Transcript No. 99/32

Hon Peter Costello MP

Budget Lock-up Press Conference

Tuesday, 11 May 1999

4.30 pm

SUBJECTS: Budget

TREASURER:

Thank you for coming ladies and gentlemen. This is the fourth Budget for the Coalition Government and when we sat down to put this Budget together the Government decided that first of all we would have a responsible economic document. The Budget that was right for the times. Something that would give us a stage to enter the 21^st Century, much as we entered the 20^th Century. With high living standards, with opportunities, a young, a dynamic nation, and we could be a nation without debt.

We also decided that it would be a Budget in which we would fulfil all of our election promises and we publish with this Budget a document that announces all of the pledges we made during the election and shows how in this Budget we meet them all. And of course we want particularly to meet the promise that we made to the Australian public for a new tax system. Only the Senate now stands in the way of the Government delivering in full, on time, on budget all of the undertakings that we made to the Australian people in the election of October.

I think Australia could be on the eve of a really significant period in its history in the first decade of the next Century. As you can see from these charts, our major trading partners have never had a worse year than 1998. And we hope that Asia has bottomed and that world growth will start returning in calendar 1999 and stronger still in calendar 2000.

Notwithstanding that our major trading partners have never had a worse year, the Australian economy has been strong and remained strong, in fact it strengthened. This shows from 1996 that the Australian economy grew in 1997/98 and 1998/99, it grew faster than Europe, faster than America, faster than the OECD, at a time when our East Asian region, which had always been a high growth area, first came to a standstill and then went into deep recession. And although we predict in 1999 average growth of 3 per cent well still be higher than the USA, than the G7, than the OECD and in Europe.

We have the opportunity with a Budget surplus and the sale of Telstra to do something we couldnt have dreamed about a decade ago. We can wipe out Commonwealth debt. If our Budget is in surplus and our asset sales are used to retire debt, by 2002 we could be a debt-free country. Since our Government was elected, in net terms we have not borrowed a dollar. Our Government was elected in 1996/97 and since then in net terms in four years we will not have borrowed a dollar. We have already paid back about $24 billion of Labors debt and we have the chance to eliminate it.

In world terms this will put Australia in front of almost the whole developed world. The EU/Maastricht requirements require debt to GDP levels under 60 per cent, the US is about 50, the OECD the same, New Zealand about 30, Japan, hitting the problem with fiscal stimulation, unfunded fiscal stimulation. Australia at 10 per cent to GDP ahead of all of the developed world, and with the Telstra privatisation, the possibility of being debt free.

In Statement 3 of the Budget we try and analyse some of the trends in the Australian economy and one of the things I direct your attention to is that there has been a step up in productivity in the Australian economy. In the 1970s growth cycle we were productivity increases about 1.5 per cent, during the 80s we were about three quarters of a per cent, productivity picked up during the early 90s but in the last two years productivity growth has been about 3 per cent. If we can maintain productivity growth at those sorts of levels we can lift the long-term speed limit of the Australian economy and we can cut the long-term averages of unemployment. We predict that unemployment will continue to grow in 1999/2000 but not the same rate as growth comes off as in the previous year, keeping unemployment stable, still the lowest its been in the decade, but on the eve of the turn up in growth in the next part of the next decade, real opportunities for Australia – real opportunities for Australia to do something that we havent done for a very long time. Spending is kept in this Budget essentially to election promises. Weve kept I think a responsible and prudent control on spending. Outside of our election promises we have been able to deliver new initiatives in education and in medical and science funding. I want to particularly highlight the medical and science funding because this is something which we are very excited about as a Government. We think that bio-technology and Australias position as a leader in medical research, positions us for one of the industries of the future and we are determined to build Australias health and medical research capacity. This will give us, with a strong scientific background, a strong medical background, a strong agricultural background at the cutting edge of these frontiers, a real opportunity to develop what could be a great industry for our country.

As we go into the 21^st Century I think there are reasons for a lot of optimism in this country. I dont want people to think everything is rosy. There are reasons for a lot of optimism as long as we keep the good policy going. If we were to sit down and say its all over, pat ourselves on the back and say we can stand still for the next decade well lose it. But if we take the opportunity to keep reform going on the eve of the 21^st Century with a Budget which I think is right for those times, the first decade of the 21^st Century could really be a great opportunity for Australia and thats the way the Government sees it.

Treasurer at what level would you like to see your initiatives on private health insurance lifted on the overall rate (inaudible).

Well I think weve probably arrested the decline in private health insurance membership and there is some evidence that weve turned it, I think lifetime community rating will be very significant in encouraging people into private health insurance. You have got twelve months to join and if you join you join at the lowest age, the notional lowest age, and you get lower premiums throughout your life. If you dont join within the next twelve months then your age for joining purposes will be whatever it is at the time of joining and that means that it will be more expensive on a community rated basis for life. So thats a very strong incentive. Theres this window of twelve months from 1 July 1999 and in particular were trying to say to young people that we want young people to make health insurance a habit. When you leave school and you get your first job, its time to take out private health insurance. Thats the message that we want to give to young people.

Treasurer, do you believe you have done enough to make Brian Harradine happy?

Well when we form a budget we are conscious that we are running an economic policy for the whole of Australia, for 18 million people, and thats the way we targeted this. Its our duty as a Government to look to the national interest and so we dont shy, in any respect whatsoever, saying that we are doing what we consider best for Australia, for all 18 million of those in Australia. Now Senator Harradine no doubt will read the Budget like everybody else and form his views. But I hope that hell form the same view as I do, that a growing economy with a good budget policy, low inflation, the lowest mortgage interest rates in 30 years, the opportunity to wipe out Commonwealth debt, standing out in a region which is in recession, 180,000 jobs created in the last year and the possibility of further in-roads into unemployment that this is the decent, right, responsible budget for the times, and thats the way we framed it.

But does it do enough for poorer families?

Well, lets go through poorer families. The best thing you can do for families as I think I say in my budget speech, is keep interest rates low. Young people can buy homes and those with homes can hang onto them because interest rates are at historic lows. You dont help families by running an irresponsible economic policy which will push up interest rates and threaten them with homelessness. Now in relation to the tax package, the new tax system, and bear this in mind, this is a budget, the budget year is 1999/2000, the tax changes start impacting in budgets from 2000-2001. So you are really asking me about not this years budget but next years budget, but under the new tax system not only are there income tax cuts for families, there are increases in the tax free threshold per child, there are additional family allowances and I think on any basis all of the indicators, all of the people that looked at it, realised that families are better off. I dont think theres been an argument that families arent better off.

Theres been arguments about pensioners, but I dont think anybody for a moment has suggested that under the new tax system families with children are not better off. They are and they are substantially better off.

Do you think you have done enough to address his concerns that the common Youth Allowance for the extension of the family tax assistance measure in this budget? It doesnt appear to go as far as what he would like.

Well, look we have an extension in this Budget to the legislation which is already before the Parliament and that extension is that for family tax payments children who are 19 and 20 will still qualify the family for those payments and if they happen to be on a part Youth Allowance, they can top up to the maximum of the Family Tax Benefit. Now that in my view is a significant extension. It comes at some cost. Its over and above, in excess of what the Government said in its election policy. Were in this funny situation now, where youve got a Government thats delivering 110 per cent of what it promised. Normally, back in the old days governments used to try and aim to deliver 30 per cent of what they promised or in the 1993 Budget, negative percent of what, no they used to deliver what they hadnt promised. Now we delivered what we promised and more, and you can always say that you should go further, 110 per cent is not as good as 120 per cent or 150 or 200 but at the end of the day youve got to run an economic policy too. You dont help families by running an economic policy at a time when we are staring down the barrel of regional recession, risking confidence in the Australian economy, risking growth, risking jobs, risking interest rates. That would not be a family policy and we have to do this on a national interest basis.

(inaudible)

Well, if I could just make the point about the surpluses. This year for the first time we go to accrual budgeting and its been an enormous effort to go to accrual budgeting. Its worth it. The only other countries in the world that do it I think are New Zealand and Iceland and somebody else. The Brits are talking about it. The Americans are looking at it. Its generally considered the way all governments should move but were now in, you know, the three leaders in the world and can I just make this point about accrual budgeting. The good thing about it is that you budget for capital expenditure which you dont do under cash. Because you are depreciating your showing as an expense your depreciation of the capital asset, you fully fund capital replacement. So our forward estimates are going to be the most honest forward estimates in the history of the Commonwealth.

The second point Id make is we are now showing on our bottom line the finance about $1.3 billion for superannuation for public trading enterprise employees, which weve always been paying but never showing before. And if we werent doing that you could just add $1.3 billion to each of those figures in your bottom line. But were right to show it as an expense because it is an expense so we are guaranteeing them their super in the future.

But coming back to the outcomes the fiscal balance and the cash balance over time should be more or less the same and in this year they are. We have a surplus of over $5 billion. In 2000/2001 there is a divergence because under the new P-A-Y-G company tax system, companies are going to pay company tax when they put in their GST return.

Put in your GST return, you will get your assessment for GST, company tax, withholding taxes, one form all tax liabilities. Now that brings forward company payments which are currently in arrears. If you made them pay both during that period, companies would be paying double tax. So what weve said is that the accrued liabilities theyll have four to five years to pay off. So under the accrual system your accruals looks $4 to $5 billion better in that year and under your cash system you pick up that $4 to $5 billion at a billion a year thereafter.

So you get a divergence in 2000/2001 between the net fiscal balance which is a $7 billion surplus and the cash balance which is a $3 billion surplus. The cash balance is the money youve actually got in that year. The $7 billion is your entitlements. Now theyre both decent surpluses but I want to emphasise that these are the outcomes we are punting for, these arent sort of opening positions. These are the outcomes that wed like to see, we think these are the outcomes of a responsible fiscal position.

But how do you get the public to understand that when theyre seeing a big bucket of money and calls for extra compensation for pensioners and low income earners?

Well, when you say big bucket of money.

Thats how the public will see it.

Well look. We have a strong economy which has low inflation, low interest rates, strong growth, a budget in surplus and were paying debt back. We also have a current account deficit which is above 5 per cent, 5 to 6 per cent. Now the important thing to bear in mind is that we shouldnt lose sight of that. The world is not going to lose sight of that. We cant sit back and say well happy days are here again and we dont have to do anything. You know we can say this is a strong position but we must remain vigilant. And weve got to be vigilant about that current account. And the world will be looking at us and they will be saying if were not running surpluses ourselves why should they fund us through the current account deficits. So that is an area thats a cloud on the horizon that weve got to bear in mind. If we dont bear that in mind, if the world loses confidence in us, then it would affect our economic story and it would affect jobs for people, so weve got to keep the good policy rolling.

Mr Costello this, as you say, a decent surplus is in prospect. Is there some extra room for compensation?

Well look, I could go over the ground again, but todays, todays..

But could you just answer that question?.

Well I could Michelle, but todays Budget day, so lets talk about budgets.

If you dont sell Telstra, will there ever be another chance for zero debt?

I dont think so?

How long?

I dont think so. I dont think Australia would ever retire its debt axing Telstra. In five budgets Commonwealth debt grew by $80 billion. Just to get a figure in your head, Mr Beazley said yesterday he believes he would have a bigger surplus. He was Finance Minister for two years, one year he ran a $10.3 billion deficit and the year before a $13.1 billion deficit. He accumulated $23 billion in two years which was 25 per cent of Commonwealth debt. And this is where it all happened from 1990 to 1995/96. It went from roughly about $16 billion to $96 billion. It went up by $80 billion. Now if we produce surpluses of $5 billion a year, to pay off $80 billion how many years would that take you, five into 80, whats that, 16 is it, 16 years. If you were running a $5 billion surplus a year. Now with a $5 billion surplus, we can take off $5 billion and the next year well have paid down $10 billion and the next year wed have paid down $15 billion and the next year wed have paid 20. If you privatise Telstra you have a one off opportunity to wipe it out. Now if you dont privatise Telstra you would be looking at, I would say decades, if at all.

Do you want to retire all the debt wouldnt Australia be without a viable bond market? Its just a notional thing.

Well, no no I just want to make this point. It is a good point because thats why we always talk about net debt. It may well be that to keep your bond market going you will issue gross securities so that youve got a bond market and a benchmark interest rate. And you would balance that up with some assets so that your net debt would be zero. Now, weve actually got a proposal in the Budget for a Commonwealth Financial Management Agency. Because we are going to be, as part of this privatisation program, running both a bond portfolio and an asset portfolio were going to need a Commonwealth Financial Management Agency to do that. But, we do want to have gross issues out there so that we can have an interest rate market and yield curve.

So when were involved in inaudible.Japanese or US Treasuries or something like that?

Well, thats a matter that we will be looking at in our Commonwealth Financial Management Agency.

Treasurer whats the impact on the Budgets bottom line if you do not sell more than more than 16 per cent of Telstra, which appears political reality given the state of play in the Senate.

Its not so much the impact on the bottom line, the operating account.

to some extent.inaudible.

well, its not, its not. The impact is this, if you want to work it out, it is lost dividend less public debt interest savings plus costs of sale. Now, the point Im making to you is in the early years it doesnt affect the Budget bottom line so much, what it affects is that it affects the debt retirement program. Thats where it has its biggest affect, not so much in the operating account.

Now that weve made 10 per cent of the net debt to GDP ratio, are you going to set another target, say 5 per cent?

Well, we can make 10 per cent absent Telstra, and thats the target we set ourselves when we were first elected in 1996. The target Id like to set with Telstra, is zero. There arent that many countries in the world that would be in that position and not only does it put Australia in such a strong position, but its come back to this PDI point, you dont have to raise taxes to pay interest anymore. And I dont know, some Treasurer in the future will probably look back and say wasnt that a great thing they did back then, and take advantage of it. If you dont do that, what you are going to see is that you are going to see, if we dont bring it back this time, you will see what they call hysteris right across that graph, and the debt liabilities will just go.

If we dont break it now and we dont bring it back as low as it was then, it will just gradually eke up and in future you wont be sitting around wondering whether your taxes are going off on education or health or defence or anything else, theyll just be going on servicing past debts. Sorry last question over here.

.inaudible.has been quite stronginaudible..and continues quite stronginaudible….big tax breaks. How long is that sustainableinaudible..?

put pressure on?

interest rates.

Well, consumer spending, I think we forecast consumer demand in our forecasts in 1999/2000 at 3- an increase in household consumption. Thats a little down on this year. Consumer spending is very strong at the moment, it is extremely strong, its what is keeping our economy going, its being fuelled by low interest rates. And I think while you keep interest rates low Australians will still have money to spend. I think you will see continuing consumer demand. People are feeling better, they, look, dont underestimate a low mortgage interest rate. When this Government was elected the home mortgage interest rate was 10 per cent, now the standard variable is 6 per cent. You can get an introductory home loan in Australia today below 5 per cent. For the average Australian mortgage thats $320 a month after tax. They would have to earn something like $600 a month, have half of it disappear in tax to get that $320. They have money in their hands and thats whats keeping consumer demand strong.

But my point is more money in tax breaks.inaudible..current account deficit.inaudible.

Well, the current account deficit is a combination really of two things. It is a combination of weak export prices, because Asia is in recession and the world economy is low, and a strong domestic economy which means that we are still buying imports. Now, I think, its still going to be a strong domestic economy next year, although a little weaker than this year right. I mean, when I say weak the rest of the world would say 3 per cent, thats boom, Europe and the G7 would call 3 per cent a boom, Japan would call it, you know, all our dreams come home at once. But in relation to export prices, if the world economy recovers export prices will come back. I think youve seen a little bit of the export prices come back, and as the export prices come back they will feed in a positive way into reducing our current account deficit.

Ive got a question. Why did you inaudible..

Well, the Government looked at it, the Minister looked at it. The scholarships were not being targeted particularly at low income people, and after doing an evaluation they didnt find that it was having a major difference. And in view of all the other spending and particularly the operation of the HECS, any person can go to university without paying fees with an interest free loan, which they only have to pay back after their salary gets, I think, its up near average weekly earnings or some multiple there of. And we believe, and the Minister believes, that that is an effective scheme for students to get to university. Now, before you ask another one I am sure we said three questions ago that was the last question. So, thank you all very much for your time.

Ends.