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TRANSCRIPT
of
THE HON PETER COSTELLO MP
Treasurer

Budget Lock-up Press Conference
Parliament House, Canberra
Tuesday, 14 May 2002
4.45 pm

SUBJECTS: Budget

TREASURER:

Ladies and gentlemen, putting the Budget together this year has been a very difficult task because we have come off a very tough international situation. In the security sense, obviously the events of September the 11^th and Australia’s land, sea and air operations in Afghanistan have been very extensive commitments. In an economic sense in the last year the powerhouse of the world economy, the US has been in recession, Japan has been in recession, Germany has been in recession, Europe has been weak, Singapore has been in recession, Taiwan has been in recession and it has made our economic outlook a very difficult one.

And when the Government sat down to do this year’s Budget it believed that its priority should be a safer Australia, secure borders, stronger defence and a strong economy.

And those measures that receive new funding in this Budget are principally in those areas.

The longer term thing that we sought to do in this Budget is to lay down an Intergenerational Report to try and paint a picture as to what Australia would be like, or what our public finances would be like in 2042 on current policy. Now you can read the Report, you’ve got to make a lot of assumptions. But what it says, is that even on a growing economy, an economy growing at 3 per cent per annum for forty years, the proportion of our Budget that is going to be, would have to be devoted to health and aged care would grow very, very considerably. About 5 per cent more of GDP, very large sums of money, $80 billion in today’s terms to maintain those services. And interestingly enough it says its not just the ageing of the population but perhaps even more significantly the increases in medical science that are going to be driving these generators.

Now the Intergenerational Report was something that was laid down by legislation in the Charter of Budget Honesty five years ago. It’s been on the cards now for five years. Well, we didn’t think we could bring the report down and not do anything about it. And we’ve looked at the areas of our Budget which we need to rein in the rate of increase.

We’re not cutting anything in the areas of disability pension or in the areas of pharmaceutical benefits. In fact, these expenditures are increasing right across the forward estimates. What we are talking about is cutting the rate of increase in relation to these measures. So that small steps taken now can do something to address the long term problems and the only thing I can say to you is if you don’t take small steps now, the steps you will have to take in ten years time will become larger and larger and less and less palatable.

The good news of the Intergenerational Report is that whatever problems we have, we’re probably better placed than most other countries. But we still have some significant problems.

Now I thought I might just in accordance with usual practice go through some of my charts, very quickly and then I’ll take some questions.

Treasury officers will take the name of everyone who groans.

We’re forecasting strong Australian growth in 2002-03, 3 ¾ per cent. As you can see we came off a weaker year in 2000-01, in 2001-02 when most of the world kicked into recession Australia kicked away. And we think our strong growth prospects will continue as the world economy comes back in 2002-03. We think that will be led principally by business investment and the principal driver of business investment, of course, is at the small firm level. And please don’t misunderstand me about that.

But there are, in addition to that numbers of large programs, business investment programs coming on train in Australia – the North West Shelf fourth train, the Alice Springs to Darwin railway, redevelopment of the Queen Victoria site in Victoria, the Woodside Offices in Perth, the Comalco aluminium refinery project in Queensland, the magnesium project, the Melbourne Cricket Ground redevelopment, the Duke Energy gas pipeline across Bass Strait, the Western Sydney Orbital – numbers of large projects that will be part of a big business investment recovery over the next year or two. We forecast Australia’s unemployment rate to be at 6 per cent by June of next year which, with the exception of six months prior to the 1990 recession, is the best that we’ve been in in twenty years.

We’re forecasting an underlying cash balance of $2.1 billion in 2002-03 after a small deficit in 2001-02 mainly led by additional spending on the war in Afghanistan and weaker cash tax receipts in 2002 with growing cash surpluses across the forward estimates.

Our Budget is in good shape by international terms, as all of the world’s economies run significant deficits, all of the world’s major industrialised economies run significant deficits through 2001-02, we will be running a very small cash deficit of $1.2 billion in 2001-02 and a surplus in 2002-03.

We continue our program to repay debt figuring that debt to GDP ratio will be at 5 per cent by 2002-03, down from a high of 20 per cent. And our good news is that in debt terms we are much better handled, much better placed than any of the comparable countries of the world to handle the ageing of the population with debt to GDP ratios around 5 per cent compared with Americans at nearly 50 per cent and the Japanese obviously, major problems with an ageing society.

In this Budget we announce the construction of a new facility on Christmas Island. And we set aside around about $450 million over four years to handle unauthorised arrivals in that facility, that is outside the Australian migration zone. And it will allow us to close Curtin and phase down Woomera.

We also have measures which, as I say in the paper, I will give you the correct figure over five years, we are spending an additional $1 billion in relation to unauthorised boat arrivals that we were expecting to spend at this time last year.

There is some evidence that the policies are working. There was a surge in the September quarter of unauthorised boat arrivals which forced the Government to take the measures that it did. They surged above 2,000 for the quarter. There have been no unauthorised boat arrivals in the March quarter of this year or so far through the June quarter of this year. This is an expensive program but there is reason to believe that it’s been successful.

The components of our increased defence spending, base defence spending, which we had in the Budgets from 1999 increasing over the forward estimates. In 1999 we increased defence spending by about $1 billion ongoing for our East Timor commitments. We still have troops in East Timor and will have for quite some time. In addition to that, in last year’s Budget, over and above that, those two layers, we increased spending for the Defence White Paper which delivers an additional $1 billion into the Defence Budget this year. And, in addition to the base, East Timor and the White Paper, we in this Budget increase commitments for the war in Afghanistan, the sanctions in the Gulf and ongoing spending in relation to responses to CBRNE which is chemical, biological, nuclear, radiological and explosive and also the technical response unit.

Growth in the Pharmaceutical Benefits Scheme over the last ten years has quadrupled, from about $1 billion per annum to over $4 billion. That’s what’s happened in the last ten years. Now let me put this into perspective, what will happen over the next forty.

That’s the last ten, the drivers of medical science will increasingly become exponential. And on current forecasts, on current policy a PBS scheme which is now costing about $4 billion would be costing up around in nominal terms $160 billion in 2042. No Government could sustain a scheme like that in forty years time. And we have to start thinking now about the steps that we are going to take.

The Intergenerational Report will show you that Australia is well placed for the next decade, but over the three succeeding decades we face huge expenditure pressures, led primarily in the health area and a little bit less in the ageing area. The graphs that you see in the Intergenerational Report are spending to GDP. Not spending, it is spending to GDP. It assumes a GDP which is increasing as 3 per cent and the spending is increasing at a faster rate and becoming a larger proportion of GDP.

So, too, disability support pension has been the fastest growing area of the pension and allowance scheme in the last ten years. Particularly changes which were put in place in about 1990 which seemed to increase the rate of increase. And disability support pension is a very fast growing area. It is available to people who are unable at the moment, assessed as unable to work at award rates for 30 hours a week. We are not changing the income test, we are not changing the asset test, we are not changing the amount. What we are saying is that the assessment for a disability pension will be the capacity to work 15 hours a week at award wages. That is, if you are capable of part time work, the Government will be providing more training places and encouraging you to seek part time work. If you are unable to find part time work you remain on the Newstart allowance, which is the unemployment allowance, which has with it training opportunities, work for the dole opportunities or other opportunities but the test of disability is changing. That’s the change in this particular area. Nobody who is unable to work will be put off a benefit. If you are unable to, if you have the capacity to work more than 15 hours a week but can’t find such work you will remain on Newstart, you will have eligibility for retraining but you won’t go on disability pension which has no work test, no training and something that people stay on until they go on the aged pension if need be.

Can I say that these arrangements do not apply to the blind. There has never been a work test for the blind and there will not be a work test for the blind. They do not apply to the severely disabled. These are people who obviously are unable to work. The largest category today on disability support pension is people who are on it for musculo-skeletal disabilities. That is, principally, bad backs. And what we are trying to encourage is people who may have bad backs who can’t do a full 30 hours a week, be encouraged to do part time work if they can and get rehabilitation.

I want to make it clear that notwithstanding those changes, spending on disabilities and disability pensions will still rise. It’s just that the rate of increase will not be as great as otherwise. This shows you that disability support pension payments even assuming these changes still rises across the forward estimates. It’s just that it would have been rising even faster had we not put these measures in place.

The Commonwealth’s contribution under the, on the Commonwealth State Disability Agreement also rises and the Commonwealth’s commitment or payments in relation to disability employment services rise. The point I am trying to establish here is that these are not cuts. These are reductions in the rate of increase to try and put these services on a sustainable basis. Now obviously, as I said earlier, we have had to meet some short term challenges particularly in relation to terrorist events and war. We have sought to meet some long term challenges in the fast growing driving areas of Commonwealth expenditure. I think Australia’s economic prospects are as strong as any developed country in the world, in many respects stronger. But this is a Budget designed to reinforce that strength and to give us better opportunities in the future.

JOURNALIST:

Treasurer, are you embarrassed to have the Budget go into deficit this year?

TREASURER:

We think that there will be a deficit of $1.2 billion in cash terms in 2001-02. At MYEFO, the Mid Year Review, we were forecasting $0.5 billion surplus. The principal reasons why it has changed are that we have had additional expenditure in relation to the war against terrorism and tax receipts in the early part of 2002 were weaker than expected. We are still running a very, very strong fiscal policy. And if there were ever a time to allow fiscal policy to take some slack it is probably during an economic global slowdown when you have got substantial defence commitments. I wish we hadn’t have had an economic international slowdown. And I wish we had avoided the defence commitments but I think in those circumstances it was a policy which gave us added strength, kept our economy growing and probably set Australia up for the kind of opportunities that I think we’ll have in the next year or two.

JOURNALIST:

Treasurer there’s an extra $387 million for the Tax Office. Is this a recognition that there have been problems in tax administration?

TREASURER:

Well, it’s really a recognition of what I said earlier about the fact that cash receipts through the early part of 2002 were weaker than we thought at the time of the Mid Year Review. As you look through the areas, the principal area where it was weaker was in company tax. Now that could have been weaker profits, but we want to make sure that the Tax Office is fully staffed so that it’s not a technical failure at the collection level and that’s one of the reasons why the Tax Office will be given extra revenues, and in return, extra revenues and in return it will raise extra revenues.

JOURNALIST:

Treasurer, the change in the alcohol excise that takes effect this evening, what is the impact of that on the consumer?

TREASURER:

What happened when the New Tax System came in is that the Commonwealth had to set an excise regime which together with GST moved prices by the levels that we set. And we did that. The States had subsidies for low alcohol beer. And so our excise regime was set, the States would then come in with their subsidies which would make low alcohol beer cheaper. What we’re doing with this measure is we’re wiping out those subsidies and reducing the excise. So you don’t have the complication of an excise plus a cash back. The effect of that is that it should mean that prices don’t move although, because it’s a uniform system, they will move in some jurisdictions by very small amounts.

JOURNALIST:

What sort of amounts?

TREASURER:

Well, it depends on the jurisdiction. Let me just see if, but it is actually designed to try and keep prices at a national level, at the same level. It’s more information is page 27 of Budget Paper Number 2, and I believe we’ve got a Press Release somewhere in the pack which says the price rises are so marginal that they will not justify a head line “Beer, Cigs Up” or “Beer, Cigs Down”. Let me assure you.

JOURNALIST:

Treasurer, on the deficit again, given the importance during the election campaign, you and the Prime Minister indicated that the Budget would be maintained in balance and in more recent statements you have also maintained that line, surely you could have revealed to the markets and the public that it had slipped into deficit and have you misled the public?

TREASURER:

No, we put out a monthly report, we put out a half yearly report which was the Mid Year Review. Treasury put out it’s pre-election report which was the Treasury’s view at the time. And then we put out monthly transactions. Now the monthly transactions in February showed that the Budget was $9 billion in deficit and, hang on, we keep publishing on a monthly basis. Now what you’ve got to do, is you’ve got to take an assessment as to how collections will pick up between then and the end of the year. Our assessment as of today is they won’t pick up to close that gap. We might be proved wrong. But that’s our best assessment as of today. We were informing markets on a monthly basis what the position was so that they could make estimates. And nobody was covering anything up. I can assure you of that.

JOURNALIST:

Treasurer, just on petrol, Trebeck has recommended that you re-introduce petrol excise indexation, automatic indexation. Do you regret now removing it in sort of a knee-jerk reaction last year to political pressure?

TREASURER:

No, Trebeck recommended resuming indexation of petrol. We will not act on his recommendation. That is, we will not re-introduce indexation of petrol. Why? Because we abolished it 12 months ago. Why did we abolish it? We abolished it because obviously there is concern, and there was concern in the Australian community at the time about the level of petrol prices. We introduced measures to try and reduce prices in rural and remote Australia and we’re not going to go back and revisit that decision and re-introduce indexation again. So, we published his Inquiry, we published our responses and we don’t accept his recommendation.

JOURNALIST:

Treasurer you told the Party Room today that in assessing tonight’s Budget you wanted people to recall how they felt on September the 12^th. What did you mean by that?

TREASURER:

What I meant by that was this. That on September the 12^th, the Australian community I think, rightfully wanted to know that its Government would do what was necessary to give it additional security. They had seen hijackings and destructions on an event which they had never seen before in the world’s most powerful economy. And they wanted to know that their Government was preparing against such a situation. And we announced numbers of measures at the time, I think we closed, well, I won’t go into what we did but we assessed a number of vulnerabilities at the time. Now, eight months on, everyone I think sort of looks back and says oh well that was another age ago, that can never happen. And I hope they’re right. I just hope they’re right. But a Government has to prepare against the event that it could happen. And put yourself back in that situation and remember what it was like and ask yourself would a Government be doing the right thing by its public if it didn’t take additional measures for security?

So what are we doing? We have got Sky Marshals, plain clothed armed people on Australian flights. We’ve closed airport security. We are increasing funding for ASIO and the Australian Secret Intelligence Service. We are going to try and develop a biometric identifier on a passport so that where people change the picture on a passport we have a biometric identifier which will tell us. We are stockpiling antidotes to possible biological outbreaks. We are setting up a tactical assault group on the East coast which will not have the delay of flying times in getting across from the West coast.

We are putting in place a permanent regiment trained to deal with chemical, biological, nuclear and radiological incidents. Now we can all sit down here today and all say, oh none of that is ever going to happen. But I sat down here in last year’s Budget and if you had said to me, will the World Trade Centre ever be brought to rubble I would have said that that’s never going to happen either. Now I say in my Budget speech, we hope for the best but we’ve got to prepare against the worst. I hope that none of this is ever needed. I sincerely hope. But I would hate to be in the situation where we had an incident and we hadn’t prepared our response.

JOURNALIST:

Treasurer, ongoing reform is a key priority in your Intergenerational Report. You also talk about ongoing business reform. What will you do and when on business reform, business tax reform?

TREASURER:

Well, business tax reform, we have announced that we will be putting out a discussion paper on further measures by about mid year and consulting with the Board of Taxation with a view to announcing further measures by the end of the year. The areas that this will be in are credit for foreign dividend withholding tax, conduit income will be a big part of it, the foreign investment rules, the FIF rules as they are called, will be a part of it. We have recently renegotiated US/Australia Double Tax Agreement, we are going to try and renegotiate a UK/Australia Double Tax Agreement and all of that will be wrapped up into the review of international tax and we will be announcing our position in relation to that at the end of the year.

JOURNALIST:

So if the Board of Taxation makes a recommendation on trusts will you act on that or will the Government squib it like it did last time?

TREASURER:

Well Steve, obviously I don’t accept the premise of your question. But having said that, let me say this. The Board of Taxation actually recommended that we not proceed with the exposure draft. We put out an exposure draft, we asked for consultation, I forget the number of submissions we had, from memory it was about three hundred and there were three hundred against it. Those in favour zero, you know, it wasn’t close.

JOURNALIST:

You could have been brave.

TREASURER:

I could have been brave? Well I could have been Steve, we always try and take a leaf out of your books. The Board of Taxation is now going away and it is consulting. If it says that this is an area which requires ongoing reform we will deal with that when it comes. But the reason the Bill was withdrawn was because it advised us to withdraw the Bill. It didn’t seem to me to be in a mood to advise us to continue.

JOURNALIST:

Treasurer talking about preparing for the future as you were just a moment ago, in framing this Budget did you have in mind that when the next election comes around in 2004-05 you may well be Leader of the Liberal Party and Prime Minister? Was that a factor in your appearing to be in the business of building a war chest towards that event with a projected surplus, I am reminded by my esteemed colleague Mr Lewis, of about $4.7 billion?

TREASURER:

No.

JOURNALIST:

Treasurer the increases to the Pharmaceutical Benefits Scheme that you project will save $1.1 billion, that’s based on a reduced demand, are you saying that you do believe that increase to prices will force some families to go without medicines?

TREASURER:

I don’t think so. The concessional rate is currently $3.60 and we’re increasing that to $4.60, by $1.00. If you buy 52 scripts in the year, you buy 52 scripts at $4.60 and after that they’re free. So somebody who has a chronic condition will pay an additional $52.00 over the year but they can’t pay any more. $1.00 per script up to 52 scripts. Under this measure a Commonwealth Seniors Health Card holder or a pensioner if they had 1,000 scripts in the year they can only pay $52.00 more. Now I don’t think that will mean that they have to go without medicines. No I don’t.

JOURNALIST:

Treasurer, just on Telstra, the forward estimates show that you plan to sell off the next tranche of Telstra in 2003-04 which suggests the Government is confident that the services to regional Australia can be up to scratch next fiscal year in order to prepare for 2003. Is that your assumption that over the next 12 months or so you can get those services up to a point where you can actually prepare for the next tranche to be sold?

TREASURER:

Well I have to make an assumption in the Budget. It is the Government’s policy to ensure that services are better, made better. That service is faster, that services are improved in rural and regional Australia and once we are satisfied that that has been done it is the policy to continue, proceed with offering further share opportunities to the public in Telstra. Now I have to put some kind of assumption in the Budget. The assumption that I have put in the Budget is that that situation will occur sometime in 2003-04. That is that I don’t think it will be achieved in 2002-03, in the next 15 months, but the point about all this, is we want to do this as soon as possible. It’s not as if we are saying oh well, let us have bad services in the bush because that can keep Government ownership of Telstra. We are actually trying to improve services in the bush. And I wish I could do it tomorrow frankly, but we are not going to offer any private equity until we have done that, and it will be quite plain, quite clear.

JOURNALIST:

Treasurer (inaudible) forecast on border protection and asylum seekers and detention, yet you yourself said that we’re winning the war against the boats, there have been no boats since this year, why is there such an increase in the costing?

TREASURER:

Well, the increase in costs arises from firstly the construction of the new purpose built facility at Christmas Island which from memory is over $200 million. Then the operating costs of that which from memory over four years is about $450 million. Then we have factored into the Budget the continuing costs of the Nauru and Manus Island facilities which from memory over the forward estimates is about $430 million and we have factored in savings arising from that of about $350 million. That’s from not processing on shore but processing offshore. So I think that the proper way to look at this is that the cost that we would have previously borne on shore we’re now going to bear in relation to Christmas Island. In order to do that however we need to construct a very expensive facility in Christmas Island. The only additional ongoing cost will be maintaining the facilities in Manus and Nauru and the degree to which you can either repatriate the people on Manus and Nauru and we’ve got a package of incentives for the Afghanis in here, the degree to which third countries will accept those that are assessed as genuine refugees from Manus and Nauru you will produce a saving off those figures. But we’ve taken a very conservative approach to the costs.

JOURNALIST:

Treasurer, with your focus on repaying debt, it obviously has implications for the bond market, what sort of level does the bond market have to get to before you consider some solutions and what might they be?

TREASURER:

Well, from memory, we have paid down $62 billion of debt in net terms and in net terms Commonwealth debt this year will stand at about $35 billion. And what we’ve said previously is notwithstanding that net debt is only about $35 billion, we try and hold gross securities out there of about $50 or $60 billion so that you could keep a bond market functioning. One of the problems for Australia’s bond market is that we don’t have enough debt out there to have liquid and deep bond markets. So we’ve held gross debt out there even though we didn’t need it in net terms. I think we say in here that in the light of the fact that we’ve got a pretty aggressive debt repayment program over the next couple of years, we understand that that will have implications for the operation of the bond market and we intend to consult with the users to come to a solution which suits both them and suits us. But we will continue to hold gross securities out there until such time as we have completed those consultations. The exact formulation that we use is in Budget Paper, Budget Statement Number 7 in Budget Paper Number 1. I will just refer you to it, 7.3 to 7.5 and that will give you the formulations.

Thank you all very much for your time.