Costello at the MRC
Friday, 09 September 2016
Candid conversation with the former Treasurer
Politicians cannot outsource responsibility for reform, Peter Costello told a Menzies Research Centre Business Breakfast in Sydney on 9 September 2016.
“The Liberal Party is supposed to be the custodian of small government and low tax. “That’s what it’s there for and if the Liberal Party decides to give up that traditional ground there won’t be anyone arguing for it.
“I don’t want to see us lose that policy debate and I don’t want to see us sort of get psychologically bludgeoned into this idea that (higher tax and higher spending) is Australia’s future: it’s not...
“I think Labor’s got a very clear view of what it’s there for, it’s got a clear view of its constituency, and it’s got a very clear view of how it will stand by that constituency.
“But the Liberal Party’s got to think about what are the things that it’s really going to chase over the next decade.”
Costello's comments were given front page treatment in The Weekend Australian.
Click above for seven minutes of highlights or HERE to watch the 70-minute event in full.
So I don’t actually do a lot of political speeches these days, but very happy to come to the Menzies Centre whenever I am invited. It’s great to be here and thank you for coming out. I know it’s a pain in the neck to come out early in the morning and to listen to further political speeches so I appreciate the fact that you’re here and my old colleagues are here, wonderful to see you and catch up on all of the gossip.
As I was thinking of what I might say, just to introduce I thought I might just give you a snapshot of the Australian economy and fiscal position in five minutes. I was inspired to do this because I recently saw Geoffrey Blainey and I said, Geoffrey what are you writing? He said I’m writing a history of the world in 200 pages. So if he can do the world in 200 pages, I can do the economy in five minutes with a little bit on the end.
“We go back to 2007, Nick said we had no net debt, actually that’s not quite true Nick. We had negative net debt. I remember when I was doing, I think, the 2006 budget and a treasury officer came in and said oh Treasurer, do you realise this year we are going to have negative net debt. I said negative net debt?
What’s another name for negative net debt? Well he said it’s when your debt goes negative…It’s negative net debt. I said well try and think of another name for negative net debt.
I said, I’ve got an idea. ‘What about this, an asset?’ ‘Ohh, we’ve never used that word in a budget, treasurer’ he said to me. So we not only didn’t have any debt because we were able to live with the surplus from the 2006/07 budget into the future fund and If I’m allowed to make one little commercial here Nick. The future fund has only ever had one capital injection once. No treasurer after me ever put any money in there because we had no balanced budget. So it’s essentially still there with the 2006/07 surplus and we have just managed to grow it to 120 billion dollars. It’s an asset, it’s a viable asset, it’s something that I always thought would be a gift to the nation.
It’s still there and we’ve kept [away] sticky little fingers…Sticky little Swan fingers, stickly little Rudd figures off it over those years, and it is still there and it’s still managed to be an asset. So that was the state of the finances in 2007. We had no debt, we had money in the future fund. Our budget was still in surplus. I think I said at the time, it was the best set of books ever given to an incoming government. It was nothing like what I’d inherited, or what Joe Hockey inherited, what Scott Morrison or indeed anybody else in the history of Federation.
In 2008, as you know, Lehman Brothers collapsed in the United States, there was a lot of financial instability worldwide. Interestingly enough, no significant systemically important financial institution in Australia was in trouble. Our financial system was strong, it was well regulated. If we needed to give a guarantee in wholesale markets, which we did, we had a triple A Credit rating, we were able to do it.
But Labor decided it was necessary to engage in economic stimulation. I won’t go through the pro and cons of that. It was a difficult time, I acknowledge that but I don’t think it was a quality, a quality fiscal stimulation. Anyway the effect of it was that spending as a proportion of the economy, which is the only real way to look at it, went from 23% to 26%. We increased spending by 3% of the economy. Every 1% of the economy is about seventeen million dollars, 3% is about 50 million. And that was to be a temporary stimulus to get us through the period of 2008 and Labor always said after the markets should drop back to normal and were functioning properly, the stimulus would be withdrawn.
And indeed Wayne Swan stood up in 2012, and said the stimulus has been withdrawn, he announced four budget surpluses. You might have forgotten that budget night 2012, when Wayne Swan began his budget by saying ‘the four surpluses I announce tonight...’ As I said, the greatest one line stand-up comedy act the parliament has ever seen. ‘The four surpluses I announce tonight…’
It was supposed to be temporary response to the financial crisis of 2008. Now, fast forward, nine years later, remember the temporary stimulus took spending from 23% to 26%. Nine years later, You know what the spending the GDP is? 25.8%. This was the temporary stimulus that’s now into its ninth year.
And you will never balance a budget. Nobody ever has balanced a budget, if spending at 25.8% of GDP. There have only been 13 balanced budgets in the last forty years and I did ten of them. Nick…has got me down to nine! You can’t balance a budget when you are spending 25.8 % of GDP. It just can’t be done. Now what worries me at the moment is this argument which is now creeping in that says well because we are now in the ninth year of deficit, because spending is 25.8 % of GDP. If we can’t deal with our spending what we’ll have to do is we’ll have to raise taxes.
That’s the argument that’s been debated at the moment and frankly, you know, I would love to see the Menzies Research Centre go out and smash what I call the high-tax cheer squad which is coming out of the Australia Institute and the Grattan Institute, you know cheerleading for higher taxes. Here’s the argument: Because we had a temporary increase in spending, it would be unfair to wind any of it back unless we have a permanent increase in tax. That’s the argument. Because we had that 3% increase in spending and it’s still there, nine years after the event, if any of that goes away, if you cut in any part of the budget, it’s only fair to raise taxes at the same time. Hey guys, this was supposed to be a temporary stimulus.
Now if we fall for that argument, the long term effect is going to be that we will entrench the spending and entrench higher taxes with it, our taxes will start to chase our spending.
Australia would become a higher tax, high spend economy and that will affect our growth and our prospects. I don’t want the liberal party to fall for that. Because one thing we do know, is that if the Liberal Party can’t get expenditure reduction through the parliament, it can get taxes rises through the parliament.
You can always rely on Labor to vote for tax rises. You remember when Tony Abbott said, ‘Oh well in order to cut back spending in the 2014 budget, we’ll have to increase the top marginal rate of income tax to 49%’. The Senate waved through the 49% tax rate and then voted down every expenditure cut.
We can always get tax rises through the senate that’s not a problem. Greens and labour are going to line up, the more the merrier. If we become the party that wants to increase taxes, they’ll say give us double, but that’s not the problem, that never was the problem. The problem is on the spending side. And I want to say to you there is a big intellectual argument raging in this country at the moment on this very issue.
Is our problem a spending problem, in which case, we need to do something about that. Or is our problem a tax problem. Labor says it’s a tax problem, Labor will always say it’s a tax problem. Higher taxes, higher spending. But that’s not what the Liberal Party stands for.
The Liberal Party is supposed to be the custodian of small government, low taxes. That’s what it’s there for and if the Liberal Party decides to give up that traditional ground there won’t be anybody arguing for it. It won’t be the Greens, it won’t be the Labor Party, it won’t be the Australia Institute. I don’t want to see us loose that policy debate, and I don’t want to see us sort of get psychologically bludgeoned into this idea that it’s Australia’s future. It’s not.
That is the European road. That’s the way you get yourself into trouble. You gradually increase spending and then you increase tax, you’re always chasing your spending, your spending moves further and further in front.
Australia will become a European style economy without all of the historic buildings to offset the depression. We’re in that part of the world, the Asian part of the world which is much leaner and where we’ve got to be competitive and that’s why I don’t want to see us miss this opportunity. We’ve got to explain the case, we’ve got to explain it intellectually.
We’ve got to win the battle in the parliament and I hope that the Menzies Institute is at the forefront of that. I don’t see a future for Australia in this part of the world as a big spending, big tax country. That’s not our prospects and we shouldn’t fall for it and indeed I hope we don’t. Now we call all sit around, we can say to ourselves, you know, it’s very bad we’ve had nine budget deficits, we’ve had $300 billion of net debt.
I think Malcolm Turnbull very rightly tried to shift the argument to say actually this is becoming a moral issue now. Why do we need to fix our budget, because we owe it to future generations. A very strong argument properly explained and well understood.
You know, I used to say deficits and debts are a kind of financial child abuse, it’s just putting millstones of debts around the opportunities and the prospects of future Australians. Now of course, I got into trouble for saying that, because you’re not allowed to say anything like that these days, but it’s graphic language and it’s true.
If you were the generation of 2007, you had opportunity because you had no accumulated debt, but if you’re the generation of 2017 your opportunities are less. If we continue along this path, the opportunities for 2027 will be a little bit less again. Is this what we want in this country? I don’t think we do?
The debt, although we’ve accumulated it faster than any other G20 country, is not yet at breaking-point because we had such a strong starting position. I always explain to people that you have to understand with debt that there’s the starting point and there’s the journey. Our journey has been very bad but our starting point was very good. Because we had such a good starting point, we had a shocking journey, but we’re still not that lost. We started from a strong position, so it can be turned around.
And our expectation is that it will be and we hope that the government will be able to do that over the course of this term. But I do think it’s got to be done over the course of this term, because we have now, as I said, nine deficits, if we have another three, that’s twelve.
And in 2020, not only do we have big expenditure programmes coming down the line such as the NDIS, the National Disability Insurance Scheme, but of course we’re starting to get into the ageing of the population and this is what we are provisioning for with the future fund, we knew it was coming. None of this was a surprise, we knew it was coming. I just hope we’ll be in a better position in 2020 when we got there.
So there are challenges. Government is not easy, never has been easy, but there are precedents in the past where we’ve managed to turn things around. There is no reason why we can’t turn things around again and we should be hoping to turn things around again.
That is the historical mission, I think, of the Liberal Party to be able to do that and what we need are these people, these thinkers like Nick and his team that are out there arguing the case, leading the charge making sure that you win it on a policy front first.
You always win on a policy front first, than the practice follows in behind. If you can’t win it on a policy front then nobody is going to follow you. So you have got to win it on a policy front first, explain it to the public and try and take them into your confidence and follow them.
So I thank you all very much for having me here today.
Q and A Session
Replies by Peter Costello
Peter Costello: (In response to a question on how Australians would come to terms with a future of higher spending and higher taxes) Well we’re not paying the full tariff you see. Let’s suppose our expenses are 26% of the GDP and our revenues are 24. There’s a 2% gap, we’re paying 24% and 2% is a deficit which we borrow and then send on to future generations. If they were paying the full tariff, I think they would be very upset, but they’re not paying the full tariff. They’re paying 24% and 2% has got to be paid for by their kids and grandkids. Now, what do you want to do about that, do you just say, Oh well, we can’t do anything about spending, it’s just there, always there, and we’ll just send a bill to future generations or we’ll increase taxes our self.
I don’t think that for a moment. As somebody who worked very hard to get it down to 23%, I just can’t accept that you can’t reduce expenditures and here’s the rub, I’ll tell you what will happen, I’ll tell you what will happen if you increase taxes from 24% to 27%. You know what will happen? The senate and the rest of them will say, raise it to 27 or 28%, and then we’ll chase it a bit more. This is exactly what’s happening in Europe, this is exactly what is happening, your taxes will always be chasing your expenditure. I have one principle I always try to drum into my colleagues. I used to say look, you know, our expenses will fit within our revenues. Our revenues won’t chase our expenses. It’s a pretty simple proposition by the way, but people think that because it’s a government, you can make it all much more complicated than that, and you can do it for a while, you can borrow the difference for a while. But there is a day of reckoning, there will be a day of reckoning, I am not saying it’s going to be this year, it may not be in 2027, but there will be a day of reckoning.
Peter Costello: (In response to a question of how he garnered support for the reforms he achieved as Treasurer during the Howard years) Well, I think, the Labor Party used to accuse me of having a ‘deficit fetish…well you know, he is just obsessed with making sure we’re not in deficit, or maybe that’s an anti-fetish, I’m not up-to-date on these sexual terms as well as I should be. I don’t know, maybe I had a fetish with surpluses anyway….and the truth of the matter is, it doesn’t matter whether your budget is, let’s say from a macroeconomic point of view, doesn’t really matter if your budget is one million in surplus or one million in deficit. You’re quite right, it doesn’t really matter, but once you accept the principle that it can be one billion in deficit and somebody says, well it wouldn’t matter if it’s 10billion, well what about 20? Would the sky fall in if it’s 40. Once you sort of, lose that rule, there is kind of no natural break as to where it stops. So you know I’ve said it, you should explain to the public why you should not go into debt and if I could hold that, then we could force people to make choices on spending and tax, but once that parameter goes you are at liberty, right? So we’re at $40billion deficit this year, and the government says all we want is $6 billion for this omnibus saving bill to go through and the Senate says well we’re at $40 billion deficit, does it matter if we’re at 46, does it matter if we’re 52?
The Labor Party said in this election, we’ll get the budget back into balance in a ten year period, so does it matter whether its 4 years, whether it’s 10 years. So I used to just give the consensus and I think I even had the Labor Party in this consensus that we should pay for ourselves and that’s the consensus we got to. Now that consensus has been shattered. Where are you going to find the new consensus? This is what worries me and without a consensus, on important things, everything becomes possible. So you have got to start arguing, you’ve got to think carefully where you’ve got to draw the defences. We have got to try and bring the press into it, you’ve got to try and get the the think tanks into it, and this is where people like Nick become important, if they’re not going to run it and we’re not going to run it, anything becomes possible. If anyone says to you well we’re 300 million in net debt, does it matter if it’s 400 million, does it matter if it’s 500 million. We can still borrow it, but you know at some point…you cross the river and you’re into Greek territory and you want to pull yourself up long before you get into that kind of position.
Peter Costello: (In response to a question of what the business community could do better) Look, you know it’s funny, I’ve been a politician and politicians always think business people aren’t pulling their weight and I’ve being in business and business people think politicians aren’t pulling their weight. I would say to you Sally, that politicans can’t expect big business people to do this for them. Business people can support it, and I hope they do. These people, these business men and women are running corporations that have obligations to make profits for their shareholders and it’s not their job to run fiscal policy or tax policy. They should be around to make contributions and I think that’s welcomed but…the politicians can’t contract this out. This is core business for a politician, absolute core business. Now they might be, and they’re entitled to in my view, ask think tanks to engage and journalists and everybody else but this is the responsibility of the political class in my view. That’s what they are there for.
Peter Costello: (In response to a question of whether the ‘political class’ is doing this well enough) I don’t know, you know, I regret the fact we are not generating what I think is enough concern about these issues…You go to the doctor. Before you’ll take the medicine you have got to know what the illness is? Now before the public’s going to take the medicine on spending and tax and whatever, you’ve got to tell them what the illness is, they’ve got be convinced that it’s an illness we’re treating. Have we told them that? Do they understand that? You know, they look around and they say, gee everything is going alright. There’s not a big problem here. There is no recession; there not all that many people out of work. You know the trains are leaving, the buses seem to be running, the sky’s…and it is, it is, it’s still pretty good. All I am saying is as your position slips, suddenly you find out that you have run out of choices and you don’t want to go there because then your future goes into the hand of someone else and that’s what I don’t want to see.
Peter Costello: (In response to a question about generational change in politics) Yes, but I was precocious, you see. The interesting thing Nick, I think, is what is the political formation of these people, what is actually motivating them into politics. In my case, you know, I started off knocking around national wage cases and big industrial disputes and you know, I became a firm critic of compulsory arbitration and that fitted in what was then called the dry agenda: smaller government, lower taxes, freedom in industrial relations, privatisation, and that was part of my political formation and when I went to Canberra we used to have a lot of debates about protection for the car industry so there was a lot of that kind of debate. So what is the political formation of these people? This is the interesting question I ask myself, What are the events that propelled them into politics and which they want to deal with and change? That will give you the clue as to what they’re likely to do. I don’t have a feel for that, perhaps I am not close enough to the people you are talking about to actually have a feel for that. What is their agenda? And I think this is a question for the Liberal Party too? [and] Labor for that matter. I think Labor has probably worked it out, I think Labor has got a very clear view of what it’s there for, it has got a clear view of its constituency and it’s got a very clear view of how it will stand by that constituency. The Liberal party has got to think about, you know, what are the things that it’s really going to chase over the next decade. You know, When I got in there, I could of told you that I wanted to balance the budget, cut tax, introduce the GST, free up industrial relations, privatise Telstra. You know…what are their motivations and that would be an interesting thing to ask them.
Peter Costello: (In response to a question of how the public are apprehensive about change and the challenges of the future) It’s an age old question and it’s impossible to answer I think. You know going back, there have always been problems in the world. In the 1960s, there was realistic fear of nuclear annihilation. When I was first going into politics, the Berlin Wall was still up, you know, we were engaged in a Cold War. You know, there were big global events then, you know, and in a funny kind of a way, we came through that before the fall of the Berlin Wall, everybody thought well liberal democracy will conquer the world. You remember Francis Fukuyama wrote his book called The End of History and it turned out it wasn’t the end of history. New challenges came with globalisation, digital disruption, the media cycle gets faster, but you know it’s a much more informed world, it’s a much more affluent world then it used to be, its more educated, people are more educated, this can be a force for good or for ill, and everyone says ‘Oh the short media cycle is a force for ill’, but it can also be a force for good, you can get your message out really quickly. So I am not sure that we should say, oh the world is changing we can’t do these things anymore, there are challenges and there always have been challenges.
Peter Costello: (In response to a question on the future direction of the Liberal Party) I put it like this, I think the Liberal Party always has to be the custodian of smaller government, lower taxes, that’s its niche because the other great political tradition in Australia, the Labor tradition, is generally the party of higher taxes, higher spending, higher regulation, so it can’t vacate that field, that’s core business in my view to the Liberal Party and to Australia. Then you get on the defence/security, you know, the Liberal Party can’t vacate that field, defence/security, that’s where it always has been, that’s what it’s got to do. Strong defence, tough line on security. Then Piers, you get on to these social issues, which is probably what you got in mind, things like gay marriage, the republic. I think the Liberal Party is going to have to be broader enough to have both on those and a freedom of view on those, but that cannot be at the expense of this core business. If we can’t unite around that core business, then we’ll end up like the Australian Democrats.
Peter Costello: (In response to a question on Australia’s relationship with China) Sure… and it [China] is our friend on the economy and trade, and we should bear in mind that we’ve just signed a free-trade agreement with China and the idea was to promote trade and promote investment it’s a big part of that free-trade agreement. So, you know, if we didn’t want to promote investment by China, we shouldn’t be signing free-trade agreements with them but you know, than the other side of this of course, is that China is going to be a superpower, if not already, it’s rising, it’s entitled to do so, but we have our own security interests and we have our own alliance partners and the South China Sea which is obviously of enormous emotional importance to China, we as a middle power, say quite rightly, this has got to be determined in accordance with international law and international law has determined it and we called on China, like any other country, to recognise, this has been arbitrated and so from a security point of view, we will be maintaining that overall framework and we can do that with a strong economic relationship. You know, China’s rise…As long as China understands, that like any power, it is still bound by international rules, a rules-based system, I don’t think the rise of China will be a problem for Australia.
Peter Costello: (In response to a question on the government’s response to the growing Higher Education debt) Well it worries me, it’s alright for the government to say you can enrol who you like, if that’s all that was happening, but the government says you can enrol who you like and we will provide a very large component of the cost. So from the Universities point of view, they can enrol everybody they can, the government’s going to start picking up the tab and how the government gets that money back is of no consequence to me as a university administrator, it doesn’t worry me in the slightest and there are a lot of people that will never pay back their HECS debt, because they’ll never go into the workforce and they’ll never go above the threshold for repayments. It worries me, it’s a very big liability. Well actually the government counts it as an ‘asset’ on its balance sheet, actually. At some point, they’ll have to go through that and say how much of this is recoverable and start marking it down, but it is of enormous concern to me. I don’t think we have got higher education right, I really don’ t and we’ve had, you know, five goes of ‘big bang’ fixes to it, and so I think if the Commonwealth is going to be paying for places it is going to have to ration the number.
Peter Costello: (In response to a question of how the Liberal Party can sell its message of ‘small government’ despite perceived divisions within its own ranks) Yes, I think, as I said before, when I first went to Canberra…by the way, we didn’t have unity on these issues, we used to have huge arguments about the tariff right, which is now more or less gone, we had huge arguments about compulsory arbitration which is now right back. So we never had complete unity on these issues, but you know, I think what we did have was powerful, competent people who were mounting the arguments and educating the members and I just hope that’s still going on. Very important to have that intellectual leadership and this is maybe where the think tanks come in again to explain this. You know, take free trade agreements, we all sit round and say ‘Oh these free-trade agreements are great breakthroughs’, and I’m a free trader, and then the moment, you know, somebody does something under the free trade agreement, we say ‘Oh that’s terrible, we can’t have that, you know, happening in the country’ we’ve got to decide in our minds do we want these free trade agreements or don’t we?, because if we don’t want to allow for free investment and trade, we shouldn’t be singing all these agreements. You can’t take the headline accolades for singing them and not have the delivery down below of the substance. So maybe we should think about these things more carefully. I am a believer in free trade, I understand national security, I think we have to protect national security, but outside of that I am a great believer in free-trade. I just hope somebody’s in the caucus, in the party room, explaining to the members the benefits on a daily basis. Maybe it’s going to be Nicole…in the tradition of Bert Kelly...Bert Kelly the modest member, absolutely!
Peter Costello: (In response to a question about what the government can do to rein in student debt) I think, you’re absolutely right. You know, you’ve got be very clear about this point and this is what it comes down to I think with the universities. Who are the universities being run for? Are we running them for the students? Or are they been run for the people who are teaching, or the bureaucrats who are administering? We know what their interest is in, their interest is to get as many students as possible, subsidised. What happens to the students when they graduate? Send them out into life with a big debt and tell them to look for a job. Or are we actually running [them] for the students, and this is a very big issue in politics, generally, you know. Is government there for the people it serves or is it there to look after the producers who are in the business of serving? I think you always have to be very clear about this. You know, I can always remember getting up in the party room and having debates, you know, we’ve got to lift the price of milk for farmers. Is that our job, to lift the price of milk for the producer? Are we here for the producer or are we here for the consumer? Unless you’re very clear about that, you will get dragged back into a whole lot of price support schemes and tariffs and everything else. So I agree with your proposition, it’s just another illustration of the point, is government there to serve the tax payer or the consumer, is government there to serve the producer, the person that’s delivering, and you know, our kids will do a lot better if we focus on them and their opportunities rather than who’s going to be making money from them on the way through.