Interview with Fran Kelly

Wednesday, 30 August 2006

7.35 am

SUBJECTS: APEC meeting, G-20 meeting in Australia, energy prices, economy, Victorian Liberal Party, stem cell research

KELLY:

Peter Costello, welcome to Breakfast.

TREASURER:

Thanks very much Fran, good to be with you.

KELLY:

Treasurer, you are off to APEC next week to discuss issues ranging from anti-corruption to Avian influenza, why is bird flu an issue for the region’s finance ministers?

TREASURER:

Well if there were an outbreak of bird flu, that would be probably the most severe economic shock that the region could have. Various modelling has been done on this, but if there was an outbreak then you would have to close borders, you would have to close cross-border trade, you would have to close movement of people, you would have obviously a lot of companies that would have to stop production and it would be recessionary if not worse, so the economic impacts of avian flu are enormous and that is one of the reasons why we spend as much money as we do. We do spend quite a lot of money preparing for such an eventuality.

KELLY:

Okay, well the economic impacts of energy are an enormous concern for all countries around the world at the moment, so in November you are hosting a meeting of the G-20 Group which brings together finance ministers from major nations including Brazil, India and China. One of the items you’ve put on the agenda is energy security. What do you mean by energy security and what are your concerns on that front?

TREASURER:

Well the G-20 is probably the most significant economic meeting in the world. It is 20 nations with their finance minsters and their central bankers and Australia is chairing that meeting this year. First of all the fact that we are a member of it speaks of our economic position in the world. Secondly the fact that we are chairing it and we are hosting it in Australia is a very significant event for the global financial community and of course for Australia. The G-20 brings together the developed countries of the world which are sometimes known as the G-7, the big seven economies of the world, with the emerging new economies such as Brazil, Russia, China, India and so you get in the one room countries that are heavy users of energy. In fact the emerging countries and the demand that they are giving is probably the principal reason for, the reason why oil prices are so high. And we will have Saudi Arabia also there as part of the G-20. So you have got big energy producers such as the Saudis and the Russians, big energy users such as the Americans and the Chinese and to talk about the way in which security can be obtained in relation to energy supplies, production can be increased and prices can be stabilised, will be very useful not just for Australia, of course very useful for Australia but useful for the world.

KELLY:

Let’s talk about Australia. Western Australia Premier Alan Carpenter has proposed that up to 20 per cent of known off-shore gas reserves be quarantined for domestic household and industry consumption here rather than export it as LNG. If we are talking energy security with Australia’s interests at heart, it seems like a good idea, doesn’t it?

TREASURER:

Well I support getting energy to Australian households at reasonable prices. But you have to also bear this in mind: if you are taking gas say from the North-West shelf and you can sell it at the world price or have some of it compulsorily taken at below world prices, you might be a bit resistant to that idea and if a proportion of the resource was locked up to be sold at a price which was below the world price you may not have the same incentive to either invest or develop it. So you have got to be very careful here. Gas is like oil, it is a world commodity and an Australian producer will want to sell it for the best price that they can possibly get.

KELLY:

Yes but wouldn’t Australian consumers like the idea of making sure there is some there left? (inaudible) in Australia.

TREASURER:

Well, as I said, I think it is important that we do have energy for Australian consumers and we do have reasonable prices. But where you are dealing with a global commodity, it is very hard to have a two tier price structure. Let’s take wheat for example. If you said to Australian wheat growers that they would be forced to sell to Australian flour mills at a quarter of the cost that they could sell to overseas flour mills, they will say, well we will sell it overseas, thank you very much. And as a producer, you would have to say you have got a bit of sympathy with them.

KELLY:

Alan Carpenter doesn’t seem to be backing off on this. Would you support the use of federal powers to block any WA action that would try and mandate you know, some preservation of gas reserves for local use?

TREASURER:

Well, I am not really entirely sure of the constitutional situation, you are going to get into all of these nice legal questions as to who has control of off-shore assets and the extent of their constitutional reach. But as I say, I do think there is a place for supply for Australian consumers at reasonable prices but I warn against the idea that with a global market and a global price, you can somehow quarantine Australia from it. It is the same in relation to oil by the way. There is some oil which is produced in Australia, we are a net import of oil, and people say, well why don’t you force that to be sold at much cheaper prices in Australia? Well the answer is, if you forced it to be sold at cheaper prices in Australia, the producers would just sell it on the overseas market. They would get a better price for it.

KELLY:

Well Treasurer, let’s come to our domestic economy now. In an interview with the Financial Review this week, you urged the States to restore their Budgets to surplus to ease the pressure on interest rates. Now, that is a bit rich, isn’t it, given that you endorsed Federal Budget tax cuts this financial year worth $9 billion – $37 billion over four years – a tax bonanza now widely blamed along with higher fuel and food prices for driving up our interest rates?

TREASURER:

We cut tax in the Budget, yes of course we did, we cut it by nearly $9 billion and our Budget will still be in surplus.

KELLY:

Yes but our interest rates, there is pressure on our interest rates.

TREASURER:

We would not have cut taxes to the degree that it would take the Budget into deficit and that is a critical point, that is the point I made all the way through. The only room we had for tax cuts was room for tax cuts which would still, after they had been introduced, leave the Budget in surplus and it left the Budget in surplus by about 1 per cent of GDP. Now the point I have made in relation to the States is many of the States have now moved from surplus to deficit. They are now borrowing again, some of them substantially borrowing. The fact that they are borrowing rather than adding to savings is putting pressure on interest rates.

KELLY:

But Treasurer isn’t there good, modern economists always say there is good debt and bad debt and there is nothing wrong with borrowing, a State or any Government borrowing to fund you know, infrastructure projects that this country needs, that in the longer term will be a positive.

TREASURER:

I have also said, there is nothing wrong with spending on infrastructure provided it is good infrastructure and provided it is going to add to capacity. My point is that the States ought to aim to spend on infrastructure and keep their Budgets balanced. And there is a way you can do that of course, you do that by getting you recurrent costs under control. You look at the States, many of them, particularly those that now have large deficits have large deficits because they don’t control their recurrent costs. It is not because of infrastructure, it is because they haven’t got their recurrent costs under control so that when they do spend on infrastructure, they can’t do both and the Budget goes into deficit. Now, if a government is running a deficit, what that means – let’s be very clear about what that means – it is borrowing. It is borrowing savings in financial markets. If you are borrowing savings in financial markets you are exerting upward pressure on interest rates. If you are adding to savings in financial markets you are exerting downward pressure on interest rates.

KELLY:

But just having a surplus doesn’t mean you are not putting pressure on interest rates. I mean the departing Reserve Bank Governor, Ian Macfarlane was explicit this month in his criticism of your Budget tax cuts giveaway, he said he tried to pour cold water on the idea of big tax cuts.

TREASURER:

Well what he said is that he had said that there was room for moderate tax cuts and I think the tax cuts which we introduced were moderate.

KELLY:

Well he says that you misunderstood those words.

TREASURER:

No, no, no, I didn’t misunderstand.

KELLY:

Well he said he tried to pour cold water on the idea, did he not?

TREASURER:

No, Fran, Fran, I didn’t misunderstand a thing because I had extensive discussions with him.

KELLY:

So the Reserve Bank Governor didn’t try and pour cold water on the idea of more tax cuts?

TREASURER:

No, no, no, no, you have got to go back to the times. There were people and certain newspapers that were arguing for tax cuts of $20 or $30 billion per annum which I had said at the time was outside the ballpark, which I had said at the time was unaffordable, because the only tax cuts which the Commonwealth could afford would be tax cuts which, after they were implemented, left the Budget in surplus and that is what we did. After cutting tax by $9 billion, we left the Budget in surplus by about $10 billion. Now, if we had cut by $20 billion the Budget would have been in deficit and that was the point that he was making, it was the point that I was making, that was the responsible course and that is why we did it.

KELLY:

Well the Reserve Bank Governor also said he was annoyed by the Coalition’s 2004 election pledge to keep interest rates low because he said it was implausible. Now we have had three interest rate rises since the last election, another one slated if the Reserve Bank Governor is right, do you now regret the pledge during the last election to keep rates low?

TREASURER:

Well the pledge that I made repeatedly through the last election was that under a Coalition Government, under John Howard and Peter Costello, interest rates would be lower than under a Labor Government with Mark Latham Prime Minister and Simon Crean Treasurer. Do you think there is anybody in Australia that thinks we were wrong about that? Let me ask you this question…

KELLY:

Well I think the Reserve Bank Governor has made it clear he think you were wrong to make that promise.

TREASURER:

…well hang on, I, you know, you have got to take into account what Mark Latham as Prime Minister and Simon Crean as Treasurer, proposed to do. I don’t have any doubt whatsoever that if Labor had won the election, with the policy that they had, with Mark Latham now the Prime Minister and Simon Crean now the Treasurer, I have no doubt at all that we would be in a very dicky situation.

KELLY:

Treasurer, can we go to politics in your home State now in Victoria. You are the senior Liberal there. There is a report in The Australian newspaper today that some in the Liberal Opposition are concerned about the policies of the Opposition Leader Ted Baillieu. His support for gay civil unions, for euthanasia, for decriminalising abortion and they think it could cost them electorally. Now you have been urging Ted Baillieu to get his policies out there. Are you worried about the Opposition Leader’s moderate credentials, moderate policies?

TREASURER:

Well Fran, whatever the candidates are saying in Victoria, that is a matter for them and that is a matter for Ted. I am not intervening in that in one way or another. The only point that I have made, and I have made it over and over again, is there is a very good chance to win this election. Victorians want better government and I think Ted has every opportunity and I am backing him to win the election in November and become the Premier. This is the object here, to make Ted Baillieu the Premier of Victoria. He will have every backing from me to get there, I have offered assistance and I am working to help candidates with fundraising and I want to see him as Premier.

KELLY:

Well that seems clear. Just finally Treasurer, stem cells. In 2002 you voted in favour of legislation to regulate research involving human embryos. How will you vote in the conscience vote later this year?

TREASURER:

Well I want to see the Bill first and I am carefully working my way through the Lockhart Review. The thing that seems to have changed is this proposal for somatic cell nuclear transfer. I wasn’t up to date with all of the arguments in relation to that when the last Bill came along and I have to satisfy myself both as to the scientific and the ethical issues in relation to that Fran, and after I have done that I will do it very carefully, very carefully indeed, I will listen to scientists and I will take ethical councel and then I will look at the Bill and then I will be in a position to announce how I will be voting.

KELLY:

Treasurer, thank you very much for joining us on Breakfast.

TREASURER:

Thanks Fran.