Budget Lock-up Press Conference

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Budget, Beer
May 8, 2000
May 10, 2000
Budget, Beer
May 8, 2000
May 10, 2000

Budget Lock-up Press Conference


Transcript No. 2000/39





Hon.Peter Costello MP


Budget Lock-up Press Conference

Tuesday, 9 May 2000

4.30 pm




Ladies and gentlemen, this is the fifth Budget that the Coalition Government

has brought down. It is an opportunity for us to bring together our economic

objectives and our social objectives. For the fourth year in a row the

Budget is in surplus and this year we pay off another $9 billion of debt.

By the end of this financial year we will have repaid $50 billion of Labors

$80 billion debt. The $80 billion which were run up in the last five

years of the Labor administration. And that gives us the opportunity as

our interest bills come down to refocus our spending priorities. The Budget

forecasts will continue the move from deficits of around about $17 billion

where they peaked in 1993-94, where the Coalition was elected in 1996-97,

our first surplus Budget, our second surplus Budget. Our third surplus

Budget this financial year, 1999-2000, which has come in about double

what we predicted in the mid-year review with stronger growth and has

come in from memory at about, we expect at the end of this financial year,

we expect to come in about $7.8 billion in cash terms. That stronger growth

has given us a better starting position for the forthcoming financial

year, where the Budget will still be in surplus, notwithstanding two factors.

One is that the Government has reduced taxes by a net $5 billion or so

and, secondly, the money that was lost in the Australian Senate by the

obstructionist tactics of the Labor Party. What that shows is that as

our interest payments on debt have fallen, our priorities on families

and hospitals and schools has increased. Before the Government came to

office, we spent about the same on interest bills as we spent on hospitals

and schools. Today we spend about half on interest bills to what we spend

on hospitals and schools. Today we spend about half on interest bills

of what we pay to families.


Our forecasts this year are for continuing strong growth, but off the

kind of level that weve seen in the last three years. The last three

years weve sustained growth above four per cent for 11 quarters,

something thats not been done in Australia for a very long time. It wasnt

that the growth was higher than has previously been the case, but it was

consistent and high in the last 11 quarters, above four per cent.

Weve had times when growth has been much higher than that. Weve had

growth at six and seven, but weve never been able to sustain it. What

was different about the last three years was that it was high and consistent,

with strong employment growth continuing. And in this Budget we forecast

unemployment to come down over the course of the year to six and a quarter

per cent, which is the lowest in a decade and if it should fall further

after that, in the

following year, we would be at historically low levels.

This year we pay off another $9 billion worth of debt which will leave

the Commonwealth debt to GDP ratio, at the end of this year where the

dotted line is, at seven per cent. Our target was to have the Commonwealth

debt to GDP ratio at ten per cent by 2000-2001. We have exceeded that

and the debt will come down to seven by the end of this year, this financial

year starting on 1 July. In that figure there are no proceeds of further

sales of Telstra. And what drives debt reduction thereafter is further

surplus budgets but where we make very large inroads in these years, proceeds

of Telstra. I want to emphasise the point that debt to GDP ratio falls

to seven per cent without any further proceeds from Telstra other than

the installments which have already been sold of course. That debt to

GDP ratio of seven per cent compares with European averages of about 50

per cent. The United States of about 50 per cent and Japan of about 50

per cent. It would be one of the lowest debt to GDP ratios in the world

and lower than any other major OECD economy by a long shot. And as we

pay off debt and our interest bills come down, its always been the Governments

intention to redirect our spending.

There are some major new initiatives in this Budget, particularly in

relation to rural health measures where over a four year period the Government

will be spending about $562 million to get more doctors and better health

services into country areas. There were some people that thought that

the Government should go into a panoply of measures, but our view is to

hold out a cure-all for all the problems of the region was to deliver

false hope. We wanted to choose an area where we could make a really big

difference and concentrate on it. And were going to concentrate on medical

services in the regional areas. One of the biggest initiatives of which,

and I dont think this has ever been done in Australia before, were going

to offer a hundred new places in medical schools to students who will

enter a bond. Theyll be paid $20,000 while they are training and the

bond will give them the right to practice in regional areas for six years

after graduation, but they will not be able to practice anywhere other

than rural areas. Its a six year bond that will give them the opportunity

to become doctors and give rural Australia the opportunity to get more

doctors and get that doctor/patient ratio down. The person to doctor ratio

in the cities is about 1:1000, in country Australia, its 1:1500. And

as you talk to people in regional Australia, theres nothing that worries

them more than the lack of access to basic healthcare.

This is a Budget which continues the strong record of economic management

by the Coalition, which brings together our economic and our social obligations,

which will secure a better future for Australia, better health, better

services in regional Australia and continuing job opportunities as the

economy grows.


Mr Costello, are you the first Treasurer in history to literally pull

your Budget surplus out of thin air, with the spectrum sales?



Well let me make a couple of points about spectrum sales. Spectrum sales

have been in the Budget since 1996, and the spectrum sales that are in

the Budget for this year were in the mid-year review. Nothing new has

gone into the Budget. The mid-year review figures had the spectrum sales,

and Ill just tell you what they were because some people were asking

me. Digital datacasting, third generation mobile and 3.4 gigahertz wireless

local loop. And licence fees for the use of spectrum in relation to television,

I think have been in the budget since 1956, and in relation to radio have

been in the budget for a longer period than that. What changed between

the mid-year review and this Budget is that obviously we werent budgeting

for as much in terms of revenue as we think we now should have. And the

reason that we tweaked to that was that the sale last year, and we had

a sale last year, came in at over $1 billion, and we didnt expect

it would raise that. So we revised up the valuation to what we consider

is a fair estimate. And theres nothing wrong with that. Theres no other

way of treating it. Its the way its been treated in Australia since

people began using spectrum, first with wireless. Its the way its treated

under the IMF guidelines. Its the way its treated under Australian accounting

standards. You cant treat it any other way and I suppose the good news

is that whilst our dividends declined, this source of non-tax revenue

increased. Now, overall our non-tax revenues went down, but they would

have gone down a lot more if the value of this non-tax revenue hadnt



So youre not concerned that the Governments record as economic managers

may be undermined by predicating the surplus almost entirely on what everyone

used to regard as an asset sale?


Well the IMF standards say that its not, that it should be treated as

a non-tax revenue. Australian accounting standards say that it should

be treated as a non-tax revenue. Our Charter of Budget Honesty says it

should be treated as a non-tax revenue. Weve always treated it as a non-tax

revenue. All the other governments in Australian history have treated

it as a non-tax revenue and theres no other way to treat it. So if somebody

could find an accounting standard which treated it differently I suppose

we could enter into it, but there is no other way to treat it. And to

say, oh well you shouldnt count that, you shouldnt count what you are

going to get from spectrum sales but you should count what you are going

to get for dividends, or you shouldnt count what youre going to get

from fees and licenses which we have always counted but you should count

one-offs in the East Timor expenditure, is really just to say that you

will try and rewrite expenses and revenues. This is the way it has to

be treated.


Treasurer, what would the bottom line have looked like without the windfall

that you saw revise up?


Wed have probably been paying off, I think were paying off $9 billion

worth of debt. If this area had been down, it depends on what had happened

in other areas. If we had got normal dividends out of our companies, wed

have probably got another $4 billion this year, but the dividends were

down. Luckily we can cope with lower dividends and when those dividends

return to the Budget next year I am sure youll all say that they are

properly counted.


But what would the underlying cash balance be on last years estimate

of spectrum sales (inaudible)?


Well, my point is this, you cant say lets assume everything in a Budget

is constant except for one particular individual item. What would the

underlying cash balance have been if we hadnt put a force in to East

Timor? What would the underlying cash balance have been if, for example,

the Government hadnt put up family allowances? I mean, you can abstract

all of these things, but a Budget takes into account everything that is

going to affect the particular budgetary year. And this is one area where

non-tax revenue is greater, and there are other areas where non-tax revenue

is less. If you want to look at it in historical terms non-tax revenue

is actually down this year. What would the bottom line have looked like

if wed had a historic return on our dividends? It would have looked much



Treasurer, why do you factor in the spectrum sales when you havent factored

in the further sale of Telstra?


Because, under IMF and Australian Accounting standards you have to factor

in license fees, whereas you shouldnt factor in asset sales. And this

is a license fee. This is a license fee. Not selling off the spectrum,

the spectrum is owned by the Government. What you do is you license somebody

to use it and when the license runs out you will presumably license somebody

else to use it. Now, I dont write the accounting standards, theyre written

by the IMF, thats the GFS accounting standards, and the Australian accounting

standards are written by the accounting standards bodies, we report against

them. You cant report against anything else. That is the way you have

to report. In fact if you didnt report against them you would be in breach

of the accounting standards. You cant do anything else.


But why did you choose not to factor in the further sale of Telstra?


You cant factor in the further sale of Telstra to your bottom line under

the GFS, which is the IMF standard, the Australian accounting standard.

We factor it into our balance sheet though, we factor it in here. Not

in this particular year because we are not anticipating any proceeds from

T3 in this particular year, but in these particular years we do factor

it in. It doesnt go into the statement of revenues and expenses, but

it goes into the debt position. As I said, we get our debt factor position

back at the end of this year, 7 per cent of GDP. Our target was 10, as

you know, so we exceed it. This will illustrate to you what would happen

with the sale of Telstra. Let me tell you what would happen with the sale

of Telstra 3. You would eliminate all Commonwealth debt. The interest

payments on Commonwealth debt would go to zero. If we are paying $6 billion

in interest payments now, when you pay off Commonwealth debt, youd get

a $6 billion per annum saving in your interest payments.

Now, the flipside of that is youd also get, incidentally, a telecommunications

company which wasnt hamstrung, which if I may say so, is an even more

important point. Telstra is a company now which is investing heavily in

internet and electronic commerce. But unlike any other company in the

world, which can invest in electronic commerce and internet, it cant

exchange equity for equity. It cant do that because there is a limit

on the equity of Telstra which is available. It has to do it by debt.

And as a result it is being absolutely hamstrung by its Government ownership.

People have got to realise this. It is not just a question now of owning

a telephone company, the Government now has a 50.1 per cent in a company

which is increasingly becoming an internet company, which is where its

profits are going to be generated. And why would a Government want to

have a 50.1 per cent ownership in an internet-type company, which is,

as you would have seen in relation to recent movements on the NASDAQ a

pretty up and down business?


Do you think Telstra share prices will continue to slide if the Government

cant break through this hybrid ownership structure?


Well, its not helping Telstra.


Do you think it will it continue to slide?


I dont want to do anything that is interpreted as moving a share price

one way or the other, and I

want to make that entirely clear.


But is that a factor in why the share price has been coming down?


But Ill make this point. It is not helping Telstra, that alone, almost

alone of the telecommunications companies of the world when it wants to

go into internet business its got to buy businesses with cash because

it cant swap equity. This is the problem with Telstra, its got to buy

with cash, it cant swap equity because it hasnt got another share that

it can put out and dilute the shareholding. So youve got telecommunications

companies all around the world, you know, Bell South, and New Zealand

and in Britain and everywhere else in the world, which are now going into

what is going to be the industry of the future. And Telstra alone of all

those companies cant match them.


Treasurer, the Australian dollar (inaudible) close to 58 cents today.

How this Budget is received will likely have an impact on the dollar.

How do you expect markets to receive it, and why do you expect them to

receive it well?



Well, I think that the markets like anybody else should look at a economy

which has come off a little in its growth rate but is still growing at

3 – per cent. An economy which has low on-going inflation, with a tax

system which is going to be modernised. With a debt position which exceeds

anything you would find in Europe, America or Japan. With fiscal discipline,

a Budget which is now in surplus for the fourth year in a row. But although

they are good measures, targetted measures, and I think that when you

look at the fundamentals of the Australian economy they are strong fundamentals.

Now you and I know as much as anything that in markets there is a whole

heap of factors that move markets. But and Ive said this a thousand times,

I think you ask me about the level of the dollar every single day and

I think every single day I say to you I dont comment on the future of

the dollar and over the long run fundamentals come into play, but in the

short term there is a lot of sentiment. And I dont want you to interpret

that any differently to the way you would interpret it on a daily basis

when I give you that answer.




You ask me every second day about the dollar.


To what extent are your forecast (inaudible)..predicated on a continuing

weak dollar?


Its not so much the value of the dollar that is the basis for our export

figures, it is the strength of the world economy. Weve lived through

in 1997-1998 the greatest financial crisis of our generation, post World

War II generation. And weve lived through the eye of the storm in Asia,

and, of the economies of Asia, Australia was the only one that kept growing.

In fact, as you see there, it actually speeded up. But it was mainly done

because domestic demand was strong. The good thing for us is, as the world

economy peaks up and exports strengthen then domestic demand can come

off. That is a good thing for us. There has been a lot of talk in financial

markets that the world economy strengthening is somehow a bad thing for

Australia. Look, let me make this point, a strengthening world economy

is a good thing for any exporting nation.


So why are interest rates going up?


Look, you know, there has been a lot of talk about the world economy.

The world economy is growing stronger than it has probably for five or

more years. The US economy is strong, Asia is coming back and that is

whats good for our exports. And thats not a bad thing.





Why scrap the Timor tax, if you had some good polling? It certainly would

have made your thin-air surplus look a little bit better.


Well. I have no polling on the issue nor would I every poll the issue

and frankly I dont think you should even suggest it. I can say to you

without a shadow of a doubt we would never ever poll an issue like that.

Never have never would. And I am sure if you did it wouldnt show the

implication of what was behind your question. We said to the Australian

people this. Were going into East Timor. East Timor is going to be a

heavy commitment. It is going to be about $1 billion a year. And in the

year 2000-2001 that billion dollars will throw this budget into deficit

for a whole host of reasons. Mostly because of the intransigence of the

Senate which had blasted by that stage $1.8 billion of damage on the budget

per annum commencing in this year. We said to the Australian people we

want to ensure that our troops lack for nothing in East Timor and we want

to keep the budget in surplus. And thats why, as a one-off measure, for

twelve months only there will be a levy to keep the budget in surplus.

And it will keep the budget in surplus to the tune of about $400-$500

million. Since November of last year the Australian economy has grown

stronger. Our tax receipts have grown. Our non-tax revenues in some areas

are better than we expected. And the budget will unequivocally be in surplus

without the levy. Now I think it is a matter of keeping faith. If you

say to the Australian people we need a levy to keep the budget in surplus

and the budget quite plainly is going to be in surplus without the levy,

the Australian people would be entitled to say to you-you introduced it

when you thought you needed it, but if you dont you shouldnt proceed

with it. What would keeping the levy have done? Keeping the levy would

mean that this year all other things being equal, rather than running

a $2.8 billion surplus, we would have run a $3.7 billion surplus. Rather

than having paid off $50 billion of Labors debt, wed have paid up $50.9

billion of Labors debt. But what, who said that. You said that.


This is an income tax cut(inaudible)…going to affect the top(inaudible)?


I thought your question was this. Why didnt you keep the levy to strengthen

your fiscal position? If you kept the levy and spent it on the bush what

would that do to the fiscal position?


Im offering you alternatives.


You wouldve had the levy and the same fiscal position. Thats what you

would have had. But if youd have taken the $900 million in and put the

$900 million out, you would have had precisely the same fiscal position

with a levy in place which you had told people was for the purposes of

East Timor and they suddenly found once it wasnt needed, had been squirreled

away on something else. I actually think this is a matter of keeping faith

with the Australian people.


If we tell the Australian people that they need a one-off levy to fund

East Timor and keep the budget in surplus and we fund East Timor and the

budget is in surplus without it, I think we owe it to the Australian people

not to proceed with it. And to have bagged the levy and spent it elsewhere

I think would have been a real breach of faith and thats the kind of

breach of faith we dont want to engage in.



Analysts believe that the spectrum would raise a lot more than your estimate

of $2.6 million. Do you suspect thats to be the case and if so will that

give you a substantial election budget?


Well two points. One is I dont put valuations on the spectrum. We have

been in the process, as I understand it, and Im a layman, there might

be higher tech people here than me, but this is my understanding. As technology

improves people figure out ways to use the spectrum which previously had

no commercial advantage but now do. And since 1996 weve been allowing

competition on the spectrum, thats been our policy. And back in the old

days we used to give it away but we think now that a better way of getting

a better tax return for taxpayers is to say, whoever thinks they can make

a use for it can pay the Government a licence fee and use it. And thats

good for taxpayers. Now hang on. Weve been doing that since 1996 and

we had an auction go in 1999-2000 and it raised proceeds that we didnt

imagine it was going to raise. And so we then had to sit down and say

well if that auction raised over a billion, what is the one in 2000-2001

going to raise? And I did what I always do. I asked the experts to give

me their best figure. I do the same thing on dividends. When Im doing

a budget I write out to Telstra, I say whats the dividend going to be?

I write out to the Reserve Bank and I ask what the dividends going to

be. When the message came back from Telstra and the Reserve Bank it was

bad news, very bad news. And my day was only saved when the message came

back from our experts who looked at these licence fees. Now you ask me

will it raise more? I hope it would. Let me tell you why I hope it would.

Because from a taxpayers point of view we want to maximise for the taxpayer

these assets. But I dont think it will because the best advice I have

is thats the figure and thats why Ive got it in there.


(Inaudible)tax cuts and raise more?


Well I like to keep a good strong fiscal policy but lets not get into

new issues.


Treasurer, how does that fit in with the fact that you given the digital

spectrum to (inaudible)?


Well we actually charge as you know the TV stations licence fees. Thats

right. And then we mandated that they should double broadcast in digital.

And from my discussions with the television stations, they actually think

by the way that the licence fees they pay on an annual basis makes what

were getting for these spectrum licences cheap.

I asked the same question of a couple of television networks and they

actually think their annual licence fees, when you look at it over a period

of time, makes this look cheap. But, since Malcolm you work for News Corporation,

I dont suppose I can convince you of that.


Im just offering you another alternative.


Treasurer what would you say if to people like(inaudible)you said before

about the targetted measures and a lot of them are focussed on the bush

and rural health. What would you say to some people like government backbenchers

who have complained or suggested that the bush is getting an unfair focus.

What would be your message to them?


I think the measurers that weve got in here are decent targetted measures.

The principle one in here is the rural health package, More Doctors Better

Services. And that measure is $562 million over four years and it is basically

designed to try and get more doctors to service country people.


But metropolitan seat holders are upset(inaudible)


Okay lets talk about the metropolitan seat holders. What do we know

about metropolitan areas? One doctor per thousand people. What do we know

about regional areas? One doctor per fifteen hundred people. Youve got

to get enough doctors out in the rural areas to get the ratio the same

before you get equality . I dont think anybody could talk about special

treatment for the bush when its starting off at such a disparity. All

were trying to do, and Im not even saying that, Im not putting a projection

here as to what the outcome is, all were trying to do is in the area

of medical services which is on an empirical basis of a lower level in

the rural areas, were trying to get it up to the average. Nobody is getting

special treatment here. What theyre getting is the addressing of special