Interview with Ross Greenwood, Business Sydney Budget Breakfast Q&A
JIM CHALMERS:
What I want to do is to really take up the invitation today, not just to tell you what's in the Budget - I think most of you watched pretty closely what was in the Budget that we released a week ago today - but really to give you a bit of a sense of what the thinking was behind it, a bit of the texture behind the Budget rather than run you through a shopping list of initiatives and what they cost. And so in doing that, I want to take you back to about five months ago, the election decided, a few ministers signed in, we sit down and work out we've got a commitment to a Budget this calendar year. And you sit down like you would, like your boards would when you maybe take over a new business or you've got a new set of challenges and opportunities - you sit down and work out what have we got going for us and what do we have to get on top of. And what we have going for us was pretty obvious - we're getting tremendous prices for what we sell to the world and we had in historical terms really quite low unemployment - so you start with what's working. And then you get to the challenges that you've got. For us obviously, we had a structural problem in the Budget, a trillion dollars in debt, 10 years of deficits, a structural deficit in the Budget. We had labour shortages - and I want to come back to that in more detail in a moment, I know that's something most of you are confronting. We had stagnant wages, we've got a crisis in aged care, and we've got chaos when it comes to energy policy.
And so those were the things that were troubling us five months ago. And then if you go from five months ago to about five weeks ago, and I pick that because about five weeks ago the Expenditure Review Committee sits around the Cabinet table and starts to really lock down some of the decisions in the Budget. If you think about what changed from five months ago to five weeks ago - that made the backdrop for the Budget: the war in Ukraine obviously causing havoc with energy markets, the global economy deteriorating quite sharply, UK and Europe the worst of it but risks in the US, a big slowdown in China while it pursues a version of COVID zero, and then a range of other challenges. But largely what all of those challenges added up to as we finalised the Budget, what was the primary influence on the Budget was this inflation challenge.
And so if you line up what we've got going for us with good prices, low unemployment against what's challenging in some of those policy areas that I mentioned, but particularly the deteriorating global economy, rising inflation, rising interest rates, and then more recently natural disasters as well - then you can see that this Budget really had one overarching task. And that was to recognise and deal with the fact that we have a heap of inflation in our economy, it's going to get a little bit worse before it gets better, but it will get better. But when you're landing the Budget in October of 2022, it needs to have front and centre this inflation challenge because inflation is what puts at risk all of the other things that you and I and the Australian people want to achieve together. And so once you recognise that, and you're trying to finalise the Budget, you get to a bit of a fork in the road, and down one road and down the other road are two starkly different approaches to the Budget. And without being partisan about it, down one road is the approach taken in March - it's unusual that we have got two budgets this year - the March Budget, down one road and the October Budget down the other. And the March approach was to get a big surge in revenue from commodity prices being high, in welcome ways, and commit that to the Budget, keep spending high, don't have any savings, commit most of the revenue upgrade in the Budget. That's effectively what happened in March. In October, this is why the fork in the road is important and the decision that we took will pay off is that we decided not to go down the same path that we saw in March.
Instead what we did in October - which some people will say that we should go harder, some people will say we shouldn't go quite that hard - but what we've tried to do is to say in an inflationary environment, when we've got to deliver a whole bunch of election commitments in important policy areas, the best thing that we can do right now is to keep real spending flat. So we did - 0.3 per cent real spending growth over the Budget. It actually falls in the first two years of the Budget when the inflation problem is most challenging. We banked 99 per cent of the revenue upgrade in the Budget from high commodity prices - 99 per cent banked over the next two years and 92 per cent over four years. And we tried to keep the cost of any new commitments down. And we are pretty confident - you don't do that because it's a kind of a fancy or a flashy Budget, you are not doing it because you're expecting people to line the streets and applaud you. But when inflation is the defining challenge then the only way to deal with that in a Budget is to show spending restraint, to make revenue commitments, but to show spending restraint overall so that you're not making the inflation problem even worse.
That's why we chose the path that we chose and once you decide that inflation is going to be the primary influence on your Budget, it guides all of your other decisions. And so we gave seven and a half billion dollars in cost-of-living relief in the Budget, but we did it in a way that was responsible because it has an economic dividend: child care, for example, paid parental leave, housing, cheaper medicines and our wages policy - all designed not to add to the inflation problem but still make life easier for people around Australia. It guided our approach to how we invested in the drivers of economic growth. People think, wrongly, that in budgets you can either have restraint or you can have investment in the drivers of growth. We showed that it's possible to do both simultaneously. The drivers of growth are obviously human capital, cleaner and cheaper energy, data digitisation, the NBN - those kinds of areas are the drivers of growth in the economy in 2022 and beyond. And so we found ways to invest in that and that is about dealing with issues in the supply chains, it's about lifting the speed limit on the economy so we can grow without adding to inflation. And obviously, the inflation problem guided our approach to Budget repair as well.
One of the things that draws all of that together and in addition to a good, solid, sustainable Budget being good for the business environment, I really wanted to give you the main reason in addition to that, that I think this Budget was good for business, the one that we handed down last Tuesday. And that is because obviously amongst all of the challenges that you're confronting in your own businesses and I'll come to energy in a moment, but really the one that you have expressed most consistently to me over a period of time now is around labour and skill shortages. And one of the things that I find frustrating - I think Lyall and I talked about this in Parramatta last week - one of the things that's frustrating about this conversation around labour supply, labour and skill shortages, which you understand, but not everybody does - is people think that you're picking from a menu. If you've got labour shortages or skill shortages, then you have to do skills or migration or early childhood education, participation or housing or some of these other areas. But the reality is that the challenges that you are facing when it comes to finding good people in this big global scramble for talent is we have to act on all of those fronts simultaneously. And we are. And that's one of the big things that came out of the Jobs and Skills Summit in Canberra at the beginning of September. It's possible for us to move sensibly but decisively and meaningfully on each of those fronts. So in the Budget hundreds of thousands of fee‑free TAFE places, 20,000 university places, early childhood education was the biggest on‑Budget investment. It will represent something like 37,000 extra workers in the economy when it comes to the impact of making it easier for parents, particularly mums, to earn more and work more if they want to – it’s a big part of the story. Obviously migration is a big part of the story. I took seriously the conversation that we had here last time from this stage where you asked me before the election to make sure that we were doing something meaningful on the permanent migration cap and on getting through the visa backlog, and we are doing that - that's an important part of it too. Housing - making it easier for people to live near where the jobs and opportunities are in the context of very low vacancy rates and very high rents is really the guiding motivation behind the Housing Accord that we announced on Tuesday night. And we also need to get better at hooking up people in communities like the one that I represent with the opportunities of an economy that's got unemployment around three and a half per cent - remarkably. We are and we need to operate on all those fronts simultaneously. Now to finish on this set of points before Ross gives me a grilling in a moment.
We know - and I think Lyall acknowledged this as well and Chris in different ways - we don't pretend for a second that you can come into office after a decade out with all of these accumulated challenges that I ran through at the start, we don't pretend that you can click your fingers in October five months into the life of a new government and all of the things that trouble us are dealt with. We have never pretended in any conversation public or private that one Budget will do the trick. But what we do think was important about Tuesday night's Budget - the first of what will be at least three, maybe four in the life of this parliamentary term - is we think that we laid the foundations of a more responsible budget and a more resilient economy. And in doing so, it will make it easier for us to deal with some of these challenges that are still there on the table. Clearly energy is still a massive challenge that we're dealing with and we don't pretend otherwise. We're working closely with Gina and her colleagues. I'm working closely with Ministers King, Husic, Bowen, the Prime Minister and the Cabinet on what else we might be able to do in energy markets in a responsible, sensible way, but also in a meaningful way recognising that the situation as it is now cannot endure. It's putting too much pressure on Australians and on Australian industry as well.
So energy is a big part of the work that we're doing now and also the structural position of the Budget. We know that we've still got even after all of the effort that went into $22 billion of savings on Tuesday night, 28 and a half billion dollars in Budget improvements, keeping real spending flat, banking upward surges in revenue from higher commodity prices. We know that there's still work to do there. And we will do that work in a collaborative and consensual way as well, because we need to work together to address some of these challenges. What I hope that we've demonstrated in last week's Budget and what I hope to demonstrate really going forward as well is a recognition of the challenges that we face, the beginnings of a plan to deal with them. Some important beginnings, important foundations laid down on Tuesday night. So much of what we did was informed by conversations with you all around the room, particularly when it came to those labour and skill shortages. So much of what we do from now on, energy and the structural position of the Budget will be guided by you as well. And in that light and in that context, I thank you again for the opportunity to talk with you today. Thanks very much.
ROSS GREENWOOD:
Thank you, Treasurer, for being with us today. You've been remarkably candid with the Australian people about the challenges that you see ahead. I mean, refreshingly, I would say. Can I just raise one point? Australia right now has a central bank that is $12.7 billion underwater. The previous government basically spent $350 billion - borrowed that money to have Australia recover and make certain it got through COVID. You in the Budget had two cases - a base case for the economy and a worst case if there's a hard landing overseas. Can you be frank with Australians and tell them what sort of shape is Australia in right now to deal with a global economic crisis?
CHALMERS:
We're in better nick than most of the countries, if not all the countries, with which we compare ourselves. And we're in better nick still because some of the steps that we took on Tuesday night and really one of the things that guided us as we put the finishing touches on the Budget in the context of high inflation, a deteriorating global environment, is what does it look like to build our buffers against some of this global uncertainty. One of the things that we did two weeks before the Budget is I went and conferred with all of my colleagues in the G20, the IMF, some of the big investment houses in the US, central bank Governor Powell and others to understand not just what they think of the prospects for some of these big economies, which have such implications for us, but also to think through properly what would it mean to rebuild our buffers against that. So Budget buffers are an important part of that - that's a big part of the reason why we banked that upward surge in revenue, but also in the economy as well. I think if you take all the politics out, all the ideology out, you take a step back from what's happened over the last couple of years - and I've heard you talk about it on your show, and you and I have talked about it on your shows - is our supply chains, our economy is more resilient than others, but not quite resilient enough. And so our job as a Commonwealth Government working with everyone is to work out how we can make ourselves more resilient. There is genuine concern, if not fear, in the global economy about how things might play out. Some of the closed-door sessions at the G20 meetings were confronting. And so what we did in the Budget, was we said here's how Treasury thinks things will play out, here's what it looks like if things are a little bit worse. And that's really to spur us and to give the context for all of our efforts to rebuild those buffers.
GREENWOOD:
Okay, so then just tell me about the UK situation. When you saw Liz Truss handing out the tax cuts, you saw the reaction in the financial markets. The worry was, of course, that would be inflationary working against what the Bank of England was doing. Did that give you pause for thought in framing the Budget here and whether if you created inflation here, you could spook the financial markets?
CHALMERS:
It was a defining moment in finalising the Budget. And the challenge for us is you don't want to be a critic unnecessarily or provide a kind of a rolling commentary on the domestic politics and policies of another country, particularly a friend like the UK. But I think any objective observer of what was attempted there would conclude that that was a cautionary tale about what happens if first of all, if there's a big surprise. But secondly, and most importantly, what happens if the central bank is trying to achieve a different objective to the government? And so if you made a list of the kind of three or four defining moments in the economic life of the first five months of our government leading up to that first Budget, we discussed and I thought about the UK really frequently. I met with then Chancellor Kwarteng twice in DC a couple of weeks ago, and his central bank governor was there as well, the UK Governor of the Bank of England. And it was really one of those things that was hanging over every conversation, the sense that if you do get it wrong, you can spook the markets, you can provoke a pretty blunt reaction from central banks, and that's what we're desperate to avoid here.
GREENWOOD:
Okay, so then take me to the stage three tax cuts which your government took to the election and agreed to, legislated. So the suggestion was that you might have been wavering about whether the timing of them was right, whether the scale of them was right. If there is any change, is there an argument that perhaps it should be put after the next election so any changes to those stage three tax cuts, effectively go to the people before they are put through the parliament.
CHALMERS:
I’ve had that view put to me Ross. The stage three tax cuts are one of those things where there's a lot of views out there in the business community and the broader community as well and what I was trying to do in that period before the Budget was finalised was to focus the country's mind on the sustainability of the Budget broadly, not necessarily specifically about these tax cuts but broadly because we've got a problem in the Budget. Even with all of the effort that went into getting debt down in the forward estimates, all of that restraint that I referred to a couple of times, the fact that we are not spending the upward surge in revenue, we saved about $47 billion dollars in interest over the 10‑year period of the Budget, all of these things are crucially important but even with that, the end of the 10‑year period we've got deficits in the high ones as a percentage of GDP. And so, that's the conversation that I think we need to have. People will have different views about the constituent parts of that challenge but I don't have a problem with people raising it in the context of how do we get on top of the structural problem in the Budget. It's not the only way to fix it - doing something different on stage three - clearly, we've got to make sure the NDIS is sustainable, clearly the less debt we can borrow, the less interest we pay on that debt, which is another big contributor to the structural problem in the Budget and so I think we need that broad conversation.
GREENWOOD:
Okay so as you were framing the Budget, you were fighting inflation, we saw that. What was your reaction when you got the Treasury forecasts that gas prices would rise 52 per cent in the next two years?
CHALMERS:
We were broadly aware that energy prices - because the war in Ukraine was dragging out much longer than anyone anticipated and the impact on energy markets was much more severe than what was anticipated earlier in the year - we were conscious that energy prices were going to be a bigger and bigger component of our inflation challenge. So if you think about inflation - and Treasury's got inflation peaking at seven and three quarters, there's a bit of upside risk to that because of the natural disasters and some of the other factors that are at play now in the economy. But even with that peak towards the end of the year, the composition of that inflation is changing. For example, petrol prices came off quicker than what was anticipated in the middle of the year and so that's helped us on the inflation front but natural disasters have added to it because it's prime producing farmland for food in our supermarkets and energy's become a bigger part of it so we were broadly aware over time that energy was going to be a bigger and bigger part of the challenge but we got those specific numbers that you're referring to particularly late in the Budget process and to be upfront with you Ross in front of everyone here, the choice that every government makes when they get advice which is as confronting as those numbers were, is whether you publish them warts and all or you don't, and we decided that we should be upfront about it in the Budget. And obviously, energy prices are a big part of the political battle, the Question Time battle in Canberra but my personal view, and it comes back to how you introduced one of the questions before is - if you've got a choice between being upfront with people or not, if you be upfront with people that gives you the best chance to deal with the challenges that we all confront.
GREENWOOD:
Okay, being upfront, industry has called for uncontracted gas in Queensland producers to be bought back into the Australian market at $10 per petajoule. Why is it so difficult? There’s a voluntary agreement now. It seems not enough gas is getting into the system which is pushing the prices up? Why is it so difficult for the Government to have a mandatory trigger to basically ensure that there is sufficient gas at a reasonable price coming into the Australian system?
CHALMERS:
There are a lot of views out there about how we deal with this challenge and they're all welcome, genuinely all welcome. Gina's probably in the same boat, certainly I get five or six calls a day about how we deal with this challenge and I think that's a good thing. I think the whole country is engaged in one way or another in this important question, and I welcome that. I'll tell you what I'm trying to do and what I'm trying not to do. What I'm trying not to - because I think it's problematic for the country's Treasurer to think out loud about all of these options. There's a lot of market sensitivity and other kinds of sensitivity associated with that so I try not to think out loud about some of the options that we might contemplate but how I am coming at this, working with regulators and with ministerial colleagues and states and territories, remembering a lot of the levers are actually held by the states when it comes to the energy market is, the situation as we expect it to roll out, can't endure - that's my starting point. It's putting too much pressure on Australians and Australian industry, particularly manufacturing. I've spent a lot of time with manufacturers in the last little while. So if you accept that the situation as it stands can't endure - and that's my position - then you need to work out how can we do something meaningful here which respects the fact that there are international relationships at play, investment that's gone into the system which is not irrelevant to us but also how do you properly shift the needle so that some of these worst case outcomes don't eventuate. You mentioned the code of conduct - we have said publicly that if you think about the three paths you can go down here when you're dealing with this challenge - number one is the tax system, number two is spending, effectively subsidising either industries or households, the third category is regulation.
GREENWOOD:
The middle one would be inflationary technically, wouldn't you think so?
CHALMERS:
Yes, I think so - at least that's the thing that gives us pause - you don't want to take any options off the table in the future but that does give us pause about that. Mailing out cheques in the way that the UK and others have done does have its own share of challenges associated with it, as does tax, obviously and so our first priority is on the regulatory side. There is a code of conduct which is voluntary, we've said we should look at ways to make it mandatory if we can, and that we need to involve considerations of the price, not just considerations of supply.
GREENWOOD:
If you do make it mandatory, what is it that you actually have to do and how long does that take because one issue is the problem is now, not in 12 months' time?
CHALMERS:
So if you think about a continuum of action, so the most important thing you can do in the energy markets is have new capacity and increasingly over time that should be cleaner, cheaper energy - we've been working on that, we've got a big policy on that. Next thing you need to do is to make sure you adequately empower and resource the regulators - $67 million in new funding for the three main regulators in the Budget on Tuesday night - big part of the story. Then you need to make sure that you're doing what you can to make businesses more energy efficient, beginning with small businesses - we have some grants for energy efficiency in the Budget for small business as well. Then you need to sort out supply and I think Madeleine King's done a great job in the heads of agreement that she worked out recently to get more supply into the system, but supply is only ever part of the story. And so, the next port of call - can we do something meaningful on the code of conduct and can we include in that a consideration of price and not just supply? I think that's the important next step that we're working on right now.
GREENWOOD:
Okay, can I take you then to the first of the options that you have, which is tax? And I'll take you to the front page of Bloomberg right now and it says "Biden Warns Oil Firms He'll Seek To Tax Windfall Profits". Why would that not be an option, given the fact that there are windfall profits being made by energy companies in Australia right now, as a result of the war in Ukraine?
CHALMERS:
Again, this is something that gets put to me, including, I'm walking down the street at the moment -
GREENWOOD:
You must have good walks to the shop!
CHALMERS:
I think there is a pretty strong view in the community that we need to get a good return for our resources and perhaps what people don't recognise is that the PRRT take did go up a bit in the Budget - a couple of hundred million dollars this year, a bit less than that next year and I understand there's appetite in the community, perhaps for a bit more than that but what we've said, a bit like what I said a moment ago, is that if you recognise that there are three parts - tax, spending, and regulation - I think at least in the first instance that regulation is the area that offers us the best potential but in saying that, my predecessors set up a couple of reviews of the PRRT, I'll listen when the Treasury advises me on the outcome of that work. We're trying not to take options off the table for down the track, but our first port of call is regulation and that's our focus.
GREENWOOD:
Okay, your fight against inflation and obviously you saw from the financial markets that they gave you a tick after the Budget, there was not much movement, it was actually pretty stable. So that was a tick for your Budget in the fight against inflation. Just tell me of your view when you saw the Victorian Budget yesterday, with money being handed out and significant spending and debt being incurred by the Victorian Government because of course, it may not just be in Victoria, but other state governments who perhaps try and fill the void in spending that maybe the Federal Government is being more disciplined about.
CHALMERS:
Whether it's a Labor state like Victoria, or a Liberal state like here in New South Wales, I have genuinely tried not to second guess the policy choices that they've made in their budgets and that's for a couple of reasons - most of all, I want to maintain a respectful relationship with treasurers from both sides of the political fence, Matt Kean here and Tim Pallas in Victoria and right around Australia. And so I hope it doesn't sound like I'm squibbing it Ross but I've got my own issues in my own Budget that I'm trying to deal with and so I'm not going to second guess what Tim does in his. In the grand scheme of things, I think in Victoria a modestly bigger deficit is not going to be the difference between whether or not we get on top of our inflation challenge in Australia - what will matter is whether there is restraint in the Commonwealth Budget, whether we can deal with these issues in supply chains, and all of the other things that I've spoken about.
GREENWOOD:
Okay, you wouldn't be blind to the headlines over the past few days about the industrial relations bill that's coming before the Parliament where it goes to a form of industry bargaining as compared with industry bargaining. Indeed, you have the Australian Industry Group, ACCI, you have the Business Council of Australia, retailers all claiming that it will create more strike action and potentially lead to fewer jobs - that's really working against what you're trying to achieve in your Budget to have more Australians working. What's your reaction to the business reaction to this industrial relations reform?
CHALMERS:
I think the theme of today and certainly the way I'm trying to go about this job that I've had for five months, is to try and be respectful when people have got different views but also to be upfront about where I disagree. I pay tribute to, for example the BCA and others who have said in their work over the course of the last two or three years, that we do now need to find a way to get wages growing again, strongly, but in a sustainable way, with more productivity in workplaces and I share that objective - I welcome the fact that business has itself said at peak organisation level that for too long we've had stagnant wages, that it needs to be the right kind of wages growth, strong and sustainable and based on win‑wins at the workplace and so that's my starting point.
I don't think anyone could say that the enterprise bargaining system that we've had is delivering the kind of outcomes we want, particularly when it comes to women, workforces dominated by women, particularly in areas like the care economy, and I know that the Commonwealth's got a role to play there, and in other areas of the economy, as well. So I do think we need to do something different in enterprise bargaining. I genuinely believe that the way that this has been designed is not about more conflict, it's about more agreement and I see in the papers today that one of the things that has been raised as an issue of concern is more of a role for the Fair Work Commission - I see that as a plus and I see that as a hedge against what businesses have raised as a concern about more industrial action. I think the role of the Fair Work Commission is really important here. Our levels of industrial action and conflict have been coming down over time - that's a good thing, obviously - we don't want to see more conflict, we want to see more agreement, and we want to see more wages growth and I think the way this is designed, to take into consideration some, not all, but some of the concerns that business have raised with us in good faith, I feel like we've struck a good balance. Having done that, we have never anticipated in an area as contentious as industrial relations that there will be some sense of unanimity but we will continue to engage with people. Not everybody at the end of the day will support 100 per cent every part of our industrial relations changes but I think they're important and I think in time, they will give us the best chance of getting wages growing in the right way, empowering the Fair Work Commission to have a role here and ideally lead to more agreement not more conflict.
GREENWOOD:
Okay, one last one for you. I know - and anybody in this room who knows anything about Jim and we heard in the introduction from Lyall that you have a zeal to reform. This Budget perhaps really didn't show that reform agenda. What I'm wondering is whether it sets you up for a May Budget next year, where you really might see some more significant reform take place, some structural reform to Australia's economy, to its tax system to really try and drive that productivity growth you spoke about.
CHALMERS:
I think the first port of call when it comes to reform, economic reform in particular is energy and I think what happened in the Budget is because a lot of the things that we kept faith with in the Budget and funded in the Budget are things we've been talking about for some time. I think if somebody came to Australia not familiar with the political arguments of the last decade and you told that person we’re going to make meaningful changes on climate change and energy, we are going to invest heavily in human capital and supply chains, we've got a big co‑investment agenda around a national reconstruction fund and energy transmission, we're going to begin to put the Budget on a more sustainable footing - all of those things are reform. And if your question is, is that it or is there more to come? Obviously there's more to come - we've tried to be deliberate about that and upfront about that. But if we get to the end of this parliamentary term, we've done something meaningful on wages, we've done something meaningful on climate change, we've made the Budget a bit more sustainable - then by the standards set by recent terms of the Parliament, that would be a productive one on the reform front.
GREENWOOD:
Just a final request from me - could you consider moving the Budget from May to October? And the only reason I ask that is because it's so much warmer standing outside on the lawns outside Parliament House in October than it is in May? Can you also please not do two a year, only one?
CHALMERS:
You're welcome, Ross, when we were working out when to do it we thought we better make sure Ross is comfortable out the front of the Parliament House.
GREENWOOD:
Thank you so much, Jim Chalmers. Appreciate it.
CHALMERS:
Thanks everyone.
