…it may be his last budget to the Federal Parliament last night. He is in our Canberra studios. Good morning to you, Peter Costello

Good morning Jon.

Why are you so optimistic about the economy? Can I put this scenario to you and I think I’m correct on each one of these counts. Imports are booming, exports are declining. The Stock Exchange is going great guns, but it is fuelled by the demutualisation of AMP, the privatisation of TAB, Telstra, energy companies and other public utilities, paper is being shuffled, but we shouldn’t confuse that with productive economic activity.

Oh, well that’s a fair point, never confuse paper shuffling with fair economic activity. So let’s look at the economic fundamentals. Inflation, the lowest since 1962. How old were you in 1962, Jon?

Same age as you.

What?

Six or five.

Interest rates the lowest since 1969. Small business interest rates the lowest ever recorded. Australia the strongest growing economy in Asia and possibly, the strongest growing economy in the developed world. A Budget coming back into surplus, and, for the first time in years, the reduction of Labor’s debt. Now, they are real economic fundamentals.

But so is the fundamental that there’s a record current account deficit, we’re importing everything from cheap orange juice to four-wheel drives, and we’re exporting less and less.

Well I don’t, I think it is important to actually be accurate in the figures. There is no record current account deficit and nothing like it. Back in the 1980s we were running current account deficits of 6 , 6.8 per cent of GDP. At the moment it is about four and we say it will go through five. Now, that is one of the consequences of the Asian economic crisis. And, in response to a current account deficit, the prescription which is the prescription, not only of our government, but was accepted by the Labor Party, recommended by the OECD, the IMF, is to deliver good, strong fiscal policy, and that means surpluses, and that is precisely what this government is doing. It couldn’t have been a more necessary economic prescription than to get the Australian Budget back in the black at a time like this.

So government spends less and taxes more?

So government, no, no…

Well, that’s what happening isn’t?

No, no, it’s wrong Jon, let’s, let’s just get the facts. No increase in the income tax, no increase in the company tax,..

Well, there’s no increase in the rate, no increase in the rate, but the take…

No increase in the wholesale sales tax..

But there’s no increase in the rate but the take, the amount you’ve earned…

No increase in the petrol excise, and let’s just look at it on an economy-wide basis, revenue to GDP 25 per cent, amongst the lowest they’ve been in the last two decades. In fact, the revenue take of the Commonwealth Government is now substantially below anything that was done by the Labor Party. No, the way in which the Budget’s been put back into surplus is by being careful with spending. That’s the whole point. And what does that mean in economic terms? What that means in economic terms is, this government is not going to be borrowing. We won’t borrow a dollar this year. That’s what a surplus means. In fact, we’ll be starting to pay back debts, and as you pay back debts your interest rate declines. That is the prescription for dealing with this kind of situation.

But Peter Costello, at the same time the reality is that through nothing more than bracket creep, typical Australian wage and salary earners are now paying more tax in 1998 than they’ve ever paid before. You haven’t had to do terribly much in order to set the Budget straight.

No, let’s go through the facts straight. What is bracket creep Jon? That‘s where inflation pushes you up into a higher tax bracket, right? What is inflation now? The CPI in the last year was negative. Inflation was the lowest since 1962. Let’s just get the facts on the table. If there was bracket creep in the last year, it was the lowest bracket creep in thirty-seven years. That’s why I was amazed when I saw somebody say, oh what about bracket creep? The lowest bracket creep in thirty-seven years, somebody has suddenly decided to talk about bracket creep.

No, we’ve been talking about bracket creep for years. You’re the beneficiary of the previous many years of bracket creep, which means the typical Australian wage or salary earner is now being treated as if they’re rich by the tax system.

No, no, one of the reasons again, let’s just come back to the facts. One of the reasons again why this was a surplus that had to be delivered by reducing spending was that there wasn’t the bracket creep. Back in the ‘80s and ‘90s when you were running inflation at eight, nine, ten per cent, you had bracket creep. The CPI in the last year was negative, negative. The lowest inflation rate since 1962 . So if there was bracket creep in the last year it was the lowest we’ve had since Robert Menzies was the Prime Minister.

Why don’t you change the tax system and the brackets, so that there’s a real distinction between average wages, and, for instance, 15 per cent above average wages as it used to be 10 or 15 years ago? So there was a distinction between what your employee was paying in tax and what their boss was paying in tax.

Well, I do want to change the tax system. We’re the government that wants to engage in tax reform for this very purpose. For the very purpose of ensuring that people on average wages, don’t pay high marginal income tax rates. At the moment, on average wages you can face the prospect by doing overtime, or taking an extra part-time job, of being kicked up to a tax rate of one dollar in two. Now, I don’t think that’s right and that ‘s why I think that the whole Australian taxation system has to be changed so that we give wage and salary earners a better go. You’re talking to the converted here, Jon, when you talk about improving the Australian taxation system. That’s the position we take. It’s the Opposition that says no the tax system shouldn’t be reformed.

But, it’s what form of tax reform, what type of tax reform you introduce that, of course, is all-important. There are lots of ways you could reform the tax system and improve…

We want to do all of them…

And improve the efficiency of the economy, and the equity to taxpayers without introducing a GST.

Well, let me ask you this question. Australia must be one of the only countries in the world that taxes its exports, with a wholesale sales tax. There is one tax recognised throughout the world which allows exporters to get back all the taxes that they’ve paid on the inputs and that is a value-added tax or a GST.

Yep.

We are the only country in the developed world…

With a developed economy, yep.

That doesn’t take advantage of that. See, when we talk about tax reform we are talking about the indirect tax system, the personal income tax system, the business taxation system. We want to take a broad approach. Now, we all know that as soon as you start talking about taxes people start scare campaigns and it’s a hard thing to do, but gee it’s necessary.

Now, what have we done in the last three years? In the last three years, no increase in income tax, no increase in company tax, no increase in the wholesale sales tax, no increase in the petrol excise. I don’t know that there would be a federal government that could say over three years it hasn’t increased any tax. And, what have we done on the other side in tax reduction? Family tax initiative, giving benefits to families, small business capital gains tax roll-over relief, and last night I announced that the provisional tax uplift factor comes down to five per cent. Under Labor it was ten. So no increase in any taxes, reductions for business and families, and the next stage a revamp of the whole taxation system. I agree with you it has to be done.

While we’re talking tax reform, and isn’t it interesting how so many discussions about your Budget in fact have de facto become discussions about tax reform, not the Budget. I’m not sure if you want to comment on that in a moment, or not.

But while we are talking tax reform

I’d rather talk about the Budget.

Well, no one seems to want to because it is regarded as a bit of a non event in fiscal terms.

I don’t think that’s right. I think what people are saying is , he promised he’d do this, and he did it. Now let’s move on. Now let’s move on. Now, actually that is a great achievement I think. To have been able to set out a position two years ago where we would be this year and to deliver on it, so that for two years everybody has known where we’re going, where we’re going to arrive, and what state we’ll be in. It’s not like it was under the sort of Keating days where you had these rabbits out of hats and mysterious 10 billion dollar deficits materialising. What I said when the Coalition became the economic managers of Australia, we would set out a plan and we would follow it. People would know it, the financial markets would know it, home buyers would benefit from it, small business would benefit from it. And if people say: gee, he said we’d do that and we’ve done it. In fact I think that’s one of the best accolades that you can get for a Budget.

In fact you’re keeping your powder dry, there’s a Queensland election within about a month to six weeks, following by the release of your tax reform package, followed by at some stage, an election. And you’re really holding off until the two federal events in that triple there, aren’t you?

Oh look, we’ve done a May Budget because we do our Budgets in May, and it’s the third Budget of this term. Now, you are right. The Federal Parliament only goes for three years, so there has to be an election some time between now and March of next year. And we want to be elected so we can continue the good economic policy and keep the interest rates down and reform the tax system. But these events are all set outside our control. The Constitution says what the election timetable is and we’ll face it. And we’ll run fairly to it, and we will say to the Australian people: look, one of the benefits for home buyers, home buyers are now $4,000 a year better off since our government was elected.

Because interest rates have gone down…

Because interest rates have gone down…

Do you claim the credit for that? You say that there are things that are out of your control because of the Asian economic crisis, but then you claim the credit for low interest rates when that’s a global economic factor as well. You can’t have it both ways, can you?

Well, no it’s not. Again, let’s come back to facts. Australian interest rates are now lower than U.S. interest rates,

Which are themselves very low…

But they weren’t when we were elected.

Neither were ours.

That’s my point. Australian interest rates weren’t lower than U.S. interest rates when we were elected. The reason why we’ve been able to bring interest rates down lower, that is, irrespective of what’s been happening globally, was two factors. One is low inflation. As I said earlier, low inflation, back to levels we haven’t seen since the early sixties. The other is that bank margins have been squeezed through heightened competition. Now both of those have been policies that we’ve put in place, and you get the benefit. Now, if you then get your Budget under control, that is, the Government’s not out there soaking up money and driving up interest rates, you can keep interest rates down. But make no mistake, if the Government were to turn around and say, we’ll go back to the Labor days, we’ll borrow $80 billion, which is what they did, borrow $80 billion on the capital markets of Australia, get in there and price up interest rates against small business and home buyers, they would go up again.

On a couple of particular things, Peter Costello, you were asked last night about the tax-avoidance measures, and I think Gareth Evans described them as “a mere trifling”, you say you’ll spend $19 million on a taskforce to recover $200 million from high-wealth tax avoiders. This is the very proposal you pooh-poohed in the last election campaign when the out-going Keating Government said they’d do much the same thing.

No, I didn’t pooh pooh it at all. In fact, during the last election campaign I accepted the then advice of the Commissioner of Taxation that there should be more aggressive measures in relation to high-wealth individuals. In my first Budget I set aside $9 million a year, and in this Budget I’ve set aside another $9 million for two years to go after it. Far from pooh poohing it ,we were the Government that did something about it. There was no task force under Labor. You quoted Mr Evans, there was no task force under Labor. The only task force that’s ever been set up has been under our Government.

Politically, surely it’s a winner, along with tax reform, to tell the vast majority of tax-paying Australians who have no choice but to meet their bill when it comes through their salary deductions, that you’re doing whatever can be done, no matter what it involves, to make the rich pay their share. Because it’s of notorious public knowledge that they don’t pay their share.

Well, I think, look I agree with you. I think that ordinary wage and salary earners who have tax taken out before they even get their salary want to know that other people are paying their fare share of tax. And this is an area which we’ve been very strong on. We’ve passed measures to stop trafficking in trust losses, we’ve wiped out the R&D syndicates. This is where you could put money into an R&D syndicate and…

For research and development?

Yes, and get leveraged deductions, and we wiped out the infrastructure borrowings scheme which was probably the biggest haemorrhage on the tax system I’ve ever seen. Some advise up around $6 and $7 billion was haemorrhaging out of the tax system under infrastructure borrowing schemes. They were introduced by Labor incidentally, and we wiped them out. Now, in fairness I should say Labor didn’t oppose us when we took measures to stop the infrastructure borrowings schemes,

Sure.

But they did oppose us when we wiped out the R&D syndicates.

But the public would like to see some high-profile, heavy-duty, rich tax avoidance prosecutions, because then we’ll be reassured, in fact, that you’re fair dinkum about that aspect of tax reform.

Well, it’s going on all the time. In this year, the Commissioner of Taxation has reported collection of an additional $100 million from high-wealth individuals, and in the Budget, on his advice ,after forwarding further resources to the Tax Office, he says he expects $100 million in 1998-99, an additional $100 million, and an additional $100 million in 1999-2000. That’s no bad, that’s $300 million, which otherwise wouldn’t have been collected over the last, over three years.

Previous Budget forecasts on unemployment, especially youth unemployment, have been notoriously wrong, and youth unemployment continues to get worse, even though the general level of employment is getting slowly better. Why should we accept that youth unemployment is now going to turn around, when there seems to be nothing in this Budget that specifically targets the rate of youth unemployment across the country?

Well, just let me come back to employment generally. The previous forecasts have been met, have already been met and exceeded in this financial year. That’s on general unemployment.

Which unemployment rate’s gone now from 26 to 27 per cent, just in the last year?

I’m going to come to that in a moment, which I think is down, isn’t it, on a couple of years ago? I’ll come to that in a moment, I’m just going to make this point. And I think it is a good-news story, and I think people are entitled to hear it. The unemployment rate in Australia now is the lowest it’s been in eight years. That doesn’t mean that we can stop, but it is the lowest it’s been in eight years since the Keating recession.

Now in relation to youth unemployment, we’ve done a lot of work in relation to this. And when you measure youth unemployment you know what you’re measuring, you’re measuring those people that aren’t in the school or university system. It’s not 30 per cent, or 26 per cent of young people that are unemployed. It’s once you take out those that are in the university and in the TAFE and the schools, of those that are looking for work, which is a minority, it’s 26 per cent amongst that group. Now we’ve done a lot of research on this, and those people are principally people who lack literacy, numeracy skills, and what they can best profit from is increased job pathways programmes from school and heightened literacy and numeracy programmes. And in this Budget we have targeted that very area to try and improve their skills so that they do have skills that can get them into the job market.

You condemned the ALP for tolerating a youth unemployment of 26 per cent, and you made promises that you would lower it. It’s now 27 per cent, it’s higher, not lower.

Well, I think I’m right. I stand to be corrected, I think it’s lower now than it was a couple of years ago, as I said. But the important thing is to make sure that you help those people develop skills. Now one of the things we announced in last night’s Budget is an increased literacy and numeracy program, and also an extension of what we call the “Work for the Dole Scheme” which says to young people who’ve been unemployed for six months that they have to do an activity whilst on the dole. And the activities that they can choose from is the green corps, community work programmes, or the literacy and numeracy class. So, if you like this is a pretty strong measure to make sure that they actually get into some activity that is going to help them. One of the things that you find with young people who are in that class, that is, outside the university and TAFE sector, is that it’s also important to keep work habits up. And this is the essence of the programme which we announced last night.

Ten minutes to nine. Peter Costello, three specific things for Victoria. Victoria’s share of Commonwealth grants has gone down by $38 million. Every other state has stayed where they are or gone higher. Our health funding has not been increased by a cent, and on state road funding Victorians kick in 25 per cent of the national take for fuel taxes. We get back 15 per cent of road spending. Can you explain any one or all of those three for us?

Well, when you take financial assistance grants and health grants together, Victoria’s allocation has gone up in real terms, in real terms, that is, after inflation. And in relation to financial assistance grants, the financial assistance grants are divided between the states on a formula which gives the state an amount per head of population, and increases it in real terms. Now the only way that Victoria can ever go backwards is if it loses population. And of course if it loses population, then of course its grants will come down. But because we have increased health funding over all ,the total of financial assistance grants and health funding to Victoria has risen, has risen.

There is a release this morning from all the Health Ministers from all the states, including most of them, of course, being colleagues of yours from the Liberal Party, saying this Budget will barely help us keep up with the growing demand for heart surgery alone, the state and territory Health Ministers say. They express amazement that the Federal Budget doesn’t contain one extra dollar for the nation’s hospitals.

Well, that is totally wrong. The federal health budget increases health-care funding 15 per cent…

For hospitals?

For hospitals, over the next five years. Well, where do you think you do heart surgery? You do it in hospitals.

Yes, but there is no additional money ear-marked for hospitals, there’s money for the health system, but the hospitals are in crisis, and there’s not a cent for hospitals in this Budget.

No, no, Jon, let me tell you. There is $30.2 billion for hospitals in the Budget over five years. That’s thirty thousand million dollars.

New money.

The Budget increases current funding for hospitals $2.9 billion, two thousand nine hundred million dollars.

The Ministers dispute the federal government’s…

Hang on, let me explain it to you.

…contains 2.9 billion funding, I’m reading from their joint press release.

Well, I’m telling you what the facts are, I’m telling you what the facts are. Fifteen per cent over five years. Now what they say is, no, no, I’ll tell you what their argument is. Their argument is, oh well, 15 per cent in real terms is not enough. It should be more. There should be more than 15 per cent in real terms. But it’s quite wrong to say there is not new money. There is new money funded in this Budget for the next five years of $2.9 billion.

Now let’s go through it: $750 million for veterans’ direct purchasing by the Commonwealth. The Commonwealth pays for veterans directly. What that means is that the public hospital system has additional places.

As a group, they say: we have sat in meetings with Minister Wooldridge where he denied that figure that you’ve just quoted – the $2.9 billion – and certainly our combined top bureaucrats say the combined Health Ministers cannot find that money in the bottom line. The reality is there is only enough new money in five years, there’s not enough new money to run the nation’s hospitals for a day.

Well, Jon, I have sat in meetings with their Treasurers and their Health Ministers where Dr Andrew Refshauge said these words: “I’m sorry, I didn’t understand it.”

So you’re saying they’re wrong? Every one of those Health Ministers around the nation is wrong?

I’m not saying, hang on, I’m not saying they’re wrong. I know the money that is being allocated. $750 million will pass through the Parliament for veterans’ affairs. And they say, they say, oh well that’s in the Veterans’ Affairs budget, we can’t find the health budget. Well, of course it’s in the Veterans’ Affairs budget if you are directly purchasing for veterans. Now, what else was said last night? Last night we gave a Gold Card to World War II diggers, which I think is a great initiative. Free private care, plus optical, dental, podiatry, chiropractic for life, no Medicare levy, for life. Now for 50,000 veterans, now again separately paid for in the private system, freeing up new hospital beds in the public system. Isn’t that a great thing? That’s another intitiative that comes out.

Now let’s go for the Commonwealth Seniors. 220,000 Commonwealth Seniors, and this is a great news story, now entitled to pharmaceutical benefits, which means they can buy their benefits for $3.20, that’s all they have to pay for their scripts, and after 52, that is 52 in a year, one a week, you get the rest free for that year. Now I think that’s several hundred million dollars’ new money into the pharmaceutical system.

It’s not hospital funding.

Well, I’ve been through hospitals. I’m now going through veterans…

Yes, can we move on in the interests…we don’t want to run out of time.

No, no let’s finish it, I’m going to pharmaceuticals. And now in relation to the medical system, full indexation for doctors in relation to their Medicare fees, which has not been done since 1993 to encourage doctors to bulk bill, which is again a great development.

And has been greeted by the AMA with a big thank you.

Can you explain the politics of some aspects of the current state of play for me please, Peter Costello, because there’s something very basic that I think I must either be very stupid or I don’t understand for some other reason. Can you explain how a double dissolution is good for the Coalition? How is it good to go to the election where you lose seats in the House of Representatives, and you’ll have a reduced majority therefore, and at the same time you may well in the Senate hand the balance of power to either Pauline Hanson on the right, or Phil Cleary, for instance, on the left? How is that a good thing to do, a double dissolution?

Well, look I’m not going to go into the ins and outs, but the only reason you would have a double dissolution in Australia would be to resolve a deadlock between the Senate and the House of Reps. As you know, if the Senate and the House of Reps can’t agree, and you have a double dissolution and they still can’t agree, you can then have a Joint Sitting, where they sit as one body. And the Government which has a majority in the House of Representatives you would assume, in that one body, could pass its legislation. Now that means that a double dissolution can resolve an impasse between the House of Reps and the Senate. There are now impasses between the House of Reps and the Senate on several matters, unfair dismissal, Wik is another, Public Service Bill is another, so…

You get those bits of legislation through but for the rest of the term of the Parliament you’ve got a Senate to deal with that is perhaps even more problematic for your legislative programme than the one you’ve got now.

Sure, oh sure. I mean, we’ve had to cope with a hostile Senate all the way through this term. We don’t have a majority in the Senate.

But at least it’s negotiable. If you go to a double dissolution you could end up with a Senate of who knows what configuration.

Well, look I’m not arguing either for or against double dissolution, I want to make that clear. But all I’m saying is, you are quite right, after a double dissolution we could still face a hostile Senate. You are quite right about that, but we face one now. We have been opposed in the Senate since the day we were elected. That has meant that we have not been able to implement the full legislative programme we were elected to implement.

All right.

It has meant, as you said, you’ve got to negotiate practically everything.

But it may still come.

Now we’ve had to deal with that.

And finally, Peter Costello, the leadership. You’re now rescuing Peter Reith, who led the charge on recovering ground from the travel rorts, you’re driving tax reform and the Weekend Magazine has stories of your brilliant secondary and tertiary education, and pictures of you in blue jeans and an open-necked shirt. When’s the leadership challenge?

I wouldn’t believe any of that stuff about brilliance. (laughter). And as for jeans, it has created a lot of discussion, but I was just wearing jeans on a Sunday afternoon. I think most normal people do that.

Peter Costello, you are…

You probably wear jeans Monday to Friday as well, Jon, do you?

And I wear a suit on the weekend. Is there a leadership in the offing? Will you deny it?

No, no, no, there’s not.

None at all.

No.

You’d like to be Prime Minister one day wouldn’t you?

There isn’t and if I thought that wearing blue jeans could create such a fuss I would have worn white ones.

Peter Costello, thank you very much for your time this morning. The Federal Treasurer, Peter Costello, speaking to us from our Canberra studios.