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Swan guarantees tax cuts -

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KERRY OBRIEN: Treasurer Wayne Swan has had some tough moments in Parliament over the past two weeks
but the next two months represent a much bigger political and economic hurdle.

Faced with the pressure of high inflation and rising interest rates, he has to come up with budget
spending cuts that provide enough pain to impress financial markets and the reserve bank, without
making voters too angry, not to mention his own Labor colleagues, while delivering the promised tax
cuts without being seen to add to inflation.

The Business Council of Australia underscored the pressures by calling today for an end to
profligate Government spending and 30 billion dollars of budget cuts over the next three years. I
spoke with the Treasurer late today from our Parliament house studio. Wayne Swan, how does it feel
to have been singled out by the Opposition as the Government's weak link in the Parliament?

WAYNE SWAN, TREASURER: Well, Kerry, I think I took something like a quarter of all questions in the
Parliament and I think it might have taken me an over or two to get my eye in. But I think I belted
a few to the boundary by mid-week.

KERRY OBRIEN: Which ones were they?

WAYNE SWAN: Plenty of them. Particularly on inflation. The neglect of the previous Government over
a long period of time to attend the inflationary pressures in the Australian economy. We have made
it very clear that we're going to deal with that problem. We took up responsibility for it on day
one and it put out our alternative plans. It just seems that in the Parliament the now Opposition
won't accept any responsibility for the inflationary pressures that this country is facing at the

KERRY OBRIEN: But just in terms of how the Parliament is scored by observers, you were certainly
scored down, were you not? And I guess, you've acknowledged that your performance in the Parliament
over the past two weeks hasn't been flash. Would you also acknowledge that you are going to have to
lift your game particularly with two capable aspirants into your job in Julia Gillard and Lindsay
Tanner, performing pretty well around you and looking over your shoulder?

WAYNE SWAN: I think people are sick of the sort of votively act that they saw from Peter Costello
over a long period of time. I think what the Australian people will pay on is performance. And
that's where the budget really matters because what Australians want is a Government that gets down
and gets the fundamentals right. And of course in recent years, as you can see from the BCA report
today, the fundamentals weren't right and in fact we've got to the point now where we've got the
highest underlying inflation in 16 years. That's the legacy left to us and that's what we're going
to deal with.

KERRY OBRIEN: The Business Council wants you to cut spending by more than 30 billion dollars over
the next three years. Is that doable?

WAYNE SWAN: Well certainly we've got a very big savings task ahead of us. I won't nominate a figure
except to say that we've said we'll be looking for a budget surplus of at least 1.5% of GDP. As you
know Kerry, during the last campaign we outlined $10 billion worth of savings and during this
budget process we will find more because the reckless spending of recent years has put up the
pressure on inflation and it falls to us to reign it in. And reign it in Kerry we will.

KERRY OBRIEN: But those $10 billion of cuts that you identified before the election, pretty much
were offset by the extra spending. In other words, those were about shifting spending priorities,
not dropping the budget bottom line. Credible economists are saying that a surplus of the size you
are talking about, that is, 1.5 per cent of thereabouts of GDP is not going to be that difficult to
achieve, partly at least because of the resources boom. Now there seems to be a consensus that
these cuts that you're talking about are going to have to cause pain in the community to have the
desirable effect, but if it's an easy process then there isn't going to be pain?

WAYNE SWAN: Well, Kerry there'll be nothing easy about this process. The previous Government was
budgeting for a surplus of 1.2 per cent. We're saying at least 1.5 per cent of GDP, and we're
saying we will bank additional revenue. We're going to let the automatic stabilisers in this Budget
work, unlike the previous Government who spent recklessly and put the Reserve Bank under tremendous
pressure. Under tremendous pressure because fiscal policy was simply too loose and the consequence
of that has been seven interest rate rises in the last three years.

KERRY OBRIEN: But whatever else flows into the Government coffers over this next 12 months, quite
clearly there's going to be a further big corporate tax windfall to you from the resources sector
by way of the huge increases in coal and iron ore prices that have been achieved by some of those
resources companies. Now is that windfall going to be on top? If and when that flows to you, is
that going to be on top of this 1.5 per cent surplus that you're going to create in the Budget?

WAYNE SWAN: That's exactly what I said, Kerry, we will bank additional revenue surprises but it's
by no means clear how large they will be.

KERRY OBRIEN: Spending under the previous Government included many tens of billions of dollars in
tax cuts. You supported most of those tax cuts from Opposition, and you're now going to spend
another $31 billion of tax cuts over the next three years, which really was as much a political as
an economic decision that $30 odd billion. How responsible is that in the light of the fresh
information that keeps pouring in about how high inflation is?

WAYNE SWAN: Kerry, what counts here is the total Commonwealth Government spend. The tax cuts are
very important. Very important to lift workforce participation, very important to provide incentive
for people to increase their skills. They are very responsible. But what we have to do is elsewhere
in the Budget find the savings that are imperative and find them we will. But I make no apologies,
no apologies at all for supporting these tax cuts. They are the reward for effort for a lot of
people who were left behind in recent years by the previous government. They deserve some incentive
in the tax system and they're going to get it from a Rudd Labor Government.

KERRY OBRIEN: There have been many, many billions of dollars of tax handed back to taxpayers since
you made, well, and you made your promise in the context of the previous Government. In a sense you
were politically matching each other dollar for dollar on tax. That's what I mean by it being a
political decision as much as an economic one. Why is it not responsible now to find some other way
of giving that money back that doesn't flow to inflation via for instance money into

WAYNE SWAN: Well Kerry, because we are facing very severe capacity constraints and we also have
skills shortages out there. We need to increase the labour supply. So measures in the tax system
that support increased labour force participation, encourage people to work additional hours and
reward them for it are a very important component of addressing the supply side problems when it
comes to labour and the economy. We are in the middle of labour shortages and a skills crisis.
These measures are a very important part of the solution. On the supply side of the economy that
was neglected by the Liberal Party for a long period of time and has produced this evaluated level
of inflation we're facing today.

KERRY OBRIEN: What is the evidence that these tax cuts will do what you say they will do? And, how
do you demonstrate that they are, at best, inflation neutral and that they won't feed into

WAYNE SWAN: Well, all the research shows it will increase labour force participation and along with
our child care initiatives they will do that, as well. So there's plenty of evidence out there. But
what we need to do, Kerry, is address the total Commonwealth Government Spend. It's not just what
we do on tax, it's what the previous government have been doing in a range of areas which produced
a reckless increase in spending over a prolonged period of time. What Lindsay Tanner and I are
doing is going through the Budget line by line, page by page to pull back that reckless spending.

KERRY OBRIEN: Is there no circumstance when it's more responsible to drop an election promise than
to keep it?

WAYNE SWAN: Kevin Rudd has made it very clear we will be keeping all of our election promises, and
that's what we'll be doing Kerry, on tax.

KERRY OBRIEN: Is there no circumstance where it's more responsible to drop a promise than to keep

WAYNE SWAN: Well, Kerry, we will be bringing down a responsible Budget which will have a
substantial surplus which will in effect withdraw Commonwealth demand from the economy through our
savings, and that will be the responsible thing to do.

KERRY OBRIEN: Wayne Swan, thanks for talking with us.

WAYNE SWAN: Good to talk to you.