it? It is not a case that at the end of the year you find yourself sitting there with $2 billion in loose change. It has already gone.

Senator CONROY —You hope not, just because Treasury have underestimated the revenue forecast. But you hope that is the case. You do not get up one morning—

Dr Parkinson —Statement No. 5 has an interesting discussion on why revenue elasticity looks quite interesting at the moment. If you have not read it, I think it is well worth a read.

Senator CONROY —You mentioned one of those options being reducing debt.

Dr Parkinson —One option would be to reduce debt.

Senator CONROY —We cannot go much further in reducing debt, though, because of our commitment to the bond market.

Dr Parkinson —We can. There is no constraint on reducing net debt. The bond market is actually about the Commonwealth government securities on issue. You can have $50 billion or $60 billion of Commonwealth government securities on issue and run up financial assets elsewhere. So your net debt is three per cent of GDP.

Senator CONROY —We have had too many ad lib conversations about net debt, Dr Parkinson. But please keep going.

Dr Parkinson —Your net debt is three per cent of GDP even though your Commonwealth government securities on issue may well be seven, eight or nine per cent of GDP.

Senator CONROY —Yes, but the markets have argued that there is a liquidity issue when you start falling below about $60 billion. Some would say $60 billion and others would say $30 billion or $40 billion, but there is a point where liquidity—

Dr Parkinson —The government has made a decision to maintain the Commonwealth government securities market.

Senator CONROY —At what level?

Dr Parkinson —At around the levels—

Senator CONROY —It currently is?

Dr Parkinson —At around the levels that it is at now. If there is any evidence that difficulties emerge as the size of the market changes, it will respond to that. But that is quite separate. You can issue those Commonwealth government securities into the CGS market—

Senator CONROY —Against an asset.

Dr Parkinson —That is right.

Senator CONROY —Like, say, an intergenerational fund.

Dr Parkinson —That asset could be just—

Senator CONROY —An intergenerational fund.

Dr Parkinson —Actually, it depends. An intergenerational fund will not offset net debt unless it was all held in the form of financial assets.

Senator CONROY —Yes. But it depends what you mean by financial assets.

Dr Parkinson —In a sense, we are already in a situation where we have—I cannot remember the exact number—in the region of $50 billion on issue in the Commonwealth government securities market. We have only three per cent of GDP in net debt, which is only about $24 billion. The rest is because we are holding other types of financial assets, some of which is cash at the Reserve Bank, in order to smooth our liquidity profile through the course of the year.

Senator CONROY —Provided the intergenerational fund was a financial asset, that would work?

Dr Parkinson —It is in a sense—

Senator CONROY —It is the maths, really.

Dr Parkinson —You then begin to find yourself in a situation, as the government has said it would look at, where if assets at the Reserve Bank went above $25 billion it would be considering whether or not it should start to hypothecate some of that away or address the unfunded superannuation liability.

Senator CONROY —Sure.

Dr Parkinson —Let me just be a little clear on this, though. What you are talking about as an intergenerational fund now is not the New Zealand model.

Senator CONROY —No.

Dr Parkinson —In the New Zealand model, you actually raise the tax to GDP ratio today. What you are saying is—

Senator CONROY —Given this is the highest taxing government in Australia's history, I really do not fancy going to the public arguing that. You would be correct in your assumption.

Dr Parkinson —What you are saying here is that you are precluding giving back the surpluses in the form of tax cuts.

Senator CONROY —I am not precluding anything.

Dr Parkinson —To build an intergenerational fund—

Senator MURRAY —You will get into trouble.

Dr Parkinson —Senator, I am not—

Senator CONROY —I am not going to let you put words in my mouth, Dr Parkinson. As I said, I enjoy always listening to you ask questions and then answer them yourself, but not in this case.

Dr Parkinson —Let me rephrase that then.

CHAIR —You can work on the presentation, Senator Conroy. I think you can give it a bit of thought.

Senator CONROY —I do not think that is what he actually asked me.

CHAIR —I think your words were, `We are not precluding anything.'

Senator CONROY —I do not think so, but it was a good try. I do not even think it was a good try. Dr Parkinson, perhaps I can go back to answering the questions—or asking them.

Dr Parkinson —I am happy for you to answer the questions.

CHAIR —Dr Parkinson, I think you should be on this side of the table and ask them.

Senator CONROY —You do not need to raise taxes if you are starting with a surplus.

Dr Parkinson —If what you are doing here is simply keeping those accumulated surpluses—in other words, you are precluding any decision to hand them back and you are precluding any decision to increase spending in other ways over and above what you have in the forward estimates—you are automatically going to end up accumulating those surpluses, and those surpluses will show up if they are held in the form of financial assets as a reduction in net debt.

Senator Coonan —And you have to run deficits in bad times.

Dr Parkinson —If you then go to spend out of that fund, you are essentially running outlays ahead of revenue, so you are running a deficit at the time that you spend.

Senator CONROY —I think you are making a whole range of assumptions as you go along there, Dr Parkinson, but I did not want to interrupt your flow. I thought I would move on. I have probably another hour.

CHAIR —Senator Conroy, we are going to adjourn at 11 o'clock.

Senator CONROY —Senator Murray was just asking me how long I was going to go. I was just indicating that this means you will be spilling over until tomorrow.

CHAIR —Senator Murray, do you have 10 minutes worth of questions?

Senator MURRAY —No, I do not. I was just trying to work out tomorrow's program.

CHAIR —You keep going, Senator Conroy.

Senator MURRAY —Just as an aside, I thought he was coming to the end.

Senator CONROY —I appreciate that consultations on the discussion paper are to be held throughout May and June.

Dr Parkinson —Is this the demographics discussion paper? In that case, I suggest you direct that question to Mr Murray. Mr Murray was the chairman of the government's demographics task force. I am more than happy to chance my arm at answering the questions, but—

Senator CONROY —But I do have some process questions more than content.

Dr Parkinson —You had still better address them to Mr Murray.

Senator CONROY —I will come back to the process questions for Mr Murray tomorrow. I draw to the attention of Hansard that you highlighted with your hand passes.

Dr Parkinson —I am sure Mr Murray will be aware of them before he arrives.

Senator CONROY —In his recent speech, the secretary raised an important issue, commenting that while the pro-growth strategy does not take a view on aggregate public spending per capita it most certainly does take a view on the individual components of public spending, including the type and geographical location of infrastructure spending. It evaluates public spending programs in terms of their implications for GDP per capita growth. I want to make sure I have something clear here. When you talk of the pro-growth strategy, are you describing an ideal strategy according to Treasury or are you describing the government's approach?

Dr Parkinson —I will just find the context of what the secretary said. Can you read the quote again?

Senator CONROY —While the pro-growth strategy does not take a view on aggregate public spending per capita, it most certainly does take a view on the individual components of public spending, including the type and geographical location of infrastructure spending. It evaluates public spending programs in terms of their implications for GDP per capita growth. I was asking: when you are talking about this pro-growth strategy, are you describing an ideal strategy according to Treasury or are you describing the government's approach?

Dr Parkinson —I think we are talking about a strategy that is predicated around growth that actually helps us address the fiscal gap. As such, one sees in this budget the government committing itself to a pro-growth strategy. If a pro-growth strategy is to be effective, it will by necessity need to address public spending programs in terms of what they can do to enhance productivity and participation. So what the secretary is saying is in terms of implications for GDP per capita growth.

Senator CONROY —Is the Secretary of the Treasury referring to the government's pro-growth strategy?

Dr Parkinson —I think that is a fair assumption to make.

Senator CONROY —That is not what I asked, Dr Parkinson.

Dr Parkinson —I am not trying to be cute. You are asking me about a definite article as against an indefinite article. One can think of it being a set of public policy choices that will enhance productivity and participation that will allow us to—

Senator CONROY —So he is not talking about the government? Pork barrelling in marginal seats does not count?

Senator Coonan —Senator Conroy, that is a totally uncalled-for statement.

Senator CONROY —I am just asking him to define what he is talking about when he says a pro-growth strategy.

CHAIR —I do not think it is fair to Dr Parkinson to expect him to respond to polemical rhetorical statements like that. Now go to your next question, Senator Conroy.

Senator CONROY —I have moved on. I am asking him to define what the pro-growth strategy is.

Dr Parkinson —You can have a range of options that you could adopt to enhance participation or productivity that could give you an outcome that closed the fiscal gap. The government has adopted a pro-growth strategy. It has already started down a route that is picking out some of those choices. But there are many more choices that will be in front of it and it will have to make decisions in the future when it comes to address those issues. I am not being cute in saying that there is an ideal one and there is the government's one. In a sense, there is a pro-growth strategy which has a lot of choices in it. The government has already started to make some of those choices but with the ultimate aim of—

Senator CONROY —Getting elected being the ultimate aim.

CHAIR —Again, Senator Conroy—

Senator CONROY —It is late.

CHAIR —these are inappropriate animated versions on your part, which—

Senator CONROY —I apologise to Dr Parkinson, as always, and I accept your admonishments.

Senator Coonan —Senator Conroy, this is becoming like a stream of consciousness instead of questions and answers.

Senator CONROY —It certainly is a stream of consciousness.

CHAIR —Minister, it is Senator Conroy's time. If he chooses to waste it, it is a matter for him. I am only here to protect the witness. Senator Conroy, you have two minutes. Away you go.

Senator CONROY —A few years back, the Victorian government established an infrastructure planning council to provide independent advice on infrastructure priorities across sectors. Are you familiar with that one, Dr Parkinson?

Dr Parkinson —No, I am not.

Senator CONROY —A similar mechanism—a national infrastructure advisory council—has been recommended by a number of infrastructure groups, including the Australian Council for Infrastructure Development, the Institute of Engineers, the Business Council. Are you familiar with that?

Dr Parkinson —No, I am not.

Senator CONROY —Through what mechanism is the transparent cost-benefit analysis of infrastructure alternatives undertaken at the Commonwealth level?

Dr Parkinson —Again, I am going to offer that one to Mr Murray.

Senator CONROY —You're not!

Dr Parkinson —I am. But I would make the observation that infrastructure is one of those issues that is bedevilled by the issue that Senator Murray raised, which is the difficulty of operating across jurisdictions. One of the ironies is that Commonwealth funds infrastructure and it appears in the states' balance sheets. Related to that is the difficulty of coordinating infrastructure provision across state boundaries. So it is very much the same type of issue that Senator Murray was raising about industrial relations.

Senator CONROY —I want to chance my arm once more to see if you drop Mr Murray in it once again.

Dr Parkinson —I could pre-commit Mr Murray.

Senator CONROY —I would like to go to box 2 on page 3-20 of Budget Paper No. 1, which looks at the growth in infrastructure investment in recent years, particularly by the private sector under the public-private partnerships. It states:

While vehicles such as PPPs are an increasingly important component of business investment, important public policy issues around the appropriate management and allocation of risks in such projects remain.

Is Mr Murray in the frame or can I keep going?

Dr Parkinson —You can keep going.

Senator CONROY —I would like to explore Treasury's view of these issues in more detail.

Dr Parkinson —Then I would suggest that you want to talk to Mr Murray.

Senator CONROY —And I think that is an entirely appropriate moment to pull stumps.

CHAIR —I was just going to say that I think on that note we will adjourn for the evening. We will resume this evidence and we will hear, no doubt, from the much-anticipated Mr Murray as well tomorrow.