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7.30 report (Budget special)

Tues day 8 May 2007

Budget 2007: Treasurer discusses budget

KERRY O'BRIEN: This is Peter Costello's fourth election year budget. He'll tell you it's his 12th, he's counted every one, but it's his fourth election year budget, so he certainly knows how to combine the politics with the economic and social policy, and so far they've worked, certainly at the other three elections. 

 

The Treasurer joins us now. Peter Costello, in your first budget 11 years ago you absolutely slashed university funding and they've been struggling in many ways ever since. Suddenly in the shadow of Kevin Rudd's education revolution, you've burst out of the closet as the super education treasurer. There's no politics in this by any chance is there?  

 

PETER COSTELLO, FEDERAL TREASURER: Well of course in 1996, we had a budget deficit of $10 billion. We owed $96 billion, we were paying interest payments of $8.5 billion and we didn't have money. And now we've got no debt, we're saving $8.5 billion in interest, and our budget will be in surplus for the 10th time. 

 

KERRY O'BRIEN: So, you've been doing pretty well in the intervening years, and you'd hardly call them education budgets. 

 

PETER COSTELLO: Completely academic when your budget is in deficit and you've got $96 billion of debt to say, "What will we spend more on?" What we've been able to do is we've been able to get the Australian economy strong. If we lock in the gains now, we can invest for the future. This is the best investment we've ever seen. It's not just spending - this is the important thing - this is a capital sum which will last forever, forever. 

 

KERRY O'BRIEN: Forever, that's a very long time. 

 

PETER COSTELLO: It's a perpetual fund and it's the earnings that will fund the first-class institutes. 

 

KERRY O'BRIEN: So, is there a limit to how big this fund can get or will it just keep growing like Topsy, depending on the size of the surplus? 

 

PETER COSTELLO: I don’t think there is a limit. Until you come into the point where you say, "Our higher ed system needs no further investment, that's when you would close the fund. There are funds overseas, particularly in the United States which are very large. This will make Australia, this will double Australia's endowments and next year we would intend to put another down payment into this. And we can continue to do that by saving and investing. 

 

TONY JONES: OK Treasurer, you say you can continue to do that, I mean will you give an absolute guarantee that once you've paid down what you need to put in for the Future Fund and all surpluses after that in a Costello Government, will actually go into the university fund. 

 

PETER COSTELLO: It's certainly been our intention, yes. 

 

KERRY O'BRIEN: You can guarantee it? 

 

PETER COSTELLO: Once we get to the position where the Future Fund has funded all of the liabilities, and we're well on our way. 

 

KERRY O'BRIEN: You're nearly there aren't you? 

 

PETER COSTELLO: We're well on our way, we're not quite there, but we're well on our way. Then we can start investing in this fund, and I think it will be a magnificent thing for Australia. It will build first-class institutions. Why am I keen on this? Because we've got to get smarter, we've got to get better to remain ahead of the pack. Here is a way which can fund it forever. No government in Australia ever thought of doing this before and they never had the capacity to do it before because we were burdened with debt. 

 

TONY JONES: You said in a press conference actually your idea, so I'm just wondering is there no one else who can take credit for this except for Peter Costello? 

 

PETER COSTELLO: Well no, but the idea of setting up a fund was my idea because I thought we could invest. I didn't want to get to a situation Tony where you know, we just went out and spent a budget surplus. What I want is to put a fund there which will be there for generations. This fund will be here long after we've all left the political scene, and hopefully future generations of young Australians will say, "Gee that wasn't a bad idea back in 2007". 

 

TONY JONES: Alright can you … one second, can you also just guarantee this for us, and that is this fund won't simply take over existing education funding or be used to funnel into existing education funding. 

 

PETER COSTELLO: Absolutely, I think that's a very important point. It's not being set up to claw back somewhere else, it's being set up to add. Now, the only guarantees I can give is while I'm still in government. But if anyone decides to raid the endowment fund, like people are trying to raid the Future Fund, it won't be there. You've got to make it politically untouchable, and I'm trying to make the Future Fund politically untouchable because otherwise you'll get cheap opportunists who will try and raid this for their own election bids. 

 

KERRY O'BRIEN: Who on earth you could be referring to. You're giving another tax cut of $5 billion next financial year, $31 billion over the next four. Is that really a tax cut or is it simply handing back bracket creep? 

 

PETER COSTELLO: No I don't think so Kerry because when you actually look at how we move thresholds, they've moved well in excess of indexation. In fact, we have a table in our glossy here which shows that the cut in tax over the last three years for somebody on $30,000 is 45 per cent. They'll be paying 45 per cent less tax than they were in 2004. These are very significant changes. 

 

KERRY O'BRIEN: I suppose the reason I related it to bracket creep because in the last budget you boasted that 80 per cent of taxpayers would be paying no more than 30 per cent tax rate, and in this budget for the next … over the next four years, you're saying the same thing, in other ways the same proportionate thing remains, that suggests bracket creep. 

 

PETER COSTELLO: That's why I don't want any bracket creep. In order to make sure that we've got 80 per cent under … across the forward estimates, we're going to change that next year, next year, not this year. But the further down the income scale you go, the bigger the percentage tax cut has been. These are tax cuts which are squarely directed at $30,000, $40,000, $50,000. Average earnings in this country is about $47,000 and that's where the tax cuts are the biggest. Now why do we do that? Because not only do you want to give relief to average earners but of course you want to boost capacity. 

 

The people that are earning $30,000 are most likely to be part-timers who are doing a few days a week, might be married women doing two or three, three days a week. Maybe they want to do a few more hours? Maybe somebody who is on a part-pension thinks they can come back into the workforce. So, this is designed to build capacity.  

 

Our economy is at near full employment, 4.5 per cent unemployment, it's near full employment. If we want to grow further, we've got to get more people to join the workforce. There isn't a big pool of unemployed anymore to pull back into the workforce. We've got to get more people who haven't been looking for work to actually want to join the workforce - there'll be mature-age workers, there might be married women, there might be people who are pensioned off on a disability pension, more people into the workforce. 

 

KERRY O'BRIEN: And how many of them fall into marginal Coalition electorates that you've got defend? 

 

PETER COSTELLO: I don't… 

 

KERRY O'BRIEN: You don't think that way? 

 

PETER COSTELLO: But I think this: the stronger you make the Australian economy, the more opportunity you give people, then you don't have to worry about those things. 

 

TONY JONES: Alright, you gave a brand new definition as far as I know anyway in your annual press conference today about the inflationary impact of tax cuts, you simply said there isn't any. Now some economists will question that, Chris Richardson has already done so. Did you run it past your … this notion, did you run it past Ken Henry, your Treasury Secretary? 

 

PETER COSTELLO: Of course, we discuss all of those things. The point I made is this: at the end of the day the budget surplus in 2007/8 will be 1 per cent of GDP. Last years' budget we were forecasting the budget surplus to be 1 per cent of GDP. There's no movement. 

 

TONY JONES: Can you explain your theory about tax cuts today? Because it seems to be you're saying that tax cuts don't really exist. 

 

PETER COSTELLO: No, no, no. I was taking objection to somebody who said, "You are spending money and including a tax cut as spend". I was saying, "A tax cut is not spending, tax cutting is very different!" 

 

KERRY O'BRIEN: But if you're not getting it, they're spending it in the economy. 

 

TONY JONES: That's right, it's coming out of … 

 

PETER COSTELLO: Well, the point I make is this Tony. The Australian budget in 2007/8 will be a surplus of around $10 billion, 1 per cent of GDP. Now, let's think about this for a moment. What other country in the world will have a budget surplus of 1 per cent of GDP? Will America? No. Will Britain? No. France? No. Germany? No. Japan? No. Can we think of another Western industrial country that will be in a position as strong as this? Not many. And there's a funny argument in Australia, in the United States, they run budget deficits of three per cent of GDP. We run a budget surplus of one per cent of GDP. It's a funny argument to say that that's a loose fiscal policy. You wouldn't get anybody around the world, anybody around the world that would look into Australia and say, "Gee, that's a loose fiscal policy". 

 

KERRY O'BRIEN: But they're all higher than us, so you want to be the education treasurer. They're just about all higher than us in terms of education spending. 

 

PETER COSTELLO: Well see, take the United States for example. The United States doesn't spend that much government money in its higher education sector, because it's mostly private. And these institutions like Harvard and Yale, they've got huge endowments. Harvard's endowment is about $28 billion. Now up until now, the whole university sector in Australia had $5 billion. As of tonight, they've got $10 billion. If we're re elected it will be a lot more than that. You're suddenly starting to put Australian universities on the map in the big time. 

 

KERRY O'BRIEN: But that's the business isn't it? That's not for the actual education, that's not for the teaching, that's not reducing the ratio of students to lecturers and so on. 

 

PETER COSTELLO: Well of course, we have recurrent funding that does all of that. 

 

KERRY O'BRIEN: But you're not boosting that. 

 

PETER COSTELLO: All of all that. Well we are Kerry, it's a $3.5 billion package. 

 

TONY JONES: But if this gets up to $100 billion at some point why shouldn't you spend it on professors, why shouldn't you spend it on keeping HECS low? One of the things that students want. 

 

PETER COSTELLO: Let's hope we have that problem Tony. 

 

TONY JONES: Would you like to have that problem? Would you like to be able to use it for these other purposes? That's… 

 

PETER COSTELLO: Let's hope we're sitting around here at some future point where we say what do we do with $100 billion? This is a problem I would like, Tony. 

 

TONY JONES: Let me just see, let's go back one step because we were talking about Ken Henry and you know what he said in his speech about expansionary fiscal policy. And I just want to know, will you take personal responsibility if there is, in the wake of these tax cuts, before or after the election, or soon after the election, an interest rate rise? 

 

PETER COSTELLO: Well, this is not a fiscal stimulus. This is not a fiscal stimulus. 

 

TONY JONES: Some people are going to disagree with that. 

 

PETER COSTELLO: Well, what we were saying last year? That the Budget surplus will be 1 per cent of GDP. What are we saying this year? It will be 1 per cent of GDP. Measured from year to year the Government is still saving the same amount. 

 

KERRY O'BRIEN: But you've said the last one a fiscal … wasn't putting interest rates in jeopardy, but the Reserve Bank differed with you. 

 

PETER COSTELLO: Well Kerry, I think you'll find that what happened during the year in relation to inflation was primarily affected by things like oil prices and other international pressures. 

 

KERRY O'BRIEN: But didn't the Reserve Bank finger government spending and tax cuts as a part of the reason why interest rates went up? 

 

PETER COSTELLO: Never. Never. 

 

KERRY O'BRIEN: Well, we'll have to go back and look (inaudible). 

 

PETER COSTELLO: In fact, I'll direct you to the testimony given by Ian Macfarlane who said when he went to international meetings, his fellow central bankers used to say to him we wish we could be as lucky as you. You know why? Because when Ian Macfarlane went to Central Bank Governors' meetings, he was there with Alan Greenspan or Jean-Claude Trichet from the Bank of France, they're all sitting around saying "What do we do about a three per cent budget deficit?" And he said, "I don't know because we've got a 1 per cent surplus. 

 

TONY JONES: Peter Costello, let's change course a bit. On climate change nothing earth shattering in this Budget, nothing in fact that reflects in fact the planet might be in serious danger. So, I'm wondering are you actually keeping your big ticket items for after your task force on carbon trading returns at the end of this month, its report? 

 

PETER COSTELLO: We have a suite of measures here. We have measures in relation to Low Emissions Technology Demonstration Fund. We have measures in relation to water. We have measures in relation to solar panels on houses, you know, practical stuff, real stuff. But having said that yes, we are getting a report shortly in relation to an emissions trading scheme and we'll announce our position on that after we've got it. Tonight was not the night to announce our response on emissions trading, so we will do that when we get it. Tonight was the night to fund Murray Darling Basin, the waterways, the Natural Heritage Trust, photovoltaics, low emissions technology demonstrations. 

 

TONY JONES: But a final question on that, because we know from what Ken Henry has said in his leaked and then finally published speech that the Treasury was saying for quite some time it wished people had listened more attentively to their climate change policy ideas, and I'm wondering was a carbon trading scheme one of those ideas way back in 2003? 

 

PETER COSTELLO: I think they were saying on water, I think that was in relation to the Murray Darling Basin. 

 

TONY JONES: It said water and climate change actually, and we never heard your answer on climate change, we heard your answer on water. 

 

PETER COSTELLO: Well, let me go on climate change. We have a task force during climate change. In fact, the person that's doing a lot of input is ex-Treasury, from Treasury, on secondment from Treasury. And look, I think trading schemes has got a lot going for it. 

 

KERRY O'BRIEN: No, no the question was… 

 

PETER COSTELLO: No, no… 

 

KERRY O'BRIEN: …was Ken Henry advising three or four years ago to go for a trading scheme? 

 

PETER COSTELLO: Let me tell you that Ken Henry's advice to me is always sound and consistent, and I think you'd find that results in all areas of economic policy would have exceeded his expectations. 

 

KERRY O'BRIEN: I think you're not going to answer the question. 

 

PETER COSTELLO: No, no, no, well that is the answer. If any Treasury Secretary … imagine you have a Treasury Secretary of the 80s or the 90s was told that you could have a balanced budget with no debt, they wouldn't have believed it feasible. 

 

KERRY O'BRIEN: You still haven't told us what his advice was on carbon trading. 

 

PETER COSTELLO: Well, I've told … no, no hang on, I've told you. No, no I've told you. I've told … no I have Kerry, with all due respect. 

 

PETER COSTELLO: I have told you that the Government has commissioned a whole of government report in relation to emissions trading which the Treasury is part of and which the Government will announce its response. 

 

KERRY O'BRIEN: The point is did the advice come from Treasury three or four years ago, in which case, why it did take you so long to act? That's the point. 

 

PETER COSTELLO: Well no, no, no. The advice is yet to come. Treasury is… 

 

KERRY O'BRIEN: No, the advice is from Treasury to you as Treasurer in 2003 or 2004. 

 

PETER COSTELLO: I can go over it bit by bit, the advice is yet to come. 

 

KERRY O'BRIEN: Right-o. You're flushed with money now, last question, but what happens when the resources boom comes off. You've made all the spending and tax cuts commitments which are of course ongoing. 

 

PETER COSTELLO: Well, I think Australians should have lower tax, and I make no apology for cutting their taxes. I've cut taxes for five budgets in a row. Our budget is balanced, we have no debt, we should reduce our tax burden, it'll make our economy stronger. Let me make the point… 

 

KERRY O'BRIEN: Very briefly. 

 

PETER COSTELLO: Yeah sure … most of the employment which is generating tax at the moment is not in the mining sector. Mining employment in mining is 1 per cent of employment in this country. 

 

KERRY O'BRIEN: It's the whole flow on effect. 

 

PETER COSTELLO: Most of it is actually in places like retail, wholesale, building and that, of course, goes to a balanced economy. 

 

TONY JONES: OK Peter Costello, we're going to have to wrap it up there. Thanks very much for coming to join us straight after your speech and we'll move on. 

 

PETER COSTELLO: Thanks Tony.