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Economics Legislation Committee


In Attendance:

Senator Wong, Minister for Finance and Deregulation

Department of the Treasury

Dr Martin Parkinson, Secretary

Output Group 1.1—Macroeconomic Group

Dr David Gruen , Executive Director, Macroeconomic Group (Domestic)

Mr Simon Duggan , Acting General Manager, Domestic Economy Division

Mr Paul Gardiner , Acting Principal Adviser (Forecasting), Domestic Economy Division

Mr James Kelly , General Manager, Macroeconomic Policy Division

Mr Russ Campbell , General Manager, Macroeconomic Modelling Division

M r Ben Dolman , Acting Principal Adviser, Macroeconomic Modelling Division

Mr Jason McDonald , General Manager, International and G20 Division

Mr Patrick Colmer, General Manager, International Finance and Development Division

Output Group 2.1—Revenue Group

M r Rob Heferen , Executive Director , Revenue Group

Mr Gerry Antioch , General Manager , Tax System Division

Mr Roger Brake , General Manager , Tax Analysis Division

Mr Colin Brown , Manager , Costing and Quantitative Analysis Unit

Mr Matt Maloney , S enior Adviser , Costing and Quantitative Analysis Unit

Mr Jyoti Rahman , Manager , Revenue Analysis Unit

Mr John Clark , Senior Adviser , Revenue Analysis Unit

Mr Phil Gallagher , Manager , Retirement and Intergenerational Modelling and Analysis

Mr Marty Robinson , Manager , Household Modelling and Analysis Unit

Mr Tony McDonald , General Manager , International Tax and Treaties Division

Mr Neil Motteram , Principal Adviser , International Tax and Treaties Division

Mr Paul McBride , General Manager, Personal Retirement and Income Division

Mr Martin Jacobs, Acting Principal Adviser, Personal Retirement and Income Division and Indirect Tax Division

Mr Nigel Murray, Acting Principal Adviser, Personal Retirement and Income Division

Ms Christine Barron, General Manager, Business Tax Division

Mr James O'Toole, Manager, Resource Tax Unit, Business Tax Division and Indirect Tax Division

Mr Anthony Regan, Manager, Company Tax Unit, Business Tax Division

Ms Brenda Berkeley, General Manager, Indirect Tax Division

Output Group 3.1—Fiscal Group

Mr Nigel Ray, Executive Director

Ms Jan Harris , General Manager, Budget Policy Division

Mr Bill Brummitt , Principal Adviser, Budget Policy Division

Mr Brenton Goldsworthy, Manager, Assets, Liabilities and Intergenerational Report Unit, Budget Policy Division

Ms Angela Baum, Manager, Budget Estimates and Analysis Unit, Budget Policy Division

Mr Chris Foster , General Manager, Social Policy Division

Ms Vicki Wilkinson , Principal Adviser, Social Policy Division

Mr Nick Stoney , Acting Principal Adviser Health Policy Unit, Social Policy Division

Ms Luise McCulloch , General Manager, Industry, Enviro n ment and Defence Division

Mr Robert Raether , Principal Adviser, Industry, Enviro n ment and Defence Division

Mike Waslin , Head of Secretariat, Clean Energy Future Corporation

Mr Peter Robinson , General Manager, Commonwealth-State Relations Division

Output Group 4.1—Markets Group

Mr Jim Murphy, Executive Director, Markets Group

Mr Geoff Miller , General Manager, Standard Business Reporting Division

Ms Helen Austin , Principal Adviser, Standard Business Reporting Division

Mr Paul Tilley, General Manager, Infrastructure, Competition and Consumer Division

Mr Bruce Paine, Principal Adviser, Competition and Consumer, Infrastructure, Competition and Consumer Division

Mr Brenton Thomas, Principal Adviser, Infrastructure/Transport/Communication, Infrastructure, Competition and Consumer Division

Mr Hamish McDonald, Principal Adviser, Housing and Cities/Energy, Infrastructure, Competition and Consumer Division

Mr Martin Halloran, Principal Adviser, Energy, Infrastructure, Competition and Consumer Division

Ms Ann Bounds, Senior Adviser, Consumer Policy Unit, Infrastructure, Competition and Consumer Division

Ms Sarah Sheppard, Senior Adviser, Consumer Policy Unit, Infrastructure, Competition and Consumer Division

Ms Anna von Reibnitz , Analyst, Infrastructure Transport Unit, Infrastructure, Competition and Consumer Division

Mr Mark Frost, Consumer Policy Framework Unit, Infrastructure, Competition and Consumer Division

Mr John Lonsdale , General Manager, Financial System Division

Mr Ian Beckett , Principal Adviser, Financial System Division

Mr Jonathan Rollings , Principal Adviser, Financial System Division

Mr David Woods , Principal Adviser, Financial System Division

Ms Kanwaljit Kaur , Principal Adviser, Financial System Division

Mr Jerome Davidson , Senior Adviser, Financial System Division

Mr James Chisholm, General Manager, Corporations and Capital Markets Division

Ms Alix Gallo, Manager, Governance and Insolvency Unit, Corporations and Capital Markets Division

Mr Daniel McAuliffe, Manager, Financial Markets Unit, Corporations and Capital Markets Division

Ms Ronita Ram , Acting Manager, Corporate Reporting and Accountability Unit, Corporations and Capital Markets Division

Ms Sue Vroombout, General Manager, Retail Investor Division

Ms Irene Sim, Principal Adviser, Retail Investor Division

M r Richard Sandlant, Manager, Financial Advice Reform Unit, Retail Investor Division

Ms Michelle Calder, Manager, Financial Services Unit, Retail Investor Division

Mr Christian Mikula, Manager, Consumer Credit Unit, Retail Investor Division

Mr Frank Di G iorgio, Acting General Manager, Foreign Investment and Trade Policy Division

Ms Sam Reinhardt, Principal Adviser, Foreign Investment and Trade Policy Division

Mr Michael Parkes, Manager, Compliance and Real Estate Screening Unit, Foreign Investment and Trade Policy Division

Australian Competition and Consumer Commission

Mr Brian Cassidy, Chief Executive Officer

Mr Mark Pearson, Deputy Chief Executive Officer, Regulation

Ms Rayne de Gruchy, Deputy Chief Executive Officer, Competition and Consumer

Mr Marcus Bezzi, Executive General Manager, Enforcement and Compliance Division

Ms Rose Webb, Executive General Manager, Mergers and Adjudication Group

Ms Jo Schumann, Executive General Manager, Corporate Division

Mr Adrian Brocklehurst, Chief Financial Officer

Mr Scott Gregson, Group General Manager, Enforcement Operations Group

Mr Nigel Ridgway, Group General Manager, Compliance Operations Group

Mr Michael Cosgrave, Group General Manager, Communications Group

Ms Michelle Groves, Group General Manager, Australian Energy Regulator

Mr Richard Chadwick, General Manager, Adjudication Branch

Mr Rami Greiss, General Manager, Merger Investigations

Australian Government Actuary

Mr Peter Martin, General Manager

Mr Michael Burt, Senior Adviser

Australian Office of Financial Management

Mr Rob Nicholl, Chief Executive Officer

Mr Michael Bath, Director, Financial Risk

Mr Gerald Dodgson, Head of Treasury Services

Mr Pat Raccosta, Chief Finance Officer

D r Andrew Johnson, Head of Reporting and IT

Australian Prudential Regulation Authority

Dr John Laker, Chairman

Mr Ross Jones, Deputy Chairman

Mr Ian Laughlin, Member

Mr Charles Littrell, Executive General Manager, Policy, Research and Statistics Division

Australian Taxation Office

Mr Michael D'Ascenzo, Commissioner of Taxation

Ms Jennie Granger, Second Commissioner

Mr Bruce Quigley, Second Commissioner

Mr David Butler, Second Commissioner

Mr Brett Peterson, Assistant Depu ty Commissioner Superannuation

Australian Securities and Investment Commission

Mr Greg Medcraft, Chairman

Ms Belinda Gibson, Deputy Chairman

Mr Peter Kell, Commissioner

Mr Adrian Brown, Senior Executive Leader

Mr Warr en Day, Senior Executive Leader

Mr John Price, Senior Executive Leader

Inspector-General of Taxation

Mr Ali Noroozi, Inspector-General of Taxation

Mr Andrew McLoughlin, Deputy Inspector-General of Taxation

Productivity Commission

Mr Gary Banks AO, Chairman

Dr Michael Kirby, Head of Office

Mr Alan Johnston, First Assistant Commissioner

Ms Lisa Gropp, First Assistant Commissioner

Dr Ralph Lattimore, Assistant Commissioner

Committee met at 9.02 am

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

I particularly draw the attention of witnesses to an order of the Senate of 13 May 2009 specifying the process by which a claim of public interest immunity should be raised, and which I now incorporate in Hansard.

The extract read as follows—

Public interest immunity claims

That the Senate—

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

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

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

(1) If:

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

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

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

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

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

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

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

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

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

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

CHAIR ( Senator Mark Bishop ): The committee will recommence its consideration of the Treasury Portfolio with the secretary of the department, Dr Martin Parkinson, and officers of the Treasury. I welcome Senator Wong, Minister for Finance and Deregulation, and officers of the department. I would like to thank Dr Parkinson for making himself available after a lengthy trip last night. Minister, do you or any of the officers have an opening statement?

Senator Wong: I do not. I do not know whether Dr Parkinson has one.

Dr Parkinson : No.

CHAIR: Let me open up this introduction with a comment. In one form or another I have been in public life since the late 1970s in different forums.

Senator Wong: You look too young for that.

CHAIR: Thank you—you can come again. I cannot recall a better time in all of my time in public life for the economy. Every indicator I look at, whether it be inflation, interest rates, employment levels, employment growth, home ownership, job availability, the impression of income equality, I have never seen individual indicators or the aggregate as good. Firstly, can you comment on the assertion that I have made from the table? Secondly, if I am incorrect, point out where. Thirdly, do you as one of the chief advisers to the government, for want of a better description, see any dangers or threats on the horizon to that state of wellbeing that I assert?

Dr Parkinson : I think the way you characterised the situation is pretty much spot on. If you look at the macroeconomic aggregates, we have growth running around trend, so low three or 3¼ per cent or thereabouts. We have underlying inflation sitting reasonably firmly in the centre of the Reserve Bank’s target range. If you look at those two broad macro aggregates, you would think that things were tracking along in a fairly sweet spot.

When you look at the opportunities in front of Australia, as I have talked about numerous times before, you would have to say that the prospects for Australia over the next period, whether it is the short to medium term or the longer term, are incredibly promising. No doubt there are some challenges there, but the opportunities confronting Australia, in part caused by the opportunities that have arisen from the emergence of the major developing economies, particularly China and India, where we are seeing a massive boost to our terms of trade and hence to our national income and to investment prospects and the like coming through the mining sector, which is incredibly positive. As those countries and other countries around the world continue to improve the living standards of their citizens, we are seeing an increasing demand for higher quality diets, which has huge potential implications over time for our agricultural sector and our food producers.

Thirdly, as I have talked about here and elsewhere, we are sitting on the edge of a massive explosion in the number of people who would be described as middle-class. There are roughly around 500 million people in the Asia-Pacific, excluding North America, who you would regard as middle-class today. We expect that to rise, on the basis of work that has been done overseas, to something in the region of 1.7 billion by 2020 and China to be a bigger dollar market for middle-class than the US, and by 2030 for that to have risen to about 3.2 billion. Now, having 3.2 billion people with middle-class tastes and aspirations offers amazing opportunities for Australia if we are able to rise to the challenges. I have talked about those challenges. They are to make sure that our tourism industries, our services sector—particularly education, legal, health and the like—but importantly also our manufacturing sector, make the transformations that are necessary to allow us as a country to exploit the advantages or the opportunities that this global transformation is wreaking on our economy.

Having said of all that, it is not to say that everything is smooth here at the moment. It is clearly not. While we have some parts of the economy growing incredibly strongly, we have other parts, particularly parts of manufacturing and tourism, and indeed one might even say parts of education services, where there is a transformation underway that is quite a painful one. We are seeing some of the business models that Australian firms have pursued over a long period being challenged by this global transformation.

I have said in a number of speeches that we need to recognise that we are in a period of transformation, and a critical challenge for us is how we manage that transformation. We can manage that transformation by being clever and thinking about the sorts of industries we want to create or we can basically try to hold on to industrial structures that the world has, in a sense, passed by. There is nothing new about that being the situation that we face today. We faced it in the nineties, eighties, seventies, sixties and fifties. The difference was that in various times in the past what we have done is tried to protect those industries from change, and when we have done that we have seen instances where inevitably those economic forces overwhelm the capacity of governments to in a sense protect them from change.

The challenge is—and I do not know whether you have seen it, but I touched on this last night at a speech at ANU—if we think about the existing structure as something we have to hold on to come what may, then we will find we will face the same challenges that we experienced coming out of the sixties and seventies, which led to the Hawke-Keating reforms of the eighties. If, on the other hand, we recognise that what we need to do here is put in place policies that help firms and industries and, more importantly still, workers manage those transformation—you can take manufacturing—and we will link manufacturers with high-end specialised knowledge based approaches, we can have very vibrant, profitable and successful sectors of our economy, whether it be manufacturing or parts of services. We are playing in those areas, but we are playing in a different way and we are playing in a way that yields high value add and high-wage jobs, which are the sorts of things that this government, the previous government and indeed its predecessor talked about—the importance of managing those transformation so that we are not characterised as a low wage, low productivity economy, but as a high-wage, high-productivity economy. That is the place you can see for almost the last 30 years public policy in this country has been directed towards.

CHAIR: Thank you for that detailed response. In your comments there were essentially three themes: firstly, opportunity; secondly, the challenge; and, thirdly, a bit on the alternatives. If we do not grasp what you call the challenge—the opportunity of advantage—embrace the change and perhaps resort to policies, strategies or approaches that were considered in the post-war years up until the early 1980s, and presume we go down that path without engaging in unnecessary speculation, what are the consequences of adopting such an approach vis-a-vis the growth particularly in this part of the world, in Asia and in those giant economies to the east and west of India and China?

Dr Parkinson : That is a very good question. Without trying to speculate about what might happen, let us just look back for a moment. What did we see right through the 1960s? We applauded ourselves for what we thought was a good productivity performance. Remember the 1960s were often recorded in Australia as some sort of golden age. In actual fact, when you looked at what happened, our productivity performance deteriorated vis-a-vis the rest of the world and by the time we got to the 1970s and early 1980s it was really quite apparent that we had lost dramatic international competitiveness. We had high and persistent rates of unemployment and inflation. We had a continual erosion of competitiveness, and because we had put so much effort into tariffs, quotas and other forms of protection, we created a mindset in Australian business that if things got too hard the first thing you did was not go down and talk to your workers and say, ‘We’ve got a challenge. How do we, together, rise to address this?’ The first thing you did was you got on your plane, you flew to Canberra and you lobbied your local member and ministers to ensure that you got more protection. Remember that is the Paul Kelly, the Australian settlement protection for all, mentality. That was well entrenched. It was really the period of the 1970s and that constant step up. You would recall we had virtually no unemployment and it ratcheted up, stabilised and then ratcheted up again. We would start to get it down a bit and then the next shock it ratchets up. We were stuck in a very bad place.

It was the realisation that we were stuck in a bad place on both sides of politics in the 1980s that allowed us to make the transformation, but we would not have gotten there if all we had done was say, ‘This is bad. Let’s deregulate and leave it at that.’ We had to think about transition paths. We actually engaged in significant removal of tariffs and quotas. Quotas early on but tariffs starting in the late 80s, and that was carried on in a bipartisan way right through until this decade. We got rid of a lot of regulation of different sectors—the services sector. We introduced competition policy reforms. We did tax reform. We did a whole pile of things that changed incentives to open up the economy, but we also said, ‘There are some parts of Australian industry that need some assistance to manage the transformation.’ The classic example is the Button car plan. The whole point of that was to identify that there is a pathway that has to be followed, but you need to have focused time limited interventions that do not simply provide another form of backdoor protection that supports a particular sector of the economy but is actually a defined pathway to help transformation. Indeed, I made that very point in the speech at ANU last night. If all you do is focus on what you would call national champions—you will have seen in Japan articles in the last couple of weeks about how METI, in its current guise, is trying to force parts of Japanese manufacturing together to create national champions to compete—and if you do that it is still a form of protectionism.

If, on the other hand, you basically do what was done with the Button car plan and the sorts of interventions that globally looked to be more successful, you actually identify what your end point is, that is, you want this particular sector to be dynamic, competitive, stand on its own two feet, not forever and a day having to rely on government handouts, and as I said you put in place a time limited clear output or outcome focused set of interventions that help reach that transformation, that is the sort of thing that governments have a legitimate role. We should not lose sight of that.

We are not a laissez-faire economy and we are not a command and control state run economy. We have always been a mixed economy and the question for us is: what is the right balance of mix at any point in time, which varies by sector and circumstances.

CHAIR: Thank you. In that response you referred to a bit of background on the approach governments should be pursuing. The question I asked was couched—

Dr Parkinson : I am sorry. Just to be clear, I did not say what we should be pursuing. I was talking about what has worked in the past.

CHAIR: Indeed. That is right and I stand corrected. With this growth of China and the figures you use, the growth also appears to be developing over in India, and spreading to border countries of both of those where they outsource industries and the like. Hence there are growing indicators of wealth in the border countries of both India and China. Does that directly impact upon us or can we really say, ‘That’s up there in Asia. It is not relevant. We should just set our own agenda and do as we wish’, or are we in some way inextricably linked to the policies they adopt?

Dr Parkinson : We are inextricably linked. There is no question. The major driver of the transformation that is occurring in Australia at the moment is the exchange rate. The high level of the exchange rate is threatening the viability of a range of existing business models. Why is the exchange rate high? It is because of the terms of trade shock. The terms of trade shock come about because of the emergence of these new giants. It is not just China and India. Indonesia is now a bigger economy than Australia. That happened in 2006, but most Australians do not recognise that. If you look in Africa, the pace of growth of South Africa is impressive, but the pace of growth of Nigeria is even more so. There is Vietnam’s growth. Brazil and Mexico are other prime examples.

We tend to think of this phenomenon as an Asian phenomenon, because that is where it is most obvious for us, but it is actually occurring elsewhere. When you come back and look at what is happening in China and India—and let us just focus on China for a moment—it is actually urbanisation. It is the movement of people from regional areas into the cities and the industrialisation that goes with that that has led to an explosion in demand for energy and resources. We are gifted by the fact that we have a massive endowment. In a sense we have grown up in a world where the terms of trade have tended to move against Australia—that is the price of exports relative to the price of imports has moved against us—but over the last decade to a decade and a half we have seen that turn around and in the last seven or eight years that turnaround has been really quite dramatic. As Glenn Stevens, the Governor of the Reserve Bank, has pointed out—and I may get this wrong, but Dr Gruen might remember—it used to be that a shipload of iron ore used to buy us 2,200 plasma screen TVs; it now buys us 22,000. That has two effects. Firstly, the price of our exports has risen dramatically, but also the price of our imports has fallen dramatically.

The way to think about what has happened in China is as follows. If you think of a global supply and demand diagram in simple terms, the emergence of China and India pushed out the global demand for resources and energy far more than it pushed out the global supply. As a supplier of resources and energy, we get a big boost to the price of our exports, but it pushed out the global supply curve of manufactured products far more than it pushed out the global demand curve. As a net importer of manufactures, we find that actually helps lower inflation. It means prices for Australian consumers are lower and, in fact, that is one of the ways in which Australian households benefit from the mining boom. There are other ways, but that is just one way in which it happens. We cannot change that phenomenon unless, in a sense, what we want to do is say, ‘We woke up today. The world has made us richer than we were yesterday, but we don’t want this’, and so we pursue policies that are actually deliberately designed to make us poor.

CHAIR: Thank you. Senator Cormann.

Senator CORMANN: All of us on the coalition side are very keen to read your speech. Despite my best efforts this morning I was not able to track it down other than the extracts in the Fin Review. Could we get a copy?

Dr Parkinson : My apologies for that. You are not the only person who has had that problem.

Senator CORMANN: Normally in the morning we can get it online somewhere. I can see that all of your colleagues have—

Senator Wong: I will ask Dr Parkinson’s staff to get some copies.

Senator CORMANN: That would be brilliant.

CHAIR: We have asked for copies to be printed and circulated.

Senator CORMANN: Thank you. Dr Parkinson, in talking about the global picture you have talked about the significant growth in many other parts of the world, beyond China and India. Does that strengthen the case for testing any policy change in Australia against the question of whether it will make us more or less competitive internationally and the need to focus on change that will improve our international competitiveness rather than put it at risk?

Dr Parkinson : I think you need to step back and ask yourself: is the comparator you want for Australian living standards Chinese, Indian or South African living standards or are they the living standards of the United States, Canada, Japan and other developed advanced economies? Clearly the things that societies are prepared to put up with when they are poor are quite different from the things that they are prepared to put up with when they are richer. A classic example—and you may be too young to remember this—

Senator Wong: There is so much flattery this morning.

Dr Parkinson : Minister, you started it.

Senator Wong: I was genuinely shocked. I was still in Malaysia in the seventies.

CHAIR: I had been to Mount Gambier in the seventies.

Dr Parkinson : The point I was going to make is that we only have to think back to our own history here in the 1970s and the extent of air pollution in our major cities. We were prepared to accept that. We could have done things about it, but we were prepared to accept it. Gradually as we got richer we changed the investments that we have made in improving the environment, health and welfare. You see this same trade-off being debated in China. A classic question that is raised in China is: do we wait to get rich before we address these challenges or do we do them as we try to get rich? That is a question that every country faces.

Senator CORMANN: What is your assessment of the level of consumer/business/investor confidence across Australia in the present market?

Dr Parkinson : Dr Gruen has coined the term the ‘boom with gloom’, and I must say I think that is really quite apt. If you look at business and consumer confidence, they are surprisingly low given the set of circumstances confronting Australia. As I said, I am not in any way attempting to downplay the fact that there are parts of Australian business that face very serious challenges in terms of transforming to gain advantage from the opportunities open to us, but I think the whole mindset is overdone. It is almost as if most Australians seem to think we live in Greece. We do not. We actually have an incredibly bright future ahead of us. Yes, there are challenges, but there are always challenges. The opportunities that we have in front of us are of a sort that we have never seen before.

Senator CORMANN: So, you think that people are being disproportionately gloomy to the reality of the circumstance?

Dr Parkinson : I do not want to say why people would be feeling that way, but personally it is somewhat surprising that there is not in a sense more focus at the national level on the opportunities that are available to us. There is an overwhelming negative sense about much of the national discussion and debate. The Treasurer has made this comment a number of times, which is that, yes, we have a multispeed economy at the moment and there are some parts that face significant challenges, but Australians have a lot to be optimistic about.

Senator CORMANN: Do the dynamics of minority government contribute to that sort of debate that you have just described?

Senator Wong: No. I think what contributes is the ridiculous commentary and the talking down of the economy that some of your senior colleagues engage in. When you have the man who wants to be the Deputy Prime Minister comparing this country with Greece, it shows you the ridiculous propositions that seem to pervade the opposition’s discussion of the economy.

Senator BUSHBY: It is—

Senator Wong: It is true.

CHAIR: Order!

Senator Wong: I am sorry. Senator Bushby seems to be talking to me. Do you have something you want to say to me?

Senator BUSHBY: A gratuitous comment in response to the way that you have put that.

CHAIR: We will not take gratuitous comments from anywhere.

Senator CORMANN: I am asking questions.

CHAIR: Senator Cormann.

Senator CORMANN: Thank you. Having looked at your speech quickly and the way it has been reported, you talk about the need for government interventions to be focused, defined and term limited, and also about what you called creating national champions, which is another way of saying picking winners or that to support ‘so-called strategic industries is placing producer interests ahead of those of consumers’. What is the impact, in your view, on consumers and jobs if government interventions are not focused, defined and term limited?

Dr Parkinson : I think I have already answered that question.

Senator CORMANN: How?

Dr Parkinson : That was the question that Senator Bishop was asking. I can go over it again, but Senator Bishop effectively asked me that question.

Senator CORMANN: I did not hear him ask that question.

CHAIR: There was a discussion about the alternatives that we faced.

Senator CORMANN: You may have discussed the subject matter, but I am asking a very specific question. What will be the impact on consumers and jobs if government interventions are not appropriately focused, defined and term limited?

Dr Parkinson : I will go back to what I said earlier, which is that our own experience in the 1960s and 1970s showed that, if you essentially try to protect industry from change rather than putting in place the policy frameworks that facilitate and encourage change, and put the incentives in place that encourage change, you in fact run the risk of ossifying your industrial structure and losing competitiveness. As you lose competitiveness, you put at risk jobs, but more importantly you have lost productivity and hence you have lost the capacity to improve living standards for your people. I would have thought that is an indisputable fact and a view shared by both sides of politics in the 1980s and 1990s.

Senator CORMANN: That is a very concise way of putting it. Looking at the size of the government, the budget papers tend to focus only on the revenue and spending that underpin the calculation of the underlying cash balance. We were told yesterday by the Fiscal Group that this excludes spending for investment in assets, including residential, mortgage backed securities, the NBN and the Clean Energy Finance Corporation. Is there an argument that it would be more appropriate to assess the size of government including all of the government commitments?

Mr Ray : We discussed this yesterday. It is the case that the underlying cash balance does not include investments in financial assets, and the headline cash balance does. The reason that successive governments have focused on the underlying cash balance is that those elements are just an acquisition of an asset rather than a transfer of resources from the government to the non-government sector. As I said yesterday, this was looked at at length when we moved to accrual budgeting in 2000, and since then both governments have focused on the fiscal balance and the underlying cash balance. The financing requirement, though, does look at the headline cash balance. If we look at the size of government, it is not about the balance but about the size of government as a proportion of GDP. Typically we look at two things. It is either government spending to GDP, which is G to GDP, or tax to GDP. The acquisition of financial assets is reflected in the headline.

Senator CORMANN: We talked about aspects of this, but I would like to put something on notice while we are going through this. Yesterday, Treasury took on notice to provide a historical time series on the headline cash balance similar to table D1 in the 2011-12 MYEFO, page 362. Could Treasury also take on notice to provide a historical time series on the components that make up the headline cash balance, particularly the revenue and expenditure components in both dollar terms and as a percentage of GDP?

Senator Wong: How far back?

Senator CORMANN: However long is available.

Senator Wong: Mr Ray may have something to say about that.

Mr Ray : I am happy to take it on notice, but the revenue time series is already published in MYEFO.

Senator CORMANN: In relation to the carbon tax, can you confirm that people who are earning around $80,000 a year or more will not be better off under the carbon tax cost impacts plus any compensation or tax cuts?

Mr Heferen : If you talking about the specific tax cuts that the government announced in the package, that is correct.

Senator CORMANN: That is correct?

Mr Heferen : Yes. There is a minor clarification. Because of the way the scales work, it is actually some small amount per year, I think in the order of $3.

Senator CORMANN: So, for all intents and purposes they are no better or no worse off.

Mr Heferen : If the metric of being better off or worse off is whether or not they have a cut to their personal tax, that is correct.

Senator CORMANN: Eighty thousand dollars a year is not that far above the average full-time wage now.

Mr Heferen : Just to clarify, we are talking about the income tax cuts. The income tax cuts will scale down, and so they will peter out at $80,000 with the $3 tax cut, as I said, which is a function of the scales. The question of whether there is compensation for families on the outlay side of the budget should also be taken into account.

Senator CORMANN: Given the income tax cuts, essentially for all intents and purposes they are $3 a year better off, and so they are not really better off.

Senator Wong: I would like to respond.

Senator CORMANN: Let me just ask my question and then you can respond.

CHAIR: Order! We are having multiple discussions. Senator Cormann will finish his question and then the minister will respond.

Senator CORMANN: Do you expect any wage pressures for working people that are earning more than $80,000, given that they are getting significantly less assistance through income tax cuts than other employees and taxpayers?

CHAIR: Minister?

Senator Wong: I was just going to make the point, because it was dismissed somewhat errantly, that obviously there may be other ways in which government is assisting people in excess of $80,000, for example, through family tax benefit and other programs.

Senator CORMANN: My question is: does Treasury expect additional pressure on wages from people in the income brackets above $80,000, given that they are no better off when it comes to the personal income tax cuts?

Dr Gruen : We traversed some of this ground yesterday. When we put together the forecasts for the MYEFO, we obviously take into account all of the things that are going on in the economy and, in terms of what we expect the impact of the carbon price to be on wage outcomes, we also take into account the modelling. The modelling did not do a sophisticated job of dealing with the assistance package. The way the modelling was done was to assume that the assistance provided to households was simply provided as a lump sum, and that is made clear in the modelling report. If you want to know the page reference I can give it to you.

When we have to move from the modelling, which is longer term, as you know, to actually making a judgement about what impact this will have on wages in the near term, the fact that there are tax reductions for the majority of households, but as you say not for households above $80,000, is taken into account by us. We have not sat down and calculated what we think will be the wage effect at different levels of income. We make an overall judgement.

Senator CORMANN: So you are making an aggregate judgment?

Dr Gruen : An overall aggregate judgement.

Senator CORMANN: If you were expecting higher wage increases for higher income earners and you are looking at it as an aggregate, as a logical consequence that would mean that you are expecting lower real wages for lower income earners?

Dr Gruen : Not lower real wages after assistance. There is a distinction to be drawn between their wages pre tax and their wages post tax.

Senator CORMANN: Except that real wage calculations do not take into account the tax cuts.

Dr Gruen : You can do a calculation of real wages pre tax or real wages post tax and they will give you different answers, if you have had a tax cut.

Senator CORMANN: Does the Treasury modelling of the carbon tax impact assess real wages pre tax cuts or post tax cuts?

Dr Gruen : The Treasury modelling does not have the tax cuts in it, and so the revenue is collected and there is a lump sum transfer. That revenue is simply handed back to consumers as a lump sum. That modelling is of relevance to trying to assess what is going to happen, but it is not the only thing. What I am saying to you is that when we came to putting together the MYEFO forecasts we had to take into account the details of the assistance package. This is very similar conceptually to what happened with the introduction of the GST in the sense that it led to a significant rise in prices, but there was a transfer to households, which was expected to and did lead to wage moderation through that period. In other words, there was not an attempt by households to maintain their real pre tax wages, because they got transfers that made them better off. It is a very similar situation, and both the Reserve Bank and we think there will not be second round effects. I think the Reserve Bank has made that clear in its most recent statement on monetary policy.

Our overall assessment, as a consequence of the nature of the assistance and the nature of the labour market with slightly higher unemployment, is that we are expecting to see wage growth in 2012-13 of about 3¾ per cent. That is the MYEFO forecast for wage growth. We think that broadly speaking the compensation will be sufficient so that there will not be second round effects on wages.

Senator CORMANN: I have a final question. In your opening statement, Dr Parkinson, you talked about the great opportunities that we had in front of us and that we are in a pretty good position. However, over the last year employment growth has effectively been stagnant at about 0.3 per cent per year, which is probably the lowest since the recession in 1990 and maybe the early 1980s. What is holding us back? Why is it that we are in such a stagnant position, which by historical standards is quite bad?

Dr Parkinson : We may have covered this previously. I think we made the point both publicly and here that when you look at the extent of employment growth in 2010 that looked to be stronger than we would have expected. We interpret that as employers anticipating the economy growing faster than we thought it would. Remember, at the end of the period prior to the GFC labour was very scarce and the interpretation that we put on that was that as the employers saw the economy picking up they basically jumped into the market to try to grab hold of labour, because they did not want to find themselves in the situation they were in back in 2007. Then as the economy grew at a more moderate pace, they basically realised they had overdone it and so they sat on their hands for a while. When you look across the two years, that is probably a more accurate picture.

Then again, you said up until December, which is fine, but you could add in yesterday’s results and the picture changes again. It is a bit arbitrary where you draw the end points, but I think the real message is that, prior to the GFC, labour was very scarce and employers were hunting for it. They did not want to find themselves in a situation. They jumped in, hired early and then basically had to sit on their hands for a while.

CHAIR: Thank you. Senator Sinodinos.

Senator SINODINOS: You talked about the structural adjustment that the Australian economy is going through at the moment. One of the issues in that is the whole labour market dynamics around this. Part of the challenge seems to be, as you say, where some industries hit by a higher dollar are having to adjust or potentially close down. The issue then becomes: are we in a situation where we can not so much guarantee but hope that there will be a transfer of labour potentially from sectors that are reducing, as it were, to sectors that are starting to boom? Are you starting to see that? In other words, do people who are potentially going to be worse off as a result of structural adjustment have the capacity to get into the industries that they need to get into?

Dr Parkinson : We have seen that already. If you look in the Reserve Bank’s statement on monetary policy that came out just this week, it shows very significant growth in a range of areas—financial, insurance, wholesale trade, healthcare, social assistance, mining and public admin—and it also shows area where we have lost jobs, particularly manufacturing, agriculture, retail and so on, and we are seeing that adjustment. You can also see it in the differential growth rates of different parts of the economy. We have the mining sector itself tracking along at around the historic rate of growth, probably about four per cent to five per cent a year, which is broadly consistent with the historical additions to capacity. We have the mining related sectors. In that sense, where construction is occurring, legal services and all of the service related components are growing at multiples of that growth rate. We then have other components of the economy, which we have talked about previously—retail, wholesale and parts of manufacturing—where growth is much more sluggish and hence employment prospects are weaker.

Senator SINODINOS: But for those who are particularly vulnerable in the labour market, including people who have been long-term unemployed or people who are outside the labour force for a variety of reasons—and the government has stressed that it is looking at strategies around this—are you evaluating the government strategies in these areas to make sure that those sorts of people are benefitting from change?

Dr Parkinson : We know that getting the long-term unemployed into work requires more than just the creation of jobs, and so there is a range of programs that government has focused on those. Perhaps another way to come at this is, if I could reframe your question slightly: are we seeing significant geographic dispersion in labour market outcomes? You conceive of that as being a forerunner of some of the issues you are raising. To date, we are not. For the 1,400 statistical local areas we can plot the actual level of unemployment for each one and then we can calculate the dispersion at any point in time across all 1,400, and when that has been done it shows us moving backwards and forwards with the economic cycle, essentially along a straight line. Whereas if we were seeing marked geographic dispersion, because of concentration of industries, then you would begin to see that kink out at the bottom. So, as the unemployment rate had been coming down, you might begin to see it flatten out, whereas in fact it just seems to keep tracking backwards and forwards. We think that is testament to the extent of flexibility that has been introduced in the labour market over the last couple of decades.

Senator SINODINOS: Part of the concern in asking the question is that, particularly if manufacturing continues to decline and is concentrated in particular areas, you then get this phenomenon where, say, middle-aged or older workers find it hard to either move or adjust. They have family commitments, housing issues and all the rest of it. Are people thinking about those sorts of issues as the structural adjustment accelerates?

Dr Parkinson : That is a very good observation. I think they are. I know your interest in productivity. One thing that is a bit of an inhibitor here is the capacity of people to take their skill sets and use them elsewhere. I do not know the facts of this particular case, but there was one reported in the press the other day where workers with skills in the Illawarra region cannot use those skills in very similar jobs in Queensland because of different occupational licensing arrangements.

Senator Wong: You might recall that the trades licensing reform is part of the COAG agenda. It is one of the areas where a couple of states are not recognising the importance of a national economy.

Dr Parkinson : You are entirely right to focus on it. Our experience, as you will recall from both the 70s and then the late 80s/early 90s is that you get some groups in the labour force that are very hard to deal with if you are not planning to deal with them. That is something Senator Cameron has had a long interest in as well.

Senator SINODINOS: On the issue of subsidies that you raised in your speech last night, you talked, in particular, about how the poor often end up bearing the burden of adjustment and bearing the burden of those sorts of policies. Can you give us an example of what you mean and how that happens?

Dr Parkinson : The classic one is if these policies result in a lack of competitiveness in the economy, a lack of competition and hence higher than otherwise inflation rates. We know that the rich are well able to handle inflation. We know the poor, particularly people on fixed incomes, always get hurt. That is why economists, as you know, always refer to inflation as the inflation tax. It is a tax that falls disproportionately on the poor. To the extent that we have phenomena like the one you were just describing of pockets of people who lose their jobs and there are not programs both to help the workers in particular—and I would stress it is actually far more important to help workers than it is specifically to help industries or individual firms—to reskill and facilitate their movement then invariably they are bearing the cost of the burden of adjustment. It tends not to be—and I do not want to put this in class terms—the owners of capital.

As former Prime Minister Keating, then Treasurer Keating, once famously remarked about the textile and clothing industry in this country, it tends not to be the owners of capital who suffer anywhere near as much as the workers. That has been an issue that we have been well served by with bipartisan policies over a long time; we have to do things to facilitate adjustment for people in those circumstances.

Senator SINODINOS: In your speech last night you referred to a speech by the Governor of the Central Bank of Canada, who talked about the world economy having had a Minsky moment. There will not be a lot of people who recall Hyman Minsky, but can you elaborate a bit on what he meant by that?

Dr Parkinson : For those people who have not read it, it is an excellent speech.

Senator SINODINOS: His speech, not yours?

Dr Parkinson : Yes, his speech. You were talking about the Governor of the Bank of Canada, Mark Carney speech.

Senator SINODINOS: Yes.

Dr Parkinson : It is an excellent speech. The governor was drawing out Minsky’s point, which is that often booms have in their antecedents the seeds of their own destruction. What happens is that you are riding an upswing of an asset price bubble, for example. You think that it is all due to your behaviours. As business encourages government to deregulate, you think that government should get out of the road and it should not regulate because look at how well we are doing. And invariably, whether it is the tulip bubble in Holland or whether it is a housing, land or some other sort of bubble in Japan or another country, these things inevitably come crashing down. Governor Mark Carney went into much greater detail and more depth over all of the ramifications of Minsky’s 1986 book on the issue. That is just one way in which we can encapsulate it simply.

Senator SINODINOS: The dilemma that raises is that, post a Minsky moment, how much do you tighten up regulation and how much do you try to anticipate and deal with asset price bubbles? Do you potentially end up overcompensating?

Dr Parkinson : I think there is a danger that you overcompensate. One of the things that we have to recognise here is that we avoided a lot of the excesses that occurred particularly in the US, the UK or in Japan in the 80s because of the quality of our regulation. We have had, for a long time, very high quality regulators and approach to regulation. That does not mean we get everything perfect. It does not mean that there are not things that we should be looking at to improve. But the approach that we have adopted to regulation has served us well. When you look at some of what is going on globally in the regulatory environment, I think there is a genuine question of whether or not some of that wants to go too far. That is being thrashed out internationally. As a small economy, if there are trends towards changes in global regulation, we have to try to ameliorate that, whichever way it is, either to greater or lesser regulation, in ways that serve our interests, and we have been pretty focused on that.

Senator SINODINOS: I have a final question on the budget stance. In your view, given the changes you also had to make in MYEFO and everything else—and we are trying to hurtle towards surplus in 2012-13—given the state of the economy do you think there is a danger that we could overshoot potentially and have a fiscal contraction happening at a time when the economy itself might be slowing more than was perhaps anticipated last year?

Dr Parkinson : Again, that is a very good question. I actually addressed that in the post budget speech in May of last year when the question came up about the speed of fiscal consolidation. I pointed out then that if you looked at the Commonwealth we were consolidating over a couple of years by about 3.8 per cent of GDP. If you tossed in the states, which is the data that we got subsequently, it was more like about 4¼ per cent of GDP. You can always argue at the margin that you might do a little more or a little less, but it seemed to me that if you really wanted to be a lot more hairy chested about the extent of fiscal consolidation, you ran the risk of taking us into quite dangerous territory.

When one looks at what is happening in Europe, where you see almost all countries attempting to consolidate at the same time, there is no way that fiscal consolidation can be growth enhancing in Europe in that context. I think it is a case where fiscal consolidation, if it boosts confidence sufficiently, may assist in particular circumstances, but that is only when that consolidation boosts the credibility of governments, which is not an issue that we confront here. But even then I think it only works if most of your trading partners are going gangbusters. If you look at Europe, every one of those countries is engaged in fiscal consolidation. Just to put it in context, when the Greeks started their consolidation program, the expectation was that GDP would shrink by about two per cent over 2011-12 and that they would do an eight per cent of GDP consolidation over the three years. The expectation now is that GDP would shrink by about eight per cent—in fact it has shrunk by eight per cent in the last 12 months—and the extent of the consolidation over three years is about 25 per cent of GDP. How you can consolidate back into a sensible fiscal position when your economy is shrinking so rapidly is completely beyond me. You can look at it and say Greece, Italy, Spain, Portugal, UK, France and even Germany are doing it, so it is no surprise that we have taken the view that Europe is going to be both in recession and probably a source of global instability for a number of years to come.

To come back to Australia, we are looking at around trend growth. We are looking at unemployment in the mid fives, which we think is broadly close to the NARU, and we are looking at inflation in the middle of the target band. In those circumstances, bringing the budget back to surplus makes sense. We think that is the right sort of policy to be pursued.

Senator SINODINOS: In circumstances of potential lower trend growth, you would have to review the budget position?

Dr Parkinson : If you thought that trend growth was lower—so potential growth was lower permanently—you would need to ask what the cause of that was and then what the appropriate fiscal stance was.

Dr Gruen : I would like to add one point relevant to this conversation. In the comparison between Europe and us we have considerable scope for monetary policy to ease were it necessary. Europe is already in a situation of interest rates being effectively zero, both in the United Kingdom and the Euro area. If growth disappoints in Europe or the United Kingdom, there is not a lot they can do. Were that situation to arise here, we would have another instrument and we would have a floating exchange rate.

Dr Parkinson : The Europe-Australia comparison is interesting, because what happened in Europe was that all those governments, with the exception of Germany, have lost fiscal credibility. That question has never been raised around the Australian government. That focus on a medium term approach to fiscal policy and bringing the budget back to surplus has served us very well, and I think it will continue to do so.

CHAIR: Senator Eggleston.

Senator EGGLESTON: As detailed in the Australian on Tuesday and in many other papers, there is now a lot of Chinese investment in the minerals industry in Africa. What are the implications of that for the Australian economy in general as well as our minerals industry in particular? Having read through your speech, I see that you have a strong view that people should learn from economic history. I recall that in the 1970s in the Pilbara, when there was a great deal of industrial disruption, the Japanese, because they wanted to secure their source of supply and were concerned about the continuity of supply dying off in the Pilbara, went and invested very heavily in Brazil and established the Brazilian iron ore industry as an alternative source of supply. Are we going to see a situation in which history repeats itself and the Chinese are now securing their supply more in terms of prices from Africa, and will this have impacts not only on the Australian minerals industry but also economic projections in general for wealth generated from minerals?

Dr Parkinson : It is fair to say that pretty much all purchasing countries, whether they are purchasing minerals and energy or whether they are purchasing agricultural products, feel more comfortable with diversified sources of supply. What we are seeing in Africa is a perfectly healthy and sensible response on the part of the Chinese. What implications does that have for Africa? If it is done well, it can actually help catapult African growth forward. If it is not done well, it has some very serious implications. What does it mean for Australia? Not a lot in the sense that all of our projections have been predicated on the fact that there will be a significant expansion in global supply and that a lot of that will occur in other countries.

In a sense, if you thought people were moving from investing in Australia to investing in Africa because the environment in Australia was unwelcoming, then you would be rightly concerned. If you thought they were investing in Africa as well as investing in Australia because they wanted to diversify their sources of supply, there is not much you can do about it, and indeed that is the picture that we see.

Senator EGGLESTON: There have been comments in Perth from the mining industry. The general concern is that the climate in Australia is becoming somewhat unfriendly with the potential of the mining tax and other factors, as well as the fact that the iron ore companies have increased their prices quite substantially quarter by quarter. I attended a conference in Perth last May, where the Chinese made the point that iron ore prices had risen substantially quarter by quarter, and in fact Africa was seen as a source for iron ore where the prices would be lower and the future would not be constrained by unfriendly actions perhaps in the form of a mining tax.

Dr Parkinson : Can I unpack that a little bit?

Senator EGGLESTON: Yes, of course.

Dr Parkinson : I think there are a couple of things there that are conflated and worth focusing on. One is that as a private buyer or a private seller you may well have a view about a desire to dig the asset out of the ground and flog it off as quickly as possible. As a society, what you are doing is taking a non-renewable asset and selling it. As a society, it is arguable that we are not receiving an appropriate rate of return on those non-renewable resources. That is the motivation behind the Henry review recommendations and the mining resource rent tax.

As an individual, you may well say, ‘I don’t like that’, but you may equally say, ‘I don’t like payroll tax, income tax and the fact that there are minimum occupational health and safety arrangements’, but societies take those decisions. I would argue very firmly that Australia has not received an appropriate rate of return for the exploitation of non-renewable resources.

I will take the second point, about the fact that prices of iron ore sourced from Australia, Brazil and so on may well have risen and prices from Africa may not. That is nothing to do with government. That is to do with consenting adults sitting around a table negotiating in terms of the Australian and Brazilian prices. If—and this is a big ‘if’—the reason prices from mines in Africa are dramatically lower and it is not because they have dramatically lower costs but because those countries are not also getting an appropriate rate of return for their citizens, that is actually a transfer of wealth from the citizens of those African countries, who we know are poor, to the citizens of China. I do not know about you, but I am not of the view that is necessarily good for anybody.

Senator EGGLESTON: I do not dispute what you are saying, and I accept the rational for the mining tax.

CHAIR: You should come and join us over here.

Senator EGGLESTON: I accept the rationale. I am not saying that I agree with it. I understand what you are saying about Brazil and Africa. I was asking you to comment on the reality of the fact that the Chinese have been concerned for many years about the progressive increase in prices of iron ore. I remember Madam Fu Ying, when she was the Chinese Ambassador to Australia, at a pastoralists and graziers convention in Perth, really wagged her finger and said, ‘We will not tolerate these price increases. What we want is a win-win relationship.’ I walked out with her and I said, ‘They were very strong words, Madam Fu Ying’, and she said, ‘Yes, they were, but the point had to be made.’ They have been concerned about what they see as unreasonable increases in prices for a very long time and now they have an opportunity to buy iron ore at probably a much cheaper rate. I was really seeking your views on the implications of that for the broader Australian economy.

Dr Parkinson : I would come back to points that we have made before. There is a very huge pipeline of investment in the mining sector—in excess of $400 billion—that is anticipated over the next half decade or so. There is little in Australia that looks likely to put that at risk. Yes, sometimes there are multiple projects proposed, which we recognise are not all going to go ahead, and we try to downgrade the announced numbers of investment to get more realistic expectations of what will happen.

Coming back to the pricing situation, BHP, Rio, Fortescue and others have their own long-term interests in mind when they negotiate. As a country we have not tended to have government get involved in what are commercial decisions. If they are making a mistake that will have implications for them and their shareholders. I am not interpreting what you are saying as you want government to sit at the table with them. I suppose what I am saying is that they are rational entities and we hope that they are thinking long term about their business. When you look at the investment projects in train, there is a huge expansion underway and likely to continue over the next decade in Australia, and there may well be diversification of supply. I think that is something where anything we would do would not alter it.

Senator EGGLESTON: At the conclusion of that session on oil prices at the conference in Perth last May, Kerry Stokes, who was the chairman of that session, got up and said, ‘We must remember that China has many choices. We only have one, and that is China.’

Senator Wong: This is from a person whose leader says, ‘We shouldn’t have a surplus made in China.’

Senator EGGLESTON: I am just interested in the implications of this.

Senator Wong: I am making the point that you cannot have it both ways. You can have a sensible policy discussion about how we need to set ourselves, given what is occurring in China, India and so on, or you can go down the path that, regrettably, some of your senior members seem to choose.

Senator EGGLESTON: I am not trying to be political, with respect.

Dr Parkinson : I would disagree with the last bit, though, that China has many choices and we only have one. There is a perception that has arisen that somehow Australia is totally dependent on China and that this is different from the past. When you look back over our history, there have been times when our trading relationship has been as dependent on one other country. There were times when it was the UK, there were times when it was the US and there were times when it was Japan. The difference is not the extent of our trading relationship with China, it is actually the emergence of China, the transformation that is wreaking on the world and the fact that when we were in such incredibly close trading relationships with those other countries they themselves were not trying to manage the transformation of their economy. That is the big issue. It is not the fact that we have a trading relationship with China.

You will recall what happened during the Asian crisis. Prices of commodities and the exchange rate fell so we redirected to other countries. If there is no change in global supply and the Chinese stop buying from us, that is simply going to shuffle who buys and who sells to which countries. The really important thing is that the prices have gone up so dramatically it was always going to induce two things. Firstly, an expansion of supply, and part of that is occurring in Australia. Hence the $450 billion investment pipeline. And part of it is occurring elsewhere—Brazil, Indonesia and Africa. Secondly, as a purchaser, you want to assure yourself that you have diversified supply sources. That does not mean that they are not going to invest in Australia or they are not going to buy Australian product. If you take a more general point, which is that we should always be thinking about our international competitiveness, I agree with you entirely, but just not in the way in which it has been characterised.

CHAIR: Thank you. Senator Cameron.

Senator CAMERON: I will not pretend to have read your speech yet.

Dr Parkinson : As I said earlier, I apologise. It should have been on the website and I do not know why it was not.

Senator CAMERON: I just picked up page 1 and I see that you, as a callow youth, were perplexed by the way our economy and society operated. As a callow youth, I had other things on my mind.

Senator Wong: I will intervene here. We do not want to know your views on other things in your callow youth you were thinking about. If you want to chat outside and reminisce, that is fine.

Senator CAMERON: I think that is why I became a fitter and Dr Parkinson became the Secretary of the Treasury. Dr Parkinson, I woke up to the radio report about your speech last night. I have had a quick look at the Financial Review report headed ‘Treasury slams industry handouts’.

Dr Parkinson : As you know, we do not write those articles and we particularly do not write those headlines.

Senator CAMERON: I accept that and I do not believe anything I read in the papers until it has been checked and double checked. Let me say a couple of things. Firstly, how many people do you have in your senior executive service in the Treasury?

Dr Parkinson : Eighty-nine or thereabouts.

Senator CAMERON: I would expect the bulk of them are employed and live in Canberra.

Dr Parkinson : Yes.

Senator CAMERON: Do any of your senior executive service live in Geelong or the western suburbs of Sydney?

Dr Parkinson : No, but many of us grew up in country Victoria and Elizabeth, next to the Holden plant.

Senator CAMERON: I grew up in Scotland. I do not really know much about it now, because I have been here for a long time, so let me just go down this path. I said that just in case you did not know I grew up in Scotland. You said this morning that there are amazing opportunities for tourism, education and manufacturing and that the prospects are incredibly promising. Sure, there are aspects of that in our economy. But I suppose if you are a fitter in Geelong, if you are a production worker in the production line of Ford in Geelong, or you are at GMH, you are not seeing these great opportunities given the strength of the dollar. I suppose if you are on Newstart getting $240 a week welfare and you are relying on charity to keep you afloat, you do not have this great opportunity that is there. There are people who will be neglected and left behind in this so-called transformation of the economy. That brings me to the Treasury wellbeing framework, where you outline five important dimensions for wellbeing. How many people are employed in the SES looking at the wellbeing framework and transposing your wellbeing framework into your analysis such as your speech last night?

Dr Parkinson : The wellbeing framework is, in a sense, an analytic construct there so that when Treasury thinks about key issues it is designed to encourage people to think more broadly than just whether it boosts GDP or productivity. It is designed to get people to ask the question: what are the trade-offs here? This particular initiative may be positive for GDP, but does it introduce risk or complexity for individuals that they might not be able to manage or will it be good in an aggregate sense for Australia, but actually have geographic or sectoral implications that need to be thought through? It goes back to what I was alluding to earlier, which is that when you think about policy changes it is not enough simply to think about these in isolation; you also need to think about some of the pathways of adjustment, particularly if there are groups in our society who may be disadvantaged or may not have the skill set to help cope with that adjustment. You need to think about what needs to be done to go hand in hand with that.

Senator CAMERON: As I said, I have not read your speech. I will be interested to read your speech to see where your wellbeing framework analytical tool was used. There are five key dimensions. The opportunities available to people—how does that reflect for a worker in Geelong or the western suburbs of Sydney? The distribution of those opportunities across the Australian people—how does that reflect for workers in the manufacturing industry? The sustainability of opportunities over time, which is an interesting point because I am not sure what the sustainability of the mining boom is. The very fact that it is called a boom would seem to me to suggest that at some time it might have to bust. I have two more to go. There is the sustainability of those opportunities and the overall level in allocation of risk borne by individuals in community. I think you have touched a bit on that, because the allocation of risk would be in the manufacturing industry to a great extent. That is the risk that we have at the moment. Then there is the complexity of choices facing individuals and communities. It is not as simple as looking up some statistic from the RBA, an RBA speech or a Treasury speech and saying, ‘So many fitters have up and moved from Wollongong to Karratha.’ It is not as simple as that. Life is much more complex. People have families, mortgages and commitments. Some people cannot move. So, the flexibility of labour is not some theoretical position, it is a political and social issue, is it not?

Dr Parkinson : Absolutely, but it is all of those dimensions. You would recall that Senator Sinodinos referenced the issues before. We have industry structures that are often geographical concentrated, and so we can identify, for example, where the bulk of people in the motor vehicle industry are working and hence living. Because you have that concentration, one of the experiences out of the adjustment of the 80s and early 90s was that some groups actually got left behind. The point I am making, which I said earlier, is that the key challenge for us in thinking about how we manage these transformations is how we encourage firms and industries to adapt, innovate and become more internationally competitive to deliver high productivity, high wage jobs and at the same time how do we focus in on the workers who are affected to ensure that they are not left behind? I have never said—and you will not find it in this speech and you will not find it in anything that I have ever said; in fact to the contrary—that you leave the workers behind. The focus has always been that the most important thing is to focus on the workers, not so much on the firms or the industries.

Senator CAMERON: The government has made some decisions to invest in strategic capabilities. We believe that the vehicle industry is a strategic industry and an important industry for a range of reasons. The focus has been in the press and recently by the Productivity Commission in a speech that basically we should not be doing that. I wanted to draw your attention to the fact that the latest taxation statistics show that the mining industry claimed $6.8 billion in fuel credits over four years; that in 2009-10 alone—this is basically government support—they claimed $1.9 billion, and at the same time the vehicle industry claimed $1 million. In 2009-10, the mining industry got $2.4 billion in government support. You say it is a mixed economy, and I agree government does play a role in the economy and that is a big role the government plays in mining. Other areas are grain, sheep and cattle, $705 million; and property and business services, $799 million. There is broad government support across this economy, and it is not simply the vehicle industry. I am just wondering why the vehicle industry is the industry that is being singled out for a reduction in support by some in the Treasury and the Productivity Commission?

Dr Parkinson : Would you like to point to where Treasury said anything in particular about the motor vehicle industry?

Senator CAMERON: As I said, I have not read your speech. You said last night, according to the Australian Financial Review, that handouts that protect the car industry from a strong dollar hamper structural changes in the economy.

Dr Parkinson : There is no reference to the motor vehicle industry in the speech.

Senator CAMERON: Do you agree with that?

Dr Parkinson : I think the motor vehicle industry is an issue for Australia. As I said before, the question is: how do we actually manage the transformation into something that is sustainable? It is a broader issue than manufacturing. You made a couple of comments that I want to touch on. It is not just manufacturing that is affected by the structural transformation. You only have to go to Cairns or places like that, which are heavily dependent on tourism, to see some of the impacts. This transformation is having impacts well beyond the motor vehicle industry or any one particular part of manufacturing.

The second thing that I would comment on is your caution about the use of the language ‘mining boom’ is probably very well taken. We have been quite clear in saying that we would anticipate that there are a number of decades of adjustment still to go in China. There are things that happen that can knock that off track, but if that does not happen then it is very hard to see that the terms of trade do not stay very high. If the terms of trade stay very high, even if they are not at the levels that they are at now, then that means that the exchange rate is going to stay very high, which is going to threaten the viability of a whole variety of industries. It is a different matter if we thought this was a shock that was going to last 12 or 24 months. If it is one that we think is going to last 12 or 24 years then we cannot pretend that we can keep things as they were. We have to find ways to help those industries transform.

As I said earlier, one of the things that I think is really important for us—and people need to be really clear about this—is that no one thinks that Australia is going to lose its manufacturing industry. The question is: what is our manufacturing industry going to look like as we go through this transformation process? To the extent that we can actually bring high-tech, knowledge based manufactures to the fore and improve our competitiveness, we will end up with a very successful manufacturing industry. We have elements of that now. The question is: how do we actually grow that? As you will recall that was very much the thrust of the day after the tax forum when there was the manufacturing forum here in Parliament House. Those were the issues that were very much front and centre in people’s minds.

Senator CAMERON: There are judgments being made in the Public Service, especially the Productivity Commission, which is not uninfluential, much to my disgust. Gary Banks made a speech recently. I will quote what he said and would like your comments on this. He stated:

Equally, the transformation of raw data into useful information in insurance, finance, health, the internet and mining exploration (to name a few) through remote sensing, neural network software and complex search engines—all services—involves more valuable and complex transformations than those from a sewing needle or lathe.

I think that summarises to me some of the thinking that is going on. I thought to myself, when I saw that, being a fitter and machinist by trade, how good is all of this transformation in the finance and health industry going to be if you are up there on the 27th floor of some high rise when the lift breaks down and you need a lathe to produce a new pinion to put in that lift to make sure it works? What is the value of that? It is absolutely essential. I think that there are these positions being developed that dismiss engineering and manufacturing as old fashioned and not important, and that is typified by the Productivity Commission.

Dr Parkinson : Let me defend the Productivity Commission. I think they are a great national institution and they have done huge things to benefit—

Senator CAMERON: I would disagree with you.

CHAIR: Order! Dr Parkinson.

Dr Parkinson : Thank you. I am making that comment because I do not think it is appropriate to criticise the commission without them having the opportunity to defend themselves. But let me come back—

Senator CAMERON: So you are criticising me, are you?

Dr Parkinson : Let me come back to the point you were making. In a mixed economy, you are exactly right. There will be people with engineering knowledge. How else do we get high-tech manufacturing unless we have high quality engineering? The caricatures that are being presented in this debate are that somehow the manufacturing sector is going to disappear. In fact, manufacturing as a share of total employment has declined consistently for decades. Does that mean the manufacturing sector has disappeared? No, it has not. The challenge for us in a world where we have high exchange rates is how we help those sectors transform. I want to be very clear about this. No one is saying that there is no role for manufacturing; to the contrary. If we want to ensure that we have a healthy and vibrant manufacturing industry then what do we need to do? That is the question. How do we help manufacturing, or other sectors, transform themselves so that they can cope in a world where we have the high exchange range and which can deliver the high-value-add and the high-wage jobs that you are focused on? There is no disagreement between us about the objective.

Senator CAMERON: That means that as part of that mixed economy the government may have to play a role in assisting that transformation.

Dr Parkinson : Exactly. That is what I was trying to say. The point I was making in the speech was that, in thinking about those transformations, make sure that they are focused on the outcome you want, that they are time limited and define exactly what it is that you are doing. Senator Bishop asked at the outset; if you do not do that we run the risk of that experience that we had in the post-war period which the Hawke-Keating government basically had to confront.

CHAIR: One final question.

Senator CAMERON: You raised in your opening comments about the business model being challenged, and I assume that is the business model in manufacturing and elsewhere. The business model that I was involved in as the national secretary of the union tried to promote within manufacturing a high-skill, complex industry where productive performance was important, not just labour productivity. Productive performance was a key issue that helped to push export jobs. As you would be well aware, the argument in the business model was that manufacturing had to have an export focus. We were arguing that point. I remember during the Keating-Hawke years going out and arguing with workers that we had to be more productive, that business had to change their model and management systems had to get better so we could export. All of that model that we spent years trying to build is wiped out on the high dollar. How do we transform again from what is a really important area?

Dr Parkinson : I recall all of that period and the role you and others played. You are exactly right. We had to get the manufacturing sector externally focused. Also— and this is something that is not focused on much today—we had to push for changes in management practices as well as changes in industrial relations practices. They are still the sorts of issues that have to be confronted if we want a successful, export-oriented, highly productive manufacturing sector. I have no disagreement with you at all about the objective.

You asked the question: how can we do it all again? We have always done it all again. We used to be dependent almost entirely on agriculture. We rode on the sheep’s back. We then became much more focused on manufacturing and then we became much more focused on services. These evolutions are constant. One of the things that we have not been successful at is explaining that the process of structural change is just that; it is a process. You do not start, run 100 metres and finish. You are constantly doing it. The question for us, as a country, is: do we have policies in place in our education system, in our workplaces, in our management skills, in the way in which we think about building infrastructure and the areas that we focus on as important for the country that will do all of those things? It is not just the productivity improvement you get out of a particular factory; it is whether the workers are sufficiently skilled, whether there is sufficient engineering and science expertise and whether the transport links work so that, if they are able to produce the product, they can get it to the docks, on a ship and overseas. There is not one little bit here that needs to be focused on. All of it needs to be focused on.

Senator CAMERON: That is productive performance.

Dr Parkinson : That is what I took by your reference.

Senator Wong: I can add to that. I think that has been a good discussion from both Senator Sinodinos and Senator Cameron. I would like to make a couple of broad points, if I may. The first is on the Productivity Commission. Senators are entitled to their views about the PC’s opinions. I am sure there is a wide range of views in this room, but they are an independent body and they are entitled to put their view. They have made a very significant contribution to public policy over a number of years. Some people may disagree with that contribution, but they are obviously entitled to put that.

The second point I would make, and I think Dr Parkinson has traversed this in more detail, is that there is a global transformation that is occurring which will mean changes for the Australian economy. The question has never been: will we or will we not change? It is: how do we change? Fundamentally, there is going to be a set of challenges and opportunities that transformation will bring. What do we have to do to best meet those challenges and exploit those opportunities? People will differ around those views. Obviously the government has taken the view that it is fundamental to invest in skills. That was the single biggest investment in the 2011-12 budget. We have taken the view that it is fundamental to try to use some of the benefits of the boom now through the mining tax to bring more competitive tax arrangements, particularly to small business in terms of the company rate, more broadly across the economy, as well as superannuation. We have invested in innovation. Obviously, we believe that the new infrastructure of the National Broadband Network is critical because you are not going to manage this transformation with a copper network. That is the set of policies and there is another set of issues which are being dealt with that Senator Cameron referenced, which is how do you look at industry policy, particularly in relation to the automotive sector. I will not add to the public discussion of that because I think that has been well ventilated.

I think parliament would serve its constituents well if this is the level of the debate that we could have about these issues, rather than a very simplistic debate that is accusatory—if I may be political for one minute—around things like the carbon price. We should be expected to have this type of debate about where we are going to go over the next 10 years, and we are very happy to have that discussion.

CHAIR: Thank you, Minister. Senator Ludlam.

Senator LUDLAM: Dr Parkinson, you used a figure about half an hour ago of $450 billion in investment over the next half decade. You said something along the lines that there is nothing that you can see likely to stand in the way of that wave of investment going through. You were using rough numbers, but how much of that investment is in extractive industries, or is it effectively all of it? The rule of thumb number, the $400 billion to $450 billion in investment, is that primarily in extractive industries—mining, oil and gas projects?

Dr Parkinson : That is mining. I said in the next half decade or so. It was a bit of hand waving. A lot of these projects will take a long time to bring on stream.

Senator LUDLAM: I understand that. Do you include oil and gas and so on in the definition of mining?

Dr Parkinson : Yes.

Senator LUDLAM: Is it Gorgon and various West Australian gas projects and that kind of stuff as well?

Dr Parkinson : That is mining investment writ large. It sweeps up the LNG projects, iron ore and anything else that would fall into that. It is not picking up investment in tourism, manufacturing services and so on.

Senator LUDLAM: That is what I thought. I just wanted to check on that. Relative to the size of the Australian economy, that strikes me as probably the single largest wave of investment in the country’s history. Is that reasonable? It seems like an extraordinary amount of money.

Dr Gruen : It is the case that we are projecting investment, broadly speaking, all investment as a share of GDP, to be at multiple decade highs. If you add this stock of investment to the investment in the rest of the economy, investment as a share of the economy is expected to be at an all-time high for at least as long as the quarterly national accounts have been available.

Dr Parkinson : I can add to that. You can see that historically mining investment as a share of GDP has bounced around one per cent. We are anticipating in 2012-13 it will be about six per cent of GDP. It is a huge wave of investment that is hitting.

Senator LUDLAM: The dollar is trading currently at $1.06 or $1.07 to the US dollar. What is that $450 billion over the next period going to do to the currency?

Dr Parkinson : One would assume that that investment expectation is reflected in people’s view about the currency. It is hard to see that the currency would fall dramatically, so you would have to think the currency was probably going to stay somewhere in these sorts of regions, but it is a mug’s game to try to forecast the exchange rate. The best forecast is whatever it is today.

Senator LUDLAM: I know. I am not after investment advice. You would have to say we are already where we are at the moment and we are forecasting this colossal surge in investment. You would have to say the smart money would be on it going higher than it currently is.

Dr Parkinson : The people who are buying and selling Australian dollars are buying and selling Australian dollars because they are either trading with us or they are investing with us and they are trading and investing with us knowing full well that that wave of investment is there. You would hope that the vast majority of that has been factored into their expectations and that, in turn, would be reflected in the exchange rate.

Senator LUDLAM: Is there no rule of thumb that for every $100 billion in investment the currency will shift by a particular degree, with consequent flow-on impact on employment in other sectors, for example?

Dr Parkinson : No.

Senator LUDLAM: Is that too simplistic?

Dr Gruen : As I said yesterday, the strongest relationship is between the currency and the terms of trade, so the ratio of the price of our exports to the price of our imports. We think that the terms of trade in the September quarter, which is the latest national accounts data that has been published, is the highest level on record, and the records go back to 1860. That level is the highest on record. The December quarter terms of trade will almost certainly be below that and our expectation, which is basically based on the conversation that Dr Parkinson was having earlier with Senator Eggleston, is that the supply is going to catch up gradually with demand and will tend to reduce the terms of trade over time. As Dr Parkinson said, it is a mug’s game to be forecasting the exchange rate, but if you took the longer term correlation between the terms of trade and the exchange rate you would say that over the longer run we would be expecting some decline in the exchange rate—over the longer run. It is not the level of investments as much as it is the relative prices that determine these things. Obviously at current prices or even somewhat below, mining is extraordinarily profitable.

Senator LUDLAM: You might need to take this on notice. Does Treasury have estimates of the amount of government spending on infrastructure that is primarily benefiting the mining sector and extractive industries?

Dr Parkinson : I do not think that we do. I understand we took that question on notice yesterday, so we will check that.

Senator LUDLAM: You mentioned before to Senator Eggleston, almost as elegantly as I think I have ever heard it expressed before, about running down non-renewable resources and therefore needing to somehow compensate for that. Where can I find in the national accounts the asset-stripping effect, the fact that we are premising a large fraction of our economy on depleting resources? Where do we find that?

Dr Parkinson : The national accounts are a flow document and really what you are asking for is the balance sheet, which is not in the national accounts.

Senator LUDLAM: Where would I find it? As Treasury and as people who obviously think about this kind of thing a lot, where can I find the accounting for the depletion of the assets that we are running down?

Dr Parkinson : There might be something in the ABS. I do not know if the publication is still called ‘Measuring Australia’s Progress’. Whatever the numbers available suggest, your conceptual point is the one that Senator Eggleston and I were talking about. Think of a balance sheet; we have our human capital, financial capital, physical capital, infrastructure and our natural resource endowment. If we run down the natural resource endowment and do not use part of the proceeds to invest in some other forms of capital, then ultimately we erode the balance sheet.

Senator LUDLAM: When I look at the national accounts or when I look at the final budget outcome in the latest version published, and I look at our assets and our liabilities, I am presuming the national endowment of iron ore and oil and gas is not figured in those numbers, is it?

Dr Parkinson : No, it is not.

Senator LUDLAM: So it is invisible to our accounting system?

Dr Parkinson : That is right. When you are looking at the budget numbers you are only looking at the Commonwealth general government sector. When you are looking at the national accounts you are looking at the flows, not the stocks.

Senator LUDLAM: I understand the distinction. The point that I am trying to make is that the running down of assets appears to be invisible to the people running our accounts.

Dr Parkinson : They are very conscious of it, but I think they would tell you that it is quite difficult to create a national balance sheet. There have been attempts to do this. They have all been fairly preliminary. I would encourage you to talk to the statistician about it. I know it is something that he is interested in.

Senator LUDLAM: I think this is a bigger question of extractive industries and the fact that this is the sector that most of us are focused on this morning. The mining industry is effectively asset stripping a continent, but we are not really putting anything in place. We are investing a huge amount, for example, in port and rail expansions that are not going to be a great deal of use once the resources are gone.

Dr Parkinson : I think you need to be careful about, firstly, the language ‘asset stripping’. That is fairly emotive. We are using non-renewable assets, but our endowment of those non-renewable assets, in some cases, is very large. Putting aside climate change issues, I think we have—

Senator LUDLAM: It is actually my job not to do that.

Dr Parkinson : Just for a moment, put aside climate change issues. I will probably get these numbers wrong, but we have something like 800 years of supply of brown coal in Victoria.

Senator LUDLAM: That is terrifying.

Dr Parkinson : No. Coming back to the climate change issue, there is a massive endowment here and that is one of the reasons why it is so important that, if we are going to use coal, to find a way to use clean coal. Going back to the issues of where governments invest, if you have massive resource endowments that you know the world is going to use you may as well try and find ways to use them sensibly.

Senator LUDLAM: We heard earlier in the week that is off the table, but that is for a different portfolio.

I would like to change direction briefly. In reply to question No. 664 at the last estimates, you said you had done some analysis of income inequality for the period 1984 to 2004 and in your reply you said that that analysis had not been updated; it did not include wealth and it did not assess the reasons for changes in income and wealth inequality and possible policy responses. It does not look as though even that limited study through those two decades had been put into a longer run context. Are you doing any structured work on inequality and, if so, when would we expect it to be released? You are all looking a bit shocked.

Dr Parkinson : I am struggling with the reference to question 664 and the answer, because I do not have it with me. We periodically look at issues like inequality. It goes back to Senator Cameron’s questions related to the wellbeing framework. We look at these things in terms of providing advice. I am not aware that we have any intention of publishing anything on this issue.

Senator LUDLAM: That was going to be my follow-up question. One of the pillars of your wellbeing framework is distribution of consumption possibilities, which sounds like a slightly more complex way of talking about wealth or income inequality. Do you recognise the central importance of inequality?

Dr Parkinson : Just go back to the issue of consumption possibilities. There are distributions in multiple dimensions. There is income distribution. There is earned income distribution. There are income distributions after you take account of government benefits. There are distributions of the capacity to consume our resource endowment, whether it is being able to go hiking in the Blue Mountains or in Tasmania, as against putting a motorway through. There are dimensions of geographic and more importantly perhaps again across time, where things like the intergenerational report come into play. It is not just about income inequality measured as a snapshot in time.

Senator LUDLAM: I will narrow the question to that, because that is what I am interested in—income inequality on the one hand and wealth or asset inequality on the other, which is rather more sharply skewed in Australia. The literature fairly strongly indicates that everything from drug dependence, health, obesity, levels of education and crime are quite sensitive to the degree of inequality within societies, as opposed to between societies. Setting aside for a moment the broader context that you just placed my question in, I place the narrow question of whether Treasury is interested, carries out studies or publishes anything on that narrower definition of inequality, which seems to me to be quite central in providing for the kind of life that we are trying to achieve in this country.

Dr Parkinson : As I have said, we look at the issue. It is reflected in the work that we do in the intergenerational report. The last IGR referenced it. What I was responding to was not whether we are interested in it or whether we do work on it, it was whether we are actually intending to publish anything on it at the moment, and the answer to the latter is no.

Senator LUDLAM: That is a shame.

Dr Parkinson : If you are interested in this, there were recent studies by the OECD study and the US Congressional Budget Office which were quite revealing about income inequality disparities across countries and how they have changed over time. If you cannot find them then we can point you in the direction of the titles.

Senator LUDLAM: I might chase you for a source. I have two other quick questions. Australia is currently involved in negotiations of a trans-Pacific free trade agreement. Is Treasury aware, or have you done any, of any good evaluations of the US-Australia Free Trade Agreement sector by sector that we can benchmark this new agreement against—not what we thought would happen, but what actually happened.

Dr Parkinson : I think that question would be better directed to DFAT.

Senator LUDLAM: They are long gone. Does that mean that Treasury has not done that work?

Dr Parkinson : It is not the sort of thing that we would do.

CHAIR: Senator Bushby, you have 10 minutes.

Senator BUSHBY: Dr Parkinson, you have indicated in previous Senate estimates that it is difficult to estimate the structural budget balance. Has Treasury ever estimated the structural budget balance of the Australian government?

Dr Parkinson : You know that to be the case because previous versions of that have been published in a Treasury round up article and may have been published in the budget papers in 2008-09.

Senator BUSHBY: Was that the last instance that exercise would have been conducted, or since it was published?

Dr Parkinson : The last time it was published in the budget papers it was 2008-09. I think the round up article was 2010.

Senator Wong: We may have referred to this previously. Prior to the tax summit I released a document which looked at outlays. It picked up on the IGR projections and looked at the expenditure growth as a result of the aging population and so forth, which is obviously of relevance.

Dr Parkinson : In the Australian Business Economists' post-budget address, which I gave last year, I talked in detail about some of the challenges in calculating structural budget estimates.

Senator BUSHBY: I am aware of your views on the challenges in conducting them, but the fact is that we have been able to overcome those challenges in the past.

Dr Parkinson : No. If I can correct that. We have undertaken calculations and people have ignored the caveats.

Senator BUSHBY: There are caveats in just about everything that is modelled or calculated.

Dr Parkinson : There are, but the caveats in this particular area are quite extreme. As I think I may have commented to this committee previously, the classic example is: let us say we developed a methodology which we could all agree on and we went and calculated the number and then the key driver of that number happened to be whether we thought the terms of trade shock was short lived, as in the next year or two or long lived as in the next decade or two. Your judgment call on that is going to change absolutely and dramatically your assessment of what the structural budget balance is. The whole point about looking at the budget balance is that as a conceptual tool it is fantastic, but as a practical tool it actually hides all of your assumptions, and it is the assumptions that you need to be careful about.

Senator BUSHBY: On that, what are the upsides and downsides if the budget is not in strong structural surplus when the terms of trade are at generational highs and unemployment is close to its natural rate?

Dr Parkinson : If the terms of trade shock is permanent or very long lived, then having the budget back broadly into surplus—

Senator BUSHBY: The structural budget in surplus?

Dr Parkinson : No. Having the published budget broadly in surplus would imply that the structural budget position was also broadly in surplus. If, on the other hand, you thought that the terms of trade were generational highs, but were going to collapse tomorrow, the published budget broadly in surplus would say that the structural budget would probably be quite significantly in deficit. Again, it comes back to a view about whether we are living through a massive transformation of our economy, because if we are then you would expect the structural budget position to actually look a lot closer to the published budget position.

Senator Wong: I can add to that answer. One of the key things to consider if one is concerned about the structural position of the budget is to look at what expenditure you are locking in and what the pattern of that expenditure will be in the years to come. With respect, a contemporary example is the private health insurance rebate where the figures that the government has released, absent any policy change, suggest that by 2050 that would comprise three-quarters of the Medicare budget. What I would say to you is that if you are concerned about the structural position of the budget you need to consider what are the policies now that would lock in what is clearly not only unsustainable, but not a high priority expenditure in the decades to come.

Senator BUSHBY: I am concerned about the potential for structural budget information to be able to inform future choices, and you have just highlighted an example of that.

Senator Wong: With respect, we have given you that information and you are still saying that you will restore the private health insurance rebate. I am just making the point. If you wish to talk about these sorts of things, they manifest. They are not theoretical propositions—

Senator CORMANN: If you were worried about a structural deficit you would not—

CHAIR: Order!

Senator Wong: You really want to speak over me whenever I open my mouth, don’t you, Senator Cormann?

Senator CORMANN: You—

CHAIR: Order! Senator Cormann, Senator Bushby has asked a question. Your colleague has asked a question. The Treasury Secretary has started to answer it and the minister is finishing it. Minister.

Senator Wong: I am simply making the point that these sorts of propositions are not abstract and theoretical. They manifest as significant policy decisions in the context of budgets. If one is concerned about the theoretical proposition, you have to manifest that in terms of the decisions you make as to which expenditure you will prioritise and which you will not.

Senator BUSHBY: On the structural budget, coming back to the question I asked which was not really the answer that I was getting, I know that Chile has focused on a structural budget position since 2000 and last year the United Kingdom adopted the structural budget balance as the yardstick for its fiscal performance, so quite clearly other nations are managing to deal with the level of those assumptions that they might have to build into theirs. The question is: would it assist the analysis—I am sure from what the minister just said that she would have to agree—of fiscal issues to publish regular estimates of the structural budget balance, or do you believe that there is no value in doing so?

Dr Parkinson : If you take the Chilean case, they have an estimate of the long-run copper price. That estimate is formed by a group of experts and periodically updated. If the copper price is above that they would essentially take all the excess revenues and hold it for periods when the copper price is below the equilibrium. In that situation, if you simply define that as your structural budget balance measure, then it is quite simple to do, but come back to thinking about this broadly rather than narrowly in that fashion. Is our structural budget balance worsened by the impact of the GFC? In fact it is. Why? Because we now have a whole pile of firms that have accumulated tax losses but, more importantly, we have a whole pile of people who will no longer be paying capital gains tax because asset prices have fallen. In that situation, if you look at the published budget numbers you would have to say that we are closer to structural balance than otherwise implied by those numbers. That is the flip side of the terms of trade shock. If we thought the terms of trade was short lived then you would have to say that the published number is actually further away from structural balance. It depends how you want to define what structural balance is. The Chileans have done something that works for them. Given the complexity of our economy, I would want to do something that was richer in terms of what it picked up. Then, if you were to do that, you would want to be very careful about the caveats.

CHAIR: Dr Parkinson, thank you to you and your team for attending this morning. Your assistance has been much appreciated by the committee. Minister, do you have any final remarks?

Senator Wong: No, thank you.

CHAIR: The committee stands adjourned.

Committee adjourned at 23:11