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Treasury Secretary

Economics Committee Thursday 2 June 2011

Senator LUDLAM: I want to ask-I do not know whether it has been canvassed very much this morning-about the tax forum coming up in October. If that has not been addressed-

Senator Wong: No, it has not while I have been here. But it might have been done in revenue, when I was not here.

Dr Parkinson: That would have been the revenue group last night.

Senator Wong: I am sure that the secretary can assist as much as he can.

Senator LUDLAM: Could you tell us what preparation you are putting in place in advance of that? I understand that it is going to be a two-day summit for later in October.

Dr Parkinson: That is right. We are doing work in the department and are in discussion with the Treasurer about issues that might be covered in the forum. We are talking to a range of interested stakeholders about what their views of things that might be covered could be. I think the Treasurer is on the public record as saying that it is the intention to put out a framing paper prior to the summit and to encourage other interested parties, whether they are attending or not, to either respond to that paper or put forward their own submissions, the idea being that there will be a rich array of background material for the participants at the forum prior to the forum itself.

Senator LUDLAM: Who do you define as an 'interested party'? This thing is probably going to impact everybody in Australia, one way or another.

Dr Parkinson: That is right. At this stage, we are in very preliminary thinking about which sorts of groups might be represented at the forum, but we are talking to anybody either who wishes to knock on our door or who we know has an interest in this. We have started talking, but we are nowhere near complete. So it is the usual suspects, in other words.

Senator LUDLAM: Are you able to tell us when you think the Treasurer's discussion paper would be expected to appear?

Dr Parkinson: No, I cannot. But-

Senator Wong: Why don't we take that on notice, Senator?

Senator LUDLAM: Yes.

Dr Parkinson: The only reason is that I just cannot recall. I am pretty sure that the Treasurer has indicated when it will come out, but I cannot remember the exact date that he has given to it.

Senator LUDLAM: The minister has taken that on notice, thank you. It is budgeted to cost about $900,000 and that is being pulled out of the ATO's budget. This might seem a little trivial, but what will the ATO not be doing regarding that $900,000?

Dr Parkinson: You would have to ask the ATO.

Senator LUDLAM: Okay, it is not your concern. One of the issues covered quite extensively in the Henry tax review, about which there has been almost no commentary or movement since, is housing tax reform. I wonder whether that is an issue that will be on the table during the summit.

Dr Parkinson: As I have said, the government will be putting out a framing paper. The Treasury envisages that other stakeholders who prepare their own papers will raise any issues that are of interest to them. So I think, as the Treasurer has indicated, it is not the government's intention-nor does it have the capacity-to prevent people from raising any issues they wish.

Senator LUDLAM: I enjoyed your post-budget speech, but I note that housing was one issue that you did not really cover in great detail. I am not being ironic.

Dr Parkinson: No, I am just thinking that there are a lot of things that I did cover in it and many more that I did not.

Senator LUDLAM: Yes. But would you care to share your thoughts on that now? Given that we have such enormous housing stress, does that impact materially on productivity and, given that it was not something that you touched on in detail in your speech, do you have any thoughts on housing tax reform or housing stress in general?

Dr Parkinson: No, I would prefer to raise those when I have had more-

Senator LUDLAM: You do not want to drop any bombshells in an estimates committee?

Dr Parkinson: I would prefer not to.

Senator LUDLAM: To be a bit more specific, though, to your knowledge, has Treasury ever analysed, for example, the impact of the first home owners scheme on house prices or the inflationary impact of the first home owners scheme?

Dr Parkinson: In the past-and recall I have only been in the job for three months-my understanding is that that has been the case-that is, in the far distant past. I have a recollection of some of that material appearing in the public domain. In the recent past-I can take that on notice.

Senator LUDLAM: If you could. I refer you to an article that ran in the Financial Review on 27 May this year. It claimed effectively-they have a graph that runs back to 1980 that shows, I think fairly conclusively-that the first home owners scheme has a direct inflationary impact on the housing market. I just wonder whether you could go back and see whether Treasury has done any thinking recently-I know a lot of that is state spending-or whether you have any position papers, statements or research on that?

Dr Parkinson: I am happy to do so.

Senator LUDLAM: That would be greatly appreciated. One thing that you did mention in your post-budget speech was the impact of natural disasters on this budget, which is substantial. You have emphasised that the economy is in transition. You speak about innovation and flexibility. With your background-I know you have had a great deal to do with climate policy-do you see a figure in that order as being effectively a permanent new line item in every budget from here on? Presumably, we have not seen the last of the kind of damage that was inflicted over this summer.

Dr Parkinson: Senator, I am not going to draw a direct link between climate change and the things that we have seen over this summer. I think it is inevitable, given what the science of climate change tells us, that we will face impacts on the budget in future of climate events-whether they be natural disasters in the form of bushfires or flooding or the like, or whether they are the destruction or the damage to infrastructure of the sort that we saw in the heatwaves a couple of years ago with Basslink and the suburban rail networks in Melbourne and Adelaide, or whether it is the impact on economic activity of sustained drought that is climate related. I am not going to try and suggest that any individual instance is climate related.

Senator LUDLAM: It almost does not matter. In a sense, the fact is that-

Dr Parkinson: I actually agree with you; it does not matter.

Senator LUDLAM: It is occurring and it is doing enormous damage to the budget bottom line as well as people's lives and communities. You do not want to be drawn on whether we want to sheet it home to climate change or not-that this might be a perpetual budget line item.
The last thing I wanted to ask you about is this: most of your post-budget speech relates to mining boom mark 2, how it is different to the first mining boom, and where to from here. You raise a couple of red flags but ultimately I think your conclusion is that we just need to ride the wave and restructure and make the best of it. How much thinking has Treasury done-recognising you have been there only a couple of months-on what happens if, for any reason at all, China is not able to continue running these extraordinary growth rates and the boom comes off for any reason?

Dr Parkinson: You said I raised some red flags but then moved on. I raised those red flags because I think there are serious risks to the backdrop against which Australia will have to operate. They are risks, in a way, that are outside of our control and they are risks around a very positive central forecast.

The issue of China is particularly intriguing. I have seen references that seem to imply that, because there is a risk that something might happen in China at some stage into the future, Australia should not somehow be trading with China. I think that is just a fundamental misunderstanding of what is happening. In an export sense, in the past we have been far more dependent on the UK as a market than China. We have been far more dependent upon Japan. Indeed, Japan is not much different to China in size as an export market for us now.

The difference is that the emergence of China and India and other countries has changed the global backdrop for demand for commodities in the first instance. This will change over time the demand for our mining resources.

Even if we chose not to trade with China, chose not to export any of our energy or mineral resources to China, their demand would be filled by someone else. Because we have a great comparative advantage or competitive advantage in this area, we would simply divert our exports to a third party.
If something were to happen in China, it would affect global prices and that would affect us anyway. The impact will come back to us. Whether it comes back directly through our export flows, or indirectly through its impact on commodity prices and global economic activity, it is unavoidable. In that sense, it is no different to the fact that even though the United States was never a very large export market for us-because the US is so large-if the US stumbled then we got an immediate hit. One of the great puzzles over time has been the way in which the Australian economy and the US economy mirrored one another in the absence of weaker direct export links.

The issue is not our engagement with China. The issue is actually China's emergence and importance in the global economy. In that respect we need to think of China as being akin to the United States. The idea that somehow our future is something that is a gift to us from China is no different to saying that in the past some of our prosperity and troubles have been a consequence of the US's role in the global economy. What I said in the ABE speech was that we need to recognise, therefore, that we will be dependent on the success of policy making in other countries. That is what happens when you have a globally integrated economy.

Senator LUDLAM: My proposal was not so much that we stopped trading with China-

Dr Parkinson: No, I was not trying to put words in your mouth. I have seen all sorts of claims made about somehow we have hooked ourselves to the band wagon of China, or because of China we should run tighter fiscal policy. People did not say that because the Australian economy will stumble if the US stumbles we should run tighter fiscal policy. We have to run tighter fiscal policy for the reasons we decide ourselves, the same way we have to run our own monetary policy and our own structural policies.

Senator LUDLAM: The direction that I am heading in more is the so-called Dutch disease. What damage are we doing to other sectors of our economy given the explosive growth of China that the mining industry is tracking? That is actually reducing resilience in the economy. If China does come off the boom and, heaven forbid, they go back to running growth rates of five or six per cent rather than eight or nine, we have done structural damage to the Australian economy in the meantime.

Dr Parkinson: They have to go back to it. They have to go back to running growth rates of five or six per cent over time. That will actually be part of the mark of success. As they continue to grow, as they become a larger and larger economy, as their relative living standards rise, their growth rate will slow. The difference is that then you will have slower growth rates on a much bigger base. It does not mean that slower growth in China in the future-I am not talking about tomorrow, but off into the future-means there are less benefits for Australia. I find this whole discussion about the importance of mining quite bizarre-

Senator PRATT: I think there are three Western Australians at the table.

Senator LUDLAM: That was not a warning; that was just an acknowledgment.

Dr Parkinson: Sorry. The reason I say that I find it is a bit bizarre-

Senator PRATT: I do not disagree.

Dr Parkinson: is because we are talking about eight per cent of GDP. It is a very important eight per cent of GDP, but there is a very important 92 per cent of GDP which is out there.

Senator LUDLAM: You should tell that to the Minerals Council-

Dr Parkinson: For some reason we have stopped talking about it.

Senator LUDLAM: We have not.

Dr Parkinson: We have to be thinking very carefully about how we exploit the benefits of this once-in-a-century transformation that is occurring globally, and we happen to be in a phenomenal position. To do that, unfortunately, there is going to be quite significant dislocation in parts of the economy. One of those areas, as Senator Cameron knows, is an acceleration of the long-term trend decline that we have seen in manufacturing. We have seen in it in Australia in exactly the same way as we have seen it in other advanced economies.

Dr Gruen: Perhaps I can just add to what Dr Parkinson was saying. It is directly relevant to the issue of Dutch disease. The idea of Dutch disease, not surprisingly, comes from Holland. They discovered a natural gas field which they exploited through the 1960s and the 1970s. The exchange rate was driven up. In fact, part of what happened with Dutch disease was that Dutch manufacturing was hurt. It was a much bigger share of the economy than manufacturing is now. The fear was that the natural gas field would be exhausted after some reasonable period of time and that the industrial structure of the economy, which was consistent with Holland's longer term comparative advantage, would be damaged. That was the nature of the argument.

What Dr Parkinson was saying-and I think it is important to understand it-is that Australia's circumstances are, in an important way, different from that. There is no question that we have got a mining boom now, but the mining boom is, to a considerable extent, a consequence of the re-integration into the global economy of a third of the global population. So China and India together are a third of the global population. The process of them re-integrating into the global economy is a process that will not take one or two decades; it is likely to take much of this next century.

At the moment, and for some time, the big manifestation for that for the Australian economy is a mining boom. The other thing that is happening is that for China and India and, for that matter, other countries in Asia, there are huge increases in their middle class. There is an enormous increase in the number of people in the middle class in China and India and elsewhere. In fact, in budget statement 4 we show some really quite dramatic graphs. The projections show there will be an enormous middle class in these countries, and much bigger than the middle class in the US or in Europe.

Why am I saying this? The point is that if we look to our future, 10, 20, 30 years hence, it is likely that those people will have demands for things from all sorts of countries. But they are almost certainly going to have demands for all sorts of things from us. The point is that this re-integration of a third of the global population is likely to change Australia's comparative advantage for a very long time. It is not like once the mining boom is over we just want to return to the industrial structure we had in 2000. It is likely that there is going to be a profound change in ways that are not completely predictable now. There are likely to be significant changes in Australia's industrial structure which will be consistent with making the best of the Asian century.

Senator CAMERON: That really is great encouragement for a 55-year-old fitter in the western suburbs of Sydney or anywhere else who might never work again. That is the problem.

Senator LUDLAM: You cannot get somebody to work on a farm in WA at the moment who can earn $150,000 driving trucks to-

Senator Wong: Senator, this is one of the big policy challenges of this period in our history. Part of the difficulty is thinking through sensibly, hopefully absent a pretty agro political debate, what are the right policy options to deal with it. You have a set of policy options-and the government has obviously made its position clear about that-about how you try and effectively turn the sale of these non-renewable resources into an income stream. Then you have a set of policy questions about how do you manage the effect of the current terms of trade and the growth in mining and resource investment on the rest of the economy in a way that is sensible. The government has put forward a reduction in the company tax rate, investment in skills and investment in participation as ways forward, but the challenge is: how do you manage this in a way that is not actually going to simply impose greater costs on those sectors of the economy which are not in the resources sector?

Senator LUDLAM: That is why I am asking the questions.

Senator Wong: I am trying to make a point here which is that there is no easy fix.

Senator LUDLAM: No. They are hard questions. I understand that. I am not coming seeking some kind of magic bullet. Just to briefly rain on the parade, I think everybody in the room will be aware that the Australian dollar is now very closely tracking global trade volumes and also-

Dr Gruen: Sorry, Senator. Could you say that again?

Senator LUDLAM: I have been quite struck in the last couple of weeks by the very close degree to which gross world trade, the Australian dollar and world oil prices are now effectively locked together. Those three indicators, over the last four or five years-

Dr Gruen: Gross world trade-

Senator LUDLAM: Yes, world trade volumes. I can get a citation from the IMF that might be helpful so that you are not working in the dark. Let us pare it back a second. The Australian dollar, world oil prices and global GDP, if you like, appear to be very, very closely in sync at the moment. The Australian dollar is now traded as a proxy for trade with China or for Chinese growth. What has struck me the most is that world oil prices now appear to be tracking that as well. As the economy roars back to life globally, world oil prices are zooming up at the same time. That, to me, seems to be completely unsustainable.

I have spent the last two weeks trying to get anybody at all interested in the concept of oil depletion. Treasury is my last hope, really. I am wondering, Mr Parkinson, whether you have done any analysis at all on the impact of oil depletion on global trade?

Dr Parkinson: Do you mean peak oil?

Senator LUDLAM: I do, directly, yes.

Dr Parkinson: No, we have not.

Senator LUDLAM: You have not. You really were my last hope. It is very, very difficult to get anybody else excited about the idea.

Dr Parkinson: There have been a number of studies around that have looked at this, but I do not know whether the IEA has done anything.

Senator LUDLAM: The IEA said conventional oil peaked in 2006. That is why I am finding it difficult to understand why there is very little sense of urgency within the Australian government or, if there is, it is very well concealed.

Dr Parkinson: They said 'conventional oil'-

Senator LUDLAM: That is correct.

Dr Parkinson: I am not aware that we have done any work on this issue.

Senator LUDLAM: Could I invite you to do so? I think it is highly significant that world oil prices are now tracking economic growth.

Dr Parkinson: What we might do is ask ABARES whether they have done any work. We will ask on your behalf. If they have we will ensure that it gets passed to you.

Senator LUDLAM: I am reasonably familiar with ABARES's history of extraordinary failure to predict world oil price movements. I am not sure that they would be the best authority. I would probably go straight over their heads to the IEA. If you have not done it, that is the answer. I will leave it there. Thanks, Chair.

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