SKY NEWS WITH BEATTIE & REITH
MONDAY, 21 NOVEMBER 2016
SUBJECT/S: AAA credit rating at risk; Deloitte economic report; fixing the Howard Government’s mistakes; World trade outlook
PETER BEATTIE: Dr Andrew Leigh is the Shadow Assistant Treasurer. Andrew, thank-you for joining us.
ANDREW LEIGH, SHADOW ASSISTANT TREASURER: It’s a pleasure gentlemen – good to be with you.
BEATTIE: We want to talk about the economy.
BEATTIE: The issue about the country's AAA credit rating. There's been speculation that it may be in danger. Can I ask you this; do you think – because you've been a professor of economics – that the AAA credit rating is in danger, and if it is, what do we need to do about protecting it?
LEIGH: It's certainly at risk, Peter. You've seen today analysis from Stephen Koukoulas-
LEIGH: -That looks at the rate of growth of debt under the Rudd-Gillard Government and under the Abbott-Turnbull Government. And he finds something that might surprise many of your viewers – debt is growing faster under this government than under the previous. Under the Labor Government – with the global financial crisis, worst downturn since the Great Depression – debt grew at an average of $4.5 billion dollars per month. Under this government it's growing at an average of $5 billion dollars a month. So the rapid blowout in debt is a real challenge for Australia. We do have lower debt to GDP ratio than many advanced countries, but this government's failed to get it under control. And they're now campaigning on this huge big business tax cut, despite the fact that we've had the ratings agencies warning about the risk to the AAA rating, Scott Morrison is doubling down and saying that what we really to do is to blow yet another hole into the budget.
BEATTIE: Andrew, let me ask you this other point. The Deloitte report today was talking about the effect of low wages, low profits and low inflation – what they will have on the economy. What can we do about that? What would Labor do about that if you were in office now? If you were the Assistant Treasurer, what would you do about it?
LEIGH: It's an interesting report because it says that there are two big factors affecting the budget at the moment. There are the increases in coal prices; going to $200 to $300 a tonne, depending upon whether you are talking about spot or contract prices. But that's been offset by sluggish wage growth. For all the talk that you might have heard from this government about a ‘wages breakout’, in fact we've got stagnant wages – slowest wage growth in a generation – and that's hurting not only Australians' household budgets but also the national budget.
Long-term wage growth has to be underpinned by productivity growth, and that means strong infrastructure like a National Broadband Network, good infrastructure that allows people to get to work, but also terrific, first-rate education systems. And the cuts to education that we've seen under this government are a form of what they call "eating the seed corn,” meaning that in the future we won’t be able to have worker's wages rising as fast because we're undercutting the productive capacity of the economy.
PETER REITH: Can we just go back to the history of this, Andrew? You say, 'oh look, the budget situation has basically got worse under the Coalition.' Isn't it a fact though that the Coalition left you with money in the bank? The Labor Party went on a mad spending spree basically. They set-up a whole lot of expenditure items, some of which are very big ones – NDIS in particular – all of which has been left dumped onto the current Government and the truth is that there are very few circumstances where Labor is prepared to do anything to really cut the budget. You're a professor of economics – surely you should be a supporter of many of the proposals which have been put up by the Coalition but which have been knocked back by Labor? Surely, given your experience in budgets, you'd be a lot more pro-reform than what Labor appears to be?
LEIGH: Peter, you and I are both political players so let's go to an independent assessment from the International Monetary Fund. They say that there's only two periods in which the budget has been in structural deficit in recent times – both under the Howard Government. In the early 2000s and then in the mid-2000s.
REITH: Hang on, 2000 was the introduction of the GST, wasn't it?
LEIGH: They identify a period at the beginning of the first mining boom and then a period again around 2005-06. They say the budget is in structural deficit in that period. In other words; given the amount that was flowing in, the budget should have been delivering a much larger surplus and that in fact what was happening was that that money was being spent flagrantly in ways in which the current parliament is looking at reining in. So if you're looking at many of the decisions at the moment – the change to the indexation of fuel excise, the change in superannuation – many of the changes now being agreed by both sides of politics are actually undoing terrible mistakes made by the Howard-Costello Government.
What we're doing as an opposition is supporting many of those saves and in other cases we've argued to go further. So in the case of superannuation, we've made a strong case that the government needs to go further in reining in one of the fastest growing tax breaks in the budget. In the case of negative gearing and the capital gains tax discount, we've said that these tax breaks just aren't sustainable and they add to the volatility of the housing market – a point that's been made by the OECD recently. We've said in the case of the big business tax cut that it's simply not affordable at this time. So we haven't just backed in the Omnibus Savings bill, we've also come up with additional savings of our own.
BEATTIE: You know the issue about commodity prices, Andrew. Obviously, the report today talked about increases – we've seen that in iron ore and coal – but most people think that that's going to be short-lived in terms of coal and we can't rely on that as a long-term buffer for the baseline of the budget. And the figure of a $109 billion is being floated as where the deficit's is likely to be. So where do we get growth in the economy if we can't rely on commodity prices long-term?
LEIGH: I think that's right what you've said about commodity prices there, Peter. Most of the experts seem to be talking about them returning to a long-run trend. For my money, growth in the economy has got to come from us plugging into the services supply chains of Asia. Making sure that young Australians have the opportunity to access services jobs that are high skill and that involve us in export activities.
We're seeing rapid growth in health care and financial services jobs – but also tourism is a fast source of growth. I was in Tasmania last week and struck there by the quality of advanced manufacturing in the food export sector. The growth of not just salmon and dairy but also a whole range of boutique foodstuffs from whiskey to wine. Those sorts of industries though rely on high-quality education systems. Again, you can't make sure that you're accessing those export-led jobs if you don't ensure that you're investing in schools, vocational training and allowing any kid with the smarts to go to university to get a place.
REITH: Wouldn't it be a big help though to the economy, to give it a boost – and I agree with you that we obviously want to take whatever opportunities we can in Asia – but we do have to be competitive and we've already seen with Trump that they're talking about reducing business taxes. Business taxes in Asia are already lower than ours. And surely that would be a productivity measure and benefit to the Australian economy and in our capacity to get into those markets? You're talking about Tasmania, all sorts of businesses need to have capital and part of that capital is to be able to have additional funds instead of having more and more and higher level company taxes. Isn't that a fair point to raise?
LEIGH: Certainly you want to be looking around the globe when you're setting your corporate tax rate, but I think one thing to remember here too is that we – unlike many other countries – have dividend imputation. Only New Zealand has it as well, across the OECD. That gives back about a third of what we raise in corporate taxes back through the personal income tax system. So a 30 per cent rate within imputation raises as much money as 20 per cent rate without imputation. Frankly, anyone who compares company tax rates across the world, while ignoring imputation, is being disingenuous.
You need to take that imputation question into account, but you also need to take into account our need to maintain a strong credit rating. I'm not sure it helps Australian businesses very much if they get a tiny company tax cut but then they're paying more on their borrowings as a result of a credit-rating downgrade. Australian businesses are pretty sensitive to what they're paying on their borrowings and they don't want to see us lose our AAA credit rating as a result of the poor economic management of the Turnbull-Morrison Government.
BEATTIE: Andrew the point about Trump that Peter mentioned before, obviously he is a much more protectionist leader of the free world than we're used to, and obviously we as a small to medium economy and one that really relies on trade it’s important that we access markets. And obviously the TPPs up for negotiation, we don't know where that will go. How do we respond to that? I mean, do we look to China? I know trade is not your area, but you as Shadow Assistant Treasurer – well shadow, and hopefully from your point of view Assistant Treasurer – you're going to have to worry about where the money is coming from. How do we manage all that? Do we go to China to take the place of the Americans in the TPP? How do we keep access to these markets for our raw materials? Our agricultural products and all those sorts of those things?
LEIGH: I always think in these instances it's useful to fall back on first principles. As a medium-sized economy, we always need to be arguing the benefits of more open markets. You saw through Gough Whitlam in 1973, through Bob Hawke and Paul Keating in 1988 and 1991, and those significant tariff cuts delivered not only massive benefits to households in the order of $4000 to $5000 per household, but also to Australian industry which then had to compete not just in a little cosseted market but on a global stage. And so we got more rapid economic growth out of those export-led businesses.
We need to maintain those principles. We need to make sure that we're still advocating the benefits of open markets. Because, as you say, we need it more than the Americans do. The Americans have an internal market of over 300 million people, which means that they can do a lot of their specialisation internally. So trade for the Americans – their exports – are a tenth of GDP. In Australia they’re a fifth of GDP. That's because we specialise a lot more than they do. We need to be advocates of multilateral trade reform, not just these bilateral preferential deals that garner short-term benefits, but actually bringing down tariffs across the board – like Labor did when we signed the last World Trade Organisation deal way back in 1993.
BEATTIE: Alright, Andrew unfortunately we have to go. I saw you at Melbourne Airport working on policy for the next election which I thought was a very forward-thinking position so Peter and I would love you to come back and talk about some of the Labor policies as we head through the next two and half or almost three years!
LEIGH: I'd love that. That sounds great.
REITH: We'd like to see a better policy than you had in the last election! That would be something! Perhaps you two should meet together in the lounge again?
LEIGH: We were swimming in policy back there Peter! No opposition since 1993 has had as much policy as we did.
BEATTIE: And based on what I saw you going to have even more at the next election! Andrew, all the best and we'll talk to you more about policy next time.
LEIGH: Excellent. Thanks to you both.
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