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Economics Legislation Committee - 16/02/2012 - Estimates - TREASURY PORTFOLIO - The Treasury

The Treasury

Committee met at 09:04

CHAIR ( Senator Mark Bishop ): I declare open this public meeting of the Senate Economics Legislation Committee. The Senate has referred to the committee the particulars of proposed additional expenditure 2011-12 and related documents for the Industry, Innovation, Science, Research and Tertiary Education, Resources, Energy and Tourism and Treasury portfolios. The committee has set Friday, 24 February 2012 as the date by which senators are to submit written questions on notice and has set Thursday, 29 March 2012 as the date by which answers to questions on notice are to be returned. Under standing order 26 the committee must take all evidence in public session, this includes answers to questions on notice.

Officers and senators are familiar with the rules of the Senate governing estimates hearings. If you need assistance, the secretariat has copies of the rules. I particularly draw the attention of witnesses to an order of the Senate of 13 May 2009 specifying the process by which a claim of public interest immunity should be raised and which I now incorporate in Hansard.

The extract read as follows—

Public interest immunity claims

That the Senate—

(a) notes that ministers and officers have continued to refuse to provide information to Senate committees without properly raising claims of public interest immunity as required by past resolutions of the Senate;

(b) reaffirms the principles of past resolutions of the Senate by this order, to provide ministers and officers with guidance as to the proper process for raising public interest immunity claims and to consolidate those past resolutions of the Senate;

(c) orders that the following operate as an order of continuing effect:

(1) If:

(a) a Senate committee, or a senator in the course of proceedings of a committee, requests information or a document from a Commonwealth department or agency; and

(b) an officer of the department or agency to whom the request is directed believes that it may not be in the public interest to disclose the information or document to the committee, the officer shall state to the committee the ground on which the officer believes that it may not be in the public interest to disclose the information or document to the committee, and specify the harm to the public interest that could result from the disclosure of the information or document.

(2) If, after receiving the officer’s statement under paragraph (1), the committee or the senator requests the officer to refer the question of the disclosure of the information or document to a responsible minister, the officer shall refer that question to the minister.

(3) If a minister, on a reference by an officer under paragraph (2), concludes that it would not be in the public interest to disclose the information or document to the committee, the minister shall provide to the committee a statement of the ground for that conclusion, specifying the harm to the public interest that could result from the disclosure of the information or document.

(4) A minister, in a statement under paragraph (3), shall indicate whether the harm to the public interest that could result from the disclosure of the information or document to the committee could result only from the publication of the information or document by the committee, or could result, equally or in part, from the disclosure of the information or document to the committee as in camera evidence.

(5) If, after considering a statement by a minister provided under paragraph (3), the committee concludes that the statement does not sufficiently justify the withholding of the information or document from the committee, the committee shall report the matter to the Senate.

(6) A decision by a committee not to report a matter to the Senate under paragraph (5) does not prevent a senator from raising the matter in the Senate in accordance with other procedures of the Senate.

(7) A statement that information or a document is not published, or is confidential, or consists of advice to, or internal deliberations of, government, in the absence of specification of the harm to the public interest that could result from the disclosure of the information or document, is not a statement that meets the requirements of paragraph (I) or (4).

(8) If a minister concludes that a statement under paragraph (3) should more appropriately be made by the head of an agency, by reason of the independence of that agency from ministerial direction or control, the minister shall inform the committee of that conclusion and the reason for that conclusion, and shall refer the matter to the head of the agency, who shall then be required to provide a statement in accordance with paragraph (3).

(Extract, Senate Standing Orders, pp 124-125)

The committee will begin today's proceedings with the consideration of the Treasury portfolio with Treasury's Macroeconomic Group, and will then follow the order as set out in the circulated program. I welcome Senator Wong, Minister for Finance and Deregulation, and officers of the Department of the Treasury. Minister or officers, would you like to make an opening statement?

Senator Wong: I do not have an opening statement. I did have a programming issue that I just wanted to get some clarity on. The committee scheduled a spillover day tomorrow, I think because the Secretary of the Treasury was unavailable due to a long-standing commitment overseas today. Obviously, it is a busy time—it is always a busy time, but in the pre-budget period it is always a busy time—and we would prefer not to have massive numbers of Treasury officials here today and tomorrow. I wonder if it would be possible for us to get a little clarity about how the committee wants to deal with various subject matters? Senator Cormann, you are completely entitled to ask as many questions as you would like, but if we could get some order as to whether some issues will be dealt with today or tomorrow then we can have clarity about which officials we would need to have here again tomorrow. I am in your hands, Chair, but I do think in the interest of efficiency it would be useful if we could get a little bit of clarity.

CHAIR: I should just state for the records that the committee was advised in writing late last year that the Secretary of the Treasury had unavoidable commitments in New Zealand this morning. That was discussed at the committee. I then had some private discussions with the Secretary of the Treasury in either late December or January, I cannot recall which, whereby the compromise was reached whereby the Secretary would make himself available for two hours on the Friday. It is certainly my long-standing view that simply because we were sitting for an extra two hours, it would not be appropriate to revisit the same topic in the same way for a second bite of the cherry. I have not had any depth to that discussion with the opposition, so having heard me and the minister representing the government I think the committee would probably appreciate that what their intent is would be useful.

Senator CORMANN: In the spirit of goodwill and constructive exchange at these committees, as is our custom, maybe we can progress a bit further through the day and have a conversation later today? Once we know the sorts of issues that we have gone through then we will have a better handle on what it is that we might want to pursue with the secretary tomorrow. If we have a conversation a bit later in the day, would that be convenient?

Senator Wong: If you wish to do that, that is fine. To be frank, we have a lot of officers in the other room. So, I am not sure—

Senator CORMANN: We have not even started yet; it is ten past nine now so we are already ten minutes late.

Senator Wong: I have not finished, and I am trying to be helpful here.

Senator CORMANN: Me too.

Senator Wong: If I may finish. All I am saying is that I think it would not be unreasonable to say to the committee, could we at least have some clarity about which officials would be required again tomorrow as opposed to bringing everybody who is in the next couple of rooms back again for the next day.

Senator CORMANN: As I have said, before the day is out we will give you that indication, but we are not in a position to do that right now before the hearing has even started.

CHAIR: I have heard the opposition respond to the minister's invitation. I just want to have it on the record. As far as the chair of the committee is concerned, this has never been—and is not now—the opportunity to discuss the same issue twice. There is a full session scheduled this morning. The opposition can ask questions as it will—and that will be permitted—but we will not be revisiting the same topic with a different set of officials or the secretary tomorrow.

Senator CORMANN: Just to kick us off, between the Mid-Year Economic and Fiscal Outlook 2010-11 and the MYEFO in 2011-2012, the budget deficit deteriorated by $25 billion. What are your indications of the macro-economic downside risks, moving forward, that will have an impact on the budget bottom line.

Dr Gruen : I think that it would be fair to say that there are both upside and downside risks to Australia's economic outlook. Looking internationally, the most clear potential downside risk is a destabilising event in Europe, particularly in the eurozone, and there are a range of possibilities there. Obviously there are negotiations going on at the moment about the next tranche of money for Greece, and the eurozone is in a fragile state with economic activity currently declining. So there are a range of possible things that could go wrong in Europe. That is the most obvious downside risk. But as I said, the risks are not all in one direction. The US is looking better than it was six months ago—not massively better, but a bit better—and they are actually seeing some decent jobs growth, which they had not been seeing earlier. On China, I think that most people's assessment is that the Chinese have been trying to engineer a soft landing, and our assessment is that they are doing that and thus far that soft landing is on track.

Domestically, obviously there are forces pushing the Australian economy in different directions. The high dollar is putting a lot of competitive pressure on those parts of the traded sector that are not in some way attached to mining. Likewise, on the upside, the pipeline of mining investment continues to build, so the general story that we are seeing—a once-in-a-lifetime mining boom—continues to be true and, if anything, is getting stronger. So I would characterise the situation as one that is unusual in many ways and which has both upside and downside risks. I would not say all the risks are in one direction.

Senator CORMANN: Can you take us in a bit more detail into your assessment of the economic and financial state of play in Europe.

Dr Gruen : Yes. The situation in Europe is a combination of high levels of government debt in a range of countries—in some cases they have been high for a long time and in other cases they have been building more recently, but that is not a new phenomenon—combined with a financial crisis which obviously cut the legs from under economic activity. There are two other crucial elements to this situation which are relevant. One extremely important one is that the cost base for different European countries within the eurozone has been growing at very different rates. If you look at the cost base in Germany in particular, it has been growing quite slowly—and we are talking about over a decade—whereas the cost base in most of the peripheral economies was growing quite rapidly. To a considerable extent that was because they had domestic booms which were fuelling strong growth in prices and wages. Those booms came to an end with the financial crisis, and also with the collapse of housing bubbles in some of these countries. As a consequence of that, they have found themselves in a position in which they are extraordinarily uncompetitive.

If you had your own currency, you would allow that currency to depreciate, as for example has the United Kingdom, in order to be able to re-establish international competitiveness. They are not in a position to do that because they are part of a currency union. So they are in a situation where they need to regain competitiveness and that is a very long, grinding process. It involves running lower inflation than Germany and German inflation is pretty low. It involves having domestic cost growth that is really very, very sluggish indeed, at the same time as they are trying to reduce the size of their fiscal deficits. The markets are watching all this and have for many of these countries become sceptical of the capacity of these countries to make this transition. That is an overview of the big problem and in a sense it was design fault in the original setting up of the eurozone, that it was a currency union without a fiscal union. They are living with that problem now that they have had such a big shock.

In my assessment, this is going to play out over an extended period of time. You do not regain competitiveness. The sorts of gaps that they have to make up are of the order of 20 or 30 per cent. You do not regain that sort of competitiveness within a currency union quickly. The only country that has made really good progress on this front so far is Ireland; the others have made very little progress. This is going to be a long, drawn out process and we are all just going to have to live with it. The other complicating factor is that the banking system in Europe is weak and there are a lot of holdings of sovereign debt. Some of the market value of that sovereign debt is a lot less than the face value. I do not think this is a problem that is going to go away any time soon, but it is obviously a problem that the Europeans are very aware of and they have been taking steps for quite some time now to deal with the various manifestations of this crisis.

Senator CORMANN: Is that something that was completely unexpected or is this a circumstance that could have been anticipated as one of the natural consequences of the GFC?

Dr Gruen : It would be fair to say that it was not well anticipated when the euro was formed.

Senator CORMANN: Which is 20 years ago.

Dr Gruen : Ten, A little bit more than 10.

Senator CORMANN: It has been in place for 20 years.

Dr Gruen : Indeed. It has been a long time.

Senator CORMANN: I am more talking about over the last year. For example, as we were preparing ourselves for the budget, is this something that we should have anticipated at budget time rather than having to make a massive adjustment at MYEFO time?

Dr Gruen : I would characterise it as saying that at budget time we were certainly aware of the nature of the problem. As is the case always with macro forecasting, one can be aware of the nature of the problem and you can still find that outcomes are not precisely what you thought they would be. I think you will find a fairly fulsome discussion of the European situation in the budget, so we were aware of it. We did reduce our estimates for European growth quite significantly between budget and MYEFO—along with many other people. As I have said many times at these hearings, we do not have a crystal ball; we do not know what the future is going to bring. We obviously look at it as carefully as we can, but we—like everyone else who does forecasting—are well aware of the fact that there is a margin of error in this business.

Senator CORMANN: In terms of where your expectations are now, do you think that we have hit the most conservative bottom in terms of our expectations around global volatility and the situation in Europe, or is there additional downward risk moving forward?

Senator Wong: Senator, I do not know if you read the RBA's most recent statement—I am sure you have, because you do read things—but I am sure there are a lot of very learned people around the world who would like the answer to that question.

Dr Gruen : The reason I was smiling was because if I knew we were at the bottom then I would know where we are going and that would be a crystal ball. If you can tell me when we are at the bottom, that would be very useful information for me.

Senator Wong: I am sure the Europeans would like to know that too.

Senator CORMANN: That is a fair observation. Going back to the MYEFO, then, what is the macro-economic basis for the government to increase its company tax revenue estimates for 2012-13, or actually, to expect that company tax receipts between 2011-12 and 2012-13 are going to increase more rapidly when you have forecast a reduction in GDP growth both for 2011-12 and 2012-13 and we still have all of these unknowns and uncertainties out in the marketplace? On what basis are you anticipating the rapid growth in company tax receipts?

Dr Gruen : I think you know the answer that I am going to give you to that question, which is that you need to ask Revenue Group.

Senator CORMANN: I thought I would try.

Dr Gruen : I thought you knew that and I thought I would not want to disappoint you.

Senator CORMANN: I thought I would try that. Since the government has released the Mid-Year Economic and Fiscal Outlook, have you formally revised your unemployment forecast for 2011-12 and 2012-13?

Dr Gruen : Since the government released the MYEFO?

Senator CORMANN: Yes.

Dr Gruen : We do regular updating of our forecasts, but we do not release them.

Senator CORMANN: You may not release them, but the Acting Treasurer, Mr Shorten, was out in the media in January—which was not that long after the Mid-Year Economic and Fiscal Outlook had been released—and he was forecasting an unemployment rate for this year of six per cent when MYEFO is forecasting an unemployment rate of 5.5 per cent for this year and next. Is the six per cent unemployment rate for this year which Acting Treasurer Shorten talked about based on Treasury advice,?

Senator Wong: I do not know the full context of those remarks.

Senator CORMANN: I am happy to give you a copy.

Senator Wong: I do not know the full context of those remarks, but as Dr Gruen said we update and release with each budget update. The most recent budget update, which was the midyear review, did make some comments about employment growth and my recollection was—

Dr Gruen : The unemployment rate is 5½—

Senator Wong: In terms of employment growth there were revised figures included there.

Dr Gruen : We do not have the number, but we can find it for you.

Senator Wong: The government will look at these figures and release them in the usual way in the budget.

Senator CORMANN: Minister, with all due respect—and I assume that the Acting Treasurer, Mr Shorten, was talking on behalf of the government—the government, though the Acting Treasurer, has already released an updated forecast, and I will be making sure that you get a copy of the article in question where that happened. I am interested in whether the Acting Treasurer's comment about the unemployment rate this year was based on Treasury advice or whether that was his own personal forecast.

Senator Wong: I do not know.

Senator CORMANN: I assume he was talking on behalf of the government.

Senator Wong: You would have to ask him, I suppose.

Senator CORMANN: You are here to answer questions.

Senator Wong: If you want me to ask Mr Shorten what was in his mind when he did an interview, I am happy to do that, but I am not actually representing him, I am representing the Treasurer. I have given you the answer in relation to the unemployment forecasts.

Senator CORMANN: And, of course, Mr Shorten was representing the Treasurer too. This could be easily helped. If Treasury could say, 'No, we stick with our 5.5 per cent unemployment forecast and Mr Shorten was wrong,' I am happy with that. But, if there is something that we need to know about what the government and what Treasury think about where unemployment is heading, then it would be very helpful if Treasury could share that with us.

Dr Gruen : As you would expect, we keep a watching brief on the economy and we update our estimates on a regular basis, and we advise the government, but it is up to the government to release publicly its forecasts for economic activity and unemployment. It does that at the MYEFO and at budget. I am not in a position to speak about advice to government about our updated forecasts.

Senator Wong: What I would say, Senator, is that our forecasts for growth were moderated, as you might recall in the MYEFO to three and a quarter per cent for 2012-13. These are broadly consistent with, from memory, the midpoint range of where the RBA's forecasts are. It did factor in some of the significant shift in the global outlook between budget and MYEFO. A lot of what you are pointing to has already been factored into the government's figures. You might recall also, I have just found them, we indicated some change in the 2011-12 and 2012-13 projected unemployment rate in the MYEFO to 5.5 and 5.5 from the lower figures which were in the 2011-12 budget.

Senator CORMANN: Minister, the reason we are here is to probe and scrutinise the credibility of the figures in the budget and to scrutinise and probe the credibility of the figures in the Mid-Year Economic and Fiscal Outlook.

Senator Wong: I wish you took this approach to your own figures, Senator.

Senator CORMANN: I know that whenever you are under pressure you come back with a political attack.

Senator Wong: I do not think I am under pressure.

Senator CORMANN: This is very simple. It is about asking questions. We have two different unemployment figures on the record from the government.

Senator Wong: You have one and it is $70 million dollars.

Senator CORMANN: You have one in the Mid-Year Economic and Fiscal Outlook of 5.5 per cent for this year and next and we have a statement from acting Treasurer Shorten who says that the unemployment rate would be heading to six per cent this year. I am interested to know what it is. Is it 5.5 per cent or is it six per cent?

Senator Wong: I will see if we can provide you with any further information. I have just seen the article. It is not a quote so I do not know to what extent it reflected what was actually said. What he said was, in quotation, 'I've got to release the December unemployment numbers today and I expect they will go up slightly.' What I would say is we have reflected the risks in the global outlook about which there has been much discussion and the consequences for Australia in the MYEFO. There is quite a lengthy discussion about that. That is consistent with the sort of approach or the views that were expressed by the RBA in the recent statement. We have taken those things into account.

Senator, yes, I do think you are one of the people in the coalition who says he cares about these issues. I wish you applied 1/10th of the scrutiny to your own numbers that you appear to want to apply to the government's. Your leader has just added $2.4 billion to your $7 billion of cuts.

Senator CORMANN: And you are sitting on that side and will not answer questions on numbers. It is your job to answer questions about the budget.

CHAIR: Senator Cormann, the minister has the floor.

Senator Wong: Thank you, I have finished.

Senator CORMANN: The participation rate has fallen from a high of 66 per cent in November 2010 to 65.2 per cent in December 2011. Can you talk us through your assessment of the reasons for that?

Dr Gruen : He is looking for the participation rate, which has come down more recently. I have that. Australia has done very well on participation, particularly with a kind of a trend rise in the participation rates of older workers. But we are getting to a stage where the first baby boomers turned 65 last year—the ones who were born in 1946 turned 65 last year. So we do expect that there we will enter a longer term period in which we see trend declines in the overall participation rate, because the participation rate is a measure of the participation of everyone 15 and over. So, to the extent that you have the baby boomers moving into the retirement age, you expect the participation rate to stop going up in aggregate and start coming down. In fact, the participation rate has gone up for a lot longer than we expected it too. When we first made projections in the 2002 intergenerational report, we were expecting the aggregate participation rate to peak in a couple of years from then, and it has continued to rise until now, so we have actually done very much better than we expected. But certainly it may be that we are now seeing the beginnings of a trend decline in the participation rate. I do not want to make too much of a few months' numbers, but certainly, if you look at participation rates by age, obviously the participation rate by age falls very dramatically as people are in their 60s. So I think we are going to see a trend decline in the participation rate.

The other thing that has been going on in the labour market in 2011 is a rise in average hours. We did not see any net increase in jobs over 2011, but we did see a rise in average hours which, if it translated into an increase in jobs, is actually quite a big increase. If there had been no increase in average hours, the amount of extra work would have required an extra 90,000 people; I think that number is right. So there are a few different things going on in the labour market. There is more of an increase in labour demand in 2011 than would be revealed simply by the employment numbers over that year. So there is a bit going on.

Senator CORMANN: You tell us that 90,000 more people would have been required if the increase in average hours had been reflected.

Dr Gruen : If it had not happened.

Senator CORMANN: If it had not happened and had been spread out across others. What about if the participation rate had remained at 66 per cent? What would the unemployment rate be then?

Dr Gruen : I have not made that calculation. I am not sure. I do not know the answer to that question.

Senator CORMANN: It is probably because the answer to that question would in my assessment have been that there would have been about 148,000 additional people in the unemployment category, which would offset your 90,000 by a bit more.

Dr Gruen : But not if those people are retiring. It does depend on what those people are doing.

Senator CORMANN: Sure, it does depend on what the people are doing. You would not be of the view, then, that the fall in the participation rate is disguising to a degree some weakness in the labour market?

Dr Gruen : The labour market was clearly weaker in 2011 than it was in 2010. I do not think there is any doubt about that. In fact, if anything we think that there may be some payback. In other words, we think that, given the amount of growth in the economy, we may see a bit more strength in employment. But there is a lot going on. In the light of what has happened in 2011, it is our considered view that there will be employment growth in the next financial year of about one per cent. So we think there is still employment growth in the economy, but—

Senator CORMANN: But not fast enough to deal with population growth. Is that correct?

Dr Gruen : That is correct. We are forecasting a small tick up in unemployment, as the Reserve Bank is. The update that it gave at the end of last week says that the unemployment rate is expected to increase modestly. Its view is very similar to ours—but we still think there will be employment growth.

Senator Wong: If you look at page 43 of the SNP, there is a graph there which reflects the participation rate. You are correct, it is lower than it was a year ago, but through the decade it has continued to grow. The Reserve Bank makes the same point as Dr Gruen, which is that growth in total hours worked has been stronger than employment growth, suggesting firms have been meeting additional labour needs via increases in average hours rather than hiring additional workers.

Dr Gruen : We look at the same data.

Senator CORMANN: I am pleased to see that there is some good humour here at the table. I would like to go back to what you said earlier. It depends on what people are doing and you talked about the fact that this could be the start of a period of decline in the participation rate. Over the decade to 2010 there were successive increases in the participation rate.

Dr Gruen : I do not want to overstate it. We are talking about gradual change. This is a very slow process.

Senator CORMANN: I understand. You also flagged the implications of baby boomers reaching retirement age. Do you have some data around the people who are dropping out of the labour market and having that impact on the participation rate? Why are they no longer looking for work? Is it because they have just retired?

Dr Gruen : Do you mean over the last few months?

Senator CORMANN: There has been a drop between November 2010 and December 2011. Do you have any data around what has caused that drop in participation rates?

Dr Gruen : No, I have not got that level of detail here, but we could—

Senator CORMANN: But you could provide that on notice.

Senator Wong: Why do we not take that on notice. Dr Gruen has conditioned his answers by saying that it is too early to tell. When Treasurer Costello put out the IGRs he spoke a lot about the demographic shifts that the country is going through, and, absent other policy change, the effects these are going to have on participation rates. I cannot recall what the last IGR said about when this would be, but my recollection is lower by the end of the decade.

Dr Gruen : Yes, definitely.

Senator Wong: There are things that the government is doing to try and encourage mature age worker participation, which is obviously good for the economy. That is one of the economic challenges.

Senator CORMANN: I would like to move to the issue of interest rates. Previous Senate estimates hearings have established that there is a well-accepted trade-off between fiscal policy and monetary policy. I gather you wrote a paper on Australia's exchange rate, Dr Gruen, and whether it is explained by the terms of trade or by real interest differentials. It touches on some of these issues and is a very interesting paper, even though it is 20 years old now.

Dr Gruen : It is 20 years old.

Senator CORMANN: Have you ever updated it or had another look to see whether is still current?

Dr Gruen : I try and do new things. I do not try and redo the things I have done.

Senator CORMANN: It would be interesting to see what your thoughts on it are now. How much lower would interest rates have been over the past four years if the government had not run four consecutive deficits totalling $167 billion?

Senator Wong: I think Dr Parkinson would very much like the opportunity to respond to that proposition.

Senator CORMANN: Now that I have asked it, the chair is not going to allow me to ask it tomorrow, so I am a bit cornered here.

Senator Wong: In fact, Dr Gruen might be more polite actually.

CHAIR: I might just make the point that it is tending to speculation, but if the minister is comfortable with the question so be it.

Senator Wong: I think Dr Gruen is happy to take the question.

Dr Gruen : Let me make the general point that the countries that have interest rates at effectively zero per cent—we are talking about Japan, the eurozone, the UK and the US—all have economies which they would very much prefer they did not have. They have economies that are in desperate need of stimulus from wherever they can get it. They are in a world where they are having to do unorthodox things like quantitative easing to try to stimulate their economies. So if you ask the question, 'Had macro policy been run in such a way that we ended up with an economy with eight or nine per cent unemployment, would interest rates be lower now?' I think the answer to that question is yes. But is that what we want? Surely, what we want is an economy that is close to full employment. We have managed, as a consequence of macro policy and a range of other things, to have an economy that largely avoided the recessions that were suffered not only in the North Atlantic but by New Zealand and a whole lot of countries. If you ask the question, 'Had we run macro policy in such a way that we had had a deep recession over the last four years'—

Senator CORMANN: That was not the question. If I can clarify, you have just made reference to the circumstances in the UK, the eurozone and the US, where official cash rates or interest rates are hovering around zero, and they have had to do other things. Some of these other things were orthodox, but some were significant fiscal stimulus. The proposition I put to you is that, in Australia, there was still more scope for monetary policy to do more of the heavy lifting more efficiently without all of the downsides, such as we have seen with pink batts et cetera, that a significant fiscal stimulus necessarily and inherently brings with it. We could have let the Reserve Bank do its work for longer, given that our interest rates bottomed out at three per cent and increased very quickly back to 4.75 per cent. That has come off a bit now. Could we have had lower interest rates if there had not been such excessive spending over the last four years, yet still have achieved the same outcome in stimulating the economy more efficiently, given that we were not in the position that other economies were in with interest rates around zero per cent? That is the question.

Senator Wong: We could have had lower interest rates and a recession.

Senator CORMANN: Why? Monetary policy can stimulate the economy. This is a serious and legitimate question, and I think Dr Gruen is a very capable expert to answer it. I do not want to put him—

Senator Wong: He is—which is why we took his advice and the advice of other Treasury staff in the construction of the stimulus package, which has ensured that some 200,000 Australians and their families were not added to the unemployment queues.

Dr Gruen : I think there is an important issue to do with timing. Monetary policy clearly has an announcement effect, but all the evidence I have seen says that it takes about 12 to 18 months for the average effect of monetary policy to take hold. So, when you have a very severe adverse shock, fiscal policy can stimulate the economy significantly more rapidly than monetary policy. Monetary policy obviously helps, but given the speed with which the worldwide downturn revealed itself—which was largely after Lehman Brothers collapsed in the middle of September 2008—monetary policy alone would not have avoided a recession. If you remember, the December quarter of 2008 was negative and there was a lot of press about whether we were going to go into recession with the release of the March quarter national accounts for 2009. The March quarter national accounts came out favourably and positively and a lot of that has to do with the fact that fiscal policy acted as quickly as it did. The consequence of that was that over the subsequent four months consumer confidence rose by more than it had risen any time in its 35-year history. The argument that says that if we had just left it to monetary policy everything would have been just fine and we would have ended up with the same outcome is not supported by the evidence. Another piece of evidence is New Zealand which did very similar things with interest rates and had very similar outcomes with the exchange rate but treated fiscal policy differently. They had a much worse recession than we did—they had a much bigger increase in unemployment.

Senator CORMANN: Dr Gruen, I do not think anybody is arguing that there should have been no fiscal stimulus; the question is about the size. I go to your point where you say that the impact of monetary policy takes 12 to 18 months to be felt.

Dr Gruen : You get some impact immediately.

Senator CORMANN: Sure, the announcement effect.

Dr Gruen : You start to get an effect, but in terms of how long it takes for the majority of the effect to be felt we are talking 12 to 18 months.

Senator CORMANN: For the majority of the fiscal impact to be felt it took longer than 12 to 18 months. You had the initial stimulus, which was broadly supported, but the subsequent stimulus was played out over an extended period of time.

Dr Gruen : It is still being spent now.

Senator CORMANN: Yes, it is still being spent now. It would not be fair to say that the major part of the fiscal stimulus was felt in the first 12 to 18 months.

Dr Gruen : There were obviously different elements of it. There was a cash payment, which was part of the first stimulus package, and there was the first home owners boost; they had relatively quick impacts. The second package in February had both public spending as well as another cash payment. The aim of the exercise was to provide both a near-term stimulus and a longer term support.

Senator CORMANN: Can you talk us through your thinking when you decided to upgrade the terms of trade in MYEFO by 1.75 per cent for 2011-12 but lower them by 5.25 per cent in 2012-13? It seems to have taken some of the economic commentators a bit by surprise.

Mr Duggan : In terms of updating the profile of the terms of trade between the budget and the Mid-Year Economic and Fiscal Outlook, it is reasonable to say that we were surprised by the strength straight after the budget. In the June and September quarters we had very strong growth. The figures that you have quoted are year-average figures. We have, of course, subsequently observed the decline. In preparing the MYEFO we were very conscious of the fall in iron ore and coal prices in particular that we saw from early September through to November, and they were factored in. But, in the way these calculations are done on a year-average basis, the whole level had been lifted by the increases that we saw earlier in the year. That will tend to lift the year-average growth rate for 2011-12.

Senator CORMANN: When did you make judgements on that though? You are talking about the increases you saw in the period from July 2011 to November 2011. Is that what you are talking about?

Mr Duggan : That is correct. Because there were fairly large movements in these prices around the time of preparing the MYEFO, we were monitoring these very closely, right up to finalising the forecast.

Senator CORMANN: In terms of your medium- to long-term outlook now, are you somewhat more cautious as to where our terms of trade are going?

Mr Duggan : At the same time as we increased our forecast for 2011-12 in year-average terms we also reduced our forecast for 2012-13, such that we hit a very similar level by the end of the forecast period at budget and at MYEFO.

Senator CORMANN: What about the period beyond that?

Mr Duggan : For the period beyond that we make a technical assumption that the terms of trade will decline at a rate of 20 per cent over a 15-year period.

Senator CORMANN: Tell me if this is a fiscal question but how does that change in profile of the terms of trade between 2011-12 and 2012-13 impact on the budget bottom line?

Dr Gruen : The only thing we can say is that there is a sensitivity analysis in the budget. There is some sensitivity analysis in the budget, but if you want more detail then I think we are going to give you the answer you are expecting.

Senator CORMANN: Going back to the issue of interest rates, you made a comparison between the circumstances in Australia and the circumstances in New Zealand. Is that a fair comparison, given that most of the home loans in New Zealand are fixed rather than variable rates? Changes in monetary policy inherently take much longer to hit households in New Zealand than they do in Australia, at least in the period when banks were following the cash rate up and down.

Dr Gruen : There are lots of differences, you are right. That is an interesting issue. There is something in that. It is a benefit for Australia in terms of micromanagement that we have predominantly floating rate mortgages. I am not certain of the proportions in New Zealand, but I know that they have a higher proportion of fixed rate loans that floating rate loans. I think that is right. I accept what you say—that is a difference—but certainly their exchange rate fell very similarly to ours. There were at least some elements of the transmission mechanism that were very similar, but I agree with your point.

Senator CORMANN: Bringing together the questions on interest rates and terms of trade, I turn to your 1991 paper and also the Treasury working paper by Yong Hong Yan and Shane Brittle, whom I think you coached and mentored along the way. Is that a fair comment?

Dr Gruen : I commented on it.

Senator CORMANN: So you provided the benefit of your undoubted expertise. I am interested in the implications of the terms of trade and interest rates moving on our exchange rate. Could you give us your snapshot perspective on how terms of trade and interest rate movements play out in terms of exchange rate movements?

Dr Gruen : Sure. There have been a large number of studies on the determinants of the exchange rate in Australia and, without exception, the determinant that is the most powerful for the Australian exchange rate is the terms of trade. The other main determinant, which is sometimes in empirical equations and sometimes not, is interest differentials with the rest of the world. Certainly, the latest version of an exchange rate equation that I have seen for the Australian real trade weighted exchange rate simply had the terms of trade as the explanator and people could no longer find an effect from interest differentials.

To give you a sense of why the current level of the real exchange rate is very high but does not seem so high when you think about what has been happening to the terms of trade, let me give you the following statistics, which are pretty striking. If you base things so that we are looking at averages over the float, the terms of trade are currently more than 80 per cent above their postfloat average, and the real exchange rate is currently about 40 per cent above its postfloat average. The point is that the terms of trade are simply extraordinary by the history of the last 30 years. So by far the dominant explanation for why the exchange rate is as high as it is, is the fact that the terms of trade are more than 80 per cent above their average over the period of the float. So is there another effect from interest rate differentials at the margin?

Senator CORMANN: What does 'at the margin' mean?

Dr Gruen : For the empirical attempts to find a link, once you control for the terms of trade—and I am now going to try to remember that paper from 1991—my memory is that we could not find any relationship with policy interest rate differentials, but we found something with long rates.

Senator CORMANN: In your paper in 1991 you found that a real exchange rate is a function of the terms of trade and real interest rate differentials.

Dr Gruen : Wasn't it long rates?

Senator CORMANN: Yes.

Senator HEFFERNAN: Hasn't this got as much to do with the technical solvency and the warehouse debt—

CHAIR: Order! Senator Heffernan, Senator Cormann has the floor. He has asked a question. The official is responding.

Senator CORMANN: To the extent that real interest rate differentials are having an impact on the Australian dollar, what factors would be driving that interest rate differential? There is obviously the link with fiscal policy. Are there some other links?

Dr Gruen : If you are asking, 'What are the determinants of Australian long interest rates?'

Senator CORMANN: I am asking you: what are the things that are appropriately in the sphere of influence of the government? Obviously, there is a range of things that are outside of the control the government and appropriately so. What are the things that are—

Senator Wong: We all know what you are trying to do, because Mr Robb has been out there making some ridiculous claims about—

Senator CORMANN: Mr Robb never makes ridiculous claims.

Senator Wong: At least he told the truth when he said—

Senator CORMANN: He is an outstanding shadow minister for finance. She is insulting—

Senator Wong: I have been very quiet.

CHAIR: It is not 'she', it is the minister

Senator CORMANN: The minister is insulting shadow minister Robb and I think you should call it to order.

Senator Wong: I do think it is a ridiculous claim to suggest that the government is responsible for changes in the exchange rate. I also think it is a ridiculous proposition—

Senator CORMANN: I am not making propositions, I am asking questions.

Senator Wong: No, you made a comment. I am responding to it. It is a ridiculous proposition to suggest that government debt levels drive the exchange rate. If that were the case, the US dollar would be a lot higher than the Australian dollar. So, yes, I do think those are ridiculous propositions. I intervened because you are clearly trying to constrain Dr Gruen in his response. If your question is 'what drives the long rate?', I am sure he is very happy to answer that.

Senator HEFFERNAN: The US has $3 trillion of toxic debt which they will not bring to the market and, if they did, they would collapse it.

Senator Wong: Senator Heffernan, if your proposition is that the US fiscal position is far worse than Australia's I agree with that. We are in a very strong fiscal position by comparison with the rest of the advanced economies.

Senator HEFFERNAN: Why don't we tell them what is really going on instead of farting around?

Senator Bushby interjecting

Senator Wong: Right. I do not think Peter Costello would have presided over the budget position the opposition's finances are in. You want to talk about Peter Costello? What would he really think about you and your lot?

Senator BUSHBY: I don't think he would—

Senator Wong: You have Tony Abbott out there making another aspiration: $2.4 billion worth of aspiration in reversal of the means testing of the rebate. That is just going to be added to the $70 billion worth of cuts you are going to have to make. Seventy billion dollars is what we pay for Medicare for four years.

Senator BUSHBY: Keep the pressure off some of the—

Senator Wong: If you want to lecture us about fiscal responsibility and budget bottom lines, maybe you should have a look at the mess that you have presided over. You are supposed to be part of the economic team.

Senator CORMANN: The Prime Minister has just delivered a $25 billion—

Senator Wong: And an unemployment rate with a five in front of it and a fiscal position that the International Monetary Fund has said is amongst the strongest in the world. If you do not like the fact that—

Honourable senators interjecting—

CHAIR: Order! We have just had seven people speaking at once. That is a nonsense: seven people speaking at once. Questions are asked and the minister or the officials will respond.

Senator CORMANN: If I take what you are saying, over the last 20 years your personal view—or your view on behalf of Treasury—is that, if anything, the real interest rate differential is less relevant now than what it might have been in years gone by. Is that what you are suggesting when it comes to the exchange rate?

Dr Gruen : It is really more a statement about one's level of confidence. Economics is an inexact science, as I am sure you will agree, so there are some things about which we have a high degree of confidence and other things that are more speculative. I guess I would say that, by far, the dominant determinant of the Australian exchange rate is the terms of trade, but there are other things and—as I said before—interest differentials at the margin have something to do with it. In the work that you were citing earlier, we found that long interest differentials could help to explain the Australian real exchange rate—or at least it could at that stage—and so, if anything, long rates in the US and other countries that are in liquidity traps are being held down by the parlous state of their economies.

Senator CORMANN: Just by way of context, the Treasury modelling says that you expect the impact of the carbon tax on inflation in 2012-2013 to be 0.7 per cent.

Dr Gruen : Yes.

Senator CORMANN: The same modelling also shows in chart 5.12 a forecast reduction in real wages in 2012-2013 of just 0.17 per cent compared with business as usual. Can you confirm in that context if this means that Treasury is forecasting that nominal wages will rise by just over half a per cent faster as a result of the introduction of the carbon tax than they would otherwise have done?

Dr Gruen : I think I might hand that to Mr Duggan.

Mr Duggan : It is certainly the case that a direct mechanical routing of the modelling would give you that result, but you need to think very carefully about the broader macroeconomic context within which the carbon price is being delivered. In the way we translate that particular finding through to our wage forecasts, we do not mechanically jump them by that amount.

As Dr Gruen just reminded me, there is also—on the other side—the assistance that is being provided to many of those wage earners at the same time. When you think about how wage bargaining arrangements will work it is not entirely the case that you will get a one-off immediate impact in nominal wages. That is certainly not our view.

Senator CORMANN: When you say 'a mechanical reading' of the modelling, what is the non-mechanical reading? What is your expectation for nominal wage rises in 2012-2013?

Mr Duggan : We publish in the MYEFO our estimate of the wage price index, which we estimate to grow 3¾ per cent in 2012-2013. This was actually down from 4.75 per cent at budget. We state in the MYEFO that that is indicative of the weakening in labour market conditions and our forecast for employment growth and our higher unemployment rate forecast in moving from the budget to the MYEFO. As I said, we take into account the broader macroeconomic environment when we translate the carbon price modelling with respect to nominal wages through to our forecasts.

Senator CORMANN: Essentially, you are actually expecting higher nominal wage rises than the Treasury carbon tax modelling would sort of seem to make us believe.

Dr Gruen : As Mr Duggan said, it does not take account of the assistance. To the extent that you provide people with financial assistance, you do not expect the wages to simply rise with the price levels. Just to give you an example, when the GST was brought in it had a roughly 2½ per cent increase in the CPI, but people got tax cuts at the same time, so the outcome was that you did not see a jump in wage growth of that order of magnitude, because of the consistence. It is the same effect. It is simply the fact that the computable general equilibrium modelling, which is basically better suited to doing long-run stuff, is not so well suited to doing macro forecasts over short periods of time. The assistance is germane to an assessment of the extent to which it will flow through to wages.

Senator CORMANN: Having listened to all of these explanations, was the answer to my original question yes or no?

Dr Gruen : Sorry, your original question being: was it going to lead to a rise in nominal wages of half a per cent?

Senator CORMANN: Yes.

Dr Gruen : I think the answer is that the assistance would lead you to expect that it would lead to a rise in nominal wages, relative to what would otherwise be the case, of less than that.

Senator CORMANN: Of less than half a per cent.

Dr Gruen : Yes.

Senator CORMANN: Does that mean the RBA needs to revisit its assumption in the February statement on monetary policy?

Dr Gruen : I do not believe so, but you can—

Senator CORMANN: Because its inflation forecast assumes the introduction of the price on carbon does not need to second-round effects on prices through higher margins or wage claims.

Dr Gruen : Sorry, it does not lead to second round effects? I think that is what I just said.

Senator CORMANN: Yes.

Dr Gruen : I think we are agreeing.

Senator CORMANN: So why is the impact of the carbon tax on real wages not much larger than the figure of 0.17 per cent? Real wage calculations do not normally take the impact of tax relief or compensational assistance into account, right?

Dr Gruen : I will have to think about that.

Senator CORMANN: That would be great. You would provide that to us?

Dr Gruen : Sure.

CHAIR: Will we be able to get that answer either today or maybe through Dr Parkinson tomorrow?

Dr Gruen : We will do what we can.

Senator CORMANN: Thank you. That would be appreciated.

CHAIR: Thank you, Senator Cormann. Senator Waters, you had a few moments. You wished to ask questions.

Senator WATERS: I do, thank you. Senator Brown is not coming, so if I could have his few moments as well then that would be fantastic.

CHAIR: I am not so sure that we have any allocation of time that we share between parties. But, Senator Waters, you go for a while and I will speak to my colleagues in due course.

Senator WATERS: Thank you, Chair. Thanks very much for your interesting information so far. I have some questions related to the importance of the mining industry and its impact on other sectors. During the GFC, which sector of the economy played a more important role in maintaining growth and employment in the economy? In your view, was it agriculture, mining, manufacturing or services?

Dr Gruen : We would have to go back and look at contributions, but certainly mining output fell quite sharply over some period of the global financial crisis. In fact, another kind of confirming evidence that the mining sector was not a big contributor in helping Australia avoid recession, as least through the early part of 2009, is the fact that the unemployment rate in Western Australia, which of course has a much higher share of mining than any other state, went up by nearly double the national average. It came from a lower base, but the extent to which it went up was nearly double the national average. So, although later in the period demand from China certainly helped, there was an important period in 2009 when mining output fell precipitously. I cannot tell you the others.

Senator WATERS: Could you take the others on notice.

Dr Gruen : We can.

Senator WATERS: Thank you.

Senator CAMERON: Can I just ask something on that point. Mr Gruen, I am sure—

CHAIR: No, Senator Waters has the call. She is asking questions. She has asked one question. Let us have a fair go here.

Senator CORMANN: In your view, will the further expansion of the mining industry lead to further appreciation of the Australian dollar? How sensitive to the level of the dollar are the manufacturing, tourism, agriculture and international education sectors?

Dr Gruen : I will not give you a forecast on what will happen to the Australian dollar. The Australian dollar is already at a very high level.

Senator CORMANN: What impact would the further expansion of the mining industry have on that?

Dr Gruen : As you are aware, we have lived through an extraordinary period in which global demand for resources has been rising more strongly than supply has been able to keep pace with. That has lead to the big rise in prices. We now anticipate that global supply will gradually catch up with global demand, and that there will therefore be gradual declines in the terms of trade. We will see a big increase in volumes of production in mining. We are already seeing that: iron ore production is up about 50 per cent since the beginning of 2010; coal is recovering from the Queensland floods of early last year; and LNG is ramping up—there is a huge increase in LNG. We will see a very big increase in the amount of production from the mining sector. We anticipate that that will happen at gradually declining prices.

If the relationship we were talking about earlier between the real exchange rate and the terms of trade were to be sustained, you would anticipate that the real exchange rate would drift down with the terms of trade, which is what we have in our longer term projections. Obviously that relationship does not give you a handle from one month to the next, or six months to the next. It is a kind of long-run relationship rather than a tight relationship over a short period. We are anticipating that the exchange rate will remain significantly higher than the pre-mining boom level for an extended period. Even if it were to come down somewhat, we are expecting it to remain pretty high.

Senator WATERS: And the sensitivity of those other sectors to that high dollar?

Dr Gruen : They are under profound competitive pressure. There is no question about that. Parts of the manufacturing sector—not all of it—are under sustained, competitive pressure, as are some but not all tourist destinations. Certainly there has been a big increase in the number of Australians going overseas rather than having holidays in Australia. The tourism sector is under pressure and, as you said, international education. It needs to be said that, if one part of the economy is growing extremely rapidly, there has to be restraint somewhere otherwise the economy overheats. There are sectors that are hurting—one does not want to downplay the difficulties they are facing—but, for the good of the economy overall, it is necessary for some parts of the economy to grow slowly.

Senator WATERS: I could have a field day with some of that, but I will press on. Has Treasury seen the environmental impact statement for Waratah Coal's China First coalmine proposed in the Galilee Basin in Queensland?

CHAIR: The Macroeconomic Group in Treasury?

Senator WATERS: In part of that environmental impact statement, there are some pretty serious economic claims. My question is whether Treasury has had any input to the environment department on those claims? So it is relevant.

Senator Wong: This division certainly would not have that. We can take on notice whether there was any consultation with Treasury; any aspect of Treasury in the environment department's consideration of the EIS. That would not generally occur, but we will take that on notice.

Dr Gruen : The people to ask would be those from the Fiscal Group.

Senator WATERS: Thank you. In general, has your macro group done any assessment of the impact of new mines on other sectors of the economy in those specific communities? For example, what is the impact on housing prices and jobs for those not employed in the mining sector? Or, again, is that a different group?

Dr Gruen : Again, that is not our bailiwick. You could try Fiscal Group, but they may give you the same answer.

Senator WATERS: Would you have looked at the impact on inflation and the impact on exchange rate and interest rates?

Dr Gruen : Yes.

Senator WATERS: Can you talk to me about the assessments you have done of those?

Dr Gruen : Do you mean of the effect of the mining boom?

Senator WATERS: Of the mining boom generally. But have you done that for specific large projects or clumped projects such as the Galilee Basin in Queensland?

Dr Gruen : From a macroeconomic point of view we look at the whole picture. We do not tend to do individual assessments of the macro-implications of any particular project. We look at the macro-implications of it all.

Senator WATERS: You do not look at it on a regional basis?

Dr Gruen : No, from a macroeconomic point of view, we do not—unless there is some macroeconomic reason to look at it and usually there is not.

Senator WATERS: Can you then talk about the general impacts?

Dr Gruen : One thing that is an attractive feature of the mining boom from the point of view of looking at regions is that there was a plausible fear about the mining boom. Certain sectors of the economy are running really hot. We define it as 'mining related'. About nine per cent of the economy appears to be growing at about 20 per cent per annum. That is largely construction and a few other bits. There are pieces of the economy that are really red hot. Then the main bulk of the economy, which is non-mining related, is growing at very slow rates. Our current estimate is that, over the next three years, that will grow at a number more like one per cent per annum. You might imagine that those very different growth rates across the economy might mean significant parts of the economy will be left behind in terms of leaving high unemployment. We have had a look at the regional distribution of unemployment. We have data on 1,400 statistical local areas, which together span the country. We can see whether the distribution of unemployment has become more uneven as a consequence of the mining boom.

Senator WATERS: I would be really interested to see that. Can you table as much of that detail as possible?

Dr Gruen : It is in the public domain. The answer is that the regional distribution of unemployment has got better, not worse.

Senator WATERS: The distribution of unemployment?

Dr Gruen : In other words, not only has the unemployment rate come down but also the variability of the unemployment rate across the country has got more even, not less even.

Senator Wong: In other words, the disparity in regional disadvantage appears to have reduced, which is counterintuitive.

Senator WATERS: Yes, it is.

Dr Gruen : But an attractive feature.

Senator Wong: As Dr Gruen says, it is obviously pleasing to see that more people in more areas, including highly disadvantaged areas, have the opportunity to work.

Senator WATERS: I will look at the figures with interest. On a related point: are you aware of claims that each new job in mining creates three other jobs in the rest of the economy? Do you find those claims plausible?

Dr Gruen : If you add up all the jobs created by all the industries, you will find that we have many more jobs than there are in Australia.

Senator WATERS: Exactly; that is my point. Is that one/three claim plausible?

Dr Gruen : It depends on how you do these calculations. The right way to think about it is that, in a well functioning economy in which unemployment is close to the lowest rate that is sustainable—I sometimes used the words 'full employment' but perhaps that is a bit loaded—any given industry that is creating jobs is doing that only to the extent that other industries are employing fewer people.

Senator WATERS: So whatever jobs it is creating it is just sucking from elsewhere. So there is no net benefit.

Dr Gruen : That is true across the board. There are environments in which that is not true. If a project takes people out of the pool of long-term unemployed or takes Indigenous people who would otherwise not be in the labour force and employs them, then that is really a net increase in employment. Those things really are a net increase in employment. But, in a well-functioning economy like ours, with unemployment close to its lowest sustainable rate, it is not the case that individual industries can create jobs; they are simply redistributing them.

Senator WATERS: Has Macro looked at the sectors from which those jobs are mostly being—for want of a better word—sucked

Dr Gruen : You can look at net job creation and net job loss. You can certainly look at those data. Those data are well known. You can look over the last year. I have the data here showing where jobs in net have been created over the last year. If you are interested, it is in the graph on page 44.

Senator WATERS: Could you tell me how those employment multipliers in mining compare with other industries. Is the one-to-three multiplier a common multiplier?

Dr Gruen : It does depend very much on how you do these calculations. I am suspicious of the idea. In a well-functioning economy that is achieving close to full employment, there really is not a multiplier.

Senator CAMERON: I think former secretary Ken Henry gave evidence to estimates at one stage on this issue of the contribution of the mining industry during the GFC. I think he indicated that if the rest of the economy had behaved the way the mining industry behaved there would be 19 per cent unemployment across Australia. Do you remember that?

Dr Gruen : I do not remember that, but presumably what he said is in the public domain.

Senator CAMERON: But is that similar to your analysis?

Dr Gruen : There was a period there—I think it was in early 2009—when there was a big decline in output and a lot of job losses in the mining sector.

Senator CAMERON: Can I ask you about what Senator Wong describes as the counter-intuitive position of growth in regional areas. That does not mean that if there is a sharp decline in one particular area that is particularly important—say, Geelong for manufacturing and the car industry—that would not have significant implications for the broader economy.

Dr Gruen : I think that it would have significant implications for that area, but I am not sure that it would have significant implications for the broader economy. It does depend very much on the broad environment in which it is happening. If the broad environment in which it is happening is one with unemployment close to its lowest sustainable rate, then that is a much more benign environment in which—for want of a better word—structural change can occur in particular places.

Senator CAMERON: So you are basically saying—I do not want to put words in your mouth; I am just trying to figure this out—that if the car industry is closed down workers should not be worried about that; they will be picked up in the rest of the economy.

Dr Gruen : I do not want to downplay the pain that some people will go through as a consequence of, let us say, the closing of a car plant or the laying-off of people. That is real. There is a lot of change in employment in an economy. The point I was making, which I think is an important point, is that it is much better for that to be happening in an environment of unemployment near five per cent than it is in the depths of a recession where it is going on all over the country.

Senator CAMERON: Is your argument that unemployment is at five per cent because of the boom in the mining industry?

Dr Gruen : No; I think the boom in the mining industry is making us better off than we would otherwise be but on average the unemployment rate is a consequence of the quality of the macro institutions and the labour market institutions that enable that to be the case.

Senator CAMERON: Some of the arguments that we have heard from Treasury and some of the articles from academic economists that you read around the place talk about the crowding out effect of the mining industry. That crowding out comes about by the high dollar, certainly in the manufacturing sector. If we are talking about a boom, then that by definition has got a period where it will become a bust. Will that boom become a bust? Is that economic theory? If you have a boom, does it become a bust? Is it a bubble?

Dr Gruen : It does not have to. You would hope that the—

Senator CAMERON: I am looking for economic analysis, not hope, Dr Gruen.

Dr Gruen : Right.

Senator Wong: The government is approaching the boom, as you know, by recognising the importance of investing wisely now in the broader economy. That is the logic behind the minerals tax. Because of some of the pressures that you are talking about and because of the recognition of the likely reduction over time, there will be different arguments about how long that will be with the terms of trade, and Dr Gruen has spoken about how the budget factors that in. We are conflating a number of issues here. What the Treasurer released in the budget last year included the economy in transition statement.

I do not know if you went into this, Dr Gruen, but there is this graphical representation of the data we are talking about. It is not to say there is no regional variation; there always is in any economy and certainly in Australia's. The point was that if you track dispersion and unemployment rates, we are doing better now than we were. In other words, the relative disadvantage in different areas is less than it was around the time of the GFC. There is still disparity. In my home state of South Australia, you are going to have the northern suburbs of Adelaide, which generally have had historically higher unemployment rates than the national average. But we are doing better than we were a few years ago on that front.

Senator CAMERON: Okay. There has been a lot of criticism about the modelling that Treasury has undertaken. There has been criticism about the Treasury's wellbeing framework. I am not sure if you have seen any of that criticism from Judith Sloan?

Dr Gruen : I have seen it.

Senator CAMERON: Good. I do not need to go through it all. Judith Sloan argues that a more traditional economic framework would work just as well, if not better, than the wellbeing framework. Why did Treasury move to a wellbeing framework? To be honest, I thought that it was one of the more innovative things that Treasury had done. We have been talking all morning about economic statistics and we have only just touched a little bit on wellbeing. Surely economics is all about producing wellbeing in the economy. Have you got some view on this argument that has been put up by Judith Sloan?

Dr Gruen : Rather than criticising Judith Sloan, I am happy to explain why we have a wellbeing framework. We have had a wellbeing framework for about a decade. Our mission statement says that our role is to enhance the wellbeing of the Australian people by giving advice to governments, and so we thought it was incumbent upon us, as part of our mission statement that we should be working to enhance the wellbeing of the Australian people, to think more seriously about what we meant by wellbeing. So we have done that: we put out a wellbeing framework about a decade ago and we have had a bit of an update on that more recently. We have engaged in a conversation with people in the department, helping people to think about why it is important. I am not going to give you the full details, but they are available.

I think you are right that it is innovative and it is now the case that other treasuries are taking a similar approach. For instance, the New Zealand Treasury has recently introduced a similar framework. They call it a 'living standards framework', but it has a lot of similarities with our wellbeing framework. It is simply a recognition that, while economic growth is important for a variety of reasons, wellbeing is a broader concept than simply rising GDP per capita. The things that we think about and regard as important are things to do with the distribution of opportunity, the risks that people have to face, the complexity of their lives—and that is often impacted on by government decisions. It is simply a framework to help us in our policy advising role to realise that it is a multidimensional world and there is a range of things we need to keep in mind in giving public policy advice.

Senator CAMERON: There have also been assertions and claims that when you have done your analysis of the impact of the 2009-10 stimulus package you deliberately omitted some countries from your analysis. What is that about?

Dr Gruen : There was a range of analysis done on the stimulus and there was a box in the budget a couple of years ago which showed—it was not specifically to do with Australia—a comparison of how much stimulus various countries had applied and how they had done relative to how the IMF thought they would do. Inadvertently, the chart and analysis that were in the budget used a subset of G20 countries and we checked that the results were robust using the full number of G20 countries. There was an error that we made. That error was pointed out to us in Senate estimates 18 months or so ago and I gave a statement at that time explaining what had happened. It was not a deliberate attempt to do anything.

Senator CAMERON: You are saying that the analysis you did is still robust?

Dr Gruen : The analysis was less robust, clearly, but it was simply one piece of evidence and I think there is a robust body of evidence—not that particular piece, but there is a robust body of evidence—that says that for countries like Australia fiscal stimulus if applied in a timely, temporary and targeted way can be a very important component of a response to a rapidly evolving recession.

Senator CAMERON: Dr Gruen, would you consider yourself a student of international macroeconomics?

Dr Gruen : Yes.

Senator CAMERON: Judith Sloan argues in an article that all students of international macroeconomics know that fiscal policy is close to useless for small, open economies with flexible exchange rates like Australia. Given that you are one of these students, is that your view? Do you know this?

Dr Gruen : There is a standard model in the IMF of open economies with floating exchange rates that dates back to the 1960s, which is a piece of work that was done by Robert Mundell—who subsequently won the Nobel Prize—and a man called Fleming. In that model, fiscal expansion is ineffective because it leads to a rise in the exchange rate, which means that exports suffer and the stimulatory effect of the fiscal stimulus is offset by the exchange rate. That standard model—which has been around for a long time—makes the prediction that fiscal policy in an open economy with a floating exchange rate will be ineffective. There has been a lot of work subsequently on that proposition, and that proposition seems to be a reasonable one for countries with very high trade shares. If Singapore tried to do fiscal expansion, that would probably be fairly ineffective. Australia, however, has a pretty small trade share—our export share is about 20 per cent—and for countries with relatively low trade shares the empirical evidence is pretty strong that fiscal stimulus has the effect that everyone thinks it has—namely, that it does work. As I say, I think the evidence is pretty robust that, for countries like ours, fiscal stimulus when properly applied can have a substantial effect and I think the evidence in the case of the global financial crisis supports that, as it does for other countries that are also in a position to provide substantial fiscal stimulus.

Senator RONALDSON: Can you please detail for me the nature of the support that the Treasury provides to the European Bank for Reconstruction and Development.

Mr Colmer : Australia has an executive director on the board of the EBRD—Mr McMullan, who was previously a senator and member of parliament. He has been there since about the middle of last year. Australia has a share of the capital of the EBRD—we provide funding through a paid-in component of around $1 billion, which was funded from shares. This is the 2010 general capital increase. I do not seem to have the actual total figure of our share in the EBRD.

Senator RONALDSON: Is that $1 billion in cash or is it a staffing component in there? How is it broken down?

Mr Colmer : The only contribution that we make to the EBRD is to buy shares in the EBRD, and we did that some time ago. The last general capital increase of the EBRD was in May 2010.

Senator RONALDSON: Can I hold you up there and move on. Is there any other funding to the EBRD provided by the Australian government that you are aware of? Is there any other department, or is it all Treasury?

Mr Colmer : Yes. In November last year we pledged a half a million Euro contribution to the EBRD for a technical cooperation fund that they are setting up to work in the southern and eastern Mediterranean. That was a contribution from AusAID.

Senator RONALDSON: Does Foreign Affairs provide any assistance that you are aware of apart from that AusAID amount?

Mr Colmer : Not directly.

Senator RONALDSON: Staffing?

Mr Colmer : No. Mr McMullan's position is as an employee of the bank, and he is paid out of the general bank funding.

Senator RONALDSON: When is his appointment up?

Mr Colmer : I am not sure of the exact date, but it is around the middle of this year.

CHAIR: You are not angling for a job, are you?

Senator RONALDSON: No, I most certainly am not. Are plans underway to look for a replacement?

Mr Colmer : Yes.

Senator RONALDSON: And what is the selection process for that?

Mr Colmer : It is an appointment by the government. The government makes a selection and nominates that to the EBRD. The EBRD then has to take a vote to appoint the person.

Senator RONALDSON: Is that the Treasurer or the Minister for Foreign Affairs? Who would be making that appointment?

Mr Colmer : It would be primarily managed by the Treasurer, but there may be a broader process around that internally.

Senator RONALDSON: So will that be a straight appointment? Presumably it will not be an advertised position.

Mr Colmer : Probably not, but it may be. We have not had discussions on the actual process for that at this stage.

Senator RONALDSON: Was it advertised before Mr McMullan was given the job?

Mr Colmer : It was not advertised at the time that Mr McMullan was appointed, no.

Senator RONALDSON: What support is provided to Mr McMullan in his role? Do you provide any departmental assistance to him?

Mr Colmer : We provide general advice on issues as they arise, but that is taken from the resources of Treasury. It works in a similar way to how we work with the other international financial institutions.

Senator RONALDSON: Do you provide any secretariat assistance in the context of staffing?

Mr Colmer : No.

Senator RONALDSON: There is no staff at all?

Mr Colmer : There are staff in Treasury in Canberra who have responsibility for working with Mr McMullan as the Executive Director of the EBRD, but they are not specifically working with Mr McMullan alone. They cover a variety of issues and tasks.

Senator RONALDSON: So there is no additional direct staffing provided to Mr McMullan?

Mr Colmer : Not from here, no.

Senator RONALDSON: Where is it provided from?

Mr Colmer : From the EBRD itself.

Senator RONALDSON: And what is the staff support from the EBRD?

Senator Wong: We will take that on notice.

Mr Colmer : I really do not know off the top of my head.

Senator Wong: We will take that on notice. Obviously we are not the EBRD. Just so that we are clear, we are talking about a position that your government appointed Mr Reith to from 2003 to 2009.

Senator RONALDSON: I have made no reflection on Mr McMullan at all.

Senator Wong: No, I just thought you might like to recall that. I am sure he did a sterling job.

Senator RONALDSON: And I am sure Mr McMullan, for whom I have great respect, is too. Mr Colmer, we were asking questions about what staff is provided by the EBRD.

Senator Wong: And I have taken that on notice.

Senator RONALDSON: Minister, we have just had a discussion about a whole range of things—

Senator Wong: Yes, and I have said we have taken that on notice.

Senator RONALDSON: and you have suddenly come in. Why?

Senator Wong: I have just taken the question on notice.

Senator RONALDSON: But, if Mr Colmer knows, why would you not let him answer the question?

Senator Wong: I have taken the question on notice because we are not the EBRD. I am happy to assist.

Senator RONALDSON: Who makes the decision about staff appointments to Mr McMullan? Is that the EBRD position's salary support? Does Mr McMullan make that decision? Does Treasury make that decision?

Mr Colmer : We have no role in that.

Senator Wong: Yes. We have given evidence that—

Senator RONALDSON: Mr Colmer, you were just about to answer my question and then the minister interrupted.

Senator Wong: Yes, and I am the minister at the table, Senator.

Senator RONALDSON: Is there something to hide here?

Senator Wong: No, not at all, but I do not think it is fair to the witness. He has given evidence that we do not through Treasury provide any staffing to this position—the EBRD does. It is a matter for the EBRD. We are not the EBRD. If you have further questions about staffing arrangements, we have taken that on notice to see if we can assist. Clearly that is a matter for the EBRD. I just do not think it is fair for you to ask the witness the same set of questions, which we have taken on notice for the reasons I have outlined.

Senator RONALDSON: We have talked about Mr McMullan's role. Mr Colmer told me that Mr McMullan is paid for by the EBRD. We have talked about the billion dollars of capital. Now you are saying when I start talking about the staffing to Mr McMullan that that suddenly is not capable of being answered?

Senator Wong: It is not Australian government staffing. That is what I am saying.

Senator RONALDSON: But either it is McMullan—

Senator Wong: This is ridiculous. Would you like to ask me about the IMF too and how they staff?

Senator RONALDSON: But minister—

Senator CORMANN: The Treasurer puts press releases out about it.

CHAIR: Senator Ronaldson, you have asked a question. The minister has chosen to intervene. She has directed that the answer will be taken on notice. There will be no response to the question from officials. You can move on. We are very close to the end of time.

Senator RONALDSON: Sure. But can I just have an acknowledgement please that although we are not employing Mr McMullan, we were happy to talk about his position but we are not happy to talk about support positions for Mr McMullan, which equally we do not have any involvement in.

Senator Wong: I am happy to acknowledge that the government announced Mr McMullan's appointment, yes, just as Mr Costello announced Mr Reith's appointments. I am also happy to say that I do not feel in a position to give detailed information about what another international organisation does with its staffing arrangements. If you want me to acknowledge both of those things, I am very happy to.

Senator RONALDSON: But you are happy to talk about Mr McMullan, who is actually paid for by this organisation, but you are not prepared to talk about those support staff and who appoints them, what the selection process is and what they are paid. Is that right?

Senator Wong: You are asking me and the officials to give detailed evidence about appointments that are made by another body or occur in relation to another body. What I have said is that we will take this question on notice. If we can assist in terms of what knowledge we have or what Australian government contribution there is, we will.

Senator RONALDSON: Has there been any discussion about providing further assistance to Mr McMullan to assist him in his role as executive director, where there maybe staff provided to Mr McMullan outside the EBRD or any request to Mr McMullan to reallocate staff within his office or appoint someone into his staffing?

Mr Colmer : Not to my knowledge. There have been no discussions with Treasury. They would have come through my area.

Senator RONALDSON: Are you taking that on notice?

Mr Colmer : No, I am saying that there have been no discussions of that nature.

Senator Wong: Ronno, he said, 'No.'

Senator RONALDSON: There have been no discussions at all about that. With Mr McMullan, within Treasury—

Senator Wong: About this issue, he has answered that question. Do not badger him, Senator.

Senator RONALDSON: Has there been any request from Mr McMullan for extra assistance?

Mr Colmer : No.

Senator RONALDSON: Has there been a request from anyone within government to provide extra assistance to Mr McMullan?

Mr Colmer : I have absolutely no knowledge of any request to do with Mr McMullan's staffing.

Senator RONALDSON: Right. Thank you.

Senator BUSHBY: There was discussion earlier about the participation rate. I think, Dr Gruen, you were saying that that was largely caused by issues like retirement and so forth.

Dr Gruen : I am not sure that that is true. I was simply making the point—

Senator BUSHBY: That that contributed to the participation rate.

Dr Gruen : Yes.

Senator BUSHBY: If you look at last month's ABS labour force figures, and I know there will be some new ones out in about 45 minutes, they indicated that the participation rate for the 15- to 19-year-old age group, which is clearly not people who are about to retire, has fallen over the last year from 56 to 54.8 per cent. Quite clearly, changes in the participation rate are not wholly coming from the sorts of factors that you suggested were contributing to it. The question that I want to put to you, which was more specifically put—I will put it to you more generally than Senator Cormann did—is whether Treasury can confirm that, as a result of the trend decline in the participation rate, the unemployment rate would otherwise have been higher?

Senator Wong: This has been traversed. If Dr Gruen has something to add to it, I am happy for him to answer it.

Senator BUSHBY: That particular question was not put.

Senator Wong: I would make the point that you can try and exclude many factors, Senator. You could equally ask the question, which Dr Gruen also answered, if employers had not instead got more workers working longer hours, what would the effect on the unemployment rate have been?

Senator BUSHBY: And that is a valid explanation to put out into the public, as is the fact that the participation rate has fallen and that that also has the tendency to mask changes in the employment rate.

Senator Wong: It has risen over the decade, though.

Senator BUSHBY: It has.

Senator Wong: If you compare the participation rate now with what it was in 2001, it is significantly higher than it was then.

Senator BUSHBY: That is right. The relevant point for accurately and transparently assessing the current rate of unemployment is the difference between the participation rate in recent times and where it is now. Looking over a period of time, it gives you the same picture in the longer term. But in the shorter term, if the government is claiming unemployment rates are fantastically low, to fully appreciate and transparently understand where they truly are you need to take into account the participation rate and no doubt also factors like the numbers of hours worked.

Senator Wong: I think you can cut statistics many ways, Senator. I will let Dr Gruen respond.

Dr Gruen : All I was going to say was I did not actually make a statement about unemployment. I made a statement about the amount of employment increase that would have been required. There is another issue here which is relevant over these short time periods. The ABS does not do a census—it does a sample. So you have noise in each of these series. They do a sample and then from the sample they know the number of people who are employed, the number of people who are unemployed and then presumably the people who are not in the labour force. They get that as well. From that, they derive the participation rate. These things have all come with measurement error. I am a bit reticent to make statements over short periods of time. If you look at the data, the participation rate shot up and then came back down again. It has not actually done very much if you look over a longer period of time. It has simply been volatile.

Senator BUSHBY: I acknowledge that. But changes in participation rate, whether in the short or long term, do have a direct impact on the number of people employed and the number of people unemployed. If there is a fall in participation rate, that impact would tend to mask the number of unemployed people, because some people have chosen not to participate in the labour market.

Dr Gruen : That is right.

Senator BUSHBY: Thank you.

Senator HEFFERNAN: The US is technically insolvent—right?

Dr Gruen : That is your statement, Senator, not mine.

Senator HEFFERNAN: The US has $3 trillion of toxic debt warehoused. What percentage of GDP to public debt is it?

Senator Wong: Certainly their position is worse than ours.

Senator HEFFERNAN: The baseline for our GFC spend has become their position. We are about 10 years away from where the US is, if we keep it up.

Senator Wong: No.

Senator HEFFERNAN: I am talking about interest rates and terms of trade, and this is very important because if the US bring their toxic debt to the market they will have a serious problem. While China has so much capital invested in the US—which is a non-market currency, and they want to maintain their terms of trade and they are not going to revalue— the only way I can see out of it is for the US to use only the inflationary tool to get rid of their debt. What is the percentage of their GDP to public debt now and what is it estimated to be in three years time?

Senator Wong: Can I just make this point and then Dr Gruen can respond. Our net debt peaks at 8.9 per cent of GDP in this financial year—

Senator HEFFERNAN: I cannot hear you.

Senator Wong: Our net debt peaks at 8.9 per cent of GDP in 2011-12. The US at 2016 is 88.7 per cent of GDP.

Senator HEFFERNAN: So they are technically at insolvency levels now.

Dr Gruen : No.

Senator HEFFERNAN: You go to Harvard and have the argument—I have been there. They are using the weight of their economy and technology as their solution at the moment. Do you recognise that they have a lot of toxic debt warehoused?

Dr Gruen : Do you want me to comment on this?

Senator HEFFERNAN: We are worrying about it, too. I am a cocky—I am a farmer. You ought to get out onto the paddock a bit; you are too grey. You have been in the office too long.

Dr Gruen : My parents owned a farm.

Senator HEFFERNAN: I cannot see how our terms of trade for exporters, for farmers, are going to improve while this insolvency situation persists. Japan is the same and England is at 200 per cent of GDP in their forward estimates. I do not think the worst has come to us yet. We are here arguing technical causes, but is the cause for our terms of trade not the insolvency of half the planet?

Dr Gruen : Do you mean our terms of trade or the level of our exchange rate?

Senator HEFFERNAN: The level of our exchange rate. We were at 67c in the spring of 2005, at 70c in the autumn of 2006 when we signed the free trade agreement and did away with the five per cent tariff—this is for our exporters to understand—and we now have a 50 per cent currency tariff against us in US trade.

Dr Gruen : We have a high dollar.

Senator HEFFERNAN: That is a technical tariff.

Dr Gruen : We have high terms of trade because the world is paying us extraordinarily high prices for iron ore and coal and there is huge demand for our LNG. At the current level of the exchange rate, we are running a trade surplus—one of the biggest trade surpluses we have run. I think as a share of GDP the trade surplus is currently the largest since the early 1970s. Despite the fact that imports are growing strongly because of the exchange rate and also feeding the mining investment boom, we are running a very strong trade account—

Senator HEFFERNAN: I understand that, but my difficulty is that everyone is saying we are going to slide off the world when demand drops off. But it will be worse than that, will it not, unless the US brings its debt under control? General Motors Holden were allowed to use their pension fund for cash flow, for God's sake.

Dr Gruen : I agree with you that the longer term fiscal problems of the United States, Japan and other countries—but let us focus on those two—are genuinely very serious. There is no question about that. The longer term fiscal problems that they have to confront are serious, especially because they have ageing populations and, in the case of the United States, they have very strongly rising healthcare entitlements. That is a long run issue for them and they have to get to grips with it. There is no question that those are serious problems that have to be dealt with. I do not think they are of crisis proportions now; they are long-term problems that have to be dealt with.

Senator HEFFERNAN: I agree with that.

Proceedings suspended from 10:59 to 11 : 14

CHAIR: I understand Senator Abetz is going to lead off for five minutes only.

Senator ABETZ: Can the department take on notice how often Treasury officials have met with the member for Denison, Mr Wilkie, about poker machine reform? In particular, can I ask whether there was a meeting with Treasury officials and the independent member for Denison on 9 November last year?

Mr Ray : I do not know that I need to take it on notice. Treasury officials have attended two meetings with Mr Wilkie.

Senator ABETZ: Was one of those on the 9th?

Mr Ray : One of those was on 9 November 2011.

Senator ABETZ: Thank you. At that meeting, was Mr Wilkie shown any documents that were labelled cabinet in confidence to your knowledge?

Mr Ray : I cannot recall. We did not provide any documentation to Mr Wilkie.

Senator ABETZ: But would you have observed whether or not he was provided such documents by FaHCSIA staff?

Mr Ray : I think you would need to ask them what they provided.

Senator ABETZ: No, what you observed is within your knowledge. I can ask FaHCSIA whether they provided something. What did you observe at that meeting?

Mr Ray : As I said, I cannot recall the exact details of what happened at that meeting.

Senator ABETZ: You cannot recall whether cabinet-in-confidence documents were supplied?

Mr Ray : I have answered the question.

Senator ABETZ: At that time, did Treasury have any advice before it that the poker machine reform deal could not be undertaken by the then proposed deadline of 2014?

Mr Ray : I am not quite sure that I understand where you are going, Senator Abetz.

Senator ABETZ: Just answer the question. That would be helpful. Do not try to second guess where I am going.

Senator Wong: If he does not understand what the point of your question is, it is hard to answer.

Senator ABETZ: It is pretty obvious. A promise was made—

Senator Wong: Can I finish. That is the first time I have intervened. Perhaps you could repeat the question and we can see if we can assist.

Senator ABETZ: That is exactly what I was going to do. The government promised this reform would be rolled out as of 2014. The government now says it has technical advice that cannot be done. I am wondering whether Treasury officials were aware of that advice on 9 November at that meeting or any time earlier or later and, if so, on what date.

Mr Ray : I was not.

Senator ABETZ: When did you first become aware of that advice.

Mr Ray : On 21 January.

Senator ABETZ: On 21 January, when Mr Wilkie was told. Thank you, Chair

Senator CORMANN: Can Treasury confirm the size of the estimated budget surpluses out to 2020-21 in dollar terms which would be required to repay debt by 2020-21?

Mr Ray : I do not think those numbers are published in dollar terms.

Senator CORMANN: That is why I am asking. You have published them as a graph of percentage of GDP.

Mr Ray : I am happy to take the question on notice.

Senator CORMANN: So you do not have the figures in dollar terms?

Mr Ray : No.

Senator CORMANN: What are your trends in revenue and expenditure over that period from 2011-12 to 2020-21?

Mr Ray : Again, I do not have that information in front of me so I would need to take it on notice. If you look at chart 3.2 on page 52 of MYEFO, you can see that the underlying cash balance flattens out in 2020-21. That is going to be driven by receipts reaching the government's tax to GDP ratio.

Senator CORMANN: I am also looking at chart 3.3, Government net debt projected to 2021-22, and I am interested in the annual yearly growth in government expenditure and the annual yearly growth in government revenue that you have assumed to 2020-21 in order to pay down net debt in that sort of speed.

Mr Ray : The projections are based on the government's fiscal strategy, which means that real spending grows no more than two percent per annum out to the surplus being one percent of GDP.

Senator CORMANN: So, you are making technical assumptions—

Senator Wong: No, it is the government's fiscal rules.

Senator CORMANN: This is the rule, but we will have to see when budgets happen down the track.

Mr Ray : That is no different from any other projection that we would make, or even indeed the budget estimates, in that they are built around the government's policy. So, the government has a stated policy and these projections take that into account.

Senator CORMANN: That is, you are paying off net debt by government edict. There is a lot more required to achieve it, rather than just to say it.

Senator Wong: There are things like offsetting new spending—something you seem to be allergic to, Senator.

Senator CORMANN: We are very good at that.

Mr Ray : The government has projected to pay off net debt through policy—I do not disagree with that.

Senator CORMANN: Policy which is yet to be decided?

Mr Ray : No.

Senator Wong: We have offset all new spending, certainly in this term, and the government's fiscal rules are reflected in the projections in the chart.

Senator CORMANN: Okay, so let me rephrase the question.

Senator Wong: Could I just check one thing here? That would also include the tax-to-GDP ratio because, as you might recall, despite what is said we are actually a lower-taxing government than the Howard government—even including the carbon price.

Senator CORMANN: Let me ask the question from my—

Senator Cameron interjecting

Senator Wong: There you go, now Senator Cameron, do not get ideas about that.

Senator CORMANN: Have you made—

CHAIR: Minister and Senator Cameron should not be engaging in side conversations.

Senator CORMANN: Are you now saying that the government has already made policy decisions which set revenue and expenditure between now and 2021 as is required to hit the government's fiscal targets and to hit—

Mr Ray : Not in the annual year-by-year decision making, quite clearly; but the government has made decisions that would achieve this, which are set out in its fiscal policy. Those decisions are to maintain real growth and spending at no more than two percent per annum until the surplus is one percent of GDP. The other element which the minister pointed to is to keep tax-to-GDP below the level of 2007-08.

Senator CORMANN: Just remind us: to keep the tax-to-GDP ratio at which percentage?

Senator Wong: At below what we inherited from you, which I think was 23.7—but the average of 23.5. You peaked at 24.2. Over the forward Estimates we project 21.2, 22.3, 22.8 and 22.8. That is obviously below what we inherited from the coalition.

Senator CORMANN: Did you make any other assumptions or are they the only two assumptions in order to drive that trend line of government net debt projected to 2021-22?

Mr Ray : They are not assumptions as such; They are the governments stated policies.

Senator CORMANN: The government states, 'That is what we will do,' and therefore you say that is what is going to happen?

Mr Ray : Correct.

Senator CORMANN: There is nothing else to it? We could draw any line and say: 'Well, that is what we are going to do.'

Senator Wong: I am going to intervene here in response to that, and then Mr Ray can add to it if he wants to. The budget bottom line is a function of decisions on expenditure and revenue and, obviously, the various parameters which drive revenue projections and forecasts. We have made some $100 billion worth of savings decisions over four budgets. We added to that in the MYEFO that we recently handed down. We achieved savings of $11.5 billion across forward estimates in MYEFO and delivered a net improvement to the bottom line of $6.8 billion across the forward estimates. We grappled with a $20 billion write-down in revenue between budget and MYEFO. You, Senator, are part of an economic team that not only has a $70 billion black hole but will also have to—

Senator CORMANN: That is actually not true, and we are not going to have a debate about us. We are going to have a debate about the government today, and we are going to be asking questions—

Senator Wong: It impels you to dramatically cut services—

Senator CORMANN: Chair, on a point of order. This is not about questions from government to the opposition. It is not about that debate.

Senator Wong: You are just—

Senator CORMANN: Point of order!

CHAIR: Minister, a point of order has been taken. What is the point of order?

Senator CORMANN: The point of order is that Senate estimates is about senators questioning and probing the government about their performance against budget. As much as they may be interested in questioning and probing us, it is not an opportunity for the government to probe the opposition or hurl abuse at the opposition. It is an opportunity for us to ask questions and probe the government.

Senator CAMERON: That is a very narrow definition of estimates. It is not a proper definition.

CHAIR: Minister, you had something to say?

Senator Wong: I just find the opposition's unwillingness to be transparent with the Australian people about any of their budget decisions—

Senator CORMANN: We are very transparent, but this is not about us.

Senator Wong: May I finish? I listened to your point of order in silence.

CHAIR: Senator Cormann, please.

Senator Wong: The opposition's refusal to be upfront and transparent with the Australian people about their budget decisions is extraordinary. I do not think we have seen anything like it in the modern era.

CHAIR: Thank you. Let me rule on the point of order, because this is important. The purpose of budget estimates and this questioning is to examine the government on policy and matters in the PBS. Senators at this end of the room ask questions of the government. Officials will answer and the minister, if she chooses, will at any time intervene and give a response. The minister may give a response of her choosing. If the opposition senators, or government senators, for that matter, do not like it, bad luck. The minister is responding. The minister has the call.

Senator Wong: Thank you, Chair, I have concluded.

Senator CORMANN: Mr Ray, can you tell us what the real growth in payments is projected to be for the current financial year.

Mr Ray : I will add to my earlier answer, if I may. If we take payments in the medium-term projection period, the government's policy is to constrain real spending growth to two per cent per annum on average until the budget reaches a surplus of one per cent of GDP. The model, therefore, puts that government policy into it. Beyond a surplus of one per cent of GDP, payments are growing on the basis of underlying growth in the estimates and in various heads of spending—health, education, et cetera.

Senator Wong: Which would exceed two per cent.

Mr Ray : Which definitely exceeds two per cent.

Senator CORMANN: Okay, we are getting somewhere.

Mr Ray : And then, on the receipt side, we project out showing government receipts on the basis of announced government policy. There are some announced government policies that affect receipts out across the decade. We take all of that into account and we allow those receipts to grow until they reach 23.7 per cent of GDP.

Senator CORMANN: And then you say, irrespective of whom you lend to, you then limit it to 23.7 per cent.

Mr Ray : Then, consistent with government policy, we hold them at 23.7 per cent of GDP. At that stage, to do that we are implicitly assuming a tax cut, but we do not assume a particular tax cut.

Senator CORMANN: So you already know that, all other things being equal, revenue could grow by more, given the policy decisions that have already been made, but you just say, 'There's a policy decision to stay at that level, so we just assume that somewhere along the way further policy decisions will be made.'

Mr Ray : No. We look at the growth in revenue heads out across the decade, taking into account announced policy. There are some announced policies, as you know, which take effect across the decade, including on superannuation. We take all of that into account until tax receipts reach 23.7 per cent of GDP, and then we hold tax receipts constant.

Senator CORMANN: Going back to my question that I asked before, what is the actual real growth in payments projected for the current financial year?

Mr Ray : That is on page 32. Not only is the number there, but so is the discussion as to why. It is 3.7 per cent.

Senator CORMANN: So even though the government has a policy of not more than two per cent—

Mr Ray : On average.

Senator CORMANN: it is more than 3.7 per cent. We actually do not know. We have a deterioration in the budget bottom line of about $25 billion between MYEFO 2010-11 and MYEFO 2011-12.

Mr Ray : Yes, the point estimate for 2011-12 is 3.7, but average growth in real payments across the forward estimates is 1.5 per cent per annum.

Senator CORMANN: Across the forward estimates. We will see that when we get there, I guess. What we have seen is what is happening this financial year.

Senator Wong: Well, actually—

Senator CORMANN: There has been a deterioration in the budget deficit of $25 billion—in fact, $26.7 billion—since the Pre-election Fiscal and Economic Outlook.

Senator Wong: I would make the point—and Mr Ray has referred you to page 32, which I have no doubt you have read—that that did follow a year in which real spending contracted in 2010-11 by 0.4 per cent. That of itself obviously means you are off a lower base. I think 3.7 per cent, interestingly, is the average of the spending growth in the 10 years preceding the global financial crisis. It is the average of the sort of annual spending increase we saw under the previous government. I just thought I would give it some perspective.

Senator CORMANN: From memory, the increase in real spending in the first two financial years of your government was 17 per cent.

Senator Wong: If you are asking whether the global financial crisis occurred and we put stimulus into the economy, the answer is yes.

Senator CORMANN: Mr Ray, just looking at the last MYEFO, your GDP growth has been downgraded by 0.75 per cent for 2011-12 and 0.5 per cent for 2012-13, yet you expect receipts from company taxes to increase faster between 2011-12 and 2012-13. What is the rationale for that?

Mr Ray : I think you know how I am going to answer this question: that is, it is a question for my revenue Group colleagues.

Senator CORMANN: Your colleague Dr Gruen told me that it was a question for fiscal. You are there. I am pleased that you are still here.

Senator Wong: You had better let him speak.

Senator CORMANN: I asked you that question before.

Dr Gruen : You did, Senator. We will need to check the Hansard, but my memory is that I said it was a relevant question for Revenue Group. You are, after all, asking about revenue.

Senator Wong: My money is on David Gruen.

Senator CORMANN: Funny, that. Could Treasury remind the committee of the difference between the underlying and headline fiscal position?

Mr Ray : The difference between the underlying and headline cash position?

Senator CORMANN: Yes.

Senator Wong: Do you mean in numbers terms or what is included—like conceptually?

Senator CORMANN: Conceptually.

Mr Ray : There is a description of that at page 335 in MYEFO. Do you want me to read it out or are you going to?

Senator CORMANN: Just tell us in your own words, just to give us context for the questions I would like to pursue.

Mr Ray : The headline cash balance includes a net cash flow from investments and financial assets for policy purposes and Future Fund earnings, whereas the underlying cash balance does not include those.

Senator CORMANN: Why does the headline position remain in deficit through the forward estimates? What types of assets are being purchased or invested in?

Mr Ray : The purchase of RMBS—residential mortgage-backed securities—the purchase of equity in the NBN and the injections into the CEFC are the three principal reasons.

Senator CORMANN: How is this additional spending funded?

Mr Ray : Spending is funded through a combination of government receipts and use of the balance sheet. The funding task is determined by the headline cash balance, not the underlying cash balance.

Senator CORMANN: But if the fiscal position is in deficit then spending would have to be funded from debt, would it not?

Mr Ray : Correct—assuming you are not doing something else on the balance sheet.

Senator CORMANN: What else could you do on the balance sheet?

Mr Ray : You could sell assets.

Senator CORMANN: Are there any plans to sell assets?

Senator Wong: You could add to the fiscal deficit by a range of policy decisions, such as some of the ones you have made, Senator.

Senator CORMANN: Are there any plans to sell assets? I see somebody shaking their head—Ms Harris.

Mr Ray : There are plans to sell assets, for example Spectrum.

Senator CORMANN: But beyond Spectrum? You said 'for example'; what other major ticket items in sales of assets—I mean, comparable to the purchase or investment in things like NBN, RMBS—

Senator CAMERON: You will sell everything! You can't just flog everything else!

Mr Ray : The position is that there are estimates for those already in—

Senator CORMANN: What is the impact on the government's debt levels of the additional spending that comes from these investments in RMBS, NBN et cetera?

Mr Ray : Other things being equal, they increase gross debt but the investment in the purchase of RMBS does not increase net debt.

Senator CORMANN: Is there a case for time series on the headline budget position to be published in the budget papers or budget updates?

Mr Ray : It is published in the budget papers and in MYEFO.

Senator CORMANN: Could you provide a time series on the headline budget position as it does for the underlying cash balance as per table D1 in—

Mr Ray : The historical series?

Senator CORMANN: That is right, that is what I am talking about.

Senator Wong: What page are you on?

Senator CORMANN: Page 362.

Mr Ray : I would need to take that on notice because it is not my decision, but one of the differences between the underlying and the headline is Future Fund earnings, and the historical series for Future Fund earnings are published in table D1.

Senator CORMANN: If you were to sell assets to avoid needing to borrow then your headline budget position would not actually be in deficit in the first place, would it?

Mr Ray : I think I was answering other questions, but the government's plans on its balance sheet are included in the headline cash balance numbers that are published in MYEFO. Just as the investments are, the plans to sell assets are also included.

Senator CORMANN: They are in the headline fiscal position but not in the underlying fiscal position?

Mr Ray : In the case of Spectrum, it is a non-financial asset so it is included in the underlying cash balance.

Senator CORMANN: That is for the sale?

Mr Ray : Correct.

Senator CORMANN: Which of course means that if the sale were sufficient to put you into a surplus position—took you out of deficit—then the question I asked before would no longer be relevant. Because the fiscal position is in deficit, then the spending on things like RMBS, NBN and so on is funded from debt. You said 'correct', but then you put the qualifier in around asset sales. But asset sales would actually be reflected in the headline fiscal position, would they not?

Mr Ray : Indeed, but some asset sales, as I was just explaining, are in the underlying position and some—if they are financial assets—will be in the headline position. Other things being equal, a decision to increase the acquisition of RMBS—with no other change—will increase gross debt but not net debt.

Senator CORMANN: Should the size of the government be assessed on total government spending, including that which contributes to the headline budget position? Should it include the spending that is excluded from the calculation of the underlying budget position, and would that be a more accurate prediction of the government's spending and borrowing activities?

Mr Ray : Oh, dear. This is a long and complex question about which is the appropriate flow aggregate to look at. When accrual budgeting was introduced in 2000, there were decisions made around which flow aggregates would be used by the then government as the particular ones that it focused on. My recollection is that there was a relatively lengthy discussion in the relevant budget paper as to why fiscal balance and underlying cash balance were the two that were chosen. There are alternatives. One is the headline cash balance and the other is the operating balance. But all four are published in the papers.

Senator CORMANN: Could you provide us on notice with a time series on the headline budget position.

Mr Ray : I am happy to take that on notice.

Senator CORMANN: Could you confirm the face value of Commonwealth government securities on issue over the forward estimates period to 2014-15.

Mr Ray : I do not think I can. I do not think those numbers have been published, although a question on notice was answered that did include some information on it. But, in broad terms, those numbers have not been published.

Senator CORMANN: Why is that?

Mr Ray : Because they are not published in the budget papers.

Senator CORMANN: But we are here to ask about things that go beyond, for example, the budget papers.

Mr Ray : Senator Bushby asked a written question on this that the government answered on the basis of the budget. I am happy to take on notice whether we can update that post MYEFO.

Senator CORMANN: What I am looking for is the face value of Commonwealth government securities expected to be on issue over the forward estimates period to 2014-15.

Mr Ray : Sure.

Senator CORMANN: Are you able to provide us with whether the face value of Commonwealth government securities is expected to exceed $250 billion in the period either during or beyond the current forward estimates?

Mr Ray : As I have said, I have taken on notice what the numbers are and we will see what we can provide you with.

Senator CORMANN: At what point do you expect gross debt to peak and at what level?

Mr Ray : I think gross debt is peaking as a proportion of GDP in the current year, 2011-12.

Senator CORMANN: Does that include the equity injections into the NBN and all of the other moneys?

Mr Ray : Yes.

Senator CORMANN: It is expected to peak in 2011-12?

Mr Ray : Let me double-check that.

Senator Wong: On the other issue, yes, the NBN injections are included in the budget figures.

Mr Ray : We are expecting government securities on issue to peak as a proportion of GDP in 2011-12.

Senator CORMANN: What is the dollar value at which the gross debt is expected to peak?

Mr Ray : I will take that on notice.

Senator CORMANN: You do not have that to hand?

Mr Ray : No.

Senator CORMANN: This is this financial year we are talking about.

Mr Ray : No. As a proportion of GDP it is peaking, but I think if you look at the balance sheet you will see that—

Senator Wong: The figures I have are that, as Mr Ray has said, gross debt as a percentage of GDP peaks in 2011-12.

Senator CORMANN: Would you take on notice when you expect gross debt to peak, both as a percentage of GDP and in dollar terms, either in the current forward estimates or beyond the current forward estimates and at what level?

Senator Wong: I will add to it if I am incorrect, but my advice is that Mr Ray is correct, that we peak as a percentage of GDP in 2011-12 for both net and gross debt.

Senator CORMANN: What about in dollar terms?

Senator Wong: The economy expands.

Mr Ray : If you look at the balance sheet you can see that gross debt in dollar terms is in the forward estimates as peaking in 2014-15—but we have a bigger economy, as the minister just said.

Senator CORMANN: Do you have any current plans to make further amendments to the Commonwealth Inscribed Stock Act?

Mr Ray : it is not for me to have plans to make amendments to that act.

Senator CORMANN: I mean, are you currently preparing—

Mr Ray : I beg your pardon?

Senator CORMANN: Are you currently the process of preparing—

Mr Ray : Are we currently drafting amendments to the Commonwealth Inscribed Stock Act?

Senator CORMANN: That's right.

Mr Ray : No.

Senator CORMANN: Okay, that was the question. So there are no plans to increase current the debt limit.

Mr Ray : That is a question for the minister.

Senator CORMANN: I will ask her: are there any current plans to increase the debt limit beyond $250 billion?

Senator Wong: The budget figures, including the updated MYEFO, assume no change to the debt cap.

Senator CORMANN: So you are saying that there are no current plans.

Senator Wong: I am saying that our plan is the budget and the MYEFO, and they assume no change to the debt cap.

Senator CORMANN: That was in November. Are you saying that right now there are no current plans to increase that debt level beyond the $250 billion that is currently.

Senator Wong: I have answered the question.

Senator CORMANN: No, you have not.

Senator Wong: Yes, I have.

Senator CORMANN: Why don't you just say, 'yes' or 'no'?

Senator Wong: I have made clear that we have laid out our fiscal strategy, our budget numbers, in the budget and then in the budget update, which is in November. Those numbers assume no change to the debt cap. I would say to you, that if you were on this side of the table you would certainly have to be increasing it, given the position you are in. Either that or you would have to cut Medicare for four years.

Senator CORMANN: Is that a 'yes' or is that a 'no'?

Senator Wong: I have answered the question.

Senator CORMANN: You sound like the Prime Minister, now.

CHAIR: I beg your pardon?

Senator Wong: That is a very—

CHAIR: You will never sound like a Prime Minister. Step up!

Senator BIRMINGHAM: I did not know that it was being so up-front to say that.

CHAIR: It is time for you to come to the forefront and lead the charge on the coalition economics policy

Senator Wong: All right, you invited this response: Tony Abbott never sounds like a Prime Minister, because he never is up-front with the Australian people about what he will cut to fund these aspirations behind which are $70 billion of cuts to services working Australians depend upon. Four years of Medicare is what you are up for cutting.

Senator CORMANN: He always sounds like a Prime Minister. The Australian people know who to trust on managing the economy, and it is not the Gillard government. It is not the Gillard government that the Australian people will trust to get the budge into surplus.

Senator Wong: It is embarrassing that the party of Peter Costello cannot balance its books.

Senator CORMANN: The party of Tony Abbott could balance its books, that's for sure.

Senator Wong: The best thing Tony Abbott could do would be to put Senator Sinodinos in your position, because he might actually fix it up.

Senator CORMANN: You have presided over a $25 billion deterioration in the budget deficit. It is on your watch.

Senator Wong: Would you like to know that the unemployment rate came out today? Would you like to talk about that? But I assume that increases in jobs are something you are not interested in, because it does not accord with your strategy of trashing the economy.

Senator CORMANN: I am interested in talking about questions of the Fiscal Group. When will the Parliamentary Budget Office be established and running?

Senator Wong: You are not going to use it, why do you care? You do not care about costings. You do not want to cost anything.

Senator CORMANN: Is that your answer?

Senator Wong: You give your costings to catering companies and companies that have been found to have breached professional standards. It is an outrage that the fiscal conservatives in the coalition allow Tony Abbott to behave like this.

Senator CORMANN: Chair, that is not an answer to my question.

CHAIR: Order! Senator Cormann, are you taking a point of order?

Senator CORMANN: I am just saying that this cannot possibly be described as an answer to my question.

CHAIR: Senator Cormann, you opened up this line of discussion by making a personal reference to the Prime Minister. That was uncalled for, but it occurred. You opened it up. Take what you get.

Senator CORMANN: I have long moved on. I have asked a question about when the Parliamentary Budget Office will be—

CHAIR: In that case, you have asked your question about the Parliamentary Budget Office.

Senator Wong: I am happy to answer that. Senator Hogg, the President, tabled a timetable in estimate around the implementation of the PBO. I think it was on Monday because I answered questions about that timetable on Tuesday. I would hope that someone sensible in the opposition would actually ensure you put your costings through the PBO and allow the Australian people to see them. There will be no answer on that: there will be an 'umm', won't there?

Senator CORMANN: Sorry?

Senator Wong: There will be an 'umm, maybe'. You care about the budget bottom line—

Senator CORMANN: Minister, I am very happy to come and sit there if you want to change positions.

Senator Wong: You say you care about the budget bottom line: why don't you commit today, Senator Cormann, to having your policies costed through the PBO. Go on, I dare you.

Senator CORMANN: I know that you are desperate to sit here and ask questions. You are desperate to come and sit her so you can ask questions of a new government.

Senator Wong: That's a genuine challenge.

Senator CORMANN: You're desperate to sit here so you can ask questions of a new government.

Senator Wong: You're too weak to take it up, aren't you? Why don't you cost your policies through the PBO and release them? Go on!

Senator CORMANN: We are not here to answer questions from the government.

Senator Wong: Not tough enough, are you?

Senator BUSHBY: When you were in opposition, you did not put them through the PBO.

Senator Wong: You have to use catering companies, not the Parliamentary Budget Office. You're a joke.

Senator CORMANN: Remember what you did in 2007; you did not publish anything. Mr Ray, what will be the interaction between your area and the Parliamentary Budget Office? Have you made any progress, such as a memorandum of understanding and things of that nature?

Senator Wong: This was answered in estimates.

Senator CORMANN: Finance told me to ask Treasury about it, so I am now asking Treasury.

Senator Wong: I am not sure that that is right. That is not right, because we—with respect to Mr Ray, and I am sure he has done work on this—work together, but we have taken the lead on this. Senator Cormann, you might recall asking about the MOU. My recollection is the answer was that we would need the parliamentary budget officer appointed in order to finalise the memorandum. We referred to the fact that President Hogg had tabled the timetable around that appointment process in the parliamentary department's estimates hearing.

Senator CORMANN: Can you describe your involvement in the developing of the Parliamentary Budget Office so far?

Mr Ray : As the minister said, we work with our colleagues in the department of finance to provide advice on the Parliamentary Budget Office. We appeared with the department of finance before the relevant committee. We made a submission with the department of finance to that committee. We and the department of finance were involved in the instructing on the drafting of the legislation.

Senator CORMANN: To the extent to which you can answer this, is there any expectation that some staff from Treasury Fiscal Group will be seconded to the Parliamentary Budget Office?

Mr Ray : That is pretty hypothetical.

Senator CORMANN: Are there any such plans?

Mr Ray : Normally with secondments, we would consider them on a case-by-case basis. Until the parliamentary budget officer is appointed, it is quite clear we do not have a request at the moment. Were we to receive a request, we would consider it.

Senator Wong: We're not going to let Mr Ray go over though.

Mr Ray : I would be hoping not.

Senator CORMANN: How much of the stimulus spending that Treasury identified to the Senate in 2009 remains to be spent in financial year 2011-12.

Mr Ray : It is clearly not much, but I need to take that question on notice.

Senator CORMANN: When you say not much, I am looking at a graph that was part of a speech by Dr Gruen and the indication was that in 2011-12 stimulus would be around 1.2 per cent of GDP which, in today's terms, would be well over $10 billion. Is it about right?

Mr Gruen : It's news me.

Senator CORMANN: I can show you the graph from your speech.

Mr Ray : We will take that on notice.

Senator CORMANN: You do not remember the Australian Business Economists annual forecasting conference in 2009?

Mr Gruen : I do remember the speech. You had not told me which speech it was, but now you have. I remember that, but I do not remember the chart you are talking about.

Senator CORMANN: I am happy to share it with you, but I will move on to the fiscal implications of overseas purchases of carbon permits as allowed from 2015-16 onwards.

CHAIR: How long do you expect to go on that area? There are a heap of other senators with questions.

Senator CORMANN: You can give the call to someone else, and we will come back to the carbon tax.

Senator CAMERON: Mr Ray, are you aware of a speech made by Rob Nicholl, CEO of the Australian Office of Financial Management on 7 June 2011 to the Australian Business Economist luncheon?

Mr Ray : I am aware of the speech.

Senator CAMERON: I would like your comments on some of the issues that Mr Nicholl raised, if that is okay.

Mr Ray : I do not have the speech with me. I am in your hands.

Senator CAMERON: Mr Nicholls gave a very thoughtful speech. I tried to ask him some questions on this last night, unsuccessfully for some reason.

Mr Ray : So you think you will have more success with me?

Senator CAMERON: I hope so, Mr Ray.

Senator RHIANNON: Senator Cameron, you are very scary!

Senator Wong: Mr Ray is not easily scared.

Senator CAMERON: Mr Ray is not easily scared—I know that. Mr Nicholls raised the issue, obviously in the context of Commonwealth government securities. He spoke about Australia's debt position and the scrutiny of Australia's debt position. He said that on one hand there are political concerns and 'the broad premise that sovereign debt is a bad thing', and, on the other hand, there is a 'close financial market interest' that boils down to 'objectives about risk-free pricing and maintaining liquidity in the bond market. He said that the political arguments are of questionable relevance. He went on to say:

However, what is important for the purpose of our discussion today is whether or not in broad terms a reasonable assumption can be made as to the appropriateness of Australia’s current and forecast debt position. Even more relevant is consideration as to whether Australia’s sovereign debt level is one that permits a sensible judgement of how to maintain a CGS market into the future.

Do you agree with that analysis?

Mr Ray : I would have to. In broad terms, yes. There are a number of reasons why we might have a sovereign debt market. Leaving aside the need to finance government spending, for some time successive governments have committed to maintain a sovereign debt market for financial market reasons, principally to support the three- and 10-year futures market. You may recall that we looked at this issue back in, I think, 2002. Senator Sinodinos is nodding.

Senator CAMERON: I do not recall it. If Senator Sinodinos was involved, I will go back and have a look.

Mr Ray : Senator Sinodinos was not involved but would have, no doubt, read the report. At the time, the government was running surpluses and net debt was coming down close to zero and there was a decision to maintain the CGS market. One of the big lessons from the period of 2008-09 is that that decision had particular foresight to it. One of the things that stood Australia in extremely good stead through the global financial crisis was the existence of the liquid triple-A rated government securities market. Since then, the current government has had a look at this question. It did so in the lead-up to the last budget. We worked with our colleagues in the Reserve Bank and APRA and consulted with some of our state colleagues and a number of private sector market participants on the future of the market. The outcome of that is that in the budget the government made another commitment to maintain the corporate bond market after debt is paid down, as the budget moves back into surplus. So, in broad terms, successive governments have seen the importance of this market to the financial system.

Senator CAMERON: Mr Nicholls goes on to look at the key questions in relation to debt in the CGS market, and he asked some questions of the economists at this meeting. The key questions to ask are, he says:

• does Australia’s debt position look reasonable in comparison with key advanced nations;

• does the current and projected level of debt look to be under control given Australia’s history of managing it in response to our changing fiscal and economic circumstances overtime; and

• how should we assess Australia’s capacity to service its debt?

Are they reasonable questions to be asking?

Mr Ray : They are reasonable questions to be asking, particularly the last one. It is quite usual to compare fiscal and—

Senator CAMERON: Mr Ray, I am sorry, I am going to ask you to address each one of these, if you do not mind. If you want to go to the last one first, that is okay.

Mr Ray : I was going to say that it is quite typical for us to compare ourselves with other advanced countries, but I would urge a bit of caution in that the circumstances of different countries are different. That is sort of obvious, but you do need to be just a bit cautious.

Senator CAMERON: On the first one: is it reasonable to compare ourselves with other key advanced nations?

Mr Ray : Yes.

Senator CAMERON: How do we compare?

Mr Ray : Rather than make a comment, if you look at our net debt as at the Mid-Year Economic and Fiscal Outlook as a proportion of GDP, it is expected to peak in the current year at less than nine per cent. In the current year, the net debt of the advanced economies, on average, is just over 70 per cent. Our net debt to GDP is projected to decline as a proportion of GDP out to 2014-15. As you can see from the medium-term projections and beyond that I was talking to Senator Cormann about, that can be compared with advanced economies where net debt as a proportion of GDP is forecast to rise out across both the forward estimates and beyond. I think we have discussed this many times. Our net debt to GDP ratio is very low, but that does not mean we should be complacent about it.

Senator CAMERON: Thank you for that advice. The second one is: 'Does the current projected level of debt look to be under control given Australia's history of managing it in response to our changing fiscal and economic circumstances over time?' What is the answer?

Mr Ray : Again, rather than make a judgment, if you look at the history, we are peaking at 8.9 per cent of GDP in 2011-12. The previous peak was in 1995-96 at 18.1 per cent of GDP and the peak before that was in 1985-86 at 10.3 per cent of GDP. Compared with recent history, the forecast peak in our net debt is below the previous two peaks.

Senator CAMERON: That projected level of debt would be under control?

Mr Ray : There is no question about that.

Senator CAMERON: Mr Nicholls then asks, 'How should we assess Australia's capacity to service its debt?'

Mr Ray : I think that—

Senator CAMERON: If he had answered these questions last night I would not need to ask you!

Mr Ray : I am going to have words with him when I next see him! The traditional way to look at these things is to look at debt to GDP ratios although I have always personally had a problem with that because we are putting a stock over a flow. That is one way of looking at it. So you are looking at the economy's capacity to meet the debt. Another way to look at it is in terms of the debt-servicing ratio, and that I have less of a problem with because at least it is a flow over a flow. The numbers on that are published in all the budget updates. Our interest rate to GDP ratios are very low.

Senator CAMERON: So there is no concern from Treasury about Australia's capacity to service its debt?

Mr Ray : No.

Senator CAMERON: Absolutely none?

Mr Ray : Yes.

Senator CAMERON: What are the main factors underpinning our AAA rating?

Mr Ray : Dr Gruen is probably going to help me. The main factors underpinning our AAA rating are the strength of our economy—in particular, we know that the government's fiscal position is important to the AAA rating—and—

Dr Gruen : All I was going to add was that the rating agencies look at the health of your financial system and the prospects for growth. Some of the downgrades that have been occurring recently in Europe are a function partly of prospects for growth. Our prospects for growth are strong. So this is just adding to the points that Mr Ray made: fiscal position, macroeconomic framework, proven capacity in the past to service your obligations and prospects for the future.

Mr Ray : And the strength of the financial system.

Senator CAMERON: There has been a lot of critique about the fiscal stimulus package. How important was that stimulus for confidence, aggregate demand and jobs?

Dr Gruen : My answer to that would be that the combination of fiscal and monetary policy applied, the fall in the exchange rate and the guaranteeing of the international borrowings by our banks were all important in helping to maintain confidence. Certainly the rapid action by the Reserve Bank and by the government in providing support was important. As I said in my earlier evidence, I note the release of the March quarter of 2009 national accounts. Before they were released there was a lot of talk. In fact, the press was talking about the fact that the release of these accounts was going to make official the fact that Australia was going into recession. And it was a surprise to the commentariat that in the March quarter of 2009 the Australian economy grew. So there was a single quarter of negative growth in the previous quarter—sorry, 'negative growth 'is an appalling phrase; so there was a single quarter of falling GDP. Confidence bounced back very strongly in the aftermath of that. I think it is pretty clear that both fiscal policy and monetary policy made some contribution to supporting the economy at that time. I think the fact that the action was rapid and substantial was very important.

Senator CAMERON: This is the reason it is in fiscal. What would have been the impact on our fiscal position if we had not undertaken that stimulus program?

Dr Gruen : Do you want me to answer that?

Senator CAMERON: Whoever.

Dr Gruen : It is a complicated counterfactual. I have not done those calculations. I think the economy would have been significantly weaker, but how that plays through to the fiscal accounts is complicated because obviously, that means that revenue would have been lower but you would not have spent the money that you had spent. So, there are swings and roundabouts. The point of the exercise is to stop the development of a feedback loop where people get depressed about the future. They get into survival mode and they sack people. Avoiding all of that has significant longer term benefits for not having skill atrophied, not getting a whole lot of people into long-term unemployment and having them become disaffected with society—all of those things. The fiscal implications are more complicated because there are both positives and negatives.

Senator WATERS: Does Treasury, particularly your group here, have any estimates of the amount of government spending on infrastructure that is primarily benefitting the mining sector?

Mr Ray : We do not. Commonwealth government spending on infrastructure?

Senator WATERS: Yes.

Mr Ray : It is probably a question for our colleagues in the Department of Infrastructure and Transport. That is probably the better place to ask.

Senator WATERS: Is there no material that you can provide to us on notice, Mr Ray?

Mr Ray : I am happy to take it on notice.

Senator WATERS: If you could, thank you very much. Can you tell me what proportion of the additional infrastructure spending from the MRRT package will benefit the mining sector?

Senator Wong: We will see if Mr Ray may be able to assist but there might be a definitional problem here. If you are investing in infrastructure in fast-growing regions because of the capacity constraints that are anticipated, or occurring, who are benefitting—the mining industry or the broader community? For example, the government is investing—

Senator WATERS: My question was: who is the primary user of that?

Senator Wong: The government has made a contribution to Perth airport—it is called Gateway WA. Some might say that that helps the mining sector because of the number of fly-in-fly-out workers, but there are broader economic benefits as well to Western Australia and to Australia. Mr Ray might be able to add to this but we can try, and take on notice what we can talk about. I suspect the Department of Infrastructure and Transport will be able to give you a more detailed or more granular assessment of what sorts of projects are funded.

Senator WATERS: Thank you.

Mr Ray : But even then, the point that the minister has made will be something that our colleagues in infrastructure would wrestle with.

Senator WATERS: I will take it up with them as well. Perhaps I should have said 'primarily benefit or be used by', if that clarifies things for you.

Senator Wong: Obviously, the MRRT is funding regional infrastructure for nothing.

Senator WATERS: Can you give me some more detail on that?

Senator Wong: That is with the Minister for Regional Australia, Regional Development and Local Government, Mr Crean—I always forget what the acronym is.

Ms McCulloch : There are two programs focused on regional infrastructure that are receiving funding from the MRRT. One of those is in the infrastructure portfolio and the other is in the regional portfolio.

Senator WATERS: How much assistance is provided in the form of subsidies to the mining industry? You could give me a ballpark figure and then the detailed figures on notice.

Senator Wong: It is hard to know what you mean by subsidy. Are we able to unpack that a little?

Senator WATERS: The full gamut of subsidies in the broadest sense of the word. I understand it is a big question, so I am happy for it to be taken on notice, but if you could give me an indication—

Mr Ray : Yes, I think we would take it on notice.

Senator WATERS: Perhaps you could give me a ballpark indication off the top of your head.

Mr Ray : Not off the top off my head; I will take it on notice.

Senator WATERS: I am interested in whether Treasury has a list of public works projects on the shelf, effectively, in case of another global meltdown that could be rolled out as part of a second stimulus package.

Mr Ray : I do not like passing you on, but I think it is a question that is better directed to our markets group colleagues.

Senator WATERS: Have we heard from them already?

Mr Ray : No, they are coming.

Senator Wong: And I hope they are listening and are prepared for this question. That was a just general comment into the ether! I am hoping someone is watching.

Senator CAMERON: Can't you just visualise all those heads nodding next door!

Senator WATERS: This morning I asked of macro a question that I think I was directed to ask of fiscal about whether you had looked at the economic claims within the EIS for Waratah Coal, particularly the assertion that up to 3,000 manufacturing jobs will be lost, which the company itself claims in its EIS. Have you done an analysis of that? Does it sound plausible to you?

Mr Ray : The answer to that question is no, we have not.

Senator WATERS: Is that something that you would normally do?

Mr Ray : No, we do not normally get involved.

Senator WATERS: Ever?

Mr Ray : Ever is a very long time. Even if I took it on notice I do not know that I could satisfy 'ever', but I can tell you we do not normally get involved in individual environmental impact assessments.

Senator WATERS: So is a question about whether or not an assessment is done of the impacts of very large mining projects or clumps of mining projects in a region on inflation, exchange rates and interest rates properly for you? Likewise I asked it earlier and was directed back to you.

Senator Wong: I think the scope of the EIS—

Senator WATERS: We have left the EIS now. We are on the general impacts.

Mr Ray : I think my colleague Dr Gruen might have tried to answer that this morning. He can speak for himself, but our colleagues in macroeconomic group do take into account the impact on the macroeconomy of investment in the mining sector—most definitely they do—but I do not think they look at individual environment impact statements.

Senator WATERS: My question was: does your group look at the impacts of very large mine proposals or several very large mine proposals in a region on interest rates, housing prices or inflation?

Mr Ray : It would not be for us to do. We have enough to do, but Dr Gruen's team look at the impact on the whole economy, including the inflation rate et cetera, of investment in mining. They certainly do.

Senator WATERS: Does anyone look at the regional impacts?

Mr Ray : No.

Senator WATERS: That is not very encouraging. Broadly speaking, there has been a long-running tendency for government spending, and hence tax, to increase as a proportion of GDP. I note that in, I think, the 2008 budget the Treasurer said tax would not rise beyond its 2007-08 proportion. I am interested in other countries where tax revenue is a higher proportion of GDP than here. Have they suffered from that? I have a long list here, including Austria—

Senator Wong: Have they suffered from what?

Senator WATERS: From having a higher proportion of tax to GDP than we do.

Senator Wong: The question, essentially, is: is higher tax fine?

Mr Ray : I understand what you are getting to. Again, my colleagues in revenue group may give you chapter and verse on this, but, in broad terms, I think the broad conclusions of cross-country analysis of different sizes of government are that it is a public choice question rather than an economic question. The more important thing is what countries do with the tax that they raise rather than the tax to GDP ratio per se.

Senator Wong: I would also make the point that there is a temporal aspect here of considering what decisions you are making now and how that might affect longer term demands on future taxpayers. This is the view that I have put publicly: it seems to me that if we argue for intergenerational equity in the context of climate change we should take the same view when it comes to what we are asking the next generation of taxpayers to fund, for example, in terms of our health and aged care systems. We should factor that in rather than simply saying that we want our kids to pay more, that we are going to lock in a particular structure of spending now that anticipates that our children and subsequent generations have to pay more.

Senator WATERS: On that point, did your group advise as to the wisdom or prudence of making that call that it would not rise from 2007-08?

Mr Ray : I would like to go back one step to something that you said, and that is that the tax to GDP ratio has drifted up in Australia. I don't know—

Senator WATERS: Broadly speaking.

Senator Wong: We are lower now than the Howard government was, on average.

Senator WATERS: I am talking in terms of centuries.

Mr Ray : Oh, centuries! That is definitely true.

Senator Wong: We used to not have the aged pension, we used to not have a Medicare system.

Mr Ray : Since the 1980s—I have not done a regression analysis—the Commonwealth tax to GDP ratio has been broadly pretty much at the same level. This is, as I said, a public choice question. That suggests to me that that is the level of tax to GDP that the Australian public is broadly comfortable with. In terms of advice on that particular element of the government's fiscal strategy, that was actually an election commitment of the current government when it was in opposition in 2007. So we did not provide advice on that.

Senator Wong: You might say that we have a mandate for that.

Senator WATERS: Okay, I will leave that to you.

Senator BUSHBY: I would like to ask why, in general, spending has never returned to the pre-GFC levels that were predicted prior to the GFC and why it is predicted to grow beyond that which was predicted during the depths of the GFC, despite us coming out in a better overall economic shape than was projected at the time. Looking at that, I note that these figures are taken from budget paper No.1. In the 2008-09 budget paper, for 2010-11 it was predicted that our expenses would be $323 billion-odd. In the 2009-10 budget paper, when the GFC was at its worst, that had gone up to $334.5 billion as the projected expenses. That was quite clearly because of decisions made about stimulus packages and so on. But then in the 2011-12 budget paper, by which time it was known that we had come out in better shape, the expenses—I assume this is probably an actual—for 2011 was $349 billion, which was some $5 billion higher than what was predicted even in the depths of the GFC, despite the fact that we came out in better shape. The same story runs for 2011-12: looking at budget papers from the past, expenses continue to go up despite the fact we came out in better shape. Even with MYEFO in 2011-12 it has continued to go up. The economy actually came through in better shape than was predicted in those depths and yet spending continued to go up beyond that which was predicted at the worst of times. What has happened there?

Mr Ray : I think I can make some general remarks but it may be better to come back with a considered response. You are talking in nominal dollars. If you are talking about that period, the economy is actually a lot bigger than was being projected at that time as well.

Senator Wong: The proportion of GDP maybe a more sensible measure than the nominal figures.

Mr Ray : That is right.

Senator Wong: Because if the economy is bigger, obviously that is going to have—

Senator BUSHBY: I would appreciate a response if you are going to take it on notice, that is sophisticated enough to explain where the difference is. Not just a, 'Well, let us just have a look at a simple proportion.' I like to know where the additional expenses are that occurred, particularly if they were prodded by the fact that the economy was stronger. Usually when the economy is strong, your expenses fall in terms of unemployment and welfare payments and so forth. They are offsetting.

Mr Ray : I was going to make a number of points. One is that, I think, if we went back in history, the tendency for spending to be higher when we get there than when it is in the last year of the forward estimates is not an usual phenomenon. It is for that exact reason that we have included conservative bias allowance. We review that each budget.

Senator Wong: We can have a long discussion about that, Senator.

Mr Ray : The second thing is that the detailed breakdown of why expenses might be higher in a particular year as a result—over a three or four years—is set out in the budget papers. One of the things that has affected spending in the recent past has been spending associated with the natural disaster season that Australia suffered last year. We would need to go back and unpick through the budget papers.

Senator BUSHBY: Yes, to the extent that it is reasonable to do so, I would like you to do that. I guess that the net conclusion is the deficit position that the government finds itself in is not all about a collapse in revenue. It is in part due to those things that you are going to look at, which involve increased spending over that period as well.

Mr Ray : This is the deficit position in 2011-12?

Senator BUSHBY: Over the 2010-11, 2011-12 and also for 2012-13, where the same trend is apparent from looking at these papers. But particularly 2011-12, because there is a good overlap between the forward estimates in 2008-09 and what we have got now. That gets sort of very thinned in terms of the issues being compared.

Mr Ray : In 2011-12 there are a number of particular things. In 2010-11 and 2011-12 there is the impact of the natural disasters.

Senator BUSHBY: Yes, which you mentioned.

Mr Ray : In 2011-12, there is the spending associated with the introduction of the clean energy future plan, where there are lump sums.

Senator BUSHBY: Which I have seen in the budget papers. But nonetheless, they are decisions of government.

Mr Ray : Sure.

Senator BUSHBY: Prompted by things outside of control of the government in some respects, but certainly not in all respects.

Senator Wong: You are not suggesting we would not have. Any government would have resiled from spending on a natural—

Senator BUSHBY: Bringing forth a compensation pack. No, I am not. As I am saying, some will be in control and some outside.

Senator Wong: Senator Bushby, let me just finish my sentence please. On the natural disasters. That is not discretionary expenditure. You may like to put it in the discretionary expenditure category, but it is hardly a discretionary expenditure to rebuild Queensland.

Senator BUSHBY: I acknowledged, if you had listened to me, that some of those were spending responses were to things that were within control of government and some outside control of government. But nonetheless, when you look at the bottom line, it is not all about collapse of revenue that has led to the budget bottom line. It is in part due to factors that have changed the expenses.

Senator Wong: I think it is $140 billion impact on revenue over four years.

Senator BUSHBY: I am not talking about revenue, I am talking about expenses here. We are in the fiscal group here.

Senator Wong: Hang on. You said, 'It is not really about revenue, it is about expenses.' I am saying that you might want to point to policy decisions of the government, and we unashamedly made a policy decision in terms of upfront assistance to working families for the clean energy package. Absolutely, we did and we have explained why. But you cannot simply—

Senator BUSHBY: Bring it forward this year means it does not show up next year.

Senator Wong: I had not finished. If I could just finish. You cannot simply dismiss revenue write downs of $140 billion and say they are not the substantial driver of where the budget is.

Senator BUSHBY: It is not the only driver.

Senator Wong: That is not something I think you have—

Mr Ray : We would need to go back and unpick it. But if you take just the movement from budget to MYEFO, the effect of the government's policy decisions on the 2011-12 underlying cash balance is $4.9 billion. A large part of that is increased payments and a large part of that was payments associated with the natural disasters and the compensations to households for the clean energy future plan. But parameter and other variations were $9.6 billion in the same direction. We could go back and give you those sorts of splits if you like.

Senator CORMANN: Over the forward estimates, what percentage of the expenses associated with the government's clean energy package are linked to the price of carbon? How many of these expenses will shift in proportion to any change in the price of carbon? What expenses are fixed cost, regardless of what the price of carbon is?

Ms McCulloch : There are a number of elements of the package that move with the price. The important thing to know for the period of the forward estimates is that that is the fixed-price period. The price will not be moving during the period of the forward estimates.

Senator CORMANN: I have a lot of questions to go, through so I will go through them quickly. Can you provide this for us if you have not got it handy: beyond the period of the forward estimates, once we go beyond the fixed-price period, what proportion of the government's clean energy package will be linked to the price of carbon and what proportion will be fixed irrespective of what the price of carbon is?

Ms McCulloch : I will take that on notice.

Senator CORMANN: Thank you. If the world carbon price remains below the $15 carbon floor price in 2015-16, do you know what the impact on the budget would be expected to be?

Ms McCulloch : The 2015-16 financial year will first be presented in the 2012-13 budget. We have not completed those estimates yet and they will be published with the budget.

Senator CORMANN: So at this point in time you do not know what the impact will be?

Ms McCulloch : No.

Senator CORMANN: Has Treasury undertaken any—

Senator Wong: Ms McCulloch said that 2015-16 will be included in this year's budget.

Senator CORMANN: I understand that, but obviously there are some medium-to long-term estimates, projections and forecasts that I am sure that they worked on. I am asking whether there is any understanding now of what the implications would be if the carbon price remains below 15 per cent. It was taken on notice.

Senator Wong: I am telling you now that the answer will be just as it was when you were in government—obviously it was different years when you were in government. The 2015-16 figures will be included in the 2012-13 budget.

Senator CORMANN: And we will talk about it in May; that is great. Has Treasury undertaken any analysis of the sensitivity of the underlying cash balance to changes in the carbon price?

Ms McCulloch : No.

Senator CORMANN: Can you confirm that the government expects to be selling around 335 million to 340 million tonnes of CO2 equivalent permits each year?

Ms McCulloch : That is not a figure I am familiar with.

Senator CORMANN: Looking at the revenue divided over the three years of the fixed-price period, if you take the revenue figure divided by the price, that is the figure that we would come up with.

Senator Wong: I do not think inviting officers to confirm your arithmetic is sensible. We will take it on notice to see if we can assist. You put those figures to Mr Comley—perhaps it was not you; oh, it was you, Senator Birmingham—in the climate estimates.

Senator CORMANN: What is your expectation on how many CO2 equivalent permits you would be selling each year over the three-year fixed-price period, which is over the current forward estimates?

Ms McCulloch : I will take that on notice. I do not have the answer here with me.

Senator CORMANN: So you do not know—

Senator Wong: She has taken it on notice, Senator.

Senator CORMANN: It makes it very difficult when asking a series of questions.

Senator Wong: She is entitled to take it on notice.

Senator CORMANN: In testimony to the Senate Select Committee on Scrutiny of New Taxes last year, Ms Quinn, who is no longer with us by the look of it—

Senator Wong: You must be grateful for that, Senator!

Senator CORMANN: She said:

If liable entities decide to buy significantly more permits from overseas, that will not necessarily have an impact—

that is, a fiscal impact. This is the important bit:

The physical number of permits that the government sells as part of the trading scheme will be set by regulation.

Could you confirm that for us: the physical number of permits that the government sells as part of the trading scheme will be set by regulation?

Senator Wong: That is probably—unless someone can put their hand up—a question that should have been directed to the Department of Climate Change and Energy Efficiency. I will take it on notice to see if we can assist, but I suspect that we will say, 'Refer question to them.' Ms Quinn, and I was probably sitting next to her at the time, was having a discussion with you in the context of modelling questions, from memory, about what assumptions—

Senator CORMANN: I do not think you were there during the Scrutiny of New Taxes Committee inquiry.

Senator Wong: I am sorry—that is true: I was not.

Senator CORMANN: What I am trying to understand is how that proposition, which Ms Quinn as a Treasury official put to a committee, fits with the idea that firms can adjust the amount of permits they purchase domestically versus those from overseas, subject only to the 50 per cent domestic requirement?

Senator Wong: That is probably a question for the department of climate change, but we will take it on notice and will see if we can—

Senator CORMANN: It looks to me like Ms McCulloch can assist.

Ms McCulloch : I cannot answer the specifics but I can give you a very general answer.

Senator CORMANN: I would be grateful.

Ms McCulloch : During the fixed-price period there is no international linking, so they are domestic permits. During the flexible-price period the price will vary with the world price and the Climate Change Authority will provide advice to government on the caps to be set on emissions. The government will take that advice under consideration and regulations will be put before the parliament as to what caps are set, and private firms will then determine how they actually meet their liabilities—what combination of international and domestic permits they purchase.

Senator CORMANN: If firms can potentially buy permits for 50 per cent of the CO2 permits for the Australian market overseas in 2015-16 instead of buying them at Treasury's expected nominal price in that year of $29 a tonne, is there a potential revenue shortfall?

Ms McCulloch : During the flexible-price period the price will vary such that the world price will be the domestic price.

Senator CORMANN: The world price will be the domestic price, with a floor of $15 per tonne—right?

Ms McCulloch : The exact mechanism for how the floor price will work and an international surrender fee are yet to be determined.

Senator CORMANN: But the modelling over the period to 2020 was done on the basis of a nominal price of $29 a tonne in the first year of the post fixed-price period, wasn't it?

Ms McCulloch : That is a question for—

Mr Ray : That is true.

Senator CORMANN: So, compared to your modelling, then—

Senator Wong: You cannot—

Senator CORMANN: Hang on. This is quite relevant. So your modelling is based on $29 a tonne, but firms will be able to purchase 50 per cent of their permits overseas from 2015-16 forward. What will be the implications on the budget from 50 per cent of permits being purchased overseas at a price substantially lower than $29 a tonne?

Mr Ray : That goes to what Ms McCulloch said earlier, that 2015-16 comes in at the 2012-13 budget and, quite clearly, as we provide advice on the estimates for the 2012-13 budget, that is a matter we will look at.

Senator CORMANN: That is a matter that you look at in the future?

Mr Ray : For the 2012-13 budget.

Senator CORMANN: Can you talk us through what will happen?

Senator Wong: We are not doing hypothetical—

Senator CORMANN: It is not a hypothetical question.

Senator Wong: That is a hypothetical question: what would happen?

Senator CORMANN: The carbon price is very low internationally at the moment, compared to what is proposed for imposition in Australia. That is why the modelling was done over a period to at least 2050, in fact. I am just interested in knowing what will happen if in 2015-16 the international price is well below the $15 per tonne floor price that was put in place in the legislation.

Mr Ray : We are a long way from 2015-16.

Senator CORMANN: So your expectation is that by 2015-16 the international price would be $29 a tonne?

Senator Wong: The officials are trying to assist valiantly. I would make two points. The first is that I think the senator is extrapolating from what occurred in modelling to the fiscal situation to what the budget figures might or might not be. That is firstly problematic. The second thing that is problematic is, despite being told that we will take on notice the 2015-16 budget numbers—or we did not even say that; we just said that we will be updating these figures in the 2012-13 budget for the 2015-16 year—the senator is continuing to ask officious questions about those figures. Consistent with past practice, we are not going to have an iterative discussion with you about how the government puts the budget together.

Senator CORMANN: The carbon tax is obviously a significant change. It has significant implications for the budget over the forward estimates and beyond. To the extent that officials can assistance us with implications beyond the current fixed price period, that is obviously appreciated. To the extent that they cannot, then we will just move on. The government has obviously structured the carbon pricing package such that there is a floor of $15 per tonne from 2015-16 onwards. Will firms not have a strong incentive to purchase the maximum possible number of permits from overseas in that circumstance where the international price is lower, yet the government will receive almost no revenue from these purchases?

Senator Wong: That should have been asked in climate estimates. That is the first point. The second is, it is essentially is a question that goes to what assumptions we would make for the 2015-16 year, and that is a budget decision.

Senator CORMANN: But you understand what I am saying conceptually. If the international price in 2015-16—

Senator Wong: Senator, I understood the first time. Repeating the same question in different ways 20 times will not change my view about what the question means and how I will answer it.

Senator CORMANN: The problem you are going to have with the floor price of $15 per tonne is that Australian firms will absolutely have an incentive to go onto the international market, where they pay much less.

Senator Wong: Senator, the problem you have is you have a policy which will cost $1,300 for every Australian household, you do not know how you are going to fund it and you do not care.

Senator CORMANN: What protections have you built into your legislation to forestall the risk that your revenue will be undermined by firms in Australia not buying their carbon permits?

Senator Wong: That is another way of asking the same question. I have answered that.

Senator CORMANN: I am nothing if not persistent. The carbon price in Europe is currently about $9 per tonne compared with—

Senator Wong: Senator, why did you not just rock up to climate estimates where we did all of this before?

Senator CORMANN: I will just give a little quote, because Mr Comley says, 'We do not make forecasts of carbon prices. The accountability within the Australian government for the forecasting of carbon prices is actually a responsibility of the Treasury.' That is a direct quote.

Senator Wong: Yes.

Senator CORMANN: Then let me ask the question. What is Treasury's current prediction for the price of the EU carbon permits for each year between 2012 and 2020? What is your assumption? What are you working with?

Mr Ray : I think I am correct that Ms McCulloch said that the 2015-16 year first comes in in the 2012-13 budget.

Senator CORMANN: . What will be the impact on government revenue? If the floor price only is paid—

Senator Wong: We are going around in circles.

CHAIR: Yes, we are.

Senator Wong: He wants—

CHAIR: I have got the point, Minister. We have all got the point. Senator Cormann, you can ask as many ways as you would like what is going to occur with the floor price here or in Europe after the four-year budget cycle which is before us at the moment. The minister has clearly indicated two things: one, that is speculation and the officials will not answer speculation; and, two, it is not within the purview of this committee at this time. I suggest you go onto something that is within the budget papers, because the officials will not answer.

Senator CORMANN: Sure. But the reference here is the Department of Climate Change and Energy Efficiency actually indicated earlier this week that financial support under the carbon tax package is dependent on the revenue, particularly for emissions intensive, trade exposed industries. If we cannot actually get indications what the revenue projections are, it is very—

Senator Wong: No, that is a misstatement of the evidence. I was sitting next to him. In fact, Mr Comley made the point that EITES assistance—you do not call it that now—that is, Jobs and Competitiveness Program assistance, is delivered in the form of free permits. That was the point he was making.

Senator CORMANN: Let me ask two final questions before handing over to Senator Birmingham.

Mr Ray : I was just going to try to help, Senator, and say: conceptually this is no different from any other estimate for the budget. It is something that we will look at in the budget process and provide advice to the government on. It is conceptually no different from anything else, and lots of things move.

Senator CORMANN: Has Treasury had discussions about whether there should be more modelling of the impact of the carbon tax in response to the EU price?

Mr Campbell : Discussions with whom?

Senator CORMANN: Have you been asked to do any more modelling, given that in Durban there was no conclusive agreement on international action on climate change? Will there be any revised modelling to take that into account?

Senator Wong: I am sorry; I did not hear the second part of that question.

Senator CORMANN: Will there be any new modelling or any fresh modelling of the impact of the carbon tax, given the failure in Durban to reach conclusive agreement on international action on climate change?

Mr Campbell : We have not been asked to undertake any new modelling, but, to be clear, the international modelling has a set of assumptions around long-term environmental targets and goals, and they have not been altered by the Durban outcomes. Indeed, what the modelling captures is the pledges that have been made, and those pledges remain.

Senator CORMANN: In the light of the increases in the Australian dollar, has Treasury calculated in relation to other countries how expensive Australia's carbon tax is now, in the current exchange rate circumstances?

Mr Campbell : We have not undertaken any new modelling of the economic impacts of climate change, not for mitigation—

Senator BIRMINGHAM: I can confirm that in 2014-15 the department of climate change expects 362 million permits to be sold—just looking back over Hansard in this time to save Treasury looking that up. Can I follow on from Senator Cormann here. Given all of the modelling work that Treasury has done, how big an influence will the European carbon price have on the Australian carbon price when it shifts beyond being a fixed price?

Mr Campbell : The expectation is that with full international linking the Australian price would closely mirror the international price.

Senator BIRMINGHAM: At present, the European carbon price, I think, on World Bank reports, accounts for about 90 per cent of carbon trading in the world, so full international linking is essentially linking to the European price, is it not?

Mr Campbell : It will depend on what is available to be linked to at the particular point in time when we get to that point. There are a whole range of discussions that can occur between now and then, including in relation to linking to other schemes that are in prospect as well. So the actual precise international price that is relevant for the purposes of budgets will evolve through time.

Senator BIRMINGHAM: If all schemes were linked appropriately, they would all effectively have the same price—that is correct?

Mr Campbell : That is right.

Senator BIRMINGHAM: At present the European scheme is the overwhelming scheme in the world, and, even with some that are talked about to come online, it is still likely to remain the biggest in the world, is it not, for the foreseeable future?

Senator Wong: He has already answered that by saying that the international price might be likely to be a product of systems which will evolve over the next few years, as well as—we cannot just take a point in time, assuming that the world never changes from today.

Senator BIRMINGHAM: The European scheme is the biggest scheme in the world today, isn't it, Minister?

Senator Wong: We have agreed that.

Senator BIRMINGHAM: Yes, excellent.

Senator Wong: But your question is essentially asking us to make an assumption about what the market might look like a number of years hence.

Senator BIRMINGHAM: Minister, I assume that you and the Treasurer are asking the Treasury to make assumptions about what the market might look like in 2015-16 for the purposes of preparing the budget.

Senator Wong: That is certainly not a discussion I will have with you, is it, Senator?

Senator BIRMINGHAM: It probably is one you will have with me in the budget estimates session. That aside, you would be asking the Treasury to prepare estimates and to make assumptions about the extent of influence the European scheme will have. Even if other schemes enter, a low price in Europe will ensure that the world price, if they are all linked, is lower than would otherwise be the case. Surely that is a statement of the obvious, given the linkages we are talking about.

Senator Wong: You are putting a hypothetical proposition and asking an officer to respond. He might be very nice and respond, but he does not have to.

Senator BIRMINGHAM: Mr Campbell does seem very nice!

Mr Campbell : Can I just clarify that question again, sorry?

Senator BIRMINGHAM: In an internationally linked scheme, a low European price will bring down the overall price?

Mr Campbell : That will depend very much on the evolution of the international market. So, if the European market continues to be the only relevant market and the CDM market does not develop separately alongside that and provide international offsets to other international agreements, in particular, other economies will choose to purchase international abatement, and that may well be the most determining feature in terms of international prices. So the European market will be one factor, but other people choosing to purchase international abatement may choose to use the CDM mechanism or other international offsets, all of which will feature as key determinants of the international price. So it will not just be an EU price.

Senator BIRMINGHAM: Certainly, but it is significant today and is likely to continue to be significant. Mr Campbell or others, the clean energy future package presents a majority of the compensation—a majority of the revenue goes back to households, does it not?

Ms McCulloch : Yes, that is right.

Senator BIRMINGHAM: Thank you, Ms McCulloch. That was a government policy objective and that is the outcome. None of that revenue is tied to the carbon price, is it?

Ms McCulloch : The household compensation package, as the government has consistently made clear, is permanent and will not be adjusted if carbon revenue is lower.

Senator BIRMINGHAM: So we have the EITES package, or the Jobs and Competitiveness Program, as it is now known, and the Energy Security Fund, and indeed Climate Change and Energy Efficiency confirmed the other day that they are the only two significant parts of the package that will vary with the carbon price when it enters its floating period.

Ms McCulloch : There are a number of elements to the package that will vary with the price—for example, the jobs and competitiveness one, which you just mentioned; any free permits that are provided under the Energy Security Fund; the fuel tax arrangements; and clearly other elements such as synthetic greenhouse gases, which are brought into the scheme through different mechanisms.

Senator BIRMINGHAM: Again, they will vary on the revenue side—

Ms McCulloch : That is right.

Senator BIRMINGHAM: in that, if the price goes lower, you will get less revenue for those last two.

Ms McCulloch : That is right.

Senator BIRMINGHAM: So we have a situation where the majority of revenue is paid out in fixed amounts but is not tied to the price. So, if the price does end up closer to the floor price, that is going to create a shortfall, isn't it?

Senator Wong: Senator, you are asking, if I may say so, more eloquently than your colleague, the same question.

Senator BIRMINGHAM: I do not agree with that.

Senator Wong: That you are asking the same question or that you are more eloquent?

Senator BIRMINGHAM: I do not agree on either point, Minister.

Senator Wong: Humility—that is impressive! So I think we would have the same answer. I would make the point that we as a government believe that there are additional policy objectives that are achieved through particularly the tax reform elements of the clean energy package. We think that on its own merit the tripping of the tax-free threshold is a good policy decision. You are rewarding people more for work. You are simplifying the tax system. The Prime Minister has made clear that not only is that a mechanism by which we can provide assistance but we believe it is a good economic policy as well.

Senator BIRMINGHAM: Let us try to deal in pure sums then, for a moment. In 2014-15, the government, purely through the carbon price mechanism, derives $9.2 billion in permit sales. That is taken from MYEFO. That is a correct figure, I assume—correct?

Ms McCulloch : That is during the fixed price—

Senator BIRMINGHAM: That is the last year of the fixed-price period: 362 million permits will be sold and the government will get $9.2 billion, on your current estimates—yes?

Ms McCulloch : Yes.

Senator BIRMINGHAM: If the floor price is the price at the next year at $15 and there are 362 million permits or thereabouts—presumably there will be a bit less because you will be reducing it in line with your targets—won't that see revenue drop to $5.4 billion?

Senator Wong: Chair, it is the same question.

CHAIR: Yes it is.

Senator Wong: It is the same question and it has the same answer.

Senator BIRMINGHAM: Minister, it is a question of fact. It must be fact. If you have 362 million—

Senator Wong: If you wish to go out and hold a press conference and make an assertion or stand up in the Senate, it is up to you. This is the Senate estimates and we are dealing with the MYEFO. The officials have said very clearly, as have I, that, if you have questions that go to 2015-16, our answer is that the 2012-13 budget will include the 2015-16 budget year. These are questions that go to that year and those figures, so I am not going to traverse this any more. You can continue to ask the question; I will just say I have already—

Senator BIRMINGHAM: But, Minister, given the way—

Senator Wong: And do not get outraged, because if you were outraged you would do something about your fiscal position, and you are not, so do not confect it.

Senator Birmingham: Given the way this package is structured, isn't the government effectively gambling on the European price and the European scheme recovering to not end up with some type of black hole in the carbon price scheme?

Senator Wong: Do not talk to us about black holes, really! Have a look on your own side.

Senator BIRMINGHAM: I am looking very closely at your carbon price scheme, and you seem to have put it all on Europe, essentially.

Senator Wong: These are our budget updates. We have made decisions to fund policy. You make promises without funding policy, which is why you are in the mess you are. It is an embarrassment for the party of Peter Costello to be in the position you are.

Senator BIRMINGHAM: And, without recovery in the European ETS, you are going to run a multibillion-dollar black hole in the first year of flexible mechanisms.

Senator Wong: You can go out and explain to people—I am happy to take that question. If the coalition want to be upfront in this estimates that their policy is to increase taxes on working Australians and to lower pensions, please do so.

Senator BIRMINGHAM: You forget that estimates is about government scrutiny, Minister.

Senator Wong: Please do so, because I am sure you do not want to answer that question.

Senator BIRMINGHAM: If you would love to have a role reversal, we would love to sit on that side of the table, but we do not yet.

Senator Wong: Senator, I am unsurprised that you do not want to front up with the logical consequence of your questioning, which is that the coalition wants higher taxes on working Australians and lower pensions but a tax break for wealthy miners. It is an interesting set of priorities.

Senator CORMANN: Just in relation to the establishment of the Energy Security Council as part of the carbon tax package, the MYEFO on page 289 says:

The Department of the Treasury will provide secretariat support to the Council. This cost will be absorbed in 2011-12 but further funding may be sought in later years.

Can you tell us what the expected 2011-12 costs to the department will be for the establishment of this council? Can you also give me any guidance as to the expected ongoing costs of the council over the forward estimates?

Mr Ray : That program is in Markets Group.

Senator CORMANN: Okay, I will ask that question of Markets Group. In the original carbon tax package, the expected size of the increases in transfer payments over the forward estimates to 2014-15 was $6.9 billion, but from the figures on page 159 of MYEFO it is now only $6.3 billion.

Senator Wong: Sorry, what do you mean by 'the original'?

Senator CORMANN: What do I mean by the original carbon tax package? The original announcement post budget.

Mr Ray : The clean energy future package?

Senator CORMANN: Yes. The original announcement stated that the expected size of the increases in transfer payments over the forward estimates to 2014-15 was $6.9 billion. In MYEFO at page 159 it is now only $6.3 billion. The figures for 2011-12 and 2013 have not changed but they are $350 million lower for 2013-14 and 2014-15. Can you tell us what accounts for this change and why the fiscal impact is now expected to be noticeably lower in the final two outyears?

Ms McCulloch : I will have to take that on notice. I do not know the answer.

Senator CORMANN: But you can see what I am talking about?

Senator Wong: We will take it on notice. It is probably an explanation around data.

Mr Ray : We will take it on notice.

Senator CORMANN: Thank you very much.

Senator Wong: I do not recall there being any policy change in this area.

Senator CORMANN: In the final minute I have left, just going back to fiscal non-carbon-tax related, in relation to the contingency reserve and the implications of the so-called fair pay decisions, given that Fair Work Australia has now handed down its decision, could Treasury please confirm the total expenditure that is expected to be incurred over the forward estimates for this commitment?

Senator Wong: Sorry, which one?

Senator CORMANN: The Fair Work decision on equal remuneration.

Senator Wong: There is a MYEFO measure on this.

Mr Ray : No, it is in the contingency reserve.

Senator CORMANN: It was in the contingency reserve but now we have a decision.

Senator Wong: No, it is NFP.

Senator CORMANN: It is no longer contingency. It has now actually happened. I can quote exactly what it says in MYEFO:

Funding for this measure has been included in the contingency reserve as Fair Work Australia has yet to table a decision.

Given that the decision has now been tabled, can you tell us what the funding for this measure will be?

Senator Wong: We will take that on notice.

Senator CORMANN: You know what I am talking about?

Senator Wong: I do know what you are talking about.

Proceedings suspended from 13 : 00 to 14 : 02

CHAIR: The committee will reconvene with the Treasury Markets Group.

Senator Wong: Chair, there is one thing I want to check. I obviously have not seen the Hansard. I referenced $140 billion figure for revenue. I am not sure whether I said four or five years; it is five years over which that figure applies.

CHAIR: Thank you.

Senator SHERRY: We have seen legislation to increase the super guarantee from nine to 12 per cent. Part of that in terms of outcomes for retirement income is the contributions tax rebate for low- and middle-income earners. That has been announced. Could someone provide me with a couple of examples of the improvement in retirement incomes that results from those policy announcements, assuming they passage parliament?

Mr Murphy : It is really a Revenue Group question. They did that modelling.

Senator BUSHBY: If the minister who has been overseeing this gets that wrong, it makes me feel a lot better about the mistakes I have made over the last few years.

Senator SHERRY: I will put it to them later today. I know you have all been working very, very hard on a whole range of reforms over the last three years. I want to personally congratulate everyone. I know the stress, the pressure and the workload et cetera. Whatever people think of the reforms, and there are some criticisms, I know the power of work that everyone has been doing and I congratulate them.

Senator Wong: You will thank them too, won't you?

Senator CORMANN: I totally agree with what Senator Sherry said. I have absolutely no doubt that the Markets Group in Treasury, like all parts of Treasury, work very hard, but it does not mean that the government asks them to work on very sensible things, necessarily. So, in that spirit I totally agree with the comments that were made by Senator Sherry.

Senator Wong: Dear me. You are a piece of work!

Senator CORMANN: If I can get to my questions. Firstly, I have a question which the fiscal group handballed to the markets group, even though it relates to the carbon tax, so I hope you can assist me. In MYEFO of last November, on page 289, it said:

The Department of the Treasury will provide secretariat support to the Council.

That is the Energy Security Council. It continued:

This cost will be absorbed in 2011-12 but further funding may be sought in later years.

Can you tell us what the expected 2011-12 costs to Treasury will be for the establishment of the council?

Mr Murphy : The council is an advisory body and the secretariat is provided by the Treasury, so I have not costed out what it would cost for normal officers to provide services to the council. The council is a mixture of private sector and government officials—that is, regulators. We do pay sitting fees to the private sector members, and that is basically the costs of the council.

Senator CORMANN: So you would say it is a small cost?

Mr Murphy : Yes, because it is an advisory body. We will take it from there.

Senator CORMANN: Why would you need to seek funding in later years?

Senator Wong: Senator, that is Mr Murphy preserving his position—his right to come back to ERC and ask us for more money, but—

Senator CORMANN: And this is, on your behalf, probing him a bit on that. I am just probing him. I am doing you a favour, Minister.

Senator Wong: I am very pleased that you are, but, if you are looking for future savings for you to manage some of your fiscal problems, I doubt that that will be found—

Senator CORMANN: Minister, we do not have any fiscal problems.

Senator Wong: in a prospective, possibly unsuccessful bid by Mr Murphy for departmental funding.

Senator CORMANN: You are the minister who has presided over a $25 billion deterioration of the budget deficit in one year. So hopefully you will not have too much time to preside over a budget—who knows what will happen over four years.

Senator Wong: That is very personal, Senator.

Senator CORMANN: So, if you throw these things at me—

Senator Wong: No, I am just making the point. You can quiz Mr Murphy; he is—

Senator CORMANN: Your performance is there for all to see. We will show our performance when we get to be the government, if we get—

Senator Wong: Senator, with respect, if you want to go there, I suspect your performance has been demonstrated by how many times you have been rolled in shadow cabinet, which is why you are in the position you are, but let us leave that to one side if we can.

Senator CORMANN: I am sure that you win every argument in cabinet, and even so you are still delivering a $25 billion deterioration of the budget bottom line.

Senator Wong: No, I do not win every argument.

Senator CORMANN: Let us go back to the question. So you cannot you tell us how much it will cost to run the council?

Mr Murphy : The statement 'further funding may be sought' relates to the business of the council—that is, that Treasury may need to contract outside advice if we cannot handle those matters. At the moment we are handling them.

Senator CORMANN: So at the moment you are handling them within your existing resources—or you are not telling us how much of an imposition on your existing resources that is—and at this stage you do not know what the cost is going to be into the future?

Senator Wong: No, that is a mis-statement of the evidence to date, Senator.

Senator CORMANN: Well, then, correct me.

Senator Wong: I refer you to his previous answers. It is not fair to officers. You can do it with me, if you wish, and I can manage it myself. It is unfair to officers to mis-state what they previously said and put it back to them.

Senator CORMANN: Okay. If he knows the cost, what is the cost?

Senator Wong: He has answered that question already.

Mr Murphy : Senator, at the moment it is absorbed within the Treasury.

Senator CORMANN: So you do not know what the cost is?

Senator Wong: No, the answer is—

Mr Murphy : Yes. I have a budget for the Infrastructure, Competition and Consumer Division, we have a certain number of people working there and it is absorbed within that budget allocation.

Senator CORMANN: If you know what the cost is, please tell us.

Senator Wong: Senator, is there some problem with you hearing the answer?

Senator CORMANN: There is no answer. It is very simple.

Senator Wong: The officer has just explained that it is being absorbed within current resources. And if that is—

Senator CORMANN: Even if it is absorbed there is still a cost.

Senator Wong: Can I finish, please. What is the difficulty with me responding, Senator? Why is it every time I respond you talk over me?

Senator CORMANN: Because you are not responding.

Senator Wong: You are doing it again.

Senator CORMANN: You are not responding.

Senator Wong: Every time I speak, you speak over me. I do not understand. Is it just a view that you have that you are entitled to?

Mr Murphy : I suggest, Senator, if you wish to find out the budget funding for the Infrastructure, Competition and Consumer Division, an allocation as to the divisions is in the portfolio budget statement.

Senator CORMANN: I was actually interested very specifically in the cost of providing the secretariat to this council through your division. But if that is a national security type secret then we will move on. I do not understand what the difficulty is, quite frankly.

Senator Wong: Chair, I think the question has been answered.

CHAIR: The question has been asked enough.

Senator CORMANN: It has not been answered—but anyway. What is the current status of the Consumer Credit and Corporations Legislation Amendment (Enhancements) Bill 2011 after the Parliamentary Joint Committee on Corporations and Financial Services made a unanimous recommendation that the bill should not proceed in its current form?

Mr Murphy : The status is that the responsible, Minister Shorten, is currently engaged in consultations with various interest groups. I think there was one yesterday and there is one scheduled for Monday. He is taking on board the report and is discussing it with the various stakeholders.

Senator CORMANN: So the bill in its current form has been withdrawn by the government?

Mr Murphy : Not at this stage. It may be amended.

Senator CORMANN: What is the process from here to the extent that you can share that with us?

Mr Murphy : The process is that the department has reviewed the report and, in light of that, the minister has decided to have further consultations with all the various groups to work out a recommendation for the bill in terms of credit which would be largely supported, I suppose, by the various stakeholders.

Senator CORMANN: Have you been given a timetable within which you have got to conclude that consultation process?

Mr Murphy : The minister is doing it now.

Senator CORMANN: The minister is doing it himself rather than—

Mr Murphy : There are officers with him but the minister wished to talk directly to the people involved.

Senator CORMANN: That is commendable. But have you been given a timetable within which the division should be finalised?

Mr Murphy : I think there are only a few very important issues. Most of the bill stacks up. I think the minister has a fairly clear view of what he wants to achieve, so hopefully that could be done in a speedy fashion and the bill could be progressed.

Senator CORMANN: It is the payday lending bit that is subject to the consultation, so all of the other bits will proceed as per—

Mr Murphy : That is a matter for the minister but we will take note of the committee's report. Yes, it is the payday lending which is the sticking point.

Senator CORMANN: You did not conduct any economic modelling of measures that were in that particular bill—measures including price controls and other limitations on lender business conduct. Will you now conduct such modelling?

Mr Murphy : I think through the consultations we got a lot of information, which is not a substitute for modelling but it does give you the clear picture as to what are the costs and benefits of particular payday lending activity. The government supports that there is a often need for people when they are in extreme circumstances to be able to access payday lending; on the other hand, there have been some pretty poor practices by payday lenders in terms of interest rates charged and people gradually being trapped into a vicious cycle of borrowing to repay previous debts. So I think we have got a lot of information on it and the industry itself and the consumer groups have provided a number of background case studies—factual information. We have got a pretty good handle on the issue, and I think the parliamentary committee did too.

Senator CORMANN: So it would be fair to say that you now have a better handling on the actual cost structures in that sort of business model that focuses on short-term small amount lending?

Mr Murphy : I think so. And that is the benefit of having consultation processes and parliamentary committees. Oftentimes we do not receive all the information we would like when we consult. Parliamentary committees look at these things. Oftentimes stakeholders feel more at liberty in putting forward submissions to parliamentary committees. So, yes, I think we have got a lot better information available to us.

Senator CORMANN: We talked about economic modelling during the last estimates, and I am just looking at some evidence from Ms Vroombout. In response to a question I asked on the interest rate caps and economic modelling, the answer was that they were not based on economic modelling. I quote:

Senator CORMANN: So you made a judgment but it is not based on any economic modelling; that is effectively it?

Mr Murphy: Yes, that is right.

Has Treasury conducted any modelling on the imposition of a 48 per cent cap since we last spoke?

Mr Murphy : No, but I do not know how effective modelling would be. You can look at the current industry practices and you can understand how the debts accrue for people, but I think it is very much a judgment as to what is a fair interest rate cap or what should be the cap on interest rates that can be charged for short-term loans.

Senator CORMANN: When you say 'what is a fair interest rate', are you suggesting that the government should regulate interest rates?

Mr Murphy : No, I am not suggesting that.

Senator CORMANN: What is the implication of saying 'what is a fair interest rate'?

Senator Wong: That was you who said that.

Senator CORMANN: What is the implication of making a judgment on what is a fair interest rate?

Mr Murphy : What I am saying is that you can get a reasonably good handle on the need for short-term lending for various individuals in oftentimes difficult circumstances. You want to have that access to finance available but at the same time you do not want to have the charges lead to people being put in a worse position than they were before they took out the loan. It is very much a financial/social policy issue, I think.

Senator CORMANN: But there is always an assumption that short-term lending or payday lending is targeted to people on welfare and the weaker demographics. You would be aware that, overwhelmingly, a lot of providers exclude that segment of the market and do not provide any loans to it at all.

Mr Murphy : I know.

Senator CORMANN: The largest part of the market is a legitimate short-term lending market that responds to a particular need that does not fall into that category.

Mr Murphy : There is advice from Centrelink. It may be at the extreme, but there are still poor practices. This type of regulation was adopted by the states prior to the Commonwealth taking over the credit regulation, so it is not a new introduction.

Senator CORMANN: That is not quite right. It is not as if the states had a uniform approach to this.

Mr Murphy : No, that is true.

Senator CORMANN: I think what the Commonwealth sought to adopt was the response of the New South Wales state Labor government, which publicly had a lot of difficulties with it. The state government in Victoria and other state governments have taken a very different approach.

Mr Murphy : Yes, but everyone has taken an approach to this particular issue—that is what I am saying. It is not something that has been dreamt up because it was identified. There is this segment of the market that needs to be addressed.

Senator CORMANN: Sure, there is a need to ensure consumer protection, but would it be fair to say that, from where you started with the initial draft bill, given the PJC inquiry and also the Senate economics committee inquiry, you would have another look at the balance between consumer protection and ensuring that the legitimate short-term lending market can continue to operate?

Mr Murphy : That is exactly right. I think it is quite difficult to get the right balance, and that is why we are quite pleased when there are public inquiries into these matters. These are very much matters that affect the community and we prefer there to be a broader church of people who express views on what the policy should be.

Senator CORMANN: That is an exceptionally good attitude towards the work we do, Mr Murphy. I commend you on it. That was a positive statement.

Mr Murphy : Yes.

Senator CORMANN: On the issue of future financial advice, has any decision been made in terms of the implementation timetable?

Mr Murphy : On the implementation timetable, various representations have been made by industry that there is going to have to be quite important changes to back officers in terms of education of financial planners. It would be helpful for the successful implementation of the policy change for there to be some consideration of the timetable. Those representations and that issue is with the minister.

Senator CORMANN: So the minister has not made a final decision on that?

Mr Murphy : That is correct.

Senator CORMANN: It is a pretty significant change which has significant implications for IT systems and so on for large organisations. We have also got the May super changes, which is another wave of significant system changes. Has any thought been given to aligning the implementation date between FOFA and MySuper.

Mr Murphy : That matter has been raised by a number of representatives of industry. Again, that is a matter for the minister.

Senator CORMANN: Has there been any more progress on the question of scalable advice under the legislation as it is currently drafted?

Mr Murphy : That is a difficult issue. Last time we met with the joint parliamentary committee we discussed it. We are still reflecting on whether you need any legislative changes—amendments to the bill—to achieve the government's objective that scaled advice be available to people. The whole idea underpinning the proposed legislation is to encourage people and to make sure people get non-conflicted advice on their financial affairs. We are trying to ensure that scaled advice means that you do not need that full whole-life story advice of what you should do, but advice on specific matters. In the draft bill at the present time, we think we get there on that. But other people have put to us whether that we may need to elaborate more in the explanatory material or in other measures coming with the bill through ASIC advice and through ASIC's statements as to how they will interpret the legislation. The onus is on us to make sure that scaled advice is available.

Senator CORMANN: We all agree that there should not be conflicted advice. If there is agreement, as you just say there is, about the objective that scalable advice should be available, would it not be better to have the legislation drafted such that that objective is put beyond doubt?

Mr Murphy : It is a technical issue in the drafting. Unless you cast the provision in a way that people meet the spirit of the legislation in contrast to—I suppose some people in the industry would say, 'Oh if we could just tick two or three boxes then we are okay to provide scaled advice.' We are saying that it is not that simple. We want to make sure that if people are seeking scaled advice it is actually in their best interest that they get scaled advice. That is the spirit and the philosophy underpinning the legislation. Up to now there has been some problems in this area and it would be better if it were made very clear to people that the onus is placed on the adviser to give advice which is suitable and in the best interests of the person. That is a key change in this approach.

CHAIR: Senator Codman, allow me to interrupt. I have been fairly liberal in allowing this discussion to proceed but it really is going to the heart of the particular bill. That bill is before us for two days for inquiry next week and the Clerk of the Senate has advised me: '... questions in estimates hearings may go to the operations or financial positions of departments and agencies. While this is a very wide ambit, I do not think it extends to questions about provisions on bills, for example, questions about the meaning, purpose, intent or effect of clauses in bills.' The reason she has written that advice is because the Senate has delegated a particular committee to go into an intensive examination of the provisions of the bill. I do not want to cut you off but I draw that to your attention at this stage. We are going into areas that are not really permitted.

Senator CORMANN: I hear what you are saying. We will have an opportunity to explore FOFA bit further next week.

Senator Wong: You can do it all over again.

Senator CORMANN: Every time you look at it you find out a little bit more, Minister. It is all very useful. Going to the performance of the department in relation to the FOFA changes, we had the opportunity to ask questions of the officers of Best Practice Regulation earlier in the week, and they confirmed that in relation to six areas of the FOFA changes the government had failed to meet the government's own best practice regulation requirements. At the point of making decisions about these changes the government did not have adequate information in front of it. Having said all of that, even so, you included into your regulatory impact statement industry super fund commissioned research about the impact of FOFA on jobs in the financial advice industry. That research said that the number of jobs would go down by 6,800. You have since updated that. It is still suggesting that the number of jobs in the financial services industry would reduce, though by less. Given that you have got legislation—I am not talking about the clauses of the legislation—which increases the regulatory burden and which will have an impact on business and consumers and on jobs in the industry, do you not think people would be entitled to expect that the government follows its own best practice regulation requirements before pressing ahead with this sort of legislation?

Mr Murphy : The government issued a RIS on FOFA in 2010. It was a comprehensive RIS which dealt with the whole of the package. As I have said on a previous occasion, in March last year Treasury prepared five RISs dealing with aspects of the proposals that had been changed from the time we put forward the first RIS, which was the comprehensive RIS. As I said previously, those RISs could not meet the timeline that was set by the government. I do think the impact on the industry is important but, as you have seen, various studies have been released, and from my reading of them the bottom line is that some financial planners may leave the industry. However, the whole FOFA debate will lead to more people seeking financial advice so if you trade that off and, given that this is a major business for the major financial institutions such as the AMPs and MLCs of this world, the impact on the industry will be marginal.

Senator CORMANN: You give the impression that the only reason the regulatory impact statements failed— and we are told that they did not meet the government's own best practice regulation requirements—is timing. The way the Office of Best Practice Regulation described that to us is that you submitted the drafts to them and they made a decision that the RISs were inadequate for the government to make a decision. There was some backwards and forwards and you were not able to get them to a level that was considered adequate by the Office of Best Practice Regulation. The government proceeded to make the decision anyway. You never went back because, of course, then it was too late. Five or six months later legislation was introduced and you actually never went through the government's own proper process to assess the impact of what is significant additional red tape on business and consumers. To the standard of your own processes—

Mr Murphy: I think it was disappointing that we were not able to obtain approval of those RISs in that timeframe. As mentioned last time, it was an issue of bad timing in the year—that is, Easter. But that said I would say to you that on the various issues that were raised in those RISs which we prepared and we submitted have been well canvassed in the business community through consultations and through parliamentary committees, which we all agree are a good thing. So I would say that the cost-benefit analysis of those particular issues have been fully canvassed.

Senator Wong: Having said that, Senator Cormann, I have made it clear in other estimates that it is my expectation that departments in all portfolios comply with the government's RIS arrangements.

Senator CORMANN: I am very pleased, Minister, that you have made that intervention, because I am totally on your side with this and I think that the Office of Best Practice Regulation does a very important job in your department in relation to this. But with all due respect, Mr Murphy, I do not think there is an appropriate cost-benefit analysis of the impact of FoFA out in the marketplace. All we have got is Industry Super Network commissioned research, which clearly comes from an interested perspective within that whole dynamic. The whole reason why FoFA is contentious is because of elements that have been attached to the reform package at the behest of the industry super fund network. So to just referred to research that was commissioned by them to say that we know what the impact is going to be is, with all due respect, not good enough. I agree with the minister that all agencies in the government should properly comply with the government's own processes.

Senator Wong: I think you are conflating two issues, Senator Cormann. There is the issue of time lines et cetera and Mr Murphy has outlined that and I think he has answered questions in previous hearings before another committee or this committee about this issue.

Senator CORMANN: There has actually been some confusion. We have had some follow-up to the Office of Best Practice Regulation.

Senator Wong: I had not finished.

CHAIR: The minister advised she was going to do an answer in two parts. She has done the first part. We are waiting for the second part.

Senator Wong: Then there is the second point you are making which is, I think, that you are taking issue with Mr Murphy's proposition that these issues have already well ventilated. The government is of the view that there has been a very extensive consultation process, ventilation of these issues with industry and more broadly. You may not agree with that but I think Mr Murphy has responded on the substantive issue of the extent to which these issues have been discussed.

CHAIR: In fact, as I said before, we are going to be having two full days of hearing next week on this particular piece of legislation. The government is still in the process of consulting by the committee.

Senator CORMANN: Sure. My questions, of course, go towards performance of the department in putting the legislation together. When was a policy decision made to make the requirement for an annual fee disclosure statement retrospective rather than just prospective? What was the timing of that decision?

Mr Murphy : That was part of the policy process—the consultation process. It was, potentially, mid-last year some time.

Senator CORMANN: The middle of last year. So the announcement around Easter, that was the way I am advised, was on a broad understanding in the industry that the application of the annual fee disclosure statement would be prospective. In the middle of last year there was a change to that position making it retrospective. Would you agree that that has significant cost implications in terms of system changes and in terms of cost moving forward to apply that retrospectively?

CHAIR: Mr Murphy, I will interrupt. Senator Cormann, you are asking about annual disclosure requirements. They are specifically addressed in the clauses of the bill. They cannot be examined here.

Senator CORMANN: May I explain the context of the question. The context of the question is the requirement of the department to have a regulatory impact statement on these sorts of changes. The reason I asked about the timing of the decision is that it has a significant cost attached to it, and so I want to know why no additional regulatory impact statement was sought when that policy decision was made. I am not asking about a clause in the legislation, I am asking about the process within government to assess the impact of regulatory change, and the cost of the impact on consumers and business.

CHAIR: I will make clear what I am saying. Any clauses in the bill that is going to be examined next week may not be examined here. If we stray into that area, officials should not engage. Otherwise, when we go into issues of government policy or costings, you may answer.

Senator CORMANN: Is there a reason why you did not do another regulatory impact statement when a decision of that magnitude was being made?

Mr Murphy : These issues are interrelated. I cannot really add to what I said previously.

Senator CORMANN: You put into your draft RISs the research from the Industry Super Network. The Financial Services Council said that the cost of implementation of FOFA across the industry would be $700 million upfront and $350 million ongoing. Are you aware of that cost estimate?

Mr Murphy : I am aware of it. As I am advised, people put forward various estimates of the impact of regulation, especially costs and the like. We saw that recently from major banks. We have to examine that. We listen, hear what they are saying and ask for their material. We then examine it to see their underpinning assumptions and how they have costed it. I am very sceptical of that estimate.

Senator CORMANN: Have you examined it?

Mr Murphy : We are examining it.

Senator CORMANN: You have not reached a conclusive view yet?

Mr Murphy : No, we have not, because these are their internal costings. As well as that, we look at what other people say. From what I can glean from all the various estimates that have come out, it is going to have a marginal impact on the financial planning industry. There will be a growth in certain businesses, and a diminution in a small fringe of businesses—that is, the people who probably do not wish to adapt to the new regime.

Senator CORMANN: That is what the Industry Super Network commissioned research says.

Mr Murphy : I know, and I think there are others. Other statements have been made.

Senator CORMANN: Like who?

Mr Murphy : Through the minister's office, I will get them.

Senator CORMANN: Perhaps take that on notice. On the government's decision finally to refer the selection of default funds on the modern awards to the Productivity Commission, how were the terms of reference determined for the review? Were you involved in putting the terms of reference together for that review?

Mr Murphy : That was done within the territory that the terms of reference are through consultation and through the ministers deciding on the terms of reference on the default funds.

Senator CORMANN: Did you consult with stakeholders about putting those terms of reference together?

Mr Murphy : There have been various representations from industry groups. This is an issue that people have particular views about. It is quite an important step when the government decides to give a reference to the Productivity Commission. That is a big step, because government wishes to give them more references than they can handle. We always see the Productivity Commission as having a very thorough, rigorous and objective view on these things.

Senator CORMANN: Moving on to—

CHAIR: Senator Cormann, before you continue, Senator Cameron has some questions arising out of the two topics you have been addressing.

Senator CAMERON: Mr Murphy, this does not go to aspects of the bill but it does go to the issue that Senator Cormann justified his questions on, and that is the operation of the Treasury department. I would like to know what financial reforms in this area your department was involved in under the Howard government. I think they were described as the FSRA reforms.

Mr Murphy : Financial services reforms, reforms to the funds management industry—there is a list as long as your arm. If you really want to get a good overview of all the things that have happened in this area there is a paper in a Reserve Bank publication of their view of the Australian economy this year. It is a paper by a Melbourne academic, Kevin Davis. It goes through all the things that happened.

Senator CAMERON: I can't wait! I will get that as soon as I can.

Mr Murphy : No, it is very interesting. There has been a long of activity and a lot of work gone through. Treasury has very good relationships with all the stakeholders, and these are relationships that have gone over a long period of time. We might beg to differ on certain issues but we hear what is going on and I think we are told the real impact or potential impact of proposed reforms by government.

Senator CAMERON: Okay. Were there any regulatory impact statement prepared for the Howard government's reforms?

Mr Murphy : There was, from memory, a short one for the FSR.

Senator CAMERON: A short one?

Mr Murphy : Yes. We did not go into as much detail in those days as we do these days.

Senator CAMERON: Senator Sinodinos says there is more red tape these days. Is that your judgment? Is it red tape or is it—

Mr Murphy : That is a big statement, Senator.

Senator CAMERON: I suppose he is defending his legacy, Mr Murphy.

Mr Murphy : The benchmark was how this sector performed during the global financial crisis and coming out of the global financial crisis. That was the stress test. All the measures that have been taken in this area and the subsequent measures to clean up pressure points which emerged from the GFC have been taken by governments in the past and governments now. And I would say that is why we have got quite a resilient and, hopefully, fair and equitable financial system.

Senator CAMERON: The regulatory impact statements done for the Howard government's FSRA reforms: would you describe them as less detailed and less sophisticated than what is being done now? How would you describe them?

Mr Murphy : From memory, probably at the time yes they were. As to whether they got to the same ends, this government has upgraded its wish to home in better on compliance costs and regulatory impacts. It is a credit to the government that it has put forward that policy. Treasury firmly believe these matters, compliance costs and impacts on business, should be examined. We firmly believe that.

Senator CAMERON: Was there a separate cost-benefit analysis prepared for the Howard government's FSR reforms?

Mr Murphy : No.

Senator CAMERON: Can you tell me why that would not have been done? Is it part of good governance to do the cost-benefit analysis?

Mr Murphy : It is not for me to comment. We were involved on that—Ms Vroombout, me and others here. It is just a different process. But I must say now there is much more attention given to these matters, and that is a good thing.

Senator CAMERON: You used the adjective 'different'—a different process. Is it a better process now?

Mr Murphy : I think it is more thorough.

Senator CAMERON: More thorough?

Mr Murphy : Yes.

Senator CORMANN: Except the government does not comply with it.

Mr Murphy : Well—

Senator CAMERON: Okay, thanks.

CHAIR: Back to Senator Cormann.

Senator CORMANN: Out of interest, given the government's commitment to taking one regulation out for any new regulation that comes in, how many regulations have you abolished in the time that you have been pursuing new regulations?

Mr Murphy : I have not got a count, but what I would say is that often when you are reforming a regulation it is not so much a matter of the words on the page but whether you can simplify it, make it easier for people to comply with it and make it easier for people to operate in the marketplace while at the same time taking account of new developments. There has been an increase in the number of pages of regulation. I do not know whether that translates into the marketplace operating less well.

Senator CORMANN: So you think an increase in the number of pages of regulations makes compliance and business easier?

Mr Murphy : It can. But it may not. We are opposed to red tape and useless compliance and burdensome regulation which is not use to either the regulator, the man in the street or the government. But at the same time, often governments come in and reform regulation because they want to change the bargaining positions that people have or they want to make sure that there is better information out there in the marketplace. One of the driving forces at the moment is that we overestimated the level of financial literacy out there in the marketplace.

Senator CORMANN: So more pages of regulation will improve the level of financial literacy?

Mr Murphy : No. The point is that, in terms of best interest duty, what you are doing is throwing the onus back on the financial planner to take more responsibility for what they are doing, because we can have less reliance on the customer knowing what is in their own best interests.

Senator CORMANN: What has been the income of the St John inquiry into the wholesale and retail client definitions, which closed for submissions back on 1 June 2011?

Mr Murphy : The report is being finalised.

Senator CORMANN: So it has not been finalised yet?

Mr Murphy : It is at the stage of dotting i's and crossing t's. It is almost final, but it has not been handed to the minister.

Senator CORMANN: When will that happen?

Mr Murphy : Quite shortly?

Senator CORMANN: Do you expect that that report will be made public?

Mr Murphy : That is a matter for the government, but these things usually are made public.

Senator CORMANN: Are there likely to be any changes to the current definitions?

Ms Vroombout : You asked about the Richard St John report on the definition of retail and wholesale. The Richard St John inquiry is into statutory compensation arrangements and it was that inquiry and the finalisation of that report that Mr Murphy was talking about. Early last year, Treasury put out a consultation paper on the retail/wholesale definitions and we are still working through the issues raised in submissions made in response to that consultation paper.

Senator CORMANN: What would be the rationale for a person with $9 million in a self-managed fund to be considered retail yet for an individual with $9 million in their own name to be considered wholesale? Is there a rationale for that differentiation depending on where the money is invested?

Ms Vroombout : That goes to the fact that sometimes when people invest in self-managed superfunds have taken funds from other superannuation environments to put them into superannuation funds. They may have significantly more funds in a superannuation context than they would have in their individual context and yet they are no more sophisticated in that superannuation context than they might be in their individual context.

Senator CORMANN: Are we taking a different approach to other jurisdictions like the US and the UK in relation to the sale of complex, high-risk products like contracts for difference to retail clients?

Mr Murphy : No. As we often do in regulatory matters, we reach for the middle in terms of the more generally accepted way. I know that the UK is seeking to move to a position such that they are going to ban outright the sale of certain high-risk products to retail investors. This government wants people to understand and have better information about these products. We want to place some onus on the advisers to ensure that the products are suitable for the investor. The laissez-faire approach is, I suppose, having no regulation whatsoever, with people being able to invest where they like notwithstanding the fact that some of the more recent products that you see in the marketplace have become much more complex. For those who are skilful investors, that can lead to great gains. On the other hand, it can lead to people having major losses—for example, the people who invested in Storm Financial with margin lending. They were not well advised in that instance. What we try to do is to find a balance between enabling these products to be developed, because we want innovation in the market and people should be allowed to pursue that, and ensuring that retail investors are given adequate information and/or protection.

Senator CORMANN: On another issue altogether, we have been getting a number of inquiries in our offices from people who wish to transfer their superannuation to New Zealand but cannot do so. Apparently, that is because the rules for overseas transfers specifically do not apply to New Zealand. The Treasurer in 2009—so a little while ago now—signed an agreement with New Zealand for a trans-Tasman retirement portability scheme which would allow for easier portability of superannuation. I gather that New Zealand has passed enabling legislation but Australia has not. Can you update us on the progress of the trans-Tasman retirement portability scheme?

Mr Murphy : That was raised in the consultations between the Treasurer and his New Zealand counterpart recently. We are still finalising the legislation. I would expect that that will occur in the near future. It is in the final stages.

Senator CORMANN: It will happen in the fullness of time.

Mr Murphy : These things are complex.

Senator CORMANN: You are doing a regulatory impact statement, I assume.

Mr Murphy : It is not my responsibility; I was just trying to be helpful.

Senator CORMANN: So this is not part of—

Mr Murphy : The matter is being handled in the revenue group.

Senator CORMANN: Okay. Thank you very much for being helpful. New Zealand has done their bit. It is now waiting for us to do our bit.

Mr Murphy : That reflects the population. Our regulatory regime is a little bit more complex than theirs.

Senator CORMANN: In relation to Trio compensation payments under the SIS Act, they were first announced in April 2011 but actual payments were not made until a few days ago. What caused the 10-month delay?

Mr Murphy : There were various issues that we had to work out with APRA and the advisers. They included the proper estimates of how much money should be paid to particular people.

Mr Lonsdale : The original announcement was a commitment to pay the $55 million. What has happened in the interim is a lot of work to recreate the account balances and to try to work out what the account balances would have been if Trio had not collapsed. There were over 5,000 members, so they are quite difficult calculations to make. Those calculations were done by APRA and the trustee. A checking process then followed. That has taken a lot of time.

Senator CORMANN: Given that so much time passed between the announcement and the payment, has been an adjustment for loss of earnings over that 10-month period or did you stick to the line in the sand at the time?

Mr Lonsdale : I am happy to come back to you on that if you are interested in the exact calculations.

Senator CORMANN: I am interested in exactly how much the government eventually paid out and whether or not there was an adjustment because of the delay and, in some more detail, what caused the delay. If you could provide that information on notice, that would be great.

Mr Lonsdale : We can provide that.

Senator CORMANN: Did the government pay the money directly to each victim of the Trio collapse or did the money go through a third party?

Mr Lonsdale : My understanding is that that money is being paid progressively from the second announcement. The trustee is making the payments.

Senator CORMANN: Do the administration costs for this come out of the compensation amount? How does that work?

Mr Lonsdale : That will be part of the compensation process.

Senator CORMANN: Is the government handling that out of its own resources or does it come out of the compensation amount—the cost of administering the payout?

Mr Lonsdale : That will all be wrapped up in the levy.

Senator BUSHBY: I thought that I might take the opportunity, given some of the events in recent weeks, to ask some questions about banks and the banking market. I would like you to update me on the banking competition package from December 2010. How many of the measures that were contained in that package have been implemented in full as set out in that package? How many are still underway in the original format that was announced at that time? How many have been effectively abandoned or replaced with something that is substantially different, like the account number portability and the central mortgage repository plans, which did not proceed?

Mr Murphy : We have a long list.

Mr Lonsdale : I can take you through the key ones. If you would like to explore things further—

Senator BUSHBY: I am happy for you to take it on notice, if you like. I do not want to go through each of them in detail. We have done that before. I am very interested in how many were implemented in full.

Mr Murphy : The exit fee ban, the key fact sheet, the review of the use of the terms 'bank' and 'banking' by mutuals, the government guaranteed deposit seal, the covered bonds, the additional securitisation market support and the aggregation of the mutual sectors funding task have all been completed. Regarding the switching issue, yes, we abandoned account portability but Bernie Fraser, the former Governor of the Reserve Bank and secretary to the Treasury, wrote a report—which has been published—on switching. We are in the final stages of developing a new model that will make it a lot easier for people to switch bank accounts if they wish to.

Senator BUSHBY: When is that likely to be completed?

Mr Lonsdale : That will be 1 July 2012. That is on track. There is a working group working through those issues now.

Senator BUSHBY: Has anything been released publicly for consultation or is it all being done behind closed doors, effectively?

Mr Lonsdale : It is not being done behind closed doors. As Mr Murphy outlined, there was a process that Mr Fraser went through.

Senator BUSHBY: I understand that. You moved on from there to—

Mr Lonsdale : Following that report, the government issued a press release. In the press release, the government said that it would set up a working group. That working group contains government representatives such as people from the Treasury, ASIC, APRA and the Reserve Bank; industry people; and consumer group representatives. Issues relating to the implementation of that policy are being worked through right now.

Mr Murphy : We are doing it through the Australian Payments Clearing Association. In effect, they deal with the infrastructure that switches accounts. It is a technical thing, really.

Senator BUSHBY: What we are talking about is the IT side of switching accounts.

Mr Murphy : And locking the institutions in to actually doing it.

Senator BUSHBY: As was canvassed in the banking competition reports that was conducted by the references version of this committee, there are a lot of alternative ways in which switching is implemented by other nations around the world. In Holland, there are obligations on banks to transfer things across. Is it that kind of thing that you are looking at?

Mr Murphy : Yes. You will not have to go to the bank that you are departing. You go to the bank that you wish to switch to and they will organise it such that everything come to them. It will make it a lot easier.

Mr Lonsdale : They are the two key features that will change now: (1) you will not go to the old bank but you will go to the new bank and (2) when the existing direct debits are identified the new bank will facilitate that change, not the consumer.

Senator BUSHBY: So, effectively—and I will blow the trumpet of the committee—it was one of the recommendations of the committee that we look at that sort of thing.

Mr Murphy : And that would apply to home loans, would it?

CHAIR: Yes, it could.

Mr Lonsdale : So at the moment these are deposit accounts and these are transaction accounts at the moment. But the government has highlighted that it will look at other things—for example, small business as well.

Senator BUSHBY: Often what happens is people do change their mortgage and then the deposit account is the messy bit afterwards presumably. That sort of picks it up and brings it with it.

Mr Lonsdale : Correct. I will make a point on your earlier question. So you wanted the list of those measures that the government has implemented and those that it has not?

Senator BUSHBY: So those as originally promised.

Mr Lonsdale : I guess you can have a debate about what the form means, but I make the general point that everything on the list in this document the government has done on time. There are a few measures where the government indicated a disposition to examine things. It went out and consulted and through that consultation process there were changes made to the policy. I think you highlighted one in terms of LMI. But in terms of the thrust of all the measures, they are scheduled to be completed on time.

Senator BUSHBY: Are there any additional measures over and above those that were announced in that package which the government is now looking at undertaking in order to help facilitate competition in the banking industry?

Mr Lonsdale : They are policy issues for the government, but the Treasurer has indicated that he is very interested in banking competition so we are always on the look-out for new things that can enhance that.

Senator BUSHBY: So potentially you may be working on looking at other issues at the moment?

Mr Lonsdale : Yes.

Mr Murphy : I think the policy issue—and it is about the Treasurer's statements here—is that raising people's consciousness and getting people to think that they can seek more competitive outcomes from financial institutions is a key factor in getting a competitive market out there. That is going to be the key thing to get an outcome.

Senator BUSHBY: I do not disagree with that at all. I know that the current Treasurer tries to do that and I know that the previous Treasurer certainly did do that as well. Certainly making it easier is a key factor and this package attempted to address some of the issues and so did the inquiry that we conducted.

CHAIR: Senator, before you move on, Senator Cameron has a question directly on this point.

Senator CAMERON: I am not sure whether this is to the minister or Mr Murphy. The competition will not improve if people do not know about the legislative changes.

Mr Murphy : That is my point. Publicity and encouragement for people to take their own initiative is really going to be the catalyst to get a more competitive market. We all know that prior to the GFC there was more competition in the market because the smaller lenders could borrow offshore cheaply. We lost that through the GFC. Now what the government is trying to do with the package is alert people to the fact that they can exercise their own competitive measure by either challenging their institution as to the rates they have got or moving their business. That is what it is all about.

Senator CAMERON: Is there some program, even from Treasury, for education?

Senator BUSHBY: That was my very next question.

Mr Murphy : We have the banking package media program. Mr Lonsdale might want to comment.

Mr Lonsdale : As part of the banking package the government announced a campaign. The first two phases of that campaign have been completed. There was TV, print and radio particularly on the banning of exit fees and then there were the one-page key fact sheets. They were the focus of the first two phases of that. There is one more phase scheduled for that campaign which will focus on credit card reforms predominantly. So there is that part and ASIC have a MoneySmart website—it is a very good website—and it contains a range of things that can help consumers and initiatives that the government has. So they are the two that I would point to. One other issue that is related to it is this. The government has announced the release of a seal and it is not so much to advertise but to at least recognise that deposits in ADIs are guarantee under the financial claims scheme for up to $250,000. That is a process that has come into operation since the beginning of the month.

Mr Murphy : That really addresses the point that people think they need to have their deposit with major banks—the big four. They do not. They could have it with any financial or banking institution prudentially registered by APRA and it would be safe.

Senator CAMERON: This is a hugely significant change in competition practice and in saving the community money. On the specific issue that drives all of this, the easy switching that you outlined, what is the education program or campaign for this? I am sure a lot of people do not understand that this is going to be a one-stop shop and that they do not have to go to their old bank.

Mr Lonsdale : This is something that we are examining as part of phase 3 of the campaign. As I mentioned to Senator Bushby before, that is a proposal or measure that will become operational from 1 July, so we are looking at that as part of phase 3. I think the Treasurer has been very vocal in saying that if people are not happy with their bank then they should move. The banning of exit fees facilitates that and the account direct debit processes also facilitate that.

CHAIR: The Treasurer has been very vocal on people making a choice and shifting between bank accounts. I read nearly every bit of transcript he puts out and I have been unaware, until this discussion, of the benefits of switching per se—and I can sense that my colleagues were not aware of it as well. I can tell you that if people out there in the community become aware that they can just walk down the road and get an interest rate on a $200,000 or $300,000 loan that is half a per cent or three per cent lower then they will do so. I would encourage you to take up with the Treasurer the idea of a campaign of education highlighting that particular aspect because that will fall on receptive ears in the wider community—without telling you how to suck eggs.

Senator BUSHBY: The Bank on a Better Deal awareness campaign, which is what you are referring to, had a budget of $10.2 million to be spent in 2010-11 and $4.8 million budgeted for this year. That was underspent at the last estimates. Did you end up spending that full budget last year, or have you brought some of that into this year and is the intention to use some of that to do exactly what Senator Bishop was talking about?

Mr Lonsdale : I think we provided those numbers to you in a question that we took on notice.

Senator BUSHBY: That was prior to the end of the financial year, though, and I was just wondering whether anything has changed.

Mr Lonsdale : My understanding is that the money that was budgeted for 2010-11 is available for 2011-12.

Senator BUSHBY: Are you able to tell me how much is left over now?

Mr Lonsdale : I do not have those numbers in front of me, but what I can say is that the people who are responsible are our corporate people and I think they are available to answer questions on this tomorrow.

Senator BUSHBY: If I am able, I will take the opportunity to ask them tomorrow. I note also that you mentioned that the Australian protected deposit symbol, the branding, has been finalised. That took some time, which surprised me. I commented on that at last estimates. Has that been finalised now?

Mr Lonsdale : Yes.

Senator BUSHBY: Is it being used?

Mr Lonsdale : It is being used quite a lot. It has been available for two weeks. In that time we have had over 80 requests from ADIs to use the seal. The process is that the ADIs approach us and we talk to them about a deed which makes sure that the seal is used in the appropriate way, particularly for the product that is being guaranteed. So the short answer to your question is that there has been a great deal of interest in the seal.

Senator BUSHBY: I can understand that particularly from those who, as Mr Murphy mentioned, are not banks or are not labelled as banks. I do not think anybody has any issue with that particular measure. What trends are apparent in the overall market share of the big four bank—their share of the housing loan market and the deposit market in particular—since December 2010?

Mr Murphy : For the housing credit from banks, the latest information is that the smaller institutions are making gains in cutting into the market share of the four majors.

Senator BUSHBY: The smaller ADIs?

Mr Murphy : Yes.

Senator BUSHBY: Is there any comeback by non-ADIs or non-backed financial institutions?

Mr Murphy : Not a lot. It is mainly the mutuals and the building societies. The credit unions and building societies are the ones who are making some impact on the four majors, plus the second tier: Bendigo and Suncorp. You could say that maybe the four major's share of the market has peaked and now it is starting to come back a bit to the others in mortgage rates.

Senator CORMANN: I wonder why?

Mr Lonsdale : Just to add to Mr Murphy's comments: that is particularly the case when you look at the banking sector. If you split off the big four from the second tier banks, the second tier banks have made quite an inroad into the concentration statistics that we have for standard home loan variable rates.

Senator BUSHBY: Are they doing that because they are aggressively marketing or are they doing it on the basis of price?

Mr Murphy : I think it is more on price. I think they are prepared to compete. These are commercial decisions in how much market share these banks want. The second tier have decided that they want to seek to get back to the market shares they had previously. We have also seen the development of different approaches—you saw recently Gateway and Yellow Brick Road. That is the start of the emergence of entrepreneurs who were previously in the non-bank sector of the market. Recently I think it was John Symons who said that he was going to go back much more heavily into competition in the mortgage market.

If things could settle down in Europe—and that is a big if—you would probably find there would be more certainty in the marketplace. People would be able to borrow to finance more mortgages and you would get more competition. All things said and done, the sector has done quite well given all the uncertainties out there.

Senator BUSHBY: I understand. The committee found when we looked into it that the major impediment to competition was the lack of available funds at a price that enabled, particularly non-bank, mortgage originators to compete.

Mr Murphy : I think what is going to happen is that the industry is going through rearranging itself to work out how it operates in a post-GFC world.

Senator BUSHBY: Yellow Brick is a good example of an innovative way of putting together funding to try and get back into the market.

Mr Murphy : Yes.

Senator BUSHBY: Let us move on to what has happened in the last couple of weeks. On the basis of their claimed higher funding costs, do you consider that the big banks are justified in lifting their rates independently of movements in the official cash rate? I have asked you before and I am aware that you do conduct assessments of their funding costs. Are the claims they are making justified?

Mr Murphy : It is a complex issue. We have done a lot of work on funding costs—that is, the RBA has done a lot of work on funding costs. There are a few principles that we could state. Then, I think it comes down to some value judgments and where you lie on this debate. The major bank funding costs are largely determined by the cash rate, their deposit rates and their wholesale funding costs. It appears that bank funding costs relative to the cash rate have increased. At the same time, overall bank profits remain very strong.

It seems that until now banks have been able to absorb the most recent increase in funding costs relative to the cash rate. There seems to be a view held by a number of people around the traps, which is, sort of, the better view—and I suppose we sign up to this—that the banks have absorbed around 15 basis points, increasing funding costs above the cash rate over the last six months. I think that is when you stop and you say, 'Right.' The other point I would make before we draw a conclusion is that the governor came out and made a statement saying that when the RBA were looking at the cash rate they looked to see what mortgage rates were operating out there in the marketplace. My understanding is that they said they took account of a 100 basis point increase in funding rates when they developed the cash rate. In other words, the cash rate is potentially 100 basis points lower to take account of that.

Senator BUSHBY: Ultimately, when the Reserve Bank makes its decision it is looking for the actual commercial rates charged by banks to be at a certain level. It sets the official cash rate to drag it to that point, not necessarily directly though.

Mr Murphy : Yes. We all know the cash rates dropped. We all know that the banks are shifting their funding base away from wholesale funding offshore and moving to relying more on deposits. We know that. To do that they are competing and they are paying more for deposits. So you have got the cash rate going down, you have got the cost of deposits going up and you also have the cost of wholesale offshore funding lifting. That is the simplified version of it. Then you get down to the value judgement and say, 'If you are looking at the long-term view of the banks, where do you start and where do you stop in terms of what you take into account now?' Potentially they are going to face higher funding costs in the future—they say that. They say, 'We have absorbed up until now the higher funding costs we have had in the past so now is the time that we should be able to increase our mortgage rates.' Alternatively, you could say that their profit levels have been maintained all through this post-GFC time and their profit levels have remained at a good sustainable level. I question—and the banks would not agree with me—whether they cannot absorb the increase in funding rates up until now.

Senator BUSHBY: There are strong policy reasons for promoting profitable banks, particularly the big ones, in Australia. I understand where you are coming from, but the question is at what point, in terms of the profits that they make, does it become a threat? I think you are suggesting that there is at least an argument that profit levels that banks are making at the moment may well be above that.

Mr Murphy : I am saying that they have maintained their profit levels and we want a stable, profitable bank system. However, you have got to take account of the past and the future. I would suggest that they could hold out a bit longer before they increase their mortgage rates.

Senator BUSHBY: They could take a little bit more of a hit on their bottom line while still remaining stable?

Mr Murphy : Yes. I think that is a value judgement because they do not see it that way, whereas the government does see it that way. The other very relevant point is that they should be considering their customers and they should be considering the availability of switching and other aspects of this competition package because you have got to retain your customer base. You do not want to lose your customer base.

Senator BUSHBY: If the banking market were truly competitive, they would not be able to make those decisions ahead of a point where it was actually threatening their viability. If you go back five or six years to when the non-bank mortgage originators were very active—

Mr Murphy : They took a lot of market share.

Senator BUSHBY: They took a lot of market share and also had a big effect on the net interest margin and kept the big banks keen. That level of competition does not exist in the industry at the moment, although as you say there are positive sides.

Mr Murphy : I think that the big banks would say that they compete heavily against themselves. You do not need 100 people to have a competitive market; you have just got to have competition.

Senator BUSHBY: But them competing amongst themselves is not delivering the same outcomes in terms of net interest margins as the competition they were facing last decade.

Mr Lonsdale : We would say we have a very competitive banking market at the moment. It is highly competitive on home loan mortgages and deposits. You mentioned net interest margins. If you look at the historical series of net interest margins going back, say, 20 years where net interest margins were around 400 basis points—

Senator BUSHBY: Twenty years ago there was not the same degree of competition.

Mr Lonsdale : Now we are at about 220 or 230, which is below the 10-year average. You can have different measures but I would conclude that we have a very competitive banking market.

Senator BUSHBY: But if it is so competitive how can the big banks unilaterally put up their interest rates without any fear that that is going to harm their market share in any great way? In a truly competitive market prices are kept in check by competitors.

Senator CAMERON: But that is theoretical.

Mr Murphy : They obviously think what they get in terms of retention of profit will trade off against the loss of market share. It is a dynamic market. When you get down to it, we talk about the big four but there are over 120 banking service providers in Australia which are all regulated by APRA, so you have some certainty there. Now we have guaranteed the deposit level. What we have been very pleased to see since the banking package is that there has been a differentiation between the majors. We had a time there when they were all charging the same rates. That is no good.

Senator BUSHBY: I think the National Australia Bank started that before December 2010.

Mr Murphy : The banning of exit fees has made a huge difference to competition. I go back to my point that we have to promote more competition in the market. I think the banks have—

Senator BUSHBY: Mr Lonsdale just said that it is very competitive. If it is so competitive, why do we—

Mr Lonsdale : You can always have more competition.

Mr Murphy : We have to get it more competitive to make people take up the different offers and to spread the lending around a bit.

Senator SINODINOS: I do not want to break up the flow of this interesting discussion but I wanted to take your attention to something else. I noticed in the additional estimates slightly more money for the Australian financial centre task force secretariat. Is that the Mark Johnson exercise and a follow-up to all of that?

Mr Murphy : Yes.

Senator SINODINOS: The government is implementing a number of recommendations. I was keen to find out, not detail by detail, how progress around the broad recommendations around things like further development of a corporate bond market and related stuff is going?

Mr Murphy : They did a very good report. It was well received by the government. Then we kept it going for 12 months to oversee the implementation of it. There were some tax measures in there. There was a corporate bond market. It is virtually a 1½-person secretariat. They work in Sydney closely with the department. We have harder nuts to crack, such as a corporate bond market. Also, they have become involved in the Asian passport concept that we are trying to do with the funds management industry. Mark Johnson himself and others have been very helpful in that. They had an initial oomph. The task force still retains some very good people, very senior people in the finance sector, but we are finding it very difficult to stimulate the uptake of a corporate bond market in Australia without the government intervening to do something.

Mr Lonsdale has been working on the retail bond market. We are trying to put out a consultation paper on whether we should wind back a little bit of the current regulation and whether that would be a stimulus to the bond market. Also, the Treasurer attended a major day-long symposium on the wholesale bond market which Credit Suisse sponsored. To their credit, they got everyone who was a player in the place over the day to talk about this.

There are two aspects to it. On the wholesale market, the major corporates in Australia can easily go to New York and borrow. The middle-ranking firms maybe get financing from the four major banks. The four major banks would not mind being the intermediary and being in the market. On the retail bond market, we think that there will be great benefit if there were more secure fixed-interest investments out there for retail investors and self-managed super funds so there could be more demand out there for a retail bond market. Everyone seems to think that a wholesale bond market and a retail bond market is a good idea; it is just what the government can do. The government is working towards listing CGS by the end of the year. We have been told by the ASX that that will provide a platform to build off a bond market. So they are the actions we have taken, but, as I say, we would not mind a bit of activity by the private sector to actually take this up. We can only go so far without government seed funding, and we are not into that.

Senator SINODINOS: Some of the states are trying to build themselves up as financial hubs. Victoria had a report, I think, a couple of years ago and Sydney is always trying to do things in this area. How do those state efforts mesh in with what you are trying to do?

Mr Murphy : We have worked closely with the New South Wales government. With the Victorian government, the report by Johnson is not saying Sydney is the place; however, it is an inescapable fact that a lot of the financial market is in Sydney. But that does not mean you cannot have very successful financial institutions in places other than Sydney. The government is not in any way discriminating against any capital city for having a sophisticated financial market; it is up to them.

Senator SINODINOS: If some of these mechanisms get off the ground, including the corporate bond market, in middle-ranking sorts of businesses, this still leaves the issue of small-business finance. There is a suspicion in some quarters, for example, that the banks cross-subsidise maybe what they are doing to be more competitive in the mortgage space by potentially inflicting higher rates relatively on small businesses. Is that something that is being monitored or picked up in your work?

Mr Murphy : That has always been around and it has always been an issue that we have looked at. During the GFC we did a lot of work on access to finance for small businesses. We do monitor it. We think that a lot of the bank lending comes from the major four to small business. We monitor lending. Again, it is not a straightforward story. The banks say to us, and they can show us their numbers, that they largely meet the demands that are made on them for funding. They meet the requests for funding and they have the money there to lend. However, it is an inescapable fact that, post-GFC, the banks are valuing risk much more tightly and would be more cautious, I suppose, in terms of their lending. That said, we think that lending to small business is quite okay at the present time. We do not see people complaining or saying that they cannot get proper credit from either the major four or the second tier, which is also quite prevalent in the small-business lending market. But it is an inescapable fact that it may be on tougher terms than it was a few years ago. It is that risk issue that they are factoring in.

Senator SINODINOS: This question is more on rates of return and the big four banks versus smaller banks and other competitors, particularly in the mortgage market. You mentioned how second tier banks and others are being aggressive in marketing more and more and potentially also shading their pricing and all the rest of it. In a market like this, where funding costs are going up because of Europe and other issues and the big banks are justifying what they are doing on the basis that their funding cost are going up, how is it sustainable for the smaller tier banks to market aggressively and shade their prices and take on the big banks in the mortgage space? Aren't they facing similar cost pressures?

Mr Murphy : They will be facing similar cost pressures but it is a matter of their judgment. From a policy point of view, we want them to be as competitive as possible, and I think we have some pretty good leaders out there in some of these second tier banks, especially in Bendigo and Suncorp. We talk to them a lot. They know what they are doing. Yes, they put up their rates as the big four do. But because they are small institutions and, to some extent, may be closer to the market, they are very cautious about what they do. They exercise pretty good judgment, I think. They have got to put their rates up. We will just have to see whether the wholesale funding costs remain as high as they are at the moment. I think they will come back. The RBA said recently that they can understand that mortgage rates have been put up by the banks. However, they think the funding costs will dip; they will come back down again. If that occurs, it would be a good thing. It removes the reasons for increasing mortgage rates.

Mr Lonsdale : The other thing to note is that a lot of the smaller players rely on the securitisation market, which has been very heavily hit since the GFC. The government has an AOFM program, but if the markets were to settle and that market were to come back that would be a big fillip for the smaller banks.

Senator SINODINOS: Finally, in terms of financial stability overall and the health of individual institutions, it is essentially a matter for APRA to determine whether—

Mr Murphy : Yes, it is; but, at the same time, in the world we live in, the RBA is concerned about the stability of the whole system. APRA is on the job visiting institutions. From a policy point of view, we are always working very closely with APRA and the RBA on how the system is going, what it is lending, whether there is enough finance for small business. Yes, there are tensions there and with mortgage rates et cetera. It is APRA's responsibility, and we keep a good relationship with APRA on these matters. At the moment, you would have to say that their bank funding costs are going to go up a bit because of the capital requirements for Basel III, and that is a big issue for them. But when it is all said and done, we have got a very good financial system.

Senator CAMERON: Senator Sinodinos raises an important issue here. I have had a quick look at some of the reporting that came out of the Credit Suisse forum. It raises an issue that I have been concerned about for some time, and that is the over reliance of the Australian superannuation industry on equities. One of the arguments is that if we had a deep and liquid corporate market then we would have another alternative to equities. According to the Financial Review, Australia has only 14 per cent in bonds and super; the US has 27; Canada has 36; and Japan has 56. Are there any issues that we should be looking at in the context of what Senator Sinodinos is raising on this?

Mr Murphy : A lot of Australia's savings go into superannuation. There have been a number of reports on superannuation in recent times. The last one would be, I suppose, the Cooper report. The government is making changes to ensure that trustees work in the best interests of their members and have investment patterns in the best interests of their members. The change that has occurred has been as a result of the GFC—that was the watershed. Investments in equities, whether a retail investor or a super fund, found higher rates of return than in bonds, cash in the bank or other alternative investments. The GFC wiped at least a third off the value of the ASX and off people's savings. Super funds are now looking at a rethink of their investment patterns. You have to talk in general terms. Most super funds have been heavily into offshore equities and domestic equities. You can hardly criticise them for not investing in domestic bonds because they virtually do not have any other than government bonds.

Mr Murphy : The theme that is running—and the super funds are on the defensive here—is that everyone sees that pot of gold and everyone who has a proposal for government who wants some funding sees the super funds as a viable pot of gold, which they seek to access. Governments have looked at this a few times. The rule should be that the trustees should manage that money in the best interests of their members and there should not be any detailed requirements or prescription provided by government. That is currently the government's position. One would hope that the people managing super funds would look at the investments around the place not only in the short term but also in the long term.

Also, there are increased investments coming into super funds through the government's decision to increase the contribution from nine to 12 per cent. There is a lot of money in super and, probably, you will find super funds may divest their investment strategies to accommodate the increased funding that they will receive. You may find that there may be more investment by super funds in infrastructure, which would be a good thing for this country, I think. But they have to make that decision on commercial terms. There may be more investments in the domestic bond market. That is a long way of saying that the burgeoning industry is a major factor in our financial system. If you put all the super money together, it is virtually a fifth major bank.

Senator CONROY: It is $1.3 trillion.

Mr Murphy : Yes, it about a fifth. That is how big the super industry is; of course its ownership is diversified.

Senator CAMERON: You mentioned 'best interest' a number of times. Is that the sole purpose test?

Mr Murphy : No, the sole purpose test is primarily a test in super which says to the trustees, 'When you're investing, you must invest in the best interest of the members of the fund.'

Mr Lonsdale : For their retirement.

Mr Murphy : Yes. Sole purpose is that you manage the money for them not for others.

Senator CAMERON: The problem in superannuation is that now you have all the league tables being done every year saying who gets the five stars, and short-termism is really dominating the super industry. That is why the push goes into equities instead of long-term more balanced returns.

Mr Murphy : Yes. That can lead to a distortion in the super fund but at the same time the super funds have to manage the money for the purpose of all their members.

Senator CAMERON: It is difficult to do that in a generic way. The best interest of a member who is about to retire in five years time is different from the best interest of someone who might have a lifetime of investment in front of them.

Mr Murphy : But they have to manage that money for both parties.

Mr Lonsdale : We are seeing anecdotal evidence from some funds that are taking a more tailored view as to how money is invested. For example, instead of having one balanced portfolio for the whole cohort of members running from age 20 to age 55 a fund might think that if you are close to retirement it may be better to have more of that money invested in cash or a safer sort of asset instead of being more heavily weighted in equities. I think we are seeing a little bit of that in the market.

Senator CAMERON: So the corporate bonds are another option to widen the base. Is that what you are saying?

Mr Murphy : Yes. That way they can diversify the risk and also match up the fund and the return they getting with the payments out, when they expect people to retire. They are now reaching a stage where some of them are churning over from the accumulation stage to starting to pay out. It may lead to different investment strategies for the funds.

Senator CAMERON: The key is in these investment strategies. If you look at the US, Canada and Japan you see that we are pushed way too much into the equities market.

Mr Murphy : Up to now, the superfund trustees—the managers—have felt that that is the way to get the best return for their members.

Mr Lonsdale : It is difficult to compare different countries. We are quite unique in Australia in that our SG system is based on a defined contribution scheme. Most other countries around the world are running defined benefit schemes—so there are promises to pay out money on a long-term basis. That will bias them towards investing in infrastructure, corporate bonds, or very long dated assets.

Mr Murphy : That is what Canada says to us. They can match up what they are paying out, and they do invest in big infrastructure projects which have long lead times.

Senator CAMERON: I suppose you could spend all day discussing this, Mr Murphy, because it is a very complex and important issue, and we may have to return to it.

Mr Murphy : It is a public policy issue, and it keeps being raised: have super funds got the best investment strategies, not only for their members but also for the community at large?

Senator CAMERON: I suppose Treasury is always interested in whether this $1.3 trillion is muscling up enough to assist the economic development of the country.

Mr Murphy : A large part of Australia's savings is in that pool.

Senator WATERS: During the GFC, guarantees were put in place for the banks. Even if they were not drawn on they obviously reduced the costs for banks of raising funds. Given that those measures were designed to maintain employment, were the banks asked to give any commitments about maintaining employment of Australian bank staff at the time?

Mr Murphy : For the wholesale funding guarantee the banks were set a fee. The banks gave commitments to the government that they would be sensitive to people losing jobs, in terms of their mortgage rates. They also made commitments that they would be accommodating with respect to lending to small business, if small business found themselves in difficult situations through the rapid downturn in the economy.

I cannot remember at the time whether they gave us a commitment—they may have—on their staff, but they did give us a commitment that they would be understanding of people who had lost their jobs and had mortgage payments. So there was some accommodation reached with the banks over that. They made that commitment to the Treasurer.

Senator WATERS: That is obviously with respect to customers, but my question was in relation to staff. Can you take that on notice.

Mr Murphy : I would probably assume that if they were willing to take account of people who had lost jobs—and, as you say, customers—they would have taken account of their own staff. I cannot remember if we specifically addressed the staff, but I would have assumed that.

Senator WATERS: I am interested in whether they were asked to maintain their levels of employment and also whether that was a condition they agreed to.

Mr Murphy : I cannot recall. We agreed with them on the other things. I just assume that that would have been the case, but I can find out.

Senator WATERS: If you could take that on notice, that would be great. When approving the Commonwealth Bank's takeover of Bankwest, did the Treasurer attach any conditions about the treatment of existing customers?

Mr Murphy : I would have to check on that. At the time Bankwest, as perceived by official regulators, was in a difficult position. It was expected that the Commonwealth Bank would assume all of Bankwest's business, so they would assume its existing customers.

Senator WATERS: I am interested in whether there were any specific conditions imposed about the treatment of those former Bankwest customers.

Mr Murphy : I can check, but I do not think so.

Senator WATERS: If you could check on that, it would be great. The second part of the question is: are there any procedures in place to monitor whether those conditions are being complied with? Are you aware of the recent media reports alleging that customers of Bankwest are now being treated unfairly by the Commonwealth?

Mr Murphy : Yes.

Senator WATERS: Obviously the claims relate to revalued assets, changed loan-to-valuation ratios and apparently pushing customers into receivership with more haste than is prudent. It is claimed that apparently the motive is that at the time of the agreement the Commonwealth somehow had a right to be compensated for customers that went into receivership before a certain date. Assuming those claims are true, would that be a breach of the assurances that were given at the time the Bankwest takeover was approved?

Mr Murphy : I am not privy to what, if any, assurances were made. I think that the issues that are being raised, from what I have seen in the press, are raised by people who, I suppose, are involved in commercial property developments.

Senator WATERS: I am not aware of the specific allegations.

Mr Murphy : Some of these comments are about commercial property developments in Queensland, where general economic conditions and market conditions are much tougher on these commercial property developments. That is perhaps one of the problems that have arisen. Whether it is peculiar to the bank and this particular takeover or whether it is just a matter of the commercial conditions operating at the present time is to be determined.

Senator WATERS: Could you take on notice whether that would amount to a breach of any assurances that were given at the time, if any were given.

Mr Murphy : Yes.

Senator WATERS: Chair, I have two further questions. Do I have time to ask them both?

CHAIR: You have now, yes.

Senator WATERS: Great. Has the introduction of covered bonds lowered the cost of funds for the major banks and, if so, is there any indication that that has then flowed through to lower rates being charged to borrowers? Likewise, have the smaller banks issued any covered bonds?

Mr Murphy : I think the point about covered bonds is that in the development of the legislation they would be available to the major banks, and also there was a proposal in there for an aggregation of smaller lenders to get together to issue covered bonds, so we tried to get the market there. Initially, covered bonds were priced below the cost of wholesale funding, but as all funding costs have gone up the cost of covered bonds has gone up. But what we hear from the market is that it is saying, 'Well, yes, the price has gone up, but we wouldn't even have access to the funds if we didn't have covered bonds.' So it has been quite useful to the major banks—less so for the second tier, but there have been second tiers issuing covered bonds, haven't there?

Mr Lonsdale : Just the majors, but second tiers can.

Senator WATERS: They can, but they have not yet.

Mr Lonsdale : The key point is Mr Murphy's last point: that when you compare it with unsecured funding, where the markets are largely closed, covered bonds are an avenue where banks can get funding and have.

Senator WATERS: Has that flowed through to lower rates for customers?

Mr Murphy : That goes into the mix of the earlier discussion here today. It has flowed through to more competitive rates for customers. The banks need to borrow a certain amount of money offshore. They have reduced how much they need to borrow, but it is still a good 25 to 30 per cent of their funding. So, if they did not have access to that funding, which they have got through covered bonds, rates would be much higher.

Senator WATERS: I asked this question of the Fiscal Group earlier and they said that you were the right folks to ask, so hopefully I am in the right place. Has your group prepared a list of public works projects that can effectively be rolled out at short notice that could act as a quick economic stimulus in the event that that is required?

Mr Murphy : Infrastructure Australia publishes a list of major infrastructure projects which it thinks are worthwhile to be conducted by governments or investors. That is the public list of infrastructure projects.

Senator WATERS: You do not keep a separate list?

Mr Murphy : No.

Senator SINODINOS: I noticed that the additional estimates talks about, at one stage, a bring-forward of some infrastructure spending under the Department of Infrastructure and Transport into 2011-12—a bring-forward from 2012-13. Obviously, between financial years there is some flexibility to shift infrastructure spending. Is that right?

Mr Murphy : Yes. You can just start digging holes earlier or you can bring forward because you can start the projects or release more funding so that more development can take place, especially in the big road projects.

Senator SINODINOS: This nation building came to a bring-forward of about 1.4 of the total amount that is being rolled out now, as it were, out of 2012-13.

Senator Wong: I do not know that I have the right officials here. That was one of the MYEFO decisions. I am not sure that it is all from 2012-13. There was a bring-forward for particular projects at the request of the infrastructure minister, but I cannot recall what the preceding profile was.

Senator SINODINOS: There is a reduction of 1.2 in 2012-13.

Senator Wong: Some beyond that.

Senator SINODINOS: So there is some scope to bring things forward in that way.

Senator Wong: If the projects are ready.

Senator BUSHBY: Still on the banks, there has been—and I will probably talk to APRA about this later on tonight as well, if I have a chance—the impact of the new liquidity and capital arrangements that are being brought in through Basel III. The next question is definitely an APRA question—the requirement for the banks to model quite drastic economic circumstances in Australia. Have you done any analysis of those changes and the impact they will have on competition in the market and the ability of banks to compete—also on the cost of the operations as a whole?

Mr Murphy : We have not done a lot of detailed work on that. The government is committed to implementation of Basel III. APRA is very keen to improve the capital requirements on the banks, and that is what it is all about. Yes, there is an issue emerging in Europe and other areas whereby people asking, 'Should we implement Basel III in the time frame that is being set out for it?' I do not think the capital requirements start until 2015. I would not put it as strongly as a 'rethink', but there are issues being raised as to whether, if you are trying to stimulate growth, especially in some other European countries, now is the time to increase your capital requirements. On the other hand, the market seems to be saying, 'These banks are undercapitalised. They need to have stronger capital bases.'

Senator BUSHBY: A lot of them have investments in sovereign debt.

Mr Murphy : You are betwixt and between in this.

Senator BUSHBY: I understand. I have expressed concern to Markets and certainly to APRA that some of the solutions that have been negotiated at an international level may be for problems that we never had, but we have to weather the price of those solutions.

Mr Murphy : We all have to be careful. If an international standard is set, we will be discriminated against if we do not meet it. On that, our best point is we are heavily involved in all these international meetings, through APRA, the Reserve Bank, Treasury, and ASIC through IOSCO. From my understanding, we are listened to, given our track record.

Senator BUSHBY: I am confident that the work that APRA did on Basel III helped to a significant extent to minimise some of those effects. But I still think there will be effects which will impact here by placing restrictions and requirements on our financial institutions which probably are not required, given all the other checks and balances that we have on our financial institutions, or not to the same extent. The impact will be an increase in the cost for ordinary Australians of doing business with banks.

Mr Murphy : It may be, but that cannot be helped if you want to have a sound and secure financial system. The bottom line is it is probably better for people to pay a little bit more as long as they have a sound and stable financial system.

Senator BUSHBY: The question is whether we already have that.

Mr Murphy : We think that. Given that we are a capital importing country and our place in Asia, we have to be perceived to be that.

Senator BUSHBY: I understand we cannot rest on our laurels and assume that because we got through the last downturn we are going to get through the next one.

Mr Murphy : That is why a review of policy, tightening of policy and changes in policy are continuous. We cannot walk away from this type of area.

Senator BUSHBY: I did not have a chance last night to ask any questions of the AOFM about RMBS, except for my multicoloured graph.

Senator Wong: You'll be known for the Bushby graph for years to come.

Senator BUSHBY: How is the RMBS market going? Early last year it was showing signs of recovery and then it tailed off a bit, and one of the credit agencies put a number of tranches on negative watch. Where is it at the moment?

Mr Murphy : It is not going as well as we had hoped. From when the government put that out as part of its package to provide an underpinning or support for the smaller lenders, it has worked and that has been helpful. Separate to the AOFM's support, the rest of the securitisation market has bumped along at the floor. It is really struggling.

Senator BUSHBY: Is it worse than it was this time last year?

Mr Murphy : No, but it has not picked up at all.

Senator BUSHBY: I remember the RBA Governor, during the banking inquiry, said in Australia it was not at about $50 billion a year, but it was closer to $30 billion a year. He did not think it would ever get back to the $50 billion a year because most of the $20 billion difference was from unsustainable models that were investing in it.

Mr Murphy : A good half of it was coming from offshore securitisation. Securitisation offshore has a very bad name, even in the US or Europe. It may pick up again. That is the problem. Australia is a reasonably small market for it. It could be affected by the fact that in repo-ing, the Reserve Bank is now recognising there can be self-securitisation by some of the banks. That may have an effect on the market by freeing it up for others to play. We would hope that it would pick up, because it is an alternative funding source going offshore.

Senator BUSHBY: And there has been bipartisan support for the AOFM investments. We all recognise getting it going again would be a good thing for competition.

CHAIR: I think that concludes this session. We will resume work at 4.15 with Treasury and the Australian Taxation Office.

Proceedings suspended from 15 : 59 to 16 : 18