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Economics Legislation Committee
Department of the Treasury

Department of the Treasury


CHAIR: The committee will now begin consideration of the Treasury portfolio. I welcome the Minister for Finance and the Public Service, the Hon. Mathias Cormann, representing the Treasurer. I also welcome the Secretary of the Department of the Treasury, Mr Philip Gaetjens, and officers of the Treasury. Minister or Secretary, do you want to make an opening statement?

Senator Cormann: I don't, but I think the Secretary of the Treasury does.

Mr Gaetjens : The 2019-20 budget was delivered on Tuesday and provides an up-to-date view on the economic and fiscal outlook. This morning I plan to only briefly touch on a few of the main points from the budget, as well as what it means for Treasury's work going forward. I will start with the fiscal outlook.

The budget forecasts an underlying cash surplus in the 2019-20 financial year of $7.1 billion, the first surplus since 2007-08. It is then forecast to increase to a surplus of $11 billion in 2021, with sustained surpluses projected into the medium term. The fiscal outlook continues to benefit, in particular, from commodity prices that have remained at elevated levels, coupled with continued growth in resource exports, which both support further expected improvement in company tax collections in 2018-19 and 2019-20.

Ongoing strength in iron ore and metallurgical coal prices since the midyear review and a consequent delay in the assumed phase-down in these prices have contributed to a higher terms of trade in 2018-19. The budget prudently assumes a return to more sustainable levels over the next four quarters. Nominal GDP growth is expected to be 3¼ per cent in 2019-20, one-quarter of a percentage point lower than at the midyear review, and 3¾ per cent in 2020-21. In contrast to the upgrade in the terms of trade, growth in real GDP and domestic prices have been revised down, reflecting data since the midyear review, including the weaker-than-expected December quarter 2018 national accounts released on 6 March.

As I noted in my last statement to the committee, the path returning the budget to surplus has been a long one and reflects the long-lasting fiscal impacts of financial shocks and economic transitions that occur as an economy rebalances. The long run of deficits has also left Australia with substantially higher public debt levels. The improved fiscal outlook now enables a greater focus on public debt reduction to improve Australia's position to meet future domestic and international challenges. In the budget, gross debt is expected to be 27.9 per cent of GDP in 2019-20, falling to 25 per cent of GDP at the end of the forward estimates and, further, to 12.8 per cent of GDP by the end of the medium term. Net debt is also expected to decline in each year of the forward estimates and the medium term, falling from 18 per cent of GDP in 2019-20 to a projected zero per cent by 2029-30.

The economic data released since the midyear review were a bit weaker than had been expected, which I highlighted in my address to the committee in February. The December quarter 2018 national accounts data confirmed the slowing in momentum in the real economy in the second half of 2018, although this followed two quarters of strong growth earlier in the year. Spending by the household sector on both consumption goods and housing has moderated. We also know that housing prices have been declining over the past year and a half. Falls in residential building approvals since late 2017 are expected to flow through to lower dwelling investment over the coming years. Consumption of discretionary items has been particularly soft, including for those components that relate to housing market conditions, such as household furnishings and motor vehicles. While the pick-up in growth in retail sales in February was welcomed, it followed a number of weak outcomes.

In contrast, non-mining investment has continued to grow at a solid pace, and spending by the public sector, including on services such as health and education as well as on infrastructure, has been growing above its long-run average rate. Mining investment is expected to grow in 2019-20 for the first time in around seven years. Despite some weaknesses in the real economy, there has been continued strength in the labour market. Employment growth was above its long-run average over the year to February and the unemployment rate is now at 4.9 per cent, a rate last recorded in June 2011. The participation rate is close to its record high.

Growth in real GDP is forecast to be 2¾ per cent in 2019-20 and 2020-21. This is around Australia's estimated potential growth rate. Growth overall is expected to be supported by accommodative monetary policy settings and the Australian dollar, which is one-third lower than its 2011 peak against the US dollar. Household consumption, business investment and public final demand are expected to contribute to growth over the forecast period. Dwelling investment is expected to detract from growth over the forecast period, particularly in 2019-20. Solid economic growth is expected to continue to support employment growth, which is forecast to be 1¾ per cent through the year to the June quarter 2020 and the June quarter 2021. Consistent with positive employment prospects, the participation rate is forecast to be 65½ per cent and the unemployment rate is expected to be five per cent across the forecast period. As economic growth strengthens and spare capacity in the labour market continues to be absorbed, wage growth is expected to pick up.

Before moving on to the global economic outlook, I would like to take a moment to emphasise the importance of business liaison in formulating Treasury's economic forecasts. In the lead-up to the budget, Treasury conducted business liaison with a range of stakeholders, including banks, mining companies, industry bodies, economists, state and territory governments, representative organisations and small business. These consultations provide detailed, forward-looking insights on the economic outlook which directly inform our deliberations on the economic forecast. Our business liaison activity also substantially benefits from Treasury's state office presence in Sydney, Melbourne and Perth.

Moving now to the global economic outlook, since the midyear review there has been some deterioration in the outlook for global growth, particularly in the euro area and with economies outside Australia's major trading partners. Reflecting this, forecasts for global growth have been downgraded. Nonetheless, growth in Australia's major trading partners is forecast to continue to be robust—at four per cent in each of the forecast years. Labour market conditions continue to be strong and inflation remains relatively contained in most major advanced economies compared with historical experience.

The United States economy continues to grow solidly. Wage growth has picked up an inflation has increased slightly, closer to the target rate. Growth in China is moderating, reflecting weaker domestic demand as authorities address risks in the financial system and trade pressures weighing on business confidence. With help from targeted macroeconomic policies, China is expected to achieve the authority's target of 6 to 6. 5 per cent growth this year. ASEAN 5 economies continue to perform solidly, with domestic demand and favourable demographics supporting growth.

As outlined in the budget, there is a high degree of global uncertainty, which appears to be weighing on measures related to confidence amid a range of economic and geopolitical risks. The risks include continued concerns about trade protectionist sentiment; high levels of debt in a range of countries, including in Europe; and Brexit risks, although Australia's trade is oriented more towards Asia than Europe. In the near term, there is also uncertainty about how quickly activity in some countries will bounce back from temporary factors that weighed on growth in the second half of 2018.

The economic outlook that I've outlined this morning and is contained in the budget papers, along with the evolving risks to this outlook, provides an important frame through which to understand the context of the budget. A number of measures are positive for demand in the economy—for example, the extension of the low- and middle-income tax offset and the additional infrastructure expenditure. A number of measures will also help to support the supply side of the economy in the longer run—for example, investment in education and the reduction in the second-highest marginal tax rate, which are supportive of labour productivity and labour force participation.

Overall, however, the budget maintains a focus on fiscal consolidation—a focus which has given rise to the forecast surpluses. There were a number of policy announcements in the budget that directly affect Treasury's work program. Tax changes for both personal incomes and small businesses will feed into the large ongoing legislative agenda for the department. It may be of interest to senators that the Treasury portfolio accounted for about 27 per cent of the bills introduced into the parliament during the 45th Parliament, 2016-19, and our law design office does a fantastic job managing this. The department received funding in the Budget to establish a new centre for population to provide detailed analysis and advice on population issues. This funding commences from 2019-20, and the centre's establishment will be an organisational priority for us. As I informed the committee in earlier hearings, Treasury had established a dedicated task force to manage the related work during the financial services royal commission. Now that the commission is finished and the government has responded, Treasury received funding in the budget to establish a financial services reform implementation task force. An announcement will be put out later today within the department on a restructure in the markets group, which will establish a financial services reform task force division.

Before taking questions, I would like to acknowledge the efforts and professionalism of Treasury staff and public officials across government in preparing the budget five weeks earlier than usual this year. This substantially compressed the usual time frames for key parts of the process. Notwithstanding those constraints, the budget production process went very smoothly, with the official documents, online resources and other budget related products delivered on time. Every year the budget is a massive undertaking that involves most areas of Treasury and substantial collaboration across government. I would particularly like to acknowledge the contribution collaboration of our Department of Finance colleagues, along with the support of their minister, whose name is also on the budget papers alongside the Treasurer. I also acknowledge the close work with the Department of the Prime Minister and Cabinet. Lastly, I'd like to thank the printers, who again provided fantastic, secure printing services for the budget papers. Thank you.

CHAIR: Thank you very much, Mr Gaetjens. For the benefit of colleagues, because we have a truncated agenda, my intention today is to give the coalition five minutes of questions but Labor 10 minutes. I will give the Greens 10 minutes of questions, should they choose to, in each session, but after that it will be five minutes only for crossbench senators and also for the Greens. Labor will continue to have 10-minute blocks, and the coalition will only have five. I will kick off questions. I want to ask Mr Gaetjens, first of all, about the outlook for business investment, whether there are signs that the outlook improved and potentially what that means for capacity in firms, particularly with regards to wages.

Mr Gaetjens : We cover that fairly well in statement 2 of the economic outlook. Non-mining business investment grew by about 9.7 per cent in 2017-18, and we are forecasting it to grow steadily over the forecast period. The latest ABS capital expenditure survey also showed a firming in non-mining business investment intentions over the forward period, so I think that augurs well for a continued boost. You will see included in the forecast on page 2-5 that mining investment was minus 4.1 per cent in 2017-18. We are expecting it to be about minus 10½ per cent in 2018-19 but positive four per cent in 2019-20. As I said in my opening remarks, that is the first positive amount there for about seven years. We are seeing some investments, particularly in Western Australia, with new mines coming on board, so I think that is a good sign for the forecast. Again, Meghan and Ange can add detail if they want to.

CHAIR: Can you explain to the committee how that correlates with your outlook for jobs growth.

Mr Gaetjens : I think what is happening now in mining in particular is that the industry went from an expansion and investment phase to a production phase. If they are now recommencing investment, there will probably be a greater job focus during the investment stage than from the production phase. I think I heard some announcements on the radio in the last few days from Fortescue about a second new mine that they were opening up over in the west. With non-mining business investment, we think measures such as the instant asset write-off can provide investment that will support a capital deepening for labour. As the forecasts show, generally labour force growth has been quite strong over the last few years in any event, and there has been a surge in the last couple of quarters again, with—my colleagues might have the right number, but I think it's about a 70 per cent proportion of full-time employment over the last few years.

Dr Grant : That's about right.

Mr Gaetjens : Again, the labour market has continued to be strong, and I think the investment measures in the budget will support, as I said, capital deepening with labour, and that might add to labour productivity.

CHAIR: What does that mean for the outlook for wages growth?

Mr Gaetjens : As we say, with strong labour force growth, we would expect and we actually forecast a growth in wages from, I think the last number was 2.3 per cent, up to 2½ or 2¾ per cent.

CHAIR: 2.3 per cent is reasonable wages growth compared to global trends, isn't it?

Mr Gaetjens : The wage price index was 2.1 per cent in 2017-18 and I think the last number we have is 2.3 per cent. Is that to the end of December?

Dr Grant : Yes.

CHAIR: You're forecasting 2.5 per cent?

Mr Gaetjens : Yes, we're forecasting 2.5 and then 2¾ per cent. That again goes to the continuing strength in the labour market. As demand for labour keeps going up, we think that will lead to a greater call for people and therefore upward pressure on wages, which is in the forecast.

CHAIR: I read a report from Goldman Sachs that said wages growth in the US had increased significantly since company tax cuts were implemented and the wages of the lowest 50 per cent of wage earners wages were growing at twice the rate as those of the highest 50 per cent of wage earners. Is that something that surprises you?

Mr Gaetjens : Again, I might ask my colleagues for details, but it doesn't surprise me to the extent that, as I understand, in the US there are skills and labour shortages across the income range of almost all workers. It's not just lower income workers; it's a shortage across the whole of the labour force. If that is happening, again, that is consistent with higher wages.

Senator KETTER: Just one question on your opening statement and that issue of wages growth: can you point to any particular government decision which is going to result in an increase in wages?

Senator Cormann: This is where Labor doesn't understand the fundamentals of the economy. If you think there is one specific magic pudding sort of magic-wand-type initiative—

Senator KETTER: I didn't suggest that.

Senator Cormann: I'll tell you how you get stronger wages growth: on the back of a stronger economy, on the back of a plan that facilitates increased investment, stronger employment growth, which we have been achieving; and a lower unemployment rate, which we've been achieving. As the excess supply in the labour market continues to reduce, competition for workers continues to increase and the additional investment improves the productive capacity of the economy, that is the only sustainable way to secure stronger wages growth into the future. Our plan is delivering the ingredients required for stronger wages growth into the future. There is no magic wand that can just, as the Labor Party appears to be suggesting—

Senator KETTER: I never suggested that.

Senator Cormann: The suggestion that the Labor Party appears to be making is a cruel hoax.

Senator KETTER: I take that as a negative response.

Senator Cormann: It's not a negative response. Our whole plan is about delivering a stronger economy, more jobs and a lower unemployment rate, which will drive stronger wages growth into the future. I point you to our track record. When we came into government, the unemployment rate was headed past 6¼ per cent. It has a four in front of it now. In the last financial year for which there is a final budget outcome, the 2017-18 financial year, actual employment growth was 2.7 per cent. When the 2017-18 budget was delivered, the forecast was for 1.5 per cent employment growth, so there was 1.2 per cent more employment growth than forecast. You know what that means? That means more personal income tax revenue for government without the need to increase taxes. It also means less expenditure on welfare and that over 1.2 million more Australians are now in a job. That is a real, tangible benefit for working families around Australia. As we continue to drive down the unemployment rate, wages growth will pick up into the future.

Senator KETTER: I think there are some heroic assumptions there.

Senator Cormann: They aren't heroic assumptions; this is economics 101.

Senator KETTER: Mr Gaetjens, you are saying that wages growth is expected to pick up, but we've seen company profits at fairly record levels for some time, relatively low unemployment, so—

Senator Cormann: We went through a period of massive losses to companies—

Senator KETTER: I'm trying to ask Mr Gaetjens a question.

Senator Cormann: I'm the minister at the table. You're making all these assertions. There was a period of significant losses across major companies around Australia on the back of the challenges faced during an economy in transition. People mention companies like Qantas and the like: yes, they've started making profits in more recent times after a sustained period of significant losses. Companies and businesses across Australia that are more successful and profitable are able to invest in their future growth. As businesses across Australia continue to grow, they will hire more Australians. In aggregate across the economy, more businesses hiring more Australians means the unemployment rate will continue to go down as long as employment growth outpaces population growth. That will necessarily drive stronger wages growth into the future as the excess supply in the labour market goes down.

Senator KETTER: Mr Gaetjens, have you received my letter of 3 April?

Mr Gaetjens : Yes, I have.

Senator KETTER: Are you in a position to table responses to the questions I've asked in that letter?

Mr Gaetjens : We're currently working on those requests. We hope to make it available as soon as we possibly can. Some checking still needs to be done. I don't think it will be tabled this morning.

Senator KETTER: Do we have officers here who can answer those questions?

Mr Gaetjens : Again, I will make sure that the information contained in those requests—

Senator KETTER: You're telling me you don't have officers here who can answer the questions in that letter?

Mr Gaetjens : You should ask the officers whether the questions relate to their areas. If the information is complete and has been fully checked, we will see what we can do.

Senator KETTER: We might have to go through each dot point then and find out. The first dot point is on the year-by-year breakdown of the full personal income tax plan. Tell me which group I should direct that question to.

Mr Gaetjens : Revenue Group.

Senator KETTER: I might go through the full list first, and then we will come back. The next one is the year-by-year figures that underpin all charts published in statement 3 of Budget Paper No. 1.

Mr Gaetjens : I think that information is on the website. If you look on the budget website, you will find there is data for charts on that.

Senator KETTER: Is that for the full—

Mr Gaetjens : That's for all the charts in the budget papers.

Senator KETTER: The next one is the full breakdown of the $28.4 billion of downward revisions to payments.

Mr Gaetjens : That's a matter for the Department of Finance.

Senator KETTER: Next is the detailed explanation for why payments as a percentage of GDP declined from 25 per cent to about 23.5 per cent at the end of the medium term.

Mr Gaetjens : You might be able to ask Fiscal Group, but, again, that would mainly be Finance, on the payments side.

Senator KETTER: Is that Fiscal Group or—

Senator Cormann: The finance department appeared yesterday. We went through all of these things in some detail yesterday.

Senator KETTER: Is Fiscal Group able to assist with this?

Senator Cormann: You can ask them the question but it is a finance department question.

Senator KETTER: The fifth dot point is the net overseas migration figures by visa class used over the forward estimates in the medium term, and how these impact on key economic parameters.

Ms Quinn : The headline numbers for net overseas migration are included in budget statement 3 on page 92. They capture the level of net overseas migration expected over the budget period. In terms of the detailed visa class information that you requested in your letter, that is a matter for the Department of Home Affairs. I believe they took that on notice yesterday, to provide that information.

Senator KETTER: And the question of how those revisions have impacted key economic parameters?

Ms Quinn : The level of net overseas migration as included in the budget numbers is broadly similar to the MYEFO numbers. There's been no significant impact on the overall economic parameters since that time.

Senator Cormann: In the spirit of openness and transparency, I can provide some further explanation. We did touch on this in the Finance estimates yesterday—why we had a $190,000 cap. The actual performance when it comes to relevant migration levels was running at about $160,000. That was reflected in the assumptions underpinning the budget forecasts. By locking in the planning level at $160,000, that didn't have a material impact compared to what was previously assumed, given the demands in the economy in terms of skilled migration and given the expectations around the level of family reunion-related migration. Previously there was a cap of $190,000 but we've brought that down to $160,000, which is broadly in line with what was assumed based on the demands and needs in the economy.

Senator KETTER: We have questions about that later. We will come back to that. The next one is nominal GDP value and percentage change by year over the medium term.

Mr Gaetjens : Sorry, I missed that question.

Senator KETTER: I'm going through each dot point in my letter to you. Have you got a copy of my letter there, Mr Gaetjens?

Mr Gaetjens : I've got one at the back of my folder.

Senator KETTER: I'm up to the sixth dot point: nominal GDP over the medium term.

Mr Gaetjens : I'm checking on that. We will have a look at that. I would say, however, that I am not aware of that number ever being included in the budget or released previously.

Senator KETTER: Right. Which part of Treasury should I be directing my question to in respect of that matter?

Mr Gaetjens : The macro group as well.

Senator KETTER: The next one is gross national income over the medium term.

Mr Gaetjens : Again, my understanding—and I might address this to the macro group as well—is we do not project that number. We don't do the number.

Senator KETTER: My last question is: can you just run through those points, Mr Gaetjens, and tell us which parts of Treasury we should be directing our questions to?

Mr Gaetjens : Unconstrained tax to GDP would be for Revenue Group. I'm reasonably sure that we have that. The department's total expenditure on advertising and information—Matt Flavel can answer that. The itemised list of advertising—again, that's for Mr Flavel. The last point on page 1 is for corporate.

Senator KETTER: No, I've got two more points—

Mr Gaetjens : The first item on page 2 would be for corporate. The value of any unannounced initiatives—again, I will double-check but you should be able to ask that of Fiscal Group. I think the answer to that is zero.

Senator KETTER: I might have missed something here, Mr Gaetjens. The last two dot points on the first page—what are you saying about those?

Mr Gaetjens : Corporate Group.

Senator KETTER: For both of those?

Mr Gaetjens : Yes. The first point on page 2 is for corporate. The value of any unannounced initiatives is, I suspect, for Fiscal Group, and I am pretty sure the answer to that is zero.

Senator Cormann: As we indicated yesterday, if there were any decisions taken but not yet announced by the time the Pre-election Economic and Fiscal Outlook was released, any such measure would be openly and transparently published in the Pre-election Economic and Fiscal Outlook consistent with the requirements of the Charter of Budget Honesty Act.

Senator KETTER: What about outstanding questions on notice?

Mr Gaetjens : I think, as of last week, there were none.

Senator KETTER: There are none outstanding?

Mr Gaetjens : Correct.

Senator KETTER: Thank you.

CHAIR: Thank you, Senator Ketter. I'm going to give myself five minutes and then I will come back to you for 10 minutes, then go to Senator Storer for five minutes, then come back to you for 10 minutes and then go to Senator Spender for five minutes. I want to ask specifically about free trade agreements and how they are potentially supporting our monthly trade balance and the government's growth agenda. Specifically, how has the coverage of free trade agreements on our two-way trade changed in recent years?

Mr Gaetjens : The negotiation of free trade agreements basically expands the price of getting into an expanded number of markets for Australian exports. There was the most recent FTA signed—I think it was with Indonesia. There have been others signed previously, not just bilateral but plurilateral as well. If I remember rightly, 'CPTPP' is the word for the comprehensive partnership for the TPP. Again, that has expanded the markets and in fact expanded Australia's access without tariffs into markets. That is a good prospect for both activity and employment in Australia. I think the government has already said it will be looking at negotiations with the UK, and I'm sure we will also be looking at the situation with Europe again once the situation with Brexit becomes clearer.

CHAIR: I read statistics somewhere—and I will get the numbers wrong—that when the coalition came to government about 25 per cent of our trade was done on a bilateral basis with countries we had tree trade agreements with. Now, with the expansion of free trade agreements and the inclusion of China, South Korea, Japan, Indonesia, the TPP and Peru, I think, as well, about 70 per cent of our trade is done with countries with whom we have a free trade agreement, whether it be bilateral or—was it plurilateral?

Mr Gaetjens : Plurilateral and multilateral.

CHAIR: I was going to use 'multilateral' but I like 'plurilateral'. I think I'll use that from now on!

Can I ask about the interaction of the lower Australian dollar that we've experienced in the last few years in supporting the transition of the economy particularly to a broader based economy, rather than just a pure mining focus, and how that interacts with the free trade agreements?

Mr Gaetjens : I might actually pass that on to the macro group to answer.

Ms Quinn : Senator, you are very close. It is 26 per cent rather than 25. Five and a half years ago, trade covered by free trade agreements was 26 per cent, and now it's 70 per cent, and that is expected to expand as the implementation of more recent agreements is completed. That provides increased access for exporters into those countries. It also provides for access for imports into our country—so, a lower cost of goods for consumers—through that mechanism as well. The lower Australian dollar helps with the competitiveness of Australian goods into foreign markets. The free trade agreements give access, and then the lower Australian dollar supports the relative price of our exports and, therefore, increased demand in those countries. Those two go together to combine for increased demand for our exports.

CHAIR: When we talk about free trade agreements, the first thing we all see is the man with the box of cherries or meat or whatever it might be, but it's the services sector that I think is the most interesting. How is our export of our services sector working with the free trade agreements to grow the economy?

Ms Quinn : Services trade has become increasingly important over time. Most people focus on education and tourism services, which are the largest, but there are many services that we trade offshore in niche markets, representing our high-value services—financial services, things like architecture and even the provision of training services, which is offshore, in terms of TAFE-like services into countries such as India. So services exports are very important for Australia, and they're a growing part of our footprint particularly in the region.

CHAIR: Are export trends expected to continue?

Ms Quinn : We are expecting continued growth in our exports. We see mining exports levelling off a little bit, having the huge increase that we've had and now the completion of the LNG export components in recent times out of Queensland. But we are expecting continued growth in services exports—not just education and tourism, but other components as well.

Senator KETTER: Mr Gaetjens, I just want to return to my earlier questioning about the wages expectations. Why does Treasury think wages will be 3½ per cent in a few years time?

Mr Gaetjens : A large part of that comes from our projection methodology approach, and I might ask my macro colleagues to actually run through that.

Ms Quinn : As we often discuss, the first two years of the projections and forecasts are forecasts, and then the last two years of the budget economic outlook is a medium-term framework that's based on an overall system analysis. So we are expecting forecasts for wages to pick up as the excess capacity in the labour market is absorbed. We have seen that in recent times, and we're expecting the continuation of recent trends. So we're not necessarily expecting a change in the trajectory—just a continuation of what we've seen in the last six months. Looking out further to those two years where we have 3.5 per cent growth in wages, that's in the medium-term economic framework, and those numbers come about because of an assumed increase in demand to catch up for the output gap and an increase in productivity to catch up to the medium-term framework. An increase in productivity leads to an increase in wages, and we also have inflation returning to the middle of the inflation band over time. So an increase in productivity and an increase in inflation lead to an increase in wages.

Senator KETTER: I notice in our estimates of wages growth in recent times, there have been many examples where they've been revised downward, and they continue to be revised back. Does this indicate a problem with the medium-term analysis and this overall system analysis that you talk about?

Ms Quinn : In the nearer term, we have seen wages increase more slowly than expected, but the labour market is a combination of not only the price that firms pay for wages but also the demand for the number of people they employ. When a business thinks about what it needs to do to increase its output, it has the choice of paying someone more money to work more or employing an additional person. We have seen in recent times a stronger increase in employment—the number of people employed—and a weaker increase in wages. Those two things offset each other, in some sense, in the decision of the firm. So we've revised up our employment growth numbers; at the same time we've reduced the wages numbers in history. That's the pattern over the last few forecast processes. Going forward, we are expecting employment growth to be a little bit less strong and wages to be a little bit stronger than in the past—so once again you've got the offsetting forces there.

Senator KETTER: What's changed since MYEFO such that you still think that wages will increase by this amount?

Ms Quinn : We have revised down the growth in wages going forward, reflecting the more recent information. We haven't necessarily changed our overall view of the mechanics of how the labour market works. We do expect the increase in demand for labour to increase the price that firms need to pay to absorb more labour, and that continues to be our view, as it is the view of most other forecasters of the Australian economy. The actual rate of increase we have moderated, partly because inflation has been lower than expected. When we look at the demand for wage increases, it's linked to the overall inflation rate, so the increase in real wages through time is a little weaker but not that much weaker. It's mostly inflation.

Senator KETTER: But if history is any guide, as I was referring to earlier, will wages be likely to hit this rate of growth?

Ms Quinn : It depends a little bit on the employment side and the inflation. If the inflation rate picks up as expected by the Reserve Bank and ourselves, and the demand for labour continues to grow as expected, then we would envisage that wages would pick up as we expect.

Senator KETTER: Can you confirm for me that wages growth has been revised down at every budget update since 2014?

Ms Quinn : I haven't been in this role since that time, so I don't have that number off the top of my head.

Senator KETTER: Dr Grant looks to be—

Ms Quinn : I don't think Dr Grant has been in her role since 2014.

Senator Cormann: We will take that on notice.

Ms Quinn : We're happy to take it on notice.

Senator Cormann: Let me make this point. Wages growth has been stronger than it would have been if we had not reversed the deteriorating position of the unemployment rate that we inherited from the previous government. If unemployment had been allowed to continue to rise as it was when we came in, wages growth would have been lower because excess supply in the labour market would have been greater and competition for workers would have been reduced. So, while we have had to work through a transition in the economy in recent years, the position that we're in is better than it would have been.

Ms Quinn : Can I add one point? I talked about the increase in employment growth. The other thing to think about is the overall number of people employed relative to the population. There is a chart on page 2-18 of Budget Paper No. 1 which shows that the employment-to-population ratio is at a historic high.

Senator Cormann: That is a very important point.

Ms Quinn : A greater change than we were expecting that has surprised other people as well is the large number of people who have stayed in the labour market towards the end of their careers and the large number of women who are now participating relative to historical trends. That increase in participation has come with the strong employment growth, but it increases the supply of labour relative to what we were expecting. That's another reason why wages have been somewhat more modest than expected.

Mr Gaetjens : I would also add that actual data, the wage price index, is increasing. I can't remember the actual time, but the wage price index curve has bottomed and it is now increasing. That is actual data—the wage price index is increasing—not just forecasts.

Senator KETTER: Okay. Mr Gaetjens, I've noted what you said in your opening statement. Given that economic forecasts in this year's budget show that GDP is down, household consumption is down and wages are down, can it be deduced that the economy is likely to be softer than envisaged at MYEFO?

Mr Gaetjens : What we've done is reset the forecasts on the outcome of the December quarter. Yes, I think there was in the calendar year of 2018 a very strong first two quarters of the year, and in the second two quarters of the year there were indications of softening. Notwithstanding that, the labour market has held strong. As Meghan Quinn just pointed out, spare capacity is being absorbed, but we're sitting on a level from the December quarter, which indicated a little bit of momentum from the first six months of the year not continuing through.

Ms Quinn : There are a few temporary factors that were affecting the economy overall level of demand at the back end of 2018, and we are expecting some of these to unwind. Some of them will give an extra boost in the near term. There were some timing issues to do with gold exports, for example, and we have the impact of the drought and floods at the back end of 2018 which we expect to unwind. We have brought down the near-term economic forecasts and reduced the real GDP for the next two years as well by a quarter point, but, based on all available information, that is our best guess and forecast for what's going to happen to the Australian economy.

Senator KETTER: Okay. The last national accounts showed that GDP per capita has declined again after a decline in the September quarter. Mr Gaetjens, can you tell me what's driving this negative per capita growth?

Mr Gaetjens : In terms of the income side or the standard-of-living-type measurements, I think a much better look at that goes to some of the national income measures rather than GDP per capita. Again, there was, I think, a bit of media comment about that outcome, but, in terms of how we would look at standard-of-living-type measurements, we use the income measures, and they stay positive and, I think, have for the last few quarters. Could I get the detail on that?

Ms Quinn : Yes. Real gross household disposable income increased, as did national income per person. We have seen very strong employment growth and, as I said, there were some temporary factors weighing on GDP at the back end. There is a sort of mismatch of timing in some ways between the GDP numbers and the employment numbers, and that results in a temporary negative number for per capita income.

Senator KETTER: Would you expect to see further declines in GDP per capita?

Ms Quinn : We are not expecting further declines in per capita GDP income.

Senator KETTER: Okay.

CHAIR: Senator Storer for five minutes.

Senator STORER: I'd like to discuss table 7 of section 4 on the government's revenue. I want to focus on the company tax component of the Australian government's general cash receipts, which in the last year were $93.7 billion of total receipts of $485 billion. So it's about 19.3 per cent of government receipts as I calculate it. I am interested in the impact with regard to chart 1 of section 6-7, which is the net debt projected to 2029-2030. I note that company tax through the projections is set to rise around that 18 or 19 per cent of total receipts. I want to know whether the projection after 2022-23 of chart 1, net debt, shows a step up of percentage decline of net debt to GDP. I want to understand whether, if there was a reduction in company tax percentages in the future, that step up in reduction of net debt would be achievable, given this is the current projection.

Mr Gaetjens : I might take that at a general level. It's a combination of Revenue Group and the tax and fiscal group, with respect to net debt. The driver of the outcome in 2022-23 is basically from the tax measures included in this budget and the previous budget. In 2022-23 there are two specific issues taking place. One is, in 2022-23, a cash payment of the low- and middle-income tax offset relating to the 2021-22 year. It is paid on assessment, so there is a one-year delay. There is a cash impact that relates to the previous financial year. That is also the year—2022-23—that the bottom tax threshold for the 32½ per cent rate increases. So there is a through-the-year impact in 2022-23. Those issues are the main driver of—again, I think there's a bit of a dip in the UCB in 2022-23, and it's basically driven by the impact in that year of a post-tax year cash payment and a new within-tax-year cash benefit from the increase in the bottom threshold.

Senator STORER: After that period it's not in place?

Mr Gaetjens : After that period you have—in fact, the low- and middle-income tax offset ends at that time, and the benefits are continued through the structural embedding in the changes to the tax thresholds.

Senator STORER: Does this not reflect the importance—or the domination, in a way—of gross income tax in our tax receipts being in this year $223 billion of $485 billion? Our income tax take in terms of our total government receipts is close to 50 per cent. It is the defining structural aspect of our tax system that we don't have a very broad tax take.

Mr Gaetjens : Our tax system is very dependent on personal income tax and company income tax. They are the two very dominant—they dominantly provide the composition of our tax revenues.

Senator STORER: So if we were to reduce either of those it would have a significant impact on our net debt projections, correct?

Mr Gaetjens : We would, but we'd also have a significant impact of not keeping tax rates consistent, either internationally—to international competition, if you like—or with respect incentive effects to get people at work. If you don't have reasonable tax rates, people then make their own decisions about the incentives and the benefits of extra work, overtime and things like that. Tax drives the supply side of the economy just as much as the budget revenue.

Senator McALLISTER: Mr Gaetjens, how far advanced is the Treasury's work on the red and blue books?

Mr Gaetjens : It is proceeding. I think it's as advanced as it needs to be at the moment.

Senator McALLISTER: So you've begun?

Mr Gaetjens : Yes.

Senator McALLISTER: Have you had oversight of any drafts of Labor's incoming government brief?

Mr Gaetjens : No.

Senator McALLISTER: So you're aware that the work's been done but you haven't seen it?

Mr Gaetjens : Yes.

Senator McALLISTER: Have you discussed with any Treasury officials any content of Labor's incoming government brief?

Mr Gaetjens : In a general sense, yes, in terms of what we would be looking at, but not in detail. We're basically looking at the structure of the briefs, for both red and blue, and not the detail yet. A lot of the detail, I suspect, will come out after the election is called, when policies are announced. It's very hard to get into the detail before policies are announced. We are preparing, as I expect the whole of the Public Service is, but it's not at the stage yet where we have got into the detail, especially, I think, on the red side, because I suspect there's a lot of information yet to come out.

Senator McALLISTER: In February, you indicated that you would personally sign off on the blue book and the red book.

Mr Gaetjens : Yes.

Senator McALLISTER: That remains the case?

Mr Gaetjens : Yes. It won't just be my work, though. I don't think it's strange that the head of a department would sign off on an incoming government brief.

Senator McALLISTER: No, you're right. That is your role now that you are the Secretary of Treasury. Senator Keneally would like to use the remaining time.

Senator KENEALLY: Thank you for being here today. I'd like to ask some questions about the budget speech itself. When was the final version of the budget speech finalised?

Mr Gaetjens : Could I take that on notice. I'll take that on notice, but I think it was Monday, and I think it was at the usual time for previous budget speeches.

Senator Cormann: We can safely assume it was finalised before it was delivered, which is very helpful with speeches!

Senator KENEALLY: Given what happened in the following 24 hours, I'm not entirely sure that's true, Finance Minister.

Senator Cormann: What happened in the following 24 hours—and I assume that you are referring to our initiative to provide cost-of-living pressure relief to eligible welfare recipients—

Senator KENEALLY: Your backflip—your crisis meetings, which you forgot about.

Senator Cormann: What happened in the following 24 hours is we made pragmatic judgements, as we do as a pragmatic government, to facilitate efficient passage of this measure through the parliament this week, and that was mission accomplished. It was successful, because we were very keen to ensure that aged pensioners would receive cost-of-living pressure relief in relation to the additional energy assistance payment. I would also just point out to you, Senator Keneally, as I did to Senator McAllister yesterday, that the Labor Party supported the equivalent measure in 2017 without raising at any point at that stage the need to include Newstart allowance recipients. Precisely the same measure as the one that was originally included in the budget was passed by the parliament with the support of the Labor Party in June 2017.

Senator KENEALLY: Thank you, Minister. I have a couple more questions about the speech if you don't mind. I'd be very happy if you want to table that information for me.

Senator Cormann: I'll continue to answer your questions openly and transparently, as is, of course, my job.

Senator KENEALLY: I do have some additional questions I would like to put to the Treasury secretary, please, Minister. Was the final version of the budget speech sent to the printers? Was it at the same time as the other budget papers were sent to the printers?

Mr Gaetjens : I will take the final time on notice, but the usual process for budgets, again, is that the bigger documents are sent to print first. The speech, by its nature, is a much smaller document, so it is generally one of the last documents to be printed.

Senator KENEALLY: So you can't say at the moment whether they were sent at the same time.

Senator Cormann: They never are sent at the same time.

Mr Gaetjens : No, they weren't.

Senator KENEALLY: They're never sent at the same time?

Senator Cormann: Under your government and under our government, I think you'll find that the budget speech is never sent at the same time as the more substantial—by size—documents, because by its very nature a speech continues to be refined for as long as you logistically can. But it was, of course, available in the lock-up.

Senator KENEALLY: That's great point, Minister. Thank you.

Senator Cormann: It was, of course, available in the lock-up at 1.30, contrary to some of the erroneous assertions that were made by some. It was available in the lock-up at 1.30 in the usual way.

Senator KENEALLY: I'm really pleased you raised that point, Minister. Were all copies of the budget speech ready for issuing at the start of the budget lock-up?

Senator Cormann: Yes.

Senator KENEALLY: You can categorically say that?

Senator Cormann: Yes.

Senator KENEALLY: So why are there some journalists who are saying that it was not?

Senator Cormann: That's a very good question. You'd have to ask them that. I often wonder why some journalists say what they say. It's a constant source of wonder.

Senator Ian Macdonald interjecting

Senator Cormann: You could well say that. I couldn't possibly comment.

Senator KENEALLY: Well, while we're talking about media coverage of the budget: Minister, have you read an article from the Sydney Morning Herald by Paul Sakkal titled 'Voters unlikely to buy Morrison government tax cuts: Costello'?

Senator Cormann: No, I have not.

Senator KENEALLY: In that article, Mr Peter Costello, who I believe would be known to you, asserts that the government had an opportunity to deliver a surplus this year but instead took decisions to bring forward expenditure to prop up next year's surplus figure. Is Mr Costello's analysis accurate?

Senator Cormann: No.

Senator KENEALLY: Why not?

Senator Cormann: Because, as we have done in our last five budgets, we make judgements based on, obviously, a whole lot of information on how to prioritise expenditure and revenue in the context of the economic parameters and other non-economic parameter information in front of us. If you compare the current fiscal position for the 2018-19 financial year, it is more than $10 billion better than when we delivered the 2018-19 budget this time last year. This time last year we were forecasting a $14.5 billion deficit for 2018-19. In MYEFO that was about $5.2 billion, and it's now just over $4 billion. Even after we have made the adjustment to the energy assistance payment, taking that cost from about $285 million to $365 million, we still have a deficit position in 2018-19 that is more than $10 billion better than forecast this time last year. If you put that in the context of our performance against budget for the 2016-17 and 2017-18 financial years, when the final budget outcome in 2016-17 was more than $4 billion better than forecast at budget, in 2017-18 it was $19.3 billion better than forecast at budget time.

We have in recent years, after we were able to reverse the deteriorating trajectory that we inherited from our predecessors, been outperforming our budget forecasts over the last three years. The monthly financial statements that I release show that that is the case for 2018-19 as well. We are in the best possible position in the context of the priorities that we believe need to be pursued in 2018-19 in the public interest. But, of course, as we have indicated for some time now, we are now very confident and are forecasting a surplus of $7.1 billion for the next financial year. Australians can have confidence based on our past track record that we will deliver on that forecast that we've made in the 2019-20 budget.

Senator McALLISTER: Like the forecast Mr Hockey made for the first year of government and every year of the coalition government?

Senator Cormann: You're being extremely misleading. I've picked up every Labor person that has falsely asserted this. Some people try to misrepresent a quote out of 2012 when the then Treasurer Mr Swan had just announced four years of surpluses. Mr Hockey at the time was asked, 'If these surpluses are real, will you also deliver a surplus?' Mr Hockey quite rightly pointed out at that time, in the context of the misleading information that Mr Swan had put into the public domain and which was subsequently proven to be wrong, that, yes, of course, we would be delivering surpluses in every year over the forward estimates of our period in government.

But in 2013, when we released our pre-election costings in the lead-up to the 2013 election, what we showed was that our budget bottom line would be about $6 billion better over the forward estimates as a result of policy decisions than that which we inherited, and we stand by that. But, of course, in the 11 weeks between Labor's last budget and the pre-election economic and fiscal outlook, the bottom line under Labor deteriorated by $33 billion—$3 billion a week over 11 weeks. That deterioration didn't stop when we came into government. It has taken a lot of work to turn that situation around. This is not the time to go back to these discredited, old Labor ways. Our message to the Australian people is we're now heading in the right direction, we've got on top of the mess Labor made to the budget and we now continue to head in the right direction.

Senator KENEALLY: Chair, can I just flag I'd like to come back to this line of questioning in a future time frame?

CHAIR: That's fine.

Senator IAN MACDONALD: People say to me all the time, 'In our household, we're required to balance our budgets, otherwise we lose the house,' and small business say to me, 'If we don't balance our budgets, we go out of business.' So I'm delighted to see the surplus of $7.1 billion, and I know people in the north are very pleased that the government is now doing what they've been required to do for years. You will appreciate from my questions that I'm not an economist or a taxation expert, but has the cash surplus been the same figure that's been used in the last 10 years in budgets? Under Labor, as I recall, for those six years, every year a surplus was promised next year and every year the deficit went up or wasn't reduced. Is it the same figure as has been used over the last 10 years? The terminology, the cash surplus, that we're talking about of $7.1 million—is that the same calculation that's been talked about in budgets over the last 10 years?

Mr Gaetjens : The answer is yes. As far as I'm aware, the approach of the underlying cash balance was introduced in about the mid-1990s. Prior to that, I think there was a greater focus on the headline cash balance, which actually included, then, the impact of asset sales and things like that. So the underlying cash balance was used, I think, as a measure to estimate the impact that the government sector had on drawing issues from the other sectors of government. It basically says: what is the impact of the government sector on the Australian economy? If it's an underlying cash deficit, then we have to borrow to make up the deficit. If we are in surplus, then the government is not drawing from other sectors of the economy; it's contributing. To go a bit further, the underlying cash balance is a feature, I think, of the IMF structure of accounts, but we also have to prepare budgets in accordance with accounting standards, and that's where the fiscal balance comes in. So, at the Commonwealth level, we do not audit actual budget documents, but we do apply the financial budget outcome, particularly to meet accounting standards. Some of the key differences there are the valuation of liabilities and the discount rate that you actually use. In terms of the UCB, the underlying cash balance, that has been a consistent key aggregate of budget documents—again, I would say, since the mid-1990s.

Senator IAN MACDONALD: For simple minds like mine, and I suspect that most Australians share this simplicity when it comes to budget figures, can I take it that there's a $7.1 billion surplus that you can put in a bank and next year there's going to be an $11 billion surplus you put in a bank, and then you can start using that $18 billion to pay off government debt that's been run up? I know that's not how an economist would describe it, but, for me and most Australians, is that how it works?

Mr Gaetjens : Yes. Again, for the detail, it might be worthwhile pursuing it with the Fiscal Group, but the underlying balance, in a cash sense, is basically cash revenues minus cash expenses. You then have a sector of the operating statement that looks at changes in valuations of financial assets, or, if the government holds shares in companies, there might be a change in valuation of that equity amount. So the pluses or minuses of the changes in value come through, then you get the underlying cash balance and then you actually add back the financial asset transactions. That gives you the headline cash balance. But underlying cash balance, yes—you've done all of your revenue in spending out and there is a $7 billion surplus. People say, 'What do you do with a surplus?' You pay down debt.

Senator IAN MACDONALD: So you do pay down debt?

Mr Gaetjens : Yes. In the previous occasions of surpluses a debt had already been paid down, so surpluses went to the Future Fund. That is a measure of creating a net asset position to offset for liabilities coming onto the budget at a later stage, which basically are the liabilities of Commonwealth superannuation.

Senator IAN MACDONALD: As I recall, in the Howard government days when we left office there was a $60 billion surplus, which went to the Future Fund, I assume. It's that surplus which is now $200 billion or more in deficit. Is that the same sort of figure?

Mr Gaetjens : The surplus would be an underlying cash figure. An annual surplus or an annual deficit would be the same measure, given the methodology that we use to frame the budget, of either an underlying cash surplus or an underlying cash deficit.

Senator IAN MACDONALD: Thanks very much for that.

Senator KENEALLY: . To Treasury: can you advise on whether a surplus this year is technically achievable via policy decisions?

Senator Cormann: That is a hypothetical question that is technically possible. Is it true that the government could have decided to increase the tax burden on the economy by $5 billion this year, in order to—

Senator KENEALLY: Or not have carried forward savings or spending?

Senator Cormann: This, of course, is a prerogative of government. We've made decisions as a government that we believe are in the public interest, based on our intention to keep the economy strong, to make sure that employment growth can continue to be strong into the future, making sure that funding for all of the essential services Australians rely on can be guaranteed and are sustainable into the future. So we are on a sensible, responsible pathway back to surplus and, as we've forecast now for some time, we are returning to surplus by 2019-20 to the tune of about $7.1 billion on underlying cash balance terms.

I hasten to add, we are already in surplus this financial year to the tune of about $8.5 billion when it comes to our net operating balance. That means we are, essentially, now more than meeting our recurrent liabilities through recurrent revenue. On net operating terms, we are already in surplus this year but we've made the judgements at the appropriate trajectory, when it comes to an underlying cash balance surplus, as reflected in the budget papers.

Senator KENEALLY: Does Treasury want to add anything to the minister's—

Senator Cormann: You're asking them, essentially, for an opinion on policy choices.

Senator KENEALLY: That's a really good point, Minister. These are policy choices by the government not to have a surplus this year.

Senator Cormann: No, we made a judgement on what was a sensible trajectory back to surplus, given the terrible fiscal situation we inherited back in 2013 when we had a weakening economy, rising unemployment and a rapidly deteriorating budget position. We have worked very hard to turn the situation around, better controlling expenditure growth. Instead of four per cent average expenditure growth year on year, in real terms, we've brought that down to below two per cent, a 1.9 per cent real growth in expenditure in the period 2013-14 to the end of the current forward estimates period.

If you look at the current forward estimates period in isolation you will see that expenditure growth is down as low as 1.3 per cent, on average, per year in real terms. Spending, as a share of the economy, is down to 24.5 per cent at the end of the forward estimates period—

Senator KENEALLY: I wouldn't be crowing about that.

Senator Cormann: for this financial year, which compares to a trajectory that we inherited—according to the National Commission of Audit—of government expenditure heading to 26½ per cent by 2023-24 and rising beyond that. So we have put the budget on a structurally more sustainable foundation and trajectory for the future. And we stand by the policy choices we made, in terms of the trajectory back to surplus that is reflected in the budget paper.

Senator KENEALLY: Mr Costello said that the government probably could have had a surplus this year. He said:

… they actually moved a lot of expenses into this year.

You could have then gone to the election with one under your belt and the promise of more to come.

Mr Costello went on to say:

Since we can hardly tell you what's going to happen in the economy in the next six months, the idea we can tell you where we'll be in 2030—I wouldn't take that to the bank.

He said:

The government is forecasting as at June 30 next year there'll be a surplus of $7.1 billion dollars—that's not a large padding.

Minister, are you concerned that a former Liberal Treasurer doesn't believe that your $7.1 billion surplus is sufficiently credible?

Senator Cormann: It's a free world and everybody is entitled to their opinions. What I can tell you is that, having spent hours, days and weeks of reviewing all of the information about economic parameters, non-economic parameters and the impact of policy decisions on the revenue and spending sides of the budget, I'm very confident that we made the right decision to put Australia on the strongest possible economic and fiscal foundation and trajectory for the future. I stand by the numbers in our forecast. What I would say to the Australian people is: 'Just look at our track record. Look at our performance against budget forecasts in 2016-17, 2017-18 and 2018-19 when we outperformed our forecasts in terms of the underlying cash balance, and we're on track to outperform it compared to the original forecast for 2018-19.'

All sorts of people have all sorts of opinions. I think my good friend Peter Costello has expressed opinions about our budgets in the past too. The Labor Party was invariably always very critical about what were supposedly heroic assumptions and forecasts that couldn't be believed. Well, guess what? 2016-17 was $4.3 billion better than forecast; 2017-18 was $19.3 billion better than forecast; and, indeed, 2018-19, according to the update in this budget, is more than $10 billion better than forecast when the budget was originally delivered. So I say to people: 'Look at our track record. Our forecasting assumptions overall have proven to be credible and our performance has been on the upside, not on the downside, as was invariably the case under the previous Labor government when Wayne Swan invariably had to confess that the budget position had deteriorated by more compared to what was reflected in the previous budget or budget update.'

Senator KENEALLY: Minister, are you concerned that the former Liberal Treasurer Mr Costello doesn't believe your debt reduction strategy? If a Liberal Party Treasurer can't take this Liberal budget seriously, why should the public?

Senator Cormann: I actually pretty comprehensively answered this question just now, but I'll do it again. We inherited from the Labor Party a weakening economy, rising unemployment and a rapidly deteriorating budget position. Indeed, in the 11 weeks from Labor's last budget to the independently released Pre-Election Economic and Fiscal Outlook, the underlining cash balance bottom line deteriorated by $33 billion.

Senator KENEALLY: That's not the question. The question was: if a Liberal Party Treasurer can't take your budget seriously, why should the public?

Senator Cormann: So we inherited a debt growth trajectory, and government net debt growth has been less because we've reduced expenditure growth.

Senator KENEALLY: Have you called Mr Costello to explain all this to him?

Senator Cormann: If you look at the budget forecast and medium-term projections, you can see that over the medium term we are expecting to fully pay down government net debt—in fact, to end up in a $1.2 billion positive net position when it comes to government net debt.

Senator KENEALLY: But Peter Costello doesn't believe you.

Senator Cormann: You're clearly not listening to the answers. If you look at the performance, our performance against budget—

Senator KENEALLY: I'm asking a different question.

Senator Cormann: Can I please answer the question, Chair?

Senator KENEALLY: Well, you're not.

Senator Cormann: If you look at our performance against budget over the last three years, we have materially outperformed the budget forecasts at budget time, with the underlying cash balance materially better than at budget time, which means the government net debt position is materially better than it otherwise would have been on the basis of our underlying cash balance performance. Of course, people across Australia know that they can trust us to manage the budget sensibly and credibly—

Senator KENEALLY: But Peter Costello doesn't.

Senator Cormann: whereas of course they know that, when Wayne Swan and the Labor Party were in government, at every budget and budget update they had to fess up to a further deterioration in the bottom line.

Senator KENEALLY: But Peter Costello doesn't trust you.

Senator Cormann: It's a free world. People are entitled to their opinions.

Senator KENEALLY: But his is a pretty significant one. Don't you think Liberal Party members pay attention to what Peter Costello has to say?

Senator Cormann: Again, he's entitled to his views. I don't agree with them.

Senator KENEALLY: He's not just a man on the street.

Senator Cormann: Well, our track record disproves what he has wrongly asserted.

Senator McALLISTER: How much time do we have?

CHAIR: One minute and nine seconds.

Senator McALLISTER: We might forgo our one minute.

CHAIR: Thank you.

Senator McALLISTER: Perhaps we could have some leeway at the end of the next 10 minutes.

CHAIR: You can have 11.

Senator SPENDER: I want to run through a couple of issues. You're establishing a centre for population. Is it going to look at the responsiveness of fertility rates to financial assistance?

Mr Gaetjens : The centre for population is basically being set up after a process of the Commonwealth engaging with the states to look at what the benefits of population are in terms of being a big factor in economic growth itself and also the challenges that come out and meeting the needs of the population.

Senator SPENDER: Is it just going to focus on immigration, or is it going to talk about—

Mr Gaetjens : No, it will focus on population, so the total population, non-domestic well as domestic. As I said, we were getting funded to establish that in 2019. We have been involved in discussions that led to the Prime Minister raising this with the states in COAG last year. We had one meeting of federal and state treasurers earlier this year, I think—again, this could be followed up with Fiscal Group with respect to the actual detail—and we will now be looking at issues. But we have started off two tracks of work already. I think one is looking at regional, and the other one just escapes me at the moment, but Fiscal Group will be able to go into it this afternoon.

Senator SPENDER: Okay, I'll take it up with Fiscal Group. This is more macro, probably. You can either correct my understanding here or, hopefully, talk to these things. I understand that your forecast period for real GDP is based on your 20-year average, but your forecast period for nominal GDP is not. I also am of the understanding that you don't have a sensitivity analysis relating to these GDP forecasts presented in the budget, and therefore there's no consideration of the possibility of, for instance, the last decade's worth of averages being used to present a more pessimistic idea about how maybe we're in a changed world. There are a couple of related issues there, including the issue of real GDP versus nominal GDP forecast periods.

Ms Quinn : I'm happy to go through that. In terms of the first two forecast periods, we look at our best assessment of what's happening in the economy to get a forecast for GDP and similarly for nominal GDP—both real and nominal. Then, beyond the first two years of the forecast, we have projection methodology, which is underpinned by a 30-year average growth rate for productivity, then an assessment about what's happening with population, which is a detailed bottom-up assessment that joins recent trends with the Intergenerational report numbers, which are updated every five years, and then a participation rate as well. Then we add the productivity, the population and the participation together, and we get our GDP medium-term projections. Then, for the nominal GDP projections, we assume that domestic inflation is at the middle of the target band, and then we have the terms of trade flat at the level that they're at at the end of the forecast period. So nominal GDP is real GDP plus the inflation rate.

Senator SPENDER: What would seem to drive the distinction there is that your first two years of your terms-of-trade assumption have a winding down of the current levels of prices.

Ms Quinn : The terms of trade are projected to be flat, around the 2005 level, from 2022-23, so we do have an unwinding in the terms of trade in the forecast and then out to 2022-23 and then flat. We look at the level of the terms of trade for the medium term, using detailed cost curves for our major commodity exports and also what we think are the medium-term trends for international prices. We do an analysis each year to make sure that that assumption of the terms of trade going back to around the 2005 level is accurate, so that bottom-up analysis matches the top-down one.

Senator SPENDER: On the issue of sensitivity analysis, you mentioned a 30-year productivity assumption. Obviously there's literature saying that maybe that's a bit optimistic and we're in a different world, but you don't present any more pessimistic scenario on that.

Ms Quinn : We do have a sensitivity analysis looking at potential growth in statement 7, which looks at exactly this issue: if we thought the potential growth was higher or lower by a quarter percentage point, what would that mean for the overall fiscal aggregate? That sensitivity analysis is in this year's chapter 7.

Senator SPENDER: I'll have a look there. This is economic; you might say it's partly fiscal. There's increasing reference in budget documents to the distinction between economic parameters and non-economic parameters.

Senator Cormann: It has always been thus.

Senator SPENDER: However, there's no distinction presented as to which parameters you're counting as economic and which parameters you're counting as non-economic.

Senator Cormann: We can provide that to you on notice, but it's been a consistent approach all throughout. There's been no change in this budget. But I'm happy to provide you—

Senator SPENDER: If you could distinguish those—which you're treating as which. We can have a discussion about whether or not you've always presented your policy decisions on payments in the same way, but that's a separate matter.

CHAIR: Last question, Senator Spender.

Senator SPENDER: It's amazing that the first couple of dozen pages, at least, of your budget document don't mention the company tax rate. And then, when you were asked about what your silver bullet—in your language—about wages is, you made no reference to company tax cuts. Why is the government going quiet on company tax cuts when you've got analysts here who have provided work before, which you've published, talking about how company tax cuts are important for growing wages?

Senator Cormann: Indeed. My answer referred to our national economic plan, which of course includes our commitment to keep taxes across the economy low. That's why we've imposed on ourselves a cap of 23.9 per cent tax as a share of GDP, something that the Labor Party have refused to do. In fact, they've already announced $200 billion in higher taxes. In this parliament, when it comes to lowering taxes, we've obviously delivered $144 billion worth of income tax relief for working families, but on top of that we've also delivered a reduction in the corporate tax rate to 25 per cent for businesses with a turnover of up to $50 million per year, which is all that was achievable, I guess, through this parliament. I think that that's a matter of public record and history.

Since then we've made further decisions. Given that that was not able to be secured, we've made decisions to further expand the instant asset write-off, increasing it initially from $20,000 to $25,000 and in this budget to $30,000 per relevant investment and also expanding the threshold, in terms of the businesses that are eligible to participate, from $10 million in turnover to $50 million in turnover.

What I said to Senator Ketter by way of response is that you've got to look at our plan as a holistic plan across the board: lowering the tax burden to help strengthen economic growth, which in turn helps to drive stronger wages growth; giving better access for our exporting businesses to key markets around the world through our free trade agenda, free trade agreements with China, South Korea, Japan and Indonesia and the Trans-Pacific Partnership; investing in productivity-enhancing infrastructure—you name it. There are a whole series of components. What I said to him is that there's not one magic bullet that you can use.

The Labor Party is suggesting that the way to increase wages is to mandate a legislated increase in wages, when of course, at the low-income end in particular, that would harm Australians because if you end up in the unemployment queue you don't get a minimum wage; you get the dole. Increasing the minimum wage by government legislation beyond what even the Fair Work Commission thinks independently is economically sensible would lead to higher unemployment. If you drive unemployment up, what that means is that, in aggregate across the economy, wages will end up lower than they otherwise would be.

Our economic plan across the board, including when it comes to tax policy settings, is designed to deliver stronger growth, more jobs, lower unemployment and, in the context of higher participation, over time, stronger wages growth as the excess supply in the labour market reduces; whereas the alternative, we would submit, of higher taxes and various other policy settings that would make us weaker as an economy would lead to fewer jobs, higher unemployment, less competition for workers and hence lower wages over time.

Senator SPENDER: Chair—

CHAIR: I will come back to you.

Senator SPENDER: can I just check. Questions on effective marginal tax rates should be directed to Revenue Group, not you guys?

Senator Cormann: Revenue Group, yes.

Senator McALLISTER: We were speaking earlier about migration and the reduction of the planning level from 190,000 to 160,000. I want to ask about the impact on employment because, despite the fact that the unemployment rate and the participation rate remain the same, employment growth appears to be stronger this year and next year. What's driving that, Ms Quinn?

Senator Cormann: Just conceptually—I will let Ms Quinn answer—obviously, in order to bring down the unemployment rate, you need to ensure that employment growth runs faster than population growth. That is the overarching point, but I'll let Ms Quinn go into the detail.

Ms Quinn : In 2018-19 we have seen strong employment growth, and the unemployment rate has drifted down, but it hasn't drifted down as much as the increase in employment, because we've had a lift in the participation rate—so the number of people that have come into the labour force. They have been in Australia, but they have come into the labour force. That's what's happened in the most recent period. We do expect population to grow about 1.7 per cent in the budget forecast period, based on demographic forces in Australia and the net overseas migration, which captures Australians going in and out and also visa processes. With the 1.7 per cent population growth and with our projected employment growth, we end up with a flat unemployment rate.

Senator McALLISTER: Yes. So the employment growth is to some extent dependent on the population growth?

Ms Quinn : In the longer term, yes. In the shorter term, the demand and supply of labour both go together, with the wage being the one that brings them together. In the longer term we think of the labour supply matching labour demand, with wages adjusting, but in the short term you can have gaps between those two as things work through the system.

Senator McALLISTER: The temporary migration projected in Budget Paper No. 3 represents a significant increase on the levels that were projected at the last budget on a year-by-year comparison, around 40,000 additional people. Does that impact on the strength of the employment numbers in this year, in 2020-21?

Ms Quinn : These numbers are provided to us by the Department of Home Affairs. As we understand it, a large part of the increase in the net overseas migration is overseas students. We have had a significant increase in overseas students come into our education system over this period. The implications for the labour market depend a little bit on the reason for the increase in net overseas migration. Those students have an ability to work but a restricted number of hours, so they would have less of an impact than, for example, an increase in net overseas migration because of a shift in the Australian balance or the New Zealand balance or other classes of visas.

Senator McALLISTER: What's the proportion roughly of that increase that is a student increase?

Ms Quinn : I believe the Department of Home Affairs said they would provide that information on notice. I don't have that.

Senator McALLISTER: But they've provided it to you, surely, because you were able to rely on that information in your answer just now.

Ms Quinn : We get an aggregate number and then a breakdown. I don't have those numbers with me. I'm happy to take it on notice and check.

Senator McALLISTER: I will make the point that I asked this same question of the Economic Division in Prime Minister and Cabinet. They took it on notice. It appears that Home Affairs took this breakdown on notice yesterday, and now you're taking it on notice, Ms Quinn. Minister, is there some problem with telling Australians what is going on in the temporary migration program? Why can't that be presented at these estimates? It's been asked three times in three separate—

Senator Cormann: It will be presented. You're asking for detailed information. Consistent with usual practice, including under your government, when detailed information is not at our fingertips in the form that's been requested—we will openly and transparently supply that information, as we always do—in order to ensure the accuracy of the information provided, we will take advantage of the opportunity that is afforded to us under standing orders to take the question on notice.

Senator McALLISTER: Minister, the change to what you're calling the 'planning level' in migration has been—you've made quite a song and dance about that publically.

Senator Cormann: That is your characterisation.

Senator McALLISTER: Yes, it is my characterisation.

Senator Cormann: It sounds like a political characterisation to me.

Senator McALLISTER: It is a political characterisation, and, indeed, you have sought to make a political big noise about it. Why it is that you can't present facts about the migration program in the estimates process in any one of the departments that I've referred to?

Senator Cormann: I completely reject the proposition that we're not presenting facts.

Senator McALLISTER: You're not presenting all that we're asking for.

Senator Cormann: First, all the relevant facts I would submit are actually in the budget papers. Second, we are here answering questions and we've provided the information that we're able to provide—

Senator KENEALLY: You're actually not.

Senator McALLISTER: I think that's a debatable point.

Senator Cormann: There is some further detail that you are interested in and, given our total commitment to openness and transparency, we will, of course, provide that information. You surely wouldn't criticise us for wanting to ensure that the information we provide to you is accurate. Given the level of detail involved, we will take the question on notice, as ministers in your government routinely did in these sorts of circumstances.

Senator McALLISTER: Ms Quinn, I think where we got to was you expressing some qualifications about the impact that temporary migration might have on employment where the temporary migration takes the form of the issuing of student visas.

Ms Quinn : We do know that there are different demands for employment from different categories of visa applicants, so it does depend on the changes. You can get an increase in net overseas migration because less Australians have left the country or more Australian citizens have returned. They have different access to the labour market than other visa categories.

Senator McALLISTER: You must have some visibility on what the present projections in Budget Paper No. 3 for net overseas migration actually mean for employment?

Ms Quinn : Between MYEFO and the budget: broadly unchanged.

Senator McALLISTER: They've changed reasonably significantly since the last budget. I accept your point that they may have been adjusted in MYEFO. Is that your point?

Ms Quinn : Yes.

Senator McALLISTER: What was the impact of that changing level of temporary migration on employment between the last budget and MYEFO?

Ms Quinn : Not a significant impact.

Senator McALLISTER: Given the potential for net overseas migration to have an impact on employment outcomes, is that because of the visa categories that were issued as part of that?

Ms Quinn : In part, yes.

Senator McALLISTER: What other dynamics might be relevant?

Ms Quinn : When we look at our labour-market projections, we look at the overall supply and demand. Another factor on the labour market has been the increase in participation domestically.

Senator McALLISTER: Sorry, I think we're talking about something different. I suppose I'm asking you: given that there was this increase in net overseas migration, is your proposition that that's not had any impact on employment—or marginal impact on employment?

Ms Quinn : Not a significant number overall. When we ran through the factors looking at the reason for changing the economic outlook between budget and MYEFO, we did see that there'd been an increase in net overseas migration. We did do some analysis on the impact, and it wasn't a significant part of the story—otherwise we would have mentioned it at the time of MYEFO.

Senator McALLISTER: Right. My question two clicks ago was: what dynamic is operating within the net overseas migration that produces this counterintuitive result?

Ms Quinn : It is related to the visa categories of immigration, yes.

Senator McALLISTER: Right. And is it related to students?

Ms Quinn : Yes, as we understand it from the information provided by the Department of Home Affairs.

CHAIR: You have about a minute and a half if you would like to carry over the same minute, Senator McAllister.

Senator McALLISTER: Perhaps I will. I will ask this quickly. There's obviously been some public discussion about the possibility that China may switch to more domestically supplied coal. Do you see this as a material risk for the economic outlook?

Mr Gaetjens : I would say a couple of things there. Australian coal, I think, is saleable across the world. So there are markets that are able to take it. There is also the fact that there has been a focus, I think, on thermal coal rather than metallurgical coal. We have certainly been discussing these issues with China. They have given their reasons for what is happening. And I think what we are trying to do is just, again, examine what is happening. We are obviously in our own conversations, but at the moment we do not see it as having a significant macroeconomic effect on Australia.

Senator McALLISTER: Thank you. More generally, would a severe slowdown in coal exports have a significant macroeconomic effect on Australia?

Mr Gaetjens : I think I would need to look at that in terms of, again, what is the definition of 'severe'. I'm not trying to have a semantic debate; it's just—

Senator McALLISTER: That's okay. I used your words so that you would be able to extend the point that you'd made already.

Mr Gaetjens : Again, I think what I'd say is that Australian coal is very high quality; it matches the needs of markets overseas, some better than others, and I think we would probably see the impact of a substitution effect before a deep impact on the economy, but it would be very difficult to go through hypotheticals to come to an answer.

Senator McALLISTER: I understand. Thank you.

CHAIR: I have a couple of follow-up questions to Senator Spender's questions, believe it or not, particularly about the new Centre for Population. Is that new centre going to be responsible for the Intergenerational report?

Mr Gaetjens : I think the new centre will actually look at probably more short-term impacts and what population levels are, both domestic and from overseas migration; what the needs are; the distribution between cities and areas; the distributions between states. Again, the state impact on population at the moment is very different. In Victoria, the population growth is well over two per cent, I think. In the other states I don't think it's as strong. I think the ACT is pretty strong too.

CHAIR: So it's not responsible for the Intergenerational report?

Ms Quinn : Treasury at the moment does put together demographic—the underpinnings for the Intergenerational report, drawing on information from across the Public Service, but—

CHAIR: I should know this, but when's the next Intergenerational report due?

Mr Gaetjens : 2020.

Ms Quinn : Yes. Every five years there is an update to the population projections going forward. That is based on, as I said, information drawn across, and that is put together in Treasury at the moment. These are things to be worked through with the centre being set up. But I'd envisage that the near-term implications for population, but also the longer term implications, would be part of the centre's work.

CHAIR: Will the Centre for Population inform things like GST distribution recommendations or will it inform things like infrastructure requirements of different states?

Ms Quinn : At the moment the population projections included in the budget do form the underpinnings for GST distributions to the states, in terms of expectations, and then the actual outcomes of population feed through the Grants Commission. The growth in population will affect demands for infrastructure. Working with the states, it is envisaged that the Centre for Population will bring together a holistic view from all the different states and the Commonwealth—the considered view from all of those parties for population growth for Australia. That's one main activity for the centre. The other main activity is to help devise a population strategy for the Commonwealth government.

CHAIR: And will the new Centre for Population inform labour projections as well, employment rates in various areas, where the demand for labour is—

Ms Quinn : That work is done in the department as it stands now. The centre is mainly looking at the supply side, so the actual increase in the numbers of people and where they are, but obviously supply and demand go together over the longer term. So you do have to factor in the demand side as well. It might not be in the actual centre, but working with other parts of the department, as an integrated whole, to produce an overall outlook for the implications of population.

CHAIR: Will it look at things like the effect of policy decisions like free trade agreements, for instance, on population? I remember when we were in the midst of negotiating the China free trade agreement there was a somewhat ill-informed assertion that, potentially, the China free trade agreement would affect the job prospects of Australians, because the Chinese would take advantage of this and come to Australia and flood our job market.

Ms Quinn : Those sorts of things are more related to the work we already do in the department. The additional bit that the centre's looking at is pulling together a whole-of-country view on the population side and putting more information in the public domain. The population strategy would be an avenue for examining those sorts of things, but it might not be done exactly in the centre, because it's already done in the Australian government, in Treasury.

CHAIR: So, if there were a political request to assess whether there were particular labour demands in certain areas because of policies that were put together by either the government or the opposition of the day, that's something that the Centre for Population would look at? I'm not describing this very well.

Ms Quinn : No. It would work with other parts of the system to come up with a holistic view of the implications for changes in population of quite a few different policies.

CHAIR: If the former opposition leader for New South Wales, Michael Daley, came out and said something as ridiculous as, 'Chinese with PhDs are taking our jobs,' is that something that the Centre for Population would consider?

Ms Quinn : It would depend particularly on the policy issues going forward. But it is envisaged that the population strategy would talk about what the population implications were both for regions but also for economic growth.

CHAIR: Okay. Thank you. Senator Keneally.

Senator KENEALLY: I would like to ask questions about the government's Climate Solutions Package. Has Treasury done any modelling on the economic impact of that package?

Ms Quinn : The overall package policy issue is a matter for the Fiscal Group to talk about; they look at the environmental portfolio. In terms of the overall economic impact modelling, I'm not aware, but you can check with them.

Senator McALLISTER: Would not Macroeconomic Group have done that modelling?

Ms Quinn : Sometimes we do in-house modelling; other times we contribute to analysis to other departments, and sometimes that's by different parts of the department. Macroeconomic Group hasn't done anything specific on that package, but I don't want to speak for my colleagues in Fiscal Group—there might be something I'm unaware of.

Senator McALLISTER: So there's a possibility that Fiscal Group contributed to modelling the Climate Solutions Package?

Ms Quinn : There is a possibility yes.

Senator McALLISTER: You can't rule it in or out.

Ms Quinn : So just check with them.

Senator KETTER: Mr Gaetjens, are you aware of whether Fiscal Group has done modelling in this regard?

Mr Gaetjens : Again, I think the question should go to the group, in particular.

Senator Cormann: Of course, the lead department for this is in another portfolio.

Senator KENEALLY: I apologise: I just didn't hear Mr Gaetjens.

Senator Cormann: He referred to question to Fiscal Group.

Senator McALLISTER: But you haven't seen it, Mr Gaetjens?

Senator Cormann: The lead responsibility for this area is in a different portfolio. It's not in this portfolio.

Senator McALLISTER: Yes, sure, but I mean—

Senator KENEALLY: Which portfolio would that be?

Senator Cormann: Well, it's the portfolio for the environment, obviously.

Senator KENEALLY: I asked them yesterday and they said they hadn't done any economic modelling.

Senator Cormann: We obviously have done the modelling that is required in order to ensure we meet our emissions reductions targets by 2030, and you would be aware that when we came into government the Labor Party left behind a significant gap when it came to meeting the 2020 Kyoto emissions reduction target of 755 million tonnes of CO2.

Senator McALLISTER: That is nonsense!

Senator Cormann: We are now on track to exceed—

Senator KENEALLY: With the greatest respect, that wasn't my question—

Senator Cormann: the 2020 target by 367 million tonnes of CO2—

Senator KENEALLY: Have you done any modelling of the economic impact of your plan—

Senator Cormann: We have a plan to meet the 2030 target that we signed on to in Paris in a way that is environmentally effective and economically responsible.

Senator KENEALLY: If you're saying it is economically responsible, what modelling can you point to within the government that shows that?

Senator Cormann: You should direct those questions to Fiscal Group, as has been indicated to you.

Senator KENEALLY: So we're clear, the department of environment told me yesterday that they haven't done any economic modelling of the Climate Solutions Package. Mr Gaetjens is now referring to that Fiscal Group. Are they kind of our last hope that the government has done some economic modelling of its Climate Solutions Package or is there some other area to ask—

Senator Cormann: Our respective policy agendas will be there for all to see. Your reckless 45 per cent emissions reduction target, which would harm the economy, put jobs at risk and increase global emissions by shifting issues overseas—

Senator KENEALLY: How can you say that if you haven't even done modelling of your own policy?

Senator Cormann: There's been a lot of modelling done over the years. There's been some independent modelling done in more recent times on various policy scenarios, including some by Brian Fisher, which was very prominently reported in recent times—

Senator KENEALLY: Do you endorse Mr Fisher?

Senator Cormann: There has been a lot of modelling over the years. I think people well understand that if you increase the burden on the economy, and if you make Australian business less competitive—vis-a-vis more polluting businesses overseas—what you actually end up doing is shifting economic activity and jobs into jurisdictions where, for the same level of economic output, emissions will be higher. So you would end up taking the global effort to reduce emissions backwards.

Senator KENEALLY: You mentioned Dr Brian Fisher. Does the government stand by the analysis done by Brian Fisher from BAEconomics?

Senator Cormann: It's not our analysis; it's his analysis. But I have noted his analysis. It's just one of a number of pieces of analysis that is out in the public domain. I think it is one of a number of pieces of analysis that will help to inform public opinion.

Senator KENEALLY: Can you tell us what Dr Fisher's modelling says is the Australian carbon price in 2030 under the government's policy, including your use of Kyoto carryover credits?

Senator Cormann: It's not my work, so I'm not here to answer questions on it—

Senator KENEALLY: Without me asking you raised Brian Fisher, so I—

Senator Cormann: I referenced his work, which has been widely reported—

Senator KENEALLY: If you can't provide me with any economic modelling that your government has done, and you've raised an independent person, I would now like to ask you to tell us what that independent modelling says is the Australian carbon price in 2030 under your policy—

Senator Cormann: Senator Keneally, that is actually not the way it works. Can I tell you how it works in the Senate? You've been here for a while now, so you should—

Senator KENEALLY: No. Please don't patronise me, minister, because you raised—

Senator Cormann: I will tell you how it works, because I used to chair a committee called the Senate fuel and energy committee, which among other things inquired into the Rudd government's carbon pollution reduction scheme—

Senator KENEALLY: Minister, you—

Senator Cormann: and in that context when you wanted to ask independent—

Senator KENEALLY: raised Brian Fisher. I didn't—

Senator Cormann: If we wanted to inquire—

Senator KENEALLY: You can't point to any economic modelling you've done—

Senator Cormann: and ask questions about independent analysis—we invited those people to appear in front of a committee. I have raised it. I would encourage you to invite him to a future Senate inquiry, if you want to, that is given the job to review the policy agenda that you are proposing to put forward, so that you can ask all of these questions about his work to him.

Senator McALLISTER: We're asking you about your policy—

Senator KENEALLY: We're asking you about your policy, which is the purpose of Senate estimates. Again, I have asked the department of environment. They have done no economic modelling and macro group has done no economic modelling. I accept that perhaps we can live in hope that Fiscal Group has done some, but you, Minister—not me—raised Brian Fisher, and pointed us to his modelling, so I am now asking you—

Senator Cormann: No. I've pointed you to Brian Fisher as one of the people that has put independent analysis out there, but I'm not —

Senator KENEALLY: He must make an impression on you. You raised him; not me.

Senator Cormann: going to be answering on his behalf. He's not a Treasury official—

Senator KENEALLY: If you don't have any Treasury modelling you can point to and if you don't have any department of environment modelling you can point to—you have raised Brian Fisher, can you tell us what his modelling say will be the Australian carbon price in 2030 under the government's policy, including the use of your Kyoto carryover credits?

Senator Cormann: I'm not going to answer questions on behalf of somebody who is not an official of the government.

Senator KENEALLY: Well, then, do you have an official in the government who's done any economic modelling—

Senator Cormann: We have referred you to Fiscal Group.

Senator KENEALLY: of your Climate Solutions Package?

Senator Cormann: We've referred you to Fiscal Group.

Senator McALLISTER: But they haven't spoken to Mr Gaetjens about their work.

Senator Cormann: You're just pursuing political—

Senator McALLISTER: Mr Gaetjens isn't aware of any work being undertaken.

Senator Cormann: We have referred you to Fiscal Group.

Senator KENEALLY: Well, Minister, I can tell you that Brian Fisher says it will be $92 per tonne. Do you stand by that?

Senator Cormann: I'm not standing by anything.

CHAIR: Senator Keneally, I'm not entirely sure these questions are appropriately directed to this minister or even this portfolio.

Senator KENEALLY: This minister raised this economic analysis.

Senator Cormann: I said there'd been a series of—

CHAIR: No, I think he referred you to an economic analysis. He didn't answer—

Senator KENEALLY: Why did he independently, and without my prompting, raise it and then refuse to answer questions?

CHAIR: Minister, perhaps you could confirm if this is an appropriate question for this committee.

Senator Cormann: No, I've already said—

Senator KENEALLY: My questions are utterly appropriate. I'm asking about the economic modelling—

Senator Cormann: several times that the appropriate group to ask these questions is Fiscal Group, and I'm not going to answer questions about the work. I've just referred to it as one of the pieces of work—

Senator KENEALLY: Have you read it?

Senator Cormann: that's been out in the public domain.

Senator KENEALLY: Have you read it?

Senator Cormann: I've read parts of it.

Senator KENEALLY: You've read parts of it! Have you read the parts that relate to your government's Climate Solutions Package?

Senator Cormann: This is not a matter for these estimates.

Senator KENEALLY: Minister, you raised it. I cannot keep coming back to this point more emphatically. You raised Brian Fisher.

CHAIR: Senator, I think the minister referred you to the report but didn't necessarily answer on behalf of Mr Fisher. I think that perhaps these questions are better addressed to a different committee and not this one. If you have questions that are appropriate for the economics committee—

CHAIR: Chair, through you, are we not we not allowed to pursue the minister's line of thinking and evidence he offers?

CHAIR: I think that the minister has answered your question.

Senator KENEALLY: He hasn't, actually. Minister, can you tell us what Dr Fisher's modelling says about the GDP impact of the government's policy by 2030?

Senator Cormann: I've referred you to the Fiscal Group in relation to all matters related to the climate change package of the government.

Senator KENEALLY: Are you aware that he says it will be $90 billion?

Senator Cormann: His report is on the public record, and it's one of a number of pieces of analysis that's out in the public record.

Senator KENEALLY: Can you tell us what the impact of the government's policy is on jobs, according to government modelling? Can you tell us that?

Senator Cormann: Well, I've already referred you to Fiscal Group.

Senator KENEALLY: Can you tell us what Dr Fisher says it will be?

Senator Cormann: I'll tell you what: the outcome of our policy on jobs will be better than the alternative because—

Senator KENEALLY: How do you know? You haven't done any modelling.

Senator Cormann: That is your assertion.

Senator KENEALLY: No, no—you can't produce any today.

Senator Cormann: Well, our modelling—

Senator KENEALLY: You cannot produce any modelling here today—

Senator Cormann: in terms of our economic growth forecast and our employment growth forecast—

Senator KENEALLY: of the Climate Solutions Package—

Senator Cormann: is reflected in the budget. And we have included all of the relevant and necessary information in terms of economic parameters, which includes employment parameters and forecasting assumptions around employment growth and wages growth and other such matters into our budget. What people across Australia know is that, having inherited a weakening economy, rising unemployment and a rapidly deteriorating budget position from Labor, we are now in a stronger position, with a stronger outlook, with stronger jobs growth, with a stronger and improving budget position.

Senator KENEALLY: Minister, these are all words unless you can point to some modelling.

Senator Cormann: That is our track record and that is also because we have taken a more sensible approach to environmental policy than that what was pursued by the Rudd and Gillard Labor governments—

Senator KENEALLY: You must be really hoping Fiscal Group has done some modelling.

Senator Cormann: and which as been widely discredited since then.

Senator KETTER: Before we finish, can I confirm, Mr Gaetjens, that you are not aware whether or not Fiscal Group has done modelling in relation to the government's Climate Solutions Package.

Mr Gaetjens : No, I said I'd refer the issue to that group.

Senator KETTER: But I'm asking you: are you aware of whether—

Senator Cormann: I think he's answered that question.

Senator KETTER: No, I'm asking: are you aware—

Senator Cormann: He has referred the question to the Fiscal Group.

Senator KETTER: You should be able to tell us yes or no—

Senator Cormann: Well, all the necessary modelling had been done for the purposes of preparing the budget papers, and the group within Treasury that is responsible for this type of modelling is Fiscal Group—

CHAIR: They'll be appearing after the break.

Senator Cormann: which will be appearing after the break—there you go.

Senator McALLISTER: Historically it's Macro Group but, you know, whatever.

CHAIR: May I ask one more round of questions about housing, in particular. Obviously supply is an important factor in the housing market. I'm wondering whether Treasury can describe the pipeline of dwellings/projects under construction in Australia at the moment?

Dr Grant : You are right. In budget statement 2, we outline the near-term forecast for the housing market. There still remains a fairly solid pipeline of investment in the residential construction sector. However, we have seen a fall in building approvals since 2017. We expect that to start to come through in the dwelling investment forecast in 2019-20 and 2020-21. We have dwelling investment falling in those two forecast years.

CHAIR: Obviously house prices have fallen quite significantly in some markets, and I know that, although we have AAA credit ratings from Standard & Poor's and from Moody's and from Fitch, a number of those agencies have identified that the housing market poses a significant risk to the economy. Is that something that Treasury would agree with?

Dr Grant : Yes. You can see in statement 2 that the housing market is listed as an uncertainty for the domestic outlook. In terms of how significant that risk is, there is a box in statement 2 that shows that, while the magnitude is fairly difficult to estimate, it's not huge in terms of what you would expect from a significant house price fall. But, yes, there is uncertainty at the moment around the outlook for the housing market, because of housing prices.

CHAIR: Have the changes to APRA's lending standards, particularly the macroprudential measures announced in March last year, had an effect on the housing market and house prices generally?

Dr Grant : It has been one of the factors. It's the case that the prices in the housing market are being affected by both supply and demand at the moment. Significant supply is coming online after large amounts of investment in previous years. We are also seeing some factors on the demand side. There has been some tightening in credit conditions, including from macoprudential measures that have been very much targeted at increasing the quality of lending.

CHAIR: Do you differentiate between investment lending growth and owner-occupied lending growth and the effects of those changes on those two segments?

Dr Grant : The way we look at it is to separate it between the detached housing market versus the medium to high density market, rather than the investor and owner-occupied sectors of the market. Of course, you have a higher proportion of the investor market in the medium-to-high density market. The reason we have to differentiate is that there's very different time lags between building a house and building some of these high-rise apartments. So we look at the approvals from that perspective rather than an investor or owner-occupier perspective.

CHAIR: Is the data on foreign investment in housing something that Treasury has access to?

Dr Grant : The Foreign Investment Review Board do put out a report, and they include some information around foreign investment in the housing market. The quality of that data and consideration of mapping that data into the macro forecast is very difficult, but of course we look at that data and we consider what we're seeing from the foreign investment data in the housing market.

CHAIR: Obviously the concern over a number of years has been housing affordability. While house prices have come back considerably, we don't want to see a crash in the market. That could possibly be the worst thing for the economy. Have you tracked first home buyers as a share of the market compared to recently?

Dr Grant : Yes. I don't have the exact numbers in front of me, but the share of first home buyers in the market has been increasing.

CHAIR: Increasing? Well, that's good. Since when? It's been increasing for how long, do you know?

Dr Grant : I don't have the exact numbers, but it is over the last little while. It's a fairly significant increase.

CHAIR: Thank you.

Ms Quinn : Senator, that goes back to your question about investor loans. We have seen a slowing in investment purchases of housing and a rise in homeowners. Those two trends are going in opposite directions.

CHAIR: Obviously we've been speaking about housing affordability for a number of years. We know that there is no one-size-fits-all approach that is appropriate for housing, because of the different markets. The Sydney and Melbourne markets have experienced considerable rises but they've also come back a significant way. Do Treasury have a forecast as to where they see the housing markets, particularly in Sydney and Melbourne, landing in the short to medium term?

Ms Quinn : As we've discussed in previous evidence before this committee, we don't specifically forecast house prices as such, because they're an asset price. What we look at is the underlying production in the economy, so we do look at house prices in the sense of: what's the price of a new building or a new apartment? We don't forecast asset prices, such as equity prices or house prices, in the macroeconomic outlook, but we have seen a significant increase in supply and we've seen a softening in demand. Exactly what happens is going to be up to the market to decide.

CHAIR: A significant shock to the housing market, though, is a risk to economic prosperity?

Ms Quinn : As Dr Grant mentioned, we have put a box in statement 2 this year to talk through the implications in the near term of a reduction in demand for housing and what it might mean for the overall economy.

CHAIR: A reduction in demand that might occur from a change in the tax regime, for instance?

Ms Quinn : It could occur for a number of reasons.

CHAIR: Senator Keneally?

Senator KENEALLY: We're trying to determine, Chair, where we were up to in relation to—

CHAIR: We have 10 more minutes and then we're going for a break. Senator Storer and Senator Spender, do you have extra questions for these groups?

Senator KETTER: We would like to keep going.

CHAIR: Yes, absolutely. So you need this group to come back after the break, because I do know that both the secretary and the minister need to go at the break.

Senator STORER: I have some questions for the minister. They're very short.

CHAIR: All right.

Senator Cormann: We're still breaking at 11.15?

CHAIR: We're still breaking at 11.15. We just have to come back with another minister.

Senator STORER: My questions will maybe take couple of minutes.

CHAIR: All right. We will let Senator Keneally go for 10 minutes.

Senator KETTER: I will ask my questions and then Senator Keneally would like to ask questions. I just want to go back to that issue of the modelling of the government's Climate Solutions Package and an explanation as to why the macro group hasn't been involved in doing the modelling for this and it has been left to fiscal, because that seems unusual.

Ms Quinn : All known government policies are included in our economic forecasts.

Senator KETTER: Could you repeat that, please?

Ms Quinn : The economic forecasts include the economic implications of all known government policies. That's the standard practice. The economic forecasts do include all announced government policies and all known government policies. I thought the question earlier was about whether there was a specific, targeted, full dynamic scoring type analysis of the government's package, and we haven't been involved in such a thing. If Treasury were involved, it would be usual for some members of macro group to be involved in that, but I didn't want to speak definitively because our fiscal colleagues are often involved in whole-of-government approaches and analysis that is done by other agencies—and I'm not aware of any specific work that they would be. If Treasury were doing economic modelling then the Macroeconomic Group would be involved in it. But the question was: had there been any modelling done by government, and I don't know the answer to that.

Senator KETTER: So you're telling me that macro hasn't done any modelling?

Ms Quinn : Not specific dynamic scoring, but we have included the economic implications of the package in the forecast.

Senator Cormann: That is the important point. This is the key point: the economic effect and the economic impact of all known government policies, including the climate change package, are reflected in the economic forecasting assumptions underpinning the budget—so, into our economic growth forecasts, our employment growth forecasts and all of the other relevant parameters that are reflected in the budget and underpinning our forecasting assumptions.

Senator KETTER: What does that modelling look like, Ms Quinn?

Senator Cormann: This is obviously part of the budget process and the deliberative processes of cabinet, but the area of Treasury that should be asked these questions is the Fiscal Group, as we've now said on a number of occasions.

Senator KETTER: But macro has done some work in this regard, and we're simply asking: what work has been done?

Ms Quinn : We've incorporated all known government policies into the economic forecasts. That's what we've done.

Senator KENEALLY: In order to do that, it presupposes that somewhere, somebody did some kind of modelling on the Climate Solutions policy package on things like impact on wages, employment, consumption. Would that be the type of modelling that feeds into the overall budget? Is that what you're speaking about?

Ms Quinn : It depends on the size of the overall policy package and the implication of how much we individually identify versus put packages together. So we go through a process of looking at the list of the hundreds of measures that are in the budget. We identify what implications they have for overall government spending. We look at the tax side as well, and so we go through that. Whether any individual package gets the sort of Rolls Royce treatment, so to speak, of individual modelling is based on the overall priority and implications for the economy. I'm not aware that we did a specific, separately-identified analysis of this package, as we did not for any other package. The main implications we looked at this time were the tax rates, which were the largest implications for the macro economy in this forecast period.

Senator KENEALLY: Thank you very much, Ms Quinn. Mr Gaetjens, is Treasury undertaking modelling on Labor's Climate Change Action Plan?

Mr Gaetjens : Not that I'm aware of. It's not government policy, so I don't think we'd be working on it.

Senator McALLISTER: Not elements of it? The extension of the safeguard mechanism and the ability of companies to earn or sell permits if they've met below baselines—are they being modelled, Mr Gaetjens?

Mr Gaetjens : Not to my knowledge, no.

Senator McALLISTER: You haven't been asked about the impact of the inclusion of international permits?

Mr Gaetjens : No.

Ms Quinn : We may well have been asked that in a policy sense, as part of the overall policy. Certainly, we've had that question in the past.

Senator McALLISTER: It's a specific question about modelling the impact of those kinds of things. In the past you've said, 'We don't model Labor policies but sometimes model policies that are provided to us by the minister's office, and they may resemble Labor policies.' So I'm trying to ascertain whether or not you are modelling things which will subsequently be represented as Labor policies, because that's been a practice in recent months.

Ms Quinn : Macroeconomic Group has not been asked anything like that.

Senator KENEALLY: How about a 50 per cent electrical vehicles target by 2030? Have you done any modelling of that?

Mr Gaetjens : No.

Senator KENEALLY: That's also part of the government's Climate Solutions Package. The Department of Environment confirmed that yesterday: that a 50 per cent electrical vehicle policy by 2030—where 50 per cent of all new car sales would be electric by 2030—is part of the government's package as well.

Senator Cormann: Questions on the Climate Change Package should go to the environment portfolio and/or to Fiscal Group.

Senator KENEALLY: They did yesterday. They said they hadn't done any and suggested we speak to you.

Senator Cormann: 2030 is outside even the medium-term projection period.

Senator KENEALLY: It is in your climate solutions policy, though.

Senator Cormann: The questions are either for environment or Fiscal Group, and that's been made very clear for some time now.

Senator KENEALLY: Alright. What about a more robust land offset market or land clearing restrictions? Mr Gaetjens, has Treasury been asked by the government to model any of those—the economic impacts of those policies?

Mr Gaetjens : Not that I'm aware of.

Ms Quinn : I'm not aware of any analysis like that.

Senator KENEALLY: Or a $5 billion energy security and modernisation fund—that is, loans and equity to support financing of transmission infrastructure assets?

Ms Quinn : That is a question for Fiscal Policy, who would have provided policy advice on those matters, to the extent that they're government policy.

Senator McALLISTER: But it's not something you've been asked to look at, Mr Gaetjens?

Mr Gaetjens : No.

Senator KENEALLY: Thank you.

Senator STORER: Minster, yesterday you very kindly said that you were happy to answer questions regarding meetings that you've held. I believe that transparency of meetings you've held with lobbyists, both in-house and third-party lobbyists, is quite important in terms of your role as Minister for Finance. Would you be able to provide, on notice, a list of both in-house and third-party lobbyists that you have met with since the start of this year?

Senator Cormann: I'll take that on notice.

Senator STORER: Secondly, the petroleum resource rent tax is only 0.25 per cent of overall receipts. It's $1.16 billion. It's forecast to just be $1.4 billion continually over the forward estimates, which is an interesting forecast. The Henry tax review in 2010 identified that this tax was very low in terms of its required reform:

… it fails to collect an appropriate and constant share of resource rents from successful projects due to uplift rates that over-compensate successful investors for the deferral of PRRT deductions.

You became finance minister in 2013, but it was only in 2016 that the Callaghan report commenced, and it is only now in 2019 that we have just passed a revision to the PRRT. Is it not the case that this very, very low revenue stream shows that this is one of the most egregious tax rorts in our Australian tax code and there should be further review of this?

Senator Cormann: The answer to that is no. The first thing to remember is that the petroleum resource rent tax was designed initially by the Hawke government, when Paul Keating was the Treasurer.

Senator STORER: Yes.

Senator Cormann: It's designed as a superprofits tax.

Senator STORER: Yes.

Senator Cormann: You are right: we did initiate the Callaghan review, which made certain recommendations, and we have—actually this week—legislated through the parliament reform to the PRRT arrangements, which, at the time when we made the decision, was expected to deliver about $6 billion additional over the medium term—nothing, at that time, over the forward estimates but, over the medium term, about $6 billion in additional revenue.

Senator STORER: Yes.

Senator Cormann: With these sorts of matters, it is always important to make decisions carefully, because these projects that pay petroleum resource rent tax are very capital intensive. There's a very high level of investment. In order to ensure that we can continue to attract investment into these sorts of capital-intensive projects into the future, making sure that people can have confidence in the stability of our relevant tax policy settings—including, obviously, not pursuing retrospective changes to taxation—is a very important element of how we approach these things. It was very important to have the review and to make these judgements sensibly, and we have.

Senator KETTER: Can I just check: is Mr Gaetjens coming back?

CHAIR: No, Mr Gaetjens is going at the break as well, I believe. But we can return with Macroeconomic Group if you wish.

Senator KETTER: Just before you go then, Mr Gaetjens, are there any aspects of my letter to which you are able to table written responses to us today, or will some of your officers be in a position to provide written responses?

Mr Gaetjens : As I said, we are currently working on this. All I want to do is make sure that we can provide as much as we can as soon as we can, so we are hoping to get some of that, at least, to you today.

Senator KETTER: Thank you.

CHAIR: The committee will now break for 15 minutes for morning tea. Thank you, Minister. Thank you, Mr Gaetjens.

Proceedings suspended from 11:17 to 11:31

CHAIR: The committee will now resume. I welcome to the desk Senator the Hon. Zed Seselja, Assistant Minister for Treasury and Finance, representing the Treasurer. We will resume with the macroeconomics and corporate group. Senator Ketter?

Senator KETTER: Thank you very much. I return to my letter to see about Mr Gaetjens's response in respect of the sixth and seventh dot points in my letter. These are macro responsibilities and haven't normally been provided, but I'm going to press the issue, Ms Quinn. Are you able to provide those figures for us?

Ms Quinn : As Secretary Gaetjens mentioned earlier, the medium-term projection levels of nominal GDP are not published in the budget. However, from 2023-24 to 2025-26, real GDP is assumed to grow faster than potential, at three, as identified in the budget, as spare capacity is absorbed. As prices are assumed to grow at 2½ per cent and terms of trade settles to its long-run level, nominal GDP growth is expected to grow around 5½. That is expected to go forward over time. As prices grow and we have other implications on the supply side, GDP goes back to its potential rate of 2¾, and we expect nominal GDP to grow at 5¼ . So it's 5½ at the start and 5¼ from there going forward. They are the growth rates that underpin the medium-term projections for nominal GDP. As for national growth—

Senator KETTER: Can I just stop you there for a second. I'm after the value and percentage change by year over the medium term. Are you able to provide that?

Ms Quinn : That's right. I've just read them out. They're published in the budget. From 2023-24 to 2025-26 we have 5½, and from 2026-27 onwards, it's expected to grow at 5¼.

Senator KETTER: And the GNI?

Ms Quinn : We do not project or produce projections for real gross national income over the medium term. It's not something we're required to do as part of the overall medium-term analysis. We would expect nominal GNI to grow at around the same rate as nominal GDP because we wouldn't make any assumptions about the depreciation, which is the element between those two numbers.

Senator KETTER: Thank you for that. Mr Flavel, I think you might be able to help with the questions relating to the total expenditure on advertising and information campaigns in the current financial year.

Mr Flavel : Yes. I will just run through those dot points in order, if that's fine. On dot point 9, total expenditure on advertising, as at 18 March 2019—that's the latest date we had available—the total amount was $4,321,612.

Senator KETTER: All right. The next one?

Mr Flavel : The next question is about an itemised list of all campaigns and the funds attributed. There has been just one campaign in the current financial year, the Better Tax campaign, and the government allocated a total funding envelope of $24.2 million for that campaign.

Senator KETTER: How much of that has been spent?

Mr Flavel : That was that figure I referred to in the answer to the ninth dot point—the $4.3 million figure.

Senator KETTER: Can you provide us with departmental expenditure on advertising and information campaigns. You say there is only one campaign for the whole of 2018-19?

Mr Flavel : That's correct. For the current financial year, there is just the Better Tax campaign.

Senator KETTER: The total funding there is $24.2 million.

Mr Flavel : Yes.

Senator KETTER: Do you have any advertising or information campaigns planned for the rest of this financial year?

Mr Flavel : No. There are no other campaigns planned for the current financial year.

Senator KETTER: So that's the eleventh dot point. I now go to AusTender contract notice numbers.

Mr Flavel : You asked me some similar questions at the additional estimates hearings back in February and we provided a written response to a question on notice that outlined those. I can run through them again. I think it is question No. 60 where we have outlined the individual contract numbers from AusTender in relation to the Better Tax campaign and the component parts.

Senator KETTER: Okay, that disposes of that. So that was the only advertising and information campaign contract for the 2018-19 financial year?

Mr Flavel : That's right. The Better Tax campaign was the only campaign for the current financial year.

Senator KETTER: That takes us to housing, and I think Senator McAllister has an interest in that issue.

Senator McALLISTER: There was obviously something of a discussion about housing earlier while Mr Gaetjens was here, but can you explain what is driving the tighter credit conditions that Treasury highlights as a factor in driving lower prices?

Ms Quinn : Some of the elements that have been referred to come under the broad heading of macroprudential policies. APRA, as the agency responsible for financial stability, implemented a cap on investment loans at 10 per cent. They also released guidance to banks on prudential lending requirements. That includes a buffer on the assessment for serviceability of loans. So if someone applies for a loan and the current interest rate is, say, five per cent, there needs to be an assessment of their ability to pay with an additional buffer above that. There are other requirements detailed about which our Financial System Division, in Markets Group, can give you more details. The other thing that happened is that the operation of the responsible lending obligations and enforcement action and processes were reviewed by ASIC to make sure responsible lending was being operated effectively in the banks. That is another element.

All of that has led to increased scrutiny of applications for loans through the banking system. Some of that will have resolved in a slowing down in the pipeline for approvals, but not necessarily a change in the overall volume of approvals. So there is an adjustment phase as the system adjusts, but we should be getting to the end of that now. So it will become clear in the near term how much the credit tightening has been as a result of macroprudential change in the level versus just the timing of when approvals come through. Overall, the assessment is that that is only one component that is affecting demand. The underlying demand for housing is a function of population growth, household formation, the overall income and prospects for future income of people wanting to buy a house—that's on the demand side—and, on the supply side, the overall number of household units that are being produced. And, as Dr Grant said earlier, in particular markets such as Sydney, Brisbane and Victoria, there's been a significant increase in the volume of houses and apartments, high-density building, that have actually been built. So there's been a big increase in supply, because there had been a gap between supply and demand with supply not keeping up with demand for a period, which was underlying the increase in house prices.

Senator McALLISTER: Just going back to the APRA regulatory measures, would we describe those as government policy?

Ms Quinn : There are regulatory actions taken by independent regulators who are given the objective of financial stability, so they're decisions by the independent regulator.

Senator McALLISTER: Are you anticipating that prices will fall further, given the credit environment?

Ms Quinn : As I mentioned earlier, we don't have a specific house price forecast sense of asset prices, and so we don't have a specific view. We look at what the implications currently are of the housing market, and we look at the implications for the building of houses, such as dwelling investment, which we expect to fall but remain at a high level over the next two years.

Senator McALLISTER: Finally, what are the relevant policy settings that government has in place to improve the current credit environment?

Ms Quinn : These are questions I urge you to direct to our Markets Group. There are some government policies, such as the securitisation fund, small business securitisation fund and other things such as that, but our Markets Group colleagues would be better able to talk to those in detail.

Senator SPENDER: I just want to ask about the PBO's paper Australia's ageing population: understanding the fiscal impacts over the next decade. Ms Quinn, are you familiar with that publication?

Ms Quinn : I have looked at the publication, but questions of that nature are best directed to our Fiscal Group colleagues, who look at the fiscal implications of the ageing of the population.

Senator KENEALLY: I want to ask some questions about bond yields and market expectations for the future state of the economy. What are Treasury's views on bond yield changes recently and increasing market expectation of cash rate reductions by the RBA?

Ms Quinn : As you know, the Reserve Bank's an independent body that sets interest rates. We look at what's happening in the market and we provide advice on the implications of that, and what's happening to the bond yields going forward is encapsulated in our forecasts. So we capture all that information, in terms of our overall aggregate outlook for the economy. The low bond rates in recent times obviously are supportive of growth, to the extent they get passed through to market rates. And, looking forward, the balance of the bond market is obviously making its assessment of the implications of inflation and aggregate demand over time.

Senator KENEALLY: Can you give us a broader view than that? I understand how the process works. Are you able to speak more broadly about the bond yield changes recently and how you see that impacting the increasing market expectations of cash rate reductions by the RBA?

Ms Quinn : The bond yield falling has an implication for the broader interest rate market. They feed through the market rates, as determined by the financial institutions that do the lending. So, overall, the market is expecting interest rates to be lower in future. Whether they are or aren't is a matter for the Reserve Bank.

Senator KENEALLY: What I'm trying to get to is: is that normally a sign that the market is expecting the economy to weaken?

Ms Quinn : It's usually around the outlook for inflation more specifically, and you can have inflation moving for demand or supply side conditions.

Senator KENEALLY: You would reject that it's normally a sign that the market's expecting the economy to weaken?

Ms Quinn : More specifically, bond yields are related to the outlook for inflation. That's what matters: the overall growth in prices. And you can have prices shifting for supply or demand side implications.

Senator KENEALLY: Let me put it this way. How is the declining bond yield consistent with the Treasurer's language about the budget being back in black and Australia being back on track? We have a circumstance that I would argue does indicate a weakening economy that is not back on track.

Ms Quinn : We are expecting the economy to grow below potential in this financial year at 2¼ per cent. As I mentioned earlier, there are some temporary factors that we expect to unwind going forward. The drought is one of them and there are other implications in there as well affecting the growth rate, and once that goes through, we would expect the economy to return to around potential. That is what we're expecting in the forecast. That's off the back of an increase in investment, continued growth in exports and modest growth in consumption continuing. And they're factors that we have in the forecast, and that—

Senator KENEALLY: And growth in wages as well?

Ms Quinn : As increase in aggregate demand continues to pull people into the labour market, we are expecting wages to continue their current path of increasing. So, as Secretary Gaetjens mentioned earlier, wages have picked up in recent times, off a very low base, and we are expecting that current trend to continue.

Senator KENEALLY: What about household debt and household spending? Right now, we have household debt at record highs and household spending is slowing.

Ms Quinn : Household spending has been modest. We do have very low interest rates at the moment. That's supporting overall household expenditure. We've seen a reduction in the household savings rate in recent times, although it increased more recently in December. We're expecting the savings rate to stay around where it is now, over the forecast period. So, we expect the increase in consumption to be supported by continued growth in employment and a modest pick-up in wages.

Senator KENEALLY: How is an increased personal income tax cut for high-income earners consistent with the situation where we've got a budget facing some headwinds, the market pricing of bonds is low and we aren't seeing a significant uptake in wages forecast? How does it help the economy to provide a tax cut to high-income earners in that circumstance?

Ms Quinn : So, in the near term, as I understand it, the reduction in tax take is actually at the lower- and middle-income areas, and that is taken into account in our forecasts. It will be supportive of consumption in the forecast period, and we've incorporated that into the near-term forecasts.

Senator KENEALLY: So you're banking on consumption increasing?

Ms Quinn : We are expecting consumption to grow over the forecast period, and those numbers are in the budget.

Senator KENEALLY: As a result of income tax cuts to high-income earners?

Ms Quinn : It's partly as a result of the income tax, but also strong employment growth that we've seen in the recent period, modest pick-up in wages, low interest rates, continued increase in prices for commodities, resulting in increases in nominal income across the economy: the usual factors affecting consumption. We do have headwinds from falls in house prices in recent times, and that's also encapsulated in our outlook for the consumption forecast.

Senator KENEALLY: Can you also see economic growth come from larger income tax cuts to people on the lower end of the income scale?

Ms Quinn : We do look at the distribution of income in the economy, and it is the case that people who have got lower incomes typically save less out of their incomes. So any increase in their incomes would have a relatively larger impact on consumption for the lower- and middle-income components.

Senator KENEALLY: Yes. Thank you. Actually, can I just ask one last question—I apologise? Just to come back to the income tax cuts for the people in the higher income scale, you mentioned those as part of the forecast that you've done in order to project a growth in consumption. Isn't it the case that those income tax cuts are some years away yet though?

Ms Quinn : That's right. We take into account the changes in taxes in 2018-19, 2019-20 and 2020-21 into the forecasts. Any changes to policy in the outer years we don't take explicit impact in because we use a projection methodology as outlined in the paper released earlier, which is about the economy returning to trend in different ways.

Senator KENEALLY: Thank you. That's helpful.

CHAIR: Thank you. We will let macro group and corporate to go. We will invite Fiscal Group to join us. Welcome to the Fiscal Group. We might kick off questions with Senator Keneally.

Senator KENEALLY: Thank you, all, for coming today. May I turn to a line of questioning that Minister Cormann recommended we raise with Fiscal Group? So have you—

CHAIR: Didn't you raise it with macro?

Senator KENEALLY: No. Minister Cormann suggested I raise these questions with Fiscal Group. Has Fiscal Group done any modelling on the economic impacts of the government's Climate Solutions Package?

Mr Atkinson : We've done no specific modelling of that package, but any economic effects, as my colleague said, were reflected through the normal budget modelling process.

Senator KENEALLY: So, if I can unpack that in a minute, Mr Atkinson. You've done no specific modelling of the economic impacts of the Climate Solutions Package, but it has fed into the overall budget?

Mr Atkinson : Correct, Senator.

Senator KENEALLY: So how has that happened because I haven't found anyone yet who's done any modelling at all of the economic impacts of the Climate Solutions Package?

Mr Atkinson : As my colleague Ms Quinn was saying, in putting together the budget forecast, Macroeconomic Group look across all of the government policy decisions and, where there are material impacts, they take those into account, as she articulated with respect to the tax packages.

Senator KETTER: But they haven't done any modelling, and you're ever telling us you haven't done any modelling. That's fairly extraordinary—

Senator KENEALLY: And the Department of Environment tells me they haven't done any modelling. So are you trying to say that perhaps the Climate Solutions Package doesn't have a notable impact on the economy?

Mr Atkinson : I'm sorry to say this, but that is a question for Macroeconomic Group. We haven't done the modelling.

Senator KENEALLY: You haven't done the modelling? The question of whether or not it has an impact would be a question for Macro Group?

Mr Atkinson : Yes.

Senator KENEALLY: How convenient! Who decides, then? Is it Macro Group that decides whether a policy gets modelled for its economic impact.

Mr Atkinson : Macroeconomic Group decides which government decisions are material to its forecasts.

Senator KENEALLY: So they make that decision, and then what? Do they ask you to do the modelling?

Mr Atkinson : In the ordinary course of events they would do that.

Senator KENEALLY: So I'm just a little confused as to how we have gotten to a point in government—and perhaps it's not fair to ask you, Mr Atkinson—where we have a Climate Solutions Package delivered by the government, which results in over 200 megatonnes of carbon abatement to 2030, and nobody's modelled the impact of that on the economy. I understand you probably can't answer that question. Minister, can you answer that question? Why hasn't the government modelled the economic impact of its Climate Solutions Package, which, as I said, takes some 200 megatonnes of carbon emissions out by 2030?

Senator Seselja: I don't have anything to add to what Mr Atkinson's provided to date.

Senator KENEALLY: Has Fiscal Group done any modelling of any Labor climate policies? Have you been asked by government to do that?

Mr Atkinson : No.

Senator KENEALLY: So no-one's modelled it? All right. That makes that easy. Minister Cormann held out great hope that Fiscal Group had modelled it.

Senator KETTER: What can we infer from the fact that there's no modelling anywhere? That indicates that there's almost a studious avoidance of looking at the economic impacts of a fairly significant government program. What inference can we draw from that?

Mr Atkinson : I'm not in a position to speculate about what inferences can be drawn from the approach to this policy, which actually is a matter for the department of the environment.

Senator KETTER: But the economic consequences of a policy are a matter for Treasury.

Mr Atkinson : Yes, and any economic implications of this were taken into account by Macroeconomic Group in the budget forecasting round.

Senator KETTER: Fine, but they have told us they haven't done any modelling, and they've moved off. Now we're stuck with you, and you're telling us you've done nothing to that effect.

Senator KENEALLY: They've passed the football to you.

Senator McALLISTER: As I understand it, your function in Fiscal Group is to work with the other line agencies and understand the impact of their programs on the budget, which presumably means providing some kind of guidance and advice to those organisations, when they're developing those policies, about the kinds of analysis that ought to have been undertaken. Did you ever advise the department of the environment that they ought to undertake modelling to cost the Climate Solutions Package?

Mr Atkinson : In the ordinary course of ERC and budget considerations, we provide advice into government, into those cabinet processes, and we work with our colleagues in the department of the environment closely on that. I don't know whether Mr McDonald can add anything about discussions around that, but the nature of the advice to government obviously is not something we can talk about. But there may have been some further conversations.

Senator McALLISTER: Perhaps, Mr McDonald, you could answer that. You might just tell us what the organisational arrangements were for the development of the Climate Solutions Package. Was it done as a standalone thing, in the department of the environment, or was Treasury involved in some sort of cross-government—

Mr McDonald : The Climate Solutions Package was developed through cabinet processes, similar to the other items that appear in the budget. We worked with our colleagues over at the Department of Environment and Energy. They led on the development of it, but we worked with them in the development of that. We worked with our other colleagues across the central agencies, especially, in the development of that and it went through the normal cabinet processes. We provided advice as part of that.

Senator McALLISTER: Was there a formal working group or was it just informal conversations between the central agencies in the department of environment?

Mr McDonald : There wasn't, to my memory, a formal task force, but we talk a lot.

Senator McALLISTER: For completeness, when you speak of the central agencies, you're talking about Prime Minister and Cabinet and the Department of Finance?

Mr McDonald : Yes.

Senator McALLISTER: Which division in the Department of Prime Minister and Cabinet was responsible?

Mr McDonald : There's an equivalent division in the Department of Prime Minister and Cabinet to my division that looks at industry and energy policy.

Senator McALLISTER: So it wasn't the economics division, it was the—

Mr McDonald : No, it's a similar structure, in terms of—

Senator McALLISTER: Okay.

Senator KETTER: The question of whether modelling should be done on the government's policy, was that a matter for discussion at this group you're talking about?

Mr McDonald : I'm not at liberty to talk about the advice that gets provided as part of these processes.

Senator McALLISTER: It's not really advice, is it?

Senator KETTER: It's a question about, 'Did you discuss at your central agency meeting', cross-agency coordination group or whatever you want to call it, 'Was that question of modelling discussed at that level?'

Mr Atkinson : The inputs into the cabinet processes and the approach to those, we don't usually talk about. Those conversations were central to forming the cabinet consideration.

Senator KETTER: We're not asking about the advice you gave to cabinet, we're asking whether the issue was discussed.

Mr Atkinson : Your question goes to the structure of the advice we provide. We can take on notice whether there was any conversation around that.

Senator KENEALLY: Minister, I might put this to you. The government's Climate Solutions Package projects that by 2030 energy efficiency will remove 63 megatonnes from the air. Twenty-five megatonnes will be taken out by Battery of the Nation and 10 megatonnes will be taken out by electric vehicles, with a 25 to 50 per cent electric vehicle target, and 100 megatonnes through technological improvement. Yet it does not appear the government's done any modelling on the cost of consumption, employment, electricity prices, food prices or wages. Is it a deliberate decision by government not to do that modelling, in order not to have to answer these questions?

Senator Seselja: No.

Senator KENEALLY: So why didn't the government do it?

Senator Seselja: I'm not in a position to add anything to what the officials have indicated. If you'd like further information, I'm happy to take some of that on notice, if the Treasurer's got anything additional to add.

Senator KENEALLY: Thank you.

CHAIR: Fiscal Group, are you the right group to speak to about the tax to GDP cap or is that Revenue Group?

Mr Atkinson : It's probably Revenue Group.

CHAIR: I'll ask Revenue Group then. But you are the right people to be speaking to about the AAA credit ratings by Moody's and Standard & Poor's. Is that correct, in some aspects?

Mr Atkinson : Yes, we can speak to that.

CHAIR: We've had these AAA credit ratings for some time now, and that's in the face of some pretty daunting economic headwinds. Can you tell the committee what those AAA credit ratings mean for the Australian economy and about the state of the economy and of the budget?

Mr Rollings : What I can say about AAA ratings is that each of the major ratings agencies, when they comment on their ratings for Australia, point to the government's fiscal position and the country's fiscal position as one of the key criteria that support their assessments. In the last few days, for example, Fitch have come out and talked about their views on this week's budget, and they commented that the credible commitment to prudent fiscal management is a supporting factor for their view of Australia's AAA sovereign rating. We're yet to see comments from Standard & Poor's following this week's budget, but in the past both Standard & Poor's and Moody's in particular have always pointed to the fiscal situation and the positive trajectory and return to surplus and prudent fiscal management as one of the key factors that support their assessments.

CHAIR: The words that they used were 'a credible commitment to prudent fiscal management'—is that correct?

Mr Rollings : Yes, that's right.

CHAIR: Why is it so important to maintain those AAA credit ratings?

Mr Rollings : What I would say generally—and the government has said this in the budget—is that having a trajectory of return to surplus and then, as part of the fiscal strategy, using that surplus situation to start to lower the country's debt levels are all part of making sure the country's in a position to respond to any unfavourable economic shocks or uncertainties.

CHAIR: But what does a AAA credit rating mean to the man on the street? Does it affect their cost of borrowing? Does it affect their cost of living? Why is it so important?

Mr Rollings : Those sorts of details are probably more for our macro group, but, in the sense that we're one of only a few countries that have AAA ratings, it is relevant to Australia's borrowing costs, and those borrowing costs are relevant across the economy.

CHAIR: What have the ratings agencies said about potential risks to the economy, particularly from the housing market?

Mr Rollings : I'm not in a position to comment on that one.

CHAIR: All right, thank you.

Senator KETTER: I refer you to my letter to Mr Gaetjens of 3 April—I'm not sure who might be the right person to start with. On the third dot point, which is the full breakdown of the $28.4 billion worth of downward revisions to payments due to parameter variations, who's best able to speak about that?

Mr Atkinson : I believe Mr Gaetjens directed that one to the Department of Finance.

Senator KETTER: He mentioned the Department of Finance but also that your group may have a role here. Do you have a breakdown of those revisions?

Mr Atkinson : No. I believe this question was asked of them and they're providing that to you separately. The revisions in payments is a core issue for the Department of Finance. I am able to speak about the medium-term question, though, a little.

Senator KETTER: Which one is that, sorry?

Mr Atkinson : I think it's probably next on your list.

Senator KETTER: The fourth dot point?

Mr Atkinson : Sorry, I don't have the letter in front of me.

Senator KETTER: All right. Do you want to speak to that one?

Mr Atkinson : You were talking about the movement in the total payments-to-GDP ratio question?

Senator KETTER: Yes.

Mr Atkinson : If you turn to page 12 of budget statement 3, that outlines the total payments. We need to put this in context. It's a bit over a one and a bit per cent move over 11 years, and the scale of this chart obviously starts at 23 and ends at 26 per cent.

Senator KETTER: Excuse me. I don't have a page 12.

Mr Atkinson : Of budget statement 3? It 3-12 in Budget Paper No. 1—sorry. That's the line we're referring to. I wanted to give you a bit of context. If I add a scale of zero on this, it would be a fairly marginal move. If you look on page 5 of budget statement 3, real growth has been around 1.9 per cent.

Senator KETTER: Page 5 of Budget Paper No 3?

Mr Atkinson : Yes. Real growth in payments has been 1.9 per cent of GDP, due to payments constraints between 2013 and projected to 2022-23. The causes for that are part of the conversation with Finance, I think, but the movements in the medium term reflect the extension of that spending constraint out through the medium term. Then it becomes a mathematical factor that if spending growth is lower than GDP the payments-to-GDP ratio will drop over time.

The other thing worth noting in here is that this movement in payments includes a virtuous cycle, you might say, of PDI reducing as debt reduces over time, as well. It also factors in the stronger employment figures that are in the forward estimates, which are driving some of that payments constraint. Obviously, in the positive part of the cycle the distance between these two lines is what produces the surpluses. So, through the positive parts of the cycle, you'd want a picture that looks a bit like this.

Senator KETTER: Going now to the second last dot point on the second page of my letter, which is the value of any unannounced initiatives, can you provide that figure for us?

Mr Atkinson : What I can say is that any unannounced initiatives that are in the contingency reserve will be articulated in a PFO, except for any that are commercial in confidence or national security, in accordance with the act.

Senator KETTER: I'm asking for the value of them, rather than asking you to identify them.

Mr Atkinson : Because you're talking on the payments side, the contingency reserve is once again an issue that Finance will answer. They have these questions, too, as I understand.

Senator KETTER: Mr Gaetjens specifically said that your group would be able to answer that question for us.

Mr Atkinson : He suggested we'd be able to talk to it, yes. The answer will be that, by definition, anything that is in there would be a decision taken but not yet announced. And, from a Treasury perspective, if there is anything in there we would be announcing it in PFO, if it's not announced directly.

Senator KETTER: Are you able to provide that figure for us? You say it's a figure that the Department of Finance has, but have they provided that figure to you?

Mr Atkinson : I'd have to take on notice what the figure is. I believe the secretary of Finance took on notice to provide the answer to this question. The reason I'm passing it to them is that there are some complex issues in there, like conservative bias allowance and those things that Finance deals with. That's what the major figures in the contingency reserve at the macro level are.

Senator KETTER: Okay. Can I now take you to page 19 of Budget Paper No. 1. Can you confirm that, excluding policy decisions, receipts have been revised down over the four years to 2022-23?

Mr Atkinson : Yes. That's on page 19—I think it's the fourth paragraph down.

Senator KETTER: And Treasury cites weakening household consumption, dwelling investment and average wages as being an issue for these receipts.

Mr Atkinson : I'm sorry to say this, but this is an issue for Revenue Group. Is that in the text?

Unidentified speaker: It is.

Mr Atkinson : It is the next paragraph down.

Unidentified speaker: Yes or no.

Senator KETTER: So, the economy has worsened since MYEFO. Would that be—?

Mr Atkinson : I believe my colleague Ms Quinn gave a very elaborate description of where the economy is up to. I wouldn't want to go across the top of Macroeconomic Group's answer.

Senator KETTER: You have confirmed that we've got weakening household consumption, dwelling investment and average wages being an issue for receipts. Yet we've got the budget back in the black and Australia's back on track. How do you reconcile that, Mr Atkinson?

Senator KETTER: Sorry, as I said, macroeconomic conditions were, I think, answered by the Macroeconomic Group colleagues.

Senator KETTER: I take you to Budget Paper No. 2.

Mr Atkinson : Is that Budget Paper No. 2 or statement 2?

Senator KETTER: Budget Paper No. 2. We can see that revenue is going to be lower over the forward estimates. That's on page 4. Expenditure will be higher over the forward estimates and capital investment will be higher. Revenue is on page 4. You're looking a bit puzzled.

Mr Atkinson : Are you in Budget Paper No. 1, statement 2, or Budget Paper No. 2?

Senator KETTER: Budget Paper No. 2.

Mr Atkinson : The measures table.

Senator KETTER: Table No. 1 on page 4. I'm just briefly going to allude to these.

Mr Atkinson : Sorry, Senator, this is a Department of Finance document.

Senator KETTER: I thought we were talking about Budget Paper No. 2?

Mr Atkinson : Yes; got it.

Senator KETTER: Just very quickly, if you look at page 4 you'll see that revenue is lower over the forward estimates—the bottom line on that table.

Mr Atkinson : That's the total impact of revenue measures.

Senator KETTER: Yes.

Mr Atkinson : The total impact of revenue measures is negative over the forward estimates. Actually—sorry—I'd have to add them up because there are pluses and minuses in there. Revenue movements are an issue—

Senator KETTER: If you add them all up, the figure is negative $399.1 million. It would have been helpful to have a total figure, but for some reason there isn't a total figure.

Mr Atkinson : The impact of revenue measures is in budget statements 3 and 4 in Budget Paper No. 1, with totals.

Senator KETTER: Expenses are on page 45. Where I'm going, Mr Atkinson, is that policy decisions announced since MYEFO have led to revenue being lower over the forward estimates, expenditure being higher over the forward estimates and capital investment will also be higher over the forward estimates.

Mr Atkinson : Probably the best articulation of this is in budget statement 3 in Budget Paper No. 1, on page 19. That has the total impact of policy decisions split between payments and receipts. If you look at that table, about halfway down it has the total policy decisions' impact on the UCV.

Senator KETTER: Which budget paper?

Mr Atkinson : Budget Paper No. 1, statement 3, on page 19.

Senator KETTER: What's the full—

Ms Wilkinson : It's 3-19, Budget Paper No. 1.

Senator KETTER: My question is about the direct impact of policy decisions taken by this government since MYEFO. My proposition to you, Mr Atkinson, is that the impact of policy decisions since MYEFO has made the budget worse.

Mr Atkinson : The particular position you're looking at there is total policy decisions impact on UCB, and the total is negative 10.3.

Senator KETTER: What does that represent?

Mr Atkinson : That's a decrease in the underlying cap value.

Senator KETTER: So there's been a deterioration in the budget bottom line as a direct impact of policy decisions by this government since MYEFO. Is that correct?

Mr Atkinson : Obviously there are swings and roundabouts with parameter variations which offset that, but that's what that line represents.

Senator KETTER: So you agree with my contention.

Mr Atkinson : As I articulated it, yes.

Senator KETTER: I'm being very specific about whether or not there has been a deterioration in the budget bottom line as a result of the direct impact of policy decisions taken by this government since MYEFO.

Mr Atkinson : Yes, senator.

Senator KETTER: Thank you.

CHAIR: There is a campaign going on at the moment alleging that the underpayment of workers superannuation is a particularly widespread issue. My understanding was that this had been addressed in a package of measures introduced by the government into parliament recently to recover unpaid superannuation for workers. Is that correct?

Mr Jeremenko : That is correct. Only a couple of months ago, legislation was passed through both houses that contains a significant integrity package around unpaid superannuation. The figure of $2.79 billion is too large, and this package is the government's attempt to really get into that and make sure that the tax office has appropriate powers to ensure that that figure is reduced over time.

CHAIR: What are the powers that the tax office has?

Mr Preston : The fundamental change to the integrity package was to increase the visibility that the ATO had over noncompliance. What it did was require all employers, particularly small employers, to report, effectively, SG owing, which it could then match with information that it receives from super funds to identify underpayment of SG. That was the main part of the package. There were several other elements.

CHAIR: Does it include a penalty regime?

Mr Preston : That is what I was getting to. One of the other major changes in the penalty regime was to introduce penalties for what I guess you could call egregious nonpayment. Where there's a pattern of nonpayment that the ATO identifies it now has several additional sanctions. One relates to education, but the other relates to criminal penalties that can be brought in extreme cases.

CHAIR: Has any other government, as far as you are aware, ever introduced a penalty regime for egregious nonpayment of superannuation?

Mr Preston : No.

CHAIR: I understand that an amnesty period is in place at the moment for the implementation of this. Why is the amnesty period in place for those employers that may not have paid the appropriate amount of superannuation guarantee?

Mr Preston : Are you referring to the SG amnesty?


Mr Preston : The main plank of the reform that I referred to was about improving the visibility that the ATO has over noncompliance. That has several elements, some of which start from 1 July 2019. That will, going forward, significantly improve its ability to track down non-compliant employers, but it won't of itself give it visibility going backwards. Recognising that there is that lack of visibility, the amnesty was put in place to try to encourage non-compliant employers to come forward and self-identify by giving them several incentives to reduce the cost for them to self-identify but not reduce what they would have to reimburse their employees. The intention of that was to try to generate more money being paid into the super accounts of employees who'd missed out.

CHAIR: I should have asked first: how many employees are we talking about that Treasury believes may have missed out on the appropriate amount of superannuation guarantee?

Mr Preston : Are you asking what is our estimate of—

CHAIR: The number of employees that will benefit.

Mr Preston : It's important to state that this was an estimate undertaken before the policy was enacted, and it was assuming that it was going to be passed through parliament in a timely fashion. If you're wanting to understand the actual take-up of the measure, it would probably be better to direct your questions to the ATO. The original estimate was that an additional 10,000 employers would come forward, benefiting 50,000 employees. I think the figure that would be paid into those employees' accounts was $230 million in superannuation.

CHAIR: Should the amnesty period not have existed? Can Treasury confirm that employees would get the same amount paid to them if it's paid voluntarily under the amnesty, as if their employer had been caught by the ATO? I'm sorry; I didn't explain that very well. Do you know what I mean?

Mr Preston : That is correct. The employee would be in the same position if their employer had been caught; yes, that's right.

CHAIR: The threat of jail time, obviously, would be something that would be a significant impetus for employers to participate in the amnesty period.

Mr Preston : The threat of jail time is for noncompliance that occurred after—I'd have to take on notice the exact start date but it didn't apply—

CHAIR: It's not retrospective.

Mr Preston : to retrospective noncompliance; that's correct. One of the further incentives to encourage employers to comply is the increased penalties that the amnesty is to apply after the amnesty period finishes.

CHAIR: Thank you, Mr Preston and Mr Jeremenko.

Senator KETTER: Could I resume with Mr Atkinson. Going back to Budget Paper No. 1: I want to take you to table 3 on page 3-10. From what I can see, this type of table is a relatively new development; I couldn't see it in the previous budget papers. Can you explain why this particular table appears in the budget papers?

Mr Atkinson : What I can say is that this table, as I recollect, did appear in MYEFO. It is constructed by the Department of Finance and it demonstrates:

Taking into account reductions in payments as a result of non-economic parameters and other variations, the net impact of decisions in the 2019-20 Budget on payments is a reduction of $982 million over the four years from 2019-20.

Any further questions apart from what's in the face of this are for the Department of Finance.

Senator KETTER: We've already confirmed that the direct impacts of policy decisions taken by this government since MYEFO have made the budget worse at a time when, I would say, the economy is weakening. Many have pointed to the headwinds, and Mr Gaetjens talked about some of the risks going forward. This particular table indicates that the effect of—I'm looking at the first line. The total payments impact of policy decisions taken since the 2018-19 MYEFO is minus $8.275 million. That's slightly different to the figure that you mentioned earlier from the other table, Mr Atkinson.

Mr Atkinson : The difference is that that table you're talking about relates to payments and the figure that we were talking about before, in reconciliation of underlying cash balance estimates, is about total policy decisions. That covers off both payments and receipts and includes tax cuts, et cetera.

Senator KETTER: The second line goes to payments impacts of noneconomic parameter and other variations. Can you tell me whether all of the noneconomic parameter changes and other variations in that line are directly attributable to the policy decisions taken and summarised in the first line of that table?

Mr Atkinson : You really have to direct this question to the Department of Finance. It's their responsibility. They construct this table. I believe they were asked these questions yesterday, too.

Senator KETTER: Can you explain to me how the government is acting consistently with its budget repair strategy—that your spending measures will be more than offset by reductions in spending elsewhere within the budget? The first line of that table clearly indicates to us that the policy decisions are having a negative impact on the budget bottom line.

Mr Atkinson : Once again, that's an issue for the Department of Finance. The bottom line of that table is the line that demonstrates compliance with that part of the fiscal strategy. Once again, I think this was asked and answered yesterday.

Senator KETTER: I'm going to take you back to the issue of payments as a proportion of GDP over the period to 2028-29, where we see it falling from 25 per cent to 23½ per cent. I am going to ask whether or not you've had the opportunity to consider the PBO's paper Australia's ageing population: understanding the fiscal impacts over the next decade.

Mr Atkinson : Yes.

Senator KETTER: You have?

Mr Atkinson : Yes, we have.

Senator KETTER: One of the key findings was that there would be a substantial impact by the end of the medium term on both the revenue side and the expenditure side. Do you agree with that?

Mr Atkinson : The impact of demographics even in the near- and medium-term is not a new thing. Intergenerational reports update that; we have the next IGR next year. Our medium-term model actually takes into account those types of demographic impacts.

Senator KETTER: That's good. The PBO says that the ageing population will cost the budget about $36 billion by 2028-29. What do you say about that?

Mr Atkinson : I'd probably have to refer that to my Revenue Group colleagues, in terms of being able to verify that number.

Senator KETTER: Well, Macro referred it to Fiscal.

Mr Atkinson : In terms of the medium term, what I can say is that those types of demographic factors are part of the underpinnings of our medium-term model and are factored into these projections. What I'm saying is: to cost whether the PBO's number is accurate, based on the existing current tax data, would have to be a discussion with the Revenue Group.

Senator KETTER: But what do you say about whether or not it will cost the budget around $36 billion by 2028-29?

Mr Atkinson : I don't think we've costed that. Mr Rollings, do you have anything to add?

Mr Rollings : It would be very difficult to unpick which aspects of demographic change you're referring to. To reiterate what Mr Atkinson said: the various models that we use which underpin the medium-term projections, which would relate to health or pension payments, or all those sorts of things, all include demographic factors as part of the parameters underlying the models. Beyond the medium term would be a matter for the next IGR, and we'll be updating our assessment of that at that time. There is a specific area of Revenue Group that looks at demographic factors and retirement income factors. They may be able to offer more comments on those issues coming out of the PBO report.

Senator KETTER: Well, the ageing of the population—the share of the population at retirement age increasing significantly, which I think you're well aware of—has an impact on revenue due to lower labour force participation and increases in spending because of more government programs supporting older Australians. The ageing population is projected to subtract 0.4 percentage points from annual real growth and revenue, and add 0.3 percentage points to the annual real growth in spending. The PBO found that, in real dollar terms, this equates to an annual cost to the budget of $36 billion. That's larger than the projected cost of Medicare in that same year. I'm asking: are you able to concur with these findings?

Mr Atkinson : I can't really add anything to what I've said previously and what Mr Rollings has said—that is, these types of demographic factors are already factored into our estimates. Obviously this PBO report is recently out. It's probably a question for them—the way they did those calculations. They might be able to describe how that fits with their knowledge of the existing budget forecasts and the models that underpin them. Revenue Group may or may not be able to go further with respect to verifying those numbers. But we haven't costed those.

Senator KETTER: What I'm interested in reconciling is what the PBO is saying, which is common sense. How are the budget papers consistent with those findings if the budget outlines the total payments as a per cent of GDP will fall to 23½ per cent? So rather than an increase in 0.3 of a per cent in spending over the medium term we'll see a 1½ per cent fall.

Mr Atkinson : As I said, the concept of ageing of the population in demographics impacting medium-term models is not new thing at all. That is built into our models already. These types of things are offset by strong employment figures which flow through to lower social security numbers on the other side of the equation. As I said, there's the virtuous circle and PDI as debt goes down with payments being significantly less. Remember that PDI's running at $18 billion this financial year, so that's a very substantial thing. As that decreases as a percentage of GDP, that moves payments down. I suppose, to answer your question, the types of demographic factors that the PBO is talking about are factored in to the existing models.

Senator KETTER: Are there spending reductions that are going to overcome the impact of the ageing population?

Mr Atkinson : At the moment we have a net structural decrease in payments that takes into account those types of demographic challenges.

Senator KETTER: Can you tell us what those are?

Mr Atkinson : It gets it back a little bit to the structural decreases in the requirement for paying social security because of strong employment and the differential in growth rates between those payments and GDP growth, because this is always a percentage of GDP. Obviously, these total payments continue to grow in nominal terms, consistent with both the demographics we're talking about and the PBO report, I suspect.

CHAIR: Senator Rice, before you begin, I understand that you have a document you want tabled?

Senator RICE: Yes, but I may not get to in this five-minute slot. I'm starting elsewhere. I want to start by asking questions about the overall work of the department on the costs and benefits of public infrastructure investment. Last year, in Budget Paper No. 1, the department put forward a GDP multiplier of four for public infrastructure investment over the 25 years of investment. Senator Whish-Wilson asked some questions about that last year. I wanted to start by asking whether the department stands by that multiplier or whether there are any changes to your views on that.

Mr Atkinson : I was just going to ask Mr McDonald to expand on that. That question is our Macroeconomic Group's responsibility. It's a macro modelling outcome.

Mr Rollings : I would say that this was a specific piece in statement 4 last year. It was informed by our Macroeconomic Group. I'm not aware of any updating of their analysis that underpinned that statement.

Senator RICE: I just wanted to start with that. I don't know whether your Macroeconomic Group is the best place to look at whether you have done any further work or looked at the average return on investment or benefit-cost ratio at the economy-wide level of investment in publicly funded infrastructure.

Mr McDonald : I don't think we've done any further work to update that work from last year.

Senator RICE: Certainly in the introduction to the budget overview you say that you continue to invest in productivity-enhancing infrastructure to ease congestion and manage a growing population. So I was just wondering, given the emphasis on infrastructure in this year's budget, whether there had been any further work that you had done on that. But you're saying you haven't. You're basically standing by the estimate of the GDP.

Mr McDonald : We provide advice through the budget process across the spectrum of the budget spending measures, including the infrastructure spending measures, measure by measure.

Senator RICE: That would confirm that you believe that investing in public infrastructure is a productivity-enhancing investment.

Mr McDonald : Certainly.

Senator RICE: Moving on from there, and doing a bit of a comparison, what's the current cost of borrowing for the Commonwealth via issuing bonds?

Mr Rollings : It probably can't be collapsed into a simple metric, because there are different bonds across the yield curve. But the assumption we've made in the budget is based on the 10-year bond yield, which is about 1.9 per cent.

Senator RICE: Yes, that was my understanding—that it was a bit under two per cent. It's a pretty low rate of return, historically. Where I'm getting to is: what's the cost of borrowing it at under two per cent per annum, compared with the wider economic benefits of public infrastructure investment? Would you see that the rate of return on public infrastructure investment would be higher than two per cent?

Mr McDonald : It depends on the project.

Senator RICE: Yes, but presuming that you've got well-chosen projects, which have positive benefit-cost ratios in the analysis of them—

Mr McDonald : For projects that have a rate of return that's higher than the cost of borrowing and that accounts for the risk associated with the project as well and takes account of broader public benefits, you'd expect that those projects would expand the economy.

Mr Atkinson : I would just add that of course we're talking about the cost of borrowing over time, and we're at extremely low levels at the moment, which may not always be the case, as we move through to the medium term.

Senator RICE: Yes, but if you were taking out borrowing for public investment now—the 10-year bond rate of under two per cent—at least you've got it then for that next—

Mr Atkinson : Yes.

Senator RICE: But would you agree that the rate of return from well-chosen public investment is generally higher than two per cent?

Mr McDonald : If it's well-chosen, yes.

Mr Atkinson : And it's an economic return, not a fiscal return.

Mr McDonald : That's true.

Senator RICE: But in terms of the benefits to the community, to society, to Australia, it's an economic return that's basically a higher return than the cost of borrowing is.

Mr Atkinson : On average that's probably correct. Once again, it depends on the project.

Senator RICE: Where I then want to go to is: in the budget strategy, as stated by the Prime Minister, the Treasurer and indeed the finance minister, the aim is to achieve a budget surplus not only in recurrent expenditure but also including capital expenditure. That's correct? That's my reading of the government's current position.

Mr Atkinson : Well, underlying cash balance, which covers both.

Senator RICE: Yes, so it's actually covering capital as well as recurrent—

Mr Atkinson : Nonequity—so, in general terms, yes.

Senator RICE: Given that debt is cheap by historical standards, and you agree that the overall return on your public sector investment will exceed the costs of borrowing, why is the government pursuing a surplus with regard to capital expenditure as well as recurrent? It seems to me that Australia is missing out on that return because of that position of insisting on a surplus on capital as well as recurrent.

Mr Atkinson : I think this goes to the fiscal and the management of the balance sheet and the size and the stock of debt in the Australian context. There are three measures of the balance sheet in the budget papers. There is net debt, net financial worth and gross debt. Gross debt, in particular, is at a fairly historic high at the moment, and so the way to move that down is through running underlying cash surpluses. The stock of debt would increase otherwise, which decreases the flexibility to deal with economic shocks and those sorts of things.

Senator RICE: That is gross debt, but the debt that you would get from investing in public sector infrastructure is a particular type of debt that you know is going to generate those returns. What I'm getting at, I suppose, is the difference between good debt and bad debt. You have debt where it is of greater benefit to have that infrastructure than the cost of borrowing. And so it seems to me that the government is essentially throwing the baby out with the bathwater by insisting that we are going to have to move to a surplus both for capital as well for recurrent expenditure.

Mr Atkinson : I think the position is a bit broader than that. It's that we need to manage the overall size of the balance sheet. In terms of the average return of projects economy-wide, it's a separate thing to fiscal management.

Senator RICE: But you'd expect that economy-wide benefit to actually be higher than the benefits for a particular piece of infrastructure, because often in the infrastructure benefit-to-cost ratio you can't always take into account the wider economic benefits, whereas if you're actually looking at a suite of public sector infrastructure those wider economic benefits are what you want to consider.

Mr McDonald : There can be a distinction between the fiscal impact of the projects and the economic impacts of the projects. So it can be the case the overall economic impact of projects, taking account of all these factors, is at one particular rate and is higher than the cost of borrowing for that project, but the direct fiscal revenues associated with that project down the track might not cover that. So, in that sense, you imagine a project might have an economic benefit but might not be able to, in monetary terms—

Senator RICE: But they are nation-building and overall society-building projects that governments should be investing in.

Mr McDonald : And so then those projects have an ongoing cost of debt associated with them.

Senator RICE: Have you done any modelling of the cost to the Australian economy of paying down low-interest debt compared to the benefits of having productivity-enhancing infrastructure that is adding to the broader societal benefits?

Mr Atkinson : I don't think we have specific modelling on that, but I think if you look at the budget as a whole, with $100 billion investment in infrastructure, there is also a point in infrastructure projects where—and this is a matter for the Department of Infrastructure, Regional Development and Cities—the stock of projects have high cost benefit returns, funded either by states or ourselves or in conjunction, and eventually you get to diminishing returns on projects.

Senator RICE: I think we're a long way from that at the moment given the need for infrastructure, particularly as we are a growing population. Having asked questions about this yesterday of Infrastructure as well, I know there are so many infrastructure projects that would have potential high rates of return that could be invested in. It seems to me that, given the historically low cost of capital—

Mr Atkinson : Did they discuss the readiness for those projects?

Senator RICE: Not in the discussions that I had with them yesterday. But, certainly if you look at the Greens platform, we have a whole range of well-considered potential infrastructure projects that would be of massive benefit to the Australian society.

Senator KETTER: This question goes to the issue of Newstart recipients and the energy assistance payment. I just wanted to go to the decision-making around that change to the budget. I'm not sure who I should be asking this question to, but when was the decision taken to expand those who can access the energy assistance payment?

Mr Atkinson : I'm not personally aware, but I believe it's been publicly stated that that was on Tuesday night.

Senator KETTER: Tuesday night?

Mr Atkinson : I believe so—but that's from a media report.

Senator KETTER: When did Treasury first find out about this decision?

Mr Atkinson : We were first informed of this on Tuesday evening.

Senator KETTER: Can you tell me what time?

Mr Atkinson : I'd have to take that on notice.

Senator KETTER: Was it late evening or—

Mr Atkinson : I think so.

Senator KETTER: Late evening. And can you tell me how you became aware of the decision?

Mr Atkinson : I'd have to take that on notice, too. Sorry, it wasn't to me.

Senator KETTER: Can you tell me who received the information about the decision?

Mr Atkinson : It would have been one of our officials.

Senator KETTER: You're not able to tell me who?

Mr Atkinson : I'd have to take that on notice too, sorry, because things just come into the organisation as parts of decision processes—because we're not involved in costing processes, which are between DSS and Finance.

Senator KETTER: How was the decision conveyed to you?

Mr Atkinson : I presume the final decision was in correspondence.

Senator KETTER: You presume? One of your colleagues in Treasury has—

Mr Atkinson : Correspondence on decisions comes through the normal systems. We'd have to take on notice when that came, which wouldn't necessarily tell us when it was signed.

Senator KETTER: Were there discussions before budget night to consider these same cohorts we're talking about for inclusion in the energy assistance payment?

Mr Atkinson : Not that I was involved in. I'm not sure what ministers talked about.

Senator KETTER: You're not sure what, sorry?

Mr Atkinson : What ministers talked about.

Senator KETTER: Okay. But, within Treasury, were there discussions about Newstart recipients and other cohorts being included in the energy assistance payment?

Mr Atkinson : I'd have to take on notice if there were internal discussions at working level.

Senator KETTER: You're not aware of any?

Mr Atkinson : Not aware of any.

Senator KETTER: So those considerations didn't go anywhere, because this measure wasn't included in the budget papers. Are you aware of any rationale at the time for this group of Australians not being included in the energy assistance payment?

Mr Atkinson : Sorry, are you talking about at the time the original decision was made on the energy assistance payment?

Senator KETTER: Yes, the original decision not to include Newstart recipients.

Mr Atkinson : Those decisions were made as part of the cabinet and budget processes, so I can't really talk about that.

Senator KETTER: Can you tell me, Mr Atkinson, what's the rationale for including this group of Australians?

Senator Seselja: The finance minister's spoken to this already in estimates.

Senator KETTER: So can you tell us, Senator Seselja?

Senator Seselja: Well, the finance minister's put it on the record. I don't have anything to add to what he said.

Senator KETTER: Can you tell me what changed over that 24-hour period to justify the change—this significant policy change?

Senator Seselja: As I said, the finance minister has outlined this in estimates—I think it was yesterday—and he talked about facilitating the speedy passage of legislation.

Senator KETTER: So that wasn't a consideration prior to the budget being—

Senator Seselja: The finance minister put on the record exactly what the government's position was.

Senator KETTER: So that only became a consideration after the budget was announced?

Senator Seselja: What I'm saying to you is that the finance minister put on the record exactly what happened, and there's nothing that I'm proposing to add to that.

Senator KENEALLY: Can I ask a supplement to your question, Senator?

Senator KETTER: Sure.

Senator KENEALLY: You requoted, and the minister did say earlier, that it was for a speedy resolution of the matter through the parliament, Minister. Does that mean to suggest the government was more concerned with the passage of the legislation than providing assistance to people on Newstart?

Senator Seselja: No, I wouldn't draw that conclusion at all. I'd just refer you to the finance minister's comments.

Senator KENEALLY: What is the government's view about people on Newstart—should they receive the energy supplement? Or is it simply about getting the budget through the parliament?

Senator Seselja: As I say, I've got nothing to add to what the finance minister's said on the subject.

Senator KENEALLY: You don't have a position on whether or not people on Newstart should receive the energy supplement?

Senator Seselja: We've got a position that's been indicated by finance minister.

Senator KENEALLY: You can't outline it?

Senator Seselja: I've got nothing to add to it, no.

Senator KENEALLY: You're a minister. You can't tell us whether or not people on Newstart deserve to have an energy supplement?

Senator Seselja: You're asking me to provide additional information to what the finance minister has very clearly stated on the record.

Senator KENEALLY: He said it was for the passage through the parliament.

Senator Seselja: As I said, I've got nothing to add to what the finance minister has had to say.

Senator KENEALLY: So you can't give us any insight into whether or not the government thinks people on Newstart should be receiving this payment?

Senator Seselja: I've answered the question several times.

Senator KENEALLY: Well, you actually haven't.

Senator Seselja: I have.

Senator KENEALLY: We have had neither from you nor from the finance minister any justification as to whether or not people on Newstart should be receiving this payment.

Senator Seselja: Sorry, I missed that.

Senator KENEALLY: We've had neither from the finance minister nor from you a position as to whether or not people on Newstart should actually be receiving this payment. We've only had evidence that it was to facilitate passage through the parliament.

Senator Seselja: I could read to you exactly what Minister Cormann had to say if you'd like me to restate it, but, as I say, I've got nothing to add to what he's put on the record.

Senator KETTER: Mr Atkinson, just coming back to you—

Senator Seselja: I can read it to you if that would help, but you could read the Hansard as well.

Senator KENEALLY: We've heard it this morning. I'm asking you if you can give us any insight into the government's thinking on this and whether or not they think people on Newstart should get this payment.

Senator Seselja: As I say, I can put to you exactly what Minister Cormann said.

Senator KENEALLY: We could have Siri here instead of you, Minister. It would be just as effective.

Senator Seselja: I can repeat to you what the minister has had to say on the matter.

Senator KENEALLY: As I said, Siri could read it out loud to me as well.

Senator KETTER: Coming back, Mr Atkinson, to the original decision to not include the cohort we're talking about in the energy assistance payment, just tell us about the policy development process that underpinned that.

Mr Atkinson : This measure was considered through normal budget processes.

Senator KETTER: Just outline what those were.

Mr Atkinson : I can't go to the specific considerations. Like all of the many, many hundreds of decisions these—

Senator KETTER: No, I'm just talking about this particular one.

Mr Atkinson : It would have been gone through the budget and ERC processes. PM&C is probably best placed to talk about that. Obviously, we don't remember where every individual decision was made over the last few months.

Senator KETTER: So PM&C is the primary driver of this particular policy?

Mr Atkinson : The policy itself would have been developed by the Department of Social Services, but PM&C run the decision-making system.

Senator KETTER: Was it the department that made the decision not to include the Newstart recipients and other groups within the energy assistance payment?

Mr Atkinson : All of the decisions that are in here are decisions of the government.

Senator KETTER: All right. I think we're done.

Senator RICE: I'm continuing on with the cost of investing in infrastructure versus the benefits. Does Treasury work with the department of infrastructure and/or Infrastructure Australia to assist them in finding out the appropriate figures for the cost of capital or to develop or evaluate business cases?

Mr McDonald : Infrastructure Australia has a role in providing advice about how to assess business cases and cost-benefit analysis. We work with both the department of infrastructure and Infrastructure Australia on different issues from time to time.

Senator RICE: Do you provide them with advice on what the appropriate costs—the bond rate costs of capital—are for their assessment, or do they do that themselves?

Mr McDonald : I don't think we've provided them with advice on the government bond rate in recent times.

Senator RICE: Do you have a view—in particular given that we've got a bond rate of around two per cent—on whether using a discount rate of seven per cent is appropriate, given the low cost of capital?

Mr McDonald : I'm taking it that the seven per cent is from Infrastructure Australia documents?

Senator RICE: Yes. Infrastructure Australia use a discount rate of seven per cent sometimes, four per cent at other times. That's my understanding. But certainly seven per cent is widely used.

Mr McDonald : We've not developed advice on that issue, to my knowledge.

Senator RICE: Would you have a view about whether, given you've got a bond rate of less than two per cent, a discount rate of seven per cent is appropriate?

Mr McDonald : I don't have a view that I can put forward.

Senator RICE: Does Treasury do any work on looking at that as an issue?

Mr McDonald : I don't think we've done work recently on discount rates.

Mr Atkinson : We do work more broadly on the balance sheet management and the structure of that. I would just make one other point. You talk about the bond yields, which are on page 14 of budget statement 6, where you have the curve there. You see that the MYEFO line is there, which is quite a bit higher. It was 2½ per cent in December, so it moves around a bit. It's just worth noting that in this context.

Senator RICE: I'll leave that there, then. I want to move on to looking at government investment in Defence verses non-Defence spending. I've got a document that I'd like to table. We made some copies of it before.

CHAIR: Fine, we're happy for you to table that.

Senator RICE: The document I'm tabling is a graph and a table that my team have developed; I think we saw something similar at the last budget estimates. Looking at this table and the figures for expenditure from 2017 through to 2023 in terms of Defence and non-Defence capital, are they are a true reflection of the numbers contained in Budget Paper No. 1 on page 3-28?

Mr Atkinson : That's really hard to do on the spot. I'll just have a look, if that's all right?

Senator RICE: Okay.

Mr Atkinson : There's quite a bit of data. There are pages of spreadsheets behind—

Senator Seselja: It's perhaps a bit difficult for an official to interpret that data on the spot.

Mr Atkinson : I can take it on notice.

Senator RICE: Can I talk you through it, then? In table 10 of Budget Paper No. 1, on page 3-28, if we're looking at 2019-20, we've got $14.3 billion in direct capital investment, $8.9 billion in capital grants, $21.3 in financial asset investment and then a total of $44.5 billion. So it's a reflection of the column that's on page 3-28. Adding up 2019-20, we've got $44.5 billion being invested in total.

Mr Atkinson : Yes, I'm familiar with that table. It's the other ones.

Senator RICE: And then the other one, which I've tabled here, is from the Defence budget paper. Table 45 shows that the investment for Defence is $12.6 billion for this year.

Mr Atkinson : So, are you looking—

Senator RICE: It's highlighted on my version of this page.

Mr Atkinson : You're talking about the total cash-used figure?

Senator RICE: Looking at the 2019-20, the first line there says, 'capital expenditure on Defence,' and it's $12.6 billion. That's come from table 45, which I tabled, of the Defence portfolio budget statement.

Mr Atkinson : Yes, I can see the $12.6 billion at the bottom of total cash used.

Senator RICE: Essentially then what we have done, for this year and for all other years, is just subtracted that $12.6 billion from the $44.5 billion of the total capital spending, giving the non-Defence capital spending—just a simple subtraction—as $31.9 billion.

Mr Atkinson : Yes.

Senator RICE: For this year, we've got capital being spent on Defence at $12.6 billion and capital on non-Defence at $31.5 billion, adding up to total capital of $44.5 billion.

Mr Atkinson : Sorry, the complexity of doing this on the run is that these figures are not always done on a like-for-like basis, so conceptually where you're going—if we had some notice—we'd be able to actually verify it.

Senator RICE: It's basically the same table that Senator Whish-Wilson presented you with at last year's budget estimates. I don't know whether the same people are around the table. There wasn't a concern about this methodology then.

Mr Atkinson : I can take on notice whether the methodology works or not.

Senator RICE: The methodology worked last year, and it's basically just expanding the methodology to add in this year's figures.

Mr Atkinson : You're saying that taking the total capital spending down by the total Defence leads you the residual.

Senator RICE: That's right.

Mr Atkinson : Yes, the problem is accounting classifications. In general, that might be right.

Senator RICE: Certainly, as I said, there weren't concerns that were expressed in retrospect about the methodology when Senator Whish-Wilson pursued this line of questioning at last year's estimates. It's really just continuing on the next year in the series.

Mr Atkinson : The difference was that last year we had budget statement 4, which broke out the Defence expenditure. We actually had the work done on it. That was all articulated and properly Treasury costed, with the differentials between Defence capital et cetera, so it was able to be subtracted. We had done that. We don't have that statement 4 in this year's budget papers.

Senator RICE: That's what I understood. In terms of the information that we used last year, that was as reflected in the Defence portfolio budget statement that I have given you a copy of there.

Mr Atkinson : They are probably reconciled back. There's probably adjustments in here. Sorry, we don't have that particular table in this year's budget papers. That's why it's hard to verify.

Senator RICE: You would agree that the figure of the $12.3 billion is the same figure that we had from last year.

Mr Atkinson : I will verify that it could well be correct, but I can't sit here and verify a set of numbers that have just been put in front of me.

Senator RICE: Certainly, if you look at those numbers and the graph that I've presented there, going forward, from this year, we have a substantial increase in Defence capital spending and actually a decrease in non-Defence capital spending. Would you agree from those figures, if you look at the figures or if you look at the graph, that that's the scenario that we're in?

Mr Atkinson : I'm not sure. It's really difficult to tell whether major capital expenditure that's inside of things like Sydney Airport, Snowy Hydro and those sorts of things are in here. That's just because of the accounting classifications, as they don't impact the UCB. Those are huge investments in infrastructure.

Senator RICE: But they would be included in your estimate of that total capital spending of $44.5 billion? You're saying you haven't got the same level of detail about the Defence numbers; but on the non-Defence numbers, you should have. You've got total capital of $44.5 billion. Essentially, from the Defence budget, we see that the capital in Defence is increasing. If you subtract the Defence numbers for the out years of the forwards—that is, the rest of the forwards—basically we end up with a scenario where non-Defence spending capital is decreasing.

Mr Atkinson : I really have to take this on notice, because it's incredibly complex. I think that the NBN is in here as well. The cash flow associated with the NBN could well be some of these spikes. It's not as simple as cutting Defence out and then you see, presto, the picture of investment in infrastructure. I can certainly take it on notice.

Senator RICE: All of the things that you have talked about would actually increase the amount of money in non-Defence capital. It would make the situation better.

Mr Atkinson : That's what I'm saying. I'm not sure whether that—

Senator RICE: If they weren't included, you would actually have an even worse situation of a decline in investment in non-Defence spending.

Mr Atkinson : No, it would increase non-Defence spending, because they're not Defence assets.

Senator RICE: Are you saying that you don't think that they are in—

Senator Seselja: The question has been taken on notice. There is a level of detail that the official has indicated it is difficult, on the spot, to be able to give firm answers on. He has undertaken to take it on notice, and he can reconcile those numbers for you.

Senator RICE: Could I clarify then, with those questions: if we go to the table 10—

Senator Seselja: If you want to move to the next phase, obviously—

Senator RICE: No, I want to clarify, in terms of table 10, as to what the government's capital spending is. With that total capital spending of $44.5 billion, are you saying that it doesn't include things like the NBN and doesn't include the Snowy Hydro? That's what you seem to be arguing.

Mr Atkinson : Unless one of my colleagues can answer that definitively, I will take that on notice.

Senator RICE: Where else would it be if it wasn't in total capital?

Mr Atkinson : Because some of that expenditure is out of other entities. You get movements inside the general government sector and equity investments that are treated differently in a cash-flow sense. I genuinely need to take it on notice.

Mr Rollings : Senator, I agree. We can take it on notice. I suspect that those things are in there. I think the part of your methodology we're struggling a little bit with is on the Defence side, in that a more detailed analysis of spending is a matter for Finance and not something that we—

Senator RICE: No, but the confusion at the moment isn't on the Defence side. The Defence capital budget is as per the Defence paper, which shows the Defence capital increasing over the forwards. Where we're having confusion is as to whether all of the infrastructure capital is included in your table 10. It's your budget. This is your stuff. You should know this.

Mr Rollings : That is the methodology underlying that. It's including all capital spending, including grants to the states for capital purposes.

Senator RICE: Yes. I don't see what the confusion is then. If that is all capital spending, that's the presumption that the rest of us are making. It's that all capital spending is included in that table 10.

CHAIR: I think the panel has taken it on notice.

Senator RICE: No, we've just—Mr Rollings has just told us that table 10 is meant to reflect all capital spending.

Mr Rollings : That is correct.

Senator RICE: In which case, with a simple subtraction, if you have all capital spending and then we've got Defence spending, then you will—if you subtract Defence spending from that all capital spending—get your non-Defence spending. They are the two figures that I want to compare. They are the two figures where, if you look at them on the graph or in the table, you've got Defence spending going up and you've got non-Defence spending going down.

CHAIR: May I suggest to the panel—we literally have two minutes and we will be breaking at 1.15, a hard marker—that perhaps the panel take the question on notice, understanding what the question is that is being taken on notice, or respond to Senator Rice.

Senator RICE: All I want to know is if you agree with that finding that, over the forwards, we have Defence spending increasing and we have non-Defence spending decreasing.

Mr Atkinson : As sit here today, I can verify what is in table 3-28; but I have to take on notice the material that has been given to us in the room. We can answer this question, but not at the table.

Senator RICE: You can verify that table 3-28 includes all of your capital spending, Defence and non-Defence?

Mr Atkinson : If Mr Rollings is sure that that includes all things inside and outside—

Mr Rollings : Yes.

Senator RICE: I could go around to Defence at the moment and ask them whether table 45 includes is an accurate reflection of their Defence capital spending. I'm sure they would tell me that it is.

Senator Seselja: Well, perhaps you should direct that to the Department of Defence.

Senator RICE: I don't know why I should have to, given that I have a table from their budget paper. I would presume that was accurate.

Senator Seselja: But you're asking officials to comment in a level of detail—

Senator RICE: No, it's a very simple subtraction. You have capital spending that can be divided into Defence and non-Defence. You have agreed that—

Senator SESELJA: Mr Atkinson has put to you the issues he has with providing a definitive answer in that space. He has undertaken to take it on notice. I don't think there's much more that can be added.

Mr Atkinson : The reason why I want to do this properly is: if you look in foot note (c), it says that the investments in financial assets for policy purposes are presented on a gross basis. That means that what's represented here are the investments into the financial assets, rather than expenditure out of the financial assets that buy infrastructure. That's why I'm taking it on notice; it's not simple.

CHAIR: Well, it is quarter past one. I'm not entirely sure that we are going to get much further, Senator Rice, at this stage. The questions have been taken on notice.

Senator RICE: I don't really see what the question is. Basically, you are going to get back to me and tell me whether we can believe the numbers that are there, in terms of total capital spending in your table 10, and whether that really, truly reflects total capital spending. That seems to be a pretty fundamental thing. If you have a table that says it reflects total capital spending, that is what it should reflect.

Mr Atkinson : It's total capital spending outside of the general government sector, including investment in financial assets.

Senator RICE: I look forward to getting your explanation of how total capital spending can't be relied upon to reflect total capital spending.

Mr Atkinson : Sorry, Senator, I didn't say that.

CHAIR: Thank you very much to the Fiscal Group. We will let you go now, and the committee will break for lunch. We will resume at 2.15 with the Revenue Group.

Proceedings suspended from 13 : 16 to 14 : 15