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Economics Legislation Committee
Corporate Strategy and Services Group

Corporate Strategy and Services Group


CHAIR: Welcome, Dr Parkinson and officers from the Macroeconomic Group and the Corporate Strategy and Services Group. I would invite you to make a brief opening statement, if you would care to do so.

Dr Parkinson : I was not intending to make an opening statement as such, but—given the national accounts have come out today—I wondered whether it would be useful for Dr Gruen to give a bit of a run down.

CHAIR: I was intending on asking Dr Gruen before we open questions if he would give a run down on international economic developments, as they impact on Australia, plus any domestic developments that may impact on our economy.

Dr Gruen : Since it has been only three weeks since the budget, I think that has not been enough time for there to be too many significant developments that are worthy of note. But I am certainly happy to give a bit of a summary of the national accounts that came out this morning, because they are of interest. Let me do that.

The national accounts were released by the Bureau of Statistics at 11.30 this morning and showed that real GDP rose 1.1 per cent in the March quarter and 3.5 per cent over the year. This result was somewhat stronger than the market had expected. The March quarter accounts provide further evidence of the major transitions underway in the economy. New business investment fell modestly in the quarter.

The national accounts, along with the latest capital expenditure survey that was released just a few days ago, confirm that business investment in the resources sector is beginning to fall and is expected to decline significantly further of the coming financial year, while a modest pick up in investment is expected in the non-resource sector.

The volume of exports is ramping up strongly, rising 4.8 per cent in the quarter and 10.4 per cent over the year. That is the strongest outcome on both quarterly and through the year measures since September of 2000. The strength of particularly resource exports is consistent with the large contribution to growth contributed by the mining sector in the March quarter.

Dwelling investment also grew strongly by 4.7 per cent in the quarter and eight per over the year. Again, this highlights the extent to which other parts of the economy are taking the place of mining investment as contributors to growth. The terms of trade fell modestly in the quarter, continuing the trend that has been evident since the terms of trade peaked in 2011.

Along with the national accounts, results were also released for state final demand. Almost exactly a year ago, the national accounts for the March quarter of 2013 were released. They showed that state final demand for Western Australia had fallen for two consecutive quarters. On the basis of that result, the next day several newspapers reported that Western Australia was in recession. When Dr Parkinson and I appeared before Senate estimates on that day, we both explained that no such conclusion could be drawn from the state final demand outcomes because they ignored the exports that were being produced from the largest mining investment boom in Australia's history. The accounts released this morning again show that state final demand in Western Australia has fallen for the past two quarters. But, as we have seen, they also show that exports, particularly resource exports, are running at record levels. It is to be hoped that the newspapers tomorrow will have learned from the experience of a year ago and will not propagate the myth that Western Australia is in recession.

CHAIR: Thank you very much, Dr Gruen. You say that exports have grown strongly—the strongest growth since 2000. Is that because primarily because the mining phase is moving from the building phase into the export phase?

Dr Gruen : Yes, that is the predominant reason. The big picture is the one you just described. A small contributor to the fact that we have extremely strong growth is that the Bureau of Statistics does its best to seasonally adjust the data, and it is common to have cyclones in the March quarter. Export volumes are reduced in those March quarters that have cyclones. We did not have any significant cyclones, or probably any cyclones, in the relevant months this year. That means that the seasonal adjustment also tends to raise the level of exports in a situation where you did not have a cyclone. But the broad picture is just as you described it, which is that the huge increase we have seen in the capital stock in the mining sector—by our estimates we have had a quadrupling of the capital stock in the mining sector—is beginning to bear fruit, and we are seeing very large increases in mining exports.

CHAIR: Which is reflected in the fall in mining investment but the increase in the income being earned through mining exports.

Dr Gruen : Indeed.

CHAIR: You also noted that business investment in the non-resources sector is picking up, and you mentioned that that was part of the transition. What is leading that? You did note dwellings. What is leading that transition? What is leading the growth in other sectors?

Dr Gruen : I do not think we have had time to do a decomposition of the quarterly results other than from the capital expenditure survey that was released a few days ago. But the capital expenditure survey surveys firms for the next financial year as well as this financial year, and, on the basis of that data, it looks like a modest pick-up is a prospect for the next financial year for non-resource investment. That is business investment, not dwellings. Another part of the transition that is going on is strength in dwellings, and that came through very strongly in the March quarter national accounts.

CHAIR: That is new dwellings being built?

Dr Gruen : And alterations and additions to existing dwellings. Both of them contributed to growth.

CHAIR: Do we have an indication of the size of that growth?

Dr Gruen : Yes. Dwelling investment grew by 4.7 per cent over the quarter and eight per cent over the year.

CHAIR: So 4.7 in one quarter?

Dr Gruen : Yes, so it is strong.

CHAIR: Yes, absolutely. We might come back to some of that in the further questioning that we have, but I will move on to some more general questions. Dr Parkinson, I am in general referring to comments you made in a speech on 2 April to the Sydney Institute. In the context of that speech, how likely is it that the budget could be returned to surplus and the debt repaid through stronger economic growth alone?

Dr Parkinson : I laid out in that speech that, on current projections, we would have gone through an assumed 33 years of uninterrupted growth and that we would have held on to fiscal drag. That is the revenue that arises from people being forced into higher and higher tax brackets—

CHAIR: Bracket creep.

Dr Parkinson : even if their real income is unchanged because the tax brackets are not indexed. I noted that, had those two things occurred, we would still find ourselves, on the basis of the medium-term projections, in deficit in the region of about half a per cent of GDP in a decade's time.

Senator WONG: Can I just clarify something in that answer? When you say 'current projections', I just want to be clear what you mean by that. They are not the projections assumed in PEFO in terms of spending growth, fiscal rules et cetera; they are the government determinations in MYEFO and the budget. I think that is what your speech was based on.

Dr Parkinson : That is right. They were the projections at MYEFO. But, Senator Wong, it might be worth putting on the record now that there were two scenarios put down in PEFO. It is possible to create a third scenario by taking the capped revenue growth and the uncapped outlays growth. If you do that, you end up with a deficit in the region of half a per cent of GDP in a decade's time. There are differences in the levels and in some of the assumptions between MYEFO and PEFO, but the story can actually be extracted from PEFO. I just thought it was useful to make that point clear because a number of people have suggested that what was in MYEFO was inconsistent with PEFO. It is actually not; it is derivable from PEFO.

CHAIR: Thank you for clarifying that.

Senator WONG: Derivable, but not the set of figures that you chose, as Secretary, to sign off on?

CHAIR: Senator Wong, you will have your opportunity in a minute.

Senator WONG: If he wants to put a political point, then he is going to get a response.

CHAIR: Dr Parkinson and I have the call.

Senator Cormann: Senator Wong, we can have the political discussion later.

Senator WONG: The chair is asking the questions, so I am happy to defer.

CHAIR: Thank you for clarifying. The figures, as you say, in MYEFO are not inconsistent with that which was in PEFO on the basis of your explanation.

Dr Parkinson : They are not identical because there were changes that were made to some of the methodologies when the new government was elected, but the story is broadly similar—that, at the end of the decade, you can from PEFO derive a situation where you have a deficit in 10 years time.

CHAIR: Did you finish answering the question that I asked?

Dr Parkinson : You asked the question of how we could get back there through growth alone. I pointed out that, to do that, we would need growth in excess of five per cent per annum. That compared to our potential growth rate of three and our near-term forecasts of under three per cent growth.

CHAIR: So you require about 5¼ per cent, as I believe you said in your speech.

Dr Parkinson : Yes, 5¼ was the number.

CHAIR: You also say—I am looking at an excerpt from your speech—that, even with a net immigration intake of a quarter of a million a year, annual potential growth slows from its current estimate of around 3¼ per cent to around three per cent for most of the next decade. That is basically what you just said then. Is that correct?

Dr Parkinson : That is correct. That is assuming that we get the sort of productivity growth rate that is consistent with our long-run average. Obviously, with an ageing population it is possible that our structural productivity growth rate could be driven down, even though we may get a cyclical improvement because people are trying to strip costs out of the economy.

CHAIR: It makes assumptions about certain things continuing and, in reality, there is some risk to the likelihood of them continuing, because of the structural issues?

Dr Parkinson : That is right.

CHAIR: What are the constraints on the Australian economy achieving sufficiently strong and sustained economic growth?

Dr Parkinson : You just have to look at the drivers of growth in the longer term. They are all on the supply side. It is the old 'three Ps'—population, participation and productivity. With an ageing of the population, the participation rates—even though we have seen for any particular age group amongst people from their 40s onward actually increase, so any age specific participation rate increase, the size of those cohorts is such that the aggregate participation rate is likely to fall. So even with very significant immigration you are not going to get an increase in labour supply coming through that will help bolster your growth rate. The question is: over the decade as a whole, does labour utilisation actually detract from living standard growth, or is it broadly neutral? That will basically be a function of the extent to which immigration is able to offset some of the impacts of an ageing population. The one thing you can be fairly sure of is it is not going to contribute anything significant to growth.

The other main driver, therefore, of GDP growth, at least the supply side analysis of it, has to be productivity growth, and there I have shown in a number of speeches that, given the likely developments in labour utilisation and the terms of trade, it is likely that if we simply get our long-run average productivity growth rate we will see living standards growth fall from around about 2¼ per cent per annum, which is where it has been over the last two decades, to something below one per cent per annum—something in the region of three-quarters to one per cent a year. Turn that around and say well if you wanted to get the same growth in living standards that you have had over the last 20 years what would productivity have to do? It would have to double. So we would need to see not just in a cyclical, not just in a short-term sense, but we would need to see permanent change in productivity such that we were seeing labour productivity growth of three per cent per annum.

CHAIR: Given the nature of the structure of the Australian economy, what would need to happen to deliver a doubling in productivity growth?

Dr Parkinson : You would have to take quite bold action in almost every area that has even been raised as a source of inhibition on our productivity growth. That would go to regulation, it would go to innovation, it would go to human capital of the workforce, it would go to industrial relations issues, it would go to infrastructure. Literally anything that has ever come up would need to be done, and then you would have to overlay on top of that a lot of innovation. Could you get there? It is not impossible, but it is pretty hard to see how that would happen.

CHAIR: So conceivably a courageous government could deliver some of that but to deliver all of it would be a big challenge.

Dr Parkinson : Governments can deliver some of it, but at the end of the day remember that productivity is the outcome of decisions taken by firms and workers. Governments can create the enabling environment for which those decisions are taken and they can create incentives, but at the end of the day governments cannot actually deliver that productivity.

CHAIR: They can set the regulatory and legislative environment.

Dr Parkinson : They could set the framework, yes. And I should also say that even in a situation where action was taken in all of those areas it still would take quite some time for that to show up as measured improvements in productivity—as we saw during the early 1990s.

CHAIR: So those are the broad view of the constraints on the Australian economy in being able to achieve sufficiently strong growth to try to get us out of the debt situation through growth.

Dr Parkinson : No, that last bit I was answering was in terms of growth and living standards.

CHAIR: But it would contribute.

Dr Parkinson : Yes. Equally, if you wanted to grow the economy at 5¼ per cent for a sustained period of time you would have to recognise that you would eat up the output gap very quickly, that would generate rising inflationary pressures, that would have implications for monetary policy, and so it would be very hard to see how you could do that.

CHAIR: Given those constraints, it is very hard, as you say—to use your words—to see how that could be achieved.

Senator Cormann: There is no way past savings—

CHAIR: That was going to be my next question: what other options are there?

Senator Cormann: which reduce spending growth trajectory if we want to get the budget back into balance.

CHAIR: In the absence of economic growth providing a solution, what are our options?

Dr Parkinson : There are essentially two options. One is you raise additional revenue, and then you have to think about the consequences of where that revenue might be raised from. As I said in the speech, if you look around the world, the pressure is for corporate tax rates to be lowered. The projections assume that you hang on to another 10 years of fiscal drag. The consequence of that is that a person on average weekly ordinary time earnings would go into the second top tax bracket in 2015-16. By the time you get to a decade out, their tax burden—so the total share of their income going in personal income tax—would have risen from 23 per cent to 28 per cent, or almost a quarter.

I will put it this way. If you go out tomorrow and say to the Australian public: 'We're going to increase your tax burden by a quarter overnight,' what sort of reaction are you going to get? You are going to get very significant behavioural responses and people starting to change their participation behaviour, and that would have implications for growth anyway.

CHAIR: If it happens over time through bracket creep, then that might not happen,

Dr Parkinson : It sneaks up on them.

CHAIR: It sneaks up on them, but they notice cost of living pressures and things like that.

Dr Parkinson : But the marginal tax rate is quite apparent to them, and so that has very negative impacts on participation particularly of second earners, the people who might be working less than full time—essentially the ones you are trying to coax into the workforce or encourage to remain there. So it is, of course, open to any society to decide to do that. But to me, in a situation of an ageing population, it is hard to see that it would be either—I think this is the language I used—politically feasible or economically desirable to move the average worker into the second highest tax bracket and have them continue to creep up and their average tax burden rising.

The other option is on the outlay side. If you believe that the issue is that outlays growth has outstripped real GDP rates so that outlays are taking a greater share of the real resources in the economy, then you have got to act on the outlay side. Then inevitably, when you start to act on the outlay side, you have trade-offs, in the same way as you have trade-offs on the tax side.

CHAIR: So there is no easy answer. But, when it comes down to it, it is not going to happen organically through growth, or that is very unlikely.

Senator Cormann: I can point to a particular number out of the Commission of Audit report, which pointed out that the spending growth trajectory we were on would have taken us to spending as a share of GDP of 26.5 per cent by 2023-24. If we all agree that the objective ought to be to have balanced budgets, then obviously the only way you would be able to balance a budget where spending is 26.5 per cent of GDP—

CHAIR: Is to increase revenue.

Senator Cormann: is if revenue overall is at least the same, if not slightly higher. Obviously, as the secretary pointed out, leaving aside the politics of having to raise taxes to that extent, the impact on the economy would be highly undesirable—the impact on unemployment et cetera. So there is no path when it comes to fiscal consolidation without significant adjustments to the spending growth trajectory moving forward, which means spending less than what perhaps in the past we thought we might want to spend.

CHAIR: Coming back to the productivity matters, what are the consequences for Australia's standard of living if we do not take the actions to lift the rate of productivity growth? Obviously it is going to be lower. What does that mean on the ground at a practical level? How will people feel that?

Dr Parkinson : Basically, what they would see is their living standards increase more slowly than they have been used to. As Professor Garnaut has pointed out in his most recent book, if the terms of trade in fact fall faster than we have been projecting, then you could have years when living standards actually fall. Indeed, living standards fell last year, 2012-13, because of the fall in the terms of trade. In a one-off, people might not see it, but, with a sustained number of years where living standards fall, then one would imagine the Australian public would respond with demands on government to do something.

CHAIR: What that means in practice for your average Australian would be that their purchasing power, their ability to buy the things they need to live, would fall.

Dr Parkinson : That could show up in a range of different ways, and probably in all of them. Wages growth could be slower, the price of imported goods would be higher and, overall, their capacity to purchase goods and services to improve, in the way they have become used to, would be diminished. In the years when living standards fall, obviously their overall purchasing power would fall.

Senator Cormann: This really goes to the heart of why we have delivered the budget we have delivered. If we are to protect living standards into the future, if we want to build opportunity and a more prosperous future, we have to make sure we get the spending growth trajectory under control now so that we do not have to make more drastic and more difficult, tougher, decisions down the track. If we do not make these decisions now to get us back onto a more sustainable, more realistic and more affordable spending growth trajectory, it will lead to the sorts of outcomes that the Treasury secretary has flagged.

Senator WONG: Dr Parkinson, there is quite a lot I could ask you after the minister's add about the budget sell. I will just confine my—

Senator Cormann: I was just putting some context around it.

Senator WONG: It was a political statement, which you are entitled to make.

Senator Cormann: It was a policy statement.

Senator WONG: No, it was a political statement, which you are entitled to make.

CHAIR: Senator Wong, we are not here to debate. If you make statements, the minister will respond; if you have questions, he will answer them.

Senator WONG: Dr Parkinson, I do not wish to traverse a lot of what you have just said in detail. We went through in detail at the last estimates, with Mr Ray and Mr Tune, about the government choices around assumptions in MYEFO. I have many other questions rather than retraversing them. You have now put a different spin or a different analysis or a different version, and that is entirely a matter for you. The only point I would make is that you signed off in PEFO in, I think, appendix F, on two scenarios, both of which had net debt returning to zero around 2020-21 or 2023-24. You chose to make those the scenarios that you included in the PEFO.

Dr Parkinson : Mr Tune and I chose to use those.

Senator WONG: Sorry, yes—you and Mr Tune. Firstly, the reduction in the indexation to schools and hospitals is the centrepiece, really, of this budget. When did you become aware of that decision?

Dr Parkinson : Mr Ray is here.

Senator WONG: I am asking you personally.

Dr Parkinson : I cannot tell you what the date was, but it was during a process when ERC were considering a set of policy proposals being put to them. On what specific date it was—I am not dissembling, I cannot actually tell you.

Senator WONG: That is fair enough. If you cannot give us an approximation obviously you are entitled to take it on notice.

Dr Parkinson : I am happy to take it on notice.

Senator WONG: There was a bit of a discussion about spending reduction et cetera. You would agree, wouldn't you, Dr Parkinson, that where you choose to reduce expenditure and how you choose to manage your revenue base are policy choices and political choices?

Dr Parkinson : Absolutely. I think I have said before, my role is to highlight some of the choices available and some of the challenges, but it is the political process that determines what those choices are.

Senator WONG: There is nothing in your advice that demands, for example, that a half a billion dollars be taken out of Indigenous programs or that people under 30 are asked to live without income after six months if unemployed or that we take $80 billion out of Australia's hospitals and schools and rip up national agreements—correct? Those are political choices.

Senator Cormann interjecting

Senator WONG: I am making the point—

Senator Cormann: No, you are asking questions.

Senator WONG: they are political choices for government—correct?

Senator Cormann: Senator Wong, I will interpose myself here because you are asking questions about choices made by government, as you quite rightly pointed out.

Senator WONG: I am surprised you do not think that he can answer this, Mathias. He is quite capable of answering this.

Senator Cormann: What I want to put on the table for the consideration and the information of the committee are the circumstances that we have found as we had to make those choices. The circumstance that we found was that over the medium term the spending growth trajectory that we inherited was essentially 3.7 per cent real growth on average over the medium term—

Senator WONG: This is with the inclusion of the GFC just so we are clear about this. It includes the stimulus package.

CHAIR: You can ask him a question about it in a minute.

Senator WONG: He is making a statement that is non-responsive to a question that I asked of Dr Parkinson.

Senator Cormann: We know that the previous government kept focusing on its fiscal rule of two per cent real growth per annum. The point I have got a make here, Senator Wong, to put some context around what you are asking and the line of questioning that you are putting to the secretary is that after all of the savings decisions that we have made in this budget, we have only been able to reduce the spending growth trajectory over the medium term from 3.7 per cent on average per annum to 2.7 per cent on average per annum, which means that we are still way short of the two per cent limit that is supposed to be imposed on real spending growth year on year.

What I would say to you is: if you wanted to deliver on limiting real spending growth of two per cent year on year from now until 2024-25, after all of the savings that we have initiated in this budget, you would have to find another $117 billion of savings. That includes after we have made judgements in relation to a more realistic funding growth trajectory in terms of funding for hospitals, a more realistic funding growth trajectory in terms of funding for schools. The funding promises that you put into the out years that were never reflected in the budget forward estimates, they were only just aspirational, unfunded promises; they were never actually reflected in hard numbers in the forward estimates period. The decisions that we have had to make were decisions that would put Australia back onto a more sustainable spending growth trajectory.

But the point I make to you is: if you really believe that the two per cent limit in terms of real spending growth by government is an important limit—and a limit that you have often talked about—we are still, after everything that we have done, 0.7 per cent away from that on average per year over the medium term. That is just an important bit of context and it shows that just articulating and saying that there is this rule of limiting spending to two per cent growth in real terms year on year—it is one thing to say we have got this rule, it is quite another to make the difficult decisions required to get to that trajectory. I would just make that final point again: after everything that we have done, spending growth on average over the medium term is still up at 2.7 per cent. So you really have to tell us where the $117 billion worth of savings will come from to take you down to two per cent. In fact, if the spending growth trajectory that we have inherited at 3.7 per cent over the medium term—if you extrapolate that, if you project that forward, you will see that there is a $282 billion gap to 2024-25 between that and a two per cent projected growth trajectory in real terms over the same period.

Senator WONG: Dr Parkinson, I think I asked you whether or not the examples I put to you were political decisions?

Dr Parkinson : Senator, all decisions involve choices. They are choices made by government and are then endorsed or changed or rejected by the parliament. I suppose the one thing I would say is that in the bit over three years I have been secretary I have been consistently saying that there are two gaps here that need to be addressed. The first is the gap between community expectations and what governments can realistically do, and that requires a frank community wide discussion to reset expectations. The second is the gap between what citizens want from government and what they are prepared to pay for those services. They are ultimately the issues that need to be addressed by anybody who is in government.

Senator Cormann: And just to correct—the 3.7 per cent average growth year on year over the medium term did not include the GFC as you just asserted.

Senator WONG: It was so much better when Senator Sinodinos was here. Notwithstanding the ICAC problem, as least we got questions up. Can we bring back Arthur—even if he is conflicted?

Senator Cormann: It is a very important correction because what happened after the GFC is that you dramatically increased spending. You started from a higher base and the 3.7 per cent growth trajectory over the medium term is future growth. It is future growth on top of what was an elevated base, the debt you left behind after your spending growth decisions post GFC.

Senator WONG: Dr Parkinson, there are a few things I do want to ask you, some of which have got a bit of public attention. I am giving you the opportunity to clarify what occurred. But before we get to the famous dinner, I did want to ask about the famous pic fact where I think there was an appearance of you and the Treasurer, which was not just a photograph but was actually filmed and so there was some conversation which ran on the news and so forth. I just wondered if you could let me know when you were asked to participate in that?

Dr Parkinson : This the one in the Treasury on the weekend before the budget?

Senator WONG: I think so. There was a little chat and I think you said something like structural reforms or something. It was a slightly awkward conversation between you and the Treasurer, but that is fine. I did not see it myself at the time—I have seen it since—so your memory might be better.

Dr Parkinson : You did not miss anything, Senator. It was probably just a couple of minutes before it happened.

Senator WONG: A couple of minutes before?

Dr Parkinson : Yes.

Senator WONG: It did strike me as unusual. I do not recall other footage in the context of budget preparation where a public servant or the Secretary of Treasury has been asked to be filmed. There may have been photographs occasionally—I do not recall.

Dr Parkinson : There may well have been film without sound.

Senator WONG: Correct. So were you aware that you were being filmed and taped?

Dr Parkinson : I was when it was happening, yes.

Senator WONG: And you did not regard that as unusual?

Dr Parkinson : Senator, I have been around for a long time and I have seen a lot of things that have become usual which earlier in my career would have been unusual. So I did not think this was anything different to that sort of process, but I was not aware that I was going to be filmed until just before it occurred.

Senator WONG: Is it your evidence—I think it was—that you do not recall a Treasury secretary being asked to do that with a Treasurer previously?

Dr Parkinson : I will put it this way: I cannot recall, and I know that, in the period that I have been Treasury secretary, that had not happened previously. There have been many times when treasurers and secretaries have been seen sitting with their sleeves rolled up—in fact, there was a quite famous one when Mr Rudd was Prime Minister the first time, with the Treasurer and Secretary Henry in the cabinet room.

Senator WONG: But I think, as you said, perhaps what made this unusual was it actually being taped.

Dr Parkinson : I think what made it unusual for me is that I am not very good in front of the camera—

Senator WONG: I think you sell yourself short, Dr Parkinson!

Senator Cormann: I remember quite a bit of footage, actually, of former Prime Minister Rudd with various senior officials and former Treasurer Swan with various officials—for example, in the cabinet room. It might not have been in the context at that time of the budget cycle, but I do not think it is unprecedented, Senator Wong, for senior ministers to be seen in public with senior public servants. I do not think there is anything unusual about that at all.

Dr Parkinson : No, and I was not suggesting that there was anything unusual.

Senator Cormann: No, it is Senator Wong's interpretation.

Senator WONG: I trust, Chair, that the time for the opposition's questions will be expanded to take account of the War and Peace answers that we are getting from the minister. Pithy he is not.

CHAIR: I will endeavour to give you a reasonable amount of time to ask your questions.

Senator WONG: I appreciate that. Dr Parkinson—

Senator Cormann: And the less political commentary there is, the less interaction there will be from me. I am quite happy to sit back.

Senator WONG: It was a literary allusion. How is that a political commentary? I just suggested you were a bit like a Russian author in how quickly you got the point. My apologies to Russian authors.

Senator Cormann: I am just putting you on notice that every time there is political commentary from the former Labor minister for finance, I will intervene.

Senator WONG: I am trying to ask a question at some point.

CHAIR: I think you should listen to what he is actually saying there. There was a point in that, but your question, please.

Senator WONG: If there was a point in it, I think everyone had stopped listening, but anyway. Dr Parkinson—

Senator Cormann: Talk for yourself.

Senator WONG: I confess I had stopped listening, and I would suspect—

CHAIR: We are descending into debate again. Please, questions.

Senator WONG: I am trying to ask a question. Dr Parkinson, you said you were aware two minutes before. Who was that communicated—

Dr Parkinson : A few minutes before.

Senator WONG: A few minutes before, I apologise.

Dr Parkinson : I was in my office and asked to come around by the Treasurer and there would be a photo taken. There was going to be a pic fac. I had not anticipated that we would be filmed, because I assumed it would be stills. Even then, I had not anticipated that there would be sound.

Senator WONG: By whom was the request communicated?

Dr Parkinson : I think it was the Treasurer's chief of staff.

Senator WONG: So the Treasurer's chief of staff came to see you in your office in the Treasury?

Dr Parkinson : One of the Treasurer's staff. I had intended to go around and see the Treasurer. The Treasurer was going to be free. He said, 'Why don't you come around now? There will be a pic fac. Do what you need to do then.'

Senator WONG: I appreciate that you were put in this position. Do you think, in hindsight, that it might have been perceived as a little more political than you might have anticipated when you agreed to do it?

Dr Parkinson : No, I do not think so.

Senator WONG: I was just going to get to the duck. The duck.

Senator HEFFERNAN: The duck? Dinner.

Senator WONG: Yes. Where have you been?

CHAIR: Senator Wong has the call.

Senator WONG: Jokes aside, Dr Parkinson! Your dinner with Mr Turnbull and Mr Palmer and Mr Harley, I think, has obviously elicited some attention and I thought I would give you the opportunity perhaps to be clear about how it occurred. I understand from public reports that it was a chance meeting with you in the car park which led to your attendance in this diner. Is that right?

Dr Parkinson : That is correct.

Senator WONG: And I do understand however from some comments by Mr Turnbull that the budget was a matter of discussion at the dinner.

Dr Parkinson : So I get this on the record. It was the night of the Minerals Council dinner.

Senator WONG: Did you leave the MCA dinner early, Dr Parkinson?

Dr Parkinson : No, I never got there. And, indeed, I realised around mid-afternoon that I was not going to be able to get to the dinner prior to the Prime Minister commencing to speak and so I thought it was probably politic to withdraw, which I did.

Senator WONG: It is probably not a good look to walk in half way through the speech!

Dr Parkinson : That was conveyed to the organisers. As it turned out, I was here in Parliament House. After meetings I ran into—

Senator Cormann: Sorry, could I just ask: is this related to the budget in any way, Senator Wong?

Senator WONG: I have asked a question, Senator.

Senator Cormann: Yeah but I am just asking the question of the chair, though. I mean these are Senate estimates—the Economic Committee—to deal with the budget, and you are asking questions about banana split—

Senator WONG: I do not have a lot of questions—

Senator Cormann: and ice cream.

Senator WONG: I did not ask about any ice cream. Can I just be clear, Chair, just for the minister's benefit: unlike the opposition, sorry the government, which spent, I think, some two hours discussing a particular former minister's book in the other estimates—

Senator Cormann: I have never asked questions—

Senator WONG: No, you have not. I do not intend to spend a lot of time on this. But I did think it was, and I think Dr Parkinson has said he was, putting some stuff on the record. Why don't we just let him finish?

Senator HEFFERNAN: I want to talk about the gutless attitude of the G20 nations in not dealing with revenue leakage—

CHAIR: Senator Heffernan, order! Now in response to your comments, Minister. Senator Wong is entitled to ask whatever questions she chooses. If the people on your side of the table decided that that is an inappropriate question then that is something that you can entertain in your answer. But Dr Parkinson at this point is answering the question and I will allow him to complete it.

Dr Parkinson : I will be brief. I was in conversation with one of my secretary colleagues in the basement in Parliament House about some issues that were relevant to both departments. That conversation finished, I went over to get in the car. Mr Harley called out my name. I have known Mr Harley as a prominent business person for many years, and I had a chat with him. He and Mr Turnbull invited me to dinner. I said, 'Look, I've got a range of things I've got to do,' and they said, 'You've got to eat at some stage'. I went back—

Senator HEFFERNAN: Did you—

CHAIR: Dr Parkinson, please ignore the interjections. Senator Wong has the call.

Dr Parkinson : I went back to the department. Some time later I joined Mr Turnbull, Mr Harley and Mr Fast at Wild Duck. We ordered for four people and we were already eating when Mr Palmer arrived. I had no knowledge that Mr Palmer was joining us. Mr Palmer sat at one end of the table, between Mr Harley and Mr Turnbull, and I sat at the other end of the table in conversation predominantly with Mr Fast.

Senator WONG: There are various protocols for departmental officers dealing with non-government members of parliament et cetera. But you did not regard this as one of those occasions given the, I suppose, informality of the—

Dr Parkinson : It was informal. As I said, I have known Mr Harley for many years. I have known Mr Turnbull in various guises over quite some time. I had never met Mr Fast before. He and I were having a very interesting discussion about, of all things, corporate governance. Mr Palmer was sitting at the other end of the table. We made a few general comments about the budget. I had never met Mr Palmer before. He asked me about my background, and I told him. That was pretty much the sum total of the discussion.

Senator WONG: In terms of the general comments about—

Senator Cormann: On the day the national account has been released, the line of questioning the opposition is pursuing is about Dr Parkinson's private dinner arrangements. Is this the best the opposition can do on the day the national account has been released and when we are dealing with what is an important, although difficult, budget?

Senator WONG: You have been doing this all day. Well, Minister, I am very happy to ask many other questions.

Senator Cormann: I would love it if you asked some real serious policy questions. I would love it if you asked some questions about the budget.

Senator WONG: Chair, how can you let him do that and then not respond? You cannot expect—

CHAIR: Senator Wong, if you couch your response as a question then we can proceed.

Senator WONG: I intend to. I would ask the minister to stop making political statements. We would have got through this many minutes ago if he had—

CHAIR: I am yet to hear a question.

Senator WONG: I am asking the minister if he would just let me finish asking my questions and let Dr Parkinson finish answering them, because then we can get—

Senator Cormann: On behalf of the government, I am using my prerogative—

Senator WONG: You see? You cannot help yourself, Mathias.

Senator Cormann: to provide the government's perspective. I would put it to you that this is not a serious line of questioning.

Senator WONG: It would have been over—

CHAIR: You did ask him a question.

Senator Cormann: You asked me a question—

Senator WONG: It would have been over if you were not giving this lecture.

Senator Cormann: I am answering your question. You might not like the answer that I am giving to you. What I am saying to you is that, on the day the national account has been released, on the day that we were supposed to deal with the macroeconomic challenges and opportunities we are facing as a nation and on the day when we should be dealing with the merits of the budget that we have delivered to protect living standards and to build opportunity and prosperity into the future, the best you can come up with is asking questions about who Dr Parkinson had dinner with and who he did not. Honestly, is this the best that Bill Shorten's opposition can do at this point in our national history? Really?

Senator WONG: Dr Parkinson, I only have one last question. You said that there were some general comments about the budget but I am assuming from what you have said that you did not regard this as a proper briefing or—

Dr Parkinson : No, not at all.

Senator WONG: You were not being asked to brief Mr Palmer by Mr Turnbull or anyone else in any way?

Dr Parkinson : No, absolutely not.

Senator HEFFERNAN: Mr Secretary, are you aware of the US budget deficit position?

Dr Parkinson : Yes, I am.

Senator HEFFERNAN: What is it?

Dr Parkinson : It has come down from—a very significant—close to 10 per cent of GDP to around three—

Senator HEFFERNAN: Can you give me a dollar figure as of June last year?

Dr Parkinson : I can take that on notice.

Senator HEFFERNAN: Could you have a rough crack at it?

Dr Parkinson : No.

Senator HEFFERNAN: My understanding, and I have got my head into the transfer pricing derivative swap, all that smoke and mirrors money, is the market is well ahead of legislation globally, and there was the $3 trillion of tax avoidance involved in transfer pricing in eight of the Group of 20 nations last year. It amazes me that in this building we are dogging each other to death about whether we will add GST or we will do this or that, when the US's position—and it is hard to estimate the precise position—as I am instructed from their people, is there is somewhere between $750 billion and $900 billion of revenue leakage in this market. I wonder what that would have done for their budget deficit had they collected the money.

Dr Parkinson : Assuming that that is a leakage each year and it is collected. It would—

Senator HEFFERNAN: That was last financial year.

Dr Parkinson : Yes. Presumably it would reduce the budget deficit by—

Senator HEFFERNAN: Would it bloody near have brought it up to manageable—

Dr Parkinson : Sorry, I missed what you said.

CHAIR: I talked about your language yesterday.

Senator HEFFERNAN: 'Bloody'?

CHAIR: Unparliamentary.

Senator HEFFERNAN: Oh, is it? Bloody hell!

CHAIR: I consider it so.

Senator HEFFERNAN: Is there a plan? I have been giving our mob a hard time. As you know, I had Swanny and your Treasury officials in my office on this. It seems to me that everyone says 'Yeah, we know it's there'—a bit like some of the business that has gone on in the churches for 50 years and the Royal Commission is now discovering what we have been saying for 50 years is true. This revenue leakage is actually going to redefine sovereignty of the Western world, or the Group of 20, at least, if we do not come together as a group of nations and fix it. Aren't we sort of playing with ourselves unless we bring our minds to fix this problem?

Dr Parkinson : It may have slipped your attention, but the Tax Commissioner has for some time been attempting to—in fact, since—

Senator HEFFERNAN: It has not slipped my mind, by the way.

Dr Parkinson : Let me finish. He has been working with his counterparts in other countries. G20 members have committed to greater exchange of tax information to help the relevant tax authorities, and indeed a key part of the G20 tax agenda for this year goes by the name of 'base erosion and profit shifting'. The whole intention is to try and land by September about half of a work program that was intended to be landed by the end of next year.

Senator HEFFERNAN: Which is why I am talking about this today. I just want the opposition, the government, the Greens, everyone, to know that, unless we fix this problem, the Western world as we know it, defined by sovereignty, is not going to exist in the future.

Dr Parkinson : I do not want to go to that.

Senator HEFFERNAN: You do not have to give an opinion.

Dr Parkinson : It is clearly an issue that was recognised in our G20 agenda. It is something that Prime Minister Cameron and Chancellor Merkel and numerous other leaders have focused on. Partly, what you are seeing is a situation where technology has moved and the underpinnings of the legislative processes have not, so double tax agreements are still based on the idea, essentially, that you build something and you send it somewhere or you grow something and you send it somewhere. But, when a lot of it is actually digitalised information or digitalised services, where it is constructed or produced is not something that our existing legal basis of our tax system covers very well.

Senator HEFFERNAN: You are the head of the thinkers in Treasury. It seems to me that the sums progressively are not adding up. I do not understand why over the last five years we have not been bashing our heads, determined to do something about this.

Dr Parkinson : We have. You may recall former Assistant Treasurer Mr Bradbury—

Senator HEFFERNAN: Yes, I am aware he is across it.

Dr Parkinson : I think his term was 'double-Dutch-Irish sandwich'—

Senator HEFFERNAN: That is the least of it.

Dr Parkinson : No, where he laid out how some of this was actually occurring. Indeed, Mr Bradbury's expertise is being recognised by the fact that he is now at the OECD working on tax matters. There is a widespread push to try and address this.

Senator HEFFERNAN: But not at the public level. I have just come from the press thing today with John Howard and Hawke. Both of them said that part of the government's way of doing business is to inform the public. I do not think the general public, especially in Australia, understands that, if we tax them 70 per cent of their income, it might offset the culture and the understanding in the multinational world. There is an understanding that you pay little tax, it will go to the bottom lines of profit and it will increase the share price. We allow companies to charge Australia $260 million for IP technology licensing back to Switzerland or somewhere. I mean, give us a break. Why don’t you guys publicise this to the Australian public? We have been ripped off. The US is technically insolvent. Do you understand that, Minister?

CHAIR: Senator Heffernan, you might provide the officer an opportunity to answer.

Senator HEFFERNAN: Sorry.

Dr Parkinson : Senator, the US is not technically insolvent.

Senator HEFFERNAN: If interest rates were not at near zero, they would be.

Dr Parkinson : Senator, the US does not technically—

Senator HEFFERNAN: Can you tell me how much they borrowed from their own—

CHAIR: Senator Heffernan, you have posted a number of questions. Allow the officer to answer.

Dr Parkinson : The US is not technically insolvent, but—

Senator HEFFERNAN: [inaudible]

Senator Cormann: Senator Heffernan, Dr Parkinson is providing expert—

Senator HEFFERNAN: Dr Parkinson, are you aware of the US government borrowing from their own pension fund?

Dr Parkinson : Yes, I am, Senator.

Senator Cormann: Senator, this is not an exam. Honestly. Obviously Secretary Parkinson's responsibility as secretary of the Treasury is to provide advice to the Australian government. I am not sure that you ought to run through the ins and outs of the American budget and American government decision making. We ought to focus on the 2014 budget here in Australia.

Senator HEFFERNAN: I agree, but, Minister, my argument is that some people say, 'We're all right compared to the US.'

CHAIR: Order, Senator Heffernan!

Senator HEFFERNAN: A final question.

CHAIR: You are not here to make an argument; you are here to ask questions.

Senator HEFFERNAN: My final question: what are the borrowings of the US government from their own pension fund?

Dr Parkinson : Sorry, if I may finish. I have actually addressed, in a range of speeches and presentations over the last three years, the US fiscal situation. Indeed, Dr Gruen filled in for me at European Australian Business Council luncheon last year, where I think we talked about his very issue. I had come down ill. So this is not news to us.

Senator HEFFERNAN: Yes, but I would just like to know—

Dr Parkinson : This is like asking me whether I know the price of a loaf of bread. It is cheap and I do not know what you think you would gain from it. The point is—

Senator HEFFERNAN: I think the Australian government—

CHAIR: Senator Heffernan!

Dr Parkinson : This is a serious issue and there are serious people working—

Senator HEFFERNAN: It certainly is the most serious issue.

CHAIR: Senator Whish-Wilson now has the call.

Senator WHISH-WILSON: Thank you.

Senator HEFFERNAN: Anyhow, the figure is $5 trillion.

Senator WHISH-WILSON: Thanks, Chair. Dr Parkinson, I had a look at the Parliamentary Library's summary of your budget last year and just wanted to say you get a gold star. Two things you predicted were a big increase in exports in the next 12 months and a rise in dwelling approvals. I am interested in Treasury's comments on the significant fall-off that we have seen in consumer confidence in the last five weeks in the country. What impact do you expect that to have on household consumption and household income?

Dr Parkinson : I might invite Dr Gruen to take that question.

Dr Gruen : I have a chart which could be of help in discussing this. I am happy to pass it across—

CHAIR: Are you happy to table it?

Dr Gruen : I am happy to table it. I have several copies, so I am happy to pass them over. I will just wait for the chart to be handed across.

Senator Cormann: It is good that the Greens are asking questions about the economy and the budget.

Senator WHISH-WILSON: Don’t you worry. I know a fair bit about them, Senator Cormann.

Dr Gruen : Has everyone got the chart? This simply shows the best-known measure of consumer sentiment—the Westpac-Melbourne Institute measure—going back two decades. It draws attention to the fact that it is quite common for there to be a fall in consumer sentiment after budgets. There was a fall in consumer sentiment after this budget which was of a similar magnitude to the fall after the budget last year, in the month of May when the budget is traditionally brought down. There was a series of months in which consumer sentiment fell by this order of magnitude. As you can see from the chart, consumer sentiment is reasonably volatile—it bounces around quite a lot. The other thing that you should be aware of is that, although it generates quite a lot of interest, there has been a fair bit of work that shows that, once you control for the background economic environment—by which I mean the level of GDP growth, interest rates and those sorts of things—consumer sentiment does not help very much at all in predicting consumption. It is something of interest and it certainly generates headlines in newspapers. I am not going to say it is of no value, but I am going to say that it contains relatively little information once you know what else is going on in the economy. Provided that the economy continues to do reasonably well with good economic growth and good jobs growth, then consumer confidence is likely to come back.

Senator WHISH-WILSON: It is interesting. This is the Westpac-Melbourne Institute survey. The Morgan-ANZ figure shows a different magnitude of drop, at 15 per cent, which they are saying is their biggest since May 2009. There have not been drops of similar magnitude in the last five years following budgets, according to their analysis. There may be a different way of constructing their index, but I would highlight that.

Dr Gruen : The Westpac-Melbourne Institute one is the one that we tend to focus on, simply because it has got a much longer run of history.

Senator WHISH-WILSON: Of time series?

Dr Gruen : Yes.

Senator WHISH-WILSON: But, clearly, the way they are constructed and their datasets are different.

Dr Gruen : That is right. I am not saying it means nothing, but I am saying that, provided the economy continues to perform well, both with economic growth and jobs growth, it will turn out to be ephemeral, as it often does.

Senator WHISH-WILSON: With your historic understanding of these falls after budgets, were changes to welfare payments, which we have seen in the budget, something that the Treasury group forecasted or was expecting. There are the Newstart benefits especially, and changes to family tax benefits. Did you forecast a drop-off in consumption and consumer spending following these changes?

Dr Gruen : We have taken into account in our forecasting of consumption the changes that are in the budget. They are things that we take into account when we put our forecasts together. We are careful to include what we assess to be the effect of budget measures on all the aggregates, not just consumption. The budget, as you are aware, includes changes to payments but also a significant infrastructure package over time. It takes some time to build up. Our overall assessment is that there was some fiscal consolidation over the next couple of years already in the numbers. In terms of the effect of the budget on the economy, the budget has a very small net effect relative to the situation as it was at MYEFO.

Senator WHISH-WILSON: In those assumptions did you, for example, consult with stakeholders like the Department of Social Services about impacts on families and their consumption habits?

Dr Gruen : In terms of putting our macro forecasts together, we do that ourselves. We broadly consult with other macro forecasters, though not on the detail of the budget, because the budget is not something that is public. We certainly cannot talk to other macro forecasters about it. We use our experience of a large number of changes to these sorts of things over a long time to come to an assessment of what we think will be the impact on consumption. There are quite a lot of things going on in the economy, as is usually the case. House prices have gone up quite strongly, the stock market has done quite well and the savings rate, which has been very high, is tending down a bit. All of those things lead you to believe that there is a reasonable amount of momentum behind consumption. You are right that the changes in the budget are one of the things that one needs to take into account, but there are a lot of other things going on as well.

Senator WHISH-WILSON: I think the brief I had outlined Treasury saying the degree to which households would dip further into their savings to sustain consumption is also uncertain, as is the degree to which real estate construction will pick up. Clearly you have outlined that savings and consumption are areas of risk or uncertainty.

Dr Gruen : We are at pains to make the point—and we have made it in a variety of different ways recently—that, with the best will in the world, our macro forecasts have a margin of error. We want to say that to people as clearly as we can because we are required to provide our best estimates. We have gone out of our way—and the budget papers make this clear—that there are significant confidence intervals around the point estimates that we provide.

Senator WHISH-WILSON: I am trying not to make a political statement here so I can get Senator Cormann wound up, but I do not think it would be unreasonable for me to say that a lot of people around the country have been shocked by the budget, particularly in areas around proposed welfare and pension changes. It will be very interesting to see whether we do get a recovery in consumer sentiment. I was at a presentation with the Tasmanian Red Cross on the weekend, for example, and they said in the last month they have had a 30 per cent drop-off in donations, which is the biggest they have ever recorded. So there seems to be anecdotal evidence out there that there is a consumer or citizen reaction to this budget in certain sectors.

Dr Gruen : I can tell you that we have been talking to the banks about their transactions data, which they obviously get in real time. In the period since the budget, their transactions data suggests there has been no change in spending patterns relative to the period before the budget. We have not talked to all the banks yet, but the ones we have talked to have come back with that. That is in aggregate; it is not going to be true for every individual.

Senator WHISH-WILSON: Are you focusing on saving rates versus consumption there?

Dr Parkinson : No, looking at transactions: credit card usage and the like—things that the banks are seeing in real time which can give us a suggestion about what is happening to spending.

Senator WHISH-WILSON: Would they drill down to the detail on discretionary expenditure, expenditure on luxury items and that sort of thing, or would it be more credit card payments for bills, mortgages—

Dr Parkinson : It would be anything that went through their accounts.

Senator WHISH-WILSON: I understand; but, if you look at them in aggregate, you are not going to be able to look at changing patterns.

Dr Parkinson : No, but ask the question: why would people suddenly start paying bills using their credit card post budget that they were not pre budget? Nothing had happened, so you should not see any change. There is no reason to expect a change in behaviour there. I think there is an interesting issue, though, that needs to be put on the table. I will be brief. It goes back to the discussion we were having with Senators before you arrived. Everybody has agreed you have to engage in fiscal consolidation, and your concern is that it is outlays that have grown ahead of everything else. Inevitably you have limited choices in the outlays space if you are going to cut outlays. Inevitably those groups in the community that get most of the expenditure are likely to bear the most significant part of the burden. These sorts of trade-offs are there all the time. We were talking before about where the pressures are on corporate tax globally, what the impacts are on personal income tax and hence on participation decisions and the like in the face of an ageing population.

Senator WHISH-WILSON: This is probably double accounting, and I do not know much about national accounts; but, if this budget is outsourcing nearly $80 billion worth of revenue measures to the states around health care and education into the future where the states have to find that type of money and therefore may have to adopt their own state based approaches to finding that expenditure, do you factor that into your long-term forecasts as well?

Dr Parkinson : Once we get some sense of what it is the states might do.

Senator WHISH-WILSON: I know in my state of Tasmania there is a lot of discussion around how we are going to pay for these things and the impact that is going to have on the real economy.

Dr Parkinson : I want to draw your attention to the fact that in the last three years I have been saying there is a gap between community expectations and what government can realistically do and there needs to be a frank community-wide discussion to reset expectations. The second thing I have been saying is that there is a gap between what citizens want from government and what they are prepared to pay for that.

Senator WHISH-WILSON: Would you add companies to that same statement?

Dr Parkinson : This is citizens. Whether they are individuals or corporations, there is a reality gap confronting the Australian public and, unfortunately, the frank conversation that has been required has not been held. I have been saying this. The Governor of the Reserve Bank has been saying this. The head of the independent Parliamentary Budget Office has said this, most recently last week. If the two most senior economic bureaucrats in the country are saying, 'People, we have a challenge, and it's about time we had a serious community discussion' and the independent head of the Parliamentary Budget Office says the same thing, it is actually in the hands of the political class.

Senator WHISH-WILSON: I do not dispute that or belittle anything you are saying there, but we have had this conversation nationally in the last four years about your predecessor's mining superprofits tax, for example, or raising the price on carbon to tax pollution. We have had these big conversations about revenue-raising measures, but the fact that we are scrapping those now to put in other measures is a key issue to my party, as I am sure it is to Senator Wong's party.

Dr Parkinson : I think this conversation is bigger than just these cuts.

Senator Cormann: The taxes raised hardly any money. It is more expensive to administer.

Senator WHISH-WILSON: As you say, it is in the realm of the political class. There is lots of brave reform we could be taking on, but it does not suit the politics of the day.

CHAIR: Is there a question in there?

Senator WHISH-WILSON: Sort of.

Senator Cormann: Taxes that are more costly to administer than they raise in revenue are not very good taxes. As a general point, what we need to make sure with our tax system is that we raise the necessary resources for government to fund the services that we ought to provide in the most efficient and least distorting way on the economy. That is the conversation we ought to have. What do we think government needs to provide by way of goods and services into the community and how do we best raise the necessary revenue in order to provide it in a way that least detracts from economic growth so that we can continue to build opportunity for everyone?

Senator WHISH-WILSON: I agree that is the conversation we should have.

Senator Cormann: The mining tax was the worst-case example. In defence of Dr Henry, he is actually not the one to blame, because what the government implemented was not the proposition that was put on the table either in the resource superprofits tax or the mineral resources rent tax.

Senator WHISH-WILSON: Yes.

Senator Cormann: It was a completely botched attempt to raise more revenue on the back of the very important mining industry.

Senator WHISH-WILSON: Thank you, Senator Cormann. I have some other questions. I will leave the economic questions to Senator Wong. I have a couple quick questions about Treasury secondment of staff outside the public sector. Can you confirm how many Treasury staff are seconded out and to which organisations or companies they are seconded to?

Dr Parkinson : I think I have put that in the public domain in a speech I gave to the Institute of Public Administration.

Senator WHISH-WILSON: I have a copy of that. I just wanted to check whether that has changed. It is 18 staff?

Dr Parkinson : I am not aware that that has changed since then.

Senator WHISH-WILSON: That was to other parts of the public sector.

Dr Parkinson : Yes—and also to a range of private sector bodies. Equally, we have quite a range of people seconded into the Treasury from private sector bodies and other government agencies, and again that was picked up in the IPA speech.

Senator WHISH-WILSON: On notice are you able to provide what level they are at, which divisions in Treasury they come from and how long the secondments last going in and out and by organisation?

Dr Parkinson : Yes. I suppose the question is: to what end?

Senator WHISH-WILSON: I am concerned about regulatory capture and conflicts of interest. Considering, as Senator Cormann was just saying, we have had one example there of a large policy change in this country with the mining tax. It concerns me that we have people from BHP Billiton and Rio Tinto. I understand why you would want to talk to them, of course, but having them working inside policy units, for example, would be a concern. This is not something I am making up; it is an issue that has been raised in past Senate inquiries.

Dr Parkinson : Treasury is constantly criticised for not being sufficiently open and engaging with different groups. People say we know nothing about business. They ignore the fact that we ran an insurance company for a decade. We have done numerous things. We have set up banks. People just do not appreciate the range of things the organisation has to do. The idea that having someone from BHP Billiton in the department is going to lead to regulatory capture of the Treasury is, frankly, ludicrous. What we are doing is putting people into these organisations to broaden our people's experience set and bringing people into the Treasury to help broaden the external people's experience set and for us to gain some of their insights. That sort of cross-fertilisation, if it is not done, is a recipe for disaster.

Senator WHISH-WILSON: I appreciate the advantages of cross-fertilisation, but I do not think it is a ludicrous proposition at all that relationships can develop with large, profit-seeking corporations who very clearly—

Senator Cormann interjecting

Senator WHISH-WILSON: Could I finish? Then I will understand if you want to have a word. We get lobbied by these people all the time. Why wouldn't their employees want to develop relationships with Treasury officials?

Senator Cormann: I have to defend Treasury here. You mentioned the example of the development of the mining tax, and my views on the tax itself are well known, but the decisions on who got consulted and in what way were matters for the government of the day. Ultimately, it is the government of the day, whether it was the previous government or this government, that is responsible for what Treasury officials and, indeed, officials right across the public service, are asked or expected to do. If there is an inquiry there on what is appropriate or inappropriate, that is really an inquiry for us because at the end of the day the public service serves whoever the government of the day is, without fear or favour, independently—as they should.

Senator WHISH-WILSON: Yes. I am not saying that there is regulatory capture now. My concern is how you manage the process to make sure there is not. I am raising this because we have had a very serious allegation about one of regulators in another inquiry about large banks and regulatory capture. That is where a whistleblower has provided that information, including details of conversations around a policy they wanted changed. It happened to be the person on secondment who was being accused of influencing that. This is evidence that has come to us from another department, so I am not making this up; I just wonder how you go about managing the potential for these things in the future.

Dr Parkinson : The Treasury has very rigorous internal policy development processes. The idea that somebody down the line is going to get captured, and that somehow they are going to be able to unilaterally change policy without it going through our filtering process all the way up and people such as Dr Gruen, Ms Cattermole, Mr Ray, Mr Heferen, Ms Harris and I basically going over this stuff, I find, frankly, bordering on the offensive. If I may, I think people need to get used to the fact that we will have to do more of this. The day I walked into the Treasury as secretary we had 1,053 staff. I have to remove one in three staff. That is one in three staff, without any reduction in the span of responsibilities. That means that either we end up doing the job worse than we have in the past because we lack the expertise or we have to find different ways to bring that expertise in.

Senator WHISH-WILSON: When you say 'bring in expertise' and that you need to do more of this in the future, aren't you confirming my point exactly—that you are relying on the expertise from bringing in these people—

Dr Parkinson : No, it is not about—

Senator Cormann: Interaction with the real world is not actually a bad thing. We want Treasury to be engaged with the real world. We like Treasury and Treasury officials to have interaction with business and with participants across the community that have relevant expertise to contribute. That is actually a good thing.

Senator WHISH-WILSON: I accept that.

Dr Parkinson : If I may, Minister, the one thing I would say is that Treasury is part of the real world.

Senator WONG: Dr Parkinson, in response to an earlier question, you talked about your frustration at, I think, the political class not being able to convince the community of the need for structural reform. That is how I recalled it. Feel free to qualify that if you wish, but that was not actually my question. You are on record outlining the merits of structural reforms including a resource rent tax and a price on carbon. Does that remain your view?

Dr Parkinson : There is nothing that has changed my view about either of those issues.

Senator WONG: Thank you. I will come back to household consumption if I have time. Some of the issues were canvassed previously. I want to start first with iron ore prices. I am not sure—I think this is you, Dr Gruen. Would you give me your views about recent movements in the iron ore price and your assessment of the implications of that, the drivers of that, your prognosis et cetera.

Dr Gruen : As I think you would be aware, the iron ore price has fallen quite substantially over the course of this month. As the Treasurer said in his press conference after the national accounts, it has fallen by more than we had anticipated. It is true to say that the iron ore price is fairly volatile, so it is a brave person who makes comments about where it is headed to next. I think the main driver of weakness has been a sense that the Chinese property market is softening. There has been a big increase in iron ore production and, in fact, Australia, if you look at imports into China—

Senator WONG: Globally?

Dr Gruen : Globally but particularly in Australia. If you look at imports into China, Australia has gained market share.

Senator WONG: It is just that in that sentence I was not sure what you are saying—that there had been a global increase in iron ore production or a—

Dr Gruen : Yes, there has been a global increase, but in terms of imports into China Australia has increased its market share. In terms of supplying the Chinese market, we have done better than other countries. Nevertheless, there has been a big rise in iron ore production and exports, but the price has come down a long way in the last month. I guess our view about that is that commodity prices are volatile. We are of the general view that commodity prices are likely to continue to trend down for some considerable time, given the heights they got to. The exact pattern of how that happens is always highly uncertain. We are not doing anything in particular, obviously we are monitoring the situation, but there is no question that the iron ore price has fallen by more than we anticipated over the course of this month.

Senator WONG: When you say 'more than you anticipated'—I cannot recall if you make explicit what price you assume for the year—

Dr Gruen : We have.

Senator Cormann: Page 2 of 14 of budget paper 1—if you wanted to have a look at that graph it shows what the forecast is.

Senator WONG: You always have to eyeball these charts and make an assumption about them, but by what sort of margin are we looking at, Dr Gruen?

Dr Gruen : I do not have that number in my head. The other thing that makes it tricky is that the thing that is monitored is the spot price for iron ore that is of 62 per cent content, and the bulk commodity export price is in dollar A rather than US dollars, but that is relatively straight forward. The other thing is that it takes into account changes in quality, so they are not strictly comparable and also—

Senator WONG: I am just trying to get some metrics around the statement you made previously. It has fallen by more than we anticipated in the budget; are you able to give me some metrics around that. Is it X per cent below what you anticipated?

Dr Gruen : We can certainly tell you how much the spot price has moved this month.

Senator WONG: I can probably work that out myself.

Dr Gruen : We could tell you how much that—

Senator WONG: That is public; what I am asking is the difference. You made the statement, which is that it has fallen by more than you would anticipate. I am just trying to get some metrics around it. Perhaps tell me in the way you think you can, without us getting into a long argument, some metrics around that proposition—by what proportion? By what percentage? Is it lower than you anticipated?

Dr Gruen : To give you a proper answer, I would need to take it on notice. But it is certainly the case that it has fallen—Mr Allford, do you have the order of magnitude that it has fallen since the budget?

Mr Allford : I do not know the exact numbers, but we can get them for you. I think the order of magnitude is more than 10 per cent below what our forecast had it at now.

Senator WONG: Where the spot price is now?

Mr Allford : Yes.

Senator WONG: Taking into account all the variability matters that Dr Gruen raised?

Mr Allford : Yes.

Senator WONG: Going to unemployment, Dr Gruen, at the previous estimates I think you described the 'sustainable rate of unemployment' as being around five per cent. I am trying to clarify what the medium-term projection in MYEFO and then in the budget assumed for unemployment. In MYEFO, what was the unemployment rate that was assumed for the purposes of the medium-term projections? Something north of five per cent, I assume?

Senator Cormann: We decided not to go back to the technical assumption that in the final two years of the forward estimates we would go back to the NAIRU. Instead of having a proposition in the budget where at 30 June 2015 we had unemployment forecast at 6.25 per cent and then on 1 July 2015 there being a technical assumption enshrined in the budget before which saw that suddenly drop to five per cent from one day to the next, we thought it was more realistic, given what the economic growth forecasts were going to be into the future, to have a more realistic forecast in the out years as well, rather than just to go to that technical assumption.

I am sure that Dr Gruen is able to put much more flesh around all of that.

Dr Parkinson : To add to that, we flagged at the last estimates and in MYEFO that we were in the midst of a transition. We have actually made that and we have put out the technical working paper that underpins all that.

Senator WONG: I am sorry, I have not read it. And even if I did I may not understand it, so I am just trying to understand—

Senator Cormann: To be helpful, if you go to page 221 in budget paper one it actually has a discussion around the medium-term projections which goes through about.

Senator WONG: Dr Gruen, are you able to answer my question?

Dr Gruen : Yes.

Senator WONG: Thank you.

Dr Gruen : As you would be aware, we released a working paper on the night of the budget which went into excruciating detail on all of this. I am just trying to find the right page. In case you wish to look it up later, the discussion is on page 21 of the—

Senator WONG: Yes, I have got that.

Senator Cormann: Page 21.

Dr Gruen : No, there are two different documents. It turns out to be 21 on both of them. It is in the budget on page 221 and more detail is on page 21 of the working paper.

Senator WONG: So what does it end up being?

Dr Gruen : Five per cent in both cases—eventually.

Senator WONG: At which point?

Dr Gruen : I will explain the budget methodology and then, if you are interested, I can explain MYEFO methodology.

Senator WONG: If you can do it quickly, that would be great.

Dr Gruen : I can do my best. In the budget we introduced a new approach which closes the output gap in five years.

Senator WONG: Five years from the end of the forwards.

Dr Gruen : From the end of the forecasts.

Senator WONG: What is that—2015-16?

Dr Gruen : The final two years of the forwards are the first two years of the five. At the end of that period the unemployment rate is back at the assumed NAIRU, and we have assumed the NAIRU is five per cent ever since 2002.

Senator WONG: By the end of five years beyond the beginning of the forecast period we get back to NAIRU?

Dr Gruen : That is right.

Senator WONG: That is in the budget, and there was a slightly different methodology applied in MYEFO.

Dr Gruen : Indeed.

Senator WONG: Okay. In the Commission of Audit report—I have only got a reference to Annex B modelling assumptions; I was a little confused, and maybe you can explain it to me—they assumed an unemployment rate of around six percent beyond 2014-15 But they also, at the same time, said that the budget aggregate projections are based on projections from the 2013-14 MYEFO. Are they in fact using a different unemployment assumption than the one you have just outlined?

Dr Parkinson : We would have to have a look.

Senator WONG: Could you look at that?

Dr Parkinson : Sure.

Senator WONG: I understood the position to be broadly as you outlined. I was not sure when it got back down to the NAIRU, but I did not understand why the Commission of Audit was saying what they said, and not just that they had assumed a six per cent but they had in fact done that because that was what was in MYEFO.

Dr Gruen : In MYEFO, the unemployment rate stays the same for the first two years of the projection period.

Senator WONG: But not beyond the forwards?

Dr Gruen : No, beyond the forwards it comes down. I can read that to you, it is here on page 21.

Senator WONG: That is fine, I do not need to read. In Annex B there is a discussion about the methodology of budget aggregate projections, there is a discussion about unemployment rate—six percent beyond 2014-15—but there is an assertion at the front of that appendix that the methodology is identical to MYEFO. It does not appear to me that that is correct given what you have said. Maybe on notice someone could clarify that. Is that possible?

Dr Gruen : Yes.

Senator WONG: And PEFO would have used the previous methodology or return to the NAIRU?

Dr Gruen : PEFO used two alternative projection methodologies. One was that we went straight back to five per cent for two years; the other was that we gradually came down by a quarter point each year—

Senator WONG: To get to five percent.

Dr Gruen : We would have eventually but, in over the two projection years, we simply came down from 6¼, to 6, to 5¾, with above trend growth.

Senator WONG: What does the change in this methodology and the change in the unemployment—the point at which the NAIRU is reached—mean to the medium-term budget projections.

Dr Gruen : So in the working paper but also in the budget, we take on board all of the changes to the methodology and we report a summary measure of what the impact has been on the budget bottom line, on the underlying cash balance. And the answer is, it is tiny. But we report it I think—

Dr Parkinson : It is on page 2-23, very top. It says:

Compared with MYEFO … results in a reduction in the underlying cash balance of $0.3 billion in 2016-17 and an increase of $0.9 billion …

Senator WONG: And then the 3.4.

Dr Parkinson : In 17-18 and $3.4 billion by the time you get to 2024-25.

Senator WONG: Dr Gruen, I presume someone in your group was aware of the discussion in the employment committee's estimates. So can you just explain this to me: as I understand it the Department of Employment produces a document, Australian Jobs 2014, which is based according to the evidence and according to the footnote on the MYEFO—correct?

Dr Gruen : Yes.

Senator WONG: The MYEFO took into account, I assume, government policy which included the asserted red tape reduction, the lowering of company tax rate and the abolition of carbon and mining taxes. Correct?

Dr Gruen : Yes.

Senator WONG: So can you explain to me if they were already taken into account in MYEFO, why is it that, as I understand the employment department's evidence, they are asserting that these job outcomes, which differ quite significantly from the government's job numbers—that is, how many jobs they are going to create—are explicable because it doesn’t take into account those economic policies?

Dr Gruen : Maybe Mr Allford can help. The information that I have was simply about what the MYEFO implied for employment growth over five years. Obviously, the first two years of that were forecasts and the subsequent three were projections, so they are not a Treasury forecast about employment in five years. But as for the evidence that was given at the other estimates, I am not on top of that.

Senator WONG: Okay.

Mr Allford : Senator, Dr Gruen is right. We only do two years of forecast and beyond that it is projections. So it is not our forecast of employment growth. For the evidence at the employment estimates of their jobs growth numbers for the five years, they have used our two years of forecast and our two years of projections in MYEFO, plus they have extrapolated an extra year to get to the five years. They come up with I think around 840,000 jobs or something like that. That is broadly consistent with what the MYEFO numbers would give you.

Senator WONG: Fine. But is there any factual basis for the assertion that that number is understated because it does not include a whole range of government policies?

Mr Allford : So we in the first two years, the forecasts, incorporate what we believe to be the effect of government policy on employment growth. Beyond that, we do not attempt to model it, no.

Senator WONG: But it is already taken into account in the forecasts that you make ?

Mr Allford : In the first two years, yes.

Dr Parkinson : Obviously, only those policies that have already been implemented.

Senator WONG: Correct. I think it is quite clear that the so-called understatement of jobs just isn’t believable.

Dr Gruen : So the only point that I would make is that—

Senator WONG: Sorry, Dr Gruen, I don’t know if you have been briefed on this. So the assertion is, to explain the difference between the 840,000 and the million is somehow that it does not take into account all these government policies. But the evidence is that you have already included government policy into your employment assumptions.

Dr Gruen : We are, to some extent, comparing apples to oranges.

Senator WONG: That is true.

Dr Parkinson : So any policy decisions that have been taken subsequent to MYEFO will not be in there.

Dr Gruen : That is true but it is also the case that we forecast for two years and then we have projections that are based on trend and do not implicitly or explicitly take government policy into account.

Senator WONG: That is a much more cogent explanation than I thought was given by Minister Abetz. But I will leave that.

Senator Cormann: Let me make a point on behalf of the Treasurer and I. As we put together MYEFO and also the budget with the support and advice of Treasury and Finance, our overarching commitment was to get the most realistic assumptions possible so that they would withstand the test of time.

Senator WONG: Can I turn now to the Article IV consultation report. Is that this group? They really want to be asked questions, don't they?

Dr Parkinson : They are knocking me over in an attempt to get to the table.

Senator WONG: Mr Flavel, could you tell me the process by which the Treasury engages with the IMF in the context of the preparation of the report?

Mr Flavel : There are various discussions that take place. The IMF has officials who are responsible as part of their duties for surveillance of the Australian economy. They come out on a mission. Prior to that mission, there is discussion around topics and issues for particular focus or discussion as part of the Article IV discussion.

Senator WONG: How big is the team from Treasury involved in this?

Mr Flavel : It would involve various parts of Treasury. On the domestic economy side, it would involve Dr Gruen and his area. To the extent that there was particular focus on aspects of financial markets, people from our markets group would be involved. There is not a fixed team. We make officials available for the IMF and the OECD when they come out on mission to help them with their inquiries.

Senator WONG: Is the first draft prepared in Treasury?

Mr Flavel : No.

Dr Parkinson : Treasury has no involvement in drafting the report. It is the IMF Article IV mission's report.

Senator WONG: So do you do any drafting?

Mr Flavel : No.

Senator WONG: Do you make suggestions as to content though?

Mr Flavel : The IMF would have ideas about things they want to focus on and there might be a discussion about ensuring that occurs in a way that is efficient. There is no sense in which Treasury or anybody says, 'These are the topics you should look at,' or in any way seeks to direct—

Dr Parkinson : Having been on both sides and having been an IMF staff member doing Article IV reports, the team in Washington will, through its monitoring of the Australian economy, identify a few particular topics it wants to dive deep on. Then, through Washington's analysis of a range of other countries, it might decide there are interesting developments occurring in other countries that are germane to Australia and might suggest to the team that they actually look at the Australian experience with a particular issue. So they will say to the national authorities, 'These are the special topics we want to deal with.' They will always want to talk about macro. They will always want to talk about fiscal key structural issues and then it is the special topics bit which will wax and wane and vary by country and over time.

Senator WONG: I am still not a lot clearer on the process. You meet with the team; how big is the IMF team?

Mr Flavel : Off the top of my head, it is around three or four officials who come out on mission as part of that process.

Dr Parkinson : It is typically larger than that. It will be maybe three people plus the mission chief from the Asia-Pacific Department desk that looks after Australia and they will be augmented by people from what used to be called policy development review. I cannot think what it is called now but it is a central strategy area. There may be somebody from the monetary or fiscal policy areas, depending what the special topics are. It is typically in the region of fewer than four and rarely more than seven.

Senator WONG: So would you meet with them with other members of the government 'team'? How would you like to describe them?

Mr Flavel : They have consultations with Treasury and the Reserve Bank.

Senator WONG: Before you get into that, I am going to take you through this process. You will have the opportunity to give me all of those answers. The first contact on this occasion—let's do it this way—with the IMF team, with which you were involved, was what?

Mr Flavel : In fact, I was not in the position the last time Article IV took place.

Senator WONG: Is there somebody I can ask questions of about the production of this document? Is that possible?

Dr Parkinson : Is there a specific issue around the production of the document?

Senator WONG: I am trying to get a sense of the process. But, with respect, Dr Parkinson, I do not want 'in theory this is how it works'; I want to know how this one worked.

Dr Parkinson : Okay, then you would need somebody from the IMF.

Senator WONG: I want to know how our engagement worked in relation to this report. That is what I want to know.

Dr Gruen : What is the date of the report?

Senator WONG: I cannot remember.

Senator Cormann: It was released on 13 February.

Dr Gruen : Of this year?

Senator WONG: Earlier this year. Mr Flavel, were you in this position at that time?

Mr Flavel : The process ran across from about the middle of last year through to February.

Senator WONG: And when did you come into this process?

Mr Flavel : I was seconded to the secretariat of the Commission of Audit during a substantial period of that time.

Senator WONG: So you were not in this process much?

Mr Flavel : During the end part, the finalisation of the report and during the consideration of the report by LMF executive board, I was on secondment.

Senator WONG: Dr Parkinson, do we have an officer who was actually involved?

Senator Cormann: Do you have specific questions we might be able to assist you with on notice?

Senator WONG: With respect, Chair, I am asking a question. Dr Parkinson, I am not trying to be difficult. I am sure you can tell me broadly how the process worked. I am interested in this one.

Dr Parkinson : I think the problem is it would have been—

Dr Gruen : Does it say in the document when the mission was? That is when the document was produced.

Senator WONG: I only have the extract.

Dr Parkinson : The mission was during the second half of last year and, I think, Mr McDonald was in the role.

Senator WONG: Let's try a different tack if this is going to be too difficult. The mission come, they talk to Treasury, Reserve Bank, private sector et cetera—

Dr Gruen : Including with the Treasurer.

Senator WONG: and you believe it was probably prior to the change of government?

Dr Gruen : We can check that. My memory is it was well before the document was published. I thought it was before the election but I am not certain.

Dr Parkinson : Typically, the mission will come, they will go back, they will write up the document and that will take typically three to four months before it gets to the IMF executive board. So whether it was just before or just after the election, we have to check the exact detail.

Senator WONG: Thank you, I appreciate that. And then is there a draft report provided to Treasury for comment?

Senator Cormann: I have got the information for you. I have got the report online. The discussions were held in Sydney, Canberra and Melbourne during 11 to 20 November 2013. The staff team from the IMF comprised Brian Aitken, Ding Ding, Juan Jauregui, Dan Nyberg and Alison Stuart—all APD, the Asia-Pacific Department. And the actual release of the report was on 12 February 2014.

Dr Parkinson : That means it would have been considered by the executive the day before or two days before.

Senator Cormann: In the interests of the witness, the staff report was completed on 24 January 2014 so the information was current up until that time.

Senator WONG: Okay, so the mission and the report to completion and, presumably, any consultation with the Treasurer of the day is post the change of government given the time frame?

Dr Parkinson : Yes, that is correct.

Senator WONG: In the process, does the government or the Treasury usually get a draft report to comment on?

Dr Parkinson : We do and what they want from us are factual corrections, updated data if they have got it wrong. Typically, teams are very resistant, unless there is a pretty significant fundamental misunderstanding, to change their positions. They do a concluding statement when they leave and that forms the basis of what they go away and write.

Dr Gruen : That concluded statement is released usually within 24 or 48 hours after they leave Australia. It is released in Washington but they finalise the concluding statement, which is the backbone of what they are going to say in the report, almost immediately after they leave, which, in this case, would have been in November.

Senator WONG: When Treasury gets a draft report for the purposes of factual correction, is that usually provided to the Treasurer's office as well?

Dr Gruen : I think so.

Senator WONG: I did have some questions about page 24. I have only got an extract. I did ask for more of it.

Dr Parkinson : Is it page 24 of the Article IV?

Senator WONG: I think so. It is the one with all the grass.

Dr Parkinson : The minister has got it here.

Senator WONG: I would love to look at it as well but my iPad has died.

Senator Cormann: Do you want me to print it out?

Senator WONG: No, I have got the page in front of me. I just do not have the remainder.

Senator Cormann: Is it the Australian comparison of fiscal outlook? Where Australia has got the second highest growth in real expenditure per capita and all of that?

Senator WONG: Dr Parkinson, are you familiar with those graphs?

Dr Parkinson : No. I can see what they have done.

Senator WONG: One of the things that has been raised is the selection of advanced economies for various graphs. They differ between the graphs.

Dr Parkinson : They do.

Senator WONG: So it is not a consistent subset. I am reminded of Dr Gruen, who is always very good at reminding me that I am not comparing apples with apples et cetera.

Dr Parkinson : And I was aware of that, now that you remind me, but that was the IMF's choice.

Senator WONG: Sure, but I just want to be clear. It appears that a different subset is utilised for various graphs and it is also not a complete set of advanced economies.

Dr Parkinson : That is true.

Senator WONG: So, therefore, you get a different statistical reading obviously. For example, a change in structural balance of fiscal consolidation is in fact above average for IMF advanced economies. The growth in real expenditure per capita over the relevant period is listed here as second but in fact that is not correct; I think it is sixth. Just to confirm, would you agree that having a subset and a differentiating subset through that series is obviously going to give you a different story compared to one that actually compared Australia against all advanced economies?

Dr Parkinson : That is self-evident. But why they have used a subset, I do not know. But, typically, you find it is difficult to get data on a consistent basis, even for advanced economies.

Senator WONG: The WEO database does it anyway, doesn't it?

Dr Parkinson : Yes, but you have to understand the assumptions there. Why they have chosen this group I do not know, but definitely switching between different subsets is not something that we would encourage people to do.

Senator WONG: Were you aware of these facts prior to my asking these questions?

Dr Parkinson : I became aware of it in the last 24 hours or so. Did you ask Mr Tune?

Senator Cormann: No, I do not think so.

Senator WONG: It is always possible. I have asked a lot of questions.

Senator Cormann: Let me put it this way. I do not have a recollection of us having discussed this.

Senator WONG: But you are always so busy talking that you do not know what questions I ask anyway Mathias.

Senator Cormann: If you had asked the question I would have referred it to Treasury of course because it was the manner appropriately for them.

Senator WONG: So Dr Parkinson you can tell me that Treasury had no involvement in the decisions around what to include, which economies to include and how to construct that.

Dr Parkinson : I cannot imagine it; very confidently.

Senator WONG: And therefore the Treasurer's office would have had no involvement?

Senator Cormann: We had no involvement as government in this process at all.

Dr Parkinson : Indeed, from my experience, any government that tried to tell an IMF team how to present data would be given short shrift. It would be counterproductive

Senator WONG: I had some corporate questions. Do you want me to ask them here?

Dr Parkinson : Yes, that would be good.

Senator WONG: Has Treasury offered or flagged the offer of any involuntary redundancies?

Dr Parkinson : I have started a process for the third round of voluntary redundancies and I have in doing so indicated to staff that if we are unable to get to the position we need to be then we will have to consider whether or not to go down the involuntary route. But I have made very clear to staff that I have not made that decision yet. What I have said though is that in order to be prepared we have thought about what sort of process we would run were we to go to involuntary redundancies.

Senator WONG: It is probably in your PBS but just remind me what your ASL reduction is? What are you factoring in terms of how many people need to leave?

Dr Parkinson : As I have said before, there were 1,053 in March 2011. We have got to go to something in the low 700s or high 600s by mid-2018. To put it in terms of annual ASL, we have got to go from 1,018 in 10-11 to 737. I can table this again; this has been tabled before. It has now been updated for the MoG that brought in small business. You may recall that in the past I have said we had to go from 1,053 to something like 680. It will be a little bit above that now because of the small business machinery-of-government change.

Senator WONG: What is the total reduction over the forward estimates?

Dr Parkinson : On an annual ASL basis it is almost 300. The way in which we have characterised it is that we have got to lose one in three jobs.

Senator WONG: And this is now your third round of call for voluntaries?

Dr Parkinson : Yes.

Senator WONG: In the first two rounds how many expressions of interest were there and how many were finalised?

Dr Parkinson : In 2012, I cannot tell you how many people—

Senator WONG: Can you take that on notice?

Dr Parkinson : Sixty-three took it in the first round and 48 in the second—that is APS and EL staff—and four and six SES.

Senator WONG: On those trends are you able to tell me how many involuntaries you might have to look at?

Dr Parkinson : No, I can't, because it will depend on how many voluntaries are requested and how many we grant. That will determine to what extent we need to do involuntaries. We need in aggregate to lose something in the region of another 50 to 60 staff, and that is simply just to get us back, and assuming that natural attrition will take over from there.

Senator WONG: I had some household consumption questions, but I will try to put most of those on notice. I did want to ask this, though. Dr Gruen, I think in response to Senator Whish-Wilson, you did make the point that consumer sentiment does not feed through—I am paraphrasing—in a linear way to household consumption et cetera. I would ask you to respond to some of the market commentary around the speed with which there has been a decline in consumer sentiment, the levels at which it currently is—I think there was a small up-tick in another survey today or yesterday—but the index that you tend to look at has obviously shown a pretty substantial decline in a short space of time. There has been some commentary in the markets about this being the worst, fastest decline, or amongst the worst since the global financial crisis. That is obviously a cause for concern. I am giving you the opportunity to respond to that.

Dr Gruen : If you look at the chart that I handed out, you will see there was a very large decline at the onset of the global financial crisis. There is another substantial decline. I cannot date it exactly but it has to be later in 2010. You can see that. It is a fairly volatile series. I am going to agree with you that the decline over the past few months has been significant. It is. But it is certainly much smaller in magnitude than the decline that occurred at the time of the global financial crisis.

Senator WONG: We are not in a GFC.

Dr Gruen : No, indeed. I am just making the point that this does tend to be fairly volatile. The point I made was that I expect it to be ephemeral provided that the economy still keeps performing well, with good economic growth like we saw with the release of the national accounts in March, which, I agree, predates this. Also to the extent that we continue to see good employment growth, I would expect this to be ephemeral. The data does attract quite a lot of attention if you focus on the underlying determinants of consumption. Taking those into account, you get very little extra explanatory power from consumer sentiment in trying to explain consumption. What that means is, provided the economy continues to perform well, I would expect this to bounce back and there to be very little implication for household consumption over the coming months.

Senator WONG: Can you give me on notice the date or dates on which the Treasurer or his office met with IMF team?

Dr Parkinson : Yes.

CHAIR: There are two documents, both tabled by Dr Gruen: one is his opening statement and the other is the graph headed 'Total average staffing levels since 2002-03 projecting to 2017-18'. We officially table those. I have a couple of questions about the structural budget balance. What did MYEFO 2013 show about the structural budget position over the medium term?

Mr Duggan : The MYEFO showed that the structural budget balance position, currently in deficit in the order of about three percentage points of GDP, would remain in deficit over the forward estimates and the medium-term projection period, closing to around one per cent of GDP by the end of the medium-term projections.

CHAIR: For the benefit of the committee, a structural budget is what?

Mr Duggan : To produce a structural budget balance, we abstract from what we consider to be temporary economic influences on the underlying cash balance. In Australia's case those things include, most importantly, the terms of trade, but also we try to abstract from the economic cycle to the extent that we can. It is very difficult to do that, but we do. We also try to abstract from very significant movements around asset prices that have implications for capital gains tax revenues. So abstracting from those three things we get a sense of the underlying structure of the budget position. The combination of structural—

CHAIR: Excluding things which may vary, effectively, outside the control of government in a sense.

Mr Duggan : That is correct.

CHAIR: We have established that. We have explained what the MYEFO showed. What about the budget? What did that show about the structural budget position over the medium term?

Mr Duggan : In the budget we updated the estimates course and, when we updated those, we show over the forward estimates period. So, in 2014-15 and 2015-16, we have the structural budget balance position improving from a deficit in the order of three percentage points of GDP to a deficit of around two percentage points of GDP to one percentage point of GDP. We have the structural position broadly in balance by around 2017-18, 2018-19, and then in surplus beyond that to the medium-term projection's period.

Chair, one point that I would like to make very clear here is that there are a range of assumptions and uncertainties around the adjustments that we make to the underlying cash balance to get to the structural balance. In particular, it is a very difficult thing to get a handle on what the structural position of the terms of trade is, so we tend to think in ranges rather than point estimates. So in the budget and, indeed, in the MYEFO we produced a range of estimates. We would encourage people who look at this information in thinking about the structural position of the budget to think in terms of those ranges. If you do that, you broadly get the sense of a structural position that is in deficit currently, turning to around balance by the end of the forward estimates projection's period—so around 2017-18-19. And then you are into surplus by the end of the—

CHAIR: So depending on the outcomes, in reality, the terms of trade and the other assumptions that you have built in, the absolute outcomes may vary but the relative differences between MYEFO projections and the budget predictions would remain fairly consistent.

Mr Duggan : That is correct.

CHAIR: On the basis of what you have just said, it is reasonable to conclude then that there has been a significant improvement in the structural budget position comparing the MYEFO and the budget?

Mr Duggan : That would be a reasonable interpretation.

CHAIR: And depending on the assumptions, potentially, under the budget we will actually move into a structural budget surplus position.

Dr Gruen : That far out, if you are looking at the medium term, then the improvement in the structural balance is almost identical to the improvement in the actual balance. Everything has returned, by assumption, to trend and therefore the change in the structural will be the same as the actual that far out.

CHAIR: As the others at the table would appreciate, the purpose of the questioning is to demonstrate that the decisions that were made in the budget, if implemented, will repair the structural budget position or certainly improve it, depending on the outcome.

Senator Cormann: That is certainly the intention.

CHAIR: Thank you.

Senator Cormann: In fact, if you go to page 3-29 in the budget it actually says explicitly:

The outlook for the structural budget balance has improved significantly since the 2013-14 MYEFO, in line with the improvement in the outlook for the underlying cash balance—

which is exactly what Dr Gruen just said.

CHAIR: The budget also includes something that the government calls the Infrastructure Growth Package. That is intended to take the total investment in infrastructure to around about $50 billion by 2019-20. Is that correct?

Dr Gruen : Yes, I think so.

Dr Parkinson : That is the Commonwealth's.

CHAIR: I was going to go onto other aspects of that package in a minute. In terms of the Commonwealth contribution, they are looking at $50 billion by 2019-20. Would that be one of the largest—

Dr Gruen : Yes, the summary is on page 1-11 of the budget:

The Infrastructure Growth Package will take the Government’s total investment in transport infrastructure to $50 billion by 2019-20

CHAIR: As I think Dr Parkinson hinted at, there is also a plan under that Infrastructure Growth Package to attract investment from state and local government. How will that work?

Dr Parkinson : This is the Asset Recycling Initiative. The way that has been established is that, if states sell existing assets and reinvest the sale proceeds into additional economic infrastructure—so into new greenfields economic infrastructure—the Commonwealth will contribute to the state the equivalent of 15 per cent of the sale proceeds of the state's asset. We think that the $5 billion that has been put aside for that can catalyse something in the region of another $33 billion from the states, so the $5 billion plus the $33 billion puts it at close to $40 billion of additional investments.

CHAIR: What analysis has gone into developing a degree of confidence that that actually will occur and that it would be attractive for the states?

Dr Parkinson : The whole point of it was to make it attractive to the states to sell their existing assets and reinvest those sale proceeds in new assets. The incentive is the 15 per cent. To the extent that the states choose not to access the asset recycling fund, there will be a reduction in the amount of investment. But we do not get any sense that the states are going to be anything other than enthusiastic users of the Asset Recycling Fund, because it would be throwing away $5 billion collectively.

CHAIR: Presumably it is also encouraging them and helping to enable the financing of new infrastructure that is actually desirable from the perspective of their states.

Dr Parkinson : Absolutely. Our point was that it should be productive economic infrastructure.

CHAIR: If the $125 billion that is projected in total to come out of the infrastructure growth package is realised, what impact will that have on the Australia economy?

Dr Parkinson : During the period in which it is being built, you will get stimulus to activity. At the end of it, the best estimate we have got of that $125 billion—and Mr Duggan has been involved in making this estimate—is that it would add around 1 percentage point to annual GDP. It would not add to annual GDP growth, but it would lift annual GDP level by 1 percentage point permanently.

CHAIR: On an ongoing basis.

Dr Parkinson : Currently the economy is about $1.6 trillion, so you have got to add an additional 1 per cent on a permanent basis.

CHAIR: That is not a bad investment.

Dr Parkinson : Yes.

CHAIR: We have got a limited amount of time left before we will finish up. Do you have any figures that indicate the number of jobs that have been created since the election?

Dr Parkinson : They are on the public record in terms of it will be the ABS labour force numbers cumulated over the period since the election.

Dr Gruen : I have in my head the number that has been created since the turn of the year, which is about 106,000.

CHAIR: So 106,000 this year?

Dr Gruen : Yes.

CHAIR: That is initial jobs over and above jobs that were in existence at the beginning the year?

Dr Gruen : That is the net increase.

CHAIR: The government has made an election promise to grow jobs by one million over five years and two million over 10 years. Would an increase of 106,000 in the first six months or so of this year be consistent with that?

Dr Gruen : In the first four months.

CHAIR: Would that be consistent with that promise?

Dr Gruen : It would if it was able to be sustained.

Senator Cormann: And on that front, I hasten to add that we are not taking anything for granted. This is early days and there is a lot of heavy lifting to be done. First and foremost, there is this budget to be passed in order to ensure that we can continue to build stronger growth and prosperity into the future.

Dr Parkinson : I would just add that the budget was quite explicit about expecting growth to run below trend for the next while, and that would suggest that employment would not grow at the pace it has grown over the last four months. There is probably an element of catch up in the numbers we are seeing, and the underlying momentum of the economy would not be consistent with that sort of growth rate being sustained.

CHAIR: Does the national account figure today impact on that conclusion at all?

Dr Parkinson : No. As Dr Gruen said at the outset, we have got a very sharp spike up in exports, and that growth will not be sustained. The level will be sustained and it will continue to grow, but you will not get the same contribution to GDP rate. We think you will actually see quarterly GDP growth rates and through-the-year rates ease back from here, which would be consistent with year average numbers being below trend.

CHAIR: That is important information as well.

Senator WONG: Can I ask something before the officers go? I had some questions—and I think Mr Gallacher did too—on distributional analysis, or the impact of the budget or different measures on different income groups. Would they normally be asked of you, Dr Gruen, or can Mr Ray field those? I just want to be clear about that.

Mr Ray : I can take those.

Senator CORMANN: Does that mean that after the break we go to fiscal? No more macro?

CHAIR: Are you happy with that, Penny? We have a limited amount of time.

Senator WONG: Happy might be overly optimistic.

CHAIR: I am sure you will have questions for fiscal as well.

Senator WONG: I do have questions for fiscal.

CHAIR: I believe you will not be with us after dinner, Dr Parkinson, so thank you very much for your time, and thank you officers from Macroeconomic Group.

Proceedings suspended from 18:32 to 19:30