2GB MONEY NEWS
TUESDAY, 2 JULY 2019
SUBJECTS: Interest rate cut; tax cuts.
ROSS GREENWOOD: Great to have your company here on Money News, going right around Australia. Of course this interest rate decision we've heard about today from the Reserve Bank, cutting interest rates to these record lows, just 1 per cent for the cash rate. And tonight a series of lenders bringing out variable interest rates for mortgage borrowers at two point something per cent - some 2.89 per cent I’ve seen today. Then you've got some of our big banks - the ANZ, for example, clearly learned a lesson from the last time rates were cut. It didn't pass it on in full and gained the full wrath of our politicians and the community. Today said they would pass these rate cuts on in full. But what does it say about Australia's economy and indeed what more needs to be done? Let's now go to the Shadow Assistant Finance Minister or Minister for Treasury. That man is always great with his time and that is Andrew Leigh, who was on the line right now. Andrew, many thanks for your time.
ANDREW LEIGH, SHADOW ASSISTANT MINISTER FOR TREASURY AND CHARITIES: Pleasure, Ross. Glad to be with you again.
GREENWOOD: Okay, so let's take our way through the rate cuts today and what it means. One thing that I take from this is the Reserve Bank continues to say that it can't do everything alone. At some point so-called monetary policy, cutting interest rates, needs to stop because we're getting close to zero. And the second part about it is at some stage government has to step up. Tax cuts, infrastructure - these are the things that government can do to help support the economy when maybe economic growth is not what everybody would desire. Is that a reasonable, sort of if you like suppositions, to you, to throw it to you?
LEIGH: Absolutely, Ross. It's like a boat rowing with one oar if you're using monetary policy and not using fiscal policy. You’ve got to be working with fiscal policy, which means getting bigger tax cuts to more people sooner. And that's why we've been calling on the government to bring forward the stage two tax cuts, that are scheduled not to take place until 2022. We think the economy needs that stimulus now, that with inflation basically non-existent, new building approvals drying up, real GDP per capita has gone backwards for nine months. Unemployment is too high and we've got this problem in retail sales, flowing from the fact that wages have been stagnant basically for five or six years now. And so people simply aren't spending into the economy.
GREENWOOD: Okay. I heard it today from the chief economist of the National Australia Bank Alan Oster, who says to me really one thing that could be done right now given that interest rates are so low is that if tax cuts take too long to get through into the economy, maybe they could do what Kevin Rudd did in the wider aftermath of the global financial crisis and hand out cash. Now that only helped to boost Australia's debt at the end of the day. Would you suggest that the Labor Party would support a government that would hand out cheques, cash to the community?
LEIGH: Ross, the stage one tax cuts do have that character. They're coming at the end of the financial year and so they are effectively a cash handout at the end of the year rather than a reduction in tax rates. We've supported them. We think the economy does need that stimulus, and putting the money into the hands of low and middle income earners means you're putting it straight into the economy. These are people who spend their whole pay cheque, whereas if you're providing tax cuts at the higher end of the income spectrum, then that's going to people who save about a quarter of their their income. And so a quarter of the benefits there don't flow back through the economy.
GREENWOOD: Okay. Tell me what is more important right now - getting money into people's hands or making certain the budget stays in surplus? Because this is something politically, of course, Labor has always had to grapple with. You had to even before the last election come up with a way in which you could try and get the economy into surplus and yet at the same time try and hand the money back. It didn't actually get accepted by the community, large tax increases in certain areas. This is a balance, so which is important? Is it important that the money’s in people's hands or to maintain a budget surplus?
LEIGH: Well, I think you can do both Ross, if you're willing to actually do tax reform rather than just straight out tax cuts. The Grattan Institute brought down a really important report this week, in which it said ‘the government's cherry picked the politically easy part of reform - cutting income taxes - while ignoring less popular changes that would shore up the tax base over time, such as introducing more efficient taxes, closing loopholes and eliminating concessions’. So if you're willing to do that careful tax reforms - for example, making multinationals pay their fair share - then you're able to see us through the downturn without having to cut funding to schools and hospitals.
GREENWOOD: Okay. Well, you know I'll never disagree with you about having multinationals pay their fair share of tax, but one bit of tax reform the government does want to bring in because you mentioned those 2022 tax cuts, which you want to bring forward again. But the fact of the matter is the real tax cuts, the ones that matter, are the $158 billion tax cuts not due until 2024. These are the ones that offer genuine tax reform by flattening the tax scales between $45,000 and $200,000, so a person pays no more than 30 cents in the dollar tax. It makes Australia more competitive, encourages people to work more, to do second jobs, overtime, whatever it might be. But the Opposition does not support that part of the tax package and again, I keep asking, why not?
LEIGH: Ross, they will make the tax system the least progressive its been since the 1950s and take us from having a relatively progressive tax system to a relatively regressive tax system by international standards. From a fiscal standpoint -
GREENWOOD: Okay, just stop. Just stop and explain it to people. Why do you say it would be a regressive tax system if you flattened it and made certain that everybody between $45,000 and $200,000 paid no more than 30 cents in the dollar tax? That to many people would actually seem like a pretty good deal.
LEIGH: Well, the flatter you take the rates, the more you go towards a regressive tax reform. The Grattan Institute has said that you have to go back to the 1950s to find a time where the tax system would be less progressive than it would be if these tax changes passed-
GREENWOOD: But Singapore actually survives with a relatively flat tax system. It doesn't necessarily get disadvantaged as a result of that system. Others around the world now have flattened out their tax scales. Why is it that Australia would be a special case where ours need to be a more steeply, shall I say tiered, tax system as compared with a flatter tax system?
LEIGH: Well, Australians have always prized egalitarianism - the notion that people who have a bit more are able to contribute a bit more to the system. So if you take those with incomes over $180,000, they comprise three per cent of taxpayers, but they'll get about 31 per cent of the total benefits of stage three. So about 10 times their proportionate share. But I think the principal argument to make about stage three Ross, is it’s not happening for five years time. So the risk is that if the government locks itself into saying they're going to promise surpluses in the interim and they're going to promise expensive tax cuts in 2024, they just won't have the fiscal firepower to respond to a downturn.
GREENWOOD: Okay. I get that, I get that. Now you and I argue about this in the past because you've still got to plan. I mean, you've got to plan for roads and future airports and future train lines. You've surely also got to plan as to how your tax system is going to look in the future. Now I recognises things might change, you might not be able to afford things, you might have to reallocate money in different ways. But if you don't have a plan and a longer term plan, surely ultimately you know as a nation you're sort of going backwards if you're making really, you know, sort of, if you like, off the hip sort of policy on the way through and it continues to change from government to government, Parliament to Parliament.
LEIGH: Ross, I love your ambition for doing long term reform and I certainly share that view. But I would like it if the government was also honestly saying what will be cut. The Grattan Institute says that the spending projections that underpin the tax cuts to stage three require heroic spending restraint. In other words, big cuts to what we spend on schools and healthcare and national disability insurance scheme. If you were to for example raise the Newstart allowance, that'd be money that goes straight back into the economy. But that becomes harder if you go ahead with a stage three tax cuts. Infrastructure projects become harder. It becomes harder to do things that we know have a really big work incentive benefit, such as improving childcare benefits for working women. We know that's got a massive productivity pay off. So there's a significant opportunity cost of these expensive stage three tax cuts. Frankly, the government's attached them to stage one and two because they know they wouldn't pass the Parliament on their own.
GREENWOOD: Okay. But what you're really telling me is that that tax cut package which is entering our parliament just today, late this afternoon, that the Labor Party still has come no closer to getting a deal with the government to allow it to be passed on a bilateral basis. Because ultimately now it's up to the minor parties and independent senators to work out a deal to get it passed, or not passed as the case might be. That's not the way a government's going to go forward. That's not the longer term thinking we were all hoping we might get in this Parliament.
LEIGH: Ross, I'm all for long term thinking, but I'm not for tying our hands in the long term so we can't respond to the short term challenge. The Reserve Bank has cut rates in two successive months. That's extraordinarily rare. We've now got interest rates at a third of a level they were at during the global financial crisis. So the Reserve Bank is ringing the alarm bells right now. They're pleading with the government to act right now, and instead the government is focused on these expensive tax cuts in 2024. Let's have that conversation, but let's not have it right now when we've got significant challenges in the global economy to deal with. Now we haven't even gone into the challenges that Brexit could cause, a trade war, the real problems of sluggish productivity, slow wage growth and unemployment being too high in Australia. There’s some big economic challenges we need to tackle right now. Ripping that money out of the budget in 2024 hampers our ability to act now on these clear and present dangers.
GREENWOOD: The Shadow Assistant Minister for Treasury is Andrew Leigh. And as always Andrew, we appreciate your time here on Money News.
LEIGH: Thank you, Ross.
Authorised by Noah Carroll ALP Canberra.