KGB INTERROGATION: Lindsay Tanner

Finance minister Lindsay Tanner tells Kohler, Gottliebsen and Bartholomeusz why the public spending party is over, how he has created a private dossier of future cuts for specific government departments, and how he thinks a Bundy and Coke should be mixed.

Stephen Bartholomeusz: Lindsay Tanner, thanks for speaking with us. This is the first Labor budget in more than a decade. How did you find the process and are you satisfied you delivered the best outcome you could in the circumstances?

Lindsay Tanner: The process has been pretty gruelling because we had a shortened time frame and a fairly large array of election commitments we wanted to implement. And highly unusual economic circumstances that, over the time we’ve been engaged in the process, have moved around a bit. So that’s all made it fairly challenging – on top of the fact that we’re going through it at a time when ministers are getting on top of their portfolios and getting staff in place an all those things. So it was very, very challenging. Having not been involved in one before, of course, I don’t have a basic comparison, but I’ve just done a speech to most of my department about 1,000 people, and tried to assure them that next year won’t be quite as bad as this year in process terms [laughs].

As to whether we got it right, these things are always a matter of opinion, though I took some heart from Chris Richardson’s [of Access Economics] comments on the night – because he has been something of a fiscal hawk over the years. Good on him – those of us whose job involve being fiscal hawks appreciate that kind of external pressure. And he was, I think, equivocal, in his assessment of whether or not we’d done enough. I took some heart from that – that’s some indication, I think, that we have got the balance about right. There’s never a situation where, you know, 1.8 per cent of GDP is absolutely correct and 1.75 per cent is a disaster and 1.9 is hopeless. You’re always dealing with a range. I believe we are in the zone where we should be. But inevitably different commentators will have different takes on it.

SB: Should we look at this budget as Labor’s one big structural shift in the budget framework or is it the start of something more evolutionary – a reorientation in terms of revenue and expenditure?

LT: Given that we’ve got a second stage of the razor gang that’s in the process of getting underway, and that’s got some fairly big objectives to improve efficiencies and reduce expenditure and improve outcomes, I would hope that it’s only a start, but it’s a pretty important start. We’ve got more targets, more things to tackle – the IT area is a really good example. The Commonwealth has over 800 web sites, we have 164 different IT platforms for processing grant applications, we have six or eight different secure networks for national security and defence-related things and so the list goes on.

So there’s still plenty of scope for structural improvement in how we do business. We’ve managed to cut back quite a bit on some of the lower priority discretionary spending but there’s always more that can be done. I would expect that you will see further reform over the years, but equally, of course, there will always be that demand for more spending, so we’ll have to run fast just to stay still and we’ll have to run even faster to make concrete progress.

Alan Kohler: How does this budget express this Labor government’s philosophy? What’s different about this Labor government to the previous Labor government, and what about this budget shows this difference?

LT: I’m not sure there’s too much dramatically different between us and the previous government – in fact I noticed that our latent expenditure increase of a bit over 1 per cent real is the lowest since the 1989-90 budget that Paul Keating delivered, which I think probably tells you that there are some distinct similarities.

I think the critical two things are, firstly, as with the Hawke and Keating governments for most of their time, the dominant issue with this government is dealing with issues on their merits. Obviously we come to the table with values and ideological views about things, as did they, as does everybody. But I think there’s a really strong ethic that Kevin Rudd has got and that is reflected in the ministry of dealing with major public policy issues on their merits.

Secondly, there’s something where there is a happy coincidence between good policy and public opinion that is trying to set things up for the long term. One of the really fascinating things about modern Australian politics is that the years of short-term vote buying and throwing money around and endless grants and all this kind of stuff, that was so dominant in the Howard era, has actually created a sentiment in the community that they want politicians who are going to take serious decisions for the long term future of the country. Now that’s a reasonable unusual thing to be the dominant message of public opinion, but it’s a very happy coincidence. The real message of the budget is that we’re trying to set things up for the long term. Obviously we won’t do it perfectly. Obviously a lot of the elements of that are debatable and contestable, but I think that it’s clear that that’s the driving mentality.

AK: Speaking about contestability and debate, a few years ago, Ted Evans, the former Treasury Secretary, attacked Mark Latham’s alternative to the Future Fund on the basis that it’s not actually a good idea to run big surpluses and put the money away for the future because the time for the spending is now and, in fact, isn’t there a case, particularly for a Labor government, to not run big surpluses but in fact to spend whatever needs to be spent, whether it’s infrastructure or tax reform or whatever, to spend that now?

LT: I followed that debate at the time, which all hung off the hook of the aging of the population…

AK: That’s right…

LT: …and legitimately so. I followed that with some interest because the population’s still aging – and you and I with it [laughs] – in fact we’re part of the problem. The debate was between what I’d call the passive and the active options – the passive option being to stash all the money away in the good times now because in 15 years’ time when for every worker there’ll be three old people – I’m caricaturing of course – we can then dip into that money to pay for things. That’s the passive option.

The active option is that if we invest all this money in economic capacity now we’ll be able to grow the economy much faster and so we’ll have a higher base of earnings with which to afford to look after the much higher proportion of older people.

AK: Exactly…

LT: I’m a bit of a middle-of-the-roader on these things. I think that if you go too far, to either extreme you’re going to get into difficulties. I tend to be slightly more on the cautious side because the risk of wasting the money if you’re spending it now can be pretty high. The problem with spending lots of money in good times is that there’s no real pressure on priority decision making and I think that’s one of the things that brought the Howard government undone. If you’ve got the money to splash around, the risk is that you’ll make poor decisions because you’re not have to have serious opportunity cost factors brought into play.

AK: Is there risk that budget surpluses become a bit of a pissing contest?

LT: Look, to some degree yes, though I think the smarter politicians up here understand that that contest occurs only in the minds of a relatively small number of highly hooked-in people and that for the vast majority of the community that it means nothing or they are actually hostile to it because they ask ‘instead of saving all that money why don’t you give some of it to me or spend it on something I think is useful?’ So I don’t think that’s a real problem because smarter people understand that that’s a competition that is pointless.

Having said all that, I still think that investing now is still important. As I say, I think I’m a bit middle-of-the-road on these things. I think you’ve got to be careful to put some serious rigour and serious constraints around what you’re doing with those surpluses now to minimise the risk that you will waste them. That’s why some of the things that we’re putting around these funds, some of the safeguards, are so important. You know, they’re managed by the Future Fund, which is all people who weren’t appointed by us. They’ve got to go through the budget process, through the Loan Council and be measured against the assessments, the analysis, of bodies such as Infrastructure Australia. In my view those are appropriate guarantees that the investment of these adventitious surpluses delivered off the back of the mining boom will actually offer long-term benefits.

So I haven’t actually answered your question that well, but my own position in that debate is a bit of a middle-ground position. The extreme of using all the surpluses now – you know, just going on a big spending spree is not good. But equally, just locking it all away for a rainy day in 25 years time is a bit silly.

Robert Gottliebsen: You spoke of the second ‘razor gang’. You saved $7 billion in the current budget – what are you targeting in the next two or three years? Another $7 billion? [laughter]

LT: That would be nice, but we haven’t set a formal target, mainly because we don’t have a sufficient knowledge base to project from and partly the problem that we’re tackling is that the previous government ran the government as if it was a giant private company – a huge holding company – that happened to own about 300 individual companies and it just have them all a little pile of capital and said ‘here, go away and do what you do and let us know how you go’.

And, of course, that has led to a massive proliferation of inefficiency and also a lack of information at the centre. So the initial phase of this process is us actually finding out who’s doing what out there with the $6 billion spend per year on IT – why do we have 800 web sites? Is there something we can do to substantially reduce that and reduce costs?

By definition it’s very hard to make an estimate and I’ve been careful not to talk that up because we just don’t know. The good thing to do in its own right is that we’ll improve the way we operate and a lot of it will be long term benefits because you’ll have contracts that might have three or four years to run – so it’s not likely to deliver big short term results but I think it will be very significant in the medium term. It’s a useful means for me to keep the saving process alive. One of the things that’s very helpful is that it keeps the psychology of the search for savings alive. To my utter amazement, on Wednesday, one of my colleagues approached me, one who’s been very constructive in the savings process, and said ‘look I’ve found another saving of about $20 million per year which I can offer up to you’, without any strings attached, any ‘I’ll give you that if you give me $20 million for this, that and the other’ – and I think that’s a direct result of people who’ve had it hammered into them that ‘folks we’ve got to find savings’. Keeping that mentality alive and keeping that sense of pressure alive, I think will be really important on a whole range of fronts.

I’m very conscious that we have a lot of irons in the fire with issues like innovation and homelessness and defence, where the pressures for increases in spending will be significant.

RG: You were very generous to the public service in requiring only a one-off efficiency gain of 2 per cent.

LT: [laughing] Well they don’t think that’s generous!

RG: Will you repeat that next year? Or the year after?

LT: Next time you come to Canberra you might get lynched for suggesting that Robert! [laughs]

We don’t intent to repeat it, but bear in mind that it is built into the base. And the key thing about the efficiency dividend is that it’s a very blunt instrument and it has an enormous variety of effects. For example, my department was able to absorb that quite comfortably – you know, a bit of turnover, a bit of churn, a bit of nip and tuck here and there – in spite of the fact that our workload has increased quite significantly – just because we’re large and we’ve got a fair degree of transportability of skills across different areas of the department.

Smaller agencies will find it much more difficult to cope with things like that. So the trouble with relying on that is that you can end up with some enormous variations in outcomes and some perverse results.

Having said that, I’m still very keen on pursuing individual agencies for greater efficiencies and one of the things my department presented to me when I first became a minister was this giant folder full of facts and figures about every agency and I have gone through it and noted – and I’m not going to make them public for obvious reasons – but I’ve noted a number of areas where it looks as though (a) they have had big increases in staff in recent years for no particular reason and (b) there’s large concentrations of staff in particular places or in particular roles where it’s hard to understand why they’re like that.

RG: So you’ll target specific areas rather than right across the board?

LT: Yeah, I think that from here on at least for the foreseeable future the objective will be to try and focus in on functions and agencies. All the way through, other than using it as a bit of an indicator of the general direction the traffic’s heading in we haven’t been too hung up about total head counts and in this budget we have actually turned things round so the total head count is actually dropping by about 1200 and if you take out the couple of thousand new soldiers in the new landforce battalion it’s about 3,000. Now that may not sound much and it still leave the total public sector head count 35,000 higher than it was in 2002, but really it will be qualitative activity that drives what we do.

There is at least one area where there’s been an additional reduction in numbers beyond the efficiency dividend and that was in the Department of Immigration and that is as a direct result of discussions between the two departments and problems that have occurred with their IT project, assistance for people that we’ve had to finance with more money and me also noting that they looked like they were a bit overweight in their staffing in Canberra – so there’s already been one significant instance where we’ve managed to slim down a bit as part of a process of fixing up problems we inherited with a new IT system.

SB: Lindsay, the $20 billion you’re tucking away into this new infrastructure fund won’t be deployed until pretty late in the term of the government. Were you concerned that spending that money early would exacerbate the shortages created by the commodities boom?

LT: Yes, that is one of the factors that I’m conscious of, particularly given that most of the states have significantly elevated their infrastructure spending. If we just go out on a sudden splurge in the same territory that will have all of the obvious effects. And of course we’ve got constraints in that Infrastructure Australia as the indicative advising body is yet to be fully up and running, so if we’re going to be true to the tests that we set ourselves, we shouldn’t be making decisions on these things until we’ve actually got our own arms-length expert advice.

But the point you make is one of the factors that certainly weighed in my mind. I think the other factor that will obviously be of some importance is ensuring that we don’t just allow the states to drop the ball. The whole aim of this exercise over the long term is to generate additional investment in infrastructure, not just for the Commonwealth to let the states kind of withdraw from the field or partly withdraw from the field and us to pick up the slack. That will require careful negotiation and a pretty tight scrutiny of what’s going on.

SB: Beyond that, you’ve given the Future Fund a massively increased responsibility. Is your view and your expectations of its role and its responsibilities any different to your predecessors?

LT: Not really. Obviously one of the major tasks that I and my department have now got – and I actually talked about this briefly in the staff gathering this morning – is to put in place all of the detail around the governance of those funds and the administration of those funds and the role of the Future Fund board of guardians.

I think as David Murray said publicly, this can be seen as a very strong vote of confidence on our part in the Future Fund board and also Paul Costello the CEO. It’s worth noting that when the Future Fund was put in place we gave our tick of approval to the people who were put in charge of it, so I actually stated publicly that I thought there was a good board and of course that board remains in place.

The investment mandate will be quite different, because what you’re dealing with here is essentially something that is broadly similar to a sinking fund, where you’ll be both paying money into it and from time-to-time drawing on capital and to some degree as well as earnings. It’s not meant to be a perpetual fund but it is meant to be a long term fund. That clearly raises some quite complex issues about the investment mandate. I’ve got complete confidence in the ability of the Future Fund board and management to deal with that, but it is going to be a very big task to put all that in place successfully and it certainly is a very significant expansion to the Future Fund’s responsibilities.

AK: One of your biggest revenue earners in this budget is the tax on ready-to-drink alcohol, which you’ve sold as being some sort of antidote to binge drinking. But in fact, sales are expected to grow 40 per cent over the three years to 2012 and the revenue’s going up. I mean, it is really a big part of revenue, isn’t it?

LT: The important bit that you didn’t mention is that the Treasury modelling suggests that the consumption of these drinks will continue to rise, but only at about half the rate that they would have risen had the tax anomaly not been fixed. Now, obviously I’m not an expert on consumer behaviour in this area. I probably used to be but that was years ago. Not anymore – and they didn’t have alcopops in those days. But that’s the advice we’re getting from Treasury and merely moderating the expansion of consumption is a significant thing in itself.

AK: Maybe you should get the advice from the Health Department instead of Treasury?

LT: Well, I’m not sure about the Health Department’s capacity for economic modelling, but obviously we get input from the Health Department on issues of this kind. It’s not the only mechanism that we’re using to tackle the binge drinking phenomenon, but there clearly has been a problem where if you buy a bottle of Bundy and a bottle of Coke and mix your drinks with the same volume in each case, you’re paying significantly more tax until now than if you buy a readymade Bundy and Coke – and that of course is a significant distortion.

There is a serious problem binge drinking amongst young people and teenagers, particularly young women or girls. It’s been a real pattern that I think began in the UK but has evolved in Australia in recent years and there’s a lot of concern out there about it.

AK: As you sat there listening to Brendan Nelson’s budget speech the other night, was there any moment where you said ‘oh, he’s got us there’.

LT: Not really. And if there was, I probably wouldn’t admit it. [laughs] But look honestly, not really. There were one or two things that are a bit surprising that were not related to the budget per se but were his own promises to people they see as their core constituency, such as the capital gains tax relief qualification for people selling their small businesses to retire.

But I genuinely saw it as just a collection of give aways or ‘we’re nice guys statements’ designed to prop up his popularity and protect his leadership that was completely devoid of any rigour or responsibility.

He’s out there attacking us, claiming it’s a high spending budget – which I think is ridiculous – and at the same time he’s putting out proposals with significant increases in spending and no offsetting savings. The other thing that I think is rather amusing is that if he’s claiming that the current budget is a high-spending, high-taxing budget it’s pretty hard to see how he can’t apply the same description to the 2007 budget, which of course he was a cabinet member helping to deliver.

RG: Lindsay, if the Victorian teachers’ wage rise spills over into the independent schools sector, will the government increase funding or will they leave the independent schools to cope on their own?

LT: I can’t really comment on that Robert because it’s not an issue that I have direct responsibility for and nor is it an issue that I’ve actually even given any consideration to. I am conscious of concerns about the wider potential spill over effects of the Victorian teachers’ pay increase into other areas. I’m not sure that they are justified, because I note that the Victorian increase is a bit more complex than it’s been portrayed and there are sections of the teaching fraternity that you might have noticed have been jumping up and down saying they’re been betrayed and so forth.

Often with these things you get dual presentations. You get one presentation for general public consumption, which is ‘we’re being really nice to teachers’ and then you get particular teachers or the Teachers Union jumping up and down and saying ‘look what a great victory we’ve just won’ and then elsewhere you’ve got the fine print which shows that it’s slightly more sober and less dramatic than a simple glance suggests. I’m not sure that’s the case here, but I suspect it might be and therefore the concerns about spill over effects may be a bit exaggerated.

Obviously we’ve got wider vigilance to maintain with respect to wage pressures generally, given the natural market conditions pushing in that direction. However, I’d have to say the most recent wages data – as I’m sure you noticed – was rather restrained. So there are still no sign of serious problems on this front. That doesn’t mean there won’t be, but I think things are still holding together quite well on that front.

RG: I know it’s outside your area, but do you agree that if Julia Gillard returns the commercial building unions their old powers, then the cost of infrastructure will rise sharply? The government has big stake in that, given the $20 billion that’s going to be set aside.

LT: I don’t agree with that analysis Rob. I’ve heard you speak about this a couple of times. I’d have to say that basically it’s market forces that are most significant in the construction sector and I don’t have a detailed analysis of what impact the Building Construction Commission may or may not have had on wage outcomes in that sector. I suspect frankly that it’s…

RG: It’s not wage outcomes. It’s actual procedures and management.

LT: Look, I’m not knowledgeable enough to make a considered comment about it but I’d have to say that there are certain aspects of the Commission’s powers that I believe cannot be justified, which is why we committed to abolish it and committed to abolish it in 2010 as you probably know.

These matters will obviously be very seriously considered by the government, but I think the key thing to note is that we’ve been a government that sticks to its commitments. As government unfolds and the years go by that can always get tougher, but it wasn’t too much further into his term of office than we are now that John Howard was starting to talk about core promises and non-core promises. I would expect that like all other matters we would honour our commitment.

There is a wider question here about the new architecture for the industrial relations regime, both the legislation and the Fair Work Australia Industrial Relations Commission.

I’m completely confident that the kind of scenario that you’ve painted is not going to eventuate, but obviously there is going to be pretty wide range of different views put to us on that matter.

AK: Well thanks very much Lindsay – that pretty much wraps it up.

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