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Transcript of media conference: Sunday, 27 October 2003: Parliament House, Canberra: Chiefly Research Centre paper on fiscal policy rules in Australia.

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Subject: Chifley Research Centre Paper on Fiscal Policy Rules in Australia

MCMULLAN: What Mark Latham and I are releasing today is an important discussion paper. What I think it will do for anyone who studies it is underline the fact that the Labor Opposition is very strongly committed to rigorous fiscal policy because we understand that is the foundation for good economic management.

A week ago, we released details of $1.5 billion of savings from Government inefficient wasteful programs. That is in addition to $5 billion of savings we previously identified.

So, those two things together make it very clear that we are committed to being tough on fiscal policy and this paper creates an intellectual framework for it. It is not a Labor Party Paper - it is an independent research paper commissioned by the Chifley Research Centre. It doesn’t constitute our policy and I don’t think we will be adopting every piece of it but what it is, is a very important contribution to the discussion about fiscal policy rules in Australia because I think it is a discussion that has gone right off the rails in the last decade or so.

The other important immediate thing that it does is look at alternative ways of dealing with the issue of the ageing of the population, the so-called intergenerational equity issue. The Government thinks the way to deal with that is a very negative response, that is, putting a very big tax on pharmaceuticals, increasing the price of pharmaceuticals for pensioners and other citizens. We think that there is a positive alternative agenda and this paper indicates the case for it through cutting taxes on superannuation. That is, providing people an incentive to do the positive things that national savings requires through incentives for increased superannuation saving rather than dealing with it defensively or negatively by big taxes on pharmaceuticals. So that is why, it is a paper that in itself is an independent paper, commissioned by the Chifley Research Centre which deals with some fairly arcane economic issues as well as some very basic and fundamental ones and its primary purpose in the long term will be to just improve the level of economic debate in Australia. I think most Australians would accept that the Hawke and Keating era lifted the quality of economic debate in Australia and after it had been fairly substantially debauched and it has lapsed again - we are trying to lift the level of that debate. So at one level it is a serious important long-term contribution to public policy debate in this country but it does have immediate consequences:

• it underlines our commitment to rigorous fiscal policy as a foundation of good economic management; • it reinforces our commitment to make tough savings decisions so that we can put our priorities before the Australian people without increasing taxes;

• we can put to the Australian people starkly different choices at the election without massively increasing spending because we are cutting out Government waste, it underpins that; • it shows an alternative way of dealing with ageing - a positive response to the

intergenerational equity problem through incentives for superannuation rather than a negative response through pharmaceutical taxes; and

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• while it doesn’t represent our final approach, we do think it is a very important contribution to the public policy discussion.

But those are my initial responses. I know not everyone has had a chance to have a look at it but I am sure there will be more analysis and discussion of it in the weeks and months to come. But, that is the paper, it is produced by Dr Ric Simes who not everybody will know - he is now a senior private sector economist but he was a Deputy Secretary of Treasury and both a senior public sector economist as well as private sector and as you can see perhaps from the acknowledgements, it has been based on consultation by him with a wide range of very experienced and prominent participants in the debate about public policy and public finance. And that is what we are trying to do, what we are seeking to do here. I am happy to deal with any questions you have got now and if some people need to take it away and come back and call me later because it is a complex document, I would be happy to do that.

JOURNALIST: You said that some recommendations you wouldn’t say that they would come on board as Party policy but there are some that would immediately jump to mind as possible Labor Party policy, say with number one the ABS …

MCMULLAN: Absolutely. We haven’t made a formal decision but I am strongly of the view and I know that most of the senior people in the Party share the view that we will adopt the proposition that the Australian Bureau of Statistics measures should be the independent measure of budget performance and that will of course kill off that stupid argument about whether the GST is a Commonwealth tax or not - that argument will be dead forever because everyone will just have to accept the obvious fact that everybody in Australia knows that the GST is a Commonwealth tax and the ABS makes that clear and we will accept it.

JOURNALIST: What about in terms of having a balanced budget over the cycle? Does that put a constriction on a Government over time?

MCMULLAN: The Howard Government has a commitment to balancing the budget over the cycle, at least in theory. It has broken it on a few occasions, for example, it ran a deficit in the fiscal year before last even though, of course, it blew the budget to get itself re-elected - so it has breached that rule. This, in fact, suggests a slightly tighter rule but broadly, our view is we will be arguing for balancing the budget over the economic cycle. We will also be arguing that budgets should make a contribution to national savings. It is a slightly different point because it could be that you don’t run such a big surplus if you are providing tax cuts to encourage people to save for superannuation - that is still the budget making a contribution to national savings it is just doing it through a private sector incentive. But that is not an excuse which we will use to avoid the obligation to balance the budget over the cycle. We will go to the election committed to do that and we will also go to the election with commitments about tax cuts on superannuation which we have already outlined.

JOURNALIST: Bob, in a sort of broad sense, does this kind of advocating a more Keynesian policy for managing the economy in addition to the monetary approach and do you think it would diminish the need for monetary policy changes somewhat?

MCMULLAN: No but there are two important points about it - I wouldn’t express it like that but it is true that this is, I wouldn’t call it Keynesian, but it is trying to re-establish the principle that it is legitimate and it is accepted throughout the world - the IMF, the OECD, every independent analyst that there is a legitimate role for government fiscal initiatives in counter-cyclical activity. That is, if the economy is going very very badly then it is proper for the Commonwealth to step in and do something about that which it did in the 90s for example after the recession. The economy tends to do that automatically and this paper says it should do that and there is a case particularly in Australia for being able to do more.

I think the second point is quite important. I think Australia is heading in the direction of interest rate increases. I don’t forecast particularly when, that is not appropriate but I do think that is the direction which we are going and with the level of Government spending and


suggestions that it is going to go up in today’s media, that is going to put more pressure on interest rates and I think families will find that it is going to put extra pressure on their budget.

JOURNALIST: But one of the interesting points that the papers seem to be making is that the Government has moved in the wrong direction on a number of occasions - you know, they have injected too much when the economy didn’t need it and not giving enough when it did?

MCMULLAN: Well there is no doubt about the first of those two things that the economy under Peter Costello as Treasurer ran deficits at a time when the economy was growing strongly and fortuitously it ran a bit of a deficit when it slowed unexpectedly but it wasn’t part of the plan it was simply that they blew the budget in the lead up to the election. So, I think the Government has been slack on spending - the only reason it doesn’t show up much on deficits is because of the record high level of tax and the net effect of the period of fiscal policy has been to put extra pressure on interest rates and I think that that is a problem that families will start to see the consequence of soon. But this is more of a longer-term proposition but it does expose, I think, the inadequacies of some of the policy recently and certainly some of the public debate recently.

JOURNALIST: In political terms, the last co uple of weeks you have told us that in Government there are going to be a lot of people who will be upset with cuts you make and now we are talking about Labor’s commitment to rigorous fiscal policy. ………strike against the old conservative attack that Labor in Government will spend like …..?

MCMULLAN: It is certainly a conscious decision in the last few weeks to make it clear that we are going to be tough on fiscal policy and not just talk about it but announce some decisions that make it clear. But it is rather because there is a view and, it could be true if we allowed it to occur that we can get caught in a trap where the Government spends all the surplus in the lead up to the election seeking to trap the Opposition into either not being able to announce any new policy or have to put taxes up. But we are saying this is the way out of that trap. We can, by articulating our commitment to alternative priorities, getting rid of the money they waste in other areas and focusing on our priorities, we can give people a real choice, make the contrast stark at the election without either blowing the budget which is exactly your point - if we look like we blow the budget and that would put pressure on interest rates then that would absolutely destroy the benefit that we would get from any good policy we might announce. We have already shown it twice, we have announced big education and health expenditure programs with virtually no call on the surplus whatsoever and we intend to keep doing that.

JOURNALIST: What is the status does this paper now have?

MCMULLAN: Well, this is an independent discussion paper. When we come out and announce our policy on these matters, it will be Labor Party policy. The Chifley Research Centre is associated with the Labor Party of course, so it is not that we have no ownership of it, but it is not our policy and it is written directly and consciously by Dr Simes as his paper but it will feed a lot into our thinking and I certainly think the underlying themes of it are sound but we won’t be accepting all the recommendations and I don’t think Dr Simes would think we would. One of the great achievements of Labor Government’s in the last 20 years has been to lift the level of economic debate in this country. We think it has fallen away and it is time it was lifted again. One of those people who contributed previously was Dr Simes and now he is doing it again.

JOURNALIST: ……(Inaudible)…

MCMULLAN: Well, we are not proposing to establish an Intergenerational Fund. But what he is talking about if you allow me to be too ‘eye glazing’ about it, what he is talking about is what he calls ‘fiscal smoothing’, that is, that when you have a surplus you shouldn’t just spend it, you should put it to one side in a fund, for the known long-term budgetary pressures that are emerging because of the ageing of the population and other trends too but ageing of the population being the most commonly expressed one of them but that would give you the capacity to call on it in 10 or 20 years, or even more than 10 or 20 years, when those budgetary pressures emerge.


JOURNALIST: …..(Inaudible) …..

MCMULLAN: Well, not quite balance forever but it does mean that it doesn’t blow out in 10 or 20 years.

New Zealand has a similar idea. There is such a fund, its not called the Intergenerational Fund, and it is driven by slightly different imperatives but it is a similar concept. There is a fund which is money from the New Zealand budget to meet long-term commitments from their public superannuation scheme which differ from the pressures we have.

JOURNALIST: …..(Inaudible) …..

MCMULLAN: No, I don’t expect the Intergenerational Fund to be our policy at the next election but I think the principle underpinning it, which is that, budgets should make a contribution to national savings is correct but I don’t expect us to be endorsing the fund at the

next election.


MCMULLAN: Well, I think at least in the short term, the next term or maybe more, the priority for us as a way of using the Commonwealth budget to contribute to national savings will be to keep the budget in balance over the cycle but to provide incentives for superannuation

which is another option that Dr Simes refers to in the Paper. We think that is the pressing priority but that will help the budget to cope. The initiatives taken in the 80s on superannuation, are already helping the budget to be able to cope with the ageing pressures and better policies on superannuation, particularly through tax cuts on superannuation, will be an incentive to save and we’ll deliver the same outcome but in a way, at least in the medium term, better. Maybe sometime in the future a Government will think about that idea but I don’t expect that part of it to be our policy at the next election.

JOURNALIST: ....detail you want (Inaudible) …..?

MCMULLAN: Simon spoke about it in some detail in the Budget Reply.

JOURNALIST: Have you put them out?

MCMULLAN: We did then. So that is broadly what we will do. Now I say that because some underlying elements of what the Government is doing about superannuation have changed since the budget so we will, at some stage, have to come back with a revised response that takes into account some of the subsequent Government changes because the base point has changed. But yes we were specific about amounts then and our indications of direction. I don’t think we are going to be able to solve the problem of irrational and heavy tax on people’s superannuation contributions in one term, probably not even in two. It looks to me like a 10-year project but it is 10-years whenever you start, so we would be looking to start in our first term.

JOURNALIST: Bob, you have talked about some bad decisions, by focusing on ….. elimination. Is Labor going to be as ………….as the Government or ……………?

MCMULLAN: Well, of course, the Government talk’s surplus but it has run deficits so only 2 years ago and I think it is quite an inappropriate time to do it. But the main thing the paper is trying to do is say debt is too narrow a focus, you ought to talk about the balance sheet - the net worth of the government. That is, for example, if you sell assets you haven’t actually made your net assets position any better off, you might have reduced your debt but you also reduced your assets. Putting aside the controversial example of Telstra, let’s have a look at some of the simple things here around Canberra where the Government has sold buildings and paid off debt and said ‘look, we are paying less debt in the budget’ but the amount of extra rent we are paying, is higher than the interest we are saving.


JOURNALIST: …..(Inaudible) …..

MCMULLAN: We haven’t sold that.

JOURNALIST: …too valuable?

MCMULLAN: Well, the Labor Party might sell it but it doesn’t belong to the Government. But if you look at the Department of Foreign Affairs building for example, which was sold, I think you will find the people who brought it with grins like Cheshire cats because of the tremendous cash flow they are getting. Now that is actually negative for the budget but if you focus too narrowly on debt, rather than on the balance sheet, what Dr Simes is saying, and the examples are manifest, you make irrational decisions. If you focus simply on reducing debt rather than increasing net worth. Australia hasn’t had a serious debt problem in the public sector since World War II. On international standards, it has always been a low-debt country - it is a very

good thing to be. High debt is not a virtuous thing, low debt is good but you really should be focusing on assets and the balance sheet.

But, your more immediate question also, on balancing the budget over the cycle. It does mean you are prepared to run deficits when the state of the economy warrants it. I have said that before and it is a proper and intelligent thing to say. The Government must believe it because they did it.

JOURNALIST: This leaves open the idea of keeping a government bond market continuing on. Is that your current policy?

MCMULLAN: Yes it is. I announced after the Budget that we had the view that it is in the national interest to retain sufficient government bonds on issue to sustain a viable bond market. It is an important financial institution in Australia and if we need to issue extra debt, it could well be used as fund set against the Commonwealth’s very large superannuation liabilities. We do have that liability on the balance sheet and if we set up a fund against those liabilities, that would be a responsible thing to do. The Treasurer has stated that is his view that we should keep the bond market but as yet he has not said how he is going to go about doing it.

JOURNALIST: …..(Inaudible) …..?

MCMULLAN: Well, I want to know more about it but I think there is a serious question to be asked. We should be courteous to our visitors and so should visitors to the Parliament but I don’t think that people get conditional invitations to address our Parliament - they get invitations and they accept them within our norms and traditions. But I don’t pretend to now exactly what happened yet so I can’t comment in detail.

JOURNALIST: …..(Inaudible) …..

MCMULLAN: … I don’t know yet enough of what happened to express a view, I simply express a view in principle that I think our democratic - one of the reasons we invite people to our Parliament, one reason is to hear them and the other to show them the strength of our democracy and we ought to give them both. There are a lot of people on our side who know more about the issue then me so they can comment on the detail but that is my view on the principle.