Senate Economics Legislation Committee, , 1:44:52 to 2:06:52
The committee questions Reserve Bank board transparency, migration's impact on inflation, and carbon farming modeling.
Topics: Emissions reduction, Carbon farming, Land management
Speakers: Jenny Wilkinson PSM, Hon Matthew Canavan, Nick McKim, Dr Angelia Grant, Speaker 12, Hon Katy Gallagher, Lisa Darmanin
Yeah, thanks. Um, just quickly back on the subject to discount, I wanted to ask um, Secretary back in uh, so we had the Ralph review and then the introduction of the 50% um, capital gains tax tax discount which which remains in place today. um in the early years of that discount in 2004, the Productivity Commission warned that uh the 50% CGT discount was um inflating property prices in Australia. Um, as an aside, I note that we know from recently released cabinet papers that treasury pushed back and actually didn't include the productivity commission analysis in the cabinet submission which went to uh Mr. Howard's uh cabinet when they were considering housing affordability. Um, but I want to ask you >> when was this >> in no well before your time as as secretary. So I I just as I said that's an aside but but what I do want to ask you is whether you would accept the proposition that was raised by the productivity commission that the capital gain the 50% capital gains tax discount is uh inflating um property prices in
So, Senator, I I think um we had a bit of a discussion about this um I think at last estimates >> and
>> I'm nothing if not persistent minister.
we have um you know then and I you know we have discussed at length um the different factors which you know contribute to supply in the in the um housing market and and economic outcomes in the housing market and um as you know and I know that we agree you know kind of supply factors are of critical I think in so part of the reason I'm hesitating um um uh Senator is is that um you know I've never run revenue group uh so um this is not an area that I have over the course of my career um delved into um deeply but um there is I think uh most when I if I would summarize what most of the the um if you like kind of academic advice is around what the likely impacts of different tax settings are. Most of them go to two points. One is uh it depends very specifically on the details of what's being proposed and the other is um that most of the of these impacts are relatively modest. I it it is on the public domain that I think you know the ta the Henry tax review looked at um these matters as part of their review and um and their Ken Henry's analysis at that time I don't recall talked about a level impact but talked about um there being a possibility that the city that the settings as they were at that at that time could um exacerbate cycles. Um, but I think that the the my my reading and again happy for you to test with this re with revenue group but my reading is that most of the of the um analysis suggests that levels impacts are pretty marginal of changes in in tax settings. That doesn't mean that they you know they there there aren't other impacts. And I think at the last estimates I provided evidence that you know our our assessment that we have provided over time has been that changes in some of these tax settings could for example change the balance of owner occupies versus investors in the market. and that that um is a um that's a different outcome but an outcome that um that the the the sort of the broader debate would would suggest is the kind of direction of change. >> Thank you be more helpful.
>> No no no thanks thanks Morgan. for perhaps um just to try and drill into that a little bit then and and then I'll just move on quickly to another matter all other things being equal and I I certainly accept your proposition on supply side but but all other things being equal and leaving aside the quantum of any um any impact uh I guess would you accept that the the implementation of the 50% capital gains tax discount which came remember from a from a baseline of just indexation. Um would you accept that that does stimulate demand for uh for housing and under normal economic analysis all of things being equal an increase in demand would flow through to an increase in prices would it not?
>> Well, I think that the evidence that I provided last time is that I would expect it might change the nature of demand. So if you think about there are different there's different um sources of demand in the housing market and you know first home buyers and owner occupiers are different from investors. So so it would potentially change that
>> understand that but just in terms of prices would would you not be
>> I think most of the evidence senator is that that the that um those price impacts are relatively modest. So,
>> but you would accept that there is a price.
>> Well, it will depend on the details of the policy that is
>> well the current I'm asking about the current policy setting which the productivity commission warned in 2004 was putting upward pressure on house prices. Would you accept that general proposition that um the 50% capital gains tax discount compared to what what the settings were previously did put upward pressure and still puts upward pressure on property prices?
it is really difficult to answer questions about all other things equal and you know just looking at this it's just it just feels to me like it's it's hypothetical and I don't want to make a comment which then gets used out of context.
>> All right. All right. Thanks. Um, just quickly on another matter then um Miss Ms. Wilkinson, you're on the board of the Reserve Bank. Um, the Reserve Bank's currently um put up interest rates. So I I listened really closely to Miss Bullock's comments after immediately following um that decision of the board and it was of interest to me that she named up credit growth. >> She named up credit growth >> as one of the uh inflationary pressures that concern that were of concern to um the Reserve Bank board. Um we know that um uh lending to property investors is skyrocketing at the moment. It's at record highs and it's growing at nearly 20% peranom. Firstly, can I just ask when um the um indicated through the governor that it was concerned about credit growth? Does credit growth include um lending to property speculators and property investors?
>> So, Senator, absolutely right. I am on the reserve the board of the Reserve Bank. Um uh the it I don't think it's appropriate for me to speak about either deliberations at the Reserve Bank board or um uh and it's actually frankly not um I don't think previous secretaries have talked about their role on the Reserve Bank board or the deliberations of the board or or or or monetary policy. The se the governor is appearing before estimates tomorrow morning. she would be best placed to um uh speak to those specific questions. I think that amongst the factors that the sorry let me also say I think there is um an enormous amount of transparency around monetary policy decisions these days. what with the statement that comes out after the board meetings, the press conference, the minutes that come out a couple of weeks later, the statement on monetary policy, there is a lot of material there that is available and I don't have anything to add. I don't think I don't think I can usefully add to that material. Um in that material, one of the things that was highlighted in terms of the things that were stronger than expected in the second half of last year was financial conditions and in part that was um looking at well credit growth is one of the indicators of financial conditions. So
>> so you can't say whether part of credit growth is uh lending to property investors.
So credit growth again
>> does that include does the term credit growth include lending to property investors?
>> yeah I was just going to say the bank covers this in their statement on monetary policy on pages 15 and 16.
>> I don't I don't think it's a controversial question.
>> Well it's I mean you're ask
in >> No, I'm actually not asking about the Reserve Bank's view. I'm asking whether the term credit growth includes lending to property investors.
>> Uh so
>> which is at which is growing at record highs and is at record levels.
>> So credit growth
>> turbocharged includes all your policies.
>> So so sorry credit growth includes all credit. So it includes all credit that's issued across the economy. Dr. Grant I mean it's like so so includes all sources of credit. Yes. I don't Yeah,
that's right. >> Not controversial. So
>> I'm going to have to rotate the call if you can finish. >> Great. Thank you, Senator Kim. Senator
C. >> Thank you, Chair. I'll be really quick. Um, Secretary, did you vote for interest rates to increase at the last monetary
Senator, I um don't think it's appropriate for me to speak to um the um deliberations of the board meeting.
>> I'm just referring the the media release put out by the RB on 3rd of February says today's policy decision was unanimous. So would have to you're a member of that?
>> I am a member of that board.
>> So you would ergo have to have voted for an increase.
>> I am a member of that board and that is the statement that came out from the
>> Did you vote for an increase?
So, Senator, I don't think it's appropriate for me to speak to um the my
>> I don't have too much time. Let me put the question another way. Why don't you argue against an incre in interest rate increase?
>> So, I'm this. So, Senator, I am not getting to the question of what were the deliberations within the observed bank.
>> Right. Really transparent. Um uh I know that in the I don't think in the opening statement I couldn't find any reference to migration. Does Treasury believe the uh unprecedented levels of migration that uh is occurring right now are contributing to inflationary pressures?
>> Uh so I'll ask Dr. Grant to um to address this. I mean again
So we do know on the latest data that population growth was 1.5% through the year to June of last year. This hasn't changed a lot uh in recent like in very recent times. So it has come off from a peak of about 2.5% down to 1.5%. And of course as you know it has both demand and supply side effects. So we don't see anything here that is giving us a sense
of concern. On the latest migration data, it shows that we the last few years since co we've been issuing visas at a rate 200,000 people more than average than the historical average before co. Are you telling me that that many more people 600,000 or more people than average is not creating inflationary pressures in the Australian economy?
>> I'm saying that compared to what so um population growth in around the the 2010s was about 1.4% I think and it's now sitting at around 1.5. So we're not seeing significant shifts. Now of course
you're right >> you're just saying it was at 2.5 just
>> in the peak of co so when we so when the
>> So did that create inflationary pressures the 2.5?
>> Well no Senator because what was happening at that time was a a payback from what had happened with the borders being closed. So as you know there was an incredible disruption in the economy through that period globally and domestically. So we wouldn't be assessing that. It goes to I suppose the point of the secretary that the context matters and the context for that was
>> way we are way above the catch up. I don't have time to go through it but that's unbelievable. The treasury doesn't think migration plays a role in the inflation we're saying. I don't think the Australian people would share that view what they said. So well they did they did they did they did they did well >> the numbers they absolutely did. They just did they said the two and a half% was catch up and didn't so I got to move on. I got to move on. I haven't got a lot of time. I've just noticed on the AFM website that um our debt is already sitting at gross debt at $993 um billion dollars. That is actually above what uh is predicted in my EFO for the end of the year. Is Treasury still confident we won't hit $1 trillion in debt by the end of this financial year?
I hate to irritate you. I I think I I I don't have that answer. Um I think that's a question if you could put to fiscal group when they come at um 1:15.
>> You don't keep track. I mean the monthly statements just came out.
>> No, no, we we do keep track. I don't
have I don't have that as part of that. >> I noticed that the monthly statement that came out on the 31st of January from the Minister for Finance from Mr. Gallagher. It has the year to date by end of December underlying cash balance sitting at nearly 34 billion just under 34 billion. The prediction in my EO released that month in December was for 37. So we're only three billion off the I know these figures are very lumpy, but it does seem to mean there's a high risk here that uh the underlying cash balance will be greater than 37 billion. Uh and obviously the headline cash is more important for the debt gross debt figure and we could be could we hit $1 trillion in debt this financial year.
So, Senator, that'll depend on the outcome. Um, you know, over the next six months, um, what we've experienced over, uh, the last several years, um, is that, um, uh, there's been a reason, you know, there's been a reasonably significant variation between our estimate of what the deficit would be in a particular year and what the outcome was. Um, uh, spending has often been lower than we had predicted and in many cases revenues
been high. Moving on to the net zero modeling. Um, last night at uh at the rural affairs committee, uh, Abears revealed that they've taken your modeling, they've taken your modeling that to get to net zero, you'd need 119 million tons of carbon sequestration by 2050. They've calculated how much that would mean in terms of lost agricultural land, lost farmland. their estimates come at 18 million hectares would need to be converted to 2050 from farming to carbon credit production. Um has the TR is the Treasury aware of that those Abears calculations and did you factor in in the net zero target analysis and modeling you did that Australia would have to give up three times the size of Tasmania in farming
aware of that report and have um had quite a number of conversations with Abears um over the course of the net zero modeling that we undertook and had advice from Abears on land sequestration. Within that report, we um noted that there is a lot of uncertainty uh around land sequestration and how much um land and the types of land um but also the types of landbased sequestration that you can actually access. Um, Abears did do some more work and that's um, since been uh, published and so we are aware of that. Um,
>> did you have the 18 million hectares figure or did the government have that 18 million hectares figure before they set the 2035 targets?
>> No, Senator, we did not.
>> You didn't?
>> No.
>> So, how could the government set a an emissions target when it didn't even know how much farming land and production we'd have to give up to p to
meet that target? The point that we do make in the report senator is that um farmers will be able to do what they um you know make decisions about their land use. Um these will be economical decisions that they make, business decisions. Part of that can be a mix of both uh standard agricultural practices that we have now but also sequestration. And I know that a bears make that point as well in their report that just
>> one other problem one other issue I think that arises from the modeling is that they come out I think they said last night well the carbon price the the price for the credits uh from sequestration would would end up being just over $100 a ton. Uh but in your modeling shadow carbon prices were more like near $300 a ton. So wouldn't that indicate that actually we could end up doing a lot more than 119 million tons of carbon sequestration if the marginal cost of or price of carbon sequestration is much below your shadow price in equilibrium. You'd expect actually more uh land to be more farming land to be given up because this is not capped. There's no cap on how much farming land can be lost. >> So have you looked at that? What what's the difference in the price? So with
those estimates, Senator, they do again talk about the uncertainty around that figure, both the number of um hectares or acres um but also the price, the
>> The problem for us in rural areas is the uncertainty here seems to be on the downside for us in the sense that more farming production could in fact be lost given it seems to be a much cheaper form of carbon abatement that you assume in your modeling and that means more rural towns will be without jobs in the farming sector than the government has uh estimated. Have you looked at the fact that the Abezz has identified seven local government areas that would face a more than 5% reduction in farming output and there doesn't seem to be any assistance for those areas of the country under the government's net zero plans.
>> The balance of that would have to be um the sequestration practices being at least as profitable as the farming practices. So it would be zero.
>> Of course that's for the farmers though. That's not for the local cabin area. That's not for the fencing contractors, the truck drivers, uh even the hotels and cafes because there will be fewer people. No one, you don't need people to generate carbon credits, just scrub. So, they lose all those jobs. Have you done any analysis of that adjustment that would be required over those seven local government areas and whether they should deserve some help uh given they're being asked to bear the burden of of net zero?
>> You're at 9 minutes.
>> Okay. >> Yeah. I mean, we have the net zero agency whose job is to um essentially support uh communities through transition um that the economy is going through uh and that will continue. We we remain committed to supporting local communities as our economy changes.
>> Um we're making investments in it. >> One more question if I can. I know we're a bit over time. I didn't get much though compared to others. Um I just note that uh uh since midocctober the 10-year yield on Australian government bonds has increased by 13%. It's gone from 4.3 to 4.8. Um in comparable countries we're only seeing a 3% increase in yields in the US. It's slightly decrease in the UK and a 7% increase in Canada yield Canadian yields. Why are Australian government interest rates our interest rates going up by so much compared to comparable
Uh so Senator as you know there are a lot of movements happening in yield curves across advanced economies at the moment. Part of this is a global uncertainty global trade policy story and then some is very much uh domestically focused. We've also seen uh recent interest rate change in Australia. This is just the market making its assessment of what will
happen. Isn't the Isn't the simpler answer here is that the market has lost confidence that the government is going to contain inflation? That's the that's the simple answer that in those other countries they're not they haven't seen such an increase in yields but obviously the market given the unexpected surge in inflation is now saying that hey we don't have confidence that you guys are
know, Senator, the market looks at a range of factors in assessing uh this part of it will be interest rates, part of it is the growth outlook, um just kind of the prospects for Australia within the global economy. They would take a fairly broad view of what it is that matters. >> A multi-billion dollar cost to our
country now that we have to borrow at the highest interest rates in the developed world. No other developed country has a 10-year government bond yield, not Italy, not anywhere above 4.8%. So, it's a big cost to Australians. Thank you, Chair. Thank
you. I note that we are a little over time for our break, but I understand Senator Paterson's got a couple more questions and that's it. So, if we can just um finish off this block with Senator Paterson, then we'll break.