Peter Costello speaks with Emma Alberici
Masterful. Here’s how you deconstruct a socialist hack who thinks its perfectly “fair” to tax you again and again and again if you save your money, only to give it to those who never did contribute Â their “fair share”.
Former Treasurer Peter Costello, who set up Australia’s future fund, joins Emma Alberici to discuss how it compares to Norway’s.Â (you can watch the video here)
Former Treasurer Peter Costello, who set up Australia’s future fund, joins Emma Alberici to discuss how it compares to Norway’s.
EMMA ALBERICI PRESENTER: Former Federal Treasurer Peter Costello set up Australia’s Future Fund seven years ago. He joined us a short while ago from Melbourne. Peter Costello, thanks so much for joining Lateline tonight
PETER COSTELLO, FORMER FEDERAL TREASURER: Thank you very much, Emma.
EMMA ALBERICI: Let’s start with Norway. That country taxes its oil and gas companies at a rate of some 78 per cent. Really puts our mining tax to shame, doesn’t it?
PETER COSTELLO: Well, Norway, of course, has decided, I think, very wisely that it will make sure that a resource which can be depleted will be set aside for future generations and it has built a very, very large Sovereign Wealth Fund as a consequence and I pay credit to them for doing it. I think it is a lesson to Australia that we should have done a lot more about putting aside something for future generations particularly out of the record terms of trade that we currently have, but you’ve got to say that Norway, I think, has taken a much more prudent approach to these things.
EMMA ALBERICI: We had a fairly robust terms of trade situation when you were Treasurer and in government for some 11 years. As Paul Cleary makes the point in Philip Williams’ piece, future generations in Australia will see lots of holes in the ground and nothing to show for it.
PETER COSTELLO: Well, let’s go back to my record, physical. I paid off all Commonwealth debt and set up the Future Fund, so there was something for future generations. Since 2007, since the Labor Government came to office, Labor has re borrowed all of the debt and set aside nothing in the Future Fund. If you want to look at the period as a whole, yes, there is not much left now. But if we hadn’t have paid off
EMMA ALBERICI: But I’m specifically…
PETER COSTELLO: the debt, set up the Future Fund, there would be nothing.
EMMA ALBERICI: I’m specifically referring to mining and of course, as you mentioned, resources that will one day be depleted, the Norway situation, we have the same circumstance here in Australia. We have a mining boom, we have had a mining boom, but not much to show from it?
PETER COSTELLO: We’ve got very little to show for it today. Over the last five years, we have gone through the greatest terms of trade in Australia’s history, the greatest since Federation, possibly rivalled only by the gold rushes of the 19th Century. And during that period of the greatest terms of trade in Australian history, not only did we not balance our budget, not only did we not set something aside for the future, but we were borrowing, borrowing the whole time.
EMMA ALBERICI: What about the little matter of the Global Financial Crisis, Peter Costello?
PETER COSTELLO: OK. In 2008 there was a downturn, but we are now in 2013, and the Budget is still not balanced.
EMMA ALBERICI: And the world economy is yet to recover, you’d have to say?
PETER COSTELLO: Well, let me say this: Did Norway not suffer from a Global Financial Crisis?
EMMA ALBERICI: But the point I was trying to make with Norway
PETER COSTELLO: No, let me make your point, which was this: You don’t expect people to save during a financial crisis.
EMMA ALBERICI: The point was specifically about the mining sector and during your time in government…
PETER COSTELLO: I will come back to that in a moment…
EMMA ALBERICI: …You actually department think it prudent to put away specific profits from the mining boom
PETER COSTELLO: No, no, no
EMMA ALBERICI: That is what I was suggesting…
PETER COSTELLO: Emma, during my time in Government, we made off all Commonwealth debt and we put $60 billion in the Future Fund for the future.
EMMA ALBERICI: We keep talking at cross purposes but I’m making the point that you didn’t think it particularly prudent to quarantine the particular profits that came from the mining boom, a super profits, a mining tax, whatever you’d like to call it?
PETER COSTELLO: During my time as Treasurer, the income which came from the mining industry and in fact from all companies came onto the Budget. The Budget was in surplus. The money was used to pay down debt, all Commonwealth debt and to set up a Future Fund. After I left office, the money which came out of even stronger terms of trade, came into the Budget was in deficit, nothing was put into the Future Fund. You made this point, you said “we could forgive the current government because they went through a financial crisis in 2008.” The only point I would make it this: So did Norway, but Norway kept on saving.
EMMA ALBERICI: Norway puts 78 per cent tax on its oil and gas companies?
PETER COSTELLO: OK. Norway kept on saving throughout 2008, 2009, 2010. Australia…
EMMA ALBERICI: Your side of politics vehemently opposed any specific tax that would help Australians benefit from the mining boom?
PETER COSTELLO: Well, let me say this: The Mineral Resource Rent Tax, if that’s what you’re arguing about I think will deliver $128 million. Our Future Fund has $82 billion. It would take us a very long period of time at that rate, Emma, to get anywhere, anywhere in Australian terms, let alone in Norwegian terms.
EMMA ALBERICI: We know under the original proposal from Ken Henry it was supposed to fund something like 40 per cent, it was supposed to tax mining companies at something like 40 per cent. We know it has been well watered down since then. In fact, the now former Treasury Secretary had recommended a 40 per cent mining tax and gradual fall in company tax to 25 per cent, eventually in fact he wanted to see a super profits tax on all companies in the country.
PETER COSTELLO: Well, good luck to him.
EMMA ALBERICI: You don’t agree, clearly?
PETER COSTELLO: Well, did the current government agree? Did the current government agree with a super tax on all companies in this country? Would I agree with it? No. Australia’s company tax is 30 per cent. By international standards that is still too high. Those people who are arguing that it should go higher ought to name the rate and they ought to say which companies it will apply to. Do I think it would improve the Australian economy? No. If Australia wants to increase its company tax rates all you will do is frighten off further investment. You won’t get more money out of companies, you will probably get less.
EMMA ALBERICI: Australia’s Future Fund hasn’t received an injection of funds for some five years now. Apart from earmarking future surplus us which onto aren’t on the horizon now, should government strategy change, should money from tax collections be hived off for future investment?
PETER COSTELLO: Here’s the point, Emma: If your Budget is in deficit and you hive off some revenue into the Future Fund or some other Sovereign Wealth Fund, all that means is you will borrow more because you’ve got to cover the money that has been hived off. You can’t put a dollar into a Sovereign Wealth Fund until you have a dollar of surplus because otherwise the money that is going in, which is coming out of the Budget, is covered by debt, and your net debt position is exactly the same. There is one reason and one reason only, why no money has gone into Australia’s sovereign wealth fund for the last five years. It is because we have been running deficits and we have been net borrowers. Until such time as the Government turns a surplus, it cannot put any money in net term noose a Sovereign Wealth Fund. Now, the regret that I have about Australia’s Future Fund, our sovereign wealth fund is that it was set up in 2006, money was put into it out of the last three budgets that I delivered. No money has been put into it since and no money has been put into it since because we haven’t balanced the Budget since. Now, Mr Swan is going to come down and bring his Budget down in May of this year and say, “Well, we won’t balance a budget for another four years,” which is quite possible, “Then we won’t put any further money in for another four years, so that would have then been seven years of record terms of trade, where we put aside nothing for the future, in fact, worse, not only not put anything aside for the future, we have borrowed and the borrowings have been set aside for the future.
EMMA ALBERICI: The aim of the Future Fund in Australia was it was to be fully funding the retirement of public servants and Defence personnel by 2020. To achieve that, the performance apparently needs to be lifted to annual growth of around 7.5 per cent. Now, are you and your fellow Future Fund guardians on track?
PETER COSTELLO: To actually fund them, you need two things. You need larger returns and you need capital inflows. Let me make this point: If the private sector employs someone, they pay their wage and they pay nine per cent into a super fund, and that nine per cent covers their entitlements when they retire. If the Commonwealth employs somebody, it pays their wage and putting nothing into their super fund, nothing. Now, of course your Future Fund is going to go under the water if the Commonwealth is not putting money in to fund their retirement. You see, everybody else in Australia has to fund the full cost of an employee, wage plus super. The Commonwealth doesn’t pay the full cost of its employees, it just pays wage. When we were putting money into the superannuation fund for private sector, we should still have been setting aside money for the public sector that should have been done in the sovereign wealth fund unless you get further capital inflows, no, you won’t be able to fund those retirement liabilities by 2020.
EMMA ALBERICI: I wanted to move onto today’s news that Woodside Petroleum has shelved its $45 billion Browse Basin LNG project. They’ve cited cost pressures, among other things. If you were in government today, what would you do to improve Australia’s competitiveness?
PETER COSTELLO: Well look, there are some cost pressures that are probably beyond the control of a government, in particular the currency. Whilst we have these record terms of trade you are going to have a high currency. There is very little you can do about that. So what you’ve got to do is work on the things you do have some control about. Now, I actually think 457 visas are very important for the mining industry, in particular. I wouldn’t be making that harder. I’d be enabling those resource companies that need skilled foreign labour to find it in relation to immigration policy. In relation to labour relations I wouldn’t be making that harder. I wouldn’t be saying we need to re unionise the big resource projects on the North West Shelf. I would be saying let’s make that easier. In relation to environmental issues, Woodside have been through a lot of very difficult environmental issues in relation to this project, I wouldn’t be making that harder either. Government ought to be working on the things it can work on and making them easier, because there are things that it can’t work on that are making things harder.
EMMA ALBERICI: You mentioned there, workplace relations and you are close to the business community. What are they telling you insofar as corporate Australia and how they feel about you know, has the pendulum swung too far in favour of the unions?
PETER COSTELLO: I think the thing that worries corporate Australia is, you can get into an industrial dispute and into protected legal action about issues that aren’t necessarily wages and conditions, issues that traditionally have been seen as part of the management of the company, and so if you get into one of those disputes, the company itself can’t abdicate its managerial responsibility. It needs to control its investment, and yet it can be taken off to arbitration it can be taken off to industrial disputation over those issues. In other words, the scope of industrial disputation has widened so much that in some respects it can affect the way in which the company is run.
EMMA ALBERICI: Is the general sentiment that too much of WorkChoices ha has been dismantled?
PETER COSTELLO: Whatever you think about WorkChoices, I think the business community would say that arbitration and industrial disputation has gone too far. I think the business community would generally say the pre WorkChoices position which was statutory contracts was a good position, and of course you can’t do that now. We didn’t go back to pre WorkChoices, we didn’t even go back to where Hawke and Keating had things, these industrial relations changes go back further than that, they go right back to the 1980s and they’ve gone back too far.
EMMA ALBERICI: So what sort of reforms, in your view, are necessary?
PETER COSTELLO: Well, as I said before, I would be encouraging the use of 457 visas where they can bring in skilled labour and we’ve even seen, as we know, we’ve seen unions using 457 visas to bring in labour. I would be encouraging flexibility and I would be making sure that those things we can control, we do control because there are a lot of things that we can’t control that are going to be working against investment.
EMMA ALBERICI: You hear a lot of talk about flexibility, how do you measure that, what is it?
PETER COSTELLO: Flexibility really is the ability of a business to plan its workforce, to know what its costs are going to be, to change the working patterns and not have that stopped by an outside arbitrarial body.
EMMA ALBERICI: On superannuation, do you accept now that the tax arrangements you implemented were too generous, that they were unsustainable?
PETER COSTELLO: Of course not.
EMMA ALBERICI: 15 per cent on the way in, 15 per cent on earnings, and then nothing on the way out, for anyone, regardless of how much they were taking out?
PETER COSTELLO: Well, you’ve already been taxed twice, you’ve been taxed on your contributions and you’ve been taxed on your earnings. If you’re taxed on the way out, you would be taxed three times. I think three levels of taxation are far too much. You could have done it another way. You could have had no tax on contributions and just tax on earnings and payouts, but you will recall Keating brought on the tax on contributions to bring forward tax receipts in the ’80s. You could have had a tax on contributions and on payouts and not had one on income, but of course inside a fund the complexity of doing that would be enormous. So if you’re only going to tax twice and you can’t move from the tax on contributions and the tax on earnings, then the proper thing to do is not to have a tax on, when the payouts came in the retirement phase.
EMMA ALBERICI: So…
PETER COSTELLO: By the way, Emma, if I may say so, Julia Gillard accepts that. She has said she will not have any tax on payouts. That’s her policy as well. Now, you might have an argument as to whether in fact what has been announced does amount to a de facto tax on pensions. Some people would say it would, but this government would say to you that they have no tax, no tax at all, on payouts.
EMMA ALBERICI: Well, they have a tax on the earnings from the payouts?
PETER COSTELLO: Well, they have a tax which they say will apply to assets over $2 million for a pension that is in the drawdown phase. Now, whether that’s a tax on your pension, and I think a purist would say that it is, they say that it isn’t because they say they are not taxing over 60s.
EMMA ALBERICI: But isn’t it fair enough to tax people who are earning $100,000 or more on their retirement
PETER COSTELLO: Well, you do…
EMMA ALBERICI: Isn’t that fair enough?
PETER COSTELLO: …You’ve taxed them when they’ve paid in and tax them on their earnings, already taxed them twice.
EMMA ALBERICI: But if they’re retiring and they are receiving $100,000 in income, it’s fair enough they be taxed?
PETER COSTELLO: No I don’t think so, you’ve already taxed them. You’ve taxed them on their contributions, you’ve taxed them on their earnings, how many times do you want to tax them, two’s not enough?
EMMA ALBERICI: It’s about making the system fair, isn’t it?
PETER COSTELLO: It’s really about making the system work to give people incentive to provide for their own retirement and save the taxpayer money. I can tell you this: If you chase people out of superannuation and they went back onto the aged pension, the taxpayer will be paying a lot more, a lot more than they are under the current arrangements.
EMMA ALBERICI: We have to leave it there, Peter Costello. Thanks so much for coming in for us
PETER COSTELLO: Pleasure.