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Economics Legislation Committee
01/06/2015
Estimates
TREASURY PORTFOLIO
Department of the Treasury

Department of the Treasury

CHAIR: I welcome the Minister for Finance, Senator the Hon. Mathias Cormann, and, representing the Treasury, Secretary John Fraser and officers. Would you like to make an opening statement?

Senator Cormann: I do not, but the Secretary of the Treasury does.

Mr Fraser : Written copies have been distributed, but I will read them out—

Senator DASTYARI: Before we get to the statement itself, Chair, can I get clarification—we were just advised by the secretariat regarding Mr Fraser's availability and times. Does the opening statement cover that?

Senator Cormann: Can we just start with the opening statement? We can deal with other matters after the opening statement.

Senator WONG: It has been tabled, Minister. We are all quite capable of reading it, and I am sure the members of the public are.

Senator DASTYARI: I wanted to get to the business of the committee so we get to the actual issues we are here to discuss.

CHAIR: You are here until 10.45 or 11.00?

Mr Fraser : I can be here until 11.45.

CHAIR: Okay. We have got quite a bit of time.

Senator DASTYARI: We were given some alternative information. If we are unable to finish everything, we can perhaps discuss as a committee what our options are for recalling witnesses.

CHAIR: I have indicated to your side that there will be a very clear run.

Senator DASTYARI: Okay.

CHAIR: Go ahead, Mr Fraser.

Mr Fraser : Since I last appeared before the committee, forecasts for the Australian economy have been updated in the budget. They point to the significant headwinds that the economy is facing in the transition from the mining investment boom and also the unevenness of the global recovery.

The US economy is back to near full employment, providing impetus to global growth. The US Federal Reserve has signalled that it expects to start raising interest rates later this year. In China, growth has eased, leading authorities to provide additional policy stimulus, with lending and deposit rates cut further earlier this month. Signs suggest that the cuts are having a more significant impact than earlier moves. Given its size, growth in the Chinese economy will continue to make a significant contribution to global growth and have a significant impact on Australia's medium-term prospects.

Activity in the Euro area has improved recently, with signs that consumer spending is being bolstered by lower oil prices, a weaker euro and stabilising labour markets. But mounting risks of Greece defaulting on its debt obligations highlights the inherent fragility and structural challenges facing the Euro area. The latest data from Japan also suggests that activity continues to recover.

Closer to home, the Australian economy is facing the challenge of rebalancing from mining investment led growth at the same time as the terms of trade are falling. Mining investment is expected to fall by around 25 per cent in 2015-16 and by 30 per cent in 2016-17, and the iron ore price has nearly halved over the past year.

On the other hand, supportive fundamentals, including the lower exchange rate, lower oil prices and low interest rates, are expected to underpin the transition to broader based growth. The budget forecasts the economy to grow at 2¾ per cent in 2015-16, before rising to around its trend rate of 3¼ per cent in 2016-17. There is evidence of these fundamentals at work in household consumption, which grew at three-year highs in the December quarter of last year. Indicators since budget, such as retail trade, automotive sales, and consumer sentiment are consistent with a further improvement in the outlook for consumption. Dwelling investment is responding to low interest rates as well as strong house prices and solid population growth. The significant pipeline of approvals suggests that the upswing still has some way to run.

The depreciation of the Australian dollar over the past year will play an important role in the transition to broader based growth by making businesses in export orientated and import-competing sectors more competitive. Exports are expected to continue to make a significant contribution to GDP growth, with resource and services export volumes growing particularly strongly.

Although investment by the services sector has grown strongly over the past year, the latest capex survey, which was conducted in advance of the budget, continues to suggest that businesses in the non-mining economy overall remain reluctant to commit to significant investment plans in 2015-16.

Liaison by Treasury staff since the budget suggests that the Jobs and Small Business package has been well received across a range of businesses, especially those operating in parts of the retail sector. This is consistent with a notable lift in consumer confidence following the release of the budget.

It remains our view that the supportive conditions I have highlighted earlier and healthy corporate balance sheets should encourage increased investment going forward. Nonetheless, the pace and timing of a recovery in mining business investment remains a significant source of uncertainty.

In the midst of this transition, the labour market has been resilient in recent months. Employment growth has picked up, labour force participation has risen and the unemployment rate has remained steady. That said, with GDP forecast to grow below trend, the unemployment rate is still expected to edge a little higher, to 6½ per cent, in 2015-16 before falling to 6¼ per cent in 2016-17.

Wage growth continues to be constrained by spare capacity in the labour market. Although modest growth in wages is weighing on household income growth, it has been crucial to supporting employment during a period where the economy has been growing a little below trend. Incomes are being affected by weaker commodity prices. Although they have recovered a little recently, further growth in low cost supply is expected to continue to weigh on prices for many of our key, non-rural commodity exports. As a result, nominal GDP growth is forecast to grow by 3¼ per cent in 2015-16 before picking up to 5½ per cent in 2016-17. This has driven a substantial downgrade to tax receipts of $52 billion since the 2014-15 budget—$20 billion of this due to iron ore prices alone.

I note that these forecasts are sensitive to assumptions about the future path of key commodity prices. In the budget we have assumed—I repeat: assumed—an iron ore price of US$48 a tonne free on board, which was the four-week average of the iron ore price on the day the assumptions were finalised. The iron ore price has been somewhat higher since which, if sustained, provides upside risks for nominal income growth.

CHAIR: Thank you, Mr Fraser. I assume that you fellows are going to give your time to Senator Wong and I know you two fellows over there would like some time. So given we are going to start with some goodwill, peace and happiness, Senator Wong, I will ask you to kick us away.

Senator WONG: Nothing but peace and happiness, thank you, Chair. Mr Fraser, I have momentarily forgotten when you started in this position.

Mr Fraser : 15 January.

Senator WONG: Can you take me through your engagement with the budget process post commencing in January?

Mr Fraser : I am responsible for Treasury's input into the budget process.

Senator WONG: I just have some process questions. Did you start attending ERC? Did you leave that to Mr Ray? Did you get across all the NPPs? I just want to get some sense of this.

Mr Fraser : I attended most of the ERCs—in fact the vast majority—and Mr Ray also attended at the same time. From memory, I probably missed three ERCs. One of those was because I was overseas at the G20 meetings and also in the United Kingdom.

Senator WONG: Did you acquaint yourself with, or did you see, every NPP that came forward?

Mr Fraser : Not every one, in terms of acquainting myself—I saw them all—not every one.

Senator WONG: On revenue measures, to what extent did you sign off on any policy proposals from Treasury—any revenue proposals?

Mr Fraser : I think the vast majority were signed off by our tax policy division, Mr Heferen and his senior people. I do not think I signed off on any particular revenue proposal, but there are a lot of them.

Senator WONG: Can I go to the instant asset write-off, or whatever you are calling it now. Is that what you are calling it? It has had a number of iterations. When were you first aware of that proposal?

Mr Fraser : Some months—sorry, a couple of months before the budget came out.

Senator Cormann: We might have to take the precise date on notice. You would not expect the secretary—

Senator WONG: No, a couple of months. If he wants to clarify it on notice, that is fine. Tell me how you became aware of it.

Mr Fraser : In discussions with Mr Heferen and his team.

Senator WONG: Okay.

Senator Cormann: And obviously through the budget process.

Senator WONG: Sure. Were you involved in developing the final design of that?

Mr Fraser : Mr Heferen and his team ran the final design. I oversaw that.

Senator WONG: Can you tell me where the $20,000 figure came from.

Mr Fraser : That was a decision by the government.

Senator WONG: Okay. You are aware, aren't you, that the history of this measure even during the GFC was for substantially lower levels of benefit? I think it was $6½ thousand during the GFC as part of the stimulus package. Are you aware $20,000 is significantly more than the analogous measure during the global financial crisis?

Senator Cormann: You are asking him for an opinion even though it is—

Senator WONG: It is a fact. Are you aware of this fact?

Senator Cormann: $20,000 is higher than $6½ thousand. What is the question?

Senator WONG: I asked him if he was aware of that. You do not want him to answer?

Senator Cormann: I am sure the Secretary of the Treasury would be aware that $20,000 is higher than $6½ thousand.

Senator WONG: If he is then I am sure he is capable of answering rather than you jumping in. Are you aware of the history of this measure?

Mr Fraser : I became aware of that, yes.

Senator WONG: When did you become aware of that?

Mr Fraser : A month or two months ago. I cannot remember.

Senator WONG: Okay. So the $20,000 was a decision of government. Are you also aware that public statements from the small business association, or COSBOA, were for a $10,000 instant asset write-off? Were you aware of that in the process of decision making?

Mr Fraser : I had met with the gentleman who leads COSBOA very well. He came to see me about three months ago. I was not aware of a specific number they put on that proposal.

Senator WONG: You said it was a decision of government. Do I infer from that that government was provided with a range of options and chose $20,000?

Senator Cormann: The government, as is inevitably the case with these sorts of measures, made the judgement based on advice. There is nothing unusual about the government considering a number of options and then making a judgement on the best way forward in the national interest.

Senator WONG: Is that a yes?

Senator Cormann: Of course. That is the way the process works.

Senator WONG: Mr Fraser, can you explain to me the policy argument—there may well be one, but I would like to understand—for $20,000 as opposed to, for example, $6½ thousand, $5,000 or $10,000? I will use a more neutral term: the policy rationale.

Mr Fraser : The policy rationale is on the basis of stimulating entrepreneurial and investment activity in the small business sector. To the extent that that happens, the impact of $20,000 will be greater than the smaller number.

Senator Cormann: I might just add here that the Council of Small Business Organisations of Australia, of course, welcomed the government's decision to provide that $20,000 immediate tax write-off. They said: 'It will send a message loud and clear to the people that the government is thinking about them'—small business—'in a good way. They're giving them something that will really motivate them to go and spend and buy things and grow their business, save their business, employ people, get cash flowing through the economy.' That is, of course, exactly what the government has sought to do. We have sought to incentivise small businesses to be the most successful they can be, to grow their business and to generate more jobs.

Senator WONG: Mr Fraser, I understand in general terms, but the answer you gave is an answer that could be given for 15, 10, or five, right? I am actually more interested in what the policy rationale for that particular figure was.

Senator Cormann: It is actually—

Senator WONG: You do not want the Secretary of the Treasury to answer questions about a budget measure?

Senator Cormann: I am entitled to answer questions for the government. You are putting Mr Fraser in a difficult position, because it was a judgement that was made by the government, not Mr Fraser. The reason the government made that judgement is because in our judgement that was the appropriate level. For you to ask Mr Fraser to second guess and provide an opinion on what motivated the government is not an appropriate question. What I am saying to you is it was the judgement of the government that in all of the circumstances and as part of our commitment to strengthen growth, create more jobs—

Senator WONG: and build a more prosperous economy—we all know the mantra!

Senator Cormann: and continue to put the budget back on a sustainable track, we made a judgement that $20,000 was the right level. You can disagree with that if you wish, although I have heard that Mr Shorten is actually supportive of what we have put forward—but, then again, we are getting used to the fact that there is a split between Mr Shorten and the leadership in the Senate. If you want to prosecute a case inconsistent with the case that Mr Shorten is prosecuting, feel free; but the Secretary of the Treasury cannot possibly be expected to justify a policy government that was made by the government.

Senator WONG: Actually, I am not asking him to justify it; I am asking him to explain the policy rationale. He is the Secretary of the Treasury. It is a Treasury measure. If the answer is simply that the government chose it, that is fine, but I actually am simply asking the Treasury secretary to explain the policy rationale behind the $20,000 as opposed to another figure. I am not making any judgement about good or bad; I am asking for an explanation as I am entitled to do.

Mr Fraser : I repeat what I said: to the extent that this has an impact, it will be greater at $20,000 than at a lesser number.

Senator WONG: Okay. I am sure there will be discussion about the growth numbers, but to what extent do you say the impact of this measure flows through to the major economic parameters, in particular nominal and real GDP forecasts and projections?

Mr Fraser : I will ask Mr Wilkinson to answer that.

Ms Wilkinson : The instant asset write-off is one element of the small business package. You would expect that the instant asset write-off part of the small business package would support small business investment in the short to medium term. The objective of that policy is to bring forward investment by that sector of the economy.

Senator WONG: Thank you. When you modelled or determined the economic parameters at 1.7, did the small business package factor? In particular, did the instant asset write-off factor in?

Ms Wilkinson : The macroeconomic forecasts always take into account government policies which are in place, announced or committed to at the time that the forecasts are finalised. That was the same process that was undertaken in relation to this particular package.

Senator WONG: So you are saying that the growth figures do reflect the impact of this policy—the instant asset write-off—and other policies contained in the budget. Is that your evidence?

Ms Wilkinson : That is correct.

Senator WONG: Okay. Can someone explain to me the rationale behind two years only? Is it right that the measure is only for two years?

Senator Cormann: The measure is for two years as per the budget.

Senator WONG: Yes. Can someone explain to me the rationale behind that?

Senator Cormann: It is because we made a decision to have the measure in place for two years.

Senator WONG: Sorry; the economic rationale.

Senator Cormann: The economic rationale is to put the measure in place for two years because that was what was affordable in the context of the budget. Obviously, the whole purpose is to bring forward activity. If you introduce an open-ended initiative from the word go then that effect is not going to be the same.

Senator WONG: Fair enough, but a decision was made for two years as opposed to one or three. I am trying to understand the rationale for that.

Senator Cormann: It was a decision on balance, and on balance—

Senator WONG: A decision of the government.

Senator Cormann: It was a decision of the government.

Senator WONG: Right. At any point is the Treasury secretary permitted to explain the economic rationale behind the budget, or are you going to take all questions?

Senator Cormann: If you ask questions that go to the motivation of the government then that obviously a question for the political level of government. If you want to ask questions on specific facts and figures, that is obviously a matter for Treasury.

Senator WONG: Okay. Mr Fraser, do you think that a $20,000 figure is economically sensible?

Senator Cormann: 'Do you think?' Sorry, but Senator Edwards in his opening remarks actually made it very clear that officers should not be asked for their opinion. If you asked him if he thinks this is sensible, that is by definition a question of opinion.

Senator WONG: Okay. Mr Fraser, is it economically sensible?

Senator Cormann: You are asking him for an opinion, and that is contrary to standing orders.

Senator WONG: You're very upset about this, Mathias!

Senator Cormann: It is contrary to the standing orders of the committee.

CHAIR: It does seem to seek an opinion.

Senator WONG: All right. Mr Fraser, when did you first become aware of the $20,000 proposal?

Senator Cormann: You already asked that question, and we have taken it on notice.

Senator WONG: Can you just let me ask questions?

Senator Cormann: But you have already asked the question, and we have taken it on notice.

Senator WONG: I have not asked this question.

CHAIR: It was very similar.

Senator WONG: The $20,000, not the proposal for an instant write-off. He then says, 'I was aware of the proposal.' Then Mr Fraser tells me the government made a decision from a range of options. I am asking when the $20,000 proposal was first brought to your attention.

Senator Cormann: And I am taking that question no notice.

Senator WONG: I am not surprised.

Senator Cormann: I am a bit confused, because the shadow Treasurer—

Senator WONG: Could I move on? This is non-responsive. He is reading off a press release.

Senator Cormann: I am seeing clarification.

CHAIR: Order! Minister, please. Everybody needs to give each other the time. I will adjudicate whether people are out of order. Minister, are you seeking some clarification?

Senator Cormann: Thank you. I am reading here from the shadow Treasurer that Labor supports the small business package, and that has been clear since budget night over two weeks ago. In listening to Senator Wong, it appears that Senator Wong is inconsistent with the position that was adopted by the leadership of the Labor Party. I am just wondering what the line of questioning is all about.

Senator WONG: Mr Fraser, you will recall—I am only working of memory, but can someone confirm my recollection that the GFC stimulus measure increased this to $6½ thousand? Five? No-one remembers?

Mr Fraser : I would have to check. I do not know.

Senator WONG: Okay. But this is a number at least double and perhaps triple or more what the GFC stimulus measure was. It is a very significant measure. Do you regard the economy being so fragile as to require a measure that is three times bigger than what was put in place during the global financial crisis?

Senator CANAVAN: Should we go back to pink batts?

CHAIR: Order!

Senator Cormann: Cheques to dead people too.

Senator WONG: I asked a question. I would like an answer.

Mr Fraser : The prime intention of the proposal, as I mentioned earlier, was to encourage entrepreneurial behaviour, innovation and growth in the small business sector.

Senator WONG: I do not think—

Senator Cormann: And it is a measure that is supported by the Labor Party even though the people listening to this—

Senator WONG: I do not think that is responsive. Chair, do I have the call, or is he just allowed to interject all the time?

CHAIR: The minister added to the secretary's answer, and you were asking another question. Minister, are you finished? Senator Wong.

Senator WONG: Mr Fraser, that is actually, with respect, non-responsive. You are giving me a general line. I am asking you whether or not you think the economic circumstances justify a measure that is at least three times more generous than what was put in place for the GFC.

Mr Fraser : I guess what I am saying is it is primarily a structural measure addressed to what I said: encouraging entrepreneurial behaviour, innovation and investment in a particular sector.

Senator WONG: So is the economy so fragile—

Mr Fraser : It is a separate issue. It is not by primary intent—and I was not here during the GFC—a macro-economic restoration measure.

Senator WONG: Explain what you mean by that.

Mr Fraser : It is a measure that is structural in primary intent. It is about building up the small business sector in Australia, which is, as we know, 96 per cent of businesses. It is about encouraging entrepreneurial behaviour, innovation and investment in the small business sector.

Senator Cormann: If I might add to that answer: the government's focus in putting this budget together as we continue to implement our plan for stronger growth and more jobs is obviously focused on a concern about what was happening in the mining part of the economy. We want to strengthen growth in the non-mining part of the economy, and this is a measure that will help boost growth in the non-mining part of the economy. This will be able to be accessed by 96 per cent of businesses across Australia. It is a very efficient way of helping to achieve our objectives of driving stronger growth by encouraging businesses to go out and invest in their future success, to invest in their capacity to hire more Australians.

Senator WONG: Thank you, Mr Fraser. That is the best rationale I have heard so far this morning. It is structural rather than macro-economic in intent.

CHAIR: They were just warming up.

Senator WONG: They were just warming up. Is that rationale outlined somewhere in the budget papers, as you just described it?

Mr Fraser : The instant or accelerated depreciation—

Senator WONG: Accelerated depreciation, I will call it.

Mr Fraser : is one of many, or several, measures for small business.

Senator WONG: That was not my question. My question was, can you just tell me, is there somewhere in the budget papers where the rationale that you just outlined is explicated?

Mr Fraser : I have just been advised that it is covered in Budget Paper No. 1, page 9, where we talk about small businesses as the engine room of the Australian economy:

This puts small businesses at the forefront of the transition from resource-led growth toward new and emerging markets.

Senator WONG: You commenced your engagement in the budget process after you started, which I think you said was 15 January. Was the budget process on track at the time that you commenced? Would you say it was on track?

Mr Fraser : Yes.

Senator WONG: You have made some public comments, which have been reported, about the budget process just gone and the budget process to come. Do I understand from that that you intend to change the budget process, particularly the commencement of the budget planning process, to be earlier for the 2016 budget?

Mr Fraser : No. I made a comment that within Treasury we could look at options for starting the process a little bit earlier.

Senator WONG: You say that it was within Treasury.

Mr Fraser : Yes.

Senator Cormann: There are obviously two levels. The government, as I have mentioned to you in the PM&C and in the Finance estimates, started the budget process this time round earlier than the year before. In fact, we started towards the end of October, early November, and then, of course, in earnest after Australia Day, as is inevitably the case. But obviously individual departments participating in the budget process also conduct their own planning on how they can maximise the value that they contribute to that process. We are very pleased that the Treasury secretary is thinking about how he can even further improve the contribution of Treasury to that process.

Senator WONG: I want to go back to what you just said, Mr Fraser. Is it your assertion that in the speech which was reported that your comments are about Treasury process, not about broader intergovernment process? Is that what your evidence is? I am a little mystified.

Mr Fraser : That is my recollection. I made a comment, and I do not resile from it. The budget process for Treasury, and indeed, I suspect, for other departments, is a bit like painting the Sydney Harbour Bridge—you never stop. I just thought that it may be worth exploring whether we could start the process a little earlier. I am talking in particular about some of the macro-economic settings, rather than the details.

Senator WONG: When did Treasury start thinking seriously about the budget this year?

Mr Fraser : I think they think seriously about budget all year.

Senator WONG: Tell me why you said:

In a wide-ranging speech after four months in the job, Mr Fraser also said he planned to begin preparations for the 2016 budget sooner than this year's because it—

and this is in direct quotes—

'shouldn't be something that we start to think of seriously in February'.

Mr Fraser : I am sorry, could you repeat the quote?

Senator WONG: The quote is:

In a wide-ranging speech after four months in the job, Mr Fraser also said he planned to begin preparations for the 2016 budget sooner than this year's because it 'shouldn't be something that we start to think of seriously in February'.

Can you tell me why you said that?

Mr Fraser : It was just a comment about the depth and breadth of the preparations within Treasury.

Senator WONG: Tell me why you said this:

The budget planning process - and I hope we can do it properly this year - should start around November.

Can you tell me why you said that?

Mr Fraser : I do not change from what I said. Some of the things within Treasury I would like to do better.

Senator WONG: The implication from this is that it was not done properly.

Mr Fraser : No. Life is about improvement, Senator—continuous improvement, possibly, to use a term from the nineties. It is about always thinking about whether you can do things better.

Senator WONG: Which things should have been done better?

Mr Fraser : We always learn. You learn from looking at experience.

Senator WONG: Mr Secretary, you made these public comments as Secretary of the Treasury. I am trying to understand what they are.

Mr Fraser : I have just said it. After every major event we have a post-mortem to think about things that could have been done better.

Senator WONG: What could have been done better?

Mr Fraser : As I just said, we are thinking about what we can do. My personal view is that we can start a little bit earlier thinking about some of the macro-economic settings—the interrelationship with the economic output.

Senator WONG: Can I also go now to some of your comments on superannuation. You are reported—and I assume it is correct, and I happen to agree with you—as saying, for example:

An important criterion for a well-functioning tax system is fairness, where there are some contentious and important issues that need to be explored. For example, substantial tax assistance is provided to superannuation savings. We need to consider whether the level and distribution of these concessions remains appropriate.

They are your words, are they not?

Mr Fraser : I think so.

Senator WONG: So it is your assessment that the level and distribution of superannuation concessions is something that ought to be discussed?

Mr Fraser : In the longer term, as is evident from the IGR, we need to think about systems which are going to pertain for the next 40 years if we are to address some of the challenges that were identified in the IGR.

Senator WONG: Correct. I cannot recall which publication, whether it is PBO or IGR, that demonstrated the growing cost of superannuation tax concession—correct?

Mr Fraser : I do not know about the PBO ones, but the growing cost of superannuation concessions has been pointed to in a number of publications.

Senator Cormann: I have to add to the answer here. Specifically, Chair, what I want to point to and inform the committee about is a quote from one such publication. I will read the quote and then explain where it comes from:

The tax concessions to superannuation are substantial. They are justified because they avoid future payment of the age pension, and they help boost our pool of savings with all the benefits for the economy that this brings … But because the tax concessions are costly to the budget bottom line, it is natural that the Treasury and Department of Finance are attracted to recommending that they be pared back when belts are being tightened. The problem with this is that it creates uncertainty for and concern by people who are making voluntary contributions to superannuation.

That comes out of a book that I have previously advertised in these committees, written by the shadow Treasurer, Chris Bowen, called Hearts and Minds. It is page 42 of his book. The only problem is that Labor, of course, says these things but they never mean it. They always look at people's retirement savings as a way to pluck their budget black holes through increased taxes on super, which of course is something that the Labor Party has announced again since then. The coalition government, unashamedly, supports incentives for people encouraging them to save more to fund their retirement so they do not have to rely on the age pension, and to help boost our pool of savings.

Senator WONG: Just going back your answer, Mr Fraser, I think you said that a number of publications have pointed to the growing cost of superannuation concessions to the budget. Correct? Was that a fact?

Mr Fraser : Yes, I am aware of work by the Grattan Institute.

Senator WONG: So it is still your view that the consideration of level and distribution of superannuation concessions is appropriate—is that right?

Mr Fraser : Is appropriate?

Senator WONG: Yes.

Senator Cormann: You are asking him for an opinion.

Senator WONG: He has already put an opinion on the public record. I am asking about it—

Senator Cormann: In these estimates, we do not ask questions of opinion.

Senator WONG: That is fine. Do you resile from your public comments in any way, Mr Fraser?

Mr Fraser : I have said in the longer term, and I do not resile, that, like many, many other programs, governments will have to address and societies will have to address the costs of programs.

Senator WONG: Including superannuation concessions?

Mr Fraser : We are addressing taxation; we are addressing superannuation; we are addressing a range of expenditures.

Senator WONG: You said, 'Substantial tax assistance is provided to superannuation savings. We need to consider whether the levels and distribution of these concessions remains appropriate.'

Mr Fraser : In the longer term over the period to 2055, absolutely.

Senator WONG: Because the long-term fiscal position of the Commonwealth would require, amongst other things, that you looked to the growing costs of superannuation tax concessions?

Mr Fraser : Any government that does not have a process of review of their longer term commitments, I think, is letting the community down.

Senator WONG: Did the Treasurer or the government take your advice prior to ruling out any changes to superannuation tax concessions?

Mr Fraser : I have always said that this is a longer term issue. There is an issue in the medium term about people who have saved under the aegis of certain rules. There is a social compact which I think needs to be respected—you cannot change the systems for people who have saved for 10 or 20 years under a set of particular circumstances.

Senator Cormann: If I might add to the answer, that is the position the government. We understand that people saving for their retirement need certainty and stability in policy settings, in particular when it comes to tax policy settings. That is a considered decision that we have made, having considered all of the relevant advice from a variety of sources. It used to be the view of the shadow Treasurer when he released his book Hearts and Minds, but of course, ultimately, Labor's instinct is always, 'If in doubt, let's whack on another tax', in particular on people saving for their retirement.

Senator WONG: I assume you thought about the certainty to part-pensioners with your changes to the assets test, which will obviously—whether or not they are meritorious—in a very short space of time change people's incomes as a result of a number of people no longer being eligible for a part-pension. Maybe Mr Fraser or some official can explain to me why it is that superannuation, despite Treasury's advice, cannot be touched, but you change the pension whenever you wish, if you are a coalition government, because only some people are required to have certainty not others—is that how it is?

Senator Cormann: Just to directly respond to that question: what we are doing in relation to pension arrangements is restoring the arrangements that were in place for nearly the whole period—

Senator WONG: Before Peter Costello changed them.

Senator Cormann: of the Howard government right until the end. What we propose in this budget—

Senator WONG: These are Costello's reforms you are outlining.

Senator Cormann: is to improve arrangements for pensioners with comparatively few assets by increasing the tax-free threshold in the context of the asset test. But, of course, we are adjusting the taper to bring it back into line with what was in place for most of the period of the Howard government. That is because pensions actually involve payments by government. Superannuation tax arrangements, to the extent that your questions imply proposed change, and the Labor Party has announced proposed change, what you are looking at is increasing taxes—that is, to leave people with less of their own money in order to fund the operations of government. What we are saying is we want to make government payments more sustainable for the medium to long term, which is why we are pursuing these reforms that we have announced in the budget.

Senator WONG: Mr Fraser, I am just putting on notice that we may have to seek you to be recalled, because I am having trouble getting time to ask you questions because I keep getting long lectures—I am just letting you know we might have to arrange that.

CHAIR: We have plenty of time.

Senator Cormann: This is part of Senator Wong trying to bully the witness into answering questions for the government.

Senator WONG: May I just proceed? Mr Fraser, I was asking you a process question. The Prime Minister ruled out any changes to superannuation—do you recall that?

Senator Cormann: No, you are verballing the Prime Minister—

Senator WONG: He just nodded.

Senator Cormann: Let me be precise because that is actually not an accurate representation—

Senator WONG: Okay.

Senator Cormann: What the Prime Minister promised and what the coalition promised in the lead-up to the last election was that we would not make any adverse unexpected changes to superannuation. Obviously to rule out any change would be silly. I do not think that anyone would complain, for example, about a beneficial change. We said we would not make any unexpected adverse changes, which is a very important clarification in the context of your question.

Senator WONG: I will find the Prime Minister's most recent quote, if you like, Mr Fraser. I am just asking whether or not you had the opportunity to provide advice about taking superannuation tax concession consideration off the table before the announcement was made?

Mr Fraser : My advice was totally consistent with my previous answer.

Senator WONG: Just in terms of process, as the most senior economic public servant, do you have the opportunity to brief the Prime Minister directly about matters economic?

Mr Fraser : I have the opportunity during the ERC meetings, and I have also had the opportunity on some other occasions.

Senator WONG: Right. Tell me, which other occasions? Is it in the context of the budget? Is it prior to announcements? What sort of occasions require such briefings?

Mr Fraser : It is a matter of public record that the governor and I attended a cabinet meeting in, I think, February to give a briefing on the economy, and in that there was discussion of the upcoming budget. I have also met with the Prime Minister, with others, on I think two occasions.

Senator WONG: Your previous statement that your advice to government is as per your public statements—can I just clarify: are you referencing advice to the Treasurer, or are you referencing advice that was provided in other contexts such as the ones you have outlined?

Mr Fraser : My advice has been totally consistent. You cannot make lightly changes with the parameters that govern people's savings behaviour for their retirement over many, many years. There is a social compact, I believe, between the government and those people which you must not play with. It is something that really should be thought of in terms of decades.

Senator WONG: Sorry, I did not see that in your comments on 27 February, so maybe you can point the committee to where you said that in the context of this discussion? What you have said here, which I understand you have not resiled from, is that we need to consider whether the level and distribution of these concessions remain appropriate. That remains your position?

Mr Fraser : If you are referring to my CEDA speech, I made it abundantly clear it was talking about the longer term challenges to Australia. It was in the context of the IGR report, which was, as you know, centred on projections out to the year 2055.

Senator WONG: Chair, you have been very kind so I will try and deal with the last measure pretty quickly. We will explore this issue later, I am sure, or my colleagues will, Mr Fraser. The inclusion of Future Fund earnings in the medium-term projections—when did you become aware of that fact, or that decision? It is just a process question.

Mr Fraser : Some weeks ago.

Senator WONG: Some weeks ago? Presumably ahead of the budget, or not?

Mr Fraser : Yes.

Senator WONG: It was not a mischievous question; it was a genuine question.

Mr Fraser : Well ahead of the budget.

Senator Cormann: Just for the record—

Senator WONG: Chair, can I please—

Senator Cormann: No, I have got to add to the answer.

Senator WONG: Chair, on a point of order—

Senator Cormann: This is—

Senator WONG: I am not proposing, Minister, to ventilate this now. You will have the chance to read all of your defence into the record when others do it. I am here for a short period of time. I am simply asking a process question. Can we defer your longwinded defence of your position till later in the program, and I do not have to be here?

Senator Cormann: You raised an issue with the secretary and I have got to add to it to make sure the answer is accurate. Firstly, this change in the treatment of Future Fund earnings, which was envisaged by the previous government back in 2012, was published in the Intergenerational report. It was published in the Intergenerational Report. I just want to make sure that there is no false impression that this is something that came on stream later in the peace in the context of budget preparation. It was published in the Intergenerational Report as something that was consistent with what was envisaged in the Future Fund Act 2006 and was consistent with the position adopted by the previous government in 2012.

Senator WONG: Mr Fraser, if we could just go back to process. As I said, I am not interested at this point about having a discussion about the merit. I think the media have demonstrated quite clearly, it is highly problematic. Let us that aside for the moment; I just want to understand process. You said you were aware some weeks before the budget. How did you become aware of it?

Mr Fraser : In the daily briefings I have with my senior team working on the budget.

Senator WONG: Were you told at that time that that was a decision government had made?

Mr Fraser : I cannot recall the precise manner of the briefing. It is a very busy time.

Senator WONG: It is a very busy time. I am aware of that.

Senator Cormann: Your line of questioning is ignoring advice I have just given you—that is, the Intergenerational Report well before the budget earlier this year. I am quoting you now directly from pages 135 and 136 of the Intergenerational Report. It made the point:

Between 2014-15 and 2019-20, annual net earnings (interest and dividends less operating expenses) of the Future Fund are excluded from the Australian Government underlying cash balance. This is consistent with the treatment in Commonwealth budget updates since the Fund was established in 2006. Once drawdowns commence in 2020-21—

Senator WONG: He is very sensitive about this because of the rules of the budget. He feels very defensive about it. Read Ross Gittins today. The books are cooked and you are embarrassed about it. No amount of ongoing lecturing of this Senate committee—

Senator Cormann: I have to say, I think Senator Wong is being extraordinarily discourteous to the committee.

Senator WONG: You cooked the books and you are embarrassed about it.

CHAIR: Senator Wong, I will take the call from you and I will go to the other side.

Senator WONG: That is fine. I think we have made the point.

Senator Cormann: Senator Wong is not prepared to let me answer the question, clearly, because she is embarrassed by the fact that she missed this in last year's estimates.

Senator WONG: Read Ross Gittins, mate. You cooked the books.

Senator Cormann: That is ridiculous.

CHAIR: I have the call. You have plenty of time, Senator Wong. I am not taking time from you.

Senator WONG: If he is going to blow it up, I am going to blow it up.

CHAIR: I am not blowing it up. I am here.

Senator WONG: You refuse to control him.

Senator Cormann: He is adding to the questions which you answer.

Senator WONG: He is not. He is reading a lecture.

CHAIR: If you are going to verbal me—

Senator WONG: If you want to control this then manage him.

CHAIR: I will control it and you will not.

Senator WONG: Well, manage him.

CHAIR: You need to ask your questions. We have plenty of time.

Senator WONG: I am trying to.

CHAIR: You are being—

Senator Cormann: I have to be allowed to answer the question.

CHAIR: I am quite interested in full answers if the secretary has an answer or the minister.

Senator WONG: Ross Gittins picked you.

CHAIR: If you want to make political points, I am interested in the answers to your questions. I am listening intently to your questions and I am having answers to your questions addressed.

Senator Cormann: I have not finished my answer, Chair.

Senator WONG: So you are going to let him go?

CHAIR: I am here til 11 o'clock. They are your rules. I am giving you as much time as you need. I cannot be any fairer.

Senator WONG: Thank you.

Senator Cormann: The inaccurate impression that Senator Wong is trying to create that this was a last-minute change in the context of the budget process is not true. As we stated very clearly in the Intergenerational Report earlier this year, pages 135 and 136:

Between 2014-15 and 2019-20, annual net earnings (interest and dividends less operating expenses) of the Future Fund are excluded from the Australian Government underlying cash balance. This is consistent with the treatment in Commonwealth budget updates since the Fund was established in 2006. Once drawdowns commence in 2020-21, net earnings from the Future Fund are included in the underlying cash balance reflecting that the fund's earnings are available to finance government liabilities from that date—

which incidentally is 100 per cent consistent the position adopted by the government that Senator Wong was a part of because, in a position paper released by Finance and Treasury in 2012, that was exactly what they said on page 4. I have tabled this document in the Finance estimates.

Once payments are made from that Future Fund, that earnings and future costs of the Future Fund will be included in the underlying cash balance as the annual draw-down of the Future Fund will be used to meet recurrent superannuation costs each year, already included in the underlying cash balance.

So essentially Senator Wong is trying to create an impression that is false, that somehow there is some dodgy accounting going on. There is no such thing. Future Fund net earnings have always been reflected in the fiscal balance budget bottom line. That remains the case. And consistent with the Future Fund Act 2006, the funds accumulated in the Future Fund become available to relevant government liabilities from 2020-21, as the related liabilities are as well.

Senator BULLOCK: Chair, a point of order. I always enjoy Senator Cormann's answers to questions. We get the opportunity to ask him questions every day in the Senate. I came along here this morning to learn a bit from Mr Fraser. I would like to hear his answers.

CHAIR: Your point of order is?

Senator BULLOCK: My point of that order is that this is superfluous.

CHAIR: There is no point of order. Minister, I ask you to conclude.

Senator Cormann: So this is entirely consistent with what the previous government envisaged, it is consistent with the legislation and it is consistent with what we announced in the IGR earlier this year. Any suggestion by Senator Wong that this was a last-minute attempt to create an impression for the period outside the forward estimates is false.

Senator WONG: Mr Fraser, I go back to my question, which was a process question. As I understand your earlier evidence, you said you first became aware of the decision or the proposal—I do not think you made it clear which it was at that point—to include the Future Fund earnings in the medium-term projections as a result of your meeting with your staff some weeks before the budget. Is that a fair summary of your evidence?

Mr Fraser : Yes, I was told pretty much what the minister has just said.

Senator WONG: With that amount of detail and, I am sure, with all the politics included.

Senator Cormann: There was no politics. I was reading from published documents. There was actually no politics other than to say that your political assertions are false.

Senator WONG: Mr Fraser, what I am trying to ascertain is whether or not this was a decision of government or a decision of Treasury. So when you were told, were you told that this was what the government has decided or you were you told this is what we are going to do?

Mr Fraser : It may have been because I asked a question, I was told that this was consistent with the previously announced decisions and it had been included in the IGR. Indeed, we addressed it in budget statement No. 3.

Senator Cormann: Consistent with decisions way back to 2012, under your government.

Senator WONG: That is not true but I am going to leave that because I am not interested in having another discussion with you. In statement 3, I do want to understand whether or not there was a decision of the government—let's say in the IGR and in the budget—to make this change or whether this is a Treasury decision?

Mr Fraser : It would be a matter for the Department of Finance.

Senator WONG: No, they have sent it to you, mate.

Mr Fraser : Have they?

Senator WONG: I spend quite a lot of time in Finance and they referred us to you on the projections, not on the UCB.

Senator Cormann: Medium- to long-term projections are a matter for Treasury.

Senator WONG: All I am asking is: is this a decision of government or a decision of Treasury to include the Future Fund earnings?

Mr Fraser : I think you should pursue that with Mr Ray.

Senator Cormann: This is a Fiscal Group matter for Mr Ray.

Senator WONG: I am asking the Secretary of the Treasury whether or not it was a decision of government or a decision of Treasury.

Mr Fraser : I do not know. I will have to take advice from Mr Ray.

Senator WONG: You do not know?

Mr Fraser : I do not know. I do not know everything.

Senator WONG: I know that nobody knows everything no matter how good we are but I am surprised that something as significant as that would not be something you would know the genesis of.

CHAIR: The secretary has indicated that Mr Ray will address it.

Senator Cormann: The government did not make this decision. This was not a government decision. This was the application of the applicable law and the applicable standards consistent with what is appropriate by the relevant agencies.

Senator WONG: Except that someone made a decision because those analogous graphs in previous budget updates—including your own, not just ours—budget and MYEFO, do not include earnings in those projections.

Senator Cormann: We have got to remind ourselves, we are talking about the period beyond the forward estimates.

Senator WONG: So there has been a decision made as to budget presentation, which has substantially increased the surplus in the years 2020—whatever it is—2021 onwards. Someone has made a decision. I am just trying to understand who has made that decision in terms of budget presentation.

Senator Cormann: And Mr Ray will be able to assist you. But let me just remind you that back in 2012 the Department of Finance and Deregulation, which was your department, and the Treasury made a statement about the budget treatment of Future Fund costs in the Australian government budget and financial documents and all the way back then flagged the budget treatment that is reflected appropriately in the budget papers today.

Senator WONG: What involvement did macro group have in those projections?

Ms J Wilkinson : We did not have any involvement in those.

Senator WONG: None at all?

Ms J Wilkinson : No.

Senator WONG: That is interesting. Do you not do a range of work which is then inputted for the purposes of generating those longer term projections?

Senator Cormann: This is not a macro-economic change though. We are talking about Future Fund net earnings, which is of clearly fiscal—

Senator WONG: I am asking a process question and he has interrupted me again. I am asking a purely process question, Chair.

CHAIR: Please let Senator Wong finish her question.

Ms J Wilkinson : Just to clarify, of course we have a role in the longer term economic projections. All I was saying was that we did not have a role in decisions taken in particular expenditure items in the same way that we do not have a role in relation to decisions taken in particular revenue items.

Senator WONG: One last thing, were the capex results this week less positive than you had anticipated?

Mr Fraser : I did not ask Jenny on this but, yes, not anticipated. It is usually a long process. It would have been good if they had been a little bit stronger.

Senator WONG: Sorry?

Mr Fraser : It would have been nice to have them a little bit stronger.

Senator WONG: We all agree with that. What I am trying to understand is whether or not they were consistent at the time the budget was handed down or whether they were on the lower side.

Ms J Wilkinson : I think it is reasonable to say that the capital expenditure survey results were on the lower side. They were broadly consistent with our expectations on the mining side but softer on the non-mining site.

Senator WONG: If you were doing the budget today on those figures, would they materially change some of your forecasts and projections for the economic parameters? It is only one set.

Ms J Wilkinson : They are one source of information that we use in pulling together our non-mining investment forecasts. They are of course important. The capital expenditure survey has much better coverage on the mining side than the non-mining side of the economy, where it is almost complete. Whereas on the non-mining side of the economy, there are significant sectors which are not covered in the capital expenditure survey. Things like spending on health, education, agriculture are not covered the capital expenditure survey. So it is one source of information. It is also the case that with early estimates from the capital expenditure survey, there tends to be very wide margin of error. There are a wide margins for how those translate into actual expenditure and those seem to be wider on the non-mining side than the mining side. So we take the capital expenditure survey. We also look at other data like the data on non-residential building construction. And then another important source of data is dater from things like the surveys like the National Australia Bank's quarterly survey, which provides indications of investment intentions over the next 12 months. That tends to have a fairly good correlation with non-mining investment and that is something that we place a reasonable weight on as well.

Taking into account all of those other factors and taking into account what we consider are likely to be the fundamental drivers of investment in the non-mining sector—so things like the level of interest rates, the level of the exchange rate and the level of petrol prices—I think we would have been concerned that the capital expenditure survey is certainly on the downside but I do not think it would have led us to adjust our investment forecasts.

Senator WONG: That is very helpful. I hope one of my colleagues will go to the nominal GDP point, but are you able to briefly explain to me the rationale behind the very substantial improvement in nominal GDP over the forward estimates—1½ to 5½? Can you summarise the rationale for that, Ms Wilkinson?

Ms J Wilkinson : In a nutshell, what is more surprising is the weakness of nominal GDP growth—

Senator WONG: But that has been the case for some years. Perhaps I should be clear: if you look at long-run average, et cetera, yes—where nominal GDP has been for some time is a concern. But what I would like to understand is why it is that the situation suddenly turns around to that extent in the out years.

Ms J Wilkinson : Our expectation is that the fall in the terms of trade is really the major factor which has driven slower growth in nominal GDP, along with slower growth in wages. Taken together, those are the two factors that have driven slower growth in nominal GDP in these last few years. And it is reasonably unusual that we have growth in nominal GDP which is below growth in real GDP, which is what has happened in 2014-15. In our forecasts, our consideration is that the fall in the terms of trade will have largely played out by the time we get to 2015-16. That means we will not have downward pressure on nominal GDP flowing from a further fall in the terms of trade in 2016-17. You can see the terms of trade and the forecast rise to a small degree in 2016-17. That means that by the time you get back to 2016-17, it is the real GDP growth, which we are forecasting to be about 3¼ per cent—that is half a per cent higher than real GDP growth in the previous year—combined with a small recovery in wages growth, which taken together is what leads to growth in nominal GDP, which is closer to what its long run average has been.

Senator WONG: I am sure some of my colleagues will come back to that. Mr Fraser, I think in February you said to us that you were a small-government person, that you believed in low public debt and so forth—I am shorthanding your evidence, but I think that is not an unfair summary. Does it concern you that the budget that you have been part of forecasts debt-to-GDP levels at 18 per cent of GDP in 2016-17, which is the highest, and certainly the highest in nominal terms—

Senator Cormann: Lower than it would have been if Labor had stayed in government.

Senator WONG: Can I finish or not? I have not even finished my question.

Senator Cormann: You made a political point, so I am going to use my prerogative to answer. The debt levels are lower than they would have been if we had stayed on the same trajectory.

CHAIR: Minister, I will provide you with the time to give a fulsome answer.

Senator WONG: Mr Fraser, I am looking at the table on 10.14-15 of budget paper 1, which is the historical tables. Leaving aside the nominal figure, and obviously this government is the government under which there is the highest debt ever, even if we going to percentage of GDP, the 18 per cent peak in 2016-17 is higher than at any level, I think, since only one year, 1995-96, where it was above that. Other than that, it is the highest net debt-to-GDP ratio, I suspect, in the nation's history, but certainly back to 1970-71—does that not concern you?

Mr Fraser : It just highlights the challenges for the Australian people in the decades ahead.

Senator Cormann: And if I may just add to that answer. Government debt is a function of revenue and expenditure, and the secretary in his opening statement outlined some of the challenges the government has been facing on the revenue side, irrespective of who would have been the government. What happened to global commodity prices and what happened on the revenue side would have happened in the same way. The side of the budget that we have more correct inference over is the expansion side of the budget. We inherited from the previous government expenditure growth of about 3.6 per cent above inflation and over the medium term to long term about 3.7 per cent above inflation which we have been bringing down. So while the position is not a position that we are particularly happy about, which is why we are taking measures to address it, government net debt is now peaking at 18 per cent in 2016-17 before coming down to about seven per cent as a share of GDP over the medium term by 2025-26 as a result of the decisions that this government has made.

Just to conclude on this point, whatever the position of the budget, it is at least $60 billion better off over the forward estimates than it would have been under Labor, given the savings and revenue measures that you are still opposing—including $6.5 billion worth of revenue and savings measures that you yourself initiated in government, and the spending that you want us to restore from savings measures that have already passed. While I understand why you are making a political point, the truth is that we are in a stronger position now than we would have been if we had not adjusted the forward trajectory. We are now heading in the right direction and making progress. We would like to make progress more quickly, but at least we are no longer deteriorating the position for years on end, as was the case under the previous government.

CHAIR: Senator Wong, be fair; I gave up my opening questions.

Senator WONG: You did. You have been very fair.

Senator Cormann: I never got more than 20 or 25 minutes, by the way.

CHAIR: The former chair used to speak for 25 or 30 minutes, that was Senator Mark Bishop.

Senator WONG: He did.

CHAIR: I gave you that because you told me that you needed to go by 10.30 and I am giving you an unfettered run.

Senator WONG: You are being very kind, Chair. I am just amused at the way that the Pre-Election Economic and Fiscal Outlook, which is prepared by the secretaries of Finance and Treasury without political interference, and which completely contradicts the minister, has been rubbed out of there.

Senator Cormann: And it is just not true.

Senator WONG: But I will decline. Yes, it is.

Senator Cormann: It is actually not true.

Senator WONG: Mr Fraser, can I take you to 10-6 and 10-7 and the historical tables there. Can I also point out to you that this government is spending more as a percentage of GDP on average in almost every year than any government in the last 10 years, with the exception, of course, of the GFC. The GFC year is—

Senator Cormann: Because you have asked the exact same question before, I think that the secretary needs the context—

Senator WONG: I am asking him to look at the table, and he has just interrupted.

Senator Cormann: I am interested to hear you qualify, 'in the last 10 years,' because when you asked that question before you said, 'ever,' and I was able to correct you there, because in 2009-10 it was 26 per cent.

Senator WONG: I just said that.

Senator Cormann: In 1993-94, it was 26.1 per cent and in 1992-93, it was 26.1 per cent—all Labor years. In 1986-87, it was 27 per cent. In 1985-86, it was 27.4 per cent. In 1984-85, it was 27.6 per cent. In 1983-84 it was 26.7 per cent.

Senator WONG: You are still the biggest spending finance minister in Australia's history.

Senator Cormann: All Labor years.

Senator WONG: You beat me by a percentage of GDP.

Senator Cormann: Now we are peaking lower. Spending as a share of GDP is now peaking lower than what it would have peaked under Labor, and it is projected to come down from 25.9 per cent this year to 25.3 per cent at the end of the forward estimates. We would like it to come down by more and faster, but the truth is if Labor truly agreed with that, if Labor truly supported that position and if Labor were truly concerned about spending as a share of GDP, you would support our savings measures in the parliament—in particular the savings measures that you yourselves initiated in government.

Senator WONG: I do not think that I was permitted to finish my question, Mr Fraser, because—

Senator Cormann: Well, you are asking a political question.

CHAIR: Well, do not lead again; just ask it.

Senator WONG: Mr Fraser, I am going to repeat my question because I was interrupted previously. I am asking you to look at the historical tables at 10-7. It is the case, isn't it, that the average expenditure over the forward estimates is higher than the average expenditure over the period of the former government and in every year is higher except the 26 per cent of GDP in the 2009-10 global financial crisis year and historically is one of the highest spends we have seen? I would also say to you that if you look at the receipts to GDP, this government is actually receiving more in receipts than the previous government ever did as a percentage of GDP. So I am a little confused as to how this is a low-spending, low-taxing budget?

Senator Cormann: Well, I can assist you with your confusion. On both spending and the tax revenue side, as a share of GDP, the forward trajectory is lower than it would have been under the previous government without policy change. On the tax side, for starters, we abolished the carbon tax and the mining tax. We are now giving effect to a 1.5 per cent tax cut for small business. So manifestly tax as a share of GDP, in the absence of policy change by the previous government, is now lower. In terms of the spending side, I have already indicated to you that spending growth under this government is much lower than it was under the previous government. We brought that down to about one per cent above inflation, on average per annum, in our first budget. It is 1.5 per cent per annum on average above inflation in this budget, compared to 3.6 per cent in the first five years of Labor government and 3.7 under Labor over the medium to long term. That is because Labor legislated and locked in expenditure growth across a whole range of areas, in particular in the period beyond the published forward estimates at the time of the last election.

The reason why in this year's budget expenditure growth is slightly higher on average per annum than last year is that in 2018-19 the ramp up in expenditure on the National Disability Insurance Scheme is coming into the forward estimates. That obviously is a very important initiative and has broad bipartisan support, but our effort in getting spending under control in other parts of the budget is, obviously, also in large part in order to make the necessary fiscal space for spending on things like the National Disability Insurance Scheme. The suggestion that somehow spending is growing by more than under the previous government is objectively false. Is spending still growing? Sure. Is spending higher as a share of GDP than we would like? Yes, but we are now heading in the right direction. Spending as a share of GDP is now trending down from 25.9 per cent this year to 25.3 per cent at the end of the forward estimates, because stabilising at 25.4 per cent over the medium term. Obviously, there is more work to be done in order to get government spending to a more sustainable level, and we look forward to the support of the Labor Party in helping us achieve that.

Senator WONG: Mr Fraser, I am going to ask some very simple questions: do you regard 18 per cent of GDP—

Senator Cormann: You are asking for an opinion.

Senator WONG: Let me finish it and if you do not want the Secretary of Treasury to answer, that is fine. Do you regard 18 per cent of GDP for net debt as being low public debt?

Senator Cormann: You are asking him for an opinion.

Senator WONG: You really do not want the Secretary of Treasury to answer that question.

CHAIR: You are asking for an opinion; I am quite happy to give you an opportunity to rephrase it.

Senator WONG: How would you describe 18 per cent of GDP for net debt? Is that manageable?

Senator Cormann: Eighteen per cent is 18 per cent. What a question is that!

Senator WONG: It is really embarrassing for him that you are treating him like a junior officer.

Senator Cormann: That is ridiculous.

Senator WONG: It is embarrassing. He is one of the most senior bureaucrats—

Senator Cormann: I am protecting Treasury officials from political badgering.

Senator WONG: I am asking him a question.

CHAIR: I do not want this to degenerate; if you could just pose the question.

Senator WONG: Okay, if you do not want to talk about net debt, that is fine. Mr Secretary, do you regard 29.5 per cent of GDP for payments as low public spending?

Senator Cormann: You are asking him for an opinion.

Senator WONG: You really do not want him to answer that either.

Senator Cormann: You are asking for an opinion.

CHAIR: It is an opinion.

Senator Cormann: Standing orders very explicitly rule out questions asking officers for opinions.

Senator WONG: You are the Secretary of the Treasury; you have said that the whole parliament needs to address the issue of the fiscal challenges. Do you have a percentage of GDP in terms of payments that you would tell this committee is what we should all be aiming for?

Mr Fraser : I repeat what I said earlier: all these figures underline the challenges in the decades ahead for all parties, for all governments and for the people of Australia.

Senator WONG: Because they are too high?

Mr Fraser : We have an ageing population. We have pressures on various parts of government expenditures, and we also have pressures on the revenue base. These need to be addressed.

Senator WONG: Thank you. Can I ask you a question about the revenue base. Is there any indication you can give to the parliament about what you think is an appropriate level—an economically efficient level—of tax to GDP?

Mr Fraser : No, because we are going through a process with the options paper on tax. We need to work through that. And then, in the context of looking at the longer term, we can come to views about appropriate levels in the longer term.

Senator WONG: So you are not—

Senator Cormann: Adding to that answer: the government, of course, made a decision to put in a cap. When it comes to tax revenue share of GDP, in terms of the assumptions underpinning all revenue estimates it is set at 23.9 per cent of the share of GDP. That 23.9 per cent is the average tax-to-GDP ratio in the period between the introduction of the GST and the GFC. As has been discussed publicly in the past, there is an in-built assumption that there will be tax relief at some point in the future in order to address the effect of bracket creep. Our revenue estimates and our revenue assumptions are based on that 23.9 per cent cap.

I might also just add in relation to the questions on expenditure that we have put our expenditure reduction proposals on the table. The alternative government has not identified a single alternative expenditure reduction proposal.

Senator WONG: It is humiliating for Fraser. It makes Fraser look like an EL2! He would never—

Senator Cormann: Zero dollars in expenditure reduction proposals, in fact. The alternative government wants us to increase expenditure, so it is a bit rich for the alternative government to try to suggest that expenditure as a share of the economy is too high under this government when it would be higher under the alternative government.

Senator WONG: Mr Fraser, just on the tax or receipts to GDP: receipts obviously include tax and nontax, right? And that is substantially higher than 23.9 per cent. So, under the budget just handed down, receipts to GDP hits 25.2 per cent.

Senator Cormann: That is not tax receipts; that is all receipts.

Senator WONG: I think I just said that.

CHAIR: Finish your question.

Senator WONG: Thank you. Receipts to GDP—I am looking at 10.7—are 25.2 per cent. Would you, looking at that table, concede that it is higher than at any time in the past decade? The only time it exceeds that is under the Peter Costello budget of 2005-6 where, obviously, mining revenues were very high. But it is in every year: in 2006-7, 25.1 per cent, just under; 2007-8, 25 per cent; then under the Labor government you are looking at 23.3 per cent, 22 per cent, 21.5 per cent, 22.2 per cent, 23 per cent, 22 per cent and 23 per cent. Then under this government it climbs to 25 per cent.

Senator Cormann: There are two responses to this. One is—

Senator WONG: I am just asking him.

Senator Cormann: and I am answering for him.

Senator WONG: Point of order, Chair!

CHAIR: What is your point of order?

Senator WONG: My point of order is relevance. All have I have asked the official to confirm is what a table said. If the minister wishes to clarify after that, he is entitled to. It is an utterly factual question.

CHAIR: He is entitled to answer the question.

Senator WONG: He will not even let the Secretary of the Treasury read a table!

Senator Cormann: Yes—

CHAIR: Senator Wong, it is his right, as it was your right, when you were sitting where Mr Cormann—

Senator WONG: It is humiliating for the secretary and it is embarrassing for him.

CHAIR: It is not humiliating at all.

Senator WONG: Parkinson would have been allowed to read a table!

Senator Cormann: Senator Wong is trying to make a political point.

Senator WONG: Yes, because you are treating the Treasury secretary like he is a FAS.

Senator Cormann: There are three points that I would make in response—

CHAIR: Order!

Senator Cormann: Quite frankly, you are asking the Secretary of the Treasury to read a table that you can read very competently yourself, I am sure, because you are trying to make a political point. There are two points that I would make. No. 1 is that the percentages of the share of GDP are lower than they would have been if the previous government had remained with the same policy settings that were in place at the time of the last election. The second point is that we actually accept that the budget repair effort needs to take place overwhelmingly on the expenditure side of the budget. That is what we have been trying to do, not with any help from the Labor Party.

CHAIR: Thank you, Minister.

Senator WONG: Thank you, I appreciate it, Chair.

Senator WHISH-WILSON: I want to ask the Treasury secretary if he could elaborate on the concerns that he expressed earlier in the year about the current tax treatment of superannuation.

Mr Fraser : I have said what I have said, with all due respect. I think that over the longer term we have to address superannuation in a very holistic way, but we have to do that very carefully. These are decisions which affect people's lives over decades and, similarly, we need to be very mindful that people have arranged their lives and taken the signals over decades to plan for their retirement. So one has to be very careful about changes that are made.

Senator WHISH-WILSON: Is the Treasury doing any modelling or any work on the impacts of superannuation tax concessions on the economy? In various forms?

Mr Fraser : It is an ongoing issue. It is a bit like the budget; it is an ongoing issue. We have the options paper on taxation and we are engaged in a very comprehensive engagement with the private sector—and not just with business, with others—about the options for taxation. Invariably, you have the interaction between taxation and superannuation to look at. So the answer is 'yes', and it is a huge project.

Senator WHISH-WILSON: What is the official forecast that you have in place for real interest rates at the moment? Do you expect them to stay low for some time?

Mr Fraser : Ms Wilkinson?

Ms J Wilkinson : In the budget process we always use an assumption which is that interest rates stay where the market is forecasting them. I think the market expectations are for normal interest rates to stay broadly around the current level, and that is the profile that we used through the forecast period.

Senator WHISH-WILSON: So over three years?

Ms J Wilkinson : The three years of the forecasts.

Mr Fraser : In short, we do not forecast.

Senator WHISH-WILSON: You do not forecast? You just take the market rate.

Mr Fraser : Yes.

Senator WHISH-WILSON: There has been a lot of talk about the fact that low interest rates are pushing superannuation funds into equities. I was just wondering if you had studied any relationship between the level of capital investment, which we have been discussing today for business, and the search for yield by superannuation investors?

Mr Fraser : It is a broader issue, with respect, than just superannuation.

Senator WHISH-WILSON: Of course.

Mr Fraser : It is a worldwide issue. Indeed, in my recent visit to the United States for the G20 and IMF meetings I had a very good discussion with the Federal Reserve Board. They said to me, bluntly, 'Well, that's what we want to happen.' That is, to get people to invest in equities rather than in fixed income.

For fixed income—that is, bonds plus right along the spectrum to term deposits—I have to say that it is an unfortunate consequence of the monetary policies that have been pursued throughout most of the world since the global financial crisis. I have said publicly that I think it is a real worry for older people. My late parents were an example: all they wanted to do when they retired was put a little bit of money into a three- or four-year fixed deposit and earn—well, what was in those days—five or six per cent. It is very difficult to get that, as I think everybody knows, and so people are being pushed into equities and indeed into riskier investments than they would have otherwise contemplated. I do not think that is good.

But it is a consequence of the QE policies and the historically low interest rates around the world—so it is not an issue peculiar to Australia. Indeed, in Australia the impact has probably been less because we are still running a cash rate of two per cent, whereas in Europe you have zero, or close to zero, cash rates. In Kensington High Street in London in December there was a big ad up for one of the major banks that offered 2.2 per cent for a three-year deposit. When I enquired of the manager I found it was linked to a structured product linked to the equity market, which was outrageous, because the information on that—my eyes are going—was writ very small. I think it is a major issue.

Senator WHISH-WILSON: Do you have any empirical evidence on whether payout ratios have been increasing in those countries?

Mr Fraser : Sorry, 'payout' ratios?

Senator WHISH-WILSON: Dividend payout ratios.

Mr Fraser : Worldwide there has been a search for yield. I know in Europe—because I was on the group executive board of a major institution—people are very, very conscious of the desire by investors for perhaps better dividend payouts than pertained 10 or 20 years ago. Whether that has an impact on investment is more problematic. What is the case—and certainly is the case in Australia—is that corporate balance sheets look very, very healthy. So it is not as if the dividend payout policies could be pointed to as a major impact on investment spending.

Senator WHISH-WILSON: Is it a chicken and egg thing? Is it because it is a high risk environment for investment at the moment that the money is not flowing into business investment or is it that they need to increase their payout ratios to maintain their share prices and a lower cost of capital?

Mr Fraser : It is a hard one to discern, which is effectively saying yes. But when you look around the world, the corporate sector, particularly in the United States as well, has been very well cashed up. It has been one of the worries that in an environment where people have been cashed up as companies, even after paying out dividends and then a world of very low interest rates, capital spending has not been higher. Economists are a dime a dozen. A lot of people would argue that capacity was expanded dramatically in the period leading up to the global financial crisis, and following that companies require even higher internal rates of return to contemplate more investment.

We have the situation in Australia, and it is well known about the mining sector, it has two parts of it: it is commodities effecting our exports but there is also the mining investment boom. We have come off a mining investment boom which will take longer to recover from because of the capacity that was built in. I do not want to generalise that too much around the world, but your first point I totally agree with, that investors or savers—whether they be superannuation funds or whatever—are being pushed more to look at equities. But the second string—has this affected the low interest rates and the search for yield; has that adversely effected capital investment—is far more problematic.

At the end of the day, in my experience in the private sector, it is all about demand. If the demand is there, smart businesses will invest in anticipation of that demand. They may, it could be argued, want further evidence that that demand is going to be sustained than was the case prior to the global financial crisis, when everybody was overly optimistic, to be blunt.

Senator WHISH-WILSON: Can I ask you about that demand? In your opening statement, you do talk about the role that exports are going to play in the Australian dollar in a transition to a broader based growth by making businesses in export orientated and import-competing sectors more competitive. Then you said that exports are expected to continue to make a significant contribution to GDP growth. Do you think that demand is there already if you are forecasting higher export growth? Could I specifically ask the question that I asked last estimates: in any of the free trade agreements the government has been signing, are you factoring in that bounce back of the export component of GDP?

Mr Fraser : Unequivocally, free trade is a good thing. I am not going to go down as the first Treasury secretary to say otherwise.

Senator WHISH-WILSON: No, I just wonder if you are factoring it in?

Mr Fraser : The free trade agreements are a part of the process of leading to better access for Australia in big and growing markets, and they will be a very, very significant factor over the medium to longer term.

Senator WHISH-WILSON: Can you quantify them at the present for the forward estimates?

Mr Fraser : To be blunt, no.

Senator WHISH-WILSON: Is it just an opportunity?

Mr Fraser : It is like a lot of things—I have said earlier, I do not know everything. Probably, with each passing year I realise the truth of that. There are things that are very difficult to model—and indeed trying to model them gives a false sense of precision. The econometrics world has not really advanced that much in the last 40 years, I am afraid, since when I studied it. But we do factor in that Australia—with a lower exchange rate in recent months, with a freer market—will be in a good position to take advantage of longer term export opportunities. But the key thing is world growth.

And we start with China and work down from China to the others. The biggest issue for us at the moment is going to be the path of China. That is not something to get too depressed about. They marked down their forecast but they have come from seven per cent to about 6¾ per cent. I am of the view—and this was firmed up with my discussions in Washington and also in the UK—that China is going through a consolidation period, which will be in our interests. In particular, they are looking at making a transition themselves from a very investment based economy to one which is going to be based more on domestic consumption. The great news is that they have a lot of people who are domestic consumers and their wealth levels are still well below Western levels. So the potential there is terrific.

We also should not forget India. India pumped out 7.3 per cent real growth last year, which is marginally up on the year before, but marginally up on the year before that. India is possibly something else that is going to figure larger in our outlook than we thought a few years ago. But we also should take some confidence in the fact that the United States economy is looking pretty good, despite a very poor first quarter. There are reasonable arguments that the first quarter was impacted by the port disputes in Newport and elsewhere on the west coast, and by the very cold winter.

I would also add that there is a study that we were alerted to last week, which said that the first quarter for about the last six years has always underestimated growth. I am just saying that the big issue is the demand side. And, worldwide, absent some terrible strategic happening, I remain confident that we, as a far more open economy than we used to be and with a lower exchange rate, will be in a better position than we were years ago to make that transition from a mining dependent economy to a more broad based one. It will be difficult, though.

Senator WHISH-WILSON: Thanks. I only have a few more minutes until we break.

Mr Fraser : Sorry.

Senator WHISH-WILSON: That is alright. ASIC's chairman, Greg Medcraft, has raised concerns about house prices and has warned of a housing bubble. There has been a bit of a debate about this in the media. Can I get your opinion, or the Treasury's opinion, on whether we are at risk of a housing bubble?

Senator Cormann: You cannot ask for an opinion. You have to rephrase your question.

Senator WHISH-WILSON: Have you factored any risk assumptions into your modelling around a potential housing bubble and the impacts that might have on the economy?

Mr Fraser : It is a very interesting question. It is one that rightly occupies the interests of the Reserve Bank, ourselves, ASIC and APRA. It is getting a lot of attention. When you look at the housing price bubble evidence, it is unequivocally the case in Sydney. Frankly, whatever the data says, just casual observations tells you it is the case. It is certainly, I think, the case in the higher priced areas of Melbourne. And I base that on my own observation as well as the data. For the rest of Australia, the evidence for a bubble is less compelling. The fact is, though, house prices are high. Certainly in Sydney I think it is having a palpable impact on young people trying to get into the housing market, and I think that is highly unfortunate.

Senator WHISH-WILSON: Do you have any concerns around correlations with level of household debt and rising house prices?

Mr Fraser : You have always got to be careful about interest rates and debt. But it does worry me that the very low—historically low—levels of interest rates are encouraging people to perhaps overinvest in housing. And I am not talking just about buying houses; I am talking about investing in housing. You just have to see the plethora of these renovation shows to realise something is amiss.

Senator WHISH-WILSON: In terms of that issue about investment in housing and the impact it is having on the economy, do you see a relationship between the level of capital investment by business and the level of investment in housing? Do you think there is a correlation there? We dealt with lower business investment this morning but we are seeing an increased investment in real estate. Have you guys looked at any correlations?

Mr Fraser : I will pass it over to Ms Wilkinson in a moment—but clearly if a market is strong businesses will look there rather than elsewhere for their investment. Housing has been a major driver in our economy since World War II—probably since before that, but we just do not have the data. Ms Wilkinson, could you elaborate on the modelling issues?

Ms J Wilkinson : There is not a fixed amount of funds that can be used in the economy. We have a floating exchange rate and we have an open capital account, so decisions that are being made by firms as to whether to invest are based on decisions by firms as to whether they think they can get sufficient return in order to justify that investment. I would not be particularly concerned about there being a 'crowding out' of investment from housing to investment.

Senator WHISH-WILSON: I was just thinking about the savings-to-investment link—if people are putting their capital into housing. I suppose where I am going with this is: do you have any concerns over the level of negative gearing in the country and the impact we are seeing on housing prices in places like Melbourne and Sydney?

Mr Fraser : No. I think there are range of issues, but the predominant ones are low interest rates and availability of finance for housing. Those are the major drivers. There are other issues, such as—

Senator WHISH-WILSON: Does that have a negative impact on negative gearing? If you are getting lower interest deductions because interest rates are only a few per cent, should that automatically slow the level of negative gearing, or increase it?

Mr Fraser : Other things being equal—but the big driver for negative gearing is the level of personal income tax rates. You have seen in countries around the world which have far lower top marginal rates that negative gearing has become less attractive. But there are a range of issues. It is not just housing. Negative gearing is fundamental within the tax system, if you are investing in anything that drives an income flow.

Senator WHISH-WILSON: You mentioned earlier your concern about investment in housing. Can you break that down? Do you break that down in your accounts, between negative gearing and personal—

Mr Fraser : No.

Senator WHISH-WILSON: You cannot do that? Can the tax department do that? Surely there must be a way of tracking the level?

Ms J Wilkinson : No. When we look at investment in housing we typically distinguish between purchases by investors compared with purchases by owner-occupiers. So the macroprudential measures, which were announced at the end of last year and which are applied by APRA, are predominantly focusing on the investor component of housing demand.

Senator WHISH-WILSON: I only have two minutes left here. In terms of capital investment, Senator Wong was asking you about the recent ABS estimates of capital expenditure that had a big fall. They fell 4.4 per cent in the first quarter. Have you readjusted any of your forecasts or your forward estimates of capital expenditure based on the recent figures?

Ms J Wilkinson : No, we have not. As I responded when Senator Wong asked that question, there are two different components, two different drivers, of capital expenditure projections. One is of course in the mining sector; the other is in the non-mining sector. The reductions in investment in the mining sector are playing out broadly as we expected, and a significant proportion of the 4.4 per cent fall in the March quarter is driven by a nearly 18 per cent fall in mining capital expenditure. If you look in the budget papers, we are very explicit that we expect mining expenditure to fall this year and to fall further again next year. So that is happening. What was more disappointing was the outlook for non-mining investment—

Senator WHISH-WILSON: And, on that point, at what stage will you get a meaningful set of data as to the impact of the small business stimulus package the government has put in place?

Ms J Wilkinson : That sort of information will come through gradually over time. I expect the first place we would see the impact that might have is in the next set of business surveys conducted. We have not had any business surveys—

Mr Fraser : Or retail spending.

Ms J Wilkinson : There could be components of retail trade which would be affected. And it would be in business surveys. We have an early indication from business liaison. We have conducted a business liaison round in the last couple of weeks, and certainly the indications we are getting from talking directly to businesses is that they are attracted by the package and are looking at opportunities that they may have to use that.

Senator WHISH-WILSON: Will I get a chance later to continue later, Chair?

CHAIR: If you are nearly finished your questioning and if it is only going to take a couple of minutes—

Senator WHISH-WILSON: I had some questions around the small business package, but I can wait my turn, if you like.

CHAIR: Thank you. We will now have a short break.

Proceedings suspended from 10:46 to 11:00

CHAIR: We reconvene, and because Senator Whish-Wilson was in a flourish we will let him continue.

Senator WHISH-WILSON: Mr Fraser, in terms of the small business package, have you done the numbers on the type of capital expenditure that we are currently seeing across the sector? If we look at a couple of million small businesses with a turnover of less than $2 million, have we got an idea of what they are currently spending? I am trying to get an idea of the magnitude of what could be coming forward with the $20,000.

Mr Fraser : I am not trying to be unhelpful, but it is probably better to ask Rob Heferen, who is head of tax policy. By dent of the $20,000 limit, to be blunt, with the small businesses I have asked, which are restaurants and the unbelievable number of coffee shops in Australia, it tends to be items such as ovens—stuff like that. The tradies I know talk about tools—so, grinders and things like that. Really, I would be wrong to say I have a comprehensive answer. I know that Mr Heferen, in putting the estimates together, would be in a far better position.

CHAIR: He will be in tomorrow.

Senator WHISH-WILSON: Okay. I should ask similar questions tomorrow in relation to how many will potentially benefit from the tax deductions. Mr Fraser, it has been reported that you authorised the Intergenerational report advertising campaign. Is that true?

Mr Fraser : Under the procedures, I have to authorise the campaigns. The advertising campaign for the Intergenerational report I authorised on 6 March.

Senator WHISH-WILSON: Is Treasury itself paying for the campaign?

Mr Fraser : I will hand over to Mr Lonsdale for that.

Senator WHISH-WILSON: And, if so, how much has it cost to date and is it expected to cost?

Mr Lonsdale : In the budget, the portfolio budget statements indicate that the government has allocated $36.2 million for two phases of the campaign. The expenditure we have to date on AusTender is around $19.5 million of the $36.2 million.

Senator Cormann: To put that into context, the previous government, for example, planned to spend $38 million on its advertising campaign in relation to the mining tax, which, as we know, when it was all said and done, did not raise any money. Over the period of the previous government, about $500 million was spent on advertising like this, including advertising during the caretaker period. But you might remember, Senator Whish-Wilson, the 'you won't be settled in Australia' campaign, which was at a time when the previous government was trying to make people believe that they were all of a sudden committed to security of our borders. Obviously, this put public servants in a very awkward position at the time. You know that this government has made a judgement that it is important to engage with the community about our medium- to long-term economic challenges as a nation, and that is why we have made this allocation.

CHAIR: Minister, I ask you to table that—whatever it was.

Senator Cormann: Very happy to table this, but I would like to be able to get the original back.

Senator WHISH-WILSON: I understand your comments on engaging with the community about economic challenges. Recently, you were selling aspects of the budget, including the small business package. Is that part of the economic challenge that you are talking about?

Senator Cormann: Obviously, we have one economy. So, we have the Intergenerational report, which sets out the very long-term challenges for our nation looking at the period to 2055. Then, of course, we have the budget, which is a next step in our economic plan to strengthen growth, create more jobs and deal with those medium- to long-term challenges. There is one economy. There is one plan from the government to strengthen growth and create more jobs and, obviously, that plan is adjusted from time to time depending on changing circumstances. That is what we are doing. The conversation with the community is a very important conversation. In the context of what has been allocated by governments for these sorts of engagement campaigns in the past, this is just middle-of-the-road.

Senator WHISH-WILSON: Mr Fraser, Senator Cormann mentioned earlier that the previous government had included the mining tax in its Intergenerational report advertising. Does Treasury consider, or has it considered, in its modelling, if there will be any medium- to long-term impacts of the two-year instant asset write-off?

Mr Fraser : I really think this is something that, when we see what the spending patterns are, we will be in a better position to make a judgement. Doing forecasting with this just strikes me as being an incredibly difficult thing to do. Directionally, I would be staggered if it did not encourage an increase in investment by the small business sector.

Senator WHISH-WILSON: My understanding was the Henry review—which my party, the Greens, had modelled our policy on—was a $10,000 instant asset write-off per annum indefinitely rather than a short-term stimulus. Presumably, all the options were considered by Treasury and advice was provided to the government on the type of—

Mr Fraser : My understanding is that is the case but, once again, it is something that Mr Heferen will be better placed to answer as to the detail.

Senator WHISH-WILSON: In terms of the economic impact though? The investment—

Mr Fraser : Yes. The first part and also the economic impact because, in putting together the forecast for the cost of the package, you have to make some assumptions but they are assumptions. It is new territory to be making hard forecasts.

Senator Cormann: If I could just make a point here too, because Senator Wong earlier inaccurately asserted that this was somehow part of the previous government's response to the GFC. It was not, of course; it was part of their mining tax package. The reason the government and its annual position since then did not support the measure of the previous government when it came to the instant asset write-off is that it was not properly funded. It was not properly funded, because the mining tax failed to raise any revenue in the final analysis.

The little in revenue it raised in the early days had to be refunded, given the various features of the mining tax deal the previous government entered into with the three biggest miners. Once you take the cost of administration and the cost of advertising into account, the mining tax, as designed by the previous government, actually left the budget worse off. In that context, the measure the previous government could afford was not affordable. What we have now done, of course, is put our measure on a fiscally sustainable foundation inasmuch as the budget continues to be on a credible path back to surplus.

Senator WHISH-WILSON: Mr Fraser, in terms of the small businesses spending $20,000, was there any work done on whether they would borrow that money or whether they would do that out of their own working capital?

Mr Fraser : Not that I am aware of.

Senator WHISH-WILSON: I support an instant asset write-off, absolutely, and so does my party. Interestingly enough, my wife's business was going to spend $20,000 on a new laser, which it needed for scar treatment. But we baulked at that, and her turnover is not quite $1 million but it is reasonably significant for a small business. That was a lot of money for us, so I am just interested that, of the two million small businesses across the country, some of them have a lot smaller turnovers. Whether we are going to get long-term productive gains out of that $20,000 or more rather than just having an instant stimulus to the economy, will it actually benefit small business in the medium to long term? Why is it going in the Intergenerational report, if we cannot prove that?

Senator Cormann: What I would say to you is that, obviously, individual businesses still have to outlay the expenditure. What we have done in this budget is to bring forward the capacity to depreciate that against your income for tax purposes. The checks and balances are that your wife—or any other business for that matter—still has to make a judgement on whether a particular investment will help the business be more successful and grow stronger into the future. You are not able to recoup all of it. In a way, you will be able to recoup as much as you would have been able to recoup in any event except that we are helping, effectively, with cash flow by bringing the capacity to depreciate the value of the asset forward up to $20,000. We believe that businesses will still continue to make considered judgements on what investments will help them be more successful into the future, help them grow their business and employ more Australians. That is the thinking behind it. Rather than having a government-driven payment stimulus, what we are saying is: 'We're going to let you have more of your own money to make judgements on how to invest in your future success.

Senator WHISH-WILSON: On that last point, Senator Cormann, if you are giving small businesses a window of one to two tax years to make that capital investment, how does that help them with long-term planning if they only get the instant asset write-off in that first one or two years?

Senator Cormann: Obviously, you want to, with any new measure like this, see how it works before you make a judgement over the medium to long term.

Senator WHISH-WILSON: So you may extend it?

Senator Cormann: Let's cross that bridge when we come to it. The key here was that, in the context of the budget, what we have judged to be affordable was to propose a measure as it is reflected in the budget papers—that is, for businesses with a turnover of up to $2 million, up to $20,000 in instant asset write-offs from budget night and then into the next two financial years.

Senator WHISH-WILSON: In relation to you judging what was affordable—could you take it on notice as to what the forecast was and what this would cost.

CHAIR: This is the your third and last question.

Senator Cormann: We will take it on notice.

Senator BUSHBY: Thank you, Mr Fraser and officers from Treasury for assisting us today. Earlier on, Senator Wong asked some questions about nominal GDP and, in the context of answering that, you mentioned the real GDP. I am interested in some comments on the real GDP, which I understand is predicted or forecast to increase from its current level of around 2½ to 2¾ and then to 3¼ per cent. On what basis have you decided or come to the conclusion that those forecasts are plausible?

Ms J Wilkinson : You are right that our budget forecasts predict the growth in the economy will increase from 2¾ to about 3¼ per cent by 2015-17. We have made those forecasts on the basis of assumptions about the impact that fundamentals will have to drive broader based growth in the economy. This includes factors like the impact that the lower exchange rate will have on the incentive for investment and export growth in the trade exposed sectors. It takes into account the transition that is taking place within the mining sector from its investment phase to its export phase, so there is significant growth in exports over the forecast period. It takes into account the impact that low-interest rates will be expected to have on dwelling investment and the impact that low-interest rates, the lower oil prices and the general increases in household wealth would likely have on consumer demand over the forecast period.

Senator BUSHBY: And presumably also some of the international factors that Mr Fraser outlined in his opening statement that the US is nearing full employment and inside Europe and China—what is happening in those economies and how that impact on Australia, particularly vis-a-vis the exports.

Ms J Wilkinson : That is correct. The outlook for the global economy is predicted to improve a little over the next couple of years, and that would support a pick up in growth in Australia.

Senator BUSHBY: Those forecasts are based on those reasons. Are there other forecasts that have been performed outside of Treasury which are consistent with those?

Ms J Wilkinson : Our forecasts are broadly in line with forecasts that have been generated at places like the bank through consensus forecasts and they are broadly in line with IMF forecasts for Australia.

Senator BUSHBY: Very good. Different subject: consumer confidence—can you update the committee on any recent high-frequency consumer confidence data that might have been released, particularly, since the budget?

Ms J Wilkinson : Sure. There are two measures of confidence. There is a Westpac measure, which is released monthly, and there is an ANZ measure, which is released weekly. Both surveys have been conducted since the budget and both surveys are pointing to a pick-up in consumer confidence. The Westpac-Melbourne Institute index increased by 6.5 per cent in May, and this survey was actually conducted during budget week. The ANZ-Roy Morgan index increased by 1.2 per cent in May. Both of them are now sitting around their long-run averages and slightly above 100, which suggests that we have slightly more optimistic than pessimistic consumers in the economy.

Senator BUSHBY: So an improvement in both, more notably with the Westpac. Did either or both of them give reasons for why they thought those improvements had occurred?

Ms J Wilkinson : I do not recall any specific comments that were made in the surveys about why consumer confidence has increased. I think it is notable that both of them were conducted in the week following the budget.

Senator BUSHBY: My information, which you might take on notice, is that both Westpac and ANZ indicated that the positive bump was at least in part due to the budget. If you could take that on notice—

Ms J Wilkinson : I think that is not unreasonable. They have subindices, and I do not recall there being any subindices where some questions are specifically answered about that.

Senator BUSHBY: A rise in consumer confidence in May is not particularly common, I believe. Are you able to confirm when this last occurred immediately after a budget?

Ms J Wilkinson : You are right that it is not common that we get an improvement in consumer sentiment in budget month. The last time this occurred there was a small rise in 2012 after the 2013-14 budget was released. There was a small rise back in 2008. The last time there was a rise of this order of magnitude was in 2007.

Senator BUSHBY: So the last time there was a noted increase was in 2007.

Ms J Wilkinson : Yes.

Senator DASTYARI: Mr Fraser, I just want to draw your attention to a matter—again, if I am talking about things that are not related to the macro group or to Treasure, please feel free to point that out, because I will be raising this stuff with the Reserve Bank in a few hours. I want to touch on an issue related to credit card interest rates and drawing to your attention—of which I am sure you are already aware—the gap between the cash rate and the credit card interest rate has now reached a record high; and the gap between what people are paying in terms of credit card interest and where the cash rate is being set is now at record levels. I wanted to just ask—understanding that macroeconomic policy is something that you are directly responsible for—whether Treasury, under your leadership, has actually been looking at this issue.

Mr Fraser : It is a very interesting issue. It was not directly considered in David Murray's inquiry into the financial system. In Treasury, internally, we looked at this some months ago and the gap is widening. That said, there is a lot of differing rates among the credit card providers. My personal view is that it is an issue well worth further and deeper investigation and consideration. I am driven partly by the fact that it does seem that the people who pay these credit-card interest rates—those who do not fully pay off the amounts—tend to be people, perhaps, less capable of servicing that debt, and that worries me. I think it is something well worth considering, and we will give some further thought to it.

Senator DASTYARI: When you said that you looked at it several months ago, could you elaborate on what in particular you looked at? You are right in saying that the data shows that the gap is growing. The data effectively shows that it seems to have been stagnant irrespective of whether it is a low or a high credit card rate or whether the cash rate has fallen. That is what has created the gap. Were you looking at that or other things around that to do with intercharge fees?

Mr Fraser : It was the broad gap. I have seen around the world that there has been similar histories but there have also been cases in some countries where the credit-card interest rate has moved down more in line with cash rates.

Senator DASTYARI: There is an academic report done by Swinburne University of Technology that tracks what has happened with the cash rate and credit card rates. The Swinburne report effectively says that 112 per cent of increases in the cash rate are passed on immediately to credit card interest, but only about 56 per cent of cuts are passed on. There is a two-month gap between the two events. The Swinburne professors have deemed it 'rockets' and 'feathers'—it goes up like a rocket and comes down like a feather. For those who set policy parameters around this space—I understand that Treasury is limited in what it can do on macroeconomic policy—but from your international experience how are these challenges best faced?

Mr Fraser : We have the context of the response to the Financial System inquiry, which will be comprehensive and does not have to be limited to issues in David Murray's inquiry. It is something that comes down to the very fabric of how the financial system operates. There is a group area within the Financial System inquiry which, in broad terms, we are calling 'consumer outcomes'.

Senator DASTYARI: A consumer outcome group?

Mr Fraser : These are recommendations; we have grouped them—bank capital, liquidity bank issues, consumer outcomes and then other issues. But, as I said, it is something that is well worth further inquiry.

Mr Lonsdale : The other point I would add to Mr Fraser's response is that it is an area where you need to think very carefully about what the policy prescription might be. So if you think about the competitive market, for example, it is an area of the market that has, arguably, fewer barriers than a number of other elements. How is it that you do not get the competitive pressure in that? Could regulation or some policy change give you that?

Senator DASTYARI: Or deregulation, in fact?

Mr Lonsdale : Or deregulation—whatever the policy change might be. It is not an easy area to address.

Senator DASTYARI: Minister, I want to put this question to you now, because when the Reserve Bank comes here later today you will not be here. From the government's perspective—without asking you for an opinion—what is your interpretation of the challenges in this area? Is it a real and live issue?

Senator Cormann: Obviously, the Australian government always wants to see consumers get the best possible deal as the result of an efficient competitive economy. So, to the extent that there are barriers to the efficient and competitive operation of any market, the government would be focused on what sensible measures can be taken to address that, whether that is in this area or any other area. Of course, the government right now is reflecting very carefully on how the architecture for our financial system can be further improved, with a focus on both competition and stability, and relevant announcements will be made by the Treasurer in due course.

Senator DASTYARI: This is my final question, then I will cede back to the chair, because I note that we will have a chance to have this discussion with the RBA a bit later. But could this be one of those areas where perhaps part of the solution to some of the challenges is actually looking at removing some barriers and looking at deregulation, where appropriate, in this space?

Senator Cormann: It is always appropriate to pursue opportunities for deregulation where appropriate.

Senator DASTYARI: We can do this one together.

Senator Cormann: I am always happy to pursue deregulation which is appropriate, in a way that is appropriate, in a bipartisan fashion.

CHAIR: I now welcome, for her inaugural session here with the economics committee, Senator McAllister.

Senator McALLISTER: Thank you, Senator Edwards. Thanks, Mr Fraser, for your remarks this morning. I just wanted to go back to some of your remarks so far around the housing market and explore some of that a little further. Your earlier remarks suggested that you share what is emerging as a fairly widespread view, that there is evidence of a housing bubble in the Sydney property market and possibly in Melbourne. Am I correct?

Mr Fraser : Correct.

Senator McALLISTER: You talked a little bit about the impact that that is having on housing affordability. Could I get your views about any additional risks it might pose perhaps to broader economic stability? APRA indicates that residential mortgage lending is now 60 per cent of the banking system's domestic loan portfolio. I wondered if you might reflect for us on what risks that presents.

Mr Fraser : First, I am very, very confident that APRA is addressing this problem properly. The macroprudential measures that were announced before the end of last year were a good step. I am also very much aware that APRA is keeping a keen eye on this. As to the risk for the broader economy, what I was trying to say is that, when you look at the data, the evidence is more about Sydney as opposed to New South Wales, and in particular areas of Sydney, although the auction data over the past three or four months is quite concerning. I had a taxidriver in Sydney last night who talked about how he had turned over his property in the western suburbs and, not knowing who I was, was asking me as to advice about whether he should buy three or four new investment properties. Not being registered as a financial adviser—I was once—I declined to give him advice, but it is a bit similar to the old adage about, when the bellboys are buying equities, it is time to get out.

In Melbourne, my feeling is that it is far more focused on, for want of a better word, the higher price areas. It does seem a little bit like a feeding frenzy, but, if you get out of those areas, into the outer suburbs, it is certainly less the case. I do not see it as a major risk or a systemic risk to the financial sector. We do a lot of consultations with the four major banks. We recently had in the regional banks. They are very much alive to the issues and they have taken their own internal measures, as they should, to make sure that their exposure is manageable. I am more worried, frankly, about the social impacts, particularly in Sydney, of younger people and perhaps more generally people on lower incomes getting access to housing. I do not take that lightly. I think it is very worrying.

I saw what happened in London. I was on the board of a girl's school over a five-year period, and attracting teachers became harder and harder, simply because they could not afford to live in London. So you get repercussions for that. I am not sure it has reached that point in Sydney, but it does have a real impact. It is one of those things that you worry about. As I said to the senator here, I think it is more a case of monetary policy settings. Frankly, if I were sitting in London, New York, Zurich or a couple of other cities, I would be responding in a similar way. I think it is predominantly a function of the monetary policy settings. And that makes sense. If finance is cheap, housing is seen in our culture to be a very good investment. It is the first thing your mum and dad told you to do when you started working: buy your own house. It is the first thing rugby league clubs used to tell their players when they made any money: buy a second house. By and large, it has worked out. It is good financial advice. So I think it is monetary policy settings and the perception that there will be a never-ending increase in housing prices—and we know that is not going to be the case.

Senator McALLISTER: Is Treasury considering any additional policy intervention separate to the prudential measures being considered by the Council of Financial Regulators?

Mr Fraser : As I think I tried to say, it is a broader issue. I think APRA has it well in hand. I would be worried if I had the sense that the banking system were not alive to the risks for their own organisations and, through that, for the financial system as a whole.

Senator McALLISTER: Thank you.

Senator KETTER: Mr Fraser, I think this is a question that I can ask only you. I am interested in how you are settling in in your role, in your first four months, and I am interested in your background. I think Senator Wong touched on this. You have expressed views about being old-fashioned and not liking public debt. You are also talking about fiscal stimulus and having a great deal of care about that. I am interested in how you are finding your first budget.

Mr Fraser : First of all, thank you very much for inquiring; I appreciate that. It has been quite a change from 22 years ago. The procedures are somewhat different. The focus on the Expenditure Review Committee is still the centrepoint. That was, from my memory, introduced pretty much in the early years of the Hawke-Keating government. Prior to that, there had been subcommittees of cabinet, but there had not been an ongoing Expenditure Review Committee process. So that is similar. The amount of work that goes through the Expenditure Review Committee is now far, far greater than what it was in the early nineties. I think that is really a function of the fact that government is dealing with a welter of broader issues, and also the Expenditure Review Committee is probably dealing with issues in more detail than was the case in the late eighties and the early nineties.

The briefing by the departments and the role of the Department of Finance, Prime Minister and Cabinet, and Treasury are pretty much the same. The one thing that is different is the Expenditure Review Committee deals with revenue measures, whereas in my earlier time—you are making me feel very old, Senator—the revenue measures tended to be in a far smaller group and also later in the piece.

Otherwise, it is different with a parliament which is of a different make-up than it was during the eighties and nineties. The amount of paper that is generated for the budget has grown dramatically and the amount of information that is provided particularly by the Department of Finance is considerably greater than what it was in the early nineties.

Senator KETTER: You mentioned earlier that there are some aspects of this budget that are stimulatory in nature. I am wondering how that sits with your preferred approach.

Mr Fraser : I have declined to comment on the budget and I will decline to comment on any government measures. I have said, and I do not resolve from the fact that over this Intergenerational report made abundantly clear the ageing of the population will bring challenges that will have to be addressed in terms of the expenditure side and also, frankly, on the revenue side. They will need to be addressed in the coming decades.

Senator KETTER: Mr Fraser, normally in the post budget scenario, someone in your position has traditionally given an address to business economists. You have declined or been unavailable. Are you able to share with us any particular reasons why you did not?

Mr Fraser : It is very simple: I arrived on the morning 14 January. I started work at 8.30 on 15 January in Canberra. I was trying to carve out four or five days to address a range of pressing personal matters. I looked at my calendar, and that was the only gap I could see. We let the business economists know this in very good time, and indeed offered Nigel Ray to be their speaker. They accepted that and advertised that. Two weeks later they cancelled the event—go figure-and then I also accepted their invitation to attend a board dinner with them but they have not got back to me. Sadly, because of the unavailability of some key people I had to see for personal matters, I did not end up taking the three to four days off. I am trying now to find an alternative slot, which is both painful and annoying.

Senator KETTER: I would like to hear your thoughts about what some in the media are speculating is a bit of a shake-up in the senior ranks at Treasury. Would you be able to take us through some of those changes.

Mr Fraser : It is not really a shake-up. Ms Jan Harris, the longstanding deputy secretary retired officially last Friday. She let me know that as soon as I arrived. As a result, we are advertising the deputy secretary. With the transition out of the G20, I merged the international division, which had been formed to look after the G20, into the markets and economics group. At the moment, we have three substantive deputy secretaries. We have two acting deputy secretaries. We have advertised for those positions. The first round was advertised purely within the Public Service. We only received two applicants, which I found very disappointing, so I readvertised that more broadly and made a number of calls to people within the Public Service. But it was advertised externally as well, and we received—from memory—28 or 29 applications. We are currently still in the process of interviewing. We have not worked our way through the list of candidates. It is an exhaustive process. I am doing that with the chairman of the Public Service Commission, John Lloyd, and with Kathryn Campbell, the head of the Department of Human Services.

Senator DASTYARI: Would that mean that the acting ones have not been—that media speculation about who is going where and that Mr Ray is going to move is not correct?

Mr Fraser : No, sorry. Mr Ray, after sterling service, asked me whether he could transfer. Budgets, strangely enough, are rather tiring, and he is a young man. He asked me if he could transfer into the Macroeconomic Group. He is taking a well-deserved break in Europe and I think—from memory—will be back on 8 July. At that time, he will assume the leadership of the macro—

Senator DASTYARI: So he is not here today or tomorrow?

Mr Fraser : No, he is here today; he delayed his—no, he didn't!

Senator DASTYARI: I almost think he might have.

Mr Fraser : He tried to—no!

Senator KETTER: You mentioned that Ms Harris was retiring. There is also talk about the fact that a number of senior women acting in deputy secretary roles will no longer occupy those roles. Do you think it is important for women to occupy senior positions within Treasury?

Mr Fraser : Absolutely.

Senator KETTER: Will that continue?

Mr Fraser : I am not going to comment about the interview process.

Senator KETTER: Has this improved over much of the past few years? Are you able to say whether the situation has improved over the last few years?

Mr Fraser : Sorry, improved in what respect?

Senator KETTER: In terms of the number of women in senior ranks within the Treasury.

Mr Fraser : I think the total female complement in Treasury is about 53 per cent. Women in the senior executive service are a nudge over 30 per cent. That has, I understand, improved in recent years.

Senator DASTYARI: I have a follow-up question on staffing. This goes back. Senator Cormann was not at the part of Finance estimates where Senator Ronaldson was, so there were a series of questions that we were asked to put to you—and maybe the minister can answer this too—regarding the tax white paper group. There is a group of people. According to the APS, as a matter of fact, five staff have been taken on to do the—

Senator Cormann: Tax white paper?

Senator DASTYARI: tax white paper, right. It came on the APS list of additional staff. There are five extra staff that have been taken on by the Treasurer. Are they working out of Treasury, or are they working out of the minister's office, physically?

Senator Cormann: You have to be precise. You are asking about the tax white paper secretariat, are you?

Senator DASTYARI: Yes. There are five people. There is a team of five people who were added to the Treasurer's staff. The question we put to Senator Ronaldson and to Finance was: are they working out of the minister's office, or are they working out of Treasury?

Senator Cormann: I think the tax white paper staff is a different number. John Lonsdale will be able to assist you on the tax white paper staff.

Mr Lonsdale : I think the answer is 'not Treasury', but you might want to check that with Senator Heffernan—Mr Heferen when he arrives.

Senator Cormann: You just promoted him!

Senator DASTYARI: We can call Senator Heffernan in, and then none of us will be leaving!

Senator Cormann: It is Mr Rob Heferen—

Senator DASTYARI: I know, of course.

Senator Cormann: who looks after the Revenue Group.

Senator DASTYARI: We know him very well. He comes to everything—all our inquiries. He is fantastic. On the tax white paper and the secretariat and where it is being coordinated, you just know that it is not being coordinated out of your office, your building?

Mr Lonsdale : That is right.

Senator DASTYARI: Mr Fraser, has the government instructed Treasury to drop any work on all of this? How does it work if they are doing it? Why aren't you doing it? Why isn't it being run out of Treasury? Normally these things would be run out of Treasury, wouldn't they? Why are they doing it themselves?

Mr Fraser : The preparation for the tax white paper is totally unencumbered, and we have been operating the group out of Treasury. The group attached to the Treasurer's office is something about which, frankly, the Treasurer's office would be better placed to answer.

Senator DASTYARI: Does the minister then, on behalf of the Treasurer's office—

Senator Cormann: As Mr Fraser has indicated, the tax white paper secretariat is part of Treasury. There is a unit supporting the responsibilities of the Treasurer which is part of the normal support for members of parliament, including ministers, under the structure of the MOP(S) Act.

Senator DASTYARI: Let us just be clear. I just want to be clear about what is going on. I assume this falls under Revenue Group. Mr Heferen will be here tomorrow, I think, or on Wednesday.

Senator Cormann: That is right.

Senator DASTYARI: There is a unit within his team that does the tax white paper, and then there is a unit in the Treasurer's office which has five people, including one with a role of chief of staff—

Senator Cormann: Role of chief of staff?

Senator DASTYARI: There is someone who has the title of chief of staff with responsibility for the tax white paper—whoever is leading the unit. That is the official title. This all came out in other estimates—sorry, Minister; you were not there, so I do not want to be unfair to you.

Senator Cormann: Because it is not my part of the Finance portfolio. That is why.

Senator DASTYARI: Sure, but there was a minister at the table. I am just saying. I am putting things to you that you were not there for, so I am trying to do you justice. There is a unit of five people. I do not understand what the unit of five people, Minister, is doing in the Treasurer's office if it is being run out of—who is in charge of this?

Senator Cormann: What we can help you with here in the Treasury estimates is in relation to questions on the tax white paper secretariat, because that is a unit that operates out of Treasury. The most appropriate senior officer to assist you with these matters is Mr Heferen, who Mr Lonsdale promoted to senator earlier!

Senator DASTYARI: But I am asking you about the government.

Senator Cormann: In relation to the group of people supporting the Treasurer under the MOP(S) Act, those are questions that are appropriately asked in the section of the Finance estimates that deals with MOP(S) Act employees.

Senator DASTYARI: But their exact words were that, in terms of what they do, I should be asking you in Treasury estimates. We are going round in circles. The point is that I am not worried about how they are employed under the MOP(S) Act. I am asking you as the representative of the Treasurer at the table. If you want to take it on notice, you can take it on notice.

Senator Cormann: They provide advice to the Treasurer supporting, obviously, his leadership of the tax white paper review process. To the extent that I can add specific information to that, I will take the question on notice.

Senator DASTYARI: My final question is to Mr Fraser, as I said at the start. Mr Fraser, has the government instructed you and Treasury—and I will ask Mr Heferen the same question; it may be that Mr Heferen was asked and not you, but have you personally been instructed by the government—to drop any further work on super tax concessions or housing tax concessions, given that the government has made public pronouncements that no changes will be made in those spaces?

Senator Cormann: The difficulty with your question is that it implies that certain things were happening that are now no longer happening. I do not think that we can accept the premise of that question. Obviously, advice to a government in the context of government deliberations is—

Senator DASTYARI: I can ask if advice has been given.

Senator Cormann: Yes, but the question was quite different. The question—

Senator DASTYARI: Do you want me to rephrase the question then?

Senator Cormann: I think we are really stretching now.

Senator DASTYARI: If you would let Mr Fraser answer, it would not be an issue. Mr Fraser, is Treasury currently doing work on super tax concessions or housing tax concessions and looking at these as part of the tax white paper process? Just that is the question.

Mr Fraser : The tax white paper will address the taxation system for at least, I suspect, the next 25 to 30 years.

Senator DASTYARI: That was not the question.

Senator Cormann: But let me answer, because the whole point of a discussion paper is not to have predetermined views and to—

Senator DASTYARI: But the government has been ruling things out—

Senator Cormann: Perhaps, as is the prerogative of the government. But, in terms of the discussion paper, it is obviously an open-ended conversation with the Australian people, and the government will make a judgement on what we will take to the next election. In that context, we have been very clear that one thing we will not be proceeding with is an increase in tax of people's retirement savings. That is the prerogative of the government.

CHAIR: Thank you very much, Mr Fraser.

Mr Fraser : Chair, can I just make one clarifying remark. I apologise that I was not on top of it. In terms of the treatment of the Future Fund earnings, I should have been aware that my predecessor and the former secretary of the department of finance put out a discussion paper on this on 10 August 2012 which indicated the time line and also the issues involved in the treatment of the Future Fund earnings and whatever. I do apologise. Thank you very much.

CHAIR: That is okay. Thank you. Don't any of you others leave, though!

Senator WATERS: Hello, everyone. I have quite a range of questions. I want to start with the Future Fund. I know that they are not here, because I understand that they are overseas.

Senator Cormann: The activities of the Future Fund are part of the Finance estimates.

Senator WATERS: I suspect my question does belong here, but I will take advice if that is not right. First of all, just a practical question: is it within the government's authority to direct the fund not to invest in certain companies or classes of companies? Would that require new legislation, or is that just a new investment?

Senator Cormann: That is entirely a matter for the Finance estimates. That is core business for the Finance estimates. In order to assist you: because the CEO of the Future Fund was overseas during the time of these estimates, he will actually be appearing in a separate session with the finance and public administration committee, so you will have the opportunity to ask those questions.

Senator WATERS: Thank you. I might take that up then. I will just ask whether or not Macro has had any discussions with the Future Fund Management Agency off the back of the Norwegian pension fund coal divestment announcement of a few days ago.

Senator Cormann: That is not something that Treasury would be involved in.

Senator WATERS: It is not something that you would ever normally do—okay.

Senator Cormann: This is truly a matter for the Finance estimates.

Senator WATERS: I am glad that that was my last question on that topic. I want to establish who is responsible for talking about the COAG Treasurers meeting agenda. Is that here?

Mr Lonsdale : That would be under Fiscal Group, with Mr Ray.

Senator WATERS: Fiscal Group is this afternoon.

Senator Cormann: It is at three, yes.

Senator WATERS: I would also like to ask about the Northern Australia Infrastructure Facility. I have some detailed questions which do belong with Fiscal, but I am interested in whether Macro has had any input to that Northern Australia Infrastructure Facility either in the lead-up to the budget or since.

Ms J Wilkinson : No, we have not.

Senator WATERS: On the Infrastructure Audit, which was prepared by Infrastructure Australia but underpins much of the assumptions of the infrastructure facility, are you aware of what the assumptions in that audit are based on? Has Macro had any input or anything to do with that?

Ms J Wilkinson : No, I am not aware. The responsibility for infrastructure matters sits within Fiscal Group. But I am not aware of any particular assumptions which have been used in that audit.

Senator WATERS: There is one assumption that aspires to expand fossil fuel exports to $150 billion worth of coal and gas by 2031. Is that something that Macro would be asked to reality check, for want of a better description?

Ms J Wilkinson : We certainly have not been consulted on that assumption. I am not aware of having been consulted—I am sorry; I am not across the process for finalising the Infrastructure Audit. There are matters that come to Treasury where there is an internal consultation process, even though they are managed by a particular group, but in this case I am not aware of having been consulted on any of those assumptions or any of those elements.

Senator WATERS: Thank you. I might put some more questions on notice to you around that. Answer them to the best of your ability, considering that it seems a fairly limited involvement so far.

Can I move now to the Galilee Basin. Have any of your officers met with or spoken to staff from the big four Australian banks about the Galilee Basin coalmines or the Abbot Point coal port expansion?

Ms J Wilkinson : No, we have not.

Senator WATERS: Have any of the officers ever asked an Australian bank to either make or not make public statements about financing those infrastructure projects?

Ms J Wilkinson : No.

Senator WATERS: To your knowledge, has the department contacted any of the big four to ask them to stay quiet about whether they will be financing those projects?

Ms J Wilkinson : Not to my knowledge.

Senator WATERS: Are you aware—and perhaps this is a question for the minister—whether anyone else within government has been in touch with the big four about Galilee Basin projects? Sorry, Minister, this one might be more for you: I am just interested in whether there has been any government contact with the big four Australian banks about financing Galilee Basin coal projects.

Senator Cormann: Not by me, I would have to take on whether there has been any such contact by anybody else

Senator WATERS: Great—if you could do so, thank you very much. Has anyone contacted Commonwealth Bank after those recent protests that happened last week?

Senator Cormann: Anyone is a very broad and all-encompassing question. I do not know that we can answer on behalf of anyone. I certainly can answer on behalf of myself.

Senator WATERS: We are in Macro Group, Minister, so is anyone in Macro Group able to answer in relation to the divestment?

Ms Wilkinson : No, no-one in macro-economic group has.

Senator Cormann: I have not either.

Senator WATERS: Great. Thank you. I am moving now to the coal forecast in the budget papers—or really the lack there of. What is the department's view of the long-term prospects of thermal coal?

Ms Barron : As you will see in the budget paper, we used a four-week average for thermal coal prices to underpin the forecasts.

Senator WATERS: I am interested first in your assessment of the long-term prospects of thermal coal.

Ms Barron : We have made no undertaking

Senator WATERS: Outside of the budget prism, what is your assessment of the long-term prospects for thermal coal?

Ms Barron : We have made no such assessments.

Senator WATERS: Is that usual to not make long-term commodity forecasts?

Mr Goldsworthy : As you are probably aware from the budget papers in previous estimates, we make assessments over the next couple of years. We have a forecast rise, and it extends out for the budget year and one year after that. We then have a projections methodology that makes a number of sensible assumptions for how the economy will evolve over the years after that short-term forecast period. As part of that methodology, there is a need to make a detailed assessment about thermal coal prices.

Senator WATERS: I do not understand why there is not a need.

Mr Goldsworthy : It is not a requirement. What we try and do is come up with a sensible outlook for nominal GDP over the medium term. In order to do that, we need to come up with an outlook for real GDP and also a number of prices. We make an assumption about the terms of trade, and the terms of trade consist of a number of elements—one of those elements is thermal coal prices. The methodology we use is more focused on where we think the terms of trade will settle at. We have an assumption that the terms of trade will settle at the 2005-06 level in the year 2019-20.

Senator WATERS: Settle at 2005-06 level—can you just say that a bit more loudly.

Mr Goldsworthy : Yes, settle at the level in 2005-06 by 2019-20.

Senator WATERS: What are the underpinnings for that assumption?

Mr Goldsworthy : There is a technical working paper that we released around the time of last year's budget or quite possibly the MYEFO that preceded that. This has been the methodology we have in place since the 2014-15 MYEFO. There is a lot of detailed information out there in the public domain but, essentially, what is done is we look at cost curves for the key bulk commodities. We also look at demand for those commodities based on estimates of industrial production—say, China—and we also do a detailed analysis of the other components of the terms of trade. From that analysis, we came up with the estimate that we call 'the anchor', so we think the anchor for the terms of trade will be at 2005-06 level in 2019-20.

Senator WATERS: Did you prepare all that information and feed that into the budget outlook process?

Mr Goldsworthy : Yes, as we have done in every budget update since the methodology was first introduced.

Senator WATERS: Why was the forecast for thermal coal not included in the budget papers?

Mr Goldsworthy : It is included.

Senator WATERS: I would love for you to tell me where, because I have graphs of iron ore and LNG, but it does not have thermal coal on there.

Ms Wilkinson : In table 1 on page 2-5, you can see down the bottom that footnote H says the forecast—

Senator WATERS: Yes, $US60. Thank you. I have some questions about that assumption. I am just interested particularly in 2-15 in budget statement 2. You have a chart for export volumes for iron ore and LNG but you have not tracked coal, particularly thermal coal, exports. I am interested in why you have two of the top three commodities but not coal included in that graph.

Ms Wilkinson : The purpose of that graph was just to illustrate that a significant proportion of the increased iron ore exports that we were expecting to flow from the investment that has taken place have already taken place. There is a bit more to go, but on LNG, which is the other area within the resources sector of the economy where there has been an enormous amount of investment, we are yet to see that flowing through into exports. We are expecting that to occur from 2015-16 onwards. So, the purpose of that chart was really to illustrate the transition that is taking placing in the economy, particularly in those two sectors from a mining investment phase to an export phase.

Senator WATERS: If you were to plot thermal coal exports on that graph, where would they lie?

Ms Wilkinson : We will have to take that on notice; I do not have that off the top of my head.

Senator WATERS: Thank you.

Mr Goldsworthy : I imagine they would be reasonably steady, but we will take it on notice.

Ms Wilkinson : We would use the BREE's projections for thermal coal exports. We do not have additional information that we would usually add to the outlook for the coal section from what BREE have produced.

Senator WATERS: Thank you for taking that on notice and, if you could also take on notice to more fulsomely explain why there is not much mention of thermal coal in terms of projections. Why did you treat that differently to those other two top export commodities?

Ms Wilkinson : Yes.

Senator WATERS: Thank you. Coming back to that table that you just mentioned, table 1 on 2-5 budget paper 1, which does cite the forecast prices—spot prices—it cites in footnote (h) a number of sources for those assumptions and projections, including unpublished ABS data and Treasury. I am seeking to understand how you arrived at that $US60 a tonne thermal coal price. You said earlier that you base your projections on—

Ms Barron : It was based on a four-week average.

Senator Cormann: What we do is on the day that the books are closed in terms of the assumptions of use, you look at the previous four weeks and use the average over those previous four weeks. That is what is transparently disclosed in relation to iron ore. That is the evidence that the officer has just given you in relation to your question.

Senator WATERS: You are forecast out to 2016-17. That is the methodology that you use irrespective of how many years in the future it is—your four-week forecast.

Ms Barron : Just for the forecast period, which is the current year plus two years.

Senator WATERS: You mentioned earlier that you base it on BREE projections—

Ms Wilkinson : We use BREE heavily. We draw upon the advice that they can provide us when we are trying to think about what is going to happen to individual commodity prices, yes.

Senator WHISH-WILSON: Could I just ask: are there some scattered forward markets for coal?

Mr Goldsworthy : There are certainly contracts for coal that extend over a reasonably long period. We certainly look more at iron ore for the futures and forward markets. To be honest, on the coal side, we would probably have to take that on notice.

Senator WATERS: Thank you for doing so. Can I just check whether you use any guidance from the department of industry's Resources and Energy Quarterly?

Ms J Wilkinson : That is produced by what was BREE, the Bureau of Resources and Energy Economics.

Senator WATERS: That is in fact what you are referring to when you say you used the BREE data?

Ms J Wilkinson : That is correct.

Senator WATERS: There has been some chequered history in terms of projections and the success of projections under that document. Do you have a view on the reliability of that publication?

Ms J Wilkinson : What I was trying to say was that we use them as a source of information. We do not take their forecasts and automatically adopt their forecasts. In fact, my recollection is that our forecasts for iron ore prices, for example, are somewhat lower than BREE's forecasts for iron ore prices. Forecasting commodity prices is extremely challenging—it always has been and I think it always will be. It is a function of big demand and supply factors, which are very hard to predict. For the purpose of the budget, for all of these major commodities we took the four-week average of the price as at 1 May and applied that through the forecast period.

Senator WATERS: Obviously, there have been some other commodity analysts that have taken rather a dim view of the prospect of thermal coal price. Citigroup and institute for energy economics have said that the collapse in thermal coal prices is in fact structural rather than cyclical. Do you have a view on that?

Ms J Wilkinson : We have not taken a view on that, no.

Senator WATERS: Could you take on notice to reflect on that to the extent of your capacity?

CHAIR: You are asking the department for their opinion about the future of global thermal coal?

Senator WATERS: Yes, I am.

CHAIR: You cannot ask them an opinion.

Senator WATERS: I cannot ask them what the government has not asked them to do, I think is the problem.

CHAIR: Do you want to reframe your question, then, so you are not asking them for an opinion?

Senator WATERS: No, because I am interested in their opinion. Their opinions go to projections which underpin the budget.

CHAIR: You cannot ask them for it.

Senator WATERS: They have not done it, so I think my question has been answered. I will move on. You mentioned earlier that you are factoring in what other countries are doing, and you mentioned China. Obviously, they have dropped their thermal coal imports by about 38 per cent—that is my recollection. India also said a few weeks ago that they will cease thermal coal imports. And the effect of Japan's targets are also dwindling demand. Firstly, are you aware of those market trends? Secondly, do you convey that information to anyone, and if so, whom?

Ms J Wilkinson : We are generally aware of these trends. You would expect all of those trends to affect prices within the coal sector, and commodity prices typically reflect both current and also expected future demand and supply. We have been transparent about the assumption that we are using through the forecast period. We obviously have to marry that with projections of exports from the coal sector. We base those on a range of different information, including information about the productive capacity of mines and when mines are expected to come on-stream. I am not sure whether Mr Goldsworthy or Ms Barron would like to add anything to that.

Senator WATERS: Just on that last point, can you take on notice or share with me now if you are able to your best estimate about thermal coal export volumes out to 2020?

Ms J Wilkinson : I do not have those in front of me. We are very happy to take it on notice.

Mr Goldsworthy : No, we don't—

Senator WATERS: Beg your pardon, Mr Goldsworthy?

Mr Goldsworthy : We don't have the data with us here, but we can take it on notice.

Senator WATERS: You do have that data, just not here with you?

Mr Goldsworthy : That is right.

Senator WATERS: Okay, thanks for taking that on notice.

CHAIR: Thank you, Senator Waters. Senator Ketter.

Senator KETTER: I have a series of questions in relation to the change in the balance of the budget. I want to establish first the premise of my line of questioning. Does Treasury accept, as I think most people do, that the size of government has increased over the last 12 months?

Mr Lonsdale : Issues related to the budget and the fiscal stance will be best handled by Mr Ray, when he arrives, under fiscal group.

Senator KETTER: Okay. That takes out a chunk of questions. I want to come back to an answer Ms Wilkinson gave earlier to Senator Wong in respect to some of the forecasts in the budget in relation to nominal GDP. For example, nominal GDP in 2015-16 is rising 3¼ per cent and then in 2016-17 to 5½ per cent, so 2¼ per cent increases on each occasion. If I heard you correctly, you said one of the factors that led you to the view that this was going to happen was wages growth. Could you perhaps go back to that answer and elaborate please?

Ms J Wilkinson : Sure. If you think about what drives nominal GDP growth, it is really sensible to think about it as being real GDP growth plus growth in the GDP deflator, which is a measure of prices across the whole economy. The question Senator Wong asked was: why was nominal GDP growth increasing from 1½ per cent this year to 5½ per cent in 2016-17? That was the question that she asked. I said that that was a factor of two things. It is a factor of an increase in real GDP growth from 2½ per cent this year to 3¼ per cent next year combined with an increase in growth of prices. In particular, if you look at table 1, you can see an increase in growth in the GDP deflator. The GDP deflator in 2014-15 has fallen by one per cent and it is predicted to rise by 2¼ per cent in 2016-17.

If your question then goes to what is driving the pick-up in the GDP deflator, there are essentially two factors. One is that we have falls in the terms of trade, which have significantly reduced the prices of exports, which directly affects the GDP deflator. Those have occurred ever since 2011. We have falls factored into the forecasts in 2014-15 and further falls in 2015-16, but by the time we get to 2016-17 we do not have any further falls in the terms of trade that will be suppressing growth in the GDP deflator. That is a very major driver of how we get a recovery in the GDP deflator. The second factor is that we have a small increase in wages growth—if you look at the wage price index—from about 2½ per cent this year to about 2¾ per cent next year.

Senator KETTER: Which table are you on?

Ms J Wilkinson : Table 1. About halfway down under prices and wages you can see the consumer price index and then the wage price index below that. So there is a small increase in wages growth, which is also contributing to increasing growth in the GDP deflator.

Senator KETTER: I was on Budget Paper No. 1. You are on a different one?

Ms J Wilkinson : Sorry, I am on Budget Paper No. 2, page 2-5 and table 1.

Senator KETTER: You have touched on the terms of trade in your answer there. The terms of trade are expected to fall by 8½ per cent next year which follows 12¼ per cent this year and then lift in 2016-17 by something like three-quarters of a per cent. Can you talk us through that please?

Ms J Wilkinson : Sure. Sorry, I just need to correct something. All of this is in Budget Paper No. 1 but it is statement 2 rather than statement 1. Statement 2 is on page 2-5.

Senator KETTER: Thank you. I will look at that later.

Ms J Wilkinson : Essentially, what is driving the terms of trade forecasts—the falls this year and next year are being driven by a fall in coal prices and falls in iron ore prices. They are the major drivers of the fall in the terms of trade over these two years. Then three-quarters of a percentage point growth in 2016-17—that is essentially flat. You get big movements in the terms of trade. Over the long term you do expect there to be a small upward increase in the terms of trade, which is driven by continuous falls in import prices. So it is not unreasonable that there is a very long-term trend under the terms of trade which is slightly pushing it up over time.

Senator KETTER: So there is an assumption of a $48 price for iron ore in the budget—is that correct?

Ms Wilkinson : Correct.

Senator KETTER: Can you tell us how you arrived at that?

Ms J Wilkinson : That was the four-week average over the four weeks to 1 May, when the assumptions were settled.

Senator KETTER: Is there a standard formula used to calculate the iron ore price?

Ms J Wilkinson : No. In every budget and MYEFO we make a judgement about what is the best information that we can bring to bear to settle our iron ore forecasts. It depends on, in part, how much volatility there has been in the series over time. But we made a judgement that this time, given the volatility that we had seen, the most sensible and prudent approach was to take a four-week average. But we have also included in the budget papers a statement which makes it clear what the impact on normal GDP in the budget would be of the iron ore price being higher or lower than that level.

Senator WATERS: Did you do that for thermal coal?

Ms J Wilkinson : We have not done it for thermal coal. We have just done it for iron ore, which is in table 4 on page 2-19.

Senator KETTER: Coming back to the GDP forecasts, can you point to any other developed economy that you think has a prospect of growing above trend for five years into the near term?

Ms J Wilkinson : Are you talking about the medium-term projections methodology?

Senator KETTER: What I am asking is: are you aware of any other developed economies that have a prospect of growing above trend in the near term?

Ms J Wilkinson : The current forecasts for growth in the US are for above-trend growth for the next three years. I do not have forecasts which go out further than that. It is certainly not unreasonable that economies which have been growing below trend and which have an output gap—they need to grow above trend for a period in order to close the output gap. That is typically just what economies do over the course of the cycle.

Senator KETTER: Would it be fair to say, though, that there are considerable risks that growth may not go to those levels and that, whilst this is what we would all be hoping for, there are risks associated with that?

Ms J Wilkinson : I think it is important to distinguish between the forecast period and the projection period in the budget statements. The forecasts which we provide for the next three years, 2014-15 through to 2016-17, are our forecasts based on fundamentals—at this point what we genuinely think is the most likely outcome for the economy. In the projections period, we have been very explicit about outlining a methodology which, if you like, is a rules-based methodology in order to have a set of forecasts over the medium term which are consistent with an economy—and therefore a budget but particularly an economy—returning to balance. The projections methodology which is applied for the five years from the beginning of the projections period was outlined in a working paper that I think was released around the time of the budget last year. That methodology assumes that it will take five years from that point for the output gap to close, so over that period you get stronger real GDP growth but you also have weaker prices and wages over that period because you have an output gap. So, on balance, it does not have a particularly significant effect on nominal GDP outcomes.

You have to have some methodology for thinking about how you project the outcome from an economy where you have an output gap. You have to have some methodology to do that. Before we had this methodology, I think the assumption was that in the first year of the projections you actually returned to balance, so there was a step change. For example, if we were to apply that methodology there would be a step change in the unemployment rate from its current level to what we would estimate its long-run average should be. That would not seem to be a particularly reasonable basis upon which you can make forecasts.

Senator KETTER: In your modelling for these growth projections, are you able to identify what are the major risks to attaining those projections you have made?

Ms J Wilkinson : In terms of the forecasts, we have outlined in Budget Statement No. 7 what some of the key risks to the forecasts are. We have outlined that in statement No. 7 to some detail. We have also provided in statement No. 7 an estimate of our confidence intervals around the forecasts for the major variables. I can certainly take it on notice, but I think it would be worthwhile to go back to the working data which outlines, if you like, the rationale for the medium-term methodology. There are risks on both sides. Five years, on average, for an output gap to close is actually a reasonably conservative assumption. If you like, one of the differences between our forecasts and forecasts that the IMF have for the Australian economy, for example, is that they think the output gap may close more quickly. It is actually hard—different recoveries take place at different times over different periods. What we have used is an average looking back over history for how long it takes for an output gap to close, and we have used very open and transparent assumptions about how rapidly it would then close.

Senator KETTER: I take it the capex survey last week, with those declining investment figures in non-mining, would be of some concern for the future.

Ms J Wilkinson : The outcomes for the capex survey are relevant for the forecast period, not for projections. As I mentioned earlier, there is no question that the capex results were weaker, particularly on the non-mining side, than we had expected. But we use the capital expenditure survey data along with a range of other indicators to try and come up with our best guess of the outlook for non-mining investment. While there is no question that the capital expenditure survey outlook for 2015-16 was weaker than we had expected, there are a range of reasons why we still feel reasonably comfortable with the forecasts that we have included in the budget. In part, that is because of things like the fact that the capital expenditure survey was completed by 4 May, well before the budget was landed, but it is also because there are other indicators. There are other surveys which paint a stronger picture for non-mining investment. We certainly consider that within the non-mining sector we may not need the sorts of lead times that you do need on the mining side in order to actually realise investment levels.

Senator KETTER: I think Senator Whish-Wilson had a question.

Senator WHISH-WILSON: It is not a rude question, but I was just wondering how often Treasury go back and back-test their forecasts to prove and see how accurate they are.

Ms J Wilkinson : We had a comprehensive review of Treasury forecasts in 2012. That has been publicly released, and that provided a lot of detail on how we performed relative to other major forecasters and other forecasters like Treasury in other countries. That review showed that we performed as well as any of the other forecasters in Australia and that, in particular, there was no bias to our forecasts. This is something that we pay a lot of attention to, and there were a number of recommendations from that review which have been implemented, including, for example, being explicit in the budget papers about what the confidence intervals are around our forecasts and what some of the risks of the forecasts are.

Senator WHISH-WILSON: So that would be an indication of your relative performance, but what about your absolute performance in terms of the risks that Senator Ketter was asking about—the level of uncertainty around commodity price forecasts and those kinds of things? Just for the layperson, how difficult is it to forecast?

Ms J Wilkinson : Forecasting is difficult.

Senator WHISH-WILSON: It is very hard.

Ms J Wilkinson : There is no question. Forecasting is difficult, and if someone has an answer and can tell me how to forecast accurately and predict how the economy is going to evolve, I would be very keen to get it.

Senator Cormann: What governments do is to make judgments based on the best available information at the particular point in time. As better information becomes available, you update your assumptions. Obviously, that is why we call them budget 'estimates'. Once the event is behind us, we can assess to what extent the actuals compared to what we thought would happen. But obviously, to a large degree, forecasting is forecasting. We do not know what we do not know. We do not know things that may or may not change in the weeks or months or years ahead, which is why there is always that qualifier.

Senator KETTER: As I have limited time, I want to move on.

Senator Cormann: I think that since Senator Wong has left us it has been a pretty clear run in terms of questions and answers.

Senator KETTER: Turning to the small business package, has Treasury modelled the potential economic impacts of the small business package?

Ms J Wilkinson : No, we have not modelled the economic impact of the small business package. Thinking about it in terms of the economy-wide impact, we do not have economy-wide modelling tools that enable us to distinguish between large employment firms and small firms, or to do some of the assessments of what the intertemporal impacts of these measures would be.

Senator KETTER: I could be wrong in this, but Mr Fraser earlier talked about the impact of the tax write-off. Is that expected to have input into those growth figures that we were talking about earlier?

Ms J Wilkinson : Revenue group are responsible for estimating the fiscal impact of measures, including the accelerated depreciation measure. They are coming tomorrow, and they can certainly talk through the methodology that they have applied. What Mr Fraser said earlier, I think, is that—

Senator KETTER: Pardon my ignorance. Revenue group has a modelling approach, but your macro group does not have?

Ms J Wilkinson : They can cost individual measures. That is their responsibility. If you then ask what the macro-economic impact of a range of different measures is, the way in which we forecast the macro economy is we use top down forecasting methodology. We predominantly look at what the fundamental drivers of growth in the economy are, and that is the basis on which we would determine what our macro-economic forecasts are.

There is no question that when we think about our forecasts for things like non-mining investment, for example, as I said earlier, we use a range of different pieces of information in order to forecast what non-mining investment will do. When we look at the pick-up in non-mining investment growth that is forecast over the period, we would certainly be expecting that the accelerated depreciation measure will contribute to us achieving that outcome.

Senator KETTER: Given that you do not have specific modelling in this area, are you able to make any comment about the likely employment effects of the small business package?

Ms J Wilkinson : Not specifically, but you would certainly expect that the small business package would support investment by small businesses. You would have thought that it would support employment by small businesses, and you would have thought that it would support output by small businesses.

Senator Cormann: Which is exactly what we intended it to do.

Senator KETTER: But you would not be able to quantify that for us?

Senator Cormann: We would be able to quantify it after the event, so when we talk this time next year you will be able to see what effect it has had.

Senator DASTYARI: It will be good for Harvey Norman.

Senator Cormann: This time next year is obviously still before the next election. I know that you are being very ambitious there, Senator Dastyari.

Senator KETTER: I will ask this question for clarification. Have any second round effects of the business package been included in the Treasury forecasts?

Ms J Wilkinson : No.

Senator Cormann: We do not do second round effects as part of this sort of assessment.

Senator KETTER: My final question is: did Treasury draw upon the experience and the response from the former government's use of the instant asset write-off with the $6,500 threshold in this current approach?

Ms J Wilkinson : That is a question which is particularly relevant for revenue group. In their costing of this measure, they will be able to describe to you the methodology that they applied and how much they drew upon what they found occurred under the $6,500 instant asset write-off policy.

Senator KETTER: Thank you, Ms Wilkinson. You kindly offered to take a question on notice for me earlier, so I would appreciate that.

Ms J Wilkinson : Very happy to.

Proceedings suspended from 12:30 to 13:33