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Wong, Sen Penny
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Ms J Wilkinson
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Economics Legislation Committee
(Senate-Friday, 6 May 2016)
Department of the Treasury
Ms J Wilkinson
Australian Securities and Investments Commission
Australian Competition and Consumer Commission
Ms de Gruchy
- Department of the Treasury
INDUSTRY, INNOVATION AND SCIENCE PORTFOLIO
Department of Industry, Innovation and Science
Dr B Williams
Commonwealth Scientific and Industrial Research Organisation
- Department of Industry, Innovation and Science
- TREASURY PORTFOLIO
Content WindowEconomics Legislation Committee - 06/05/2016 - Estimates - TREASURY PORTFOLIO - Department of the Treasury
Department of the Treasury
CHAIR: I welcome the Minister for Finance, Senator the Hon. Mathias Cormann, representing the Treasurer; Secretary of the Treasury, Mr John Fraser; and other officers. Minister or Secretary, would you like to make an opening statement?
Senator Cormann: I do not, but the Secretary of the Treasury does.
CHAIR: I would be very pleased to hear from you, and I am sure other senators would too.
Mr Fraser : Thank you very much. I understand copies of the statement are being circulated to senators. If it is all right, I will read through it. It is a short one.
Since I last appeared before the committee, forecasts for the Australian economy have been updated in the budget. In essence, the budget forecasts indicate that the Australian economy continues to transition from mining investment led growth to broader based growth. But real GDP is forecast to be below potential over the next two years, at 2½ per cent in 2015-16 and 2016-17, and then to strengthen to three per cent in 2017-18 as the detraction from falling mining investment eases. Over the following two years, real GDP is projected—importantly, not forecast—to increase by three per cent per annum. The economy is already benefiting from rapidly rising mining export volumes, and this is set to continue as more LNG export capacity comes online. Mining export volumes are expected to increase by more than 20 per cent over the forecast period.
In the midst of this transition, and as noted at our most recent hearing, the labour market has been remarkably resilient. The labour market has performed better than expected at the 2015-16 MYEFO. Employment growth has been supported by moderate wage growth and the transition to more labour-intensive sectors of the economy.
Inflation outcomes so far appear to have been weaker than forecast in the 2015-16 MYEFO. Consumer price inflation in the March 2016 quarter showed broad based weakness. That was reflected in the very weak underlying inflation outcome. In that context, the Reserve Bank board decided to reduce the cash rate by 25 basis points to 1.75 per cent. This is the lowest setting on record.
Reports from across Australia indicate that activity in New South Wales and Victoria remain strongest, while activity in Tasmania has also picked up. The Northern Territory and the Australian Capital Territory are performing reasonably well, and Queensland is performing better than expected a year ago, supported by a pick-up in construction around Brisbane. South Australia continues to remain soft, and there are clear signs that activity in Western Australia is weaker than expected.
Globally, growth is forecast to be weaker than at the 2015-16 MYEFO. The United States has had a slow start to the year, but there are tentative signs of a pick-up in Europe. China's growth continues to moderate, but remains relatively strong compared with most other major economies.
I want to focus my comments today on the risk to the global outlook—the risks to the global growth outlook at present in both advanced and emerging market economies as global uncertainties increase. This message was made clear at the latest meeting of the G20 finance ministers and central bank governors in April, where the outlook for growth was assessed to remain modest and uneven.
As also noted previously, significantly for Australia are the uncertainties around the implications of the transition in the Chinese economy from investment-led to consumption-and-services-led growth, given the exposure of Australia and its major trading partners to China. And while China's economic transition is expected to contribute to more sustainable growth over the longer term, Chinese domestic consumption and a growing service sector is unlikely to fully offset the decline in investment and a slowing industrial sector in the near and medium term.
There will be opportunities for Australia in this transition. Our past trade has predominantly been focused on demand for commodities. Trade with China as it transitions to a consumer-led economy will be more focused on demand for our services. We also expect a growing investment relationship with China, building off a strong base and further boosted by the China-Australia Free Trade Agreement. A sharper-than-expected slowdown in Chinese growth, however, would have significant implications for our economy and for the region. This is because China is Australia's No. 1 export market and import supplier. But globally, China is one of the main trading partners for more than 100 economies, which account for about 80 per cent of world GDP. So a slow in China will have far-reaching effects around the world.
There are risks of renewed volatility in financial markets, which we saw earlier this year. That volatility can reflect concerns in equity and credit markets as to whether the outlook for current global growth will be strong enough to drive corporate earnings and maintain low default rates in order to sustain current valuations. Such bouts of volatility have adversely impacted the financial conditions faced by businesses and households in key global economies.
Banks globally also continue to hold more capital than they did prior to the global financial crisis. However, a number of major economies continue to face financial challenges, particularly in the euro area, in Japan and in a range of emerging market economies. Significant debt has been raised in recent years, particularly in emerging markets, which could also create challenges for both borrowers and lenders in a continued low-global-growth environment.
Inflation remains low globally, reflecting in part the impact of low energy costs. I expect inflation in major advanced economies to remain below policy targets for at least the near term, and monetary policy in major advanced economies to remain accommodative for some time yet. Significantly, expectations for further US federal reserve rate rises have been pushed out a little. There is also the risk that low inflation, coupled with low wages growth and low productivity growth experienced in many advanced economies could become embedded in lower potential growth over time. Estimates for long-run potential global growth are also being reconsidered by official forecasters. This partly reflects the ongoing legacy of the global financial crisis, which has long-lived effects on investment in productive capital and on labour markets in advanced economies. Potential growth was slowing even before the financial crisis.
Contributing to low productivity growth and declining potential growth is the significant transition underway in global demographic conditions. The global population is growing more slowly. As fertility rates fall and people live for longer, populations are growing older. A number of countries, including Japan, China and Germany, are confronting declining working age populations. There is also uncertainty about the effect of oil prices on global growth. This is because the response to lower oil and energy prices in 2015 has not been as strong as might be expected based on historical experience. Factors likely to have muted the positive net impact of lower prices on global growth include lower global energy investment and a smaller than expected increase in global private consumption—perhaps as consumers save part of the windfall from lower oil prices.
In summary, it is all very uncertain on the global front. The budget shows that the Australian economy continues to transition from mining investment-led growth to broader based growth. As a still relatively small open economy, global economic conditions are very important to Australia's economic outlook. The fact is that global economic conditions continue to be challenging.
On another matter, Treasury's standard practice is not to release costings beyond the forward estimates or for the medium term. On this occasion, the Treasurer has authorised me to provide to the committee the medium-term estimate of the cost to the budget, of lifting the small business entity threshold and reducing the company tax rate to 25 per cent by 2026-27. The cost of these measures to 2026-27 is $48.2 billion in cash terms. These estimates have been incorporated into the budget's medium-term projections for tax receipts. I note that, as with all tax projections over 10 years, these costings have considerable uncertainty attached to them. I also note that the medium-term economic projections in the budget assume significant ongoing economic reforms.
Finally, I note that the Treasury has estimated that the government's tax package is estimated to increase the level of GDP by a little over one per cent in the long term.
CHAIR: Thank you, Mr Fraser. I guess the big question has been answered there with the company tax rate over the next 10 years, and it is good to see it detailed there. Before we go to questions generally, this low-growth international environment that we are in, what are the short-term policy dangers? Are there any bear traps here for us in Australia, if we are not vigilant in this global low-growth environment right now?
Mr Fraser : It is an issue which I know is being looked at in a major study by the Reserve Bank. We ourselves started the study some time ago to look at: what if? The issue about low growth is very fundamentally that it will have an impact on employment over the longer term. We can possibly expect unemployment rates to be high around the world. Just as importantly with growth, lower living standards, or the growth and living standards, will be constrained, and I think that will put pressure, particularly on countries in Europe with some of the broader population movements they are having to deal with.
There is a challenge for policy makers as a number of commentators and the governor have recently indicated. What is the role of monetary policy in this environment? I do not think many—there may have been some, but I am not aware of them—people really contemplated a world where negative interest rates would be common in Europe, in Japan and in Switzerland. To operate monetary policy in this environment is really taking us into new frontiers. It was hard enough doing it when things were more normal; I think it is going to be more difficult in this low inflation environment. We have seen the dangers with Japan, who have had a low growth environment and low inflation environment for over 20 years now, and we have to be very mindful of it. One thing we have to be very careful of is not getting too depressed about it all—the business cycle has not been uninvented, and we have to be careful that we do not extrapolate from current or recent conditions on a long-term basis. The story about forecasting over the past couple of decades is that we have not been very good at picking turning points. I hope we improve on that, but I remember my own experience in the early 1990s when we were pleasantly surprised that the economy came back so quickly in 1992-93, and this was well prior to the mining boom. So we have to be careful. We have to realise there is a thing called the economic cycle but, equally, we have to be prepared for a different environment going forward.
One thing that has already shown up with us is the impact on revenue. A key determinant of revenue is nominal GDP, not real GDP, and that has made us and other countries more alive to the fact that the revenue yield may not be as great as we may have thought a year or two years ago. So there are challenges aplenty. We have clearly learnt from the GFC, we have clearly learnt from that experience in the 1990s but, that said, there is a lot of new ground to be wrestled with, and I would not pretend that there is a definitive set of answers. Mr Ray was at the G20 meetings in Washington recently, and it is certainly the case that the international institutions are very mindful of these concerns. The managing director of the IMF has been vocal about it, but we also have the OECD. I know that is a rambling answer. I wish I could give a definitive answer, but it is certainly very much on our minds.
Senator WONG: Mr Fraser, you are the centre of attention, aren't you—$48.2 billion is the cost?
Mr Fraser : Yes.
Senator WONG: Firstly, I have a process question. Thank you for your opening statement; can you tell me when the decision was made to put the 10-year cost of the company tax cuts into your opening statement?
Mr Fraser : Late yesterday afternoon.
Senator WONG: Who made the decision?
Mr Fraser : The Treasurer.
Senator WONG: Can you tell me: did he inform you to put it in?
Mr Fraser : Yes, I spoke with him. Or he spoke with me, rather.
Senator WONG: Was it at your suggestion that the 10-year cost be included?
Mr Fraser : No.
Senator WONG: So the Treasurer determined to put it in?
Mr Fraser : Correct.
Senator WONG: Was this discussion before or after question time?
Mr Fraser : It was about six o'clock.
Senator WONG: Six o'clock yesterday evening?
Mr Fraser : Roughly. Roughly.
Senator WONG: Can you confirm to me precisely which measures in BP2 are included in that $48.2 billion cost?
Mr Fraser : I will ask Mr Brake if he could do that.
Senator WONG: Mr Fraser, as a matter of courtesy—this is a very truncated estimates committee and, to make sure that we are efficient, there may be some questions which would benefit from having both fiscal and macro around, and perhaps even—is Mr Heferen still in the revenue division? No?
Mr Fraser : No, he is not with the Treasury anymore.
Senator WONG: I saw the announcement; I was not sure if it had occurred yet. Who is the Deputy Secretary Revenue? Oh—you? I am terribly sorry. So you are all here?
CHAIR: Have you got a nametag?
Mr Brake : Unfortunately I do not have a nametag.
CHAIR: Here he is. Yes, he does.
Senator WONG: I was going to say it would be useful to have Revenue, Fiscal and Macro Dep Secs all available. I think that would make things more efficient, if you are alright with that. Thank you.
Mr Fraser : Absolutely.
Senator WONG: Mr Brake—how are you?
Mr Brake : Good, thank you, Senator. The two measures that the secretary was referring to are the lifting of the small business entity threshold, which is on page 40 of Budget Paper No. 2, and reducing the company tax rate to 25 per cent, which is on page 41 of Budget Paper No. 2.
Senator WONG: Are there 11 measures in the Ten Year Enterprise Tax Plan? I think that is right. Is that correct? You can count. I am sure Treasury officials can count better than I can. I was looking at BP2, between pages 36 and 43.
Mr Brake : Yes, there are 11.
Senator WONG: And you have given us the costing for two.
Mr Brake : The aggregate cost of those two.
Senator WONG: But only for two. What is the total cost of the 11 measures over the decade?
Mr Fraser : I have not been authorised to release those.
Senator WONG: So the total cost of the government's plan is obviously going to be significantly more than $48.2 billion?
Senator Cormann: Actually, if you look at the budget papers, the overall effect of government policy decisions on the budget bottom line is an improvement of $1.7 billion.
Senator WONG: That was yesterday's line.
Senator Cormann: But that is actually—
Senator WONG: Today's line is $48.2 billion, Matthias. You have been dragged kicking and screaming to fess up.
Senator Cormann: Hang on, Senator Wong. I know that you want to look at one measure in isolation. I know that you want to claim higher taxes are savings, as if somehow they are spending reductions. But the truth is that, if you look at the fiscal effect over the forward estimates, as a result of policy decisions, we are improving the budget bottom line by $1.7 billion. That is because we have paid for all of the required additional spending with spending reductions in other parts of the budget.
Instead of using increased revenue from tax measures in one part of the budget to increase spending, we are using it to cut taxes in other parts of the budget in order to strength growth in job creation. You are proposing to tax more to spend more and to go into further deficit and debt; we are proposing to pay for our spending increases with spending reductions and to tax better without increasing the overall tax burden in the economy. In our judgement, increasing the overall tax burden in the economy would be exact wrong thing to do, given that we are currently in a transition from resource investment driven growth to broader drivers of growth.
Senator WONG: Senator Cormann, I am not going to engage in sequential political monologues such as the one you just outlined. I do not think that we are going to be lectured about fiscal responsibility by somebody who has tripled the deficit in two years.
Senator Cormann: That is a ridiculous assertion. We have improved the budget—
Senator WONG: I have questions of the secretary.
Senator Cormann: You have just made an assertion that I have to correct.
Senator WONG: I have questions of the Secretary of the Treasury.
Senator Cormann: Policy decisions taken by the government since we came to government have improved the budget bottom line at every budget and budget update. Obviously there are economic parameter variations and other parameter variations that have had an impact. There have been global headwinds and falls in terms of trade overall since we came to government. So, yes, that has had an impact which has been openly and transparently disclosed. But the policy decisions taken by the government on the things that are under our control have actually improved the budget bottom line, not detracted from it.
Senator WONG: Mr Brake, I understand the secretary's evidence is that you have only been authorised two of the 11 measures over the 10 years. Correct?
Mr Brake : Correct.
Senator WONG: So I will ask you a qualitative rather than a quantitative question. I will just go through BP2. It might be quicker. I assume that, over the 10 years, the measure at page 36, the 'Better targeting the deductible liabilities' measure, would be a net cost to the bottom line over the decade.
Senator Cormann: While Mr Brake is looking for that answer, this is probably an opportune time to remind you, Senator Wong, that when you were the finance minister—and I am quoting here from an interview you gave to ABC Insiders on 18 March 2012—you said: 'We don't release 10-year costings.' That was your quote. If you want to now go through a shopping list of measures which have all been costed consistently with the costing conventions over the four-year estimates period which is published in the budget paper, what I will do is take these questions on notice and consult with the Treasurer to see whether there is any other information we may be able to assist you with.
Senator WONG: Actually, we released 10-year indicative costings on NDIS and Gonski.
Senator Cormann: I am quoting directly from your interview on ABC's Insiders on 18 March 2012.
Senator WONG: I am so pleased you are very focused on what I say all the time.
Senator Cormann: We do always watch you very carefully.
Senator WONG: I will come to the tobacco tax, where the government also chose to release 10-year costings. I am actually not asking about 10-year costings. I have accepted Mr Fraser's evidence that he is not permitted by the Treasurer to release anything further on this one. I have accepted that. I actually was asking a qualitative question. I am not asking for a number; I am simply asking the obvious question because it is a hit to the bottom line over the four years. Would it be right to assume that that measure on page 36, the 'better targeting the deductible liabilities measure', would be a net cost to the budget over the decade?
Mr Brake : Clearly, it has a cost over the forward estimates. As the measure description says, basically, the previous government announced a measure to deal with these deductible liabilities. What the government is doing is modifying that measure to largely have the same policy intent, but the mechanism for achieving that is a little different. As the measure description says:
Over time (and after accounting for the deferred start date), the revenue gain from the two approaches will be broadly the same and hence the cost over the forward estimates period from the modification largely reflects a timing difference only.
Senator Cormann: To add to that answer I am going to refer members of the committee to Budget Paper No. 1 page 3-11. You will see there that there is a graph here which shows that the projected return to surplus is the same as it was before Christmas in our half-yearly budget update: 2020-21. The cost of all of the measures in this budget, where relevant, is of course reflected in our medium-term projections. What this graph shows is that over the medium term all the way to 2026-27 we are projected to remain in surplus based on the policy decisions and our current assessment of relevant economic parameters and other parameters. I understand the line of questioning that Senator Wong is seeking to pursue, but the plan the Treasurer delivered on Tuesday for jobs and growth, as you can see here, is actually affordable, funded and sustainable within our budget over the medium term.
Senator WONG: Mr Brake, is it a net cost or not over the decade? If I understood your answer, there is a timing issue hit to the bottom line over the first whatever number of years, and then essentially parity with the preceding position. Is that a broad summation? To my way of thinking, that is still a net cost over the decade.
Mr Brake : Senator, because of the nature of this measure and the fact that there are these timing issues, in terms of assessing the cost over the 10 years versus over the four years I would like to take that on notice.
Senator WONG: I am just trying to get a sense. I am not asking you how much; I am just trying to get a sense of whether it is budget positive or budget negative. That is all I am trying to get to. What about the next measure on page 37? Is it negligible?
Mr Brake : I think we assessed this as being unquantifiable.
Senator WONG: Same as with the next one, 'enhancing access to asset backed financing'? Negligible?
Mr Brake : Unquantifiable.
Senator WONG: Unquantifiable. Excise refund scheme for distillers—that would be a cost to the budget over the decade?
Mr Brake : That is an ongoing measure.
Senator WONG: One question I had on this is why it is flat. It is a $3 million cost in each year. I would have assumed there would be some variation in the take, which would be reflected in the—
Mr Brake : Sorry, can you repeat that question?
Senator WONG: Why is the excise refund so flat over the three years? It just seems unusual to have a revenue measure that does not vary at all.
Mr Brake : We round out our estimates.
Senator WONG: I am sure! How much are you [inaudible]!
CHAIR: Not $20 billion rounding errors, though.
Senator WONG: And the collective investment vehicles is a minor positive over the 10 years; would that be right?
Mr Fraser : Yes.
Mr Brake : Correct.
Senator WONG: You did not include, interestingly, the tax discount for unincorporated small business, which is the measure at page 40. This is the tax discount that an unincorporated small business can take. It is a reasonably significant cost over the forward estimates—$150 million a year from 2017-18. Do I infer that therefore this is going to be a net cost to the budget over the decade?
Mr Brake : That would be correct.
Senator WONG: You gave us the cost of the company tax rate. Can I just confirm it includes the totality of what is occurring in that measure—that that is it both the reduction in the rate and the increase in the threshold?
Mr Brake : Correct.
Senator WONG: The next one is 'unquantifiable'. The personal income tax relief, which is the income tax threshold increase—you have not included that. That is obviously a cost over the decade too. Correct?
Mr Brake : Correct.
Senator WONG: And then the final one, which is the wine equalisation tax, which I am sure Senator Edwards could talk a lot about, would be a cost over the decade. No—
Mr Brake : No.
Senator WONG: No, that is positive—
Mr Brake : That is a positive.
Senator WONG: isn't it, because we are tightening it. Yes. When did Treasury first arrive at the $48.2 billion cost? When was the figure that you have given today first generated?
Mr Brake : It would have been some weeks before the budget.
Senator WONG: And in relation to what other matters was a 10-year cost generated in relation to the totality of the Ten Year Enterprise Tax Plan? I am assuming, if you call something a 10-year plan, you are going to at least provide indicative costs of the 10-year plan, right?
Mr Brake : For those measures that do not mature over the forward estimates and where there is a significant change between the cost beyond the forward estimates and the forward estimates, we would have done costings up until the point where those costings mature. Basically, the way we do our medium-term projections is that once a costing is mature it falls into the overall revenue base, and then we grow that.
Senator WONG: I do want to talk about the medium-term projections and the picture that Senator Cormann keeps pointing to, but can I come to that later?
Senator Cormann: It is a very important picture.
Senator WONG: Yes. I am sure we could all point to many in past budgets.
Senator Cormann: This is a very important graph. It sums up the position that we were in after 2½ years of fixing the situation we inherited.
Senator WONG: Fixing!
Senator Cormann: When we came into government, we inherited a weakening economy, we inherited rising unemployment—
Senator WONG: Here goes the script! You tripled the deficit, Mathias; live with it! You are a hard fiscal man, you beat your chest—and you tripled the deficit and increased taxes.
Senator Cormann: and we inherited a deteriorating budget position on the back of unsustainable spending growth. The economy is now growing at three per cent—
Senator WONG: What happened to the hard fiscal man?
Senator Cormann: up from two per cent in your last year in government. The unemployment rate of 5.7 per cent is below what was previously anticipated when you lost government.
Senator WONG: Here we go!
And of course the budget position is on a believable track back to surplus on the same timetable as what we announced before Christmas in our half-yearly budget update. That is because we have continued to control expenditure, that is because we are cracking down on tax avoidance and that is because we are repairing the budget without increasing the overall tax burden, which would hurt jobs and growth and which would harm our current transition from resource investment driven growth to broader drivers of growth in a strong and diversified economy. That is what the Treasurer delivered on Tuesday as a plan for jobs and growth and a plan to put the budget on a sustainable foundation for the future whereas what Bill Shorten delivered last night was all politics, no plan. What Bill Shorten delivered last night was a push for $100 billion in additional taxes, which would hurt jobs and growth.
Senator KETTER: On a point of order, given that we have a truncated exercise today and given that the importance of scrutiny on the budget is paramount, I would suggest that ministerial monologues are—
Senator Cormann: On the same point of order, if Senator Wong has political swipes and makes inaccurate assertions, I will respond to those inaccurate assertions.
Senator WONG: How can you say they are inaccurate? You tripled the deficit. It is in your own budget papers. The 2014-15 budget compared to this year's budget—
Senator Cormann: That is an inaccurate assumption because we did not.
Senator WONG: No it is not. Have a look at your 2014-15 to this year's budget. You have tripled the deficit.
Senator Cormann: The policy decisions of the budget have improved the budget bottom line.
Senator WONG: He is just fibbing.
Senator Cormann: This is dishonest Labor spin.
CHAIR: I have a point of order in front of me. I will rule on the point of order: there is no point of order. The minister was talking about the budget, which was in context.
Senator WONG: Will I get to ask a question some time?
CHAIR: Senator Wong, you have the call.
Senator WONG: Mr Brake, I am paraphrasing you so correct me if I am wrong. You said, 'In relation to those costings which mature beyond the forwards, you do a medium-term costing.' Is that right?
Mr Brake : To prepare the medium-term projections, where a tax measure matures beyond the forward estimates and where it is sort of significant, we would, as a general rule, do a costing until that policy matures, which may mature over some time. It does not necessarily mature at the end of the 10 years.
Senator WONG: It might be longer.
Mr Brake : Or it might be shorter.
Senator WONG: I will come to the graph to step through. It is not a bottom-up generated model, is it?
Mr Brake : I can go through that.
Senator WONG: No, I want to come to that but can I just finish this point. Which were the costings that matured beyond the forwards? Did you undertake costings for time frames that differed from the forwards?
Mr Brake : Is that within the Ten Year Enterprise Tax Plan?
Senator WONG: Or more generally.
Mr Brake : To give you a full list of that, I would probably need to take that on notice.
Senator WONG: What about within the 10-year tax plan?
Mr Brake : Even there, I do not have that information to hand.
Mr Fraser : If I may, since January we have done roughly 500 tax and superannuation costings. Those would cover forwards, some of those would cover periods beyond the forwards and some of those would not reach maturity until well beyond the 10-year period. It is a huge number of costings. That is our job.
Senator WONG: I am going to ask you about the costs of the unincorporated small business tax discount over the 10 years.
Mr Brake : What was your question?
Senator WONG: The unincorporated small business tax discount, I am asking you to give me the 10-year cost of it.
Mr Brake : Because the discount increases after forward estimates, we would have done a 10-year costing for that.
Senator WONG: Yes, and I am asking you to give me the cost over the 10 years.
Mr Brake : We will need to take that on notice and refer that to the Treasurer.
Senator WONG: I am sure he will be helpful. Let's go to the chart or the picture. Let's just finish Mr Brake's evidence. As I understand your evidence, Mr Brake, for the purposes of what Mr Brennan's group does, you need to feed in essentially the revenue assumptions over the 10 years. Can you take us through how you do that and in particular how you aggregate different measures.
Mr Brake : I will do my best on this. We start with the current revenue. We then look at the various costings. We then, each year over the forwards, build up what the revenue is taking into account the starting point and those costings. And then once those costings have matured, that gets formed into the various base. For example, we have individuals tax or personal income tax, head of revenue; we have a superannuation head of revenue; GST head of revenue; excise head of revenue and so on. We then take parameters given to us by our macroeconomic group colleagues and from those parameters we can project forward how we think those revenue heads will grow over the medium term and then we provide those numbers to the fiscal group.
Senator WONG: Sorry, can you please repeat the last bit of what you said. I did not hear the last sentence.
Mr Brake : Once we have done our projections of tax receipts, we provide those to fiscal group and fiscal group then uses that information to construct the overall medium-term projections.
Senator WONG: Just to be clear on your projections of tax receipts, the model is not like bottom-up in the sense that we are going to individually cost all of these bits. Do you not come to a view about what the various heads of revenue are likely to generate over the medium term in aggregate?
Do you understand what I am saying? It is a model which makes assumptions about broad changes in revenue but it is not so granular as to be able to say, 'If we took this little measure out, there would be this really large deviation' or is it?
Mr Brake : We do attempt to take into account all government policy in constructing it. At the head of revenue level, we use broad parameters. Typically we do not have lots and lots of parameters which feed into, say, the company tax projections but there are some.
Senator WONG: Mr Brennan has given you the revenue base. What do you call it? What was the overarching term you used? Projections of tax receipts over the 10 years.
Mr Brake : Yes.
Senator WONG: What do you then do?
Mr Brennan : We would then take the data from revenue group and put it into our medium-term model. That model, in essence, takes the projections for receipts of revenue—they are receipts because it is an underlying cash measure—that we have received from the revenue group. We match that up with some expenditure projections, which would have largely a similar process but coming off what is in the forward estimates—we are in the last year of the forward estimates—making some allowance for government policy, where policy is having a significant impact on potential medium-term growth in payments, but also using a kind of projection methodology in relation to a number of payments. There might be some payments that are broadly expected to grow in line with nominal GDP; others might have a different indexation rate by virtue of government policy et cetera. We would essentially project those out.
One key projection assumption that we make in putting this chart together is that the tax-to-GDP ratio, once it gets up to 23.9 per cent, is then assumed to flatline at that level. That is only a projection assumption. It is not a reflection of government policy; it is something that we have had for some time built into the framework just to reflect the tendency of government over time to not allow the tax-to-GDP burden to grow as it would in an unconstrained way. At the moment, that tax-to-GDP cap kind of cuts in about halfway through the projection period in 2021-22.
Senator WONG: Do you make an assumption about expenditure growth per year? Is that fed in as well as a—
Mr Brennan : We make assumptions about expenditure growth in individual lines.
Senator WONG: So there is not a top-down assumption about growth in spending per year?
Mr Brennan : It is fairly top-down but for some individual categories. There would be individual programs where a level of indexation might be reflected.
Senator WONG: Sure, but I wonder—
Senator Cormann: We did not do what Labor did, which was impose an artificial two per cent cap, which Labor knew they would not actually reach but which then completely misrepresented the numbers over the medium term—I think you know exactly what I am talking about.
Senator WONG: You are a higher spending than we were, Mathias—higher taxing, high spending and higher deficit.
Senator Cormann: You imposed a two per cent cap which was artificial and theoretical—
Senator WONG: You can keep trying to divert, but you are spending more and taxing more—
Senator Cormann: and you knew in practice was not going to be complied with.
Senator WONG: and you have more debt.
CHAIR: Senator Wong.
Senator Cormann: That made your medium-term projections artificially look better than what they actually were going to be.
Senator WONG: You are spending more and taxing more and you have more debt.
Senator Cormann: That is not true. We have returned to the—
Senator WONG: Have a look at the historical tables in BP1. Can I get back to asking questions?
CHAIR: The sooner you stop interjecting—
Senator Cormann: We have stopped the spending as a share of GDP trajectory that we inherited from Labor and we are now bringing it down.
Senator WONG: You are spending more than I did, Mathias. You are taxing more—higher spending, higher taxing and higher deficits.
Senator Cormann: We inherited a trajectory to 26.5 per cent spending as a share of GDP and we have now stopped that at 25.8 per cent.
Senator WONG: He does not like the facts. Can I ask questions?
CHAIR: Senator Wong.
Senator WONG: Do you generate any assumption about spending growth or is it just an aggregate of your spending assumptions for a range of areas of government?
Mr Brennan : There are a range of line items on the expenditure side which would have different expenditure growth assumptions associated with them. There would, for example, be a line for Defence which would reflect the commitment in the defence white paper around a particular level of spending over the medium term. Where governments have made explicit decisions about the indexation on particular payments, that would be reflected and some would reflect nominal GDP, for example, as a kind of default.
Senator WONG: I am glad you raised nominal GDP because I was going to ask a question about that. Is it okay, Mr Fraser, if I flick to that, particularly while you are here?
Mr Fraser : Sure.
Senator WONG: The assumption in the budget is that nominal GDP growth, which, as you know, has been lower than historically, increases quite markedly in one year—2.5 per cent for the current year to 4¼ and then five per cent in the remaining three years of the forwards. I invite you to explain that, because it does seem to be contrary to what we have observed over a number of years. It also seems to be contrary to what some in the market are saying and it is a reasonably significant increase in nominal GDP forecasts and projections.
Mr Fraser : I will ask Mr Ray to respond. I just note that the two five per cents, in 2018-19 and 2019-20, are projections.
Senator WONG: That is, they are not as accurate?
Mr Fraser : They are projections; they are not forecasts.
Senator WONG: I know, but they are in the budget and they have a significant—
Senator Cormann: They are based on the best available information at this stage.
Senator WONG: Really? I have not even asked a question.
Senator Cormann: That is what you do with projections. You base them on the best information that is available to you at the time.
Senator WONG: Nominal GDP has a material effect on the budget bottom line—
Mr Fraser : Absolutely.
Senator WONG: because your assumptions around that are going to affect pretty much every head of revenue. Correct?
Mr Fraser : Correct.
Senator WONG: Therefore, a more optimistic nominal GDP figure absent of any other variable is going to make your budget look better.
Mr Fraser : Correct.
Senator WONG: So I am asking you to explain to me how we can get to five per cent in the out years.
Mr Ray : I will divide my answer into two. It is the case that, in 2017-18, we are forecasting nominal GDP to be growing at five per cent. That is principally because we are forecasting a pick-up in real GDP growth in that year. There are a range of factors. One is the detraction from real GDP growth that is coming from the fall in the growth in mining investment. That is unwinding by 2017-18. Second, by 2017-18 we have a strong contribution from net exports. In particular, we have major LNG projects that are coming on stream over 2016 and into 2017-18. Also, we have consumption growth picking up next year. We have non-mining business investment picking up across the forecast period as well. So a range of factors have us forecasting real GDP growth in 2017-18 half a percentage point higher than 2016-17. In addition, we have inflation in prices accelerating in 2017-18, both consumer prices and wage prices, although the GDP deflator is growing at the same rate—1¾. So it is a forecast that is built bottom up in 2017-18, and we get to five. That is the forecast.
Beyond the forecast, as you said, we are into the projection period. As I think we have discussed previously, we have actually lowered our view of nominal GDP in the projection period in the last six months or so. That stems from some recalculation we have done of the size of the output gap and the potential growth rate in Australia.
Senator WONG: You have only lowered it in one year, the 2018-19 year, because it was 5¼ for 2018-19 in MYEFO.
Mr Ray : Yes, but we lowered it before MYEFO.
Senator WONG: I do not have the previous budget here—
Mr Ray : At the budget, we had real GDP at 3½ in the first five years of the projections. We are now down to three.
Senator WONG: You have the previous budget there.
Mr Ray : No, I do not have the previous budget here.
Senator WONG: What was the nominal GDP forecast for 2014-15 and 2015-16 in last year's budget?
Mr Ray : In 2015-16 it was 3¼.
Senator WONG: What are we on track to—
Mr Ray : We are currently forecasting 2½.
Senator WONG: So it was an overly optimistic nominal GDP forecast.
Mr Ray : It was a forecast that has turned out not—
Senator WONG: To be wrong.
Mr Ray : Like all forecasts, in general. That is just the way of the world. We publish a lot of information on that and we are not alone.
Senator WONG: No. It was not a gotcha moment. I am just making the point about making the same mistake and continuing to do it again. We have already had a revision down in nominal GDP forecasts from three-quarters to 2½.
Mr Ray : As we have in every year since about 2011.
Senator WONG: Correct.
CHAIR: Can anybody tell what the iron ore price is going to be in three years or any of those other things which are part of the forecast?
Senator WONG: Do I have the call or are you going to—
CHAIR: No. Senator Wong.
Senator WONG: Thank you. As I said, it is not a gotcha moment. The point is there is a demonstrated phenomenon which appears to be occurring which is that nominal GDP is lower than we would anticipate. That is not a partisan point. I think that is under both governments.
Mr Ray : I think it is reasonable to say that we have been surprised by the weakness in domestic price growth. We have been surprised by the way the labour market has performed. That has two sides to it. One is the wages growth has been slower than we were expecting. The other is that job creation has been stronger than we were expecting.
Senator WONG: Right. On nominal GDP for the moment, the budget figures show that, under this government and under the previous in the last couple years, nominal GDP growth has been lower than anticipated.
Mr Ray : After a period in which it was higher than anticipated.
Senator WONG: Sure. So why—
Mr Ray : I think, as we explain—
Senator WONG: Can I please finish the question? More importantly in many ways, you have already had to revise down over the last two budget updates the nominal GDP number for the current budget forecast period. In light of that, I put to you that these are very optimistic figures. They obviously have the benefit of improving the budget position too.
Mr Ray : I would be the first to say that forecasting nominal GDP is even harder than forecasting real GDP. We have explained that on many occasions. It is set out in the budget papers. That said, I would be cautious to use words such as 'optimistic'. They are the best forecasts available. As I am sure you understand, they are not designed to have a particular impact on the budget bottom line.
Senator Cormann: The key words here are that they are the 'best forecast available'. That is obviously the way this document has been put together.
Senator WONG: Mr Ray, I assume you are aware of some of the commentary in the market and most particularly Moody's, which has projected nominal GDP at, I think, 3.7 per cent next year, which is obviously lower than the government's position. I assume you are aware of their comments. Do you have any response? Why are you more optimistic than them? Mr Fraser really wants to say something about the ratings agency!
Mr Ray : I am trying to be careful too, including that we do not forecast to a tenth. The reality is that there is a range around it. As we publish, there is an estimate range, and reasonable people can come up with different estimates, both higher and lower, in that range. The central case forecast for 2016-17 for nominal GDP growth that we have is 4¼. We built that up using all the tools and resources available to us.
CHAIR: Would you like to add something, Mr Fraser?
Mr Fraser : First and foremost, I take total responsibility for the forecast. As you would expect and as I want to, I take a very close interest in the forecasts. I sign them off. With the nominal GDP, this time last year we had a forecast for 2016-17 of 5 ½ per cent. At MYEFO it came down to 4½ and it has come down to 4¼ per cent at the moment. As Mr Ray has said, there are a number of key factors. A major one was the finishing of the negative impact of the mining investment, but we also have to take account of what we see happening with prices, and a key part of that is also wages. We do not back away from these forecasts. They are the best ones we can put together. Other people will put out their best forecasts. That is what happens. I am very comfortable that these are the best we could do. Are they going to be correct? We shall see. The record on forecasting around the world in both the official sector and the private sector is varied. Ours is pretty much in line when you look over the last 20 years. It is nothing to write home about, but that is what you would say about any forecasting group, whether it be here or overseas, at any time over the past 20 years or, indeed, even longer period.
Senator RICE: I am also interested in the level of growth. The statement says:
As our economy transitions to broader-based growth, near-term economic activity will continue to be supported by household consumption, dwelling investment and exports, while falling mining investment is expected to continue to detract from growth …
How important do you see housing construction continuing to be? How important has it been in sustaining positive GDP growth since the GFC?
Mr Fraser : Like many Western developed countries, it is a very important element. It reflects the aspirations of the community, and I think it is fair to say people have had higher aspirations for their dwellings. It has been a key part of our forecasts. When we do these forecasts, we look at the sectors, and housing is one which we have confidence in. The consumption and everything at the moment—not everything, but most things—point to that being sustained as well.
Mr Ray : We actually have dwelling investment growth slowing in 2016-17, but it is at a high level. That is based on our understanding of the supply chain.
Senator RICE: I am interested in the contrast between the statement there that dwelling investment is expected to continue to be a significant part of growth and yet, as you note, the forecast is that we are going from growth of 7.9 last year and eight this year down in 2016-17 to two and in 2017-18 to one. That does not seem to add up to me.
Mr Ray : But it is still growing and it is what is by historical standards an elevated level.
Senator RICE: So still growing but at a lower rate.
Mr Ray : The level is still high.
Senator RICE: Surely, given that tapering off will not be as important to our overall growth as it has been for the last number of years—
Senator Cormann: But it is still a net positive.
Mr Ray : It is still supporting growth, unlike, say, mining investment, which is detracting from growth.
Senator RICE: So you still expect to see growth in housing construction and growth in people employed in housing construction?
Mr Ray : Yes.
Senator RICE: It seems to me that there is still a bit of a contradiction given the importance that that high level of housing growth has been to supporting the level of growth we have had in the economy at the moment. Would you accept that, with those lower levels, it is not going to be as significant in future years as it has been?
Mr Ray : It is just as significant as it has been for the level of activity. It is not making as large a contribution to growth. That I accept. So it is moderating.
Senator RICE: Do you expect that there is going to be an oversupply of housing in the near future?
Mr Ray : No.
Senator RICE: Is it basically going to match population growth?
Mr Fraser : It has been a central issue for the Heads of Treasuries and the Treasurer's meeting with the Council on Federal Financial Relations about affordable housing, and there is certainly not going to be an oversupply of housing. The worry is more about keeping up the infrastructure, that is the land release, and the infrastructure to service that. That is why the state governments and the federal government have been working on initiatives to increase the supply of housing. We are certainly not in a position where we think there will be an oversupply of housing.
Senator RICE: With regard to infrastructure, how important do you see infrastructure being in terms of that overall growth?
Mr Fraser : I think it is very important. I have said that on previous occasions. I think around the world we are probably suffering a little bit by the lack of infrastructure in previous decades. Certainly the opportunities should have been grasped more firmly in the seventies and eighties to build infrastructure. In the countries that did—there were big infrastructure surges in the United States in the fifties and sixties, and in the United Kingdom, particularly with transport, in the late fifties and through the sixties—the return on that infrastructure is far, far greater than anybody forecast at the time. I think it is very heartening to see that there is a recognition over the past decade or so that we need to do something about infrastructure. The problem is, and it has always been, that it is slow. It is slow to develop the projects and it is slow to construct the projects. There have been a number of initiatives which came out of the G20: we have the Global Infrastructure Hub in Sydney, which is successfully operating and I am chairman of that, and we have the Asian Infrastructure Investment Bank, which we have a board member on. More beyond that, we have the multilateral development institutions focussing on infrastructure. But there is a lot of talk and we need to get on and start digging things.
Senator RICE: Again, there is the contrast between seeing that infrastructure is important and yet in Budget Paper No. 3, Table 2.3, in the total payments for infrastructure for the states, we actually see them declining over the forward estimates from $6.9 billion this year to $3.9 billion in 2019-20.
Mr Brennan : I think when I eyeball that table, probably the biggest contributor to that movement is the Asset Recycling Initiative. The Asset Recycling Initiative was always a time limited or a kind of one-off initiative aimed at providing states with some incentive to sell assets and to use the proceeds to invest or reinvest in productive infrastructure. The nature of that National Partnership Agreement that was signed with the states was with a view then that we would have a series of bilateral agreements with individual states about which assets they might privatise and what new investments they might make. The government is in an advanced stage of finalising those negotiations and there were always, basically, two milestone payments under that agreement: one at the point where the asset sale process commenced and the planning around the infrastructure investment was under way, and the second once the asset sale was complete and the actual construction of the infrastructure investment was underway. The profile we have there for the Asset Recycling Initiative, which was always a capped program, basically reflects the timing of those milestone payments. When I look at the reduction over time, those, along with the one-off payment to Western Australia, are probably the biggest drivers of the trend that you are referring to.
Senator RICE: Given what we hear about the rhetoric of the importance of infrastructure in maintaining the growth, particularly as the mining sector is in decline, that does not seem to be consistent with that in those fall off in payments to the states over the forwards.
Mr Brennan : I just note that it could reflect higher than usual payments in the early years; things like the Asset Recycling Initiative effect have added to the infrastructure spend over the short term.
Senator RICE: But would you agree that that trend, that pattern, is not consistent with infrastructure having a greater importance over the forwards in terms of its contribution to our growth?
Mr Fraser : Well, for the economy if we rely purely on the government sector to grow infrastructure, it will be a tough task. Where infrastructure can really blossom—and this is happening, but not as quickly as it should—is the private sector's interest in infrastructure. In my previous life we had a very large infrastructure fund and we were not alone in that—other asset management companies are doing that and have done that. That is where the real boost for our infrastructure will come—that people see opportunities with infrastructure and they invest in groups to do it. The thing around the world, which is what I referred to earlier, is the lead time from having an idea about infrastructure to somebody actually turning a sod of earth.
Senator RICE: Potentially what you are saying is that, if you have the private sector wanting to invest, it may pick up but it is not likely to pick up over the next four to five years, given that lead time.
Mr Fraser : Infrastructure takes about 12 to 15 years to return to investors, so if people are going to invest in infrastructure they have to be willing to accept no liquidity for up to 12 years. It is a very long lead time project. What is encouraging is in our region, in particular with those bodies that I mentioned earlier, there is a real sense that partnerships between the public sector and the private sector are starting to look more attractive and more likely. It is not just in transport, road transport, ports or railways; it is in the whole gamut of infrastructure, including social services. That to me is probably recognition, as I said at the start, that we underinvested as a world in infrastructure over the past few decades.
Senator RICE: But you are seeing that growth to be private investment in infrastructure that is going to be required?
Mr Fraser : If you took the number of conferences they have around the world as your gauge, you would be terribly optimistic. There have been a lot of conferences, but I am very hesitant to say that the game is won. But I do think there is certainly a lot more private sector interest in putting together infrastructure funds both here and elsewhere in the world to marshal investors—and increasingly retail investors—into infrastructure. That is part of a response to the low-interest rate environment. People are now starting to seek out other investment opportunities.
Senator RICE: Moving to interest rates, in the overall narrative you say:
The Australian economy is forecast to strengthen over the next few years—with historically low interest rates and a lower exchange rate supporting growth in household consumption and exports.
I am interested in contrasting that with what is said about low-interest rates globally. You also say:
Expectations for global growth have moderated over the course of 2016 … economic difficulties in a number of commodity exporting countries weighing on the outlook.
Monetary policy settings—
that is, low—
in advanced economies reflecting low inflation and a weaker growth outlook.
So you are saying that low inflation and exchange rates in Australia are going to have a different outcome than what you are saying is going to be happening globally.
Mr Fraser : Well we are having a different outcome than globally—
Senator RICE: Why is Australia different?
Mr Fraser : Bluntly, we are doing quite well. As I have said in the previous estimates, we have been swimming against the tide in a pretty good fashion. I am hoping the tide gets less and that we continue to swim stronger. We have benefited I think from not having been dragged into the vortex of negative interest rates, and I think that is a credit to the Reserve Bank. We are in a situation where we have got good real GDP growth. Prices are coming off, but we have a very good labour market.
Senator RICE: Basically it seems to me that the low-interest rates are what have fuelled the housing boom and housing construction. That is coming off, so why do you expect growth then to continue with low-interest rates that are not fuelling that growth elsewhere in the world?
Mr Fraser : The drivers of the housing market around the world are the subject of many studies. Every investment bank puts out a study that gives different conclusions. The fundamental driver of housing is demographics. Then you have affordability issues. Interest rates clearly play a part in that. But, as I said earlier, it is also a question of land supply. Of course, the situation with the housing market in Australia has very wide regional differences, as it does elsewhere. Then you also have situations where some cities are far more attractive to foreigners that others—clearly, New York, Zurich, for reasons I cannot understand, and London. Obviously, Sydney is very attractive. So it is a mix. You cannot just put it down to interest rates. But, clearly, the lower interest rates will not reduce demand by itself, but there are other factors at play. The banks, of course, have been making some changes to their eligibility requirements for housing, and we will see how it comes out.
Senator RICE: Looking at why Australia has been different over the last few years, housing seems to have been a big part of it. You are forecasting that the housing demand is going to drop off. The logical conclusion is: the combination of low interest rates and low growth will actually mean that the growth is likely to drop off in Australia, as well.
Mr Fraser : As Mr Ray indicated, it is a slowing, but it is a slowing from a much higher level. So if you think of the contributions to growth as weighted averages, we have a much higher level. Sure, the growth is lower, but compared with a few years ago it is still a very big contribution to our growth. And it is possible—
Senator RICE: Overall, given that we have housing dropping off, we have the mining sector dropping off, what does underpin your forecast for growth in the Australian economy?
Mr Fraser : I will hand back to Nigel, but I will say again that housing is slowing, but from a much higher level. Back to you, Mr Ray.
Mr Ray : I am not sure that I have that much to add to my earlier answer. We are forecasting real growth next year to be the same rate as real growth this year. Then we are forecasting acceleration in real growth in 2017-18. As I said in answer to Senator Wong, part of that is that we have a smaller detraction from growth from the fall in mining investment. Secondly, we have a larger contribution to growth from non-mining business investment.
Senator RICE: What sort of businesses are we talking about there in the non-mining business investment?
Mr Ray : We are talking about businesses right across the economy.
Senator RICE: In any particular sectors?
Mr Ray : In 2017-18, it is not in particular sectors; it is across the economy.
Senator RICE: Given that we seem to be relying upon these sectors, I am interested to know what the basis of growth is in those non-mining sectors.
Mr Ray : We have capacity utilisation, which is currently at historic highs. We have business confidence and business expectations that are relatively high. We have low cost of capital relatively—historically. We have continued demand both from offshore and from domestically. Our expectation is that, at some point, with those conditions, businesses will invest.
Senator RICE: So you do not have any particular sectors? It is just, given those underlying factors, there is a general sense that the non-mining sector will pick?
Mr Ray : That is right.
Senator RICE: Is there a reason why they will pick up more over the next four years than they have in the last four, for example?
Mr Ray : The underlying conditions in the economy are gradually tightening. It is the case that forecasts for global growth have been revised down again but, if you take our major trading partners, our major trading partners are growing at a faster rate than the global average and have been for some time, and that is continuing. So we are seeing quite strong growth. We have had growth in mining exports recently, particularly, iron ore but in the future, particularly, LNG. We have growth in services exports, including tourism and higher education. So those things are continuing to support growth.
Senator RICE: Thank you.
Senator KETTER: I just have a follow-up question in terms of reconciling your comments on 2-20 in Budget Paper No. 1:
The pace and timing of a pick-up in non-mining business investment continues to be a key source of uncertainty—
for the outlook.
How does that compare with the assertion that we are in a smooth transition from mining based investment to a non-mining based economy?
Mr Ray : As I think we have set out in a box in Budget Paper No. 2—I will take a step back: given the size of the mining investment boom both on the upswing and the downswing, the performance of the Australian economy through this cycle has been quite remarkably solid would be the way I would put it. We have seen the economy adjust in this cycle—more smoothly might not be quite the right term but in a less disruptive way than we have seen in previous cycles of this nature. We are continuing to see that. We are continuing to see expansion in sectors outside of the mining sector as the economy adjusts. As Mr Fraser has said, the exchange rate is playing a large part in that.
CHAIR: Just a little bit of housekeeping: I am going to go to Senator Bushby then I will return to Senator Wong and Senator McAllister. We are trying to push this through to a conclusion before we break, Mr Fraser, so that we can see you off the premises in the nicest possible way. We will—
Senator WONG: That was an unfortunate turn of phrase.
Senator Cormann: He meant it nicely.
CHAIR: We will break for a full 15 minutes when we do break, so—
Mr Ray : Sorry, Chair, I just wanted to add to that answer: there is a chart—we can point to where it is in the budget papers—showing where the employment growth has been, which shows how the transition is occurring; part of the transition story.
Senator BUSHBY: Thank you, Mr Fraser and Treasury for assisting us today. Before I get onto some other questions, just a quick question from your opening statement. As a senator for Tasmania, you note that activity in New South Wales and Victoria remains strongest while activity in Tasmania has also picked up. In previous estimates, you have talked about Tasmania's improvement in terms of its economic performance. Does that mean that the fact that you have included that with those first two that you are grouping that as one of the three best-performing states at this point? Am I reading too much into that?
Mr Fraser : As a recent visitor to Hobart—we had the Reserve Bank board meeting there in the first week of December. If you took Hobart by itself, you would probably put Hobart ahead of New South Wales and Victoria. But, having travelled out of Hobart on that visit, clearly, there are issues outside Hobart. My colleague, who is the head of the Tasmanian Treasury, was delighted that there were seven cranes on the skyline of Hobart and he told me that is the best it has been for a long time.
Senator BUSHBY: There were many years when there were no cranes.
Mr Fraser : And also trying to get a restaurant booking was a bit of a challenge. Clearly, the youth employment numbers, when you get into the rural areas, make me a little bit cautious to say the place is booming. It is not.
Senator BUSHBY: It is coming off a low base.
Mr Fraser : It is coming off a low base, but my own feeling is that they are heading very much in the right direction. In answer to the previous question, I believe the transition is showing up very much in the labour market, and the real opportunity for us is tourism—not just tourism from outside Australia but tourism inside Australia. It is not for me to give Tasmania investment advice, but I would think that expanding the hotel rooms in Tasmania would make a lot of sense.
Senator BUSHBY: That is what most of the cranes are doing.
Mr Fraser : There is a lot of construction, but there are seven cranes, and then you go to Melbourne and look out one of the high-rise buildings in Melbourne and the place is full of cranes.
Senator BUSHBY: More generally, it is true, is it not, that Treasury's current estimates of nominal GDP in the budget are well below historical averages?
Mr Fraser : It is probably the case, yes. Apart from anything else, inflation is well below—
Mr Ray : But also potential growth is lower.
Senator BUSHBY: Potential growth is?
Mr Ray : Lower.
Senator BUSHBY: What was the average nominal GDP growth over the past 50 years?
Mr Ray : Over the past 50 years?
Senator BUSHBY: Fifty years, yes.
Mr Ray : I think I would need to take that on notice.
Mr Fraser : It was skewed very much in the eighties because we had very high inflation rates. You got quite large, double-digit nominal GDP rates married with quite modest real GDP rates. I will take it on notice. My memory is going.
Mr Ray : I have done a chart which suggests it is considerably above five, closer to 10.
Senator BUSHBY: My advisers pulled up a number, which they have sent to me, that says that over the last 55 years it is 8.7 per cent.
Mr Ray : Looking at this chart, it is plausible.
Senator BUSHBY: Have you made any recent decisions on nominal GDP forecasts?
Mr Fraser : I signed off on a forecast on the evening of 27 April. We did that in the wake of the national accounts data that we had received and also the CPI.
Senator BUSHBY: What was the effect of those decisions?
Mr Fraser : We shaded inflation down a little bit and I think we shaded the unemployment rate off a little bit in one of the out years.
Senator BUSHBY: And the effect on the nominal GDP forecast?
Mr Fraser : Not much.
Senator Cormann: Just to remind people, in the Mid-Year Economic and Fiscal Outlook, nominal GDP growth forecasts were also downgraded. The government acts on advice, the Secretary to the Treasury signs off on the forecasts, they are the best forecasts available, as Mr Ray has also said, and we believe that they are realistic forecasts.
Senator BUSHBY: At MYEFO did you also update the assumptions for the medium-term projection of potential growth to be more conservative?
Mr Fraser : Yes. We looked at this in some depth during the course of October and November. Mr Ray eloquently addressed the Australian business economists in November to explain what we had done. We previously, through our modelling paradigm, had 3½ per cent for the two out years of the projections. We had a good debate and we brought it down to three per cent, which I am very glad we did.
Senator BUSHBY: This committee particularly has had lots of debate over the years about what goes into forecasts and how much you can rely on them. Would you say that the forecasts you have put forward are the most realistic set of forecasts that we have?
Mr Fraser : Absolutely.
Senator BUSHBY: I have a whole series of other questions that I could get into, but I think you want to move on.
CHAIR: I would if you would not mind.
Senator BERNARDI: I have a few questions as well when there is a moment.
Senator WONG: I am trying to get to the few questions that we would like to ask while the Secretary is here, because I am sure he has a fair bit to do. Mr Fraser, you said, I think in answer to Senator Bushby, you signed off on the forecasts on 27 April, which I assume was prior to the final consolidation.
Mr Fraser : I think the final consolidation was around about 3 o'clock on the 28th.
Senator WONG: Did you discuss them with the Treasurer?
Mr Fraser : No. I presented them to the Treasurer and Minister for Finance on the afternoon of the 28th.
Senator WONG: I would also ask you to respond to some of the comments from Moody's and others, such as Mr Donaldson from the CBA, who have suggested that the limited progress or failure to make progress in reducing debt and deficit puts Australia's AAA credit rating at risk.
Mr Fraser : It would take a lot to put our AAA rating at risk. We are particularly well placed. I have publicly said that for us not to address our debt and budget consolidation issues would be foolish, and I think we are. When we look around the world, our position stands out to the better. That said, it is a case of eternal vigilance. If you do not take it seriously and worry about things, people will come in and make comments. That is why we have to be resolute in making sure the economy grows and, as the economy grows, that we address these fiscal issues.
Senator WONG: The reality is, though, for the coming year we have a deficit that is significantly larger than was forecast for this year in the 2014-15 budget, and we have higher levels of net debt to GDP ratio than were forecast as well.
Mr Fraser : The story of the last few years has been what we have been touching on, in terms of the revenue estimates. They have, consistently, disappointed and they have disappointed in a way that none of us expected. That is something that has bedevilled the UK economy and even the Irish, who have done an outstanding job in turning their country around. This is a world of lower inflation and lower growth and, I am afraid, we are navigating our way through seas that are a little bit rougher than we expected on the revenue side.
Senator Cormann: And the important point, here, is that the way to strengthen revenue growth, in a good way, is by strengthening economic growth and by creating more jobs. The bad way to go about this is by increasing the overall tax burden in the economy, which is what Mr Shorten and the Labor Party are suggesting. Increasing the overall tax burden will hurt growth and will cost jobs—
Senator WONG: There is no question of—
Senator Cormann: which means that revenue for government, over time—
Senator WONG: It is just a speech.
Senator Cormann: will not improve to the extent it could if you had a plan for jobs and growth.
Senator WONG: I am trying to be courteous and allow the secretary to lead. Secretary, you just said what I was going to ask you. I think you said the story, over the last few years, has been lower than anticipated revenue. Correct?
Mr Fraser : I said there have been lower than anticipated wages and prices growth, which is—
Senator WONG: I think you used—
Mr Fraser : Yes, and manifested itself into lower rates of nominal GDP or GN, which has, in turn, led to lower receipts growth than we expected. I think you would get a very similar answer in many countries around the world.
Senator WONG: I am putting to you that the budget position is consistent with what you said, that the budget challenges are on both the revenue and spending sides of the budget.
Mr Fraser : The budget challenge comes down to debt and addressing our deficit position. The thing that any government around the world has far more power over is the expenditure side. That is what I am trying to get across.
Senator WONG: Government also has a choice as to whether or not they give companies a $48.2 billion tax cut over the decade.
Mr Fraser : Correct.
Senator Cormann: That is the choice we made, because it will help attract additional—
Senator WONG: Mathias—
Senator Cormann: You asked a question about the choice the government made.
Senator WONG: I am trying to allow him to lead. If you want to head to the election and you want him sitting here asking—
Senator Cormann: You asked a question about a choice the government made. Senator Wong, you have asked the question, and it is my prerogative to answer it.
Senator WONG: Fine. No worries.
Senator Cormann: The government has made a decision to put forward its 10-year enterprise tax plan, and a more competitive corporate tax rate will help us attract investment. It will help us improve productivity. It will help us increase the level of job creation. Over time, it will help us increase real wages and living standards. The advice the government has received from Treasury is that over the long term it will permanently add more than one per cent to the size of our economy. It is a central part of our plan for jobs and growth. It is a central part of helping to secure the successful transitioning of our economy from record resource-investment driven growth to broader drivers of growth in a diversified economy. That is why the Treasurer delivered it as part of his budget on Tuesday.
Senator WONG: Mr Fraser, while you are here, I want to ask you a couple of quick questions about superannuation. The concessional caps—I am just trying to find the measure, my apologies. Let us start with the introduction of the transfer balance cap. This applies to existing accounts, accounts already above the $1.6 million threshold. If someone already has in excess of that amount, they will be required to reduce that balance in their super account by July next year. Correct?
Mr Fraser : I am going to turn to Ms Wilkinson.
Senator WONG: That is fine.
Mr Fraser : I have learnt, with superannuation, to get the experts involved.
Ms Wilkinson : Could you, please, repeat the question?
Senator WONG: I just wanted to understand the implementation of, first, the $1.6 million transfer balance cap. If someone already has a balance in excess of that—as at today's date they are already above that—they will be required to transfer out of their superannuation balance an amount to get them below the cap or to the cap, or face a tax penalty. Is that how this particular measure works?
Ms Wilkinson : They do not have to remove anything from their superannuation, overall. If you have a balance above $1.6 million in your retirement phase account you will be required to remove the excess, and you can put that into your accumulation account or choose to withdraw it. If you are over 60 there is no tax levied on any of those withdrawals.
Senator WONG: That is for people who invested on the basis that this was not in place, and now it is in place.
Ms Wilkinson : That is correct.
Senator WONG: And the caps for contribution—
Senator Cormann: The important point, here, is that the tax only applies to future earnings post 1 July 2017. Any suggestion, as Bill Shorten has made, in recent times, that this is a retrospective tax change is false. As Ms Wilkinson just indicated, there is no suggestion that the government is taking any of the capital away. One point six million dollars is the asset base that people are able to transfer into their tax-free retirement income account. The remainder can either remain concessionally taxed in the accumulation phase, where earnings would attract the 15 per cent concessional tax that currently applies in the accumulation phase, or they can take it without any penalty whatsoever out of that superannuation savings environment, subject to having reached the right age conditions.
Senator BERNARDI: Regarding the practicalities of this, if someone has $1.6 million in their retirement account and market fluctuations reduce that amount can they add to it, again?
Ms J Wilkinson : The policy that the government has announced is that there is a limit on the amount that someone can transfer into that account. So, if you have transferred $1.6 million into your retirement phase account, then you have used up 100 per cent of your cap, and then earnings on that balance do not have to be withdrawn and changes in that balance are no longer affected. So there is no ongoing monitoring of the balance in those retirement phase accounts once you have actually met that transfer.
Senator Cormann: That is an important point because—
Senator WONG: Could we let her finish?
Senator Cormann: increases in the capital value, increased earnings, all of that, can also remain in that environment where—
Senator BERNARDI: This is what I want to clarify. What happens in the event that there is a major market mishap, like in 2008, for example? Most people have a substantial amount of equities in their retirement phase accounts, and there is no provision for it to top up; they have got to wait for it to recover again. If it goes from $1.6 million down to $1 million in value, they cannot do anything about it.
Ms J Wilkinson : There is no provision for that but, for example, if you had only $800,000 that you could transfer into your retirement phase account, and you transferred that amount in, you would still have 50 per cent of the cap left, and so, if at a later point you downsize and you have not used up the lifetime non-concessional cap, then you can make an additional contribution.
Senator BERNARDI: I am just trying to deal with those who have reached the $1.6 million and then market fluctuations see it increase or decrease significantly. The minister has answered both aspects of the question. Thank you.
Senator Cormann: It is a transfer cap, so, once it is in the tax-free environment, any additional earnings, any capital gain—
Senator BERNARDI: Okay. This is not going to be helpful to you, Minister, but I am going to say it anyway. The Treasurer said $1.6 million would enable the earnings basically for four times the age pension. That is essentially what he said the other day. If there is a serious issue with the equity markets and the investment value falls and you have only got $1 million in there, a safe withdrawal rate might be four per cent, and then it is not four times the average age pension.
Senator Cormann: Obviously I am not in a position to provide financial advice to people that are in the retirement phase as to what the appropriate investment mix is in terms of capital that is invested through a retirement income account. The observation I would make—and the Treasurer has also made this point—is that, based on the advice in front of the government, one per cent of Australians with superannuation are in a position where they have $1.6 million in that sort of retirement income setting. So, overwhelmingly, most Australians are not affected by this.
The second point I make is that it is not as if there is not still tax advantageous treatment for capital that is outside that entirely tax-free retirement income setting where you have been able to transfer $1.6 million. If you are in the fortunate position where you have got more than $1.6 million in retirement savings in terms of the capital from which you can generate earnings, then the earnings for any capital that is outside of that tax-free retirement income setting is, if you choose to leave it in your accumulation—
Senator BERNARDI: It is the same as the existing super.
Senator Cormann: It is 15 per cent, which is still very tax advantageous. In the end, you have got to make judgements on what the right balance is. We believe that we made the right judgement. Just to confirm again, this is a change that applies prospectively, not retrospectively.
Senator WONG: That is a political statement. Are the caps backdated, in the sense that the contributions cap will be backdated? Government will look back to 2007—is that right? Sorry; I have not looked at this in detail. I should say to Senator Bernardi, who is interested: we do propose to come back to super; I just want to ask Mr Fraser a question after I have finished on this issue.
Ms J Wilkinson : The $1.6 million transfer balance cap would take effect from 1 July 2017.
Senator WONG: But in respect of capital invested prior to that? Capital that is put into a retirement phase account prior to that is counted for the purposes of the $1.6 million—correct?
Ms J Wilkinson : It is the total balance—that is right—that you have at that point.
Senator WONG: Thank you.
Senator Cormann: So if you—
Senator WONG: Minister, can I just ask a question?
Senator Cormann: But I have to add information about this.
Senator WONG: I know you are sensitive about this.
Senator Cormann: No, I am not sensitive.
Senator WONG: Let me ask the officer a question. I have asked 1½ questions.
Senator Cormann: I am using my prerogative to provide an answer here.
Senator WONG: Chair, I yielded to Senator Bernardi because he had a question, but I would like to ask the officer a question. I yielded the floor.
Senator Cormann: I am using my right to add to the answer.
Senator WONG: I yielded the floor. That is the phrase, isn't it?
CHAIR: Okay, are we done?
Senator Cormann: No, I am yet to finish my answer.
CHAIR: Okay, Minister.
Senator Cormann: Thank you very much. The implication of the question was—
Senator WONG: I have not even got to that bit. I will get to that bit, and you can interrupt me then, but I have not got to that bit.
Senator Cormann: If I may answer the question, income tax rates change from time to time, up or down, and a change in the income tax rate that applies from 1 July 2017 is not a retrospective income tax change. If you are in employment in a business and the income tax rate in relation to your wages changes from 1 July 2017, that is a prospective income tax change. If you have capital invested in shares or in a business and the tax rate changes on the income that is generated by that investment from 1 July 2017, that is a prospective income tax change. The same applies to capital that is invested through the superannuation system. I have to say again that the government is not imposing a wealth tax. The government is not imposing a penalty in relation to a couple who have previously transferred in excess of $1.6 million. The government is only proposing a change in the applicable tax rate for income generated on the back of capital in excess of $1.6 million that is no longer able to be transferred into an income-tax-free retirement income account.
Senator WONG: Do I get to ask a question now?
Senator Cormann: I do not know that your snide comments are all that helpful, Senator Wong.
Senator WONG: Thank you. Ms Wilkinson, I have found the measure: BP 2 at page 27.
Senator Cormann: Are we still in Macro, by the way?
Senator WONG: As I said at the outset, I am trying to be courteous in the face of some persistent discourtesy and finalise any questions which we want to put to Mr Fraser.
Senator Cormann: But you are not putting questions to Mr Fraser.
Senator WONG: That is because he has deferred to the officer. He would have been out of here now if you had just let me finish. But if you want him, the day before an election, to be in here talking to me, that is fine. I am going to ask—
Senator Cormann: I did not know we were going to have an election tomorrow, Senator Wong.
CHAIR: Minister, can we just—
Senator WONG: Yes, everybody wants you to just stop—
CHAIR: I do not need any help from you either.
Senator WONG: True. I am sorry. I am just going to ask Ms Wilkinson a couple of questions, and I will come back to the secretary. Can I just do that, please.
Senator Cormann: You will make political points. I will use my prerogative.
CHAIR: I agree that the two of you are masters of this.
Senator WONG: I am just trying to ask a question. I am still trying to ask a question.
CHAIR: Well, ask.
Senator WONG: I am just going to wait till he shuts up, and then I will ask.
Senator Cormann: You are being incredibly discourteous, Senator Wong.
CHAIR: Please ask Ms Wilkinson your question.
Senator WONG: Ms Wilkinson, I refer to BP 2 at page 27. This is the lifetime non-concessional contributions cap. As I understand from this, it will take account of contributions made on or after July 2007 for the purposes of considering the cap. Correct?
Ms J Wilkinson : Are you now talking about the $500,000—
Senator WONG: Correct—BP 2, page 27. Am I right?
Ms J Wilkinson : Correct. I do not have a copy, but yes.
Senator WONG: I apologise. Can someone give her Budget Paper No. 2. I am now talking about the lifetime cap for non-concessional superannuation contributions. As I understand that budget measure, you go back to 2007, you look at all the contributions you have made over the last nine years, and that counts for the purposes of this cap. Correct?
Ms J Wilkinson : That is right. The contributions since then are taken into account, but there is no requirement, if you have made contributions in excess of the cap, for you to remove any excess contributions.
Senator Cormann: And that is the key point. If you have contributed more than $500,000 in non-concessional contributions to your super account prior to the effective date of this measure, you are not required to take that out of the superannuation environment. The $500,000 lifetime non-concessional cap only applies prospectively.
Senator WONG: Do I understand the anomaly, therefore? If you are already above the $500,000, you are okay, but if you are at $490,000 between 2007 and 2017—is that when it starts?
Mr Fraser : Yes, 2017.
Senator WONG: Yes. You can only put in another $10,000 before there is a tax disincentive. Is that right?
Ms J Wilkinson : So this measure took effect from budget night.
Senator WONG: Sorry; from budget night. So if you were at $490,000 over the nine years, you are affected—you are brought into it. But if you are at $520,000, you are not. Is that what you are saying?
Ms J Wilkinson : If you are at $490,000, you have not yet met lifetime caps.
Senator WONG: No, but you will hit it after $10,000 more. Is that correct?
Ms J Wilkinson : That is correct.
Senator WONG: But if you are at $520,000, you are home free, as it were?
Senator Cormann: That is right, because it is a prospective change.
Senator WONG: Mr Fraser, can I ask you this: if you have a measure which reaches back to 2007, and looks at your investment behaviour to date, and changes your tax position today as a result of past behaviour, can you explain to me how that is not retrospective?
Mr Fraser : I will defer to the minister, I am afraid.
Senator Cormann: It is past behaviour—so if you have worked really hard to get a better job, and the government decides to make changes to the income tax rates, are you suggesting that that is somehow reaching back? Labor is saying that they want to permanently lock in the elevated top marginal tax rate, in terms of personal income tax, instead of having it as a temporary measure. So when people in the past made a particularly strong effort to earn more than $180,000 a year and you change the income tax rate to lock it in at the elevated level permanently, are you saying that that is a retrospective change? The argument that you are running is the exact same argument.
Senator WONG: I am actually just trying to ask a question.
Senator Cormann: But the thing is, you are trying to somehow substantiate an assertion—which is wrong—
Senator WONG: I have a point of order, Chair.
Senator Cormann: that this is a retrospective tax change.
CHAIR: Minister, could you just pause for a moment.
Senator WONG: If you calculated over the last half an hour how much anybody has been speaking, the overwhelming majority of the time would be the minister just giving everybody a lecture. If he wants to go out and hold a press conference—
Senator Cormann: Not everybody; I am just answering your questions.
Senator WONG: If he wants to, he can go out and hold a press conference to explain how it is not retrospective. I am here to ask questions—
CHAIR: Senator Wong, that is not a point of order, as you well know. But Minister, do you want to wrap up?
Senator Cormann: I have explained my position, and the government's position.
CHAIR: All right. Senator Wong.
Senator WONG: Mr Fraser, I will give you the opportunity on the $1.6 million as well. I have asked you a question about the $500,000. I am now asking a question about the budget measure—sorry, how did you describe it?
Senator Cormann: While you are looking for that information, are you suggesting that the 15 per cent tax on $75,000 of earnings is a retrospective cheaper tax change? That is your proposal.
Senator WONG: This is actually estimates, so I ask questions; I do not answer them. I am happy to swap sides and I will answer them.
Senator Cormann: Not yet!
Senator WONG: I am looking at the $1.6 million transfer balance cap at page 25 of Budget Paper No. 2. Mr Fraser, I am asking you: given that this is a transfer balance cap that counts funds that have already been invested in good faith by someone, do you regard that as retrospective?
Mr Fraser : Look, I know it is political, but I do not—because there have been changes to things, like the assets test for the aged pension, which have changed things—this is over past decades—and there have been changes to the income testing for the entitlement programs. Personally, I do not regard it as retrospective.
Senator WONG: Can I ask why you were prepared to answer that, but not the question about the $500,000 lifetime contributions cap.
Mr Fraser : Well, I just thought I would intervene.
Senator WONG: Would you agree that the retrospective argument is more patent on the latter?
Mr Fraser : No, it is not that. These things are difficult when you are designing these programs.
Senator BERNARDI: Senator, I have a question to ask on that.
Senator WONG: As long as he does not give you a lecture.
Senator BERNARDI: In the determination of the $1.6 million as the threshold, what return value did Treasury calculate the retirement benefit for an individual to be—that the Treasurer used as four times the average pension?
Ms J Wilkinson : So if you had a return of six per cent per annum, and you did not draw down on any of the capital, then you would get a return which would be around four times the single Age Pension.
Senator BERNARDI: It is. It is six per cent. Treasury has obviously considered that a reasonable thing, given we have heard we are going into a low-growth—possibly even a very low inflation—environment.
Mr Fraser : That is an interesting question, as all the question are. The actuarial profession, as I understand it, has recently been determining to move away from the seven per cent—which, for decades, has been the imputed return they have used in their calculations—and to move more towards 6.5 per cent. I am not sure whether that has been adopted in Australia; it has certainly been adopted elsewhere.
Senator BERNARDI: Sorry, I need to interrupt you because we only have a couple of minutes left. This is like a contradiction to the previous arguments we have heard that the returns for previous decades have been skewed by high inflation, credit growth and a whole range of things, and with the outlook going forward it is almost not reasonable to assume six per cent for the next decade.
Mr Fraser : I understand. The actuarial assumption is a long-term one over decades, and these are unusual times, as we said.
Senator WONG: Mr Fraser, in answer to an earlier question I think you said you had done around 500 costings since January.
Mr Fraser : Not me personally, but my people.
Senator WONG: Yes, you put 'vous' not 'tu'. Of those costings, were a large number superannuation costings?
Mr Fraser : The superannuation costings were about 100. The personal income tax ones were about 100, and the rest were other tax measures.
Senator WONG: The Ten Year Enterprise Tax Plan?
Mr Fraser : These are all the costings; they are not just longer term ones.
Senator WONG: There are 100 for super and 100 for personal income tax. Approximately how many are there for the Ten Year Enterprise Tax Plan?
Mr Brake : Approximately 150.
Senator McALLISTER: Mr Fraser, I want to ask you again about the Progressing Women initiative and the target of having 35 per cent female SES by 2016. You have said to me in the past that you are committed to that target. Are you still committed to that target?
Mr Fraser : Absolutely.
Senator McALLISTER: Can we get a copy of the org chart? The org chart that we got from the website still has Mr Heferen in place as a deputy secretary. Is there an updated copy?
Mr Fraser : We can get an updated one.
Senator McALLISTER: Is there one present now?
Mr Fraser : No.
Senator McALLISTER: I understand, from the information we have, that there are still no female deputy secretaries. Is that correct?
Mr Fraser : That is incorrect. Maryanne Mrakovcic starts on Monday. It was announced over a month ago.
Senator McALLISTER: But it is not shown on the org chart yet?
Mr Fraser : I apologise for that. She starts on Monday.
Senator McALLISTER: How are you going on the broader target for the SES?
Mr Fraser : I think we are at about 37.
Senator McALLISTER: So you think you are going to make it?
Mr Fraser : If the target is 35, I think we have made it.
Senator McALLISTER: Congratulations.
CHAIR: Noted. We will take a break now. Thank you very much to Mr Fraser and the officers of Treasury.
Pr oceedings suspended from 10:58 to 11:17
CHAIR: I welcome the minister and officers back. Mr Brennan, is a cap being placed on VET FEE-HELP loans, as outlined, likely to be a help to the budget? We saw some mention of it yesterday.
Mr Brennan : I would have to have a look at the detail of the policy that was outlined last night. It is probably better if I talk in general terms perhaps about the accounting treatment that pertains to HELP loans.
CHAIR: What help do you think might be delivered if you capped VET FEE-HELP loans?
Mr Brennan : In relation to a HELP loan, any limit that would be placed on the size of the loan would have a positive impact on the fiscal balance. It would be a positive in terms of the accrual treatment. But, over time, there would probably be a slightly negative impact on the underlying cash balance. The reason for that is: HELP loans are one area where there is a distinction between the way the cash and the accrual accounting treatment works. Often with government payments and expenses that is not the case, but HELP loans are one. When you extend a HELP loan, you book a receipt from the interest that is repaid on the HELP loan over time, but in fiscal terms, where you recognise the effect on the balance sheet of that policy up-front, basically what you are doing is recognising an expense associated with the fact that the liability that you are incurring—because you are borrowing money and paying a bond yield—is greater than the asset that you are recognising, because the rate of replacement on HELP loans is linked to CPI, not interest rates. That is the general proposition. So, when you increase a HELP loan or when you offer a HELP loan, you typically incur a fiscal balance cost. You might make a small positive on the cash side. The inverse would hold. If you are reducing HELP loans, you would recognise a positive impact on the accrual, the fiscal balance, and a small negative on the underlying cash. That is a very general assessment.
Senator Cormann: The important point here is that, if you put a cap on these sorts of HELP loans, there is no saving to the budget bottom line on underlying cash balance terms. That is what is monitored, of course, when we attract the budget position, in terms of improving the trajectory when it comes to the deficit position going into an expected surplus by 2020-21. But, in fact, over time there is a cost to the budget bottom line because, one, you lose your income from your loan fees and you do not generate the income from relevant interest earnings over time.
CHAIR: Given the treatment of concessional loans, how could a policy to cap the size of VET FEE-HELP loans—say, at $1000—affect the fiscal balance and the underlying cash balance, if I work in conceptual terms, not quantum?
Senator Cormann: I might take you to page 77 of Budget Paper No. 2 to explain to you the better treatment in relation to these sorts of matters. You can see the higher education reform measure—further consultation?
Senator Cormann: You will see that it shows a positive impact on the fiscal balance, but the text also shows that there is a negative impact on underlying cash. So, when it comes to the budget bottom line position, the underlying cash balance position, there is a $596.7 million cost.
Senator Cormann: The reason for that is that, if you write fewer loans or if you end up writing lower loans, you generate less income from the interest on the back of the loans. The principle is the same with the proposition around VET FEE-HELP loans. There is no saving in underlying cash balance terms from what was announced last night. If anything, there is a cost to the budget bottom line from what was announced last night.
CHAIR: So, reduced?
Senator Cormann: It would increase the size of the deficit. What Bill Shorten announced last night in terms of the VET FEE-HELP loan cap would deteriorate the budget bottom line and would increase the underlying cash balance deficit. It would only have a positive balance sheet impact and it would have a fiscal balance positive impact, which, for the purposes of assessing the budget position is not the number that we monitor and track.
CHAIR: I see the shadow Treasurer is claiming that their proposed policy to cap VET FEE-HELP at $8,000 would reduce the underlying cash deficit by $6 billion over 10 years, to be precise. Minister, the transcript reads:
Well, I think, I think it's a very, very significant step in the right direction. I mean, this problem has been very evident in the last few years. The Government's decisive actions have been a discussion paper released last week, well Kim Carr and myself and Tony Burke have been looking at this issue. This is a very sensible plan which not only has a positive return on the budget bottom line but stops the rip off young people in particular who are looking for improvements in their qualifications but are being treated to very shoddy service by ... providers.
The evidence given by yourself and Mr Brennan would suggest that that is inaccurate—if I could put it in the softest possible terms.
Mr Brennan : Chair, I would have look at the detail of the specific proposition in order to form a view. I would keep it at the general level.
CHAIR: The shadow Treasurer also said—
Senator Cormann: We will take it on notice. We might be able to assist later on today.
CHAIR: that on ABC radio this morning as well.
Senator Cormann: What we will do, Chair, is to take that on notice and I am sure that Mr Brennan will be able to come back later today with some more conclusive information.
CHAIR: I just want to know whether it is a conclusive statement.
Senator Cormann: What I will put to you is that it is absolutely beyond doubt that the proposal to cap VET FEE-HELP loans to $8,000 will not reduce the underlying cash deficit by $6 billion over 10 years. In fact, if anything, it will detract from the underlying cash balance over that period on the basis that it will reduce—if you write fewer loans—the level of interest income to government and that is what is accounted in the underlying cash balance, which is something that Mr Bowen, as a former Treasurer, should of course know.
CHAIR: It is a pretty basic error.
Senator KETTER: Chair, I have given people licence on this, but I think the purpose of these proceedings is to look at the government's—
CHAIR: I just want to know. It is a pillar of the alternative government's budget-in-reply speech, Senator Ketter.
Senator McALLISTER: And that is not the purpose of estimates to examine the alternative government's budget-in-reply speech.
CHAIR: We do have the Treasury officials in front of us.
Senator McALLISTER: And the Treasury officials have given evidence that they have not examined this proposition.
CHAIR: I want to know whether it is patently false—you guys do not have a real good track record when it comes to managing the Treasury.
Senator McALLISTER: Well, that is a political argument for you to make in another forum, Senator Edwards.
CHAIR: You are suggesting that it is political. I am just wondering.
Senator Cormann: We will get back to you on notice later today.
CHAIR: I would be very interested. Thank you very much.
Senator KETTER: I have got a couple of questions on macro issues, then Senator McAllister will go back to that.
Mr Brennan : Sorry, Chair, if we are back on to macro we might have a slight issue in that I think our macro people have gone. We can try and get them back as required, but it might just take a bit of time.
Senator KETTER: Let us see how we go with it. Firstly, I have a question about whether there has been any modelling or analysis done on the impact of negative gearing?
Mr Brennan : I would have to take that on notice.
Senator KETTER: And if so when—at what time was that conducted? I also have some questions on the R&D tax incentive and the impact of the changes to the corporate tax rate.
Mr Brennan : I think some aspects of those questions could be handled by the Revenue Group, which is on later this afternoon. It might be worth, if there is a way that we can flag what questions you have on those two matters, we might be able to work out whether we need to take them on notice for macro or whether they can wait for revenue to appear.
Senator KETTER: Okay, just going back to some of the underpinnings of the budget—in respect of the assumptions of commodity prices. The iron ore price of $55 per tonne underpins the forecast for 2016-17, whereas the National Australia Bank is forecasting prices to fall to an average of $42 per tonne in 2016. They are also saying that although iron ore prices might rise in the short term the trend is unlikely to be sustained. I just want to explore the rationale for underpinning your forecast with a $55 per tonne figure.
Mr Brennan : Again, I apologise, Senator, but I think we will have to take that on notice. We will try and see if we can get some macro people back here or whether we can come back to you as soon as possible on some of those questions. I apologise if we have misread the requirements of the committee because the macro people have gone.
Senator KETTER: No, there might have been a misunderstanding on our side.
CHAIR: I misunderstood and I apologise.
Senator KETTER: I might just run through a couple of these questions so people listening can take note of them and hopefully we can get responses this afternoon. Are there any temporary factors responsible for the current price returning to a long-term average? Have short-term supply disruptions driven iron ore prices higher? Does Treasury consider that the fundamental demand for iron ore will continue to sustain the current price? What guidance did the Treasurer's office give about the projections for commodity prices? What assumptions underpin the strong increase? I have a similar problem with respect to wage growth. There might be somebody here who can explain to me: when was the last time wage growth was this low in Australia? That would be a worthwhile thing to look at. I would also like further explanations as to why wages are growing so slowly. What is the impact of that sluggish wage growth on consumption? What is the long-term impact of low wage growth on consumption?
Mr Brennan : They all are questions which would be best answered by our macroeconomic group. We will see what we can do in terms of getting appropriate people here—
Senator KETTER: I might defer now to Senator McAllister.
Senator McALLISTER: I understand people have gone back to the other building—presumably. If they were able to come back after lunch, that might be the best way through it. I have a series of questions around negative gearing which I suspect live there also.
Mr Brennan : Yes. I think that is right.
Senator McALLISTER: Can I ask you this is the correct group to ask about the changes to superannuation?
Mr Brennan : It is, yes.
Senator McALLISTER: We have had some discussion about it in the last session. Can I start by asking about the LISTO, the 'low-income superannuation tax offset'. Can you talk us through that measure?
Mr Brennan : I will defer to Ms Wilkinson, but it is essentially a measure which aims to ensure that low-income earners are receiving, in effect, the equivalent of a tax rebate to offset the 15 per cent contributions tax that would have been paid effectively on their behalf by the superannuation fund, reflecting the fact that their marginal tax rate would generally be less than 15 per cent.
Senator McALLISTER: Is it the marginal tax rate or the average tax rate that is the relative comparator?
Mr Brennan : It might be both. LISTO goes up to an income of—remind me, Jenny, $37,000? Is that the level at which the average tax rate exceeds 15?
Ms J Wilkinson : The marginal tax rate is zero up until $20,540; then 19 cents in the dollar. I think the intent is that people do not pay more tax on their superannuation contributions than they do on their income. So that is the same outcome as what the low-income superannuation contribution delivers.
Senator McALLISTER: Okay. So what are the key differences between the LISC and the LISTO?
Ms J Wilkinson : The low-income superannuation tax offset is a non-refundable tax offset. It will be available to eligible fund members. Like the low-income superannuation contribution, it will provide rebate into members' funds so that the tax offset can help build balances for low-income individuals. So it has been provided as a tax offset as opposed to being provided as a payments mechanism.
Senator McALLISTER: What is the difference that the individual will experience in terms of it being a tax offset rather than a payment?
Ms J Wilkinson : From the individual's perspective the intent is to deliver the same outcome as the low-income superannuation contribution would deliver. The arrangement would, like the current arrangement, basically be managed between the superannuation funds and the ATO. There is no particular role for individuals that is different under the LISTO.
Senator McALLISTER: Are there any revenue impacts that arise from treating this measure as an offset rather than as a payment?
Ms J Wilkinson : The costing that the government has published in the budget in relation to the low-income superannuation tax offset has the same implications. There would be the same budget implications of having the low-income superannuation contribution.
Senator McALLISTER: As had we retained the LISC? So the tax offset will have the same budgetary impact as retaining the LISC?
Ms J Wilkinson : Correct.
Senator McALLISTER: This is perhaps for Senator Cormann: it is almost just a name change, is it not Senator Cormann? Why have we gone through all this pain?
Senator Cormann: I just have to remind you that, when Labor promised the low-income superannuation contribution, it was supposed to be paid for by a failed mining tax, which did not raise any money. It was part of Labor's failed mining tax package. When Kevin Rudd and Wayne Swan first announced the resources superprofits tax, they said it would raise $12 billion over the first two years of operation and $99 billion over the decade.
Labor, then in government, had spent all the money they thought it would raise and more, when it was very obvious that it was never going to raise anything. By the time we had finished on the mining tax, with all of the additional deals and all of the administrative expense in the ATO and all of the advertising expenditure promoting the tax, it actually ended up costing the budget. So what we said in the lead-up to the last election was that, while we were sympathetic and supportive of the policy intent, it was not affordable at the time. What the government has done on this occasion as part of our overall tax package—improving our tax mix, making our tax system better without increasing the overall tax burden in the economy—is pay for this on a sustainable basis by making changes in other paths of the tax system.
So Labor attached this to a failed mining tax. We are putting this at the heart of our plan for jobs and growth and our plan to put the budget on a sustainable foundation for the future. The key feature of that of course is our crackdown on tax avoiders. A key feature of this is our focus on making sure that tax concessions in particular in the super space are better targeted.
If you look at the fiscal effect of policy decisions taken by the government overall, they actually improve the budget bottom line by $1.7 billion. So, unlike the approach taken by the previous government when they introduced the low-income superannuation contribution, by introducing this measure we will ensure that low-income earners do not pay more tax on savings going into super than on income taken as—
Senator McALLISTER: Chair—
Senator Cormann: We have actually paid for it.
Senator McALLISTER: Chair—
CHAIR: Senator McAllister.
Senator McALLISTER: Essentially, though, it is the same measure as was in place previously—with a different name.
I think we talked before about the number of different options and measures that were modelled in preparation for the budget. I am interested in the advice that was provided, or the options that that were considered, around the threshold for the high-income superannuation contribution. Was $250,000 annual income threshold the recommendation of Treasury?
Mr Brennan : I think that question goes to the content of policy advice.
Senator McALLISTER: Were other amounts considered, Mr Brennan?
Mr Brennan : I think that is still going to the content of advice. We provide advice on a range of these matters. The government ultimately takes a decision on what policy they wish to enact.
Senator McALLISTER: Mr Brennan, were you asked to model other amounts? Was it more than one? Or was there just one option? The amount that appears in the budget is $250,000. Were you asked to consider other amounts?
Mr Brennan : I cannot honestly recall whether we were asked to model other amounts.
Senator McALLISTER: Did you model other amounts? Was there more than one option modelled?
Mr Brennan : I think again that goes to the content of advice that we would provide. I think it is fair to assume in a reform process of the scale of this, in relation to superannuation and other tax measures, that a range of options are looked at, but—
Senator Cormann: Let me help you, Senator McAllister. Yes, I can confirm that the government, in putting this comprehensive tax package together, looked at a whole range of options, including in relation to this measure. The policy intent of the government was to deliver sustainably a tax cut for low-income earners on income that is going into superannuation which otherwise could have been taxed from the relevant date onwards at a higher rate than if it was taken as take-home pay. The budget measure reflects the decision that the government has made. It reflects the policy intent of the government.
Senator McALLISTER: I was asking Mr Brennan about the instructions that were given to Treasury about these preparations and whether a range of options were canvassed. He still has not actually answered my question. He says that it is reasonable to assume that more than one option was canvassed. I am asking you whether you were asked to canvass more than one option about the threshold.
Mr Brennan : As the secretary mentioned, we had multiple requests for costing. But as to whether we looked at different options in relation individual measures, I do not think I am really at liberty to say.
Senator McALLISTER: When did that work commence, Mr Brennan?
Mr Brennan : The work on superannuation options?
Senator McALLISTER: On this specific measure, which is the change to the high-income superannuation contribution threshold.
Mr Brennan : Ms Wilkinson will be able to help me out, but I would have thought late last year or early 2016.
Ms J Wilkinson : I think it was first discussed late last year.
Senator McALLISTER: So you first started working on it late last year. Was there more than option on the table at that point?
Ms J Wilkinson : The reforms to superannuation have been considered over a period of time. I became the division head in December last year, and there had been discussions about elements of the superannuation reform package before I arrived, including on those matters.
Senator McALLISTER: So there had been discussion about elements of it, but the modelling commenced at the end of last year?
Ms J Wilkinson : Costings for specific measures do not get done until there are designs for specific measures which have actually been landed. It takes some time. You have a policy development phase, where you are looking at a range of different things that could be considered, and then, once those have been narrowed down, you move into a costing phase. So I cannot say specifically whether there were any costings done before I arrived as division head last year. But certainly there were costings done from early this year.
Senator KETTER: Just as a follow-on from that, was there any consultation with stakeholders in relation to this issue?
Ms J Wilkinson : Again, this was an issue that was canvassed in the tax reform process. There were a number of submissions in response to the discussion paper on tax reform which went to a number of different aspects of superannuation but certainly including this issue.
Senator KETTER: Were those public discussions or private discussions?
Ms J Wilkinson : My understanding is that most of them are publicly available, but I would have to defer to my revenue colleagues who were responsible for the tax reform process.
Senator KETTER: Apart from submissions, were there meetings conducted with stakeholders as part of that process?
Ms J Wilkinson : We have had a range of discussions with a range of different stakeholders over the past—
Senator KETTER: Would the Financial Services Council have been included in this?
Ms J Wilkinson : We have certainly had discussions. We have had discussions with a number of different stakeholders around superannuation reforms, yes.
Senator KETTER: Would the AMP have been included in those discussions?
Ms J Wilkinson : I have certainly met with and have had a number of discussions with AMP around superannuation over the past four months. Yes, that is correct.
Senator McALLISTER: I want to ask about the possibility of paying superannuation guarantee payments on paid parental leave. Was that one of the options under consideration as part of the policy development process?
Senator Cormann: As you know, the budget process, the Expenditure Review Committee process and the process that put the tax package together that is in our plan for jobs and growth, is a cabinet level process, and you are going to have to rephrase your question.
Senator McALLISTER: Does Treasury have any information about the impact of the superannuation guarantee on paid parental leave? Is there anything about the potential costs?
Ms J Wilkinson : I am not sure what you are asking.
Senator McALLISTER: I am interested in understanding whether you have information that you can share with the committee about what the impacts would be of introducing superannuation guarantee levy payments on paid parental leave.
Ms J Wilkinson : I do not have that information with me. I am happy to take that question on notice.
Senator McALLISTER: Is that something Treasury has been looking at? It is not uncommon for Treasury officials to tell us about some of the options that have been modelled or canvassed.
Senator Cormann: It is highly unusual. If I had asked the question that you have just asked to Senator Wong when she was sitting in this spot and I had asked her to run me through the options that were considered by the cabinet or by the Expenditure Review Committee before making decisions, she would have told me where to go.
Senator McALLISTER: Although I am not asking about what was considered—
Senator Cormann: That is effectively what you are asking. The officials can provide information about what is in the budget, and the officials can provide information, of course, about the performance of the government against budget. The officials are not here to go on a fishing expedition or to provide opinions.
Senator McALLISTER: Has there been any consideration, more broadly, of the benefits that flow respectively to men and women from the changes in the budget, particularly around taxation? Is gender analysis a component of the work that is done in the lead-up to decisions?
Ms J Wilkinson : There has been no analysis which has been done in an overarching sense on a gender analysis of the package. However, on the other hand, it is clear that there are some individual measures within the package which would certainly tend to benefit women. For example, the Treasurer has already made it clear that around two million of the 3.3 million recipients of the low-income superannuation tax offset are expected to be women. It is also the case that some of the other measures in the budget, such as the provision that allows people to carry forward unused contribution caps, are expected to benefit people who have had broken work patterns. Again, that tends more to be women, so there are a number of individual elements. And then, of course, the spouse tax offset is a measure where you would typically expect there to be more benefits that would flow to women from the package. We have certainly looked at individual measures and at, if you like, what the benefits to women or to individuals who have employment arrangements which are different from a standard employment arrangement could be.
CHAIR: Ms Wilkinson, through our inquiry into this issue we have seen that the vast majority of women are affected greatly by the inflexibility. From where I sit, the changes provide a great recognition of different work patterns. Perhaps you might just want to go to the more particular issues which you believe actually address these things that Senator McAllister and I found were impediments to women increasing their retirement incomes.
Senator McALLISTER: Do I have the call?
CHAIR: It is the same issue; it is just a follow-up question.
Ms J Wilkinson : I am not sure that I am quite clear on what the question is, Senator Edwards. As I have said, I think we are all aware that some of the factors which make it more challenging for women to accumulate superannuation balances are that they do take time out of the workforce, they are more likely to have employment arrangements where they earn some of their income in a self-employed capacity, they earn some of their income as a wage and salary earner and they are sometimes employed part-time. There are a range of different arrangements which are more typical of women's employment patterns, and many of the flexibility measures that the government has introduced in this package would therefore be expected to be of direct benefit to women and to others who have different employment arrangements. I am thinking there about the low-income superannuation tax offset, the roll over of concessional contributions—the roll over of unused caps—and extending the spouse tax offset. Even the general provision to improve access to concessional contributions improves access for all individuals to make the most use of the $25,000 concessional caps regardless of their employment circumstances.
Senator McALLISTER: The budget paper says annual concessional caps can limit the ability of people with interrupted work patterns to accumulate superannuation balances. Do we have any evidence about how many people are presently affected by that limitation? How many people are presently nudging up against that $25,000 a year cap—or the $35,000 a year cap—and how many of them are women?
Ms J Wilkinson : As the Treasurer announced with the package, we are expecting roughly three per cent of individuals to be affected by the contribution caps moving down to $25,000.
Senator McALLISTER: I am talking about the ability to roll over—
Ms J Wilkinson : How many people are likely to benefit from the roll over?
Senator McALLISTER: That's right.
Ms J Wilkinson : Around 230,000 people could benefit from the roll over of the concessional caps.
Senator McALLISTER: How was that arrived at?
Ms J Wilkinson : That is an internal costing that we do. We look at ATO data. We have quite good data on member contributions. We make a best estimate as to how many people might meet the cap one year and not another year, and we make an estimate as to how many of those may come forward.
Senator McALLISTER: So 230,000?
Ms J Wilkinson : Yes, 230,000 is roughly the number of people we expect may be able to take advantage of this flexibility in 2018-19.
Senator McALLISTER: Is there a gender analysis of that?
Ms J Wilkinson : I am not aware that we have done a gender analysis of that measure.
Senator McALLISTER: So 230,000 people might be able to take advantage of an opportunity to put more than $25,000 a year into their super?
Ms J Wilkinson : It is not quite that. I guess the way to think about it is that the annual concessional caps still hold. The annual concessional caps are $25,000. If in the first year, in 2017-18, you only make concessional contributions of $15,000 then you have the ability in the following year to contribute $35,000. So you are rolling over the unused amount of the cap.
Senator McALLISTER: But from the analysis you did we do not know whether it is men or women who are in that position?
Ms J Wilkinson : I am not aware that we have done gender analysis on that. I am very happy to take that on notice.
Senator McALLISTER: I think that would be useful. The measure is very clearly being sold as a measure to benefit women. I am interested to know how many women are in a position to put in even $25,000, let alone more, particularly if they are a person who is experiencing interrupted work patterns. I would be very interested to understand whether your analysis produces a large number of women in that position. Can I ask about the $1.6 million cap. You may have already answered this morning—sorry, I did not note it down—but how many Australians have retirement income balances of over $1.6 million?
Ms J Wilkinson : We expect that less than one per cent would be affected by this measure.
Senator McALLISTER: What proportion of those are in the accumulation phase and what proportion are in the drawdown phase?
Ms J Wilkinson : I do not have that breakdown with me. I am happy to take that on notice.
Senator McALLISTER: Okay. Is it possible to talk us through the assumptions that underpin the statement that a superannuation balance of $1.6 million provides an income stream in retirement of around four times the single age pension? I know Senator Bernardi was pursuing that earlier, but it would be quite helpful if you could just step us through that.
Ms J Wilkinson : I think the statement is that it could provide an income stream in retirement of around that level. It is worth keeping in mind that, in an account based pension, individuals have a choice over how they invest their funds. In most cases, if you have a large balance—for example, $1.6 million—it would make sense to invest that in a balanced portfolio which has a combination of bonds, shares and property. It is very hard to be definitive about these sorts of things, because at the end of the day it is up to individuals as to the choices they make about how they wish to invest their superannuation funds. But it is certainly the case that, if you invested in a portfolio and you received a return of between five and six per cent and you drew down on the capital a bit—which is of course the point of superannuation—then you would expect to get an income stream which would be broadly the same level as around four times the single age pension.
Senator McALLISTER: Can I ask about the practical consequences for people whose balances are over $1.6 million. The budget papers indicate that members already in the retirement phase of balances will be required to reduce those balances by 1 July 2017, stating:
A tax on amounts that are transferred in excess of the $1.6 million cap (including earnings on these excess transferred amounts) will be applied, similar to the tax treatment that applies to excess non-concessional contributions.
Could you step us through how that would work. If someone found themselves in that situation, where they had a balance of more than $1.6 million and they transferred it across, what rate of tax would they be paying?
Ms J Wilkinson : This is a new measure, and the government will be consulting on the details of this new measure. I can certainly speak to the way excess non-concessional contributions are currently taxed. But I think it is worth emphasising that, with a new measure like this, the intent is that the policy around all of those things, including what the penalty would be for individuals who transferred more than $1.6 million into their account, would be a matter for consultation through the legislative development process.
Senator McALLISTER: So a penalty—
Ms J Wilkinson : If there were to be a penalty, as you are talking about, for people who transferred more than the $1.6 million or who at that point had more than $1.6 million, that is what we would be consulting on through the policy development process—exactly how that would work. The intent of the policy—
Senator McALLISTER: I suppose I am not raising the notion of the penalty; I am looking at what is in the budget papers, which assert that a tax on amounts that are transferred in excess of the cap will be applied. So that is the government's position.
Ms J Wilkinson : The way to think about that is that that is just the penalty that would be applied. Like in the current policy if you make contributions which are in excess of the current non-concessional caps, you pay a tax, that is the penalty for making contributions above that level.
Senator McALLISTER: What is the tax that would be paid on that?
Ms J Wilkinson : The way that operates currently is that, if you make non-concessional contributions in excess of the cap, you have to withdraw those excess contributions. There is no penalty for withdrawing those excess contributions. The ATO will work out what the notional earnings are on that excess contribution that you have put in as non-concessional contributions, and you pay tax at your marginal tax rate on the earnings on that excess contribution.
Senator McALLISTER: So the tax on earnings could be 49 per cent?
Ms J Wilkinson : If you take the amount that you contribute, which is above the cap, the current arrangements are that you have to withdraw that amount and you have to pay tax on the earnings on that excess amount—
Senator McALLISTER: At the marginal rate?
Ms J Wilkinson : At your marginal tax rate, that is right.
Senator McALLISTER: Can I ask about the way this measure will interact with self-managed super funds. Of course, those are structured quite differently to the institutional funds. People may be holding assets where there is not a third party to assess or verify the value of the assets held in those funds. Will it be the responsibility of the fund managers in those self-managed super funds to identify the value of their assets and assess whether or not they are in breach of the $1.6 million?
Ms J Wilkinson : Again, the details of how the $1.6 million will apply to all funds including self-managed superannuation funds will be a matter for consultation as we are developing the legislation.
Senator McALLISTER: Was there any consultation—
Ms J Wilkinson : Let me clarify: at the moment it is the case that self-managed super funds obviously have to pay 15 per cent tax on earnings on assets which are in accumulation funds. There is an established set of arrangements for how those earnings are assessed and how those earnings are taxed. The legislation for managing both superannuation in self-managed super funds and in pooled funds already exists.
Senator McALLISTER: Do those arrangements for self-managed super funds provide a mechanism to assess the value of the assets held in the fund?
Ms J Wilkinson : They do.
Senator McALLISTER: If they have a house, there is there a mechanism for identifying that?
Ms J Wilkinson : They do. I do not have the specific details with me, but, yes, there obviously has to be a requirement so that if you are in accumulation phase then you need to pay tax on the earnings, and if you have your money in a self-managed super fund then, obviously, you have to pay tax on the earnings just like you would if you were in a pooled fund.
Senator McALLISTER: The relevant question for the $1.6 million is not a question about earnings, it is a question about the value of the asset, is it not?
Ms J Wilkinson : But in order to determine what tax needs to be paid on assets, you need to be able to value them at different points in time.
Senator McALLISTER: Was there any consultation with the self-managed super fund sector prior to the announcement of this change?
Ms J Wilkinson : We have had discussions with the self-managed super fund sector on a range of different matters over the past six months.
Senator McALLISTER: Did you discuss with them the introduction of a $1.6 million superannuation transfer balance cap?
Ms J Wilkinson : There were consultations with a range of different members of the superannuation industry, including the self-managed super funds, in the context of the tax reform process, but I have not been involved in any specific consultations on specific measures.
Senator McALLISTER: Can you explain to me, moving onto the non-concessional contributions cap, which has been established in the budget as a $500,000 cap, what was the reason behind settling on $500,000 as the number?
Senator Cormann: You are now asking the official for an opinion rather than for an explanation of policy.
Senator McALLISTER: I am asking for the policy—
CHAIR: Do you want to reframe your question?
Senator McALLISTER: Can I ask about the analysis which underpins the selection of $500,000 as the non-concessional contributions cap?
Ms J Wilkinson : I think the intention behind introducing the lifetime non-concessional cap is to improve the sustainability of the superannuation system to make sure it is being used for its primary purpose and to strengthen public confidence that the system is being used to assist people to build superannuation which can be used to support incomes in retirement, rather than as a tax minimisation or estate planning tool.
Senator WONG: Perhaps you could indicate the rationale for the particular figure that is chosen.
Ms J Wilkinson : I think that was a matter of judgement for government. Certainly, there was an observation that if you look over the period since 2007 only one per cent of superannuation fund members have made contributions in excess of $500,000 to their superannuation accounts. The vast majority of people have made no non-concessional contributions at all, while a small proportion have made contributions of around $250,000. It was just a judgement that that was a reasonable level for the level of non-concessional contributions, which would be allowed within the superannuation system to be provided over an individual's lifetime.
CHAIR: Ms Wilkinson, what is the purpose of superannuation in this country? Let us keep the objectives clear.
Ms J Wilkinson : The government has agreed, as part of its response to the financial system inquiry, to introduce legislation to make it clear what the objective of superannuation is. After a consultation process, the government agreed that the objective is to provide income in retirement to substitute or supplement the age pension.
CHAIR: Full stop.
Ms J Wilkinson : Correct.
Senator WONG: I think I was out, Chair, but I think there was a question about the budget impact—I am interested that the Treasury was able to answer already the cost of the opposition's policy—
CHAIR: No, that is not fair.
Senator WONG: You weren't?
Senator McALLISTER: They weren't.
Senator WONG: I'm sorry—the budget impact.
Senator Cormann: He made a very generic point.
Senator WONG: Did you factor in in your answer, Mr Brennan, PDI impact?
Mr Brennan : No. to go back a step—I am not making a definitive statement about the cost of any particular policy. This was a general statement about the accounting treatment that applies to HELP loans. I can get Mr Raether or Mr Crooke to assist me with this, but the point we were making is that in the formal costing for underlying cash balance costing, the treatment would be that you would take into account the revenue received on the HELP loan that was extended. For a fiscal balance costing you would take into account up-front the full effect of the difference between the loan repayments and the cost to government of borrowing. It is true that over time, I think the point you are getting at, while it may not be reflected in the line item for the underlying cash costing, in order to extend the HELP loan you do have to borrow the money, so there is a PDI impact.
Senator WONG: Correct. You have more debt so there is a PDI cost.
Senator Cormann: But it is not reflected in the UCB costing.
Senator WONG: I just wanted to make clear we were—
Senator Cormann: When you were not here, what I pointed to was the similar measure which is in our Budget Paper No. 2 in relation to higher education. Of course, by essentially reducing the level, or the quantum, or the size, of the loan book in higher education as a result of deferring the implementation of our higher education reforms we are booking a $596 million cost to the underlying cash balance, whereas—
Senator WONG: But an improvement in the fiscal balance.
Senator Cormann: there is a $2 billion saving in fiscal balance terms. That is because, as Mr Brennan explained previously, obviously the loan is not just a liability it is an asset, but the value of the asset is discounted, given there is obviously there is not a commercial rate of return from that loan to the Commonwealth, but there is a rate of return based on interest payments at CPI. The point is that you cannot claim an underlying cash balance benefit by using the costing arrangements under the charter of budget honesty the way it appears—this is me speaking, now—that the opposition has done. That is because if you reduce the size of the loan book you lose some revenue, you lose the revenue from relevant loan fees and you lose the revenue from interest collected on those loans.
Senator WONG: I do actually understand that. Mr Brennan, or whomever, you referenced the measure at BP2 page 77, which is the higher education reform for the consultation measure. Consistent, I think, with the answer is that there is a cost to that from, essentially, your deferral of some aspects of your higher education changes. There is a UCB cost of $596 million but a fiscal balance improvement of about $2 billion, correct? Therefore, if you had a similar type of change to the VET-FEE arrangements you would get a similar type of outcome—not in quantitative terms but in qualitative terms—you are likely to get a UCB cost but a fiscal balance improvement.
Mr Brennan : That is correct.
Senator WONG: Thank you.
Mr Brennan : I should make clear on that measure: that is actually bringing together a number of items. One is the deferral of the higher ed. package in its entirety. The other is the move away from full-fee deregulation, which is probably more to the point. The move away from full-fee deregulation is the thing that drives that wedge between fiscal and underlying cash.
Senator WONG: Okay, but I am making a qualitative not a quantitative point.
Senator Cormann: But the point you are making is right.
Senator WONG: I would like to come back to the $48.2 billion costing that was put out this morning. Would you prefer me to do that with Revenue Group.
Mr Brennan : Yes. I think that would be preferable.
Senator WONG: Does the Charter of Budget Honesty require that the costing of a loan type program such as VET-FEE HELP require the inclusion of the PDI?
Mr Brennan : I will defer to Mr Flavel, but I think there is some provision where you have policies which have an impact on PDI.
Mr Flavel : Not the Charter of Budget Honesty, per se, but, as you know, under those provisions that relate to costing of election commitments, the secretaries of Finance and Treasury issue costing guidelines. Those costing guidelines do address that issue. I do not have a copy with me, unfortunately, but I think they do address the issue you have raised.
Senator WONG: I have some fiscal strategy questions—I am not sure whether my colleagues have asked them while I was out. Before the 2013 election the former Prime Minister went to that election with a commitment to a fiscal strategy to reach a surplus of one per cent of GDP by 2023-24. That was reflected in Budget Paper No. 1 in the 2015-16 budget. It is no longer reflected in the fiscal strategy description in BP1 for 2016-17. Can you confirm that the government in fact formally moved away from that commitment in the MYEFO.
Senator Cormann: I can answer that question, because you asked me a similar question yesterday in Finance, and if I refer you—
Senator WONG: Actually, I didn't ask you this question.
Senator Cormann: to page 3-7 in Budget Paper No. 1, where the government actually outlines our fiscal strategy. I am quoting directly from what is published:
The Budget repair strategy is designed to deliver sustainable budget surpluses building to at least 1 per cent of GDP as soon as possible, consistent with the medium-term fiscal strategy.
That is a position that the government has publicly articulated for some time.
Senator WONG: The corresponding page in the 2015-16 Budget Paper No.1, at 3-4, says:
Budget repair strategy
The budget repair strategy is designed to deliver budget surpluses building to at least 1 per cent of GDP by 2023-24 consistent with the medium-term fiscal strategy.
Senator Cormann: We changed that—
Senator WONG: Can I—
Senator Cormann: in MYEFO. We have been making that point—
Senator WONG: May I?
Senator Cormann: very clear ever since before Christmas.
Senator WONG: May I? I hadn't actually finished.
CHAIR: Come on you two!
Senator WONG: What do you want me to do when he interrupts a question? I had not actually asked a question.
CHAIR: You have the call. Ask the question.
Senator WONG: Thank you. I was just confirming that the move away from the election commitment to a surplus of one per cent of GDP by 2023-24 occurred in the MYEFO, where the year was removed, and is no longer the government's position. Is that correct?
Mr Brennan : Yes. In relation to that, the fiscal strategy in the 2016-17 budget is as it was in the 2015-16 MYEFO, which is to refer to the one per cent surplus as an objective as soon as possible, as distinct from in a particular year.
Senator WONG: Okay. And that was a decision for government? Sorry—you cannot just nod; they cannot write a nod!
Mr Brennan : Yes.
Senator WONG: Technically, does that mean the government could run budget deficits beyond 2023-24 and still comply with the medium-term fiscal strategy?
Senator Cormann: You are now asking him for an opinion, for a hypothetical question—
Senator WONG: I am asking him about the operation of the rule—
Senator Cormann: The government strategy is laid out in the budget papers. It is there in black and white, and the government's expectations are laid out in the budget papers. Based on what we know currently about economic and other parameters, and based on the policy decisions of the government on the spending and revenue side of the budget, the expectation is that the budget will return to an underlying cash balance surplus by 2020-21 and be in surplus for the remainder of the medium term.
Obviously, we do not know what we do not know. We do not know what might happen to global economic conditions and we do not know how the economic parameters might either improve or deteriorate. As such, obviously that is why these parameters are updated in budget-to-budget updates. But as far as the policy decisions of the government are concerned, of course they have continued to improve the budget bottom line.
Senator WONG: I actually was not asking for an opinion, I was asking about the operation of the rule.
Senator Cormann: You are asking for an opinion.
Senator WONG: No, I am not. I am asking what the rule enables—permits? That is a factual—
Senator Cormann: You are looking at the rule in isolation from the other rules.
Senator WONG: Okay, well, I am asking a factual question: what does Treasury understand the rule to permit in terms of deficits beyond the 2023-24 year?
Mr Brennan : To some extent it goes to a line of questioning we had in the last estimates from Senator Ketter about what constituted compliance or breach of the strategy. I guess we assiduously avoided forming an opinion about what constitutes a breach or what constitutes compliance with the strategy. The strategy clearly says that the aim of the government is to return to a surplus in the order of one per cent of GDP. Elsewhere, in a statement—
Senator WONG: By some unknown point?
Mr Brennan : Well, as soon as possible, but not nominating a year. In relation to the medium-term projection, I note that page 3-19 of Budget Paper No. 1 states:
The medium-term projections indicate that there is much more work to do to deliver surpluses building to at least 1 per cent of GDP, …
That is reflected in the fact that in looking at the chart on page 3-11 it is clear that the current projections do not have us returning to a surplus of one per cent of GDP over the medium-term period.
Senator WONG: Sorry, can you just repeat that last sentence?
Mr Brennan : Chart 1 on page 3-11 indicates that on current projections we will not be returning to a surplus of one per cent GDP, hence there is more work to do. That is the line on 3-19.
Senator WONG: Thank you.
Senator McALLISTER: I wanted to talk about the measures around tobacco excise. There have been figures in the public domain about the 10-year budget profile of tobacco excise policy. I assume that is modelling that was provided by Treasury?
Mr Brennan : Yes. Again, this will be a question for revenue group—the relevant modelling of revenue gain from the excise increase was done by revenue group.
Senator McALLISTER: I am interested in understanding more about the assumptions that underpin the $28.2 billion figure. Are those questions I ought to direct to Revenue Group?
Mr Brennan : Revenue Group, yes.
Senator McALLISTER: Thanks, Mr Brennan.
Mr Brennan : We could deal with some of Senator Ketter's question on iron ore assumptions and the like because we have the relevant people from M acro to handle that side of things.
CHAIR: We will deal with those now.
Senator KETTER: As I was indicating before, NAB is forecasting that the iron ore price will fall to an average of $42 per tonne in 2016, and yet we have forecasts of $55 per tonne underpinning the budget. I just wanted to explore that. In terms of the current price, do you see that there are temporary factors responsible for that or are we returning to a long-term average?
Ms Barron : We do not attempt to forecast commodity prices. We use an assumption to underpin our forecasts and we use a price over a recent average period. That is how we came to the $55 on which the forecasts are based.
Senator KETTER: What sorts of factors go into that assumption?
Ms Barron : We just take a recent period average of the spot price.
Senator KETTER: In your view, have short-term supply disruptions driven iron ore prices higher?
Ms Barron : No, I think from its peak in 2011 there have been fairly fundamental features that have driven the price of iron ore down, and that is a significant increase in supply since then and some weakening global demand. There has been a more recent rise in the spot price but there was some volatility as part of that rise. There are a wide range of commentators who take different positions on this. I think one thing you could point to is that China has confirmed its growth target and has also said that its intention is to implement the policies it needs to achieve that growth target, and that may have given some support to the market for iron ore.
Senator KETTER: There is also some talk about the current price appearing to be more to do with commodity price speculation in China.
Ms Barron : There is, as I understand it, a growing derivatives market in iron ore and that could drive some day-to-day prices.
Senator KETTER: Do you believe that the fundamental demand for iron ore will continue to sustain the current price?
Ms Barron : As I said, we do not forecast the price of iron ore, so I would not make a comment on what the price of iron ore might do.
CHAIR: If you can, that would be most helpful for him and everybody else in the world. That would be handy.
Senator KETTER: What guidance has the Treasurer's office given about the projections for commodity prices?
Ms Barron : They gave us none at all.
Senator Cormann: Let us be clear. The assumption used here is a technical assumption determined by Treasury. There is absolutely no interference in that from the political level of government.
Senator KETTER: Okay, but you are assuming a price of $55 per tonne.
Senator Cormann: It is a technical assumption based on an average price over a preceding period. We are being very transparent that that is what it is; we are not trying to make it into something that it is not. The reason that technical assumption is used is that, quite frankly, there is no more credible method to make a prediction on what will happen to these prices in the future, so that is the best we can do.
Senator KETTER: What has led to that increase in the assumption?
Senator Cormann: The average price was higher in the previous four weeks. Remember that in the period we have been in government, since September 2013, every variation up until this budget was a downward revision. It went down to $90, to $60, to $39 a tonne at MYEFO before Christmas. This is the first time for a long period that the revision was an upward revision, for no reason other than that the average price in the relevant preceding period was higher.
Senator KETTER: So we are basing this on a four-week period?
Ms Barron : A recent average, yes.
Senator KETTER: Is that a sound basis for making a long-term assumption?
Senator Cormann: You are now asking the officer for an opinion. As I have indicated to you very transparently, in the absence of being able to accurately predict and forecast these sorts of price movements into the future, it is as sound a method as any. It is the method that we are using and it is transparently declared.
Senator KETTER: I have some other questions about wage growth. Would it be appropriate to discuss those now?
Ms Barron : Yes, while we are here.
Senator KETTER: We are looking at the impact of wages growth on nominal GDP growth. I asked the question earlier: do you know the last time that wage growth was this low?
Ms Barron : In the Wage Price Index, on which we report, I think this is the lowest growth since the series started to be produced in the late 1990s.
Senator KETTER: Is there a rationale for why wages are growing so slowly?
Ms Barron : In a number of advanced economies at the moment, wages growth is slowing at a time when unemployment is also falling. I think it is fair to say that it is a bit of a puzzle and does not look like previous relationships between those two things.
Senator KETTER: What would you say is the impact of sluggish wage growth on consumption?
Ms Barron : Our consumption forecast is based on a forecast that there will be some continuing further trend decline in the savings rate and that is what will sustain consumption through the forecast period.
Senator KETTER: If there were low wage growth over the longer term, what would the impact on consumption be?
Ms Barron : There are many factors that drive consumption—employment, as well as what happens to the savings rate. Wealth effects can drive consumption.
Senator KETTER: Other things being equal, what would you say is the impact?
Ms Barron : Other things generally are not equal when you forecast.
Senator Cormann: That is the problem. That is what makes it such a challenging science.
Ms Barron : Or art.
Senator WONG: It is not a science.
Senator Cormann: Art, yes. I was hesitating as I was saying 'science'!
Senator McALLISTER: Craft?
Senator KETTER: A dismal science. In general terms, what would you say is the relationship between wage growth and consumption?
Ms Barron : Income is clearly one factor that determines that, but how much of the income you consume depends on how much you alternatively save. Our forecasts have some trend decline in the savings rate. That is coming off a very high level of saving during the GFC.
Senator KETTER: I had some questions about negative gearing and R&D tax incentive.
Senator Cormann: Revenue: we might do better there.
Senator WONG: R&D tax: that is also Revenue?
CHAIR: Just before you do—no, we will do it after. We will break now till half past one.
Proceedings suspended from 12:29 to 13:30
CHAIR: The committee will resume. Senator McAllister.
Senator McALLISTER: I think I indicated before the break that I had some questions about the tobacco initiative in the budget papers. Revenue Group is the group we ask? Great. Firstly, I assume that Treasury was responsible for modelling the costings that produced the $28.2 billion figure that appears in the budget papers?
Mr Brake : Yes. We are responsible for all tax costings in the budget.
Senator McALLISTER: When did you initiate modelling on an increase to the tobacco excise?
Mr Brake : It would have been some weeks before the budget. I would have to take the precise time on notice.
Senator McALLISTER: Okay, but it was this year—since January?
Ms Horvat : Yes.
Senator McALLISTER: Okay. Terrific. How do you go about doing that?
Mr Brake : I might hand over to Ms Horvat to give an explanation.
Ms Horvat : I can take you through quite a detailed description of how we do it, if you would like, or—
Senator McALLISTER: Sounds good.
Ms Horvat : All right. The first step we would do is basically determine the base of tobacco consumption volumes. To do that we use RAU—that is our Revenue Analysis Unit within my division—data. They are also the people who forecast tobacco excise revenue or receipts. So we would use the volumes that they have in their data and we would reflect on that in terms of good tobacco clearances and collections of receipts historically.
Senator McALLISTER: So you are looking for trends in that data?
Ms Horvat : Correct. Once we have determined the tobacco clearance volume, we would split it into cigarettes—how many sticks are within that volume—and also loose tobacco—how many kilos of loose tobacco are in that estimate. We also rely on data from my colleagues here at the table, the ATO, and the Department of Immigration and Border Protection, obviously.
The second step would be to determine the new tobacco excise rates of the policy we were being asked to estimate. The 12½ per cent increases are applied in the model to the existing excise rate on September forecasts for each year.
Senator McALLISTER: Right.
Ms Horvat : The baseline forecast tobacco excise rate from September 2017 is increased by 12½ per cent in addition to the increase from indexation to AWOTE. You are aware that we already index by AWOTE?
Senator McALLISTER: Yes.
Ms Horvat : A kind of third, broad step in calculating our excise receipts and the excise costing of any increase in change is to determine the current average price of tobacco. To do this, we actually need to do some research on price lists of tobacco products for various brands and quantities, and from various sources. That can be through consultations but also just through research on the internet, looking at wholesalers' costs.
To standardise the prices that we gather through that research, we divide the quantity in each package to obtain the price per stick and price per kilogram. Once we have gathered those prices we say, 'Well, that is for a 36-pack, what is the price per stick?' Averages of the stick and kilogram rates are calculated for the use in the price-effect calculations. We have now got a price, we have got our volumes and we are now going to apply the increase in the excise to those prices. Before we do that we have to decide, of the price, what component is as a result of taxation and what component is the profitability of the tobacco company. There is a market price, but only one part of that is obviously going to be a result of taxation. We determine that split and then we apply the increased excise rate to the tax component of that split.
We now have a price increase and we have our quantity base levels. But, of course, we want to determine how behaviour will change as a result of the price increase. We would expect behaviour to change. Treasury uses an elasticity for this estimate of negative 0.5. That means: basically, for every 10 per cent price change, we expect to see a five per cent demand fall. If a packet of cigarettes is $24 and we increase the price by $2.40, we expect demand for that packet of cigarettes to decrease by five per cent.
Senator McALLISTER: How is that rate selected?
Ms Horvat : That is a good question, Senator. There are a range of elasticity estimates available. The World Health Organisation has a range of estimates that it has suggested for both developed and developing countries. We use our best judgement to select what range we think is appropriate for Australia.
Senator McALLISTER: You have obviously been modelling the impact of tobacco—
Ms Horvat : Quite some time.
Senator McALLISTER: excise for quite some time. It is an enduring feature of the tax system. Has the elasticity rate changed in the last year?
Ms Horvat : In the last year—
Senator McALLISTER: When was the last time that the elasticity rate, used by Treasury in its modelling exercises, changed?
Mr Brake : The last time we would have done a costing of this type was when the previous government announced their four-step increase in tobacco excise. We would have made an assumption about the elasticity at that point in time, which was 2013.
Senator McALLISTER: Do you know what assumption was used in 2013?
Ms Horvat : It was very similar to this assumption.
Senator McALLISTER: Was it the same?
Ms Horvat : Not exactly the same, but there was only a minor variation.
Senator McALLISTER: What number was used in 2013?
Mr Brake : I have got some advice here that previous costings have used elasticities that range from minus 0.42 to minus 0.58. The minus 0.5 is obviously in the middle of that range.
Senator McALLISTER: When you last did it 2013, what was the elasticity rate that was selected then?
Ms Horvat : It was minus 0.58.
Senator McALLISTER: It was minus 0.58 last time and minus 0.5 this time. I interrupted your flow; you were providing a most interesting summary; please continue.
Ms Horvat : I am pleased to say that I am almost finished. Once we apply the elasticity, it is obviously applied to the tobacco volume. The final step is calculating the revenue raised under the higher tobacco excise rates. The new tobacco volume is multiplied by the new excise rate to calculate the total amount of tobacco excise that we expect to collect for each respective year. So that gives us a final overall costing, but we also, obviously, have to calculate the difference in tax collections and the GST impacts, so that we can allocate the GST impacts to that revenue head for the states and territories to benefit from.
Senator McALLISTER: Excise is not the only reason that tobacco consumption is declining. We also know tobacco consumption declines as a consequence of interventions like plain packaging or other kinds of policy measures. How is that dealt with in the steps that you have outlined? Is that in step 1, where you are looking at the trends, or is there another step where there is what might be described as, perhaps, a normal background rate of decline?
Ms Horvat : It would actually be both. It would be reflected in step 1, as you said. We see the trend in volumes, so it would be part of that, but it would also be a part of that elasticity estimate of how much we expect behaviour to change.
Senator McALLISTER: So that bakes in a price effect, plus the effect of other policy measures. Is that correct?
Ms Horvat : Primarily, the price effect. My understanding from the World Health Organization is that the price effect is one of the key ways to affect demand and consumption, and uptake of tobacco consumption.
Senator McALLISTER: I asked you about changes in that elasticity number since 2013, when this exercise was last undertaken. Are there any other changes since 2013 in terms of the approach you take to building this model?
Ms Horvat : There may have been.
Mr Brake : The basic approach that Ms Horvat has outlined would be very consistent with a range of costings we would do. That basic methodology is quite standard.
Ms Horvat : We would continue to update all of our costing methodologies as we learn more, observe more and get more up-to-date data. We may have updated in some way, but the methodology overall—I have given you a very high level—should be the same.
Mr Brake : One thing—and we can check on this—is what the forecast for the underlying tobacco consumption was. This is more of a revenue forecasting issue, because we assume how much revenue is going to change on a no-policy-change basis. We do look at that from time to time. I would need to check whether the people who do the revenue forecasting have looked at that in the last few years.
Senator McALLISTER: What you are saying is that, even without a change in excise, Revenue Group is interested in understanding the consumption volume because of its impact on the tax receipts, so you have a methodology for assessing that, that you use in the ordinary course of budget preparation.
Mr Brake : Correct, and tobacco excise raises significant revenue, so it is an important factor in looking at the revenue forecast as a whole. We do examine what is happening to those collections so that we can give the best possible forecast going forward.
Senator McALLISTER: Can you talk me through how that process comes about?
Ms Horvat : It is actually very similar to the process I have stepped you through already, except, obviously, we do not apply the change in excise. We apply the no policy change in excise to forecast what receipts we will receive.
Senator McALLISTER: You said you commenced this work earlier this year. Was that at the direction of the minister's office? The Treasurer's office?
Ms Horvat : I am not trying not to be helpful, but I actually could not tell you. As my secretary outlined earlier today, we have costed over 500 policies within my division. So to keep track of each and every one—I just cannot tell you. I am happy to take it on notice.
Senator WONG: Was it discussed with the Treasurer's office?
Ms Horvat : I am sure at some stage it certainly would have been discussed. It would have at least gone to ERC before it appeared in cabinet.
Senator WONG: No. It was a process of the provision of assumptions—
Senator Cormann: Sorry, I cannot actually hear you. I literally cannot hear you.
Senator McALLISTER: My original question was about the direction for you to commence modelling this increase to the excise. As part of those directions, were there any directions from the minister's office about the assumptions you might use in undertaking that exercise?
Ms Horvat : No, there were not.
Senator Cormann: Sorry can I just go back to the original direction, obviously—and Senator Wong would be familiar with this—
Senator WONG: No, I have forgotten everything.
Senator Cormann: The way these processes work is for a measure to come forward as a proposal to the Expenditure Review Committee for consideration in the budget process, obviously, the minister would put forward a new policy proposal and, first of all, the Prime Minister would give authority for the new policy proposal to come forward. Then it would go through a well-established process which includes, of course, the relevant work and the relevant assessments by Treasury and Finance officials as appropriate, depending on what the measure is.
Senator McALLISTER: I am sorry, Minister Corman, I did not quite catch all of that. Your evidence is that the Treasurer's office or his staff were not involved in providing direction about the assumptions used in this exercise.
Senator Cormann: The officer was very explicit in saying that there was no direction given by the minister's office or the Treasurer's office in relation to the assumptions used.
Senator McALLISTER: Did you provide advice to the Treasurer's office about the assumptions that you would be using?
Ms Horvat : I cannot recall but I may have—I may not have, to be honest. Can I just say that 0.5 elasticity is the best estimate of my division. This is our best endeavours estimate of the elasticity for this measure.
Senator WONG: I assume you that you were aware—I think the shadow Treasurer has said that questions would be asked in estimates about this. So I assume that you have come prepared, remembering the process as well.
Ms Horvat : As best I can, Senator. As I said, it has been an incredibly busy year.
Senator WONG: We know—sorry.
Senator McALLISTER: So many tax proposals.
Senator Cormann: Without increasing the overall tax burden in the economy—
Senator WONG: It is good, because you are taxing higher than at any time under Labor. It is a good thing that you did, isn't it? You are the highest-taxing—
Senator Cormann: You are wanting to push taxes up by—
CHAIR: If you left the comment out, we would not have this.
Senator WONG: finance minister—higher taxing than we were, so it is unsurprising that—
CHAIR: If we can return to question and answer, I would be most pleased.
Senator McALLISTER: The estimates for tobacco for 2015-16 and 2016-17 have increased from MYEFO. Was that factored into the costing when you were doing the measure—it was?
Ms Horvat : Yes, it was. That was factored in in the elasticity decision also. Step one, sorry: I will correct my answer.
Senator WONG: Sorry.
Ms Horvat : That was factored into step one—so reflecting the volume growth in history.
Senator McALLISTER: I think we had eight steps. But I think we may have stopped counting at some point—maybe seven or eight—but your last step was the process—
Ms Horvat : Seven.
Senator McALLISTER: where you roll all of those things together to produce a revenue increase. Was that the same methodology as was used in 2013?
Ms Horvat : Yes, Senator.
Senator McALLISTER: You will be aware, I am sure, that the Parliamentary Budget Office has costed a number of different proposals in relation to tobacco excise in the last year. Do you talk with the Parliamentary Budget Office about the processes and assumptions that are being used in the calculation of tobacco excise impacts?
Ms Horvat : We have protocols and a memorandum of understanding with the Parliamentary Budget Office which encourages staff to work cooperatively together. Yes, on occasion we do talk to the Parliamentary Budget Office.
Senator McALLISTER: Have you spoken with the Parliamentary Budget Office since January when you commenced this exercise about the assumptions used to calculate tobacco excise impacts?
Ms Horvat : Yes, I have.
Senator McALLISTER: Can you talk to me about the key issues that you have sought to consult them on—I think the words you used were 'encouraging staff to collaborate'. What are the areas you are seeking to collaborate on in this instance?
Ms Horvat : Obviously, neither party openly discusses what they are working on for confidentially reasons. It is quite important the PBO can maintain their confidentiality and, similarly, we maintain the government's confidentiality. We would have theoretical discussions about underlying methodology in costing processes.
Senator McALLISTER: So there has been a theoretical discussion about underlying methodology in costing processes associated with a tobacco excise? Was elasticity one of the factors that was considered in discussions between you and the Parliamentary Budget Office? Are you the officer who would be making the contact with the PBO?
Ms Horvat : That is correct.
Senator McALLISTER: Yes, it is you. Was the elasticity factor one of the subjects for discussion?
Ms Horvat : To be honest I think, yes, it may have been raised; I think I may have raised what we would use. To be honest, I cannot clearly, 100 per cent recall.
Mr Brake : One thing that we do, under the MOU, is provide data and our costing models to the PBO. Those models can include some of the assumptions we have been talking about as well.
Senator McALLISTER: On this occasion, did you provide data or models to the PBO about a tobacco excise?
Ms Horvat : I think our model has been provided previously, but I do not recall providing it this year.
Senator McALLISTER: Was it provided last year?
Ms Horvat : I am sorry; we would have to take it on notice.
Mr Brake : We provide the models when we get asked to provide the models, so that is part of the process.
Senator McALLISTER: It would help if officers could recall when the model was last provided.
Ms Horvat : Certainly. I can ask someone to go and call back to the department and try to get you an answer on that.
Senator McALLISTER: I think that would be of assistance. I am principally interested, I suppose, in understanding whether there has been an alteration to Treasury's model since the model was last provided to the PBO, and if in making that telephone call we could seek that information as well, that would be helpful.
Ms Horvat : We could, but as to whether there has been changes to my model, or the model in my division, the PBO would not be aware of that; but as I have already stated, overall, the methodology has remained the same. We may have changed minor things at the edges, but the methodology has remained the same. Those seven steps I outlined would have would be the same as what we have used in the past.
Senator McALLISTER: So which are the changes that the PBO would not be aware of?
Ms Horvat : I guess the forecasts of the growth going out, the forecasted volumes—et cetera?
Senator KETTER: Chair, can I suggest that person that is being referred to there come to the table so we can address that person directly.
Senator WONG: Might be better for your neck too!
CHAIR: You are about to be somebody else, I take it. That is okay; it depends on your answer whether you want it or not.
Mr Maloney : That is right!
CHAIR: Thank you, Mr Maloney.
Ms Horvat : Matt Maloney heads up our business tax unit who produces these estimates.
Senator McALLISTER: Terrific. I ask either of you, Ms Horvath or Mr Maloney: you mentioned that there may have been some parameters changed within your model, or some relationships within that model that had changed since it was last provided to the PBO. Could you step through those for us?
Mr Maloney : I think they would be very minor changes. As Ms Horvat stepped through, I suppose we go through a process of updating the model. So compared to any previous model we may have provided we would update it for the latest underlying forecasts of excise, the clearance volumes—that sort of thing. I cannot recall any substantial methodological changes that we have made to the model.
Senator McALLISTER: Not methodological changes, so it is not about the relationships between these things but it is simply about the parameters and the inputs, I suppose.
Mr Maloney : Yes.
Senator McALLISTER: So they have been updated. Has the revenue forecasting model, which I think you alluded to, Mr Brake, also been provided to the PBO?
Mr Brake : No. I guess it is useful to point out that, of course, the PBO knows the forward projections of the various revenue heads, including tobacco excise; that is published in the various budget papers. So they would have had access to the forward estimates of tobacco excise for MYEFO—well, depending on when they did their costings. If it was before MYEFO then they would have had the forecast as of budget last year. If they were doing costings post MYEFO then they would have the forward estimates as of MYEFO.
Mr Maloney : I have an answer for you on your question you asked before. We provided the PBO the model in 2014 and it did contain the elasticity that Ms Horvat set out for that change in 2013.
Senator McALLISTER: So it was minus 0.58 rather than minus 0.5?
Mr Maloney : That is correct.
Senator McALLISTER: Coming back to the modelling undertaken for government, was there only one option modelled for government or were there multiple options based on different assumptions and different inputs into the model?
Mr Brake : I think that is going pretty closely to the number of options, or whether the government considered a range of options about a particular area—
Senator McALLISTER: Perhaps I can reframe.
Senator Cormann: I am happy to say that the government considered a range of options.
Senator McALLISTER: Thank you, Senator Cormann. I appreciate it.
Senator Cormann: We always do consider a range of options because, obviously, otherwise it is very difficult to make a decision if you do not assess several potential options.
Senator McALLISTER: That is very wise. Can I ask, though, whether the options that were considered—not the policy question, which is what is the level of—
Senator Cormann: We are not going to go to the content of what is part of the cabinet deliberative process—
Senator McALLISTER: I am not seeking to ask about that.
Senator Cormann: But as part of putting the tax package together we consider a whole range of revenue options.
Senator McALLISTER: I am asking about the analysis undertaken to support it and whether there was sensitivity analysis done against particular parameters to understand the impact of the options under consideration.
Ms Horvat : Yes, there was.
Senator McALLISTER: And which were the parameters that were varied to do that analysis?
Ms Horvat : The elasticity parameter.
Senator McALLISTER: What was the range of elasticity parameters that was considered in undertaking these different models?
Ms Horvat : It would have been similar to the range that we had used for all previous costings, so it would have been between 0.4 and 0.58 negative.
Senator McALLISTER: What is the revenue impact, say, at the extremes of that range for the 12.5 per cent over a year for four years measure?
Mr Brake : I think we will need to take that on notice.
Senator WONG: Are you able to give us a ballpark? I am trying to get some sense of how much that drives the revenue model.
Mr Brake : I think we will need to take that on notice.
Senator WONG: Are we talking tens of millions, or hundreds of millions, or more? Just an order of magnitude.
Mr Maloney : I would prefer to take it on notice.
Senator WONG: You are not prepared to even give us that?
Mr Brake : We do not want to provide a number which is not—
Senator WONG: We are talking a—
Senator Cormann: We have taken it on notice, and we will assess whether we can be more helpful in our usual attempt to be as helpful as possible.
Senator McALLISTER: You will be aware that, on Monday 2 May, Laurie Oakes revealed leaked Treasury figures which then, of course, appeared in the following day's newspapers. Laurie Oakes had a document that indicated it was 'PROTECTED Sensitive: Cabinet'. Does that document contain costings that were modelled by Treasury?
Mr Brake : Sorry, Senator?
Senator McALLISTER: On Monday 2 May there was document marked 'PROTECTED Sensitive: Cabinet' that was leaked with the journalist Laurie Oakes. I am asking whether that document contains costings that were modelled by Treasury.
Mr Brake : I have not seen that document.
Senator McALLISTER: Are you aware of the leak, Mr Brake?
CHAIR: Have you got the document? We will table it. I am happy to do it.
Senator WONG: No, you have probably got it. The minister has probably got it, because—
Senator Cormann: I do not have the document.
CHAIR: You are referring to something that the officer has not seen.
Senator Cormann: I have seen it on TV, that night.
Senator WONG: So the figures that are in the public arena, Mr Brake—are they your figures?
Mr Brake : What I can say is that I have seen—
Senator Cormann: Maybe we can assist you with the 10-year projections of what the expected revenue is from the measure that is included in the—
Senator WONG: If you are going to table that, can you also table the 10-year company tax cut costs that you—
Senator Cormann: I was about to finish. Consistent with what the secretary to the Treasury did for the committee this morning in putting the revenue impact of the company tax cut over a 10-year period, I am happy to confirm that the 10-year impact of the tobacco excise measure included in the budget is $28.17 billion. I think that Mr Brake might be able to confirm that that is on the basis of a Treasury costing.
Mr Brake : That is correct. The $28.17 billion figure, which was over 10 years, is the same as a Treasury-generated figure.
Senator WONG: That was costed for the budget, presumably?
Mr Brake : We have been doing costings of the tobacco increase for the budget, yes.
Senator WONG: When were you first aware that this had been provided to a journalist?
Mr Brake : Someone notified me that the person had seen a media report.
CHAIR: Same time as me, probably.
Senator WONG: So no-one from the Treasurer's office spoke to anyone at Treasury about the fact that this was going to happen?
Mr Brake : I cannot talk for everybody in Treasury, obviously, but no-one contacted me to notify me that this figure would appear in the media.
Senator WONG: Did anybody at the table know about this ahead of time? What about Mr Brennan—did he know ahead of time?
Mr Brake : Mr Brennan? Michael Brennan? Not that I am aware of.
Senator WONG: The secretary?
Senator Cormann: We might have to take that on notice, given they are not here. I think it is fair to assume that nobody in Treasury would have been involved in this leak, but who knows? Who knows where Laurie Oakes's sources come from?
Senator WONG: Did you provide the document?
Senator Cormann: No, I did not.
Senator WONG: Can I ask you, Minister—
Senator Cormann: I seem to recall that one year Mr Oakes received a copy of the whole budget. I think they are still trying to figure out where that came from all those years ago. If the purpose of the exercise is to ask us whether we have been able to identify the source of the leak, no, we have not.
Senator WONG: Did you know that it would be provided to the media before it happened?
Senator Cormann: I did not, no.
Senator WONG: Has a Treasury secretary or anyone at Treasury initiated any investigation into this leak? If not, why not?
CHAIR: I hope not.
Mr Brake : The answer to the first question is: no, there has been no inquiry into this matter.
Senator WONG: Has the Treasury notified the AFP of the leaking of this information?
Mr Brake : Not that I am aware.
CHAIR: Bring the printer in!
Senator WONG: Are you participating in this now, Chair?
Senator Cormann: Sorry, what was your question, Chair?
CHAIR: It is all right. Proceed, Senator Wong.
Senator WONG: Thank you. These are legitimate question.
CHAIR: Yes, fair enough.
Senator WONG: You may not think, Chair, that this is a problematic issue. On television there is a document which you can see very clearly has on it 'PROTECTED Sensitive: Cabinet'. Can you tell me why it is Treasury has not initiated any investigation into a document headed 'PROTECTED Sensitive: Cabinet' that was provided to a journalist for political purposes? Do you think that is okay? You don't think that actually compromises your department?
Senator Cormann: You are now asking Treasury for an opinion.
Senator WONG: Sorry, I will withdraw that question. Can you tell me why you have not initiated any investigation about nor referred to the AFP the leaking of a document which is headed 'PROTECTED Sensitive: Cabinet'?
Mr Brake : I think that would normally be a matter for the secretary to make a decision about.
Senator WONG: It is a good way to—
Senator Cormann: I think it is fair. Under the standing orders, any officer appearing in estimates is always entitled to refer a matter to a senior officer or to the minister.
Senator WONG: He is. That is fine.
Senator Cormann: We are taking that on notice. I will ask whether the secretary to the Treasury has anything to add to the evidence by Mr Brake.
Senator WONG: Would you also ask the secretary to consider the question of whether he has a concern that the leaking of such a document and the provision of a Treasury costing which has been confirmed today in the lead-up to a budget and an election risks politicising the APS and his department?
Senator Cormann: I will take it on notice—
Senator WONG: Thank you.
Senator Cormann: though I do not agree with the premise of the question.
Senator WONG: Come on.
Senator Cormann: You are making an assumption.
Senator WONG: Come on, Matthias.
Senator Cormann: I remember when you were releasing advice from Treasury and Finance in the middle of a campaign. I think it was a huge embarrassment to you, actually, during the last campaign.
Senator WONG: Which is why you tried to leak it, but it has come back to you, hasn't it?
CHAIR: We are doing circle work, as Senator Heffernan would say.
Senator Cormann: I completely reject the proposition that I leaked anything. I have not leaked anything.
Mr Brake : Could I just add one point to this? Treasury takes budget security extremely seriously.
Senator WONG: You have not done anything, Mr Brake.
Mr Brake : We have very vigorous procedures in place and we were particularly conscious of the sensitivity of the work we were doing on tax and superannuation in the lead-up to this budget. The secretary of the Treasury has made that manifestly clear to me and to all the senior staff of the department.
Senator McALLISTER: I have one question before we move off this issue. Can I just clarify your earlier evidence, Ms Horvat and Mr Maloney, that you can confirm that Treasury provided the government with a number of policy options which had been modelled using different elasticity assumptions?
Mr Brake : I think we have provided a wide range of policy options, broadly.
Senator Cormann: This is part of the overall tax package?
Senator McALLISTER: Sorry, in relation to tobacco excise.
Senator Cormann: We are not going to go into the specifics of each individual measure. The decision the government has taken is reflected in the budget paper. I am happy to confirm that in the context of putting the tax package together a whole range of different potential measures were put forward and a whole range of different potential options were considered. The government made decisions through the usual process. The decisions the government has made on the revenue side of the budget are reflected in the relevant part of Budget Paper No. 2.
Senator WONG: I want to go back to the $48.2 billion that we discussed some hours ago. Firstly, you said that was a 10-year period. Can you tell me in which year that costing starts? Is it 2016-17?
Mr Brake : I think the secretary's opening statement—
Senator WONG: He does not say in the opening statement—he just says 'over 10 years'. Sorry—he says 'to 2026-2027'. Does it start in 2016-17?
Senator Cormann: It is over the medium term, hence over the 10-year period.
Mr Brake : It is the cost from now on.
Senator Cormann: From 1 July 2016—
Mr Brake : to 2026-27.
Senator WONG: Can you give me the year-by-year costs?
Mr Brake : We are not authorised by the Treasurer to provide that information.
Senator Cormann: I will take it on notice. We will see whether we can add some more information.
Mr Brake : He said he was not authorised. Why don't you give him a call, and if you want to release it, go ahead? You have a few hours left. We can do that.
Senator Cormann: I have taken it on notice.
Senator WONG: We all know that you will never come back on it before an election, so if you really want to be transparent, why don't you just get them authorised?
Senator Cormann: I have taken it on notice.
Senator WONG: Is this net of imputation?
Mr Brake : The costings include the effect of the change in the company tax rate, which changes franking credit, which changes the amount of personal tax paid.
Senator Cormann: So the answer is yes.
Mr Brake : The phasing is such that by 2023-24 all companies have a 27.5 per cent company tax rate, and then it goes 27, 26, 25.
Senator WONG: Does it include the effect of the 25 per cent rate for all companies in the 2026-27 year?
Mr Brake : Yes.
Senator WONG: What is the costing for that year?
Mr Brake : We will have to take that on notice.
Senator WONG: Are you authorised to release it?
Senator Cormann: He has taken it on notice.
Senator WONG: I think you may have answered this and I have momentarily forgotten—when was the 10-year cost of this measure first done?
Mr Brake : I think I said earlier today that it was some weeks before the budget.
Senator WONG: Was that the first occasion on which it was provided to the government?
Senator Cormann: We might have to take the specific date on notice. You would not expect us off the top of our heads to remember precisely—
Senator WONG: I assume you undertook a 10-year number as a result of a government request or a government decision.
Senator Cormann: No. You have been on the Expenditure Review Committee. On the Expenditure Review Committee these measures are considered with four-year costings, obviously with an eye on the medium-term impact. The medium-term impact is reflected in the relevant budget forecasts and projections. Obviously, in the ordinary course of doing its job Treasury would have done relevant work to ensure that the medium-term projections were as accurate as they could be given the imperfection of information in relation to events that are still a very long way away.
Senator WONG: Was the costing done before the GDP estimates were finalised? It must have been, because I think they were signed off on the 27th. I think that was the evidence from Mr Fraser.
Senator Cormann: The difficulty is that the numbers across the budget are updated as appropriate if there are parameter variations that warrant such variation. A costing is not frozen at a point in time. It is adjusted if that is appropriate.
Senator WONG: Shall I ask my question again?
Mr Brake : How the process works is that we do our costings, then there are the revenue forecasts and then, as you know, it goes into this consolidation process. That happens right near the end of the process. The finalisation of the revenue forecasts, as the secretary said, happened—I think he mentioned the 27th of the 28th—
Senator Cormann: He specified a date earlier.
Senator WONG: I want to confirm that costing that you have given me today is predicated upon the GDP macroeconomic parameters that were finalised on the 27th.
Mr Brake : The costing that we have been talking about today is the budget costing, which is consistent with the rest of the budget.
Senator Cormann: It is based on the most recently available information at the time when the budget numbers were finalised.
Senator WONG: Can we go back to the 10 years. I think the minister and you said two different things.
Senator Cormann: No we did not.
Senator WONG: You said the first year was 2016-17. The secretary in his statement says the last year is 2026-27. Isn't that 11 years? Which is the 10 years for the $48.2 billion? You have an additional one at the end—2026-27. Is it 2016-17 to 2025-26? This is where you have to draw a little chart.
Mr Brake : The policies start on 1 July 2016, so from that point through to 2026-27 is 11 years.
Senator WONG: That is what I have just said. Is it a 10-year figure or an 11-year figure and, if so, which is the 11 years?
Mr Brake : It is an 11-year figure. It starts now and finishes in 2026-27.
CHAIR: Ten years from 1 July.
Mr Brake : From 1 July 2016 to 1 July 2026 is 10 years.
CHAIR: That is pretty simple. Even I get that, and I am not an accountant.
Senator Cormann: It is the usual medium-term projection.
Senator WONG: Can we let him finish? I have not actually got the answer. I just want the end date.
Senator Cormann: It is the usual medium-term projection which, in 2016-17, takes you to 2026-27. The question is whether you prepare it from one year to the next—
Senator WONG: Can I get the end date? Before you were interrupted by both the chair and the minister, you gave me an end date. Can you give—
Senator Cormann: He was not interrupted. I was using my prerogative as the minister in the chair—
Senator WONG: Can you let him finish his sentence?
Senator Cormann: to provide answers to questions that are asked. Obviously from 2016-17 to 2017-18, do you think that is two years or one year?
Senator WONG: I do not actually want an argument. I just want to get the end date.
CHAIR: Senator Wong, can you frame your question?
Senator WONG: He actually answered before you and he talked over him, chair. I just want to get the end date. Is it 30 June 2027? Is that the end date of the $48.2 billion?
Mr Brake : The final year is 2026-27.
Senator Cormann: As reflected in the budget papers and the medium-term forecasts.
Senator WONG: Can you just be quiet? I am just trying to ask him—
Senator Cormann: You may not like it, but I am entitled to answer questions.
Senator WONG: I am tired, and everybody is tired.
Senator Cormann: It is 2026-27. That is clear.
CHAIR: Thanks, Minister. We have cleared that up.
Senator WONG: So the $48.2 billion is over the period 1 July 2016 to 30 June 2027? Mr Brake?
Senator Cormann: It is from 2016-17 to 2026-27. He has said that several times now.
Senator WONG: He is pausing. I am giving him an opportunity—
Mr Brake : It is 2026-27.
CHAIR: Framing the question—
Senator WONG: Can you just let him finish?
Mr Brake : I think there is something in the budget papers which describes exactly when the medium-term—
CHAIR: That is three times this has been asked, Senator Wong.
Senator WONG: I am sorry, I cannot hear you, Mr Brake.
Mr Brake : I was just looking for the reference in the budget papers—
Senator WONG: to the medium term. All I am doing is confirming the start date and the end date of the costing that was given in the statement this morning.
CHAIR: Which we have had.
Senator WONG: I July 2016 to 30 June 2027.
Senator Cormann: From 2016-17 to 2026-27, which we have said several times now, which is consistent—
Senator WONG: Why is it so hard? The minister just keeps interrupting. I just want to make clear—
Senator Cormann: I am responding to your interjections and your political swipes.
CHAIR: We are going round in a circle—
Senator WONG: Can we just let the bloke answer?
Senator Cormann: He has answered it several times.
CHAIR: He has answered three times. This will be the fourth.
Senator Cormann: I do not know what you are trying to get at.
Senator WONG: I am not actually trying to get at anything. This is much ado about nothing. I just want to make sure—
Senator Cormann: We have answered this question several times now. This is like tedious repetition.
CHAIR: I can get you a Tim Tam, we can get some sugar going.
Senator WONG: Do not be patronising, chair.
CHAIR: It is four times now.
Senator WONG: Because you guys both keep interrupting him. All I wanted to get—
Senator Cormann: The answer is 2026-27. I have said this several times. The officer said it several times.
CHAIR: I would like to accommodate you, Senator Wong, but we do have other senators. Would you like to wrap up your questions?
Senator WONG: If it possible to answer questions without the chair and the minister interrupting—
Senator Cormann: The minister is entitled to provide answers to questions by the opposition. That is why the minister is here.
Senator WONG: The chair is not. He is supposed to be at least half there.
CHAIR: I am generally pretty good, but it was even getting monotonous for me. Frame the questions and we will get the answers.
Senator Cormann: Are we going to get the same question again, chair?
CHAIR: No. Do you want me to go to Senator Bushby for a while?
Senator WONG: I want you to stop interrupting me for one second, and I might be able to ask a question.
CHAIR: I will remain silent until you speak.
Senator WONG: I can ask all of these. I am trying to work out which ones we do not want to ask or whether I need to do any of these.
Senator Cormann: I might just say 2026-27, if that helps.
Senator WONG: At the risk of having you and the minister interrupt again, the point I was clarifying was—I have no difficulty with the period of the costing, but the costing is actually over 11 years, and the secretary just described it as a 10-year costing. That was what I was clarifying.
Senator Cormann: To answer that question again, the costing, consistent with the evidence provided by the officer, goes from the period 2016-17 to 2026-27—
Senator WONG: Eleven financial years.
Senator Cormann: which is the medium term, as outlined in the budget papers.
Senator WONG: There is no comment about that. I was just getting clarity about the dates.
Senator Cormann: And I have just clarified that again.
Senator WONG: So why are you interrupting? I just wanted the dates identified.
Senator Cormann: Because you keep asking the same question. I know that Senator Bushby would like to ask some questions.
CHAIR: Take it back down again.
Senator WONG: Thank you. I think some of my colleagues may ask ATO staff this question, but I actually wanted to ask about the revenue costing, or benefit, to the budget bottom line of the ATO measure—what is it described as?—that yields something in excess of $3 billion in revenue, where you employ 1,000 people. The tax integrity package: is that what it is called? No?
Mr Brake : Was it the Tax Avoidance Taskforce?
Senator WONG: I cannot keep up with all the names. By the way, who did decide the name '10-year enterprise tax plan'? Whose decision was that?
Senator Cormann: That would have been a decision of government. As I have previously indicated—and I think as you know—the budget document is a document of the government, and the government takes responsibility for the measures that are in it and for the way the measures are described.
Senator WONG: Mr Brake, can you just explain to me how you come up with this costing. The revenue gain that is forecast is $3.7 billion over the forward estimates period. In effect, is it the second largest tax savings measure in the budget? I think that is right.
Mr Brake : Of tax and spending?
Senator WONG: Yes, I think so. Sorry; it is the second largest save.
Senator Cormann: It is not a save; it is a revenue increase. I know that the Labor Party describes revenue increases as savings—
Senator WONG: I think, in your budget document—
Senator Cormann: But revenue increases are not actually savings. Savings are spending reductions, which is why the statement that was put out by the shadow Treasurer last night is so misleading. Out of $71 billion in asserted savings, $65 billion, according to the opposition leader's budget reply speech, are actually tax increases: $49 billion related to a higher company tax rate and about $16 billion—
Senator WONG: It is your budget.
Senator Cormann: Well, it is the opposition leader. The opposition leader decided to keep taxes $65 billion higher, and then tried to describe them as savings. Tax increases are not savings.
Senator WONG: Okay. So your $3.7 billion tax hike—if you want to call it that—
Senator Cormann: This is cracking down on tax avoidance, as you know.
Senator WONG: I do like it: a coalition measure is not a tax hike, even though it increases tax. It is impressive.
Senator Cormann: This is an integrity measure. But we are not increasing the overall tax burden as a result of decisions that we have made, whereas you want to spend all of your tax hikes on higher spending.
Senator WONG: Highest taxing! He is a higher taxing finance minister than I ever was.
CHAIR: Senator Wong and Senator Bushby, I really do not want this to unravel, and I—
Senator WONG: Well, we were thinking—
CHAIR: No, I am just saying—
Senator WONG: If he keeps having a go, I will have a go back.
CHAIR: Keep the partisan shots to a minimum. I am sure the minister will not feel compelled to respond if you do not feel compelled to ramp things up.
Senator WONG: Point of order, Chair: all I asked was that it is the second largest saving in the budget. He then chose to have a partisan go.
Senator Cormann: It is not a saving.
Senator WONG: See?
Senator WONG: All right, call it something else; I do not care. I do not give a flying whatever.
CHAIR: You know what—
Senator Cormann: It is a revenue measure.
Senator WONG: Seriously, I just want to ask the question about the measure.
CHAIR: You cannot expect an answer to a politically charged question.
Senator WONG: I have not actually asked the question.
CHAIR: So, ask the questions and we will get on with the answers.
Senator WONG: Have a go at me! Why don't you control the minister?
CHAIR: I am conveying the message to everybody in the room.
Senator WONG: Why don't you tell him to stop jumping in halfway through a question?
CHAIR: Let's move on, and hopefully—
Senator WONG: Okay. Regarding, the tax integrity package establishing the Tax Avoidance Taskforce, which gains a revenue gain of $3.7 billion, which I am suggesting is the second largest savings measure or tax hike in the budget, can you tell me how it is employing 1,000—is it 1,000 people? I do not think it is in this version, but it might have been in the PBS. How many more additional people are there? Was it 390 ASL per year?
Senator Cormann: I think this is a question for the tax office.
Mr Olesen : The Tax Avoidance Taskforce extends existing programs that we have been funded for, where that funding expires at the end of 2017, and expands those programs. In total, it will have in the order of 1300 staff involved in a task force coordinated looking at multinational tax avoidance, at large private group compliance issues and high-wealth individual tax issues.
Senator WONG: I was just after the number of people that this measure funds—the additional people that this measure funds.
Mr Olesen : There are approximately 900 staff currently with us under the existing program that this measure extends and there are an additional 390 staff that are added to those programs as a result of this measure.
Senator WONG: So it is not actually any additional staff; it is just a continuation of—
Mr Olesen : It is 390 additional staff plus the continuation of programs that otherwise expire 30 June 2017.
Senator Wong: Can someone explain to me how 390 additional staff yield $3.7 billion? Is that a Treasury costing?
Mr Olesen : I am happy to have a—
Senator WONG: I want to ask first if it was a Treasury costing.
Ms Horvat : Yes, officially, it is—I mean all revenue estimates in the budget are Treasury costings—
Mr Brake : On these sorts of measures, when it comes to integrity of the tax law and the ATO compliance program, the ATO provides advice and then we look at that advice. Most of the work in coming up with this estimate and, as Mr Olesen said, is that the ATO has existing compliance programs and so on, so the information data to inform the revenue that will be expected to be collected from a continuation and expansion of this sort of program, the ATO would take the main running on putting those costings together. However, we do look at those costings and sign off on them.
Senator WONG: It is just a lot of money for 390 people. The flip side is—just remind me, Mr Olesen: how many staff in the 2014 budget—what was the reduction?
Senator Cormann: In which budget?
Senator WONG: The 2014 budget.
Senator Cormann: In the 2014 budget, all we did was reflect the efficiency dividend that was applied by the previous government in the economic statement for the 2013 election and we brought some of that forward by a year. But it was actually the same quantum that was applied by the previous government in which you were of course a senior member of the Expenditure Review Committee.
Mr Olesen : The point to make is that, whilst we have had significant reductions in our staffing level, we have been able to maintain our performance on the commitments that we had made to government under the programs that are already funded, so we have continued to meet the revenue commitments that we made under those programs that are currently funded. So the costings for these measures are a reflection of the outcomes that are currently arising, because of the programs that we have already got in train. So we have some real experience based on the last two to three years from those programs that are currently funded that inform us about what our expectation will be under these new programs that both extend and expand those existing programs.
Mr Hirschhorn : Maybe just to expand on that: the $3.7 billion is not attributable to the 390; it is attributable to the additional work of the extended programs which would have run off when those programs ended, and so it is both the effect of the 930 being extended and the 390 new resources.
Senator Cormann: If it had not been for this measure, we would not have been able to realise on the basis of the expert advice the government has received that $3.7 billion in revenue, and so the government has acted on that advice and protected our revenue base by making this decision.
Senator WONG: How many staff are covered by your answer? So not ex; the 390.
Mr Hirschhorn : The continuing programs is 936 staff.
Senator WONG: So you generated the $3.7 billion ATO revenue gain?
Mr Olesen : Yes, it is substantially our estimate, yes.
Senator WONG: There has been some public reporting—and I am not going to ask about the detail of the person's tax affairs—in relation to a particular fashion designer, a Ms Johanna Johnson. It has been asserted publicly in the Sunday Telegraph that the foreign minister has made representations to the ATO. I simply want to ask—
Senator Cormann: Do you have a copy of the article there? I have a slightly different recollection of what was reported.
Senator WONG: Sure. I am happy to table it. It is my only copy and it has got highlights.
Senator Cormann: I remember reading it.
Senator WONG: I only have one question: has the ATO received any representations, directly or indirectly, from Ms Bishop or her office in relation to Ms Johnson's tax matters?
Mr Olesen : I think we would have to take that on notice.
Senator WONG: Does anyone have any knowledge?
Mr Mills : No. We have not seen anything.
Senator WONG: What about from the Department of Foreign Affairs and Trade?
Mr Olesen : Again, we would have to take that on notice.
Senator WONG: Thank you.
Senator BUSHBY: Coming back to the Ten Year Enterprise Tax Plan, what does Treasury modelling show will happen to growth as a result of that plan?
Mr Brake : I will call my macroeconomic group colleagues, who examined the macroeconomic aspects of this package.
Mr Kouparitsas : As we have reported, not only in the budget papers but also in the supporting documents, we estimate the package will generate, in the long term, an improvement in GDP of a little over one per cent.
Senator BUSHBY: On what basis did you come to that conclusion? Was there modelling? How have you worked it out?
Mr Kouparitsas : For analyses of that type we have computable general equilibrium models, which are considered best practice for analysing—
Senator BUSHBY: To short circuit the answer, in view of time, you have actually used that model to come to that conclusion?
Mr Kouparitsas : Yes, that is right.
Senator BUSHBY: When you provided your initial answer you said 'estimate', but you have actually modelled this?
Mr Kouparitsas : We have modelled it, yes. That is right.
Senator BUSHBY: So it is an outcome of a lot of expertise in Treasury that has been built up over a number of years that has led you to draw this conclusion?
Mr Kouparitsas : Yes. I think it is fair to refer to it as a comprehensive, economy-wide model that is to a large extent dedicated to analysing tax policy.
Senator BUSHBY: Okay. Is your modelling backed up by any other modelling or any other evidence?
Mr Kouparitsas : Yes. As part of this process—and Mr Brake can talk a little more to this—we also drew on some research from Chris Murphy of Independent Economics as well as KPMG. Again, in all of our public release around the time of the budget, their results confirm the direction that we have reported in terms of the long-run effects of the policy.
Senator BUSHBY: Which was that you would expect it to exceed a one per cent increase in GDP?
Mr Kouparitsas : We have some slight variations in terms of the GDP, but with the critical numbers around what would happen to gross national income, which are important for Australian households and income, we get a broadly similar outcome.
Senator BUSHBY: Generally, increases in GDP and, although slightly different, gross national income are positive indicators for wage growth, jobs growth, consumption and living standards for Australia—is that generally accepted?
Mr Kouparitsas : Yes, all of those outcomes are supported by our analysis and both Independent's and KPMG's analyses.
Senator BUSHBY: So, by corollary, if this particular measure were implemented and did deliver around a one per cent increase then that would have benefits for wage growth, jobs growth, consumption and therefore living standards et cetera?
Mr Kouparitsas : Yes, that is what the analysis shows.
Senator BUSHBY: Do many international organisations share the view that lower company tax rates raise living standards?
Mr Kouparitsas : Yes, there is a fair amount of academic research by Nobel laureates and others who have come to similar conclusions. A reasonably well-known study is by Her Majesty's Treasury as well as the revenue office, and they come to broadly similar conclusions about the scale of the response in growth of the economy through GDP as well as the effects on real wages and household incomes and consumption. So the short answer is yes. There is broad evidence to support that.
Senator BUSHBY: As somebody who has formal qualifications in economics, I can probably say that economics is generally considered the dismal science. I know that it is rare to get everybody agreeing but, broadly, do those studies reflect the general consensus?
Mr Kouparitsas : Yes, the common view of the studies is that the primary mechanism is that it encourages deepening of the capital stock, so increasing the amount of productive capital in the economy, and that capital then improves the productivity of workers, which generally leads to an improvement in their real wages which they can then utilise to undertake higher levels of consumption. The important outcome here is that these are not temporary responses; these are permanent, enduring responses.
Senator BUSHBY: Very good. How do Australia's business tax rates compare to those of other OECD countries?
Mr Kouparitsas : I will let my Revenue colleagues speak to some of those details.
Senator Cormann: In a general sense, I might just say that we are at the higher end and, by reducing it to 25 per cent over the decade, we will end up in the middle of the road on the average of OECD countries.
Mr Brake : I believe Mr Duggan has a handy table which we can take you through.
Senator BUSHBY: Would you care to add to that?
Mr Brake : One point made here is that over time our company tax rate has been stable whilst other countries have reduced their corporate tax rates. Fifteen years ago our corporate tax rate was one of the lowest in the OECD, so that relative position has changed significantly.
Senator BUSHBY: And we have been left behind a little bit in the relative direction that other OECD countries have been taking. Is that correct?
Mr Brake : That is correct.
Senator BUSHBY: Mr Duggan, if you could take us through that, that would be appreciated.
Mr Duggan : Australia's company tax rate is currently the seventh highest out of the 34 OECD economies. As Mr Brake said, the last time the headline statutory company tax rate was reduced was in 2001. At that time, we had the ninth lowest out of the 34 OECD economies, so our relative position has shifted over that period.
Senator BUSHBY: Coming back to Mr Kouparitsas's comments earlier about the international studies, if we have seen other OECD countries reducing theirs, have they had associated benefits compared to where they would have been? I know it is hard to compare where they would have been with where they ended up, but has it had benefits for them in terms of their GDP growth? Are there studies to show that as well?
Mr Kouparitsas : I think there is evidence towards that. As you say, it is hard to disentangle all the things that happen in open economies, but in general I think lower tax rates definitely point to inward capital flows.
Senator KETTER: I just have a follow-on question, just very quickly. You were talking about the international experience, Mr Kouparitsas. In the Canadian experience, as I understand it, some 15 years ago there was a lowering of corporate rates of tax, but I understand the provinces over there have started to increase taxes in order to cover public services. Is that correct?
Mr Kouparitsas : I do not know of the exact Canadian experience.
Senator KETTER: Mr Duggan?
Mr Duggan : I must admit I am not aware of the precise Canadian experience either. The United Kingdom is often quoted as an example. They have reduced their corporate tax rate quite significantly in recent years and have plans to reduce it further, from 20 currently down to 17 per cent. There have been some studies done—Mr Kouparitsas referred to the UK Treasury and Her Majesty's Revenue and Customs—which would suggest that they have had something of an investment response from those reductions.
Senator KETTER: So you have not looked at Canada at all?
Mr Duggan : I just do not have information in front of me on Canada and cannot recall precisely what their experience has been.
CHAIR: Have I missed Australia's competitiveness?
Senator BUSHBY: We are seventh highest of OECD countries.
Senator BUSHBY: For the record, you just mentioned then that the UK's rate is 20, going down to 17. Ours is currently 30.
Mr Duggan : That is correct.
Senator BUSHBY: I want to move to another question on tax but another measure in the budget, which is the change in the second highest personal income tax bracket. How many taxpayers will be relieved from moving into that second highest personal income tax bracket by the change proposed?
Ms Horvat : Some 3.1 million taxpayers will benefit from the personal income tax cut included in the budget. That is our estimate.
Senator BUSHBY: Is that over time or immediately?
Ms Horvat : It would be per annum. There would be some growth in the figure for population and as incomes move through thresholds.
Senator BUSHBY: I want to ask about the diverted profits tax. Can you explain to me how that will work and what types of companies will fall into that arrangement?
Mr Duggan : You may be aware that the United Kingdom has a diverted profits tax. Broadly speaking, there are two limbs to that. The first is ensuring that companies that do business in a country have a tax presence—what is called a 'permanent establishment'. Australia implemented that as part of the multinational anti-avoidance law. What the diverted profits tax that the government has announced does is to implement the second limb of the UK's diverted profits tax, which looks at related party transactions. It looks at the transactions between an Australian based entity and its overseas parent or related entity. It ensures that the transactions between those entities are not shifting profits in a way that is aimed at avoiding the payment of tax in Australia.
Senator BUSHBY: How is that different to and likely to capture more avoided tax than the transfer pricing mechanisms that we already have in place?
Mr Duggan : The diverted profit tax, in broad terms, does three things additional to what the existing transfer pricing and anti-avoidance laws do. The first is that it eases the test that the ATO would be asked to apply in determining whether or not there is a multinational tax avoidance circumstance. Currently part IVA of the Income Tax Assessment Act 1936 talks about the dominant or principal purpose of the transaction being to avoid tax. What the diverted profits tax does is allow the ATO to raise a provisional assessment in a case where it is reasonable to conclude that there may be tax avoidance as the motivation for the transaction. That potentially brings more things into scope for the ATO to consider.
Senator BUSHBY: It shifts the burden, in a sense.
Mr Duggan : It does. The second element is that it is a penalty tax rate. The proposal is that it be levied at 40 per cent. That is a penalty rate relative to the 30 per cent company tax rate. So what that does is provide an incentive for the taxpayer to do the right thing under the corporate tax system—to do all the right things under the transfer pricing provisions and be cooperative with the ATO so that they avoid being streamed into the diverted profits tax.
Also, there are some administrative differences, such as that company tax is levied on a self-assessment basis. With the diverted profits tax, the ATO would make an assessment and lodge a provisional assessment with the taxpayer. So it changes the onus of proof and requires the taxpayer to come forward with information over a period of time if they want to change that provisional assessment. It is bringing forward what might otherwise be an uncooperative taxpayer to engage with the ATO.
Senator BUSHBY: In layman's terms, it creates an incentive for companies that have the potential to shift some of their profits around a bit to do the right thing—
Mr Duggan : Exactly.
Senator BUSHBY: because it is not going to be pleasant if this is how they are dealt with.
Mr Duggan : A good outcome under the diverted profits tax would in fact be an increase in company tax rather than the levying of a diverted profits tax.
Senator BUSHBY: If the diverted profits tax raises nothing, but company tax goes up, then it is working?
Mr Duggan : Exactly.
Senator BUSHBY: What is it estimated to raise?
Mr Duggan : It is estimated to raise $100 million a year after it comes into effect, so $200 million over the forward estimates.
Senator BUSHBY: Does that take into account anticipated increases in company tax as a result or is it anticipated to be raised directly from the DPT or is it both?
Mr Duggan : Both. The way the measures are costed is to look at the total revenue gain to the Commonwealth from the policy decision. With respect to the diverted profits tax, I think our expectation would be that a lot of that would come through the company tax system.
Senator KETTER: Mr Duggan, Mr Jeremenko has made some comments about the UK's Google tax, which is the model for the diverted profits tax. He said:
How can this actually work? … A 25 per cent tax on profits is perhaps a nice soundbite for media reporting and it might get some good political traction for the UK government, but it’s certainly not that easy.
Do you share that assessment?
Senator Cormann: You are asking the officer for an opinion. I think you know that under the standing orders you can ask for explanations of policy but not for an opinion. You might need to rephrase your question.
Senator McALLISTER: This seems to be a very loose committee.
CHAIR: I beg your pardon. I am trying to keep the lid on it. It seems to have got very calm in recent minutes.
Senator Cormann: I wonder why.
CHAIR: We will keep it calm and in the spirit of good natured bipartisanship that does exist on this committee, we will continue to do so.
Senator KETTER: There would be some complexities associated with this particular tax. Can you explain those complexities?
Mr Duggan : With the budget there was a consultation paper put out which outlines precisely how the tax would work. Basically, a lot of the core design features replicate those in the United Kingdom. It is different to the way other elements of the corporate tax system operate. Is it complex? We have done everything we can to try and make it not complex. We have laid it out in as simple terms as we can—in terms of how it will function. We are going through a consultation process at the moment and we are hoping to get submissions to that which will allow us in the legislative design to make this operate as effectively as it can and, hopefully, avoid as much complexity as we can.
Senator KETTER: Was this considered as part of the tax white paper process?
Mr Brake : One of the important things mentioned in the tax discussion paper was the whole issue of large corporates paying the right amount of tax—a broad sweep of issues fall into that.
Senator Cormann: This is obviously part of the government's policy to crack down on tax avoidance and specifically here multinational tax avoidance. As the officer has explained, it is a continuation of previous measures that we have pursued and legislated through the parliament.
Senator KETTER: The revenue from the Multinational Anti-Avoidance Law was set out in the form of asterisks previously and it was identified as being unquantifiable. How do you explain the costings that we have here for the diverted profits tax?
Mr Duggan : What was said at that time in estimates was that Multinational Anti-Avoidance Law was a new provision within Australia's anti-avoidance laws. Since that time, the ATO has accumulated experience in implementing that law—
Senator KETTER: It was only legislated in 2015.
Mr Duggan : That is correct. I will defer to the ATO, but I know that there have been interactions with taxpayers in the lead up to that.
Mr Olesen : Yes, Senator. We have taken a very active approach, setting out a road map for taxpayers who might be affected by that new provision in how they can engage with us. I think we have engaged, through correspondence, with 175 entities that may be caught up by those new laws. A range of those have engaged directly with us and have signalled restructures to their corporate structures. Through that experience, even over this relatively short period, we now do have a stronger sense of the impact of these changes.
Senator KETTER: Has Treasury changed its assumptions in relation to the costings, or are they totally based on the ATO's advice?
Mr Duggan : I think, as Mr Brake said earlier, when we come to cost anti-avoidance provisions, our Tax Analysis Division quality assures and signs off on everything that goes into the budget. But the ATO has the information set in order to put those costings together. It is their experience with taxpayers that informs those costings.
Senator KETTER: Okay. It sounds like there has been a change of methodology here—a different set of assumptions applied. You say that the ATO has had some experience. It is a fairly brief experience to make such a significant change to the methodology underpinning the budget.
Mr Brake : I do not think it is a change in methodology, as such. Before we had less information and now we have enough information to feel that we can quantify the effect.
Senator Cormann: That is actually derived from budget to budget update to subsequent budget. That is the way forecasts and projections are always updated. As the information that you can rely on to make those forecasts and projections become better you obviously can improve the quality of those forecasts. One of the reasons the government decided to release the half-yearly budget update in December, for example, is that we wanted to have the relevant third-quarter national accounts data to be able to feed into the Mid-Year Economic and Fiscal Outlook document. We wanted to have the most recently available information for that purpose. But as time goes by obviously the quality of the information you can rely on to make certain judgements improves, and if the information that you can rely on improves then the outcomes out of any forecasting model, obviously, improve.
Senator KETTER: Mr Brake, in terms of the fact that we can move from asterisks to millions of dollars—I used the term 'methodology', but you are uncomfortable with that—did the government play a part in changing the approach?
Mr Brake : No, Senator, not that I am aware of.
Senator KETTER: Can you advise whether the diverted profits tax violates any tax treaties to which Australia is a signatory?
Mr Duggan : We received some legal advice on that. In fact, we received legal advice when multinational anti-avoidance law was brought into effect as well. By doing it as an anti-avoidance provision under part IVA of the Income Tax Act what our treaties allow us to do is to enforce our existing taxes through the anti-avoidance provisions. So the legal advice that we have received is that there is no violation of any of our treaty obligations.
Senator KETTER: I just wanted to clarify the costings on the revenue from the profits tax. It was $100 million per annum, wasn't it, over two years?
Ms Horvat : The last two years, yes.
Senator KETTER: I would just like to go back to some of those macroeconomic questions that I had earlier in the day, which go to the issue of negative gearing and whether any modelling had been done on the impact of negative gearing.
Mr Brake : I might ask Mr Brine to join us.
Senator KETTER: Okay. Thank you.
Mr Brine : We have not undertaken any economic modelling of the impacts of negative gearing of the nature that Mr Kouparitsas was discussing earlier.
Senator KETTER: The government has made quite a lot of announcements and has formed strong positions on negative gearing, and you are telling me that you have not done any modelling to inform government about this issue?
Mr Brine : That is correct.
Senator KETTER: I will turn now to the R&D tax incentive and seek some advice about that—more to do with the impact of the 10-year corporate tax program. Can you explain what will be the impact of the changes to the corporate tax rate on the R&D tax incentive?
Mr Brake : When you say, 'What are the changes?', do you mean from a costing perspective or changes to the incentive for people to undertake R&D?
Senator KETTER: From a costing perspective.
Ms Horvat : That incentive is incorporated in our company tax base forecasts.
Senator KETTER: Are there any changes that need to come about as a result of the changes to the corporate tax, as it affects the R&D tax incentive?
Ms Horvat : No.
Senator KETTER: So there will not be any need for any further legislation or changes to the structure of the bill?
Ms Horvat : Not from the budget.
Mr Brake : The change in the company tax rate does not require legislative change to the R&D arrangements.
Senator KETTER: I understand that the bill to amend the R&D tax incentive has lapsed. This was the bill to reduce the rate of the tax offset by 1.5 percentage points. Is that correct?
Mrs Purvis-Smith : I believe that is correct. It lapsed when parliament was prorogued on 15 April and it has not been restored to the Notice Paper.
Senator KETTER: Is it still government policy to reduce the rate of the offset by 1.5 percentage points?
Mrs Purvis-Smith : There has been no government decision to do anything else.
Senator KETTER: Does that mean it—
Mrs Purvis-Smith : It remains policy.
Senator KETTER: It remains the government's policy. Are the budget forecasts for the R&D tax incentive based on the assumption that the rate will remain the same, or are they based on 1.5? So you are saying they should be based on a 1.5 percentage point reduction, I would think.
Mr Brake : They are based on current government policy.
Senator KETTER: On the policy which is the 1.5 per cent reduction? You are nodding your head, so that means—
Mr Brake : Correct, Senator.
Senator KETTER: That means yes; okay. I now will jump around a bit and go to the petroleum resource rent tax. I have some questions about the forward estimates. We heard earlier about the impact which my home state is going to make on the bottom line with the LNG industry and that we will become the largest gas exporter by 2020. Could somebody explain why the projected PRRT revenue falls from $1.87 billion in 2014-15 to $800 million to 2019-20?
Mr Brake : It is a significant fall, but that is consistent with lower Australian dollar oil prices. Since MYEFO, there has been a significant fall in Australian dollar oil prices and that is leading to that fall. The petroleum resource rent tax is historically a very volatile revenue head, because it is based on rent and because that, in itself, is a relatively volatile item to tax. We often see quite substantial fluctuations in the petroleum resource rent tax; it is one of the harder tax revenue heads to forecast.
Senator KETTER: So you are saying it is the volatility in the oil price?
Mr Brake : I think that is the major reason.
Senator KETTER: How does that offset the volume rise in the gas that we are exporting?
Mr Brake : I think a number of these projects—because of the way the PRRT works, you can build up credits against future tax. These projects can take a long time before they start paying PRRT, so you can get these long lags between when they enter production and when they start paying PRRT. That is sort of a general comment.
Senator KETTER: But we will be the world's largest gas exporter by 2020.
Mr Brake : If there is any further information, we can provide it for you, but I do not have any further information on this.
Senator KETTER: Is there anybody else here who can?
Ms Horvat : I do not have any further information with me either, sorry.
CHAIR: Are you happy to provide it on notice?
Mr Brake : Yes.
Senator KETTER: I want to touch on the so-called Panama Papers, on the impact of those leaks and on the implications that they may have for tax revenue in Australia. Have these implications been factored into Treasury's costings?
Mr Brake : I might start, and the tax office could perhaps discuss a little bit about what they are finding from the Panama Papers. We take into account all of the available information.
Mr Olesen : While it is early days with the Panama Papers, we are well placed in the sense that we have access to some of that data. We have some sense of the Australians who are caught up in that data, but there is a lot of work to be done to make the connections, including working with our colleagues in other jurisdictions around the world and sharing the different bits of data that we all have. I understand that the ICIJ are looking to make public the full dataset on Monday of next week, so that will naturally be of interest to us.
We are well placed to work through that information, having had the experience of dealing with disclosures of this kind under Project Wickenby. Indeed, separate to Project Wickenby—which has been a very public exercise—we have had multiple other sources of data made available to us, not all of which have made it to the public domain, that we have worked through to deal with the tax evasion that has been made evident through that information. We are confident that we will be able to work through this, but it is really too early at this stage to be able to put anything solid on what the impact might be or on the exact scope.
You would be aware, perhaps, that over the last 12 months or so—ending late last year—we ran an exercise where people were able to come forward on a voluntary basis and disclose to us accounts they may have had offshore. We have put that money back onshore and we have not only raised additional revenue from that work but also managed to get over $6 billion worth of assets brought back into Australia to feed into the ongoing revenue take. We are well placed with this new data to follow up and to take a firm hand with those people who did not take the recent opportunity to come forward voluntarily. If they did not and if they are caught up in this latest information, then of course we will follow up on that.
The data that we have got under the Panama papers extends back a long time—it goes back some 30 or 40 years—so there is a good chance that some of the information there has in fact already been dealt with through other processes that we have run over the last decade. They are some of the details that we have to continue to work through to get a finer sense of what the implications might be.
Senator KETTER: So some developments but early days, Mr Brake. Has any of that flowed into the Treasury costings for the budget?
Mr Brake : As Mr Olesen says, it is early days. As a broad point we consult with the tax office in putting together revenue forecasts, including what is happening on compliance developments, I guess you could say, more broadly. When the tax office brings things to our attention we incorporate them into the forecasts.
Senator KETTER: So the answer is: yes, the costings have been affected by the Panama papers?
Mr Brake : No, I do not think I said that. Because it is early days it sounds like we are still working through what the potential impact of that would be. If, when the tax office has done that work, that has a material effect on compliance and therefore revenue then that would be incorporated into the revenue forecasts.
Senator KETTER: I am just trying to understand in my own mind. So what you are saying is—and correct me if I am wrong—at this point there is no material impact on the costings for the 2016-17 budget?
Mr Brake : That is correct. Obviously one thing this new Tax Avoidance Taskforce can look at in particular is helping drill into some of these details. But it is early days.
Senator KETTER: I know the ATO has a view on this, but which countries does Treasury consider to be tax havens?
Mr Brake : There are a number of international processes looking at tax havens so jurisdictions are being very much encouraged to normalise their arrangements to be taken off various lists.
Mr Duggan : We do not keep a list—we do not have a black list, if you like—of tax havens within Treasury.
Senator KETTER: So you are indifferent about this issue?
Mr Duggan : We are certainly not indifferent. We do not keep a list of countries. The way I characterise it is that we are certainly interested in ensuring that the right amount of tax is paid on any economic activity that takes place in Australia and we are certainly concerned by any attempts to avoid paying tax in Australia. Irrespective of what that method is and what country might be utilised in order to achieve that, that would be of concern to us; that is right. But we do not have a list of specific countries that are of particular concern to us as a Treasury.
Senator KETTER: That surprises me. You may not have an official list but I would have thought you would be generally aware of what is happening in the world and that that would inform your decision making.
Mr Duggan : I think we are also now getting into a compliance question primarily. The question about what might raise a flag with respect to a particular transaction when the ATO conduct their activities with taxpayers. It is more an administration question I think than a policy question.
Senator KETTER: So you would rely on advice from the ATO; is that what you are telling me?
Mr Duggan : I do not think there is a policy design question there. I think it is an administration question.
Senator KETTER: I have some questions on a matter dear to your heart—the wine equalisation tax.
Mr Olesen : Senator, I wonder if I could just quickly go back to the question about the Panama papers and the revenue impact.
Senator KETTER: Sure.
Mr Olesen : I have just been reminded that, in the revenue estimate for the Tax Avoidance Taskforce, some of the work that we are doing there is in connection with activities like those that will be disclosed potentially through the Panama papers. There is no express amount built in because of those papers, but part of the work we will be doing under that task force will look at both the Panama papers disclosures and any other disclosures that we feel we need to act on in relation to tax evasion. Part of that $3.7 billion estimate for the Tax Avoidance Taskforce includes work of the kind that we will do leading out of the Panama papers, without anything being built-in expressly because of the Panama papers because it is too early yet for us to understand. I just wanted to make that clarification.
Senator KETTER: Right. So it is sort of there, but it is not there?
Mr Oleson : The part of the revenue that we will get through that is from work of the kind where people have hidden money in other jurisdictions and have not returned that to be taxed appropriately in Australia. We expect to get a return on that through the work of that task force.
Senator KETTER: I have some questions in relation to the alcohol tax. Can you advise of the rationale for lowering the WET rebate cap from $500,000 to $350,000 on 1 July 2017 and then to $290,000 by 1 July 2018?
CHAIR: I can help there, if you want? But you probably do not want—
Senator KETTER: I would rather—
Senator McALLISTER: Actually that would be fantastic! Tell us!
CHAIR: I will leave it to the officers. I always declare an interest; I am a winemaker, and registered as such with the—
Senator KETTER: I think Ms Purvis-Smith is waiting eagerly to tell us more about this.
Senator EDWARDS: She is very polite.
Ms Purvis-Smith : The reduction in the WET rebate—the wine equalisation tax rebate—is designed to take the rebate back to its initial intention, which was to support small wine producers in rural and regional Australia.
Senator KETTER: What are the eligibility criteria?
Ms Purvis-Smith : The eligibility criteria will ensure that the rebate is only accessed by wine producers with an investment in the industry. We will consult on the definition, the nuances and the finalisation of the definitions in relation to the new eligibility criteria.
Senator McALLISTER: Can I just jump in, Senator Ketter? I have a follow-up question. You just said that the purpose of lowering the cap is so that we can take the measure back to its original purpose, which was to support small wine producers in regional Australia. In what ways had it deserted its original purpose?
Ms Purvis-Smith : In a couple of ways. The rebate as currently formed and in recent times has encouraged restructuring within the industry and by businesses to maximise the claim of the rebate. This happens, for example, when one entity breaks up into multiples in order to maximise the rebate. This is designed to take it back to its original intent.
Senator McALLISTER: How does lowering the cap remove that incentive to restructure?
Ms Purvis-Smith : A higher cap provides a greater incentive—
Senator McALLISTER: Sorry—yes, right.
Ms Purvis-Smith : A higher rebate provides a greater incentive to maximise the dollar value of the rebate that an entity can claim.
Senator McALLISTER: Okay. Thanks, Senator Ketter, I appreciate that.
Senator KETTER: The 2015 tax expenditure statement lists the WET as a $1.4 billion expense over the years to 2019. In Treasury's view, is that value for money?
Mr Brake : Sorry, did you ask, 'In Treasury's view, is that value for money'?
Senator KETTER: Yes.
Mr Brake : I think that would be a question of opinion.
CHAIR: Perhaps, Senator, you might also ask the question, 'What would you expect as revenue from the 29 per cent which is garnered from wine sold in this country over the forward estimates?' and then apply that to the new policy which has been announced, and what you think might be the savings to Treasury over that same period.
Mrs Purvis-Smith : Page 43 of Budget Paper No. 2 provides the gain to revenue from the wine equalisation tax rebate integrity and it also includes the wine tourism funding as well.
CHAIR: Can you explain what that is.
Mrs Purvis-Smith : That provides a gain to revenue of $50 million in 2017-18, $70 million in 2018-19 and $180 million in 1920. That is the gain to revenue from the budget measure.
Mr Brake : The assistance to the Australian Grape and Wine Authority to promote wine tourism within Australia and Australian wine overseas is worth $50 million over the forward estimates.
Senator McALLISTER: What will this wine promotion overseas involve?
Mrs Purvis-Smith : The details of that will be finalised and that will be provided through detailed material to government.
Mr Brake : That is actually another portfolio.
CHAIR: Is it fair to say that the Australian Grape and Wine Authority did not know that they were getting this windfall benefit until 7.30 on Tuesday night?
Mrs Purvis-Smith : I am not able to comment on that—I do not know.
Senator KETTER: What modelling has been done on the numbers of producers who will lose access to the WET rebate cap by state?
Ms Horvat : We would not have historical activity statement data, so data on who may have claimed the WET rebate in the past, that would be the extent of the state-by-state—
CHAIR: So broadly would it be represented by the industry's representation of the Australian wine industry, which I understand to be about 60 per cent in South Australia, with the balance made up of the other states?
Ms Horvat : I would have to look at those figures and take that on notice.
Senator KETTER: Perhaps you could take that on notice. What would be the impact on jobs of this measure in the wine industry?
Mrs Purvis-Smith : We have not done any estimates on that, as far as I am aware.
Senator KETTER: I thought we had an interest in jobs and growth under this budget. Have you done nothing to estimate the impact of this?
Mr Brake : Another point here is what will be the impact of jobs and growth on the $50 million given to the Australian Grape and Wine Authority. It would be a complicated thing to look at.
CHAIR: Is it probably fair to say that in this measure you are looking to rid the industry of traders—$500,000 per annum is a very attractive number, and is it fair to say that with this qualification method you have introduced now they will have to own vineyards or a winery to qualify to be a producer under the tax act, because traders can effectively come and go and clip the ticket for 29 per cent on the way through. Is that what you are looking to address in this initiative?
Mrs Purvis-Smith : One of the things we are looking to address is the multiple break-ups to get the rebate and really maximise the claim of the rebate and multiple rebate claims. One of the important changes was that there had to be an investment in the wine industry in order to bring it back to one of its original intentions. Again, to the nuances of definition, we will be consulting.
CHAIR: I understand.
Senator KETTER: We do not know how many jobs will be affected by this measure—was there any modelling done about the change?
Mr Brake : A change of this nature would be very difficult to put into some sort of broad macroeconomic model to derive employment effects. It is of a level of detail which is too small for that sort of modelling.
CHAIR: Was the industry calling for these changes? Continuing Senator Ketter's theme of questioning: if there was going to be a negative impact, you would think that the industry bodies, group, and growers and makers around Australia would be protesting on the front steps of Parliament House, if they did not like this. Did they actually come to you with this policy position?
Mrs Purvis-Smith : There has been a lot of consultation with industry in the lead-up to the policy, including the consultative group last year that Treasury chaired. This measure does pick up some of the recommendations that they put forward. The wine industry has been looking at and asking for changes of some kind in the industry—that is correct. This measure picks up on some of those issues that the industry has raised.
CHAIR: But it is pretty quiet, considering it is such a dramatic change. Is it fair to say that the industries—I have read the media since Tuesday night—have accepted this policy change with open arms?
Mrs Purvis-Smith : I would not like to make a comment on how the industry is accepting it.
Senator KETTER: I think I might have missed this before—and I think Senator Edwards knows much more about this than I do—but when did the industry find out about this budget decision? Did they get any advance notice about it?
Mrs Purvis-Smith : I would have to take that on notice. I am not sure.
Senator KETTER: Did Treasury receive any industry feedback about the need for certainty before the 2016 crop was picked?
Mrs Purvis-Smith : There has been a lot of consultation with industry on a range of things on what is happening in the industry, particularly around the rebate. There would have been consultation. I would have to take on notice whether that was one of the issues that they raised specifically.
Senator KETTER: Is the eligibility criteria that we have settled on the same one that was consulted on in August of last year?
Mrs Purvis-Smith : I would have to take that on notice. I think that there has been quite a lot of consultation over quite some time, and there might have been some different types of material and issues discussed. I do not know whether this is exactly the same as what was consulted on last year.
Senator KETTER: I could ask Senator Edwards this question, but I am going to ask you instead. Did Senator Edwards write a letter to the Treasurer urging him to keep the current rebate cap?
Mr Brake : I think we will refer that matter to the Treasurer.
CHAIR: It is fair to say I have been active in the space, Senator Ketter. The first reduction in rebate comes in in July 2017, too, by the way. That is 1 July—over that period.
Senator KETTER: So you are confirming that, Senator Edwards?
CHAIR: What is that? That the rebate has its first reduction? I think the letter that I wrote to the Treasurer was fairly well publicised at the time, Senator Ketter. I think any media report that you go back to at the time would indicate that
If I could go back to MAL. Could anything additional be done over and above MAL to divert a profits tax to counter multinational corporate tax avoidance in light of the overseas experience? The issue that I see—and this reflects onto the gearing test and in that context.
Mr Duggan : There are a number of measures in the budget that are directed at combatting multinational tax avoidance. The diverted profits tax is one, but there are others, such as the anti-hybrids rules—moving forward with the OECD's direction with respect to thinking about transactions that are treated as equity in one jurisdiction and debt in another. So, for the first time the tax office will have the capacity to look across jurisdictions in the way it assesses transactions to ensure that there is no long-term tax deferral or nontaxation of those arrangements. There is also a measure about updating the guidelines on Australia's transfer pricing rules—again, to bring them up to speed with international best practice. I think it is reasonable to say that the ATO has already been implementing international best practice. This will reflect that in the legislation. And there are a range of other measures under the tax integrity package which are directed at the specific issue of multinational tax avoidance.
CHAIR: But, in general terms, would a worldwide gearing test be a common feature overseas? It is being proposed by other sections of the political community?
Mr Duggan : With respect to Australia's thin-capitalisation rules, there are currently three tests that apply. The worldwide gearing test is one of those tests, but there are two additional ones, which are the arms-length debt test and a safe harbour. They determine what level of debt you can carry vis-a-vis your assets in working out what a reasonable approach is in terms of your ability to claim interest deductions, which is one of the methods that is often considered high-risk in terms of considering transactions that could be utilised to avoid tax. So yes, worldwide gearing is, in Australia's current context, one of three measures.
CHAIR: Would that test specifically harm the economy?
Mr Duggan : Keeping the current test? Or is your question if that were the only test that were to apply?
Mr Duggan : If that were the only test that were to apply—I think the previous deputy secretary of Revenue Group has given testimony on this in the past—if the implication of the worldwide gearing ratio test is that the entity operating in Australia could only have the degree of leverage of the worldwide group, in the Australian context we have industries that are very capital intensive, where for commercial reasons it makes sense for them to have a reasonable degree of leverage. So, were they to be constrained and lose access to in particular the arms-length debt test, which is the test that basically asks, 'Could the level of debt be sustained in the absence of the relationship to the overseas entity?', then, were that test to be removed, there could be an impact there in terms of not allowing the same degree of debt deductions to be claimed. The impact of that would be an effective increase in the effective company tax rate in Australia to the extent that that took place—I think the previous testimony that was given was that that would have an impact, potentially, on the level of investment in Australia and therefore the level of economic activity.
CHAIR: Thank you very much.
Proceedings suspended from 15 : 34 to 15 : 50