Here’s Scott Morrison, the Australian Government’s Treasurer.
In your speech today, Treasurer, you listed all the economic good news and said that the show is going on in 2018. This week obviously the stock market had quite a big correction in the US which affected us because interest rates over there are expected to rise, a bit more than expected, partly because the fiscal stimulus from tax cuts there according to the analysts, economists and so on, is not really needed and is likely to send interest rates higher than they would otherwise be.
I’m just wondering, doesn’t your speech today suggest that the same thing can be said of here? We’ve got a strong economy, as you say, and the tax cuts that you’re proposing are likely to result in higher interest rates than would otherwise happen because they’re not really needed for fiscal stimulus reasons?
Well, no, I wouldn’t agree with that, Alan, for a couple of reasons. One, is because the US has already got unemployment down below the full employment level; Two, their tax cut program also will require additional borrowings because of what it does for how it’s financed, whereas ours, particularly the larger components of this package comes in when the budget is already back in balance over the medium term. Then you look at what’s happened in the US markets themselves and you of course know the difference between the markets and the real economy.
I mean, I think there are real differences between what’s going on in the US markets than what the fundamentals are of where Australian markets have been at. So I think the issues are quite different. Phil Lowe, last night, I think set that out pretty well. Where he sits on where rates are, he made his own comments on that last night. He’s in a very calm and measured space as usual and focusing very much on what’s happening here. I think the two cases are quite different in terms of their impact on inflation and rates.
I mean, your speech was incredibly upbeat and rightly so, the economy here is strong and as you pointed out, you’ve witnessed extraordinary jobs growth and smashed records as you point out.
Well, in jobs growth that’s true.
Yeah, so that would suggest that we don’t need tax cuts, surely?
Well it’s just, can too much growth be a bad thing? I don’t agree.
Well, of course it can be…
I mean, we still haven’t got growth back to the long run average and we have that forecast over the budget and forward estimates and we want to see growth continue and we want to see wages lift and that’s not going to happen unless businesses continue to invest. We’ve come out of many years now where new private investment in the non-mining sector had been heading in the wrong direction, that’s finally turned. So, no, I wouldn’t be getting ahead of myself to think that the economy is now running at such a pace that people need to think about pulling it back. What the economy is still rebuilding and resurging from what has been a very difficult period for many years. I mean, you look at what’s happened with earnings and with profits. If you look at in the gross operating surplus, over six years when you compare that to what’s happened with the compensation of employees on the wages side, it’s six times the growth that was on the profit side. We have not yet seen that sustained profit performance for the vast majority of businesses that will support sustained increases in wages and that’s why this is so critical.
Can you just bring us up to date with where you’re at with that? I read this morning that One Nation, Pauline Hanson, now against it. I think you need 9 of the 12 cross-benchers to get it through the Senate. How many do you know that you’ve got?
When it’s finally voted on in the Senate, that’s the ultimate reckoning that would have to be made on this. I mean, we’ll continue to apply ourselves to the debate that’s happening right now. Remember when we got the first tranche through, no one thought we’d get it up to $50 million. The truth is, these changes to the tax system for businesses are even more important than they were at the last election and will be even more important at the next election because of the competitiveness. The world is taking their business taxes down and if we can’t keep pace with that, that’ll obviously disadvantage Australian businesses.
And in terms of Australian workers, if government through the parliament – if the parliament is making businesses pay the government more than they’ll obviously be less room for them to pay workers more.
Just on that international competition…
I’ve never understood the argument for higher taxes on business. I don’t know how that works. If people want to see more investment and more wages growth, I don’t understand how higher taxes achieves that.
Higher taxes achieve revenue for the government.
But that’s the government getting money, that’s not the business being able to invest or the wage earner walking away from it. If you believe in the government running the economy, well I suppose that’s what the Labor Party believes, but we certainly don’t share that view.
But on the international competition thing, even if you get this through the Australian tax rate goes from 30% to 25%. The US tax rate, was 35%, will be 21%. Even if you get it through, we’ll be going from having a corporate tax rate less than the US by 5%, to having a corporate tax rate more than the US…
Yes, but that doesn’t take into account state taxes, for example. Even in lower taxed states in the US you’ve got taxes of around 4% on corporate profit. What this does, when you compare apples with apples, is it puts us basically on the same wicket. In some states you’ve got corporate taxes which are well above 8% at state level. What I think you’ll see in the US is a bit more competition on that front and that was one of the things I noticed from my trip there last week. I think that will become more of a pressure point over there. You’ve got low tax states like Texas who will be in a very strong position to be attracting firms and business activity to their state when you’ve got high tax states like California and New York doing the opposite.
Pauline Hanson made a statement which I must say struck a bit of a chord with me, she said, ‘Foreign-owned multinationals don’t consider corporate income tax rates in their investment decisions because they don’t expect to pay any tax in Australia.’ And that’s true of a lot of companies, isn’t it?
If the company’s not making profits, they don’t pay tax. If a company has made significant investments in new capital then you know that gets written off against the revenue they’re taking. There are a lot of international companies that have had big upfront capital investments in their projects in Australia, particularly in the resources sector. That shouldn’t be surprising. But more broadly, where companies and our multinational anti-avoidance laws, which are the toughest in the world, and which have unleashed and identified some $7 billion dollars in multinational and other major corporate revenue that previously hadn’t been identified which comes into our tax net. We’re making big strides on that.
I hear heaps of excuses why people don’t want to support these changes, but I think those excuses don’t bear up to the light. The Labor Party says they’re not affordable. Well, they’re in the budget and we’re back into balance. The Labor Party says it impacts on inequality. Well, Professor Holden, one of their own claimed researchers, has identified what is an outstanding study in Germany which shows that it actually reduces inequality and the main beneficiaries are women and the low skilled. There are a lot of excuses not to do it but largely the reasons for not doing it are political populism, and that doesn’t show much economic conviction on my part when I’m assessing their credentials.
One of the excuses – if I can call it an excuse – came from Alberto Calderon, the CEO of Orica – I think it was yesterday – just saying that one of the complicating factors is our franking system. He says, ‘Cutting the corporate tax rate would do little to boost investment if companies just passed on the savings to shareholders through higher dividends…’
Well, tell me this, Alan. Do companies pay their wages before or after they distribute dividends?
Obviously, it comes before.
They pay them before, and so the company tax is paid after you’ve paid out your wages, company tax is paid after you’ve made your investments, when you invest it in research and development. That position and how much room you have and making sure all of those things are relevant and how much space you have with your revenue knowing that it’s not going to be taken out and taxed and then that’s what you get to pass on. I don’t follow that argument.
Well, listen, I’ve been kicking around companies for a long time and I know that companies do not make decisions on how much they pay their workers according to what their tax rate is.
But no, they make it based on how much they’re earning.
They’ll pay their workers what they need to pay them.
And how much they’re earning.
No, no, no. Treasurer, the profit derives from what their wages are, it doesn’t go the other way around, they don’t go look at their profits, ‘Oh, okay, we’ll pay workers more now.’ They’ll pay the workers what they have to pay them according to what the market says in the human resources market, the labour market says they have to pay them and what they need to, and then the profit comes out of that.
Well, of course it does and then they’ll pay tax on that and how much tax they have to pay – if they’re paying less of that to the government, then that actually gives them more to work with to invest in their business. If you only want to talk about very large businesses – because remembering, most of these tax cuts actually go to small and medium sized business and the next cab off the rank for our plan is for businesses between $50 and $100 million. They can be a business with as few as 30 employees and an average of around 200. Many of these firms don’t even distribute at all. These companies take what they earn and they reinvest it, that’s what they do. Then they have a tax bill and they pay it and the less tax – I mean, if your argument is, if higher company taxes is such a good thing, well let’s put them up. That’s an absurd notion.
[Laughs] I don’t think we’re arguing that.
Well, I know you’re not going to but you are arguing that company taxes should remain high and it has no impact on a business’s decision to invest and what they have available to pay their workers better. I mean, that’s nonsense.
Fair point, Treasurer, fair point. On the question of personal tax cuts, the Prime Minister said that you and he had been working over Christmas to figure out whether you can provide more tax relief for more middle income Australian families, while at the same time meeting our commitment to bring the budget back into balance. What work were you doing and how’s it going? Have you got there yet?
It’s going well and we’re going to keep doing it. As you know there’s a budget in May and the election is not until next year, so we will continue to work on these plans, along exactly the lines that you’ve just indicated.
It seems like you’re on the hook now for personal income tax cuts in the May budget?
We’ve set a clear direction about what our priorities are here and I think they’re very clear, we wanted to leave that tax relief to middle income earners in Australia. The important point about that is they will see that relief long before any large company will ever see their tax cut. They’re our priority and that’s where we’re focused, and we make no secret about that. The scale and opportunity for that is defined also by the budget task and our commitment to bring the budget back to balance. We’re not stepping away from either of those commitments.
Obviously, this work over Christmas that you’ve been doing probably comes out of the extra $9 billion from MYEFO in December in terms of extra revenue going forward. Since then, the terms of trade have been increasing further, I think. Therefore, is it a reasonable thing to assume that there’ll be more available by the time we get to May?
I think it’s dangerous to make those assumptions. What we’ve seen with commodity prices impacting these things, can be temporary. That impact in this current fiscal year is certainly there and we have a very modest forecast position on commodity prices, particularly iron ore at $55 FOB (tonne free on board). That’s been a deliberate decision by the government, by me as Treasurer, to ensure that we keep these things in, I think, a very sensible space.
If it betters that, well, it betters that, but it would be wrong to think that the government doesn’t have a broader fiscal strategy which is about continuing to keep expenditure under control, continuing to ensure that our tax base remains reliable and consistent and deals with any integrity issues that are there and multinational anti-avoidance is a key one of those. We’re seeing our revenues from that scale up as the measures that we’ve put in place and that were opposed by the Labor Party now start to take effect.
You’ve also been quite active on the subject of banks this week, there’s been quite a lot of stuff going on including the Productivity Commission report. But one of the things you’ve done is, I think, announced that more lenders will be able to call themselves banks?
Yeah, more than 50 will be able to do that, yes.
Who decides who gets to call themselves a bank and where will this end?
Well, they’re ADIs, that all goes through APRA, which is the appropriate place for it to happen. It’s just that we’re not going to have a closed shop for ADIs on who can call themselves a bank and we’re trying to even the playing field wherever we can. But look, we’re doing the same thing in terms of opening things up for customer owned banks as well and enabling them – we’re working on the plans now to implement giving them the ability to raise their own capital. The comprehensive credit reporting that comes in place on the 1st of July this year is all about ensuring more of a level playing field and giving smaller and medium sized banks access to customers, customers better information, their own information to use to get them a better outcome in the financial marketplace, so it’s all about more competition.
It seemed a bit like calling TAFEs, universities, is that a reasonable analogy?
I’m not saying it’s bad, I’m just saying…
No, but they’re banks. If they’re an ADI and they’re purporting a banking function and they have the same – they’re regulated and they’re supervised, well, they’re a bank. They are subject to supervision and to suggest that they’re somehow less supervised I think would be sending the wrong message. These labels do mean certain things in the marketplace and it’s just a change to a name but I think one that does carry some weight and certainly one that’s been raised with us by those who operate. But of all the measures, I think it’s an important one, but there are many, many more all designed to do the same thing.
We have a highly regulated banking system in Australia and a very strong one and a very resilient one. That’s not about to change. I noticed the report this week which talked about the Four Pillars policy, but then didn’t actually recommend that it be changed because it would more likely lead to three banks, not four, and whether that was a good thing or not, they didn’t sort of land on. So it is a very regulated sector and where we can sort of level the playing field in this area, we will. But at the same time, not compromising the broader resilience of the sector which is why we survived the GFC.
Another way you’re going to level the playing field is with open banking which forces banks to provide data to their competitors so you can shop around. But I can download all my data now from my bank on an Excel spreadsheet, all my transactions and give it to whoever I want. I’m just wondering, what’s changed?
It goes well beyond that. But the other point is, it’s allowing you to have your data, Alan. This isn’t about forcing one bank to give it to another bank, it’s actually forcing the bank to give it to you, one, and it’s to recognise that that data is owned by you, and that’s a fundamental shift. This is the beginning of a consumer data rights sort of reform that goes beyond banking. It can apply to telcos, it can apply to energy markets, it can apply to utilities, any range of things. And when customers have more control of their data, then data, as you know, in the new economy has real value and we want to know and be assured that that value is going to reside with the customer, not large regulated institutions.
And as I mentioned, the Productivity Commission has come out with a report on banking and obviously the thing that got most attention was they said that the Four Pillars policy was ad hoc and redundant. So what are you going to do with that report?
Well, it hasn’t recommended a change on the Four Pillars. It makes a sort of an observation, but I think it recognises that at the end of the day, the Australian banking and financial services sector is highly regulated, there are reasons for that. I mean, if you didn’t have it, it wouldn’t mean you’ve had six big banks, you’d probably have lesser. But then I think when you move away from that you raise other questions. Those questions are, well, if you want a completely competitive banking and financial service sector, then why do you need the foreign ownership controls on those banks? And then you’d see even more consolidation in the sector. There’d be a lot of competitive pressure but you’d have fewer big banks and more market dominance.
I mean, in a financial services market like Australia there’s always been a role for this regulation and it has served us very well, and most countries look at how we do it and actually think we do it better than anywhere else in the world.
You’ve just got back from the US, haven’t you?
Yeah, just got back before heading back to parliament.
And you went to Silicon Valley. What were the highlights, what did you learn there that would be worth passing on?
A couple of things. Obviously, in the US the thing that just really drives everything – innovation in particular – is competition. It is an enormously fierce scaled competitive market and that brings with it a lot of innovation and a lot of change and that’s why it’s no surprise, particularly up in Silicon Valley but right across the US economy, you do see these very significant advances taking place. I headed up to Boeing as well up there in Seattle. Australia has the largest presence of Boeing outside The United States and what is clear in the new economy is that just having the lowest cost skilled labour is not necessarily into the future what is going to provide the defining competitive advantage for manufacturing location.
How smart and sophisticated and stable the economy is, and training systems and the bench strength of your engineering workforce and the ecosystem of collaboration that can be created around your universities. What’s amazing about Stanford is its advance really came when it really was under the pump financially. It wasn’t getting the public support that it once had, as I understand it, and it really went out there and made a name for itself. It’s not a huge university, it doesn’t have a massive volume of students. It just decided to be the smartest and the best, as it could be, and they’ve put themselves at the centre of an innovation ecosystem there which is producing some of the best graduates, if not the best in the world in that space and it draws others into its world which constantly feeds that innovative environment in that part of the world.
The government didn’t do any of that, really. It was a result of just allowing people to invest and collaborate. It really reinforced to me the importance of collaboration between universities and the corporate sector and to see the transference of knowledge and skills and access particularly to the students. It’s not just the professors and the academics, it’s actually these incredibly bright students that they’re attracting to the university. They don’t need a lot of them, they just need the best, and that is what inspires a lot of the intellectual transfer taking place.
I interviewed Bill Ferris, the Chair of your Innovation and Science Advisory Board this week and read the report that they put out. He was making similar points about how all the innovation has to come from the private sector and not government. But one of the interesting things he said was…
It’s got to come from the leadership at the universities too. I mean, Stanford’s President was the one who really drove it as an organisation. Vice Chancellors focused on making their universities peak in their field and particularly in certain disciplines and being able to isolate that and achieve it. There are commercial opportunities for universities who achieve that too which sometimes I think in Australia are shied away from because a big cheque from the government seems to be the model.
Well, the Vice Chancellors I talk to are desperately trying to save money so they can keep up with your cuts.
Well, that just makes my point. I mean, an open sort of commercially focused business building institution like the ones I see in The United States, they haven’t become great off the back of government cheques. There’s a role for government to play, and I’m not stepping back from that, but our universities have got lots of options to them and I think they’re outstanding, but we need them to really create these ecosystems, these intellectual scientific communities. We have a role to play in that, but so do they and so does business.
The one thing that Bill Ferris did say about government is that in Australia presently 85% of government spending on innovation is indirect, mainly through the tax system, and 15% direct. He reckons that that’s the flipside of what usually happens overseas and in the US, that it’s mostly direct government spending on innovation and only 15% or so indirect. I wonder if you saw that and have you been thinking about that and whether we should change?
Well, we want our tax incentives that sit around innovation and research to be effective and to be targeted towards things that drive additionality, more value. One of the things that has always concerned me about that, Alan, in the tax system, is you get those big accounting firms that go around – it’s called ‘grave digging’ and they just heap over the past accounts and go, ‘Oh, that might qualify for R&D. We’ll make a back-claim against that.’ And no one’s invented anything. There’s no research that’s come out of that. It’s one of the problems with how often the tax system’s engaged with, if it’s just sought to be gamed then these incentives can lose their effectiveness.
We want to make sure they’re tighter and more targeted and actually going towards company’s activities that are generating real innovation. I met a number of med-tech firms when I was over at the Texas Medical Centre for whom these R&D tax concessions were just critical to what they were able to develop with their own products. I mean, I think those things can be very effective in supporting businesses, but they’ve also got to be designed in such a way that they’re not being largely taken advantage of for tax planning.
I suppose the problem is the tax office isn’t really setup to make decisions about what innovation should take place.
I don’t know if I’d necessarily agree that it’s about a tax administration. I mean, the rules themselves, if they open themselves up to that sort of tax planning, well then there’s design issues there. You put your finger on another important point and that is the world economy, the domestic economy is changing and our tax base and our tax systems were very much based on an old economy model. This is what multinational tax avoidance has a lot to do with. The digital economy, for example, and where transactions are conducted, where intellectual property rests, all of these things mean something very different in the new economy but our tax system is based on an old economy model. Around the G20 table, that’s one of the things I spend a lot of time trying to work with my colleagues on. How do we transition our tax bases as modern economies so we can continue to basically draw out of the economy equivalent revenues to what we did out of the old one to pay for hospitals, pay for schools, pay for defence forces and all of the necessary things that governments have to provide.
Just on that subject and finally, Treasurer, what do you think about blockchain and cryptocurrencies?
Well, they’re two different things. If you ask me about blockchain, I mean the ASX in Australia is in the middle of one of the most exciting projects going on in Australian business, and that is to move to a real time payment settlement system, a real time settlement system for a stock exchange. Blythe Masters is heavily involved in that along with Don at the ASX. If this project can be achieved and they’ve been working on it for years, that is a real game changer in global financial markets and that can position Australia very strongly.
We’ve got a new payments platform which is now coming into effect, which also moves to 24/7 settlements as well when it comes to payments. As you know, our old payment system largely worked office hours and not weekends, which is a bit strange for a machine, and that’s being modernised now and that’s coming into being pretty much now and that will phase in over the months ahead. The need for cryptocurrencies to somehow bypass inadequacy of a digital payment system, I don’t think those issues present themselves in Australia any more they do in Canada or the United Kingdom. Cryptocurrencies use seems to be for those moving between borders, sometimes for extremely nefarious reasons or to operate in economies which don’t have as an established or secure payments network.
That’s why it’s there, speculators will go anywhere and look to make a buck and that is what it is. But in terms of the structural value-added opportunity to the Australian financial system, I don’t think there’s a gap to be filled with cryptocurrencies. But in terms of blockchain technology, through Data 61 and you talk about the need for direct investments in research and development, we’ve been providing exactly that as a government to Data 61 to help them build the understanding and the applications of this blockchain technology to any number of problems.
You’ve been very generous with your time, Treasurer, I appreciate it, thank you.
Always good chatting, Alan.