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STANDING COMMITTEE ON FINANCE AND PUBLIC ADMINISTRATION
09/02/2009
Appropriation (Nation Building and Jobs) Bill (No. 1) 2008-2009 Appropriation (Nation Building and Jobs) Bill (No. 2) 2008-2009 Commonwealth Inscribed Stock Amendment Bill 2009 Household Stimulus Package Bill 2009 Tax Bonus for Working Australians (Consequential Amendments) Bill 2009 Tax Bonus for Working Australians Bill 2009

CHAIR —I welcome back Dr Henry and representatives from Treasury. I also welcome back Dr Watt and representatives from the Department of Finance and Deregulation. Information on parliamentary privilege and the protection of witnesses and evidence has been provided to you. As departmental officers, you will not be asked to give opinions on matters of policy, though this does not preclude questions asking for explanations of policy or factual questions about when and how policies were adopted.

Before I invite members of the committee to put questions to you, can I thank you for your indulgence in the rescheduling we had to do today. I am sure you join with the committee once again with passing on our condolences to the Victorian families who lost the lives of family members and friends.

Senator FIFIELD —Thank you, Chair, and, through you to the witnesses, I encourage those at the table to keep their answers as short as possible because we are short of time. The good news is that, because the time for tabling our report has been put back a little bit, that provides Treasury and the Department of Finance and Deregulation with a greater opportunity to respond to some questions which we may place on notice. I am sure you will be very pleased about that.

CHAIR —In light of the fact that we have to table the report tomorrow evening, I am not sure that it does give anybody a great deal of time.

Senator FIFIELD —There is tomorrow morning, which is useful for all of us. Dr Henry, Mr Eslake gave some evidence by teleconference just before you arrived, and a part of his evidence I found particularly alarming and I hope you do too. In Mr Eslake’s evidence in reference to the size of the stimulus package he said:

It may well ... be true that servicing or repaying the debt incurred now will ultimately require higher taxes ... That would be in many ways regrettable—

It is good that Mr Eslake is of the view that that would be regrettable—

... but it may also reflect the fact that the tax cuts implemented in the middle years of this decade were only sustainable to the extent that the commodities boom, which largely paid for them, continued, which it ... has not. I would also argue that a modest increase in debt now and, if necessary, taxes later is preferable to much larger increases in debt and taxes.

Dr Henry, is that a very real concern, as expressed by Dr Eslake, that it may be necessary for government to increase taxes in light of the debt that the Commonwealth is looking at incurring?

Dr Henry —I refer you to page 5 of the document Updated Economic and Fiscal Outlook February 2009 which, at the middle of the page, sets out the government’s forward fiscal strategy to be employed as the economy recovers. It notes at the first dot point:

As the economy recovers, and grows above trend, the Government will take action to return the budget to surplus by:

  • allowing the level of tax receipts to recover naturally as the economy improves, while maintaining the Government’s commitment to keep taxation as a share of GDP below the 2007-08 level on average—

taken together with the second dot point—

  • holding real growth in spending to 2 per cent a year until the budget returns to surplus—

I consider that there is good reason to expect that, with those two conditions satisfied when the economy is growing strongly, any increase in net debt due to the implementation of this package would be unwound over time. The reason I draw your attention to the first dot point is that that implies that the increase in net debt would be unwound over time without taxation increasing as a share of GDP above the 2007-08 level, on average.

Senator JOYCE —You would have to plan how we are going to pay back the money—those two dot points.

Dr Henry —As I indicated the last time we met, obviously net debt will be reduced over time by future budget surpluses—that is the intention—and that would be true no matter how the budget surpluses were achieved, obviously. It could also be achieved by asset sales. That has certainly been a way in which debt has been reduced in the past. But, provided the budget achieves a headline surplus, and certainly if it achieves an underlying cash surplus in the way we measure these things these days, the net debt will be reduced. That is a tautology.

Senator FIFIELD —Would it be unfair to characterise those two points at page 5 as aspirational statements?

Dr Henry —I think they are more than aspirational in the way they are stated; that is just a matter of language. They are stated as commitments.

Senator FIFIELD —It is not possible to outline in any greater detail how those commitments might be achieved, other than the aspiration that those commitments be met?

Dr Henry —Or the commitment that they be met—are we getting into semantics here? I think the points really speak for themselves.

Senator JOYCE —I can see what Senator Fifield is saying. I spent five years in banking, and we used to spend hours, days—the bigger the facility, the more detail there was; there were a whole range of parameters which we expected the credit paper to fall within. I cannot believe for one minute that we are about to lend $42 billion and that is it. We hope one day we may be able to repay you is basically what it says.

Dr Henry —There is a little more to it than that. As we indicated in evidence to you on the last occasion we met, and as this document reveals, the net debt-to-GDP ratio is expected to go to 5.2 per cent by June 2012. In banking similar ratios are of course employed—debt-to-income ratios are employed—and I suspect most people lending money would take comfort from such a rather modest debt-to-income ratio.

Senator FIFIELD —I guess that what causes me concern, Dr Henry, is that Mr Eslake, who is not unsympathetic to this package, flags that in his opinion there is a real possibility that taxes would have to be increased in the wake of the stimulus package.

Dr Henry —I have not spoken to Mr Eslake about this matter. I am not aware of what modelling he may have done to arrive at that conclusion. I can only repeat that, on the basis of our analysis, we would expect that the net debt would be repaid over time with these two commitments—

Senator FIFIELD —So Treasury has done modelling which would evidence that?

Dr Henry —Not explicit modelling.

Senator FIFIELD —The same sort of modelling as Mr Eslake’s?

Dr Henry —As I indicated, I am not in a position to know what modelling or otherwise Mr Eslake may have done, so I cannot answer that question. But we have done sufficient in this area to be satisfied that, with this fiscal strategy being adopted as the economy recovers, net debt would be reduced over time.

Senator FIFIELD —Okay. I will move on—

Senator COONAN —Can I just ask one question. If you have a strategy to have future reductions through cutting spending, or curtailing spending growth, are you able to tell us at all—I cannot see it from the document—how great the cuts in future spending will be, or where the cuts would be made?

Dr Henry —No. The second of the two dot points that I referred to earlier indicates that, as the economy recovers and grows above trend, the government will hold real growth in spending to two per cent a year until the budget returns to surplus. That is quite a significant commitment, judged against historical performance in Australia.

Senator COONAN —But at the moment we do not know how on earth you would do that or where you would make the cuts—

Dr Henry —No, clearly that is not set out in this document.

Senator FIFIELD —I guess one of Senator Coonan’s concerns might be that, as psychologists will tell you, one of the best predictors of future behaviour is past behaviour. I would not expect you to comment on that, Dr Henry, but looking at the past behaviour of Labor when they have been in office, there is reason for some scepticism.

Senator CAMERON —Point of order, Madam Chair. I am new to this game, but I am pretty sure that you cannot put forward propositions such as has just been put forward to the witnesses and ask them to make some comment on the propositions.

Senator FIFIELD —Chair, I picked myself up. Senator Cameron is quite right—that was an unfair proposition to put to the witness, so I picked myself up and did not ask Dr Henry to answer it. But I think Senator Ryan wanted to follow up on a point.

CHAIR —I think we are all very much aware from the meeting we had this morning of the way we are going to conduct ourselves.

Senator RYAN —I note that you refer to the bullet points on page 5. I suppose one of the issues that concerns some of us is that your projections of growth in 2010-11 and 2011-12 are three per cent, which would be a fairly strong recovery from the previous two years of one per cent and ¾ of one per cent for this year and next year. But in those two later years we still see projections of deficits in the order of $30-plus billion and $20-plus billion. So I was wondering two things. Firstly, what would be the impact of a slower rate of growth? Have you modelled or projected that? Would that actually lead to a larger deficit? And, secondly, what would the rate of growth need to be in order for those bullet points you referred to, particularly the first one—as the economy improves and tax receipts improve—to bring the budget back into surplus, using the automatic stabilisers, I presume?

Dr Henry —The projection years to which you have referred do indeed project real GDP growth of three per cent. Assuming the economy is indeed in a growth phase in those years, three per cent growth would not be strong growth; three per cent growth would be less than what we would be projecting, if we were indeed in a growth phase. The three per cent is a historical trend rate in growth. When economies recover from a period of weakness, the general experience is that they grow above trend. That is how the unemployment rate is reduced and that is how economies get back closer to their supply potential—because they grow at faster than trend growth. So, if in 2010-11 and 2011-12 the economy is in a growth phase, as our projections would indicate, then we would be experiencing a real GDP growth of more than three per cent. If we are experiencing GDP growth of more than three per cent then of course the budget outcomes in 2010-11 and 2011-12 would be stronger—that is, the deficits would be smaller than has been projected in this document.

Senator RYAN —I appreciate that stronger growth would lead to a stronger fiscal position and that these are projections. What about weaker growth? If, for example, the growth of those two years represented the growth you are forecasting for this year and next, have you modelled the potential impact of what slower than three per cent growth would be on those fiscal outcomes?

Dr Henry —Sorry, that was the second part of your question and I answered only the first part. No, we have not. With respect to the forward estimates years—and, in this document, that is 2010-11 and 2011-12—our usual practice is to project real GDP growth at trend, and those are the projections that we publish. We do not publish alternative scenarios. We do not model alternative scenarios.

Senator RYAN —So that three per cent growth is merely a trend based on historical average—

Dr Henry —That is correct.

Senator RYAN —whereas the fiscal numbers and the fiscal outcome are based on—I assume—the complex model we spoke about last week, which had so many outputs and which we saw at the back of the budget papers or MYEFO, and would mean that your number on the fiscal balance is based on something more than just a historical trend.

Dr Henry —No, the fiscal balance numbers for 2008-09 and 2009-10 are based on detailed forecasts for the macroeconomy. The fiscal balances for 2010-11 and 20011-12 are based on the projections for the macroeconomy, including and in particular a projected rate of growth of real GDP of three per cent per annum.

Senator JOYCE —Does your technical modelling and the detail include the CPRS?

Dr Henry —No, clearly not—

Senator JOYCE —So it is not too technical then, is it?

Dr Henry —Well, obviously not. As I just indicated, in the period 2010-11 and 2011-12, we were using long-run growth projections based on our history. Given that the CPRS will commence in 2010, it is outside of the period in which we undertake explicit forecasts.

Senator JOYCE —So the CPRS is not in it?

Dr Henry —It cannot be.

Senator JOYCE —Thank you.

Senator RYAN —I have just one last question before I pass back to Senator Fifield on this topic. In your experience, what rate of growth, above the historic trend, would be necessary to bring the automatic stabilisers in and actually achieve that first bullet point you mentioned on page five of bringing the fiscal balance back into actual balance, for lack of a better way of putting it?

Dr Henry —Over what time frame?

Senator RYAN —I was actually looking at the years that are projected here—2011 and 2012. I am assuming that a higher rate of growth in those years would lead to higher tax receipts and lower transfer payments for those suffering from unemployment. So what rate of growth would we be looking at to actually reduce these deficit numbers?

Dr Henry —To reduce the deficit numbers, obviously all you need is a higher rate of growth than three per cent. To get the budget back into balance within that time frame is a rather different proposition. I do not believe we have undertaken the work that would allow us to answer that question.

Senator RYAN —Thank you.

Senator ABETZ —I would like to clarify a few issues. In the UEFO, on page 71, we are told that Treasury gets $260 million in 2008-09 for investment in social housing. I thought FaHCSIA was getting it. Is it because Treasury is transferring the money to the states that it has somehow fallen into the Treasury?

Dr Henry —I will commence an answer to that question, but I suspect that Mr Ray is going to have to help me. As I understand it, the reason that the $260 million figure appears against the Department of the Treasury rather than FaHCSIA is that the numbers in this appendix are based on what would happen were the parliament to pass the legislation that supports the COAG reforms which changed the financial arrangements between the Commonwealth and the states such that payments to the states will be made by the Department of the Treasury rather than by the line department. I accept that that legislation has not yet been presented to the parliament—although it is intended that it be introduced in February—

Senator ABETZ —Is this document from the most recently held COAG meeting?

Dr Henry —No.

Senator ABETZ —So when was the COAG meeting to which you refer?

Dr Henry —That was in December.

Senator ABETZ —Thank you for that. I am being asked to vote on Appropriation Bill (No. 2) by the end of this week. On page 16 we have a summary of the appropriations, and that tells me that the Department of Families, Housing, Community Services and Indigenous Affairs is going to have the $260 million appropriated to it.

Dr Henry —That is correct.

Senator ABETZ —Do you see an inconsistency between the two documents, for those of us who are trying to get through this?

Dr Henry —I do, and I am really trying to be helpful in explaining the reason for the inconsistency. Given that the parliament has not yet passed the COAG legislation to which I early referred, and given that the Senate will be considering the appropriation bill before it considers that COAG legislation, the Senate, if it agrees to the appropriation bill, will be appropriating these funds to the Department of Families, Housing, Community Services and Indigenous Affairs. But the numbers presented here, against the Department of the Treasury, show the effect of that appropriation if and when the Senate subsequently approves the COAG—

Senator ABETZ —So, really, this document, as the current legislation stands, is incorrect, and ‘the Department of the Treasury’ should in fact be ‘FaHCSIA’? That is the current state of play with the legislative framework under which we are operating today.

Dr Henry —Yes, I agree—as the appropriation bill makes clear.

Senator ABETZ —The appropriation bill makes that clear but unfortunately the UEFO, on page 71, did not. And given that we are supposed to look into a crystal ball as to what the parliament might pass in the future, it was a matter of some concern to me. Can I move on to another issue. Page 17 of the UEFO refers to the small business and general business tax break. In general terms this is a tax break which will apply to all businesses. Is that correct?

Dr Henry —Yes. In general terms that is correct.

Senator ABETZ —And therefore the vast bulk of that money will be going out to businesses other than small businesses—or not? Has any modelling or analysis been done to determine who is going to get the lion’s share of this?

Mr Parker —The way the general business and small business tax break operates is to provide eligible businesses with an additional tax deduction—

Senator ABETZ —I am sorry to interrupt, Mr Parker, but time is very short. I think I know how it operates. All I want to know is: have we done any modelling which would suggest that small businesses would be the major beneficiary, or larger businesses? If we do not have the figures, that is fine; tell us.

Mr Parker —I do not have the figures in front of me. We could endeavour to find that out for you.

Senator ABETZ —That would be most helpful. Do you agree with me that motor vehicles or cars would be considered to be assets for the purposes of this measure?

Mr Parker —Yes, I do.

Senator ABETZ —Have you done any modelling as to how many cars were sold to the private business sector last month, for example?

Mr Parker —When we put the estimates of this together we did so from the perspective of an aggregate estimate of business investment expenditure which would be eligible for the tax break. We did not build it up from the perspective of cars, computers and all of the various other components. However, as I understand it, you did raise this matter with the ATO—

Senator ABETZ —Yes.

Mr Parker —and, consequently, we have had a look at those numbers.

Senator ABETZ —You have had a look at them?

Mr Parker —Yes.

Senator ABETZ —What can you tell us about looking at those numbers? You stand by them, or you think an adjustment might need to be made, or we are not going to sell 26,000 cars per month—what is the analysis?

Mr Parker —I understand that, as you put it to the ATO, you suggested that if 26,000 cars were sold per month that would absorb all of or the greater part—I am not precisely sure—of the estimate. We have done those numbers and we have come up with a substantially lower figure than you suggested.

Senator ABETZ —All right. What figure? I am willing to be corrected.

Mr Parker —Fine. Let me just refer to some notes that I have here and I will take you through it.

Senator ABETZ —Just the end figure is all that I am interested in at this stage, thanks.

Mr Parker —Okay. I will just refresh my memory of it. With some relatively simple analysis, if 26,000 cars per month—

Senator ABETZ —What is the end figure, please, because time is very short. I am sorry to rush you.

Mr Parker —The number that I have written down here for the 30 per cent tax rebate is approximately $600 million.

Senator ABETZ —So that would be, in rough terms, about a quarter just swallowed up by motor vehicles.

Mr Parker —A little less than a quarter.

Senator ABETZ —So can I suggest to you that the analysis would suggest you will be spending a lot more than $2.7 billion on that measure.

Mr Parker —No. As I said, the way that this estimate was done was to look at the estimates for aggregate investment, as estimated in the forecasts, including the bring-forward estimates—

Senator ABETZ —All right. I look forward to estimates in about two years time and we might see what happens there. In relation to payments to taxpayers, are temporary residents considered to be taxpayers for the purposes of this package and thus beneficiaries of the $950?

Mr Parker —I would have to take that precise question on notice. Certainly, nonresidents are not picked up in the measure. As I said, I will take it on notice.

Senator ABETZ —But what if people were temporary residents whilst earning the income and have since shifted out of Australia? A number of accountants have emailed me suggesting that we might be talking of literally tens of thousands of temporary workers, especially during the huge demand for labour that has occurred over recent years, who have now gone back overseas who will have this money repatriated to them and so are hardly likely to spend it in Australia. If you could take that on notice for me, Mr Parker, I would be much obliged.

Can I move to the size of the stimulus package. According to page 71 of the Economist of 31 January, the weighted average stimulus of the G7 countries plus the BRIC countries was 3.6 per cent of GDP spread over several years, so the question is: why should Australia have a bigger stimulus than these other countries which are in a worse financial and economic state than Australia?

Dr Henry —I will try my hand at that, Senator. I am not actually sure what figure for Australia would compare with that 3.6 per cent; that is, I am not sure how that 3.6 per cent has been calculated. Therefore I am not sure the premise of the question is correct.

Senator ABETZ —But you are aware that that figure has been put out there into the marketplace?

Dr Henry —Yes, I am aware that there is a figure of 3.6 per cent sourced to the Economist.

Senator ABETZ —It is not one that I have plucked out of the air. But you are aware of it? It has been in discussion.

Dr Henry —I was not suggesting that. I just do not understand how that figure has been arrived at.

Senator ABETZ —All right. I had a follow-up question, but in the event that you are not able to comment on the 3.6 per cent I will yield to Senator Ryan.

Senator RYAN —On that point, Dr Henry, say we calculate the spending in the announcements on an annual basis and divide it into GDP. I understand—this goes to the 6.4 per cent comparison that Senator Abetz was talking about—that if we add up all the government announcements since 1 July that are taking effect over the current financial year that would actually come to, on a like-for-like basis, 6.4 per cent of GDP. And therefore the comparison with the Economist would be valid.

Dr Henry —That is news to me. I am not aware of any 6.4 per cent and what that would mean or whether that would have any meaning at all with respect to the fiscal stimulus measures that have been taken in Australia. I do not know whether such a figure would be comparable with the 3.6 per cent figure that has appeared in the Economist since. As I indicated, I am not sure how that figure was calculated either.

CHAIR —Now to Senator Abetz.

Senator ABETZ —I will move on to the fiscal multiplier and ask: what was Treasury’s estimate of the multiplier of the Keating government’s One Nation package? Can we dig back that far?

Dr Henry —Not here tonight.

Senator ABETZ —Not here tonight?

Dr Henry —We’ve certainly can’t.

Senator ABETZ —All right, but if you could have a look at that for us that would be helpful. Can I ask what the estimated GDP and employment multipliers for each of the 10 components of the package are. Has that been disaggregated and considered?

Dr Gruen —I think we may be traversing some ground that we traversed last week. We have given an aggregate number, as you are aware, of up to 90,000 jobs. That was based on a range of estimates which suggest to us that the fiscal multiplier is somewhere between a half and one.

Senator ABETZ —But, if I may interrupt, you say it is an aggregate figure. That sort of suggests to me that a few things have been ‘aggregated’, so I am wondering this: what have you aggregated? What specific items have you considered to get the aggregate figure? Just to say it is one big aggregate—well, I accept that. But I want to drill down into the 10 specifics if that was in fact done.

Dr Gruen —What was done was to look at the profile through time of the spending and work out what effect we estimated that would have on GDP. So the thing was done at an aggregate level but taking into account the timing of the package.

Senator ABETZ —So the 10 separate items, if I can refer to them as such, were not separately considered and then added together in your total aggregate?

Dr Gruen —No.

Senator ABETZ —Without being rude, could I suggest it was a broadbrush approach rather than adding 10 specifics together to bring you to that conclusion?

Dr Gruen —We made the point last week that we think that the multiplier for infrastructure spending is probably higher than the multiplier for one-off payments. The reason we made that point is that it has a direct one-off first-round impact on GDP, whereas one-off payments have to be spent. Some of them get saved.

So we have made the general point that we think that infrastructure spending—and this is broadly consistent with what the IMF, the OECD and others say—is likely to have a higher multiplier. But we would not want to overstate the level of precision with which we, or anyone else for that matter, know these multipliers. They are quoted usually with ranges. There was a document that you may have seen that the IMF put out for the G20 a couple of days ago, and they have ranges for tax cuts and infrastructure spending. All of us, with the best will in the world, only know these things with a reasonable margin of error. The point of that is to say that the more disaggregation that one wanted to do, the less confident one should be about the answers.

Senator ABETZ —See, I am being asked, along with fellow senators, to vote for a package that includes 10, if you like, separate measures. We would like to know the quality of the spend and the multiplier effect of each one of those specific measures to determine whether it is, in fact, value for money. It is all very good to say ‘in aggregate’, but there might be an absolute dud in amongst that which pulls the total aggregate benefit right down. If we are not told what the value is of each of the 10—if they are just given as a broad brush or in aggregate, to use that term again—it is very difficult to undertake a proper analysis of the 10 measures. Do you understand the difficulty?

Dr Gruen —I do understand the situation you are in. These multiplier estimates come from a wide range of places and, as I say, they are usually provided as a band. I think it is fair to say that the nature of the evidence we have is not sufficiently precise to be able to do any better than that.

Senator ABETZ —So none of them are sufficiently good to detail them separately, but if you aggregate them all together we get this magic figure at the end on which we should have total reliance and vote for a $42 billion package. I am sorry, but it does not fill me with confidence if you cannot disaggregate. You tell us, ‘Trust us on the totality.’ Can you not tell us the band on each one of the 10 stimuli?

Dr Gruen —If one were to disaggregate and apply the same elasticity to each of the subcomponents, one would get the answer we have got. The point I am making is—

Senator ABETZ —Right, so why do we not?

Dr Gruen —One could do that, but the point I am making is that the quality of our evidence is not sufficient to be able to say that the multiplier for one of those things is a particular number, for another one of those measures is a slightly different number and for another one of those measures is a slightly different number. What we have done is said that, overall, this is the amount of spending that is being envisaged and that the range of estimates that we have available to suggests that the multiplier is somewhere between half and one, and that gives you an overall number. In principle, you could pro rata it for each of those items. You could do that.

Senator COONAN —You could do it by sectors, couldn’t you?

Dr Gruen —Absolutely. If you were willing to make the assumption that the multiplier was the same for each of them then you could do that.

Senator ABETZ —But you would not do that, would you? You would not assume that the multiplier would be exactly the same for each one of the 10 stimuli. That is why we want to drill down and find out what the multiplier effect is for each one of them, because in amongst the aggregate figure there might be a real dud which is pulling the aggregate down. If we were to excise that particular part of the stimulus package, we might be getting a lot better value—in fact, not for taxpayers’ dollars but for the money that we are going to borrow for the stimulus package. But, look, we do not have the disaggregated figures and I do not think you are minded to give them to us, so I will hand over to Senator Joyce.

Senator CAMERON —On that point—this issue of a dud in the package—the package was the subject of lots of Treasury analysis, surely.

Dr Gruen —Yes.

Senator CAMERON —Did you find any duds in the package?

Dr Gruen —I took that as a rhetorical flourish and I did not respond to it, and I think that is probably how we should leave it.

Senator FIFIELD —Do you expect Treasury to characterise decisions of government as duds, regardless of what they thought?

Dr Gruen —Which is why I did not comment on it.

Senator COONAN —Before we leave the multipliers: I was curious about how these multipliers compare with the analysis of the $10.4 billion package, which I do not think was formally modelled. Was it?

Dr Gruen —In MYEFO you will find a statement which says that at the time we estimated that the multiplier was between one-half and one.

Senator COONAN —It is the same.

Dr Gruen —Yes. We have been consistent.

Senator JOYCE —We know that the Carbon Pollution Reduction Scheme, which is the biggest effect on the economy that is coming down the track, is not in the modelling for this. I am now going to try to look back in the past. On page 36, the second dot point, you say you are going to pay this back by holding real growth in spending to two per cent. The only way we can judge that is by how you are going on other things. Is there any information as to whether we are meeting any of the targets in the efficiency dividends that were in the last budget papers? Are they turning into reality or are they remaining amorphous concepts?

Dr Watt —They are turning into reality. The efficiency dividends are automatically deducted from the relevant agency appropriations, so the agencies have to live within a reduced budget.

Senator JOYCE —So we basically say, ‘You don’t get any more money, and you just have to cut wages wherever.’

Dr Watt —We actually say, ‘You get less money.’

Senator JOYCE —I have been thinking about an answer Senator Conroy gave on Thursday about the interest expense of this being $2.66 billion. We know that we have a facility that will in the near future be fully drawn to $200 billion. I was listening to Mr Tanner on Lateline the other night, and he said it was netting out because of HECS, the Future Fund and some other concept. Obviously someone has done the work; I am curious about whether you have the calculations showing how you came up with the number $2.66 billion.

Mr Ray —I think that calculation is done by applying a weighted average cost of funds to the net debt.

Senator JOYCE —And the weighted average cost of funds is around 4½ per cent?

Mr Ray —Around four—a bit under at the moment, probably.

Senator JOYCE —You are saying, in that case, that the net debt position takes into account that you give precedence to the HECS debt, but that does not have a reliable income stream. That is completely amorphous; it relies on people earning a certain amount of money, which in the middle of a recession, you would have to say, is less likely.

Mr Ray —The net debt position is our projection of gross debt less the debt-like assets.

Senator JOYCE —But Mr Tanner himself says it takes into account HECS debt and Future Fund receipts. These are all dependent on the strength of the economy and the capacity for those people to repay or deliver a dividend. I would suspect that that is not there; therefore, we have way understated our interest expense.

Mr Ray —Our projections of net debt are our best projections of net debt.

Senator JOYCE —Do you have some calculations showing how you came up with that number that you can table for us?

Mr Ray —I can take that on notice to see what I can provide.

Senator JOYCE —With the greatest respect, I have seen some of your other replies to questions on notice. They are pretty brief. I really want to drill down on these numbers, find out exactly what our total interest expense is without netting it off and then find out where you perceive your interest income coming from. You can provide those to us?

Mr Ray —As I said, I will take it on notice to see what we can provide.

Senator JOYCE —With your current stimulus package, one thing that has come through is that, everywhere else we look at stimulus packages over the last couple of days, we have seen that there is a reduction in both tax and infrastructure expenditure. This seems to be confirmed through every major stimulus package we have looked at around the world.

CHAIR —This is your final question for the time being, Senator Joyce.

Senator JOYCE —Okay, that is fair enough. What was the philosophy that stood behind the idea that, in the process of devising this package, we would not have a reduction in income tax or any infrastructure expenditure?

Dr Henry —Sorry, Senator, can I just clarify that you are asking: why does the package not contain income tax cuts or why does the package not—

Senator JOYCE —Wouldn’t the logic that is pervasive throughout the world in these fiscal stimulus packages suggest that a package that had a reduction in income tax and infrastructure expenditure be a more likely acceptable instrument to stimulate the economy? If not, can you please direct me to another package somewhere else in the world that is of a similar nature to the one Australia has put forward?

Dr Gruen —Senator, it is certainly the case that plenty of the stimulus packages being discussed around the world have some tax measures or some measures that are payments to individuals, but it is also the case that plenty of them are not tax cuts. For instance, the US package does not include income tax cuts; it includes tax credits in 2009-10 and access to per child tax credits. It has a series of temporary payments to individuals which are by their nature rather similar to the payments in the package under consideration. Long-term tax cuts have by their nature long-term fiscal implications, and most countries around the world who are considering these things do not regard those long-term fiscal implications as a reason for not giving long-term tax cuts.

CHAIR —I have to move onto Senator Milne.

Senator MILNE —My question goes to the fairly consistent criticism from the economists who have looked at this package in relation to the cash payments and whether or not they are sufficiently well-targeted to guarantee an immediate spend and therefore the immediate stimulus that the package is designed to achieve. Professor McKibbin had suggested that you could have a temporary reduction in the GST by 50 per cent, say, for a three-month period or something like that, which would give a powerful incentive to bring consumption spending from the future to that period of time, therefore, more likely guaranteeing you a spend than the cash payments, and recognising of course that you would have to compensate the states.

At the same time, the other issue in relation to this are the cash payments to people who had a taxable income of $80,000 to $90,000 and $90,000 to $100,000. It has been suggested that they are the people least likely to spend the bonus. Many of them will have salary sacrificed to get to that income level and they are not likely to spend this money. I just wonder if you have actually considered bringing consumer spending forward by a temporary cut to the GST, and why you think those income groups are likely to spend the bonus they get?

Dr Henry —Senator, we have not considered changing the GST arrangements in order to provide a macroeconomic stimulus. As you know and as you mentioned in your question the GST revenue goes to the states. In the time that the GST has been legislated in this country it has been the position of the Commonwealth government that the GST arrangements are a matter of agreement between the Commonwealth and the states.

So we have not considered an option such as that. I would note that, depending upon how large the cut in the GST rate was and the time period for which the cut in the GST rate applied, it could be quite an expensive option given how much revenue the GST raises—and I am not at all sure, in terms of its budget impact, that that would be a cheaper way of stimulating household consumption activity.

Senator MILNE —I was not suggesting it might be cheaper. I was suggesting it might be a more effective response in terms of getting people to spend the cash payment in the time frame. Can you respond to the question about the two higher income bracket areas and why you think they will spend it.

Dr Henry —In the document that is before you the amounts of one-off cash payments provided to those two higher income brackets are quite a lot smaller than the $950, and so the package has been structured so as to deliver the greater amount of payment to those who because of their income are considered more likely to spend, with relatively smaller amounts provided to people in those higher income ranges. But I do not know that I can add to that.

Senator MILNE —I would just like to know the rationale that makes you think people with a taxable income between $80,000 and $100,000 are likely to spend that bonus.

Dr Henry —Maybe Mr Parker could add to that.

Mr Parker —I can provide you with some further information on the relative split between the two groups. This is based on the 2006-07 tax statistics. There are around 450,000 people who have a taxable income between $80,000 and $100,000. That is against the 8.7 million people estimated to be eligible for the bonus. People on incomes between $80,000 and $100,000 do not receive the full $950. In round terms we estimate that the cost of that would be in the order of $230 million.

Senator SIEWERT —That is the $80,000 to $100,000 income bracket?

Mr Parker —That is right.

Senator MILNE —That is $230 million.

Mr Parker —That compares with the $8.1 billion for the total, so it is a fairly small amount.

Senator MILNE —I understand it is fairly small but it looks to me like it is a case of every player wins a prize. I cannot see that this $230 million is actually going to be spent.

Mr Parker —I can give you some information about some of the rationale.

Senator MILNE —Yes; what is the rationale for those two groups in particular?

Mr Parker —Apart from the fact that you would expect some spending from those groups—we could debate how much it would be—when you introduce these types of payments, if you have a sudden-death cut-off at a particular point then it raises equity issues as between someone who earned one dollar less than the threshold or one dollar more than the threshold, so it was effectively to smooth that out. That was one of the rationales which went to that.

If you like, I could also add some additional points on the GST. As Dr Henry indicated, we have not specifically modelled that. The reason that we did not is that, having thought about the potential to use that—that was in the early stages of thinking about that—we quickly came to the conclusion that it was something that was relatively infeasible in the Australian context because the GST has in effect been designed not to change. I can give you some figures about the impact of this.

Senator MILNE —Excuse me, Mr Parker. The Greens have only 20 minutes and my colleague has a lot to say, so could we get your further comments on the GST on notice so that my colleague can ask her questions?

Mr Parker —Sure. I am happy to do that.

Senator JACINTA COLLINS —On that point can I ask you also to address the following question. Utilising the GST, what sort of impact would you be expecting on the various exemptions in terms of consumption? For instance, people are not going to get any particular savings in food and other areas where the exemptions apply—and was that a factor?

Mr Parker —That was one of the thoughts that we had during the early consideration. Suppose you were to reduce the GST by 20 per cent for three months; that would be a reduction of two cents in the dollar in the GST rate, which is 10 per cent.

Senator JACINTA COLLINS —I just meant when you deal with it on notice.

Mr Parker —Sure, I am happy to do that.

Senator SIEWERT —Did you do any modelling of what the cost and impact would be of increasing the base rate for those on Newstart?

Dr Henry —No, I am sorry.

Senator SIEWERT —You did not do any modelling of the situation if the government were to lift the base rate of Newstart instead of doing a bonus for those on $80,000 to $100,000? Did you look at what impact that would have in terms of boosting the economy?

Dr Henry —I have difficulty answering that question because it goes to policy advice that may or may not have been provided to government. Since it does not form part of this package I do not see how I can comment on it.

Senator SIEWERT —So the answer is that you cannot answer the question, or is it that you have not done any—

Dr Henry —That is right; I do not think I can answer the question without revealing the nature of policy advice that might have been provided to government.

Senator SIEWERT —Could you tell us what data set Treasury were using to assess the number of people who are in receipt of various income support payments?

Dr Grimes —The data sets that we would use would be data sets provided by departments such as the Department of Families, Housing, Community Services and Indigenous Affairs, and maintained by Centrelink.

Senator SIEWERT —What years was that data from?

Dr Grimes —I would not have the specifics, but we may have someone here who will be able to help you out with that. Alternatively we could take it on notice.

Senator SIEWERT —If you could take it on notice.

Dr Grimes —We will be able to do that.

Dr Watt —I would assume that we would be using the most recent data available, which is pretty up-to-date.

Senator SIEWERT —The data available on the website is not ‘pretty up-to-date’.

Dr Watt —I would hope we would do better than the website data.

Senator SIEWERT —It makes it difficult for some of us who are trying to work out the impacts of this when the data on the website is not necessarily up-to-date. Could you also provide us with the cost—and I would appreciate this now if possible—of the specific component of the Education Entry Payment—that is, what estimate you have made in terms of that particular component of the training bonus?

Dr Grimes —I do not personally have that detail. I will see if another officer here has the information; otherwise we will take that on notice.

Senator SIEWERT —While we wait for the other officer, could I ask if you in your modelling have projected the fact that the changes that will be made under the stimulus package are likely to increase the number of people who are currently applying for and eligible for the Education Entry Payment?

Mr Ignatius —That is correct. Our estimates for the take-up and the likely payments under that supplement did take account of an increase in the number of people who will be likely to claim.

Senator SIEWERT —Could you tell me what percentage you were using for those who are already claiming and what estimate you are using now for those you think are likely to take it up?

Mr Ignatius —I do not have that data here but I can take that on notice and get it to you tomorrow.

Senator SIEWERT —That would be appreciated. I am aware that you may not be the right department to ask, but have you done any modelling or do you have any information on the impact this will have on the capacity of the sector to provide the increase in training requirements?

Mr Ignatius —Not in a direct sense, but there have been measures taken by the government recently that have increased the number of training places. We would anticipate that those would be used in responding to the increased take-up.

Senator SIEWERT —At the moment the uptake from those on Newstart—or those allowed to do it—is relatively low. Under this package—and because you cannot tell me what your projection is for the increased number of people who will be taking it up—it is difficult for us to know whether this capacity is going to be there. So it would be useful if you could take on notice.

Mr Ignatius —Certainly.

Senator SIEWERT —So, what planning has been put in place for the increase in capacity? Is there actually funding available to meet that capacity? Because the $950 available to those who are eligible for it will not necessarily totally provide for putting that capacity in place.

Mr Ignatius —We will take that on notice.

Senator SIEWERT —What I want to be clear about it is how many people on Newstart will be getting the $950 bonus. Okay?

Mr Ignatius —Yes.

Senator SIEWERT —The package also, if I understand correctly, includes the projected increase in the number of people applying for the actual payment, which is $208. So I want the breakdown for both, if that is possible, please.

Mr Ignatius —People would be eligible for both of those payments. So, provided they had undertaken an approved course, they would get—

Senator SIEWERT —Yes, I appreciate that. The point is that there will be an increased number of people eligible for the payment or taking it up. Does the package include projections for the increase in numbers both for the $208 and for the $950?

Mr Ignatius —Yes.

Senator SIEWERT —You will provide me with those figures?

Mr Ignatius —Glad to take that on notice, Senator.

Senator SIEWERT —Thank you. Will the requirement for Newstart recipients to either come off Newstart when they are getting this payment or have it as part of their activity agreement still be enforced?

Mr Ignatius —Sorry; can I have the question again?

Senator SIEWERT —The existing requirement for this payment is that either you move off Newstart to some other form of income support or it has to be included as part of your activity agreement. Will that still be a requirement?

Mr Ignatius —Yes. The conditions are the same as the conditions for the current employment entry payment. It is just that that rate has been increased, and also the period for which a person has to be on the payment has been reduced to a month.

Senator SIEWERT —Reduced to four weeks, yes. So each person who is now eligible for the $950 will have to ensure that their activity agreement is reassessed and amended in order to get this $950? And—sorry; it is a double-banger question—will there still be the same requirement for the eligible training courses?

Mr Ignatius —The conditions are the same as the current payment.

Senator SIEWERT —Okay. So there is no change. Thank you. Have Treasury done any modelling on where they expect the highest rates of unemployment to be? I am coming from the perspective of the poverty postcodes—you would be aware of the work around the poverty postcodes. Have you done any work that looks at where these measures might be best targeted geographically?

Dr Henry —No, we have not.

Senator SIEWERT —So you are not looking at trying to focus these resources on those most in need or those most subject to disadvantage, or looking at where we are going to see increasing rates of unemployment, people entering into financial crisis, for example?

Senator MILNE —The crash postcodes.

Senator SIEWERT —Yes.

Dr Henry —I would make two points in respect of that. Our modelling has not had any geographic disaggregation in it, so we have not produced forecasts of just where in Australia we expect the aggregate demand deficiencies to show up and, consequently, where in Australia the increase in unemployment might occur. Obviously enough—and it is certainly fair to raise it—there will not be a uniform reduction in aggregate demand and, obviously enough, there will be some dispersion geographically in the increase in unemployment rates. The measures in this package are designed to stimulate aggregate demand—and that is aggregate demand. The question you are raising, I think, is whether this package has been designed to target particular geographic regions. Not especially so. I think it has really been designed, as I indicated earlier, to support aggregate demand.

Senator SIEWERT —I might sneak one more question in—that is, what modelling, if any, was used to double the amount of money that is available in the package for emergency relief? I think it is $60 million. Was there modelling used for that, or how was that figure arrived at?

Mr Ignatius —Senator, I can answer that. The current forward estimates were used for that program, and it essentially doubled the estimates, assuming that there would be a partial takeup for this year from around the beginning of March.

Senator SIEWERT —It doubled; I appreciate that. But on what basis was that doubling undertaken?

Mr Ignatius —It was on the basis of the current forward estimates for that program for the current year and future years.

Senator FIELDING —I have had a lot of emails come through to me about this stimulus package and I am sure others have too. I have a couple of cases here. One is an 88-year-old war veteran who makes donations to various charities each year—the Red Cross, the Salvos et cetera—and has zero tax to pay. He pays no tax because he gives to charities. He believes he is not going to get any payment because he has no taxable income.

Mr Parker —It might be best if you were to provide these particular cases to us and we could give you an answer. On the basis of the broad story that you have told, he has no net tax liability therefore he is not within the scope of the tax bonus.

Senator FIELDING —I have another case here. A man and his wife, both 22, start full-time tertiary studies this year. They start on 23 February. They will transfer on that date from the Newstart payment to youth allowance. Because they were not on youth allowance on 3 February, they will miss out. They have not been on Newstart for 12 months or more, so they are not eligible to claim the education payment. Is that your understanding of that case? They are pretty simple cases.

Mr Ray —I think, again, Senator, it is such a precise, individual case that it would be better if you provided it to us so that we could give you a considered answer.

Senator FIELDING —I will give them to you, but I have been through them and I have been through the documentation and I cannot see these people getting a particular payment. In another case, there are two sisters whose hardworking mother died of breast cancer and left her super and life insurance to her daughters. The two daughters paid the tax as a one-off payment and declared it in their 2007-08 tax returns, putting them in for the first time at above $100,000. In the years on either side of that year’s return they had taxable incomes under $80,000. They will miss out on the money. I have another case here—

Senator ABETZ —Senator Fielding, for what it is worth, I put nine such scenarios to the tax office when they were before us.

Senator FIELDING —I think it is pretty important to look at these cases. Here is another one: a GP and his family will be receiving about $3,000 from the package. The GP explained that he earns approximately $300,000 a year. Because his wife earns less than $80,000 and his adult children residing at home are students, they will qualify for the government’s handout. The doctor is appalled that his family will receive this payment as a high-income family when there are so many other Australian families in need. I have another one here—

Senator SIEWERT —How do they qualify if they are over 18? They should not be getting Austudy.

Senator MILNE —If they are getting Austudy, they should not be living at home, if they are independent. What is going on? Investigate.

Senator FIELDING —There is another one here who says, ‘Personally, I do not need the extra $950, but there are so many Australians who do. I am considering giving my money to people who need it more than I do.’ Obviously, you would say that it is great for them to do that. It goes on to ask: ‘Can you find some way of urging the government to give it to those who need it most?’ There is a theme happening here across the board. I do not want to go into the needs of people in Victoria, but I am being frank. There are a lot of people who are contacting me and saying that they do not actually need the money. Yes, they will take it, but they do not need it. And at this time of hardship I ask about finetuning the package even further to make sure that we look at people who do need it more than just these broad categories. I will give the cases to you. I do not expect you to respond now. I do not want to embarrass you folk, but there is something horribly wrong here.

CHAIR —The officers have suggested that they will take it on notice. I think that is covered in Hansard.

Senator XENOPHON —What is the long-term economic—Dr Henry, sorry; my terseness is a function of time rather than temperament—as distinct from budget, advantage of a stimulus package involving lump-sum payments up-front instead of tax cuts, particularly in light of the acknowledged advantage in terms of improved multiplier effects of long-term tax cuts and particularly as this downturn is expected to last some time?

Dr Henry —I am not sure I agree with the premise of that question—that is, I am not sure that it is the case that the multiplier effect associated with a permanent cut in income taxes is larger than the multiplier associated with a one-off cash payment, for example, or a short-term fiscal stimulus. I know there has been a lot of commentary in the press both in Australia and internationally that indicates that that might be the case, but I do not believe that the evidence supports that conclusion at all. We discussed the further point about the fiscal implications of a permanent tax cut the last time we met and I made the point that a permanent income tax cut has implications for the budget both in the short-term and, obviously enough, in the medium to longer term, and this particular package has been designed to have a temporary fiscal stimulus and not to build into the budget long-term reductions in the fiscal balance. The purpose of the package is that the stimulus be temporary and, as the economy enters a growth phase, the budget return to surplus as quickly as is prudent.

Senator XENOPHON —If I can just move to the issue of the cash payments, the intent of that is to give a stimulus to the economy as soon as possible in increasing demand in terms of consumer spending.

Dr Henry —That is correct.

Senator XENOPHON —In relation to the last cash payments, last December, you have indicated it will take a few months for ABS statistics to fully set out what exactly happened. Was any consideration given to having a household expenditure survey or research to actually find out in a qualitative sense what the recipients actually did with the last $10.4 billion so that we can better plan or target the next lot of payments?

Dr Henry —No, and for two reasons. Firstly, such surveys, if done well, are expensive and take a long time to set up.

Senator XENOPHON —But it would not be in the billions of dollars; it would be hundreds or tens of thousands, wouldn’t it? In relative terms, we are talking about a lot of money.

Dr Henry —There are two points there, as I said. Firstly, it would be expensive, but it would also take a long time to set up, if it is an ad hoc household expenditure survey that you are talking about. The second point, and I think it is much more important, is that—as I indicated the last time we met—we never imagined that all of the household expenditure associated with the Economic Security Strategy announced in October would show up in the month of December. Indeed, we would not expect that all of it has shown up yet. In fact, far from it. In the analysis that we did in support of the Economic Security Strategy announced in October, we took the view that it would take some quarters—that is, many months—for the full increase in household consumption activity to appear. It would in our view be much too early to conduct that empirical study, that household survey, that you are referring to.

Senator XENOPHON —What ballpark percentage, what proportion of the $10.4 billion in December and of this proposed package of handouts would be spent in what period, say in the first six months? How much of that is expected to be spent rather than saved or used to pay off debt?

Dr Gruen —As Dr Henry said, we do not have data for that event but we do have data for similar events and in particular—

Senator XENOPHON —Previous cash bonuses?

Dr Gruen —Yes. The most careful analysis that we are aware of was done for the one-off payments in 2001 in the United States, which have been studied very carefully. In those cases what was found were two things of relevance. One was that something like 20 to 40 per cent of it was spent in the first three months and also people with credit card debts tended to pay them off to some extent. Over time, on average, the people who paid off their credit cards used their lower level of debt to fund further expenditure later—after the first three months.

Senator XENOPHON —Could you provide that information?

Dr Gruen —Yes.

Senator XENOPHON —And also, the Howard government’s baby bonus of several years ago, about 2004, was a significant cash payment then. Have any studies been done as to how that was spent?

Dr Gruen —We can get back to you on that one. Let me just finish, the estimates after six months were that about two-thirds of the money that had been handed out in 2001 in the US was spent.

Senator XENOPHON —Surely a survey at different points in time would still be valuable in terms of targeting policy and what measures should be implemented next, given the magnitude of the payments.

Dr Gruen —Yes, I am not going to deny that. It is just limited resources, I suppose.

Senator XENOPHON —They are significant resources in the amounts we are talking about. There has been some discussion amongst one of the retailer’s groups saying that a voucher system would be better and there has been discussion about using a debit card. References were made that Thailand and, I think, even Germany looked at a system whereby you get the bonus but you have to spend it on goods and services within a fixed period. Leaving aside any administrative issues there, to what extent would that be more effective in providing stimulus to the economy?

Dr Gruen —I think you have hit the nail on the head. It is the administrative issues that are crucial. To the extent that the logic of these payments is to get stimulus quickly into the economy, if it is the case that setting up the administrative arrangements will slow you down significantly then that is a very significant downside to this suggestion.

Senator XENOPHON —Has that been analysed at all by Treasury in terms of delivery systems such as vouchers, debit card or another mechanism?

Dr Henry —No. There is another difficulty with such proposals which is that, if you were convinced that, absent a voucher mechanism, all of the $950 was going to be saved, if you were convinced that that is how the relevant household was going to behave—

Senator XENOPHON —I am not suggesting that.

Dr Henry —I am just trying to illustrate why there is a difficulty with the voucher proposal—then surely a household that could only access the $950 through a voucher arrangement would simply spend that $950 and reduce spending by an equivalent amount elsewhere in their income. That is, if you thought that the whole $950 was going to be saved unless you had a voucher mechanism then surely what the household would do is take the voucher, spend all the money and save another $950 part of their income. To put it another way, money is fungible.

Senator XENOPHON —You do not see that it might shift things in terms of encouraging expenditure?

Dr Henry —It should not make any difference at all. There may be some behavioural science in this that I am not aware of, but I cannot understand why a household would not act rationally in these circumstances.

Senator XENOPHON —Can I go back a bit. Dr Gruen has also answered this in part. We have spent billions of dollars and are proposing to spend billions of dollars in payments. Would it make sense to invest a little in relative terms in some systems to be able to give Treasury, to give the government, information as to how it is being spent and to what extent there are savings—looking at that behavioural economics, which, I think you have acknowledged, is a relatively new science.

Dr Henry —That may be. It is not for us to make a judgement on whether or not that should happen, but I think that, if you were going to do it, you would really need to start with the existing Household Expenditure Survey, because it is comprehensive and well established. We understand the statistical properties of it reasonably well. I think that what you are talking about is refinements to the Household Expenditure Survey. I know that the existing Household Expenditure Survey could not be made to operate as quickly as you would want it to operate. It has lengthy recall periods in it—I think up to 12 months—which is quite understandable if you are asking people how much they spend on durable items, for example. I think there is a difficulty in designing a comprehensive Household Expenditure Survey that has recall periods as short as, maybe, a couple of weeks, which I think is what you are after.

Senator XENOPHON —I will not take it any further. Professor McKibbin, in his submission, said that Australia has been put in a very advantageous fiscal position to respond to external shock. He says:

This suggests that the scale of the Australian response should be less than the world average.

Do you agree or disagree with that?

Dr Henry —I do not agree with that.

Senator XENOPHON —You do not think that the fact that we are in a better position than other countries should temper our response in part?

Dr Henry —No. In fact, I think that one may well argue to the contrary. It is true that our starting point in fiscal circumstances is much better than most industrialised countries. That gives us the capacity to move more quickly and more aggressively than other countries in dealing with the macroeconomic challenge that we confront. We would have more scope to move. I think one could argue that we should use that greater scope that we have.

Senator XENOPHON —Finally, in relation to the CPRS, your modelling goes only to 2010 and the CPRS will come in after that time. Should that be considered, given that we are looking at an impact on the budget, with this proposed debt for a number of years? Shouldn’t the CPRS have been factored into this, given the significance of the proposed scheme?

Dr Henry —I do not know how we would factor it in. In order to factor it in, given that the CPRS commences outside our forecast period, we would have to obviously extend our forecast period. To give explicit economic forecasts for the present fiscal year and the subsequent fiscal year, we would obviously have to extend our macroeconomic forecasts for longer periods of time. In evidence presented to Senate estimates committees over a number of years we have made the point that, whilst we can see a case for providing longer term forecasts, the reliability of those forecasts would obviously fall, the longer the forecast period. We could provide such forecasts but they would be less reliable than the forecasts for the immediate future.

Senator JACINTA COLLINS —I have a few questions for Dr Henry, if I might. Dr, we were taken on a few occasions to this Economist article about the weighted average of 3.6 per cent, but I want to take you to a different point. To quote from the article, which was by Messrs Iginla and Xian, it states:

… if countries that can stimulate safely do not do enough, and if fearful investors shy away from emerging markets, the odds of a lasting recovery of the global economy seem slim.

Is that not indeed consistent with the IMF position also?

Dr Henry —Yes, that is consistent with the IMF position.

Senator JACINTA COLLINS —And would you agree with it?

Dr Henry —I think that is an unexceptional statement.

Senator JACINTA COLLINS —Thank you. You were taken earlier to Professor McKibbon’s evidence before us. He appeared as a private individual. I wonder what consultation occurred with the Reserve Bank, if you can inform the committee of that and of their view on this package.

Dr Henry —I think I can indicate that, during the development of this package, I kept the governor informed in a general sense of the possible shape of the package that was under development. I then briefed the Reserve Bank board in full on the detail of the package prior to the board taking its monetary policy decision last Tuesday, and obviously prior to the announcement of the package.

Senator JACINTA COLLINS —And were any significant concerns raised regarding the composition or scope—

Dr Henry —Senator, you put me in a difficult position there. It is not for me to speak on behalf of the Reserve Bank board. I think it appropriate that I leave that task to the chairman of the board, to the governor.

Senator JACINTA COLLINS —Let me move to another issue: credit rating agencies. What can you tell us of the reaction to a stimulus package of this size in relation to Australia’s likely future standing?

Dr Henry —Credit rating agencies have also been briefed on the package, and credit rating agencies have not expressed any concern with the package.

Senator JACINTA COLLINS —Would they take a different view of a $180 billion versus a $200 billion debt?

Dr Henry —I cannot speak for credit rating agencies, but I would be surprised were they to draw a distinction.

Senator JACINTA COLLINS —On the discussions we have had about the scope of the individual payments, particularly with respect to the coverage of low-income earners, has any sort of estimate been done on what proportion of low-income earners was likely to attract payments, either under this stimulus package or the earlier one—putting aside the fact that, as you quite rightly pointed out earlier, utilising existing delivery mechanisms is also going to have consequences?

Mr Parker —You asked a question to that effect the last time we met.

Senator JACINTA COLLINS —Yes. I don’t think the answer is back yet.

Mr Parker —We have tabled answers to those questions. The estimation that—

Senator JACINTA COLLINS —If you have tabled it, that is fine; we will see that in the tabling documents—but we have not yet seen them all.

My final question relates to the point that you were making earlier that the stimulus package was designed to be temporary and immediate. I think that would be a fair characterisation. In relation to a focus on social versus economic capital, or infrastructure, can you brief the committee on the advantages of the more immediate sense that an investment in social capital involves rather than economic capital?

0Senator Milne interjecting

Senator JACINTA COLLINS —Sorry, I think Senator Milne is asking what I meant by that question. I am asking whether you can reflect on what has been put to me—that investment in social capital is more likely to have a more immediate impact, particularly on employment, and that local projects are more likely to be, in the phrase that we have been using so far, ‘shovel ready’ in that field as opposed to in the economic infrastructure field.

Dr Henry —Sorry, yes, I now understand the question. I think we did traverse this ground a little—

Senator JACINTA COLLINS —Sort of. But the answer that came back to us was not comparing social versus economic; it was actually comparing social versus one-off payments to individuals.

Dr Henry —I see. I think we made the general point the last time we met that sizable economic infrastructure packages typically have quite long lags associated with them—decision-making lags, for one thing, but also quite significant implementation lags. With respect to large economic infrastructure, repairs and maintenance activity can be undertaken in a much more timely fashion. Smaller scale social infrastructure packages can, in general, also be undertaken in a more timely fashion.

Senator JACINTA COLLINS —Thank you.

Senator CAMERON —Professor Dixon made the point in his presentation today that the issue of spending $27 billion should result in 450,000 jobs as distinct from 150,000 jobs, I think he said. Do you have any explanation for that assertion?

Dr Henry —No, I am sorry but I do not understand the basis for Professor Dixon’s calculation. I have not seen Professor Dixon’s evidence until now; I have just had it put in front of me. I would need some time to consider the nature of that evidence.

Senator CAMERON —I would appreciate that. He said that $27 billion divided by 60,000, which is the average wage, should result in all these extra jobs. I would be interested to hear your view.

CHAIR —Would you take it on notice?

Dr Henry —That looks like back-of-the-envelope arithmetic. I should not presume that it is but, from the way you have presented it, it looks like it is. I do not think one should divide $27 billion by an average wage number to calculate an impact on employment. I imagine the better figure to use would be GDP per worker, which is very different from average labour income per worker. For one thing, I would be dividing by a much larger number than 60,000, because GDP per worker is considerably larger than 60,000, obviously. In fact, it is about double that. I do not know whether that is the only difficulty I would have with Professor Dixon’s calculations.

Senator FIFIELD —I will pass straight across to a colleague but I think there is something we neglected to ask to be taken on notice. When Senator Ryan was asking what rate of growth would be required to get the budget into balance, the time frame was—

Senator RYAN —Over the projections.

Senator FIFIELD —I think we neglected to specifically ask for that to be taken on notice. Could you do that, please?

Dr Henry —We will see if we can provide an answer to that question.

Senator FIFIELD —Thank you.

Senator ABETZ —I want to ask one quick question, if I may, Dr Watt. I think you indicated that there was a COAG reform procedure. Was that the COAG reform bill that passed the parliament on 18 December 2008?

Dr Watt —I am sorry, but I am not clear in what context I indicated that.

Senator ABETZ —I thought it was you. I was asking my bracket of questions in relation to the UEFO, saying that the money was going to be spent by Treasury whereas the appropriation bill said it was going to be spent by FaHCSIA.

Dr Watt —I think it was Dr Henry who indicated that.

Senator ABETZ —Well, somebody has now indicated to me that a COAG reform bill was in fact passed on 4 December, received royal assent on 18 December and came into play on 1 January 2009. Is that the reform package that you were talking about?

Dr Henry —It is not that bill. Maybe—

Senator ABETZ —That is all I need to know. Thank you.

Senator JOYCE —Dr Henry, on 3 February 2009, in a Treasury fact sheet on energy efficiency measures, you said: ‘Overall, it is estimated that these new measures could result in the abatement of 4.7 million tonnes of carbon dioxide equivalent Mt CO2-e per year from the end of the program and the total abatement of 49.4 Mt CO2-e by 2020.’ Since you are discussing there the efficiencies in relation to carbon pollution reduction, would you agreed that even with the Carbon Pollution Reduction Scheme, which has a five per cent target for CO2 reduction by 2020, the insulation measure in the stimulus package will not actually reduce carbon emissions at all but merely reduce the permanent price, allowing polluting businesses to purchase emission permits at a lower price?

Senator MILNE —Yes, because you are not reducing the cap; it is just trading within the cap, so you will reduce the price.

CHAIR —Perhaps we could allow Dr Henry to respond. Or would you like to take it notice?

Dr Henry —I think I will have to take it on notice.

Senator JOYCE —Dr Henry, we have already heard the argument that because tax cuts are not targeted they are ineffective. But giving someone a voucher is also not effective. If you hold that tax cuts are not effective in how they target that expenditure, why would anything be less effective, if that is the direction you want to go in, than handing someone a voucher and saying they have to spend it by a certain date?

Dr Henry —I did not mean to give the impression that a voucher would be ineffective. What I was saying is that I do not think giving someone a voucher would be any different from giving them an equivalent amount of cash. I do not think the behaviour response—

Senator JOYCE —So it would be the equivalent of cash?

Dr Henry —Correct.

Dr Gruen —Provided that they had enough money to be able to spend the voucher and then use the other money and save it; that was the point. There will be some individuals who presumably have no money at all and would have to spend the voucher.

Senator FIELDING —What analysis was done by Treasury on that small business voucher for the GST? I am interested to know what Treasury does—if they do things and then do not measure them.

Dr Henry —We have undertaken an analysis of that, but it was some time ago and I cannot recall the details.

Senator FIELDING —Could you take that on notice?

Dr Henry —Of course.

Senator ABETZ —The question that everybody in Australia wants to know the answer to is this: at what time in the future can we come back into this room and discern whether or not this package has worked? Or is that time never going to arrive?

Dr Henry —It will always be difficult. Through the course of this year and next year, as we get the figures we will do our best to make an assessment. But it will always be difficult because, in making that assessment, we will necessarily have to make a judgement about where the economy would have been without these measures, and that is even more difficult than estimating where the economy really is at. We will try to make an assessment as the statistical evidence comes in, but it is going to be difficult for us to be able to provide the parliament with precise estimates of the actual fiscal impact of the package.

Senator JOYCE —There are no other economies that are similar but doing it differently—such as, to just pluck one out of the air, the Canadian economy—where you could say, ‘They’re not doing it, we are doing it, so let’s see what happens down the track’?

Dr Henry —No. The problem is that all economies are different. All economies are experiencing different macroeconomic circumstances. It is true that all economies around the world are experiencing unusually weak macroeconomic circumstances, but there are sufficient differences among economies that that sort of analysis you are referring to would not be particularly useful.

Senator JOYCE —Thank you.

Senator RYAN —I have a couple of quick questions to Dr Gruen about the multiplier. I understand that you said you cannot disaggregate the individual components of the package and maintain a degree of confidence about the multiplier for each of them. Is that a fair summary of what you were saying earlier?

Dr Gruen —I was making the point that if you assumed that the multiplier for each of the individual packages was identical, if they had the same multiplier, then you would get the aggregate answer but—

Senator RYAN —You would not be confident assigning the various different multipliers to each component of the package?

Dr Gruen —That was the point I was making: that there is a sufficient range in these things that being more precise about this having a slightly higher multiplier than that gets you into a situation where you have less confidence.

Senator RYAN —Everything else in the UEFO is a number estimate, a point estimate. You have quoted a couple of times ‘0.5 to one’ as the multiplier assumed in the model for the programs announced as part of UEFO. Is there a specific number that is the multiplier, between 0.5 and one, for the sum total of packages that you can give us?

Dr Gruen —Let me just give you an explanation of the ‘up to 90,000’. Not only is there a range for the multiplier, but it is also the case that there is a time profile for the effect on jobs. The 90,000 is an estimate of what we think is a reasonable number for the maximum jobs impact over this period up to the middle of 2010.

Senator RYAN —So that is jobs over two years. If the model says that this is not possible I will understand. Through our discussion of this we have always referred to a 0.5 to one multiplier effect. Is there a single number. There is not—it is a range?

Dr Gruen —Yes, it is a range.

Senator RYAN —You do not have a higher degree of confidence about a single number? We had the discussion last Thursday about the jobs and whether it was a range of jobs, and there was not a number you could give us at a lower range of jobs because there was a degree of confidence about the ‘up to 90,000’. But with the multiplier it is a range—there is no specific number that can be given even with a high degree of confidence?

Dr Gruen —In the document you will find an estimate of by how much GDP has been raised. If my memory is right, it is half a per cent in 2008-09 and between three-quarters and one per cent in 2009-10. We are saying that GDP at the end of 2009-10—let me hope I get my algebra right here—is between 1¼ and 1½ per cent higher than it would otherwise be. Let me just check that; yes, that is correct. We are saying that one per cent increase in GDP creates up to 75,000 jobs. So 1¼ to 1½ will give you a number around 90, 000—possibly a bit higher, possibly a bit lower. That is the basis on which we have done these calculations.

Senator RYAN —And the difference between the one and the 1¼ or 1½—I understand there is a range in the document as well—is based partly on the variance in the multiplier that is assumed?

Dr Gruen —I think we are sensitive about giving the impression that there is more precision in this than there really is—

Senator RYAN —I appreciate that.

Dr Gruen —so sometimes we provide ranges. There is a kind of tension here between giving point estimates, which are easier to understand, and sometimes giving ranges because we think they are a more realistic—

Senator RYAN —But you will not give the same range for jobs.

Dr Gruen —Well, we said up to 90,000. In principle, you could take our previous estimate—

Senator RYAN —But we do not say up to one as a multiplier; we say 0.5 to one as a multiplier.

Dr Gruen —Yes, it sounds like up to one.

Senator JOYCE —Dr Gruen, since we cannot decompose that package—

Dr Gruen —You could if you liked. You can if you want.

Senator JOYCE —Well, ‘deconstruct’—whatever you want. Because we cannot deconstruct—or ‘deaggregate’—the package then as for the 10 issues that you have given us—no, not that you have given us but that have been given to you to analyse, obviously—would it make any difference if we just went out and dug $42 billion worth of holes and then filled them in?

Dr Gruen —I guess the answer to that is that Keynes at some point made the point that the effect on aggregate demand would be the same if you dug holes and filled them in. It is actually a famous example. But to the extent that you can do something which has the same effect on jobs and you end up with something that is actually what society wants, that is clearly preferable to digging holes and filling them in.

Senator JOYCE —But society does not want Pink Batts and boom gates in the same form as they want infrastructure.

Senator RYAN —Dr Gruen—

CHAIR —This is your final question.

Senator RYAN —Yes, Madam Chair. Dr Gruen, I have got one final question. Firstly, I did put a question on notice—and I am wondering about the possibility of answering that, and I understand there are time restraints—which was about disaggregated revenue tables.

Dr Gruen —Yes, we have got that.

Senator RYAN —Thank you. This other question may be taken on notice. I may have missed it—I did look through the UEFO and I noted the GDP growth figures, nominal and real, and I noted the figure at the end of 3½ years there is expected to be 5.2 per cent of GDP—but I actually could not find in it nominal dollar values for GDP and for the debt expected as 5.2 per cent of GDP. I was wondering this: is it possible for those to be provided? I just have not had the time to go back and calculate it from the budget papers or the MYEFO.

Mr Ray —We can do the calculations for you.

Senator RYAN —Thank you very much.

Senator COONAN —What is your best example—

CHAIR —Can I say that was the final question. We have exceeded our time. There is one issue relating to a question that Senator Collins raised. Do you want to clarify it, Senator Collins?

Senator JACINTA COLLINS —Yes, it is just that we do now have on notice—I am sorry, but the secretariat had not passed this one on—what proportion of people are covered in the scope of either the first or second package. So it is if I can confirm that the 98 per cent of non-dependant adult Australians who receive a payment is for both.

CHAIR —I thank Dr Henry and the officers that have appeared before us. I again thank you very much for the consideration of rescheduling. I also thank my committee members for what has been a very sobering day and for their diligence in observing what we set out to achieve today. So I thank you all. I thank Hansard and the secretariat. I remind people that with questions on notice we need a response by 12 noon tomorrow, because we have to tailor the report tomorrow evening. Thank you all, and drive safely.

Committee adjourned at 9.03 pm