STEVE CANNANE, PRESENTER: The Nobel Prize-winning economist Joseph Stiglitz has warned that the Abbott Government's proposed spending cuts are a threat to Australia's future prosperity. Professor Stiglitz, who is in Australia for a series of public lectures, has told Lateline Australia's future relies on investing in its people and that means spending more, not less. And the Nobel laureate had some harsh words for multinational companies avoiding tax, describing the amount of tax the tech giant Apple pays as an outrage. I spoke to Professor Stiglitz earlier today at the Australian National University in Canberra.

Joseph Stiglitz, welcome to Lateline.

JOSEPH STIGLITZ, NOBEL PRIZE-WINNING ECONOMIST: Nice to be here.

STEVE CANNANE: The Abbott Government is about to try to push a whole lot of large spending cuts through the new Senate. You're advocating for spending rather than spending cuts. Why's that?

JOSEPH STIGLITZ: Well there are two reasons. The first and most obvious one is that Australia is not in a bad fiscal position. Its debt-to-GDP ratio - net debt-to-GDP ratio is under 14 per cent. It's one of the lowest in the advanced countries. It's absurd to think that that is your major problem. Even your deficit GDP ratio is very, very low. The real challenge for the future of Australia are going to be related to investments - investments in people, infrastructure, technology - to make Australia competitive in a global economy. If you don't make those investments, where will you be?

STEVE CANNANE: Well, Tony Shepherd, the chair of the Commission of Audit, made the point today that the Department of Human Services writes out cheques for $400 million per day. How is that an investment?

JOSEPH STIGLITZ: A country's most important resource are its people. And if you don't invest in your children, if you don't invest - make sure they have adequate nutrition, education, health, it will jeopardise your future.

STEVE CANNANE: So you see welfare as an investment?

JOSEPH STIGLITZ: Appropriately-designed policies are clearly an investment. One of the reasons the US has not been performing as well as it should is that if you're not lucky enough to be born with the right parents, able to give you a good education, your prospects are really bleak. The likelihood that you'll be able to live up to your potential are really very small.

STEVE CANNANE: The Government though is making the point that we're already paying a billion dollars to finance the debt per month on the government debt and that is likely to blow out even further as Australia's population ages. Is the kind of spending increases that you're advocating for unsustainable?

JOSEPH STIGLITZ: They're very sustainable. I mean, think about it the following way: if you were a firm and you could borrow at very low interest rates - in Australia, the United States are currently able to borrow at a negative real interest rate. You know, take into account inflation. And you could take that money and you could invest it in high-return investments, investments in infrastructure, technology, education, in people, in making sure that all of your citizens are able to live up to their potential, then these investments more than pay back. We've done studies in the United States - I haven't done them for Australia - but we've done studies in the United States where we looked at the return on these public investments across the board, and they yield a far higher return than the cost of capital. So, it's actually making a country stronger when we make those investments.

STEVE CANNANE: But I know you're a fan of the way Australia handled the Global Financial Crisis, but wasn't one of the reasons they were able to do that was that their budgets were balanced, that they had that money up there sleeve for difficult times?

JOSEPH STIGLITZ: Well it is a good thing to have, you might say, a rainy day fund. Today, though, the world is in very volatile shape. The global economy is very weak. The US economy is growing about 2.2 per cent, not even able enough to create new jobs for the new entrants in the labour force. Europe, many of the countries are in depression. This is not the time for fiscal contraction. Now obviously you want to be very careful on your spending. You want to make sure you get high returns. But a lot of people talk about the waste in government. The private sector waste a lot. And in fact, no government has ever wasted money on the scale of America's private financial system, which has cost us trillions of dollars. But if you don't make these investments, you're wasting resources.

STEVE CANNANE: You've written a lot about inequality. Are you concerned that the Budget measures recently announced by the Abbott Government, which the Crawford School here at the ANU found hit the lowest paid workers the hardest, that they could lead to increased inequality in Australia?

JOSEPH STIGLITZ: Very much. I mean, that's why they're widely perceived to be grossly unfair. Already - Australia is not the worst, but it's not the best. Australia ranks about fifth among the advanced countries in the level of inequality after tax and transfer. That's not an enviable position to be. I mean, you're not worst - America is the worst. But the other countries are like - that are up on the scale are not countries you would want to envy. So, the point is, you're already not performing in terms of equality very well. Your inequality in the standard measure Gini is twice that of the best-performing countries. So you're not really, as I say, performing well. And these cuts are going to make Australia even worse.

STEVE CANNANE: What can we learn from the American experience, where you have argued that growing inequality is linked to America's sluggish growth rate?

JOSEPH STIGLITZ: This is not just true for America. The IMF has pointed out that high inequality is associated with lower economic growth and more economic instability. This is a very big change in perspective from the way we thought about things before. We used to say, "Well, inequality is bad, but if we do anything about it, it will slow economic growth." Now we realise that inequality has reached a level where it's actually having adverse effects on countries like the United States and other advanced countries.

STEVE CANNANE: But you want to see higher income tax rates at the higher level end of the scale, in excess of 50 per cent, I understand. How do you know that that won't be a disincentive to create wealth and also an incentive to avoid tax?

JOSEPH STIGLITZ: There've been very careful studies looking at what we call the supply elasticity, the response of the private sector to - in labour supply, in savings, to an increase in the tax rate. And the leading experts on this have looked at these numbers very carefully, have said there's really no problem, so we could increase taxes substantially above 50 per cent. They've talked about ...

STEVE CANNANE: How much higher before it becomes a problem?

JOSEPH STIGLITZ: They've talked about 70 per cent or more. Now, it depends to some extent on how targeted you can be in your taxes. If you tax monopoly power, if you tax excess what we call rents of a whole variety of kinds, there are some ways in which raising taxes at the top can actually improve the efficiency of the economy. Let me give you an example. In the United States, the speculators are taxed at lower rates than those who work for a living. The result of that is more resources go into speculation. The result of that?: an economy that has an excessively large financial sector, an economy that's excessively is unstable, excess activities in speculation, and, less of our scarcest resource, our most talented young people, fewer of them are going into research, into the kinds of things - transistors, lasers - all these basic research that would improve our standard of living. Why go into those low-paying research jobs if you can make a lot more money after tax in speculation?

STEVE CANNANE: The Treasurer Joe Hockey says that 10 per cent of the Australian population pays two-thirds of all income tax and two per cent pay more than 25 per cent. Aren't they paying their fair share?

JOSEPH STIGLITZ: Well I don't know the data for Australia, but I do know the data for the United States. Rich people like Romney, hundreds of millions of dollars in wealth. We're paying half the tax rate that people of comparable income were paying because they were taking advantage of all these loopholes that they and people like them have put into the tax system. So, you look - I know for the United States that those at the very top pay a smaller percentage, smaller percentage of their income in taxes. Now they do pay a lot of taxes. Why do they pay a lot of taxes? 'Cause they have a lot of income. The top one per cent in the United States gets over 22 per cent of all the income, has more than 30 per cent of all the wealth. So, yes, they should be paying a lot.

STEVE CANNANE: You want to see a crackdown on multinational companies who are avoiding tax. Now this issue is meant to be on the agenda at G20 in Sydney next year. What should they be doing about it?

JOSEPH STIGLITZ: Some of the problems are pretty obvious. You have companies like Apple that basically have created a corporate organisation that exists in cyber space. They claim to be in Ireland, but they found a loophole so they don't even pay full taxes in Ireland. So, here you have the largest American company in capitalisation pretending as if all the production, all the profits are generated by a few people in Ireland. It's an outrage. It's particularly outrageous because a company like Apple would not exist if it were not for the internet, if it were not for government investments in technology that led to the internet, that led to a lot of the advances that they're taking advantage of. So they're willing to take, but they're not willing to give back.

STEVE CANNANE: So how do you crack down on them? Because some of these companies have just as much innovation when it comes to avoiding tax as they do to creating new products.

JOSEPH STIGLITZ: Precisely. And that's the point of the G20 discussion. Say - look, this is a question of moving money around to these tax havens. Those tax havens exist because of what the governments - the governments in the United States and Australia have allowed them to exist. You know, a few years ago, we discovered that the terrorists were using these islands, offshore senders to help fund their terrorist activities. We quickly found out where that money was and we shut them down, for purposes of terrorism. But we said, "OK, it's alright if you go ahead and engage in money laundering, tax avoidance. Those activities are OK," but they're not OK.

STEVE CANNANE: Do you think the will is there within the G20 to suddenly crack down on these companies?

JOSEPH STIGLITZ: There is a beginning to get a will. Part of the reason is if they escape taxes, there are more taxes that have to be imposed on ordinary citizens. And they're already having these cutbacks, they're seeing basic services cut back and that's going to become less and less acceptable. So, I hope, I hope they actually do something and not just talk.

STEVE CANNANE: You were the lead author on the 1995 IPCC report which received the Nobel Prize in 2007 alongside Al Gore. Last week Al Gore stood next to Clive Palmer at a press conference as he announced that his party would in the Senate vote to kill off the carbon tax. Were you surprised Al Gore turned up at that press conference?

JOSEPH STIGLITZ: I was a little surprised, except that there was a deal as part of what Palmer was doing where he made a commitment to get a price of carbon if other countries were willing to do it.

STEVE CANNANE: And we know from the reality in the US that cap-and-trade is dead there, so ...

JOSEPH STIGLITZ: Well, it's not quite dead. Actually - the States are actually doing a lot in both the East Coast and the West Coast, so there is an understanding in certain parts of our country that climate change is a real - really serious problem. And there is a resolve on the coast to do something about it. And if we had the right president and right congress, we will do something about it. I would prefer to keep the carbon tax. I think having a price of carbon to send a signal that one of our most valuable resources is our environment, and once we destroy it, we won't get it back again.

STEVE CANNANE: The Australian Prime Minister Tony Abbott has said that he's not going to take action on climate change, which "clobbers our economy". Would maintaining a price on carbon have clobbered the Australian economy though?

JOSEPH STIGLITZ: Absolutely not. In fact, I would say it actually puts you in a better position, because we know that eventually there will be a price of carbon. The fact of the matter is - even the United States, which is a moderate climate, some of us used to think that, yes, the south would get hotter and less pleasant to live in, but Minnesota would get warmer and actually would be nicer. We now realise that our economy is facing a very big cost, as where variability goes up, crops are being destroyed, hurricanes. We are paying a very big cost.

STEVE CANNANE: But if Australia acts before the rest of the world, are they not ceding an economic advantage to those countries?

JOSEPH STIGLITZ: No. First, you're getting in a better position than other countries to deal with the inevitable. And secondly, if you're taxing carbon, you're getting revenue that you would otherwise have to get from other sources. Ask a simple question: is it better to tax bad things or good things? Is it better to tax something that's destroying the global planet or to tax work or savings? And my view is: let's tax carbon and use that revenue to enable a lowering of taxes on savings and work. To me, it's just common sense. Tax bad things rather than good things.

STEVE CANNANE: Joseph Stiglitz, we've run out of time. Thanks so much for joining us.

JOSEPH STIGLITZ: Thank you.