KGB: Joe Hockey

The shadow treasurer says expenditure cuts can return the budget to surplus despite recent Treasury forecasts, and does not support direct intervention in response to the Australian dollar's strength.

Shadow Treasurer Joe Hockey tells Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

He rejects estimations of a $50 billion deficit in this year's budget, and is confident the Opposition can return the budget to surplus through expenditure cuts.

The promise to deliver a budget surplus is not predicated on forecasts of higher economic growth.

He does not support direct intervention in response to the strong Australian dollar, but productivity improvements and engagement with overseas growth opportunities.

There is comfort for business in the abolition of individual parental leave schemes, balanced against levies to pay for the Opposition's paid parental leave scheme.

The Opposition would lift productivity by reducing the overlap between Commonwealth and state governments, implementing workplace reform and streamlining infrastructure use.

Alan Kohler: Well Joe Hockey, there seems to me to be a contradiction in your policy. On the one hand you’re against the mining resources rent tax, although you’re in favour of the company tax cuts that are going with that and you’re proposing to introduce them. But on the other hand you’re proposing a levy on companies to pay for an un-means tested paid parental leave scheme. How do you reconcile those two things?

Joe Hockey: Well, the contradiction is on the Labor Party side of the equation. We have said we oppose the mining tax package. Now, it would be hypocritical for us to oppose the mining tax package and then to vote in favour of company tax cuts that are paid for by that mining tax. We believe that we can find savings to pay for a modest reduction in company tax. We will do that by finding savings in the budget.

When it comes to the mining tax we need a bit of reality. The starting point is to understand how much it’s going to raise. The government claims over the next three years it will raise around $10 billion dollars. The government has borrowed $10 billion dollars in the last three months just to fund its current deficit of $40 billion dollars for the current year. The total amount of the mining tax over the next three years will represent about one per cent of all Commonwealth government revenue. So, it’s not the silver bullet for the budget and nor is it the silver bullet for the economy. What we’ve said is whatever you put in place needs to be sustainable. We don’t believe the revenue from the mining tax is sustainable and we also don’t believe that if you fund the company tax cuts out of the mining tax, it will not be sustainable.

AK: But on the other side of it you’ve got this company levy to pay for an un-means tested paid parental leave scheme. I mean that is a joke, isn’t it, Joe? Come on.

JH: No. From our perspective, paid parental leave is a workplace entitlement like long service leave, if that’s the case in the workplace, or annual leave, and of course the annual leave and long service leave and other forms of leave like sick leave are not capped at a payment. And from our perspective, why should paid maternity leave be capped? Now, we’ve only capped it because there are financial restrictions and we would expect that over a hundred and fifty thousand employers would make up any difference for the very small number of people affected. But we see this as a workplace entitlement. It is also about improving participation in the workforce and also of course productivity because when people who are having children leave the workforce, not only does it affect participation rates, but significantly those people have had a lot of education and a lot of training and their leaving the workforce ultimately does affect productivity over the longer term.

AK: Okay. Well, just finally from me before we move onto Steve and Bob: on the question of funding tax cuts and other things, Martin Parkinson, the Treasury secretary, made a speech earlier this month in which he said that tax receipts are now four per cent of GDP lower than they were before the GFC – and before the GFC they were 23.7 per cent of GDP, which implies that they’re 19.7 per cent now of GDP. And that’s $308 billion dollars, which is $40 billion dollars less than not before the GFC, but less than just six months ago in MYEFO. So, just in this year’s budget if you’re looking at Parkinson’s numbers, there’s a $40 billion dollar hole. Now, obviously that’s a problem for the Treasurer, but it’s also a problem for you, isn’t it, because you are saying that you’re going to introduce surpluses. Your first budget will be a surplus whenever it is, this year or next year, and you’re also saying there are going to be tax cuts. I mean, how are you going to do that?

JH: Well, for a start the government currently has a $37 billion dollar deficit. Now, they claim they’re going to get to surplus based on the mid year economic and fiscal outlook document. They say they’re going to get to surplus within six months. The $38 billion dollar turnaround is made up of $34 billion dollars of increased taxes. So, looking forward rather than looking back, the government thinks that it is going to get an extra $34 billion dollars of taxes so they can bring the budget back to surplus next year.

AK: No, but we’re asking you. I’m asking you how you’re going to get it back to surplus. Because you’re promising the surplus too.

JH: We’ve said based on the current numbers we will do it, and on that’s the information that has been released including the $34 billion dollar surge in receipts that the government says they’re going to get over the next six months. Based on that we would get the budget back to surplus in our first year and every year after that. So, we can only base it on the information that is available today, Alan. And secondly, we are going to have significant cuts across the public sector. We’ve been very up-front about that. I mean, what other political party has ever had the guts to say we are going to reduce the public service by 12,000 employees when we are elected? What other political party has had the courage to lay down, as we did at the last election, in extreme detail, all of the cuts across the board that go to fund our election policies? No one has done that before and we’ll do it again before the next election.

Robert Gottliebsen: Joe, if the Treasury head is right and there is a $20 billion to $40 billion dollar shortfall in taxation revenue, from what the Treasurer has been saying, would you then be saying: Well then it’s going to be too big a problem for me? I mightn’t be able to be in surplus if it’s as bad as the head of Treasury says?

JH: Well, what you’re presenting to me is completely at odds with what the government released in its last mid year and economic and fiscal outlook. So, if there is a significant change, the government is effectively saying there’s no way it’s going to get surplus next year.

RG: They may of course fiddle it, Joe. You know what governments do. Both parties, they bring expenditure forward and they defer it and do all sorts of things, but if the head of Treasury is right, then there is a deep problem that both Treasurers face, both the current Treasurer and if you were to be elected yourself.

JH: Yes. And, Bob, the issue here is the government’s last released data says that they are going to have a surge of $34 billion dollars in extra taxes in the next six months, right. That’s how they’re going to get back to surplus in the next financial year. Now, if Martin Parkinson’s speech or statement says that that money isn’t there, then why on earth is the government still saying it is committed to a surplus next financial year? In order to achieve $34 billion dollars in one year of savings, the government is only going to do it by cuts. They’re not going to do it by cuts in expenditure. And from our perspective, what we’re saying is with $370 billion dollars of expenditure each year, we can find savings to pay for our promises. We can do that.

But when it comes to revenue – and the most volatile area of revenue is company tax – effectively personal income tax is on a slow growth, but it’s not as volatile as company tax receipts. And what’s happening is that the government says in its public pronouncements it’s still determined to get to surplus next year. Its latest figures say it is going to get surplus next year based on higher tax revenue, and I understood Martin Parkinson to be saying that governments across the country are going to find it hard to have large surpluses for the future. And if that’s the case, then that’s all the more reason to go for growth, which is the topic of the speech I gave last week, which is all about economic growth – which is the big challenge for the global economy. How do we get growth going in the absence of fiscal stimulus in many countries where monetary stimulus has a pretty benign impact?

Stephen Bartholomeusz: So, Joe , apart from the spending cuts, is your promise to deliver a surplus in your first year predicated on there being a resumption of a higher growth than we now have?

JH: No. It’s based on the current numbers revealed by the government. We can only go on their numbers, Stephen. That is the basis – otherwise we’re comparing apples with oranges. So, what we’ve said is that we’ve got a plan to improve productivity, and if you improve productivity then you can contribute to an improvement in economic growth. And if you have economic growth, then you have higher revenues and then that means that you can start to get the budget back to surplus and start paying down the debt.

AK: Joe, I reckon it’s based on the proposition that Wayne Swan is going to do the heavy lifting and you’ll come in on his coat-tails.

JH: Oh. I suppose that's why an interrogation rather than an interview, Alan. I can assure you we’re not afraid to do the hard yards, mate. We are not afraid.

RG: Exactly how, Joe, will you improve productivity ?

JH: Well, there are a number of key factors. The first one is that we are going to have public sector reforms – and we have indicated that we are going to, for example, be able to cut at least a billion dollars of red tape from the public system. We’re going to massively reduce the overlap between Commonwealth governments. We’ve pointed out there are thousands of people in the Department of Health here in Canberra and it doesn’t have one patient; there are thousands of people in the Department of Education and it has no pupil. It is time for Commonwealth state reform. Tony Abbott has flagged that. I strongly support that, having been one of the few people that have also worked for a state premier.

Secondly, we’ve talked about competition reform. That is hugely important, a written branch review of the Competition Act. And part of that is also focusing on better arrangements for access regimes, so we better utilise existing infrastructure rather than the creation of new infrastructure that runs in parallel with other infrastructure. There’s a huge infrastructure backlog in Australia and only a limited amount of money to fund that. Thirdly, we’ve also flagged a workplace reform policy that is going to lift some of the burden off employers and give employees a freer hand, with a focus on fine-tuning the existing system. And one particular area where there will not be fine-tuning, but rather a blunt instrument, is to reinstate the Anti-Corruption Commission with all of its power. Now, they are just a few of the areas where we believe we can improve productivity, but you know we’ll have more to say about that, including further initiatives in education and training, as we get closer to the election.

SB: Joe, if you were to become Treasurer , one of the immediate issues and one of the biggest issues you would confront is the strength of the Australian dollar and the impact that’s having already on the manufacturing industry. What would you do? Direct intervention?

JH: Well, no. I’m not a direct interventionist at any point. You know, I’ve spoken to the Canadians about this at length and naturally enough the Canadians have a relatively similar issue. There will be industries that go through transition because of the comparatively high Australian dollar. Those industries going through transition will need some limited fiscal assistance provided it is assistance with a transition, not assistance to try and halt the tide and that’s hugely important.

Secondly, we need to look at the initiatives that are going to facilitate greater opportunities overseas. And there is no doubt that we could be doing more and being more aggressive, particularly in China and particularly focused on the growth of the middle class. Initiatives like education, where we have said that the government’s current restrictions on education visas have had a punitive effect on Australian exports and on the Australian education system.

Thirdly, Australian companies should be looking to upgrade productivity domestically by purchasing more machinery that is going to be very cost effective if brought to Australia from overseas. And that machinery can improve productivity, as we’ve seen with the general improvement in manufacturing productivity right across the Western world over the last thirty years. So, there a number of mechanisms that can be put in place, but I also think this is a broader debate and I’d like to see more people participate in this debate across Australia. If things do continue the way they are, it is not inconceivable that the Australian dollar can go much higher against the United States dollar and I think we need to have a proper informed public debate about the question 'how do we manage that higher dollar?'

AK: Well, just on that subject, Joe, you’ve talked about cutting 12,000 public service jobs, but thanks to the higher dollar, the manufacturing industry is in trouble and as a result of that many of the Eastern states are either in or near recession. And whenever a car company or somebody cuts 300 jobs or even 1000 jobs, it’s front page news and really terrible, terrible times. Everybody gets despondent about it. Can you imagine what will happen when you start cutting 12,000 jobs in the public sector?

JH: Well, the public sector in Canberra has increased by more than 20,000 jobs since Labor was elected and we believe you can be more efficient. No matter what your business is, if there’s a way to be more efficient and more productive that is the best way. Now, if that means from time to time there will be a reallocation of jobs, then so be it, but what matters is: are there other jobs available and is there the capacity for people to retrain?

Now, it’s also the case that there are government actions that can make a situation worse. There is not one single person out there that suggests that the $23 a tonne carbon tax, to start on the first of July, is going to create more jobs than the number of jobs that are going to be lost. The only people that assume that there’ll be an equal number of jobs created and lost are the Treasury, who used it as an assumption in their modelling of the carbon tax, yet overnight we’ve heard from the South Australian Treasury, which estimates fifteen hundred jobs will be lost in South Australia as a result of the carbon tax. I think we’ve got a challenge at the moment. There is an accumulation of initiatives often directed by a government that are making it harder, not easier, to employ people and I think that’s got to change.

AK: Now, you raised the topic of the carbon tax. Can we get some clarity from you about what are you going to do about the money that’s going to flow back to the community under the carbon tax proposal? Obviously none of the money goes into general revenue; it goes back out to the community either in compensation or, more importantly, in tax cuts and welfare. Are you going to do anything with that money? Are you going to do any of those things that would otherwise be funded by the carbon tax?

JH: Well, let’s just go back a bit. The carbon tax is estimated to raise around $30 billion dollars and a little bit over half of that is going back in personal income tax cuts and compensation. The rest of that money the government is spending on a whole lot of different programs. Now, from our perspective, if there’s no injury, there doesn’t need to be compensation. Having said all of that, what we’ve said is that we will reduce government expenditure, we will make savings within government that will fund personal income tax cuts.

AK: Of how much?

JH: Well, you’ll see it before the next election, Alan. And I’ll say to you why that is. People suggest that it’s all a bit cute to say before the next election. Well, there are two budgets before the next election, two scheduled budgets. If you look at the current budget, the current budget was forecast eighteen months ago to be a budget deficit of $12 billion. It is now a budget deficit of $38 billion. So, if you ask us to do the numbers today, we can do it on the information available today, but if you ask us to promise for an election, we’ll do the information available before the election.

RG: So, if Parkinson's indication is right, then it will be very hard for you to deliver those personal tax cuts.

JH: No. Martin Parkinson encouraged governments to cut spending and I agree.

AK: But you’ll have to cut it by about $50 billion dollars.

JH: Well, I don’t necessarily accept the $50 billion dollar figure, but –

AK: It’s a very large number though, whatever it is.

JH: Yeah, well, I’ll say to you that over the next four years total government revenue will exceed $1.5 trillion dollars, so when we talk about revenues and costs of policies and so on, look at the entire picture. You know I keep saying, but no one seems to be listening, on the idea that the mining tax represents this great silver bullet, the solution to all the world’s problems: this great mining tax is raising 1 per cent of government revenue – $10 billion dollars. And ten billion dollars is a lot of money to you and me, but given that there’s one and a half trillion dollars of revenue over the next four years, it is a very, very, very small percentage.

AK: So, you might as well keep it then?

JH: Nice try, Alan. No. And you know what? Can I just add to that? Because you guys are not just interrogators, but you are investigators, I would suggest that you go to BHP and Rio and Xstrata and ask them how much of the mining tax they do expect to pay over the next ten years.

AK: What a good idea.

RG: Joe, it’s nothing like $10 billion. That figure, I don’t know where it’s come from, but it’s not what the companies are expecting, nor is it what the analysts are expecting.

JH: Exactly. That is exactly our point. So, what we’re saying is, do not lock in a structural growth expenditure against a diminishing tax. That is a poisonous cocktail for the federal budget and this mob keeps doing it. They’ve done it on the carbon tax package, where they have built in continual growing expenditure against a tax that even now the New South Wales Treasury said will be at least $5 billion dollars a year worse off in the federal budget from 2015 onwards. Now, the mining tax, you know and I know because we all speak to these businesses, we can’t find big businesses that are going to be paying the mining tax and yet the government is building in structural expenditure against these taxes. That’s why we’re voting against the company tax.

AK: Things like paid parental leave, you mean?

JH: Sorry?

AK: You mean things like paid parental leave?

JH: Well, no, because that’s why the 1.5 per cent levy to pay for the parental leave is a growth levy, obviously. Because company tax revenues should grow against what will be the cost of the paid parental leave scheme, and it also nets out for some businesses, not totally. Coles and Woolworths, for example, which are very significant employers of female staff – two biggest individual company employers in the country – they will get some balance sheet benefit out of the abolition of their own schemes even though they’ll have to pay the company tax levy. So, there is some comfort for companies.

SB: Joe, at the last election and ever since, the government has made a lot of noise about the credibility, or lack of it, for your costings going into that election. How are you going to address that issue this time around?

JH: You will see that the people we bring in to independently verify our numbers, as well as the processes we go through, will provide a much more compelling case than ever presented by any political party prior to the election. At the last election we stood up and did a press conference the Wednesday before the election with all of our numbers in it. The Labor Party, as they did in 2007, in 2010 they released their costings by press release the day before the election – on the afternoon before the election. Wayne Swan didn’t even have the courage to front up to stand by his numbers before the last election. Now, the irony is that when Treasury after the election disputed our figures, they went on to then use some of our initiatives in the next budget, such as the uplift on the contingency reserve. So they criticised us and then they used it themselves. So, we are very wary – very, very wary – of any engagement with the Commonwealth government in the lead-up to the next election, but we will have robust processes that prove that we’ve done the hard yards.

AK: Thanks very much, Joe. We’ll have to leave it there.

JH: Thanks, guys.

SB: Thanks, Joe.

RG: Thanks, Joe.

JH: Anytime.

Follow @AlanKohler on Twitter

Related Articles