WONG: I just wanted to start with a few thoughts and I hope that its been a good conference thus far and that this is reasonably on-point.
Obviously we are living through a transformative change in terms of the global economy; a period that will be looked at as a very substantial change point in human history. And its also a time when were seeing a long-run change, which of course is the shift towards Asia as the driver of global economic growth and the substantial force of greater geopolitical influence. At the same time concurrently with the after effects of the global financial crisis, which has had such an effect on most of the worlds advanced economies. So, I thought it was an interesting way in which you phrased the topic Victory by default really encapsulated both of those propositions.
The global outlook at the moment as Im sure people in this room understand very deeply is one categorised by, certainly, a lot of risk and a substantial amount of volatility, particularly looking at Europe. We do believe, I think with a fair deal of evidence, that Australia is better placed than almost any other advanced economy to face this volatility. A lot is discussed about our reliance on resources, and certainly theyve been a substantial driver in terms of Australias economic position. But there is strength in sectors of the economy beyond resources, and if you look at the recent national accounts data youll see that consumption is in fact holding up well over the last year. Weve seen a broad-based lift in other data sets such as housing improvements and retail sales.
I would end on this point: my view about where Australia is at the moment is that we cant rest on past success. We have to be restless in our pursuit of future success. And the key public policy question that faces this generation of leaders, whether they be political or business or thought leaders, is how it is that we maximise the opportunities for this nation in the Asian Century, and that will require good economic policy settings. But, even more than that, I think it will require continuing to change our mindset, our attitudes and our capability and engagement with Asia.
GODDARD: Thank you, Minister. I do want to come a little bit later to the Asian Century question, important question as it is. I do feel, I think, duty-bound to start with something that is close to your own hand, at least in the earlier iterations of
WONG: Youre going to talk about carbon, arent you? (laughs)
GODDARD: Im sorry. Im sorry. (laughs) I do apologise.
GODDARD: (laughs) Im duty-bound, partly because The Economist itself has a leader and you can pick up the issue outside it has a leader on that this week
WONG: You were almost complimentary, in an economist kind of way (laughs).
GODDARD: (laughs) It says that there are both defects and ... it praises the Australian Government in many ways and says that actually theres part of (inaudible) interesting merits of this program. And it says it shifts the tax burden from hard-earned wages and profits to unearned rents and uncompensated harms. From an outsiders point of view I must say that Im very intrigued to see the level of vocal opposition to this, and I just wondered whether you could... I mean, foreign businesses, I understand, will be quite supportive of this, and I notice (inaudible) most vocal in supporting the move towards cleaner emissions for Australian businesses. What is behind all this?
WONG: That requires a very bold discussion of the political change around the concept of pricing carbon over the last decade in Australia. This was, as a policy proposition, reasonably uncontroversial, certainly in terms of partisanship, at the 2007 election, where both major parties went to the election committing to price carbon.
Obviously, as a result of the legislation that I was involved in developing and worked very closely with a lot of businesspeople in developing and changing to try and ensure it did achieve the outcome we wanted but with appropriate transitional assistance that legislation failed in the Senate after Mr Turnbull, who I think spoke to you today, was deposed as Opposition Leader. And weve entered a period over the last few years where this has become a highly partisan and aggressive policy debate.
I understand that we are seeking to tax something which has previously been free, which is the amount of carbon that people can put into the atmosphere, and that does mean that some business models will have to change. I think the policy argument for it is clear. For the same reasons that John Howard thought a price on carbon was sensible, I think a price on carbon is sensible.
If you assume, first, that the globe will continue to pay a premium for low-carbon goods and services, and you live in the advanced economy which is the most carbon-intensive in the world, then you need to work out how you develop the capability to compete in those markets. The cheapest way, the most cost-effective way to do that, is to price carbon.
So thats the first point. The second is that, as you say, the package that we now have also combines within it a tax reform element whereby we are also reducing the tax burden, particularly on low- and middle-income Australians, through an increase in the tax-free threshold. And I think that is a very good mix of tax reform policy thats taken up in the package.
Its been the subject, as everyone knows, of a pretty vocal campaign. And we can talk about why its become so controversial. Im more interested in talking about what we now do. I think people will see or have seen that it hasnt had the effect on the economy that some people have been asserting. And I dont think it will. I think it will continue to give the right signal for investors and the right signal for business over the years to come.
GODDARD: One of the possible effects of it, though, might be that we will see, as polluters pass higher costs on to consumers, might be a shift in higher inflation. And, particularly as the Government gives money out to voters to compensate for higher energy costs, are you worried? I mean, the RBA of course has discounted that; it hasnt actually put up interest rates in the recent decision in July. But are you worried about that?
WONG: No. First, the CPI impact we anticipate, in terms of the Treasury modelling, is about 0.7 per cent. Thats substantially less than the GST impact, which I think was 2.5 per cent. So thats the first point, in terms of the inflationary impact, its minor. The second point is the RBA itself has made clear that they will look through any one-off shocks, one-off temporary increases to inflation, just as they did in terms of food prices when we had natural disasters and our inflation figures reflected the cost of bananas skyrocketing. So, theyll look through that, and thats the way in which theyve approached past introduction of similar policies. I think the negative effects are, again, an overstatement. There will be price passed through. Weve made that clear. And thats been the basis of the way in which we have structured assistance through the tax and benefits system to Australian households.
GODDARD: I dont want to belabour the issue, but just one final question. Obviously its not a popular tax, and its not something thats gone down well with businesses, or indeed the Australian public. Tony Abbott of course stands a decent chance of coming or at least his party stands a decent chance of coming into power at the next election, says hes going to repeal the legislation. Is there a sense that the Government itself might be open to adjustments, amendments, and changes, or essentially is it off the table?
WONG: I think weve withstood a fairly ferocious fear campaign. I dont think were going to start wilting after the introduction of the carbon price itself. I think lets try and get back to sound public policy. Is it a sensible thing to repeal a price on carbon once its already in fact in? That prospect simply brings uncertainty to the business environment, which is not a good thing for investment.
Its also not sensible public policy and you raised Mr Abbott to have a policy which has the same environmental outcome at a higher cost to the economy. That is what the Coalitions policy is, and you only have to listen to Malcolm Turnbulls explanation of it to understand how true what Im saying is. Same environmental outcome, higher cost to the economy. And I dont think thats a sensible thing for business and for consumers.
GODDARD: It is a politically interesting time in Australia, and I know the Government has just delivered a surplus for 2012-13. A small surplus, it looks like a wafer-thin surplus, but nevertheless, a surplus. And that was fulfilling the Governments promise to get away from deficit spending, post-crisis. How sustainable really is this as the globe turns down again and as we start to look at a more gloomy outlook? Can you really sustain this? Particularly in an election year?
WONG: There are a number of facets to that question, so Ill try and deal with them in sequence. The first is why the surplus? And I think its important to remember we said we would do what we did, in terms of the intervention in the economy; the fiscal stimulus which I think most people would agree, most reasonable commentators would agree, certainly had the right outcome in terms of Australias current economic position. But we said that the deficits that were entered into at that time would be temporary, and that we would ensure we came out of deficit. So thats the first point.
The second is that we anticipate the Australian economy to continue to grow at around trend. And in those circumstances its sensible to make sure you bring fiscal policy back to a more normal setting. Which brings me to the next point. I think the person who most well communicated the rationale behind the surplus was a particular Australian journalist, who described it as a return to normalcy. Because what he understood is what the Government is trying to do, and that is to put fiscal policy and monetary policy bring them back into a more normal balance than had been required during the global financial crisis. And that is, obviously monetary policy, run by an independent Reserve Bank, that fine-tunes demand in the economy, but fiscal policy that looks to the medium term rather than tries to deal with the shorter-term demand issue. So, I think it is a sensible balance, given where the economy is at.
In terms of how sustainable is it? We have factored in, I think, pretty reasonable assumptions around the global economy, and also the terms of trade which was obviously the subject of discussion on the previous panel. The first point Id make is that our projections around Europe are probably more pessimistic than a number of the international institutions, forecasting a contraction of around three-quarters of a per cent. So that was already factored into our budget. We also assume a decline in the terms of trade over the budget forecasts. So, I think both of those things probably go to your is it sustainable proposition.
GODDARD: And how far does China figure in that consideration about the decline in the terms of trade?
WONG: That leads to whether you are a China pessimist or a China optimist. Im a China optimist, notwithstanding that there are going to be various challenges China has to address. I think they have both the policy capacity and the firepower to do that, and I think thats been demonstrated to date. Having said that, I do agree with some of the comments that we cant assume that commodity prices, and therefore Australias terms of trade, will remain at the levels that we have seen, which is why we have anticipated a decline in our budget assumptions.
GODDARD: Theres been a great deal of discussion, as you might imagine, today about the Eurozone, and we had a discussion around this last night I know, on the impact of the GFC, the Eurozone crisis, and the global, I suppose, recession or at least the recession in the European countries and the slowdown in America on Australia. And I suppose the prevailing view, if Im not misconstruing this, the prevailing view here is that, not withstanding a European or a Euro collapse, is that Australia is pretty much alright, thank you. And its banking sector is pretty well managed, its prudent, resilient, its got access to funds, its got capital. Even though there are, I suppose, temporary withdrawals of wholesale funding to some degree of European banking capital and funding here, but nevertheless, despite the need to keep a weather eye on whats happening in Europe, things are pretty much OK here. I just wonder I mean, that struck me as being possibly quite a complacent view. Do you share that, or not?
WONG: A Finance Minister should never be complacent. I think there are two key propositions. No country is immune from elements of the global economy, but we are fortunate to be in a position to face those developments with a great deal of confidence. I do think our banking sector is in pretty good shape, and I think youve heard from people today on that front. We obviously have a pretty good set of figures in terms of where our growth is, where our unemployment rate is, weve got contained inflation, and a very large pipeline of investment coming into this country, which is a tick of confidence.
But, youre right, you shouldnt be complacent, which is where I started. You cant look to the future by simply resting on past success. You have to think through what it is that needs to be done today and tomorrow to ensure prosperity and success for Australia in the decades to come.
The Prime Minister, as you know, has commissioned the White Paper on Australia in the Asian Century. I think that and the attendant discussion around the directions in that and what policy propositions flow out of that is a very important discussion for this country in terms of the future.
GODDARD: Let me just talk a little bit about some of the policy decisions that might need to be taken in terms of one of the big issues that seems to be clouding Australias success is the perception that and indeed this was highlighted too by Glenn Stevens, the Reserve Bank Governor that Australia is running a multi-speed a two speed really economy, that mining and resources is somehow squeezing out the other sectors by drawing away their capital and by pushing up the exchange rate. I mean, this is obviously a structural issue that has been recently introduced. What are the kind of policies that the Government will put into place to ameliorate this structural issue .
WONG: A few things I want to say about that. One, there is no doubt there is a lot of change going on in the Australian economy driven in part by, or primarily by, what you were describing, which is the high dollar. And thats making life very difficult for some parts of our economy. And there may be people in this room who are a lot more familiar at a first hand level than I am of that, and certainly that isnt easy for some sectors. So, you have to think through what is it that Government can and should do at a time of this structural change.
I think the first, and almost as close to a no regrets policy as you can have in a time of change, is the investment in your people. So if theres been one priority that you could identify that this Government has placed at the top of its list, it wouldnt actually be the carbon and mining taxes despite the fact that theyve got a lot of press its the investment in education and skills. Weve almost doubled funding to schools. Weve increased funding to universities, increased funding to research and innovation, and the VET sector.
And that is because in a time when we know your economy is changing, you may not know every job which will be created in the next ten years, but you certainly know you need to skill your people for that and you need to also bring more people into the workforce. Weve done a fair bit around participation and the tax reform package we referred to earlier will also help on that front. You also can do things such as weve done in the tax system which is the loss carry back regime, which is to try and give a bit of flexibility in the tax system to assist those businesses who are trying to change their business model to reflect the changing business environment.
But I think in many ways the most important thing is to recognise what you can change and what you cant change. And this isnt a time in Australia where political leaders should be pretending to Australians that nothing ever needs to change, because thats wrong and its a false assertion if people are making it. We are at a time of change. Its a change which can bring with it enormous opportunity. The question is what is it that we have to do to bring it down to realise those opportunities. How do we maximise our linkages into China, into India, into South Korea and the other countries of our region? What are the goods and services over the next decades that we want to be able to provide, and how do we position ourselves and improve our capability to provide them? Those are the key questions.
Finally, and we touched on this last night, I think in terms of the change and particularly the engagement with Asia challenge, in part it is a question of hard policy, absolutely, and we should have a good discussion about that. But in part it is also a question of our collective mindset and our capacity as a nation to ensure we not only develop the obvious things around Asian literacy, Asian languages and so forth, but the way in which we think about our future, the way in which we think about our prosperity, and the way in which we think about our national identity; that we make the shifts needed to recognise how close we are with those in the Asian region and how we are part of it.
GODDARD: I am tempted to follow up on that but I do want to give the opportunity out to the audience to see if you have observations or questions for the Minister.
AUDIENCE MEMBER: I suppose this is a bit of a challenging question and I apologise in advance. We heard a bit from Paul Howes earlier about the grim outlook for Australian manufacturing under the current conditions. And I want to return to the idea of fiscal policy because I wonder if there isnt a bit more to this than was discussed earlier. The Treasurer Wayne Swan announced a target for surplus before the global economy weakened materially in the second half of last year. Yet, rather than concede that perhaps the export industry is suffering from the high Australian dollar and weak external demand, the Government chose to cut further and deliver a surplus thats so small its almost theoretical. Id like to hear a bit more about that basically because Im not sure of the validity of that.
WONG: First, I dont think that it is be sensible to suggest that the savings that we took in order to achieve our budget strategy were a bad thing for the economy. I dont know if that was implicit or explicit in your question. And in part that is also some of the decisions about what sort of savings measures we took, and some of them were, for example, we deferred the introduction of various initiatives until we anticipated revenues recovering, given that revenues have obviously been very substantially hit in this economy, as in others, by the global financial crisis and its aftermath. So I think theres a presumption in your question that I dont agree with.
Theres a second point, I suppose, which is perhaps tangential, which is what is the role of Government at a time of change? And I tried to go into that in my previous answer, which is the closest thing I could think of to a no regrets policy is investing in your people. There are times when we do have to, as a Government, assist industry with the transition in different ways and preserve certain capabilities, support development of greater capability. But you cant prevent any change occurring if business models arent sustainable, and we shouldnt pretend to people that we can.
In terms of the surplus, I think I outlined that in an earlier question. I think theres a strong macro economic argument given where the economy is for that surplus strategy which obviously isnt just the 2012-13 year, its over the budget period, the forward estimate period. I also come to this, I suppose, as a Finance Minister which is I dont just see the surplus as a point in time. With an ageing population, with health costs and aged care costs increasing as a share of GDP out to 2050, you should be trying to do what you can at this point to continue to improve the structural health of the budget, and I think we are doing that.
GODDARD: More questions please.
AUDIENCE MEMBER: Minister, can I just put a few numbers around the previous comments? The (inaudible) into deficit was 3 per cent of GDP, which is the biggest that weve ever seen in the history of Australia. There was a 4.5 per cent cut in real terms in expenditure in 2012-13. They were some fairly big movements. The market has not been able to work out the impact on growth. We have estimates of between three-quarters of a per cent and 1.5 per cent on GDP but it seems to be a contractionary Budget. The lead up to the Budget was that we havent seen growth above trend for four years. The market was expecting the Reserve Bank to cut rates by 100 basis points, which implied that there was a general view that growth wasnt looking particularly strong. So it seems to be a fiscal tightening at a time when the other and of course the world is a very dangerous place it seems to be a very substantial fiscal tightening at a time when other signals around the world suggest that possibly we should have had fiscal stimulus. Could you sort of enlighten me as to why the fiscal stance was so substantial in the Budget?
WONG: Of course since that time weve also seen the more recent national account figures. I accept that they included a quarter with output or production coming back on-stream post the natural disasters, but it was a very strong quarterly result. So, Im not, possibly, as negative, if thats how you were, about the outlook for the domestic economy.
I make two points. The first is and I think the Treasurers had this discussion as well, certainly publicly and possibly with you that you shouldnt equate the proportion of GDP that the surplus turnaround represents, in a linear sense, with the effect on the economy. For example, and this is only an example, one of the decisions we made was to defer our achieving our Millennium Development Goal commitment in relation to foreign aid. I appreciate that some people didnt like that decision, but that is not a savings decision that is going to have a substantial impact on the Australian economy. And I think there are analogous decisions in the Budget for that reason.
I think it also depends, and Ive read some of what youve written, but I think it depends also on where you think fiscal policy should be vis--vis monetary policy. And, as I described earlier, the Governments view was it was time to return to a more normal set of settings in terms of which policy goals do we want, and to enable monetary policy to play the role that it should at times when economic growth is at or around trend. And, thus far, I think that has been the case.
AUDIENCE MEMBER: Minister, youve been talking today a little bit about the future of Asia and the Governments White Paper coming out. Theres been a global discussion going on between Treasury and Finance Departments around what a green economy looks like both internationally and within countries. That debate has not other than pricing carbon has not really played out here in Australia much. But Australias doing some very interesting things and I do think it provides some vision and an alternative to where were going, you know, in an economic sense. I just wanted to hear your thoughts a little bit about that
WONG: I tend to prefer thinking about this as a 21st century economy rather than as a green economy or a brown economy or whatever, because I think theyre fairly, may I say, old terms. And also, probably, value label terms, which gets you into a not necessarily helpful debate. I dont think in this century we can be a 21st century economy without having made sure weve made certain changes. One of them is greater investment in and a greater proficiency in and a greater capability in low-carbon goods and services and clean energy technology. Our primary mechanism for that is pricing carbon but its not the only one.
I also think that the investment in the NBN and I know The Economist has had different views on this, but leaving aside that argument I think its a fairly strong proposition to say that if you want to be a 21st century economy, you dont want infrastructure which was built in the middle of the last century. That infrastructure is not going to support the sort of innovation that we do want to leverage from the private sector.
So, to my way of thinking, the green economy is actually just a way of talking about where, increasingly, I think smart economies will go.
GODDARD: One more question?
AUDIENCE MEMBER: Minister, just a general question about perception. It used to be said that as long as economies were coming along strongly that governments really didnt have much to worry about. And the Australian economy by world standards is doing very well. And yet your Government is not doing well in opinion polls. The same thing happened in a different way I suppose to the Howard Government in its last year the economy was strong but it just lost all public support, probably for different reasons.
But weve heard today from experts praise the way the Government responded to the global financial crisis. Yet weve also been told that one of the Governments problems is this apparent inability to sell a narrative to the country on, you know, where its going. Whats your take on this disconnect between a strong economy and a Government thats struggling?
WONG: Im glad you mentioned the Howard example because I think that is a good reminder that the fact that you have an economy thats doing well doesnt necessarily translate to political popularity.
Id make a few points. First, I think you probably would have had a discussion about confidence today and whats driving some of the lower levels of confidence than you would otherwise anticipate in Australia. I think there are a number of reasons for that. One is Europe and the recent memory of the GFC. The second is whats happened to asset values, particularly peoples houses. So I think those factors particularly are impacting on confidence. And the third, I think, is the state of the political debate. I think that it is easy to say, its all the Governments fault. But I think the truth is always more complex than that.
I would make the point that this minority Government has passed some very substantial legislation through the Senate, most recently our Budget, the mining tax, the carbon price. These very significant reforms, highly contested, have come through the minority Government and minority Parliament.
I dont think that the current rancour and aggression in the tone of national political debate is a good thing for the country. And people can choose to lay that blame where they wish, but I dont think it is a good thing. I dont think it is a good thing that we have political debates which are so far removed from sensible policy debates and carbon I think is one of them.
And I think if we are serious about dealing with some of the longer run challenges, which Im sure you discussed today, then political leaders across the political spectrum, media leaders, and business leaders, need to lift the level of debate. Were not going to find neither the policy answer nor the will to implement them if we simply keep having the situation where people are shouting at each other and pointing the finger.
I think that weve always had and we had a long discussion about this last night but theres always a difference or a disjunct between electoral timeframes and the timeframes around the policy horizon that you have to deal with. And, in Australia, over history, weve managed to bridge that gap in different ways; bipartisanship is one of them, political or broad policy consensus, even if it wasnt bipartisan, is another, and an attempt to have a sensible dialogue around key things, such as floating the dollar, opening up our markets, reducing tariffs, financial services reform et cetera, et cetera. As a nation, I think we need to lift the tone of the debate and perhaps return to something thats a little more sensible around the way forward.
GODDARD: The election timeframe is rapidly coming upon us and I do hope in that sense the level of debate and dialogue certainly very high today, and certainly very high in this session I hope that can somehow be reversed, or put back into a good state. Please join me in thanking Penny Wong, the Minister for Finance.
ENDS