Peter Costello there’s a lot of excitement tonight, not about the fact that you’ve created a surplus because that was expected but certainly that you’ve fired up the speculation that the surplusses you have projected over the next few years are going to pay for a quite substantial income tax cut?

Well, what we said was that we had two goals. The first was to put Australia back into the black in this first term and we’ve delivered. The second was over a five year period to halve the debt to the economy ratio. This was to start making inroads into Labor’s debt. We are well on track to do that. That’s what I call the second leg of the journey. If Telstra is sold, if we get a mandate to do that, and apply that to debt reduction, we could get debt down to about 1.5% of the economy which is pre-Whitlam levels. We could get Australia back to a pre-Whitlam position. Now, if you were in that position. If you had your debt under control, if you didn’t have to raise taxes to pay interest, you do have alternatives. You’ve got the alternative of providing better services, or new services. You’ve got the alternative in relation to the tax scheme. But you might want to actually redistribute the benefits back to tax payers, but that’s something that’s a long way down the track. That’s in 2001, 2002. We’ve got about three years to go to get to there Kerry…

What about 1999 and 2000?

And everybody is sort of enviously looking at 2001/2002. We have to continue to do the hard yards. It’s not over yet.

Just let me get something clear. I know that there are limits to how you’ll be drawn on your tax package, but you will be delivering the totality of that reform in your next term of Government, that’s your intent?

Yes, well, look to get tax reform in this country, what has to happen? One, we have to get re-elected. There’s going to be no tax reform unless we are re-elected. That’s the first thing. The second thing is we have to negotiate tax reform through the House of Representatives and the Senate. Now that is going to take time. The third thing is you have to get the implementation systems up and working and I have said before that the full impact of tax reform would only occur in 2001, 2002. You might be able to get some benefits in 2000 but not a full year. That is why…

(inaudible)

What are we now, Kerry? We’re looking at 1998-9. You are asking me about 2001, 2002.

What I am asking you about is whether…

Can we focus on this one point? What is going to happen next year in 1998-99? What is going to happen next year in 1998-99 for the first time in eight years, Australia will pay its way and that’s a great thing for the country.

In terms of paying its way, are you confident that you will be able to completely fund an income tax cut as part of your tax reform package from the surpluses you are projecting?

See, the great thing about this is we are now sitting down and talking about what the possibilities might be.

Well I’d like to talk about one possibility.

No, no, that is one possibility Kerry, isn’t it and another possibility is better government services. But can I tell you Kerry, we didn’t have any possibilities two years ago.

You’ve made the point about…

No, it’s an important point. We did not have possibilities. We won’t have the possibilities of 2001, 2002 unless we stick to the path. I think the tendency is to say, well you’ve achieved the first leg. Let’s count the second leg in the bag and let’s start thinking about the dividends. There is still a second leg to go and that only comes if the Government is re-elected.

So therefore people of Australia you’ve got to vote for us again?

Well Kerry, if we hadn’t two years ago sat down and started fixing the budget, you wouldn’t be talking about any possibilities tonight. You would be talking to a Labor spokesman about how we would get out of deficit after running nine years of deficits.

Now you’ve made all the virtuous points about this, can I come back to the question about…

Well I haven’t….(inaudible)

I didn’t say they weren’t. I said they were virtuous. Can you now come back to the simplicity of the question. Are you confident that you could completely fund your income tax cuts as part of the tax reform package from your projected surpluses?

Let me say this, I am confident of this. If we can run the course, if we can get rid of Labor’s debt and keep the budget in surplus, I think taxpayers should get benefits.

I think that’s about as vague as you have been in the last three or four months.

I think the taxpayers should. You know, at the end of the day if Australia can pay its way, if we can pay off the credit card bills then you can think about the return. But let’s get there first.

Okay. Let’s look at some of your other projections. 3 percent growth. Is that conservative?

I think it’s realistic. I don’t think anybody will say it’s too high. We had three and a quarter in the mid year review. We’ve brought it down a bit. We think that the Asian crisis is probably biting a little earlier than we did then. The good part of that of course is if it is biting earlier and if Asia is turning, then the benefits will bite earlier as well. But I think 3 per cent is a credible number. We would have been looking at higher growth in this year. This year we are up in the high threes, possibly nudging even 4. We would have been looking at higher, but Asia turned.

So one of the immediate casualties of that of course is the unemployed because although you are projecting seven and three quarter per cent unemployed by the end of next financial year, that’s in 14 months time, it’s obvious from your figures that it’s going to go back up over 8 per cent in the interim.

No it bounces around a bit. You know, it’s 7.9, it’s 8, it’s 8.1. We think it’s around the 8 mark at the moment. We think over the year it will come down, it will end at 7 and three quarter but it will bounce. It’s been bouncing for a year.

But again, you are making a virtue of the fact that you’ve got it down, as you say, now that it’s below 8 per cent, that’s a virtue in political terms and you are saying it’s the lowest figure in eight years. But the fact is you inherited 8.6 per cent. You’ve now got it down to 7.9. That’s a mere .7 of 1 per cent in more than two years of your Government and yet it’s going to go back up in the next few months.

No it’s not going to go back up. As I said to you, it bounces around, 7,9, 8, 8.1, it’s about 8 at the moment.

You might say that’s bouncing around and I am saying that’s going back up before it comes down.

All you’ve got is to look at the labour force figures. They bounce around. It is about 8 in trend terms and it will come down over the course of the year. You asked me about Asia. Yes, Asia will affect that.

If we’d had an economy which was getting growth out of Asia as we have for the last 25 years, sure, we would be doing stronger in Australia. But let me make this point, Kerry, if we hadn’t strengthened the Australian economy two years ago when nobody was predicting Asia, where would we be now? Where would growth be now and where would unemployment be now? Now, you can say, well, unemployment is at 8%, but let me ask you this question. If Australia had not strengthened its economy, if we were now in the ninth year of deficit. If we were $80 billion in debt and rising. If we were in the Asian region which has had massive instability, where would we have been?

Well, let me ask you more about Asia. I mean, what have you factored in for Japan and how are you reading Japan and what happens if Japan goes significantly into recession?

We factored in, I think we say in here, a growth rate of about one-and-a-quarter in relation to Japan. Japan is somewhere between naught and one. It’s been there for about five or six years and we don’t see any bright news coming out of Japan. There’s no bright news coming out of Indonesia. All the way through, can I make this point…

What if the news out of Japan is the opposite of bright.

Well, it’s hard to think how it can get much worse. You’re down around 0% Kerry. But the point I make for Australia is this. One thing we knew for 25 years – whatever happened in Australia, Asia would give us growth and that changed. Even when Australia was in recession, when Keating had us in a Labor recession in 1990, they were getting growth of eight and nine and ten per cent out of Asia. Where would Australia have been in a situation like now where you are getting no growth out of Asia. That’s why it was so important to strengthen the economy. It’s taken the gloss of, yes, but it was the right decision.

The Governor of the Reserve Bank saw fit recently to draw connections between an overvalued Wall Street today and the crash of 1929. Do you have any nervousness in the context of what we are talking about, about the dangers represented by Wall Street, on top of Asia?

Look, the one thing I’d say is that the stock markets have been pretty volatile. We only have to think back to October of last year where you saw a big shake started in Hong Kong and there was volatility around. And even in Australia stock prices went down, substantially down. I remember people saying to me at the time this was the beginning of the crash and I said then that small corrections aren’t bad things if they prevent big corrections. And that’s always been our view. Now, we’ve recovered since October. We are back, our stock market index is back above where it was in that October fall of last year. We would be the only stock market in the Asian region which is higher today than it was 12 months ago, which is another indication of how we’ve weathered the crisis. But I am not going to predict movements in Wall Street. All I will say is that there’s a lot of volatility and, by and large, consistency is better for economic policy than volatility.

I don’t know whether you heard Chris Caton talking from the dealing room floor earlier tonight but he was saying that there was some surprise about the size of the inflation figure projected.

Well really, I don’t think there should have been. The inflation figure was in line with what we were saying at mid-year and we think it will pick up, largely for exchange rate reasons that there are no underlying, unsustainable pressures we don’t think in the Australian economy, but our exchange rate has changed and that will have an affect. But let’s suppose it goes to two and a half, we’ve said two to three over the cycle. We’ve had it a lot lower. It’s two and a half per cent inflation is not a problem. Think back six or seven years, we used to think eight or nine per cent was a great outcome.

Well what about the current account deficit? Again, that was one figure that you omitted in the specifics in your Budget speech……

Not so Kerry. I’m afraid I said it would be five and a quarter per cent of GDP.

Yes, but the amount, $31 billion deficit for the year. Why won’t that force the dollar down to dangerous levels to the extent that it then puts pressure on interest rates to go up?

Well I think most people have already factored in that the current account is going to widen. Financial markets know about Asia, they know it’s affecting our exports. They think it’s going to , widen and we’ve been saying it will. I think the Governor of the Reserve Bank said the same thing more or less last week. But I’d make a couple of points about it. One is, it’s not the six and a half, six point eight we had in the ‘80s. Two is, it’s on a low inflation rate which we didn’t have before. And the third point I’d make is that, if external advisers were advising an economy on what to do in response to a current account deficit, what would they advise? Tightening your Budget policy and delivering surpluses – precisely what we are doing, developing public saving. Now that’s another point, you see, there will be people that will say, well, the Budget surplus you should start spending that. To which I would say look, in a time of current account pressure, and when you are paying debt, it’s probably the worse thing you could possibly do.

One projection in the Budget that’s got me intrigued is what seems to be a windfall increase in Reserve Bank profits of well over a billion dollars. How are they going to make all that money? If not on a dollar that goes down that they buy and then goes up at some point.

That’s actually the dividend they’ve made in relation to past trades. What they do is they actually advise us what their position is, and so I suppose, look, I won’t go into the Reserve Bank but they are in the best business in the world. They actually, literally print money. It’s called seigniorage by the way.

Very briefly, we are getting close to time, but very briefly once again, according to your forecasts you are gong to keep wages down around, I think, four and a quarter per cent, is the forecast for the year. When are you going to start controlling executive salaries in the same way as you do ordinary wages?

Well look, I think the best that you can do about executive salaries is make your views known and I have. These executive salaries are not set by the Government. They are not given out by arbitration commissions. They are negotiated by boards, and boards have to respond to shareholders.

In terms of your leadership, how high do executive salaries go before you start to call them obscene, particularly when you look at the levels that they’ve reached in the United States with the warnings that we are going down the same path?

Well I think I made some comments about some that got into double figures the other day, and high millions. I made some comments about those. But at the end of the day, who sets the executive directors salaries – the boards. Boards have got to be accountable. Boards have to account to shareholders. I suppose there are some boards that can convince their shareholders that this actually profits. But my view is, I’m looking at it from the example point of view and I want people to think that boards are being responsible just like employers should be.

Peter Costello, we are out of time. No doubt in the days ahead there’ll be plenty more reason to interview you again but thanks for joining us.

Thanks Kerry.