GREENWOOD: Many thanks for your time Minister.
WONG: Good to be with you Ross.
GREENWOOD: There is of course criticism about the place that the Government could have cut this budget much, much harder. Is that your view as well?
WONG: I think it depends on who you talk to. Ive seen some people saying its pretty tough and others saying they wanted it to be tougher. We put in place $22 billion worth of savings. I think the other thing people -
GREENWOOD: Lets pick it up there because thats over four years. Lets also certainly pick it up that some of that is actually deferment of either projects and or expenditure that was there. And so the truth is that the really hard numbers that you got down to were probably somewhere between $3 and $5 billion over the next year.
WONG: Look, Im not sure thats right. I mean the net save out of the budget is just over $5 billion. And remember, despite a very substantial reduction in revenue to government because of the legacy effects of the global financial crisis and the floods and cyclones and all of that that you know about and the high dollar, which hit revenue by about $16 billion over two years, were still coming back to surplus. One of the key reasons were doing that is a lot of spending restraint.
GREENWOOD: Theres a lot of spending restraint, but there seems to be something structurally wrong with the Australian economy. That is, we have got a mining boom on, we have got terms of trade at record levels, but money is not flowing down to the Government. Where is the blockage?
WONG: Thats a very good question and thats one of the things we certainly focused a lot on, particularly in the last month or so. Because obviously you continue to get updates on that.
There are a number of reasons for it. As you know, weve had this year we know growth is going to be slower than was previously anticipated for some of the reasons weve spoken about. So obviously thats going to affect things. The high dollar does affect revenues to government because obviously that impacts on the profitability of those sectors which find it hard under a high dollar.
Weve also got a bit of a legacy effect going on in the capital gains tax area where some of the losses from the GFC period still havent washed through the tax system. And finally, youve got a very capital-intensive investment boom where obviously theres a lot of deductions when you make that kind of investment, as were seeing in the mining sector.
GREENWOOD: So because its being built at the moment, the infrastructure, and because youve got your retailers and your manufacturers suddenly being infected by a high dollar, youre not getting the money through the door but yet all this infrastructure is being built in the anticipation of the future wealth. So youve had to if you like defer some of your spending, defer a lot of the programs off until you anticipate the rivers coming back through into the taxation coffers of Australia.
WONG: Yeah, thats probably not a bad way to explain it. Big boom in mining but theres a lot of investment which isnt necessarily turning into tax revenue yet for government. Or there are certainly a lot of deductions on that. And then as you say, manufacturing, some of the services sectors, some of those areas which are affected both by the high dollar or by the fact that Australians are saving a lot more than they are spending these days than they previously were. Theyre obviously a much softer part of the economy than they were.
So thats all affecting government revenues. But were still coming back to surplus by 2012-13, which is the right thing to do.
GREENWOOD: We just heard from the chief executive of the Commonwealth Bank, Sir Ralph Norris; that he, after the Budget, has said that he thinks it was a responsible budget, it was on the right track. He also says that he still believes the Reserve Bank will raise interest rates twice this year. The Commonwealth Bank also has a forecast of four interest rate rises over the next 12 months. Do you believe that had the Government cut harder in this budget, that it couldve taken more pressure off interest rates?
WONG: Interest rates are set by the independent Reserve Bank. What we had to do was to confront the task of getting the budget back to surplus.
GREENWOOD: But there are two levers out there. Theres monetary policy of interest rates and theres fiscal policy.
WONG: Thats right which is
GREENWOOD: And as Finance Minister, you always know that if you dont pull the fiscal policy lever hard enough, then the Reserve Bank is going to pull the monetary policy lever hard, which is interest rates. The question is did you pull your lever hard enough?
WONG: We pulled back pretty hard, this is the fastest turnaround that the country has seen since about the 1960s. About a 3.8 per cent of GDP turnaround between this year and the year we come back to surplus.
And in terms of spending, lets just have a think about that. The average growth in Commonwealth expenditure over the Budget period will be about 1 per cent a year. in fact in one year it goes backwards. Thats in the context of a budget where youve got things like pensions, which continue to rise according to how much wages rise. The last time a government delivered that sort of spending restraint, Ross, was in the 1980s.
So its a very substantial clamp down on spending, precisely for the reasons you are talking about, which is we have got to do our bit to recognise the price measures in the economy and not compound them.
GREENWOOD: But a budget is also not just an economic statement but its also a political statement as well.
WONG: Thats true.
GREENWOOD: And of course inside you own party, there has to be significant and vigorous debate about the measures that you have and what you give and what you take in order not only to be responsible for the economy, but also to be responsible to your party and your reelection chances. What was the nature of that debate? Was it vigorous inside your own party?
WONG: Its always vigorous when youre saying no to ministers who want to spend things, and as the Finance Minister you know whats responsible. And I think the Expenditure Review Committee which Im on and the Treasurer is on obviously took a very responsible approach.
But can I tell you how we approached it in terms of what we wanted to spend on and what we wanted to save. And that was, what were the economic priorities? You asked earlier about fiscal policy. Fiscal policy is important, the budget is important not just for what you save, not just for how much you dont spend, but also what you spend on. And what are we spending money on in this Budget? Were spending money on building the capacity of the economy. Increasing the capacity by investing in skills and getting more people into the workforce.
GREENWOOD: But you as Finance Minister, you of course have to go and try to find the hollow logs in each of the departments. Theres been this new dividend efficiency dividend coming out of the public service as well.
WONG: Thats right.
GREENWOOD: How did you find that process? I almost called it a penny pinching budget simply because I thought that you were the one actually trying to get out the actual dollars from the individual departments themselves.
WONG: (laughs) Yes, its like someone called me Moneypenny when I first got this job and I said
GREENWOOD: Thats a terrible line! Youre going to get every one of those, arent you?
WONG: (laughs) Im actually no Moneypenny. Thats the reality.
Look weve got to try and find efficiencies everywhere. Weve increased the efficiency dividend. We also reduced the growth in civilian positions in Defence. We took some hard decisions in terms of tightening up various payments. Weve abolished a couple of tax offsets, like the Dependent Spouse Tax Offset.
So there are some difficult decisions in the Budget. But theyre decisions that I think we have a very strong argument for. And if you compare it to what the Opposition is putting up where they seem to be saying they want to return to surplus earlier but they oppose the savings measures. I mean, thats just economic muddleheadedness.
GREENWOOD: And or political shall I say nous or skill or whatever it might be which actually comes around the place from time to time. Because it is political combat, after all, Penny Wong.
WONG: Thats true.
GREENWOOD: Youre only too well aware of that as well. Penny Wong is the Finance Minister. And as always, we appreciate your time here on Money News.
WONG: Good to be with you.
ENDS