Transcript No. 99/13

Hon Peter Costello MP

Doorstop Interview

Wednesday, 3 March 1999

12.00 pm

E&EO

SUBJECTS: December Quarter, National Accounts, Budget, Heroin, Republic

TREASURER:

Well this is a great result for Australia. In the December quarter the economy grew at 1.1 per cent and through the year at 4.7 per cent to the December quarter. This was our fifth consecutive quarter of growth above one per cent and Australias economic growth leads the world. The average in the G7 is growth of 1.5 per cent. This is growth higher than Britain and France and Germany. The average in the OECD is 2.6 per cent. A very strong economic performance in the US but Australia leads US growth at 4.7 per cent through 1998. And this has been done in the face of an Asian downturn and recession for most of our major trading partners. We were carrying the heaviest weight and we ran our fastest race, in horse racing terms. And I want to pay tribute to Australias exporters who, in the most difficult of climates, have performed magnificently. When their markets were turning down in Asia, aided by a flexible exchange rate, they turned to other regions and the value of exports to countries outside Asia were up 43 per cent in the seven months to January of 1999.

The Australian growth has been kept strong as a result of strong domestic demand and the low interest rate climate in Australia has been a very large part of that. An Australian family on an average mortgage now has $4,000, after tax $4,000, of savings on their mortgage, their biggest expenditure, which has kept retail sales strong, and has aided confidence. In addition to that we have low inflation. The National Accounts today confirm an inflation rate at 1.6 per cent. Historical low inflation rates and growth in real wages is outstripping prices. So people have higher disposable income. They have interest rate as low as weve seen them in a generation. You have strong consumer confidence and at a time when the external situation was dreadful you had a strong domestic economy keeping things going in Australia.

Todays National Accounts demonstrate the benefits of good policy. You can see now the benefits of putting the Budget back into surplus; entering into an agreement with the Reserve on inflation; the reductions in interest rates; keeping our markets flexible. You can see the benefits of work which was done years ago in todays figures. And its the work that we do today which will reap the benefit in years to come. Now is not the time to stop. Now is the time to lay the foundations for the future in the way we started laying the foundations for now three years ago. This has been a terrific result but we have to keep working. There is no grounds for complacency. The external environment is still as hostile as its ever been in our lifetimes and thats why we have to continue to run good Budget policy; why we have to continue on the privatisation and microeconomic reform and why Australia needs a new tax system.

In the first 18 months of the Asian financial crisis I think Australia has weathered the storm better than most people predicted and as well as could possibly have been expected. To have a 4.7 per cent growth to the end of December has been a great result for our country and I pay tribute again to our exporters and those businesses that have produced it. We do not consider the great external challenge to be over and that is why its important that we continue to work on the things that will strengthen our economy.

Mr Costello putting aside the external situation that you talked about, domestically, is the domestic economy showing any signs of overheating and do you see the domestic economy going to slow at all?

Well, I think I said after the September National Accounts came out showing five per cent growth you wouldnt expect growth to stay at five per cent. Well, we have stayed at five per cent through to December. I still make the point, I am not forecasting either in this financial year or in next financial year five per cent growth. We have a figure out there for this financial year of, I think, 3 is our most recent Mid-Year review figure, and you would have to say on the basis of the first two quarters we will easily achieve that. If you look ahead to 1999/2000, we have forecast, our first preliminary forecast was 2- per cent. We will now sit down on the back of these National Accounts figures and try and put together a forecast for 1999/2000 which well be releasing in our Budget in May. We dont think that the external crisis is over. And we do expect that it will have a dampening effect on Australia, as it most probably already has. Youve got to ask yourself the question what would Australian growth have been in the last year if Asia had been booming? Which would, you know its a very interesting question to ask yourself. But we do expect that, the crisis not being over, that there will be an effect and we dont expect five per cent growth to continue. So I would expect things to slow during the course of 1999/2000 but profiling how that occurs is the trick. But I make this point: lets suppose it slows to around threes. That would be a fantastic result for Australia. To come through a situation as we have where Singapore is in recession and Hong Kong is in recession and Japan is in recession and Korea is in recession, New Zealand is in recession, when the region is in recession and to have growth “slowing”, in inverted commas, to three per cent would be a fantastic achievement.

Mr Costello in this framework, or against this background, what do you see as the imperatives for this Budget that youre about to start putting together. Whats the sort of broad parameters?

Well the first imperative I think is to hold the fiscal position. The Australian Budget was in surplus last year. It will be in surplus this year and our budgetary policy is to keep it in surplus right across the forward estimates which was the next four years. Thered be six years of surplus. Now, remember this, were coming off seven years of deficit and some of those deficits were huge deficits. Under the last seven Labor Budgets the accumulated deficits were something like $70 billion. Now, we have to wipe those deficits out during the growth part of the Australian cycle. And actually we can do it. If, when we came to office Commonwealth debt to GDP was 20 per cent of GDP. We have the Budget on a path to halve that. That was my first goal, to halve it in five years by 2000/2001. We are on track to do that. With the privatisation of Telstra we can take it a step further. We can practically eliminate Commonwealth debt. That is, we will have totally reversed the $70 billion accrued deficits of the last seven years and improved on it. Now, I mean, theyre the two possibilities that are in front of us. So I think the important thing in the Budget is to maintain that fiscal position which is surpluses across the forward estimates. I think its also important associated with the Budget to secure the revenue base, because thats got a bit part of the forward estimates in the future.

What does this mean for spending?

Well it means that we are going to maintain a tight rein on spending. Our revenues by the way, the path that weve got our revenues, is not to increase revenues. The Budget had been brought back in surplus by restraining spending. Weve got Commonwealth outlays to GDP falling on current projections back to the pre-Whitlamite levels. I mean, have a look at where we can go, we have the opportunity to go pre-Whitlamite. If you think that a lot of the rot in Australia set in with Whitlam, which I do, in economic terms in 1972, we can go pre-Whitlam, we can, we can sort of improve the situation back to the best that it has been in thirty years in budgetary terms.

Well there is a bit of a problem with that isnt there. Two of the components of GDP that kept growth going, private consumption and Government consumption, and the one component, the one big component that detracted from growth in this quarter is business investment. How long can private consumption sustain growth in that situation? Secondly, if you are going to put a tight rein, as you said, on Government spending, doesnt that make the outlook for growth adverse as well? And thirdly, how is the outlook for growth in relation to business spending affected by the possibility of the reduction in incentives for new investment?

Well, I will try and remember all of your questions. The first one, I think, was about business investment and its contribution to the National Accounts. Business investment has been growing incredibly strongly for seven years, and I think the business investment cycle is maturing, and I think thats one of the things that the National Accounts today show. But its at historically high levels. Its at about the level of 11 per cent of GDP compared to an average in the 90s of about 9 per cent. So it is maturing, but if it is staying up at those levels, it is still staying at historical levels. The second point is on the reining in spending and the effect that that might have on growth. Were making our forecast based on current patterns, which is very disciplined spending. And looking at those forecasts, I think that is quite consistent not-withstanding the external situation, with continued growth. As I said, if the greatest Asian downturn in our lifetime slowed Australian growth to 3 per cent, is, it would be a phenomenal outcome. That is almost the long-term growth average of the Australian economy, and it may be that, absent Asia, when Asia turns, it may be that we can kick the long-term growth of the Australian economy up a notch or two. Maybe thats what we are starting to see come through here. Now, we have to keep a tight rein on spending. Why? Well we have got to keep our Budget in surplus at a time when you are having pressure on the current account, its a point that I have always made. Youve got to keep your Budget in surplus if you want to run a low interest rate policy, and frankly when it comes to private demand, I think, low interest rates are the significant factor. I think thats whats given us the demand in the last three years. It is not big Government expenditure thats pumped up demand in the last three years, its been the low interest rate policy of getting interest rates down and keeping them down, and giving them that kind of assurance. So thats why we need to do that. Your other question was about, I took it was rather about tax and business investment. Let me make this point: that the Governments tax package – A New Tax System, introduction of a broad-based goods and services tax – is estimated to cut the cost of investment. The estimate that we have put forward, and I dont think anybody has seriously challenged, is that the cost of investment falls 3.2 per cent under the new tax system. It is itself an aid to investment, investment goods, plant and equipment, falls under the Governments new tax system. That is one of the reasons why we are doing it. May I also make this point, and I ask you to bear it in mind in the light of some of the comments I was making on the current account deficit yesterday. The Government’s tax policy, A New Tax System, cuts the cost of exports. I mean, the Opposition was running around yesterday saying, things are bad, therefore we should do nothing.

You know, the economy is bad therefore we shouldnt change the tax system, we shouldnt change the labour market, you know, we should oppose Telstra privatisation. I say things are strong but we still need to work harder. They say things are bad so we should do nothing. I mean, how could you possibly say in a current account deficit you are against the tax policy, which states embedded indirect taxes off exports.

Do you find the BCAs contribution to the Business Tax Review debate yesterday helpful in your thinking about the options between a lower company tax rate and tax concessions?

I welcome everybody’s involvement and, you know, I read it all with great interest.

Do you think it is really feasible to allow them to pick their own tax system?

I dont think you can operate dual tax systems. Im not sure you can allow companies to choose it any more than you can allow PAYE income earners. PAYE income earners are likely to say, why cant we choose our tax system too. The tax system is a tax system. Bear this in mind, when a Government runs a tax system, it puts it in law and everybodys entitled to change their arrangements to comply with the law, but its the law that applies to all taxpayers. You dont have law A, law B, law C or law D, you know, multiple choice opting in or out.

Mr Costello we have had a very long upswing now on our business cycle. How long can it continue?

Well, you really have to ask yourself what are the risks I guess. The risks are the external environment. I have never underplayed this, and, you know, I make this point again. Asia is in a bad state, outside China, and you can take your own views on China, practically every economy is in recession, possibly depression in some countries. I wouldnt proclaim that Asia is yet turning, I think some countries are turning and some countries still have deep-seated problems. We have been through, I guess the way Id put it is, you know, its hard to think how much worse things could get on the external front isnt it, with Asia, Russia, with Brazil, with the volatility on the exchange rates. So weve had those terrifying experiences. What other threats do you see? Well obviously the US economy, which has remained strong through this period. If that were to turn down that will also have an effect and I think people will want to make sure that stock markets reflect underlying realities. I think in Australia incidentally, we havent, weve seen steady stock markets, we havent seen volatility one way or the other. So, Im not talking so much about Australia but, you know, world stock markets. They seem to be the threats, but I think the thing that would worry me the most is if we sat down and we said, well look, we had a huge handicap and we did our fastest time, lets rest. There is no room for complacency. When we started putting the Budget back into surplus 3 years ago we didnt know about an Asian financial downturn. We did know we had to right our own domestic house and arent we glad we did it? Now if we were to sit down and say, well look, weve weathered all of the batterings, it cant get any worse, therefore well stop, it would be, in my view, the wrong lesson to learn. The lesson that we should be learning now is weve just got to keep on going. You get, you know, you get your nose in front and you try and extend the lead to a head, and then a length, and try and make it ten lengths if we can. But lets not just stop.

Is that the difficult thing with your colleagues Mr Costello, because the domestic economy is booming, getting that feeling of, that youve still got to tighten fiscal policy?

Well, I think it would be a mistake to say, well the economys strong weve weathered the storm, lets relax fiscal policy. Yes, I think that would be a mistake. That would be a mistake in the light of the current account. You know, to say for example we have Australia on a path to reduce debt to GDP, we can now stop. I mean I would like to take a situation, do you realise we have a situation with the privatisation of Telstra where we could wipe out Commonwealth debt? How many other countries in the world have no central Government debt? None of the G7, none of the Europeans. We could just go eight lengths of the straight in front of other countries on that. We have an opportunity to get a new tax system. In many respects were trailing the world there, so you know theres one opportunity to use my horse racing analogy, where we could round the bend and run the straight and catch up with them. But, if we were all to sit down now and say well thats enough, wed be making a fundamental mistake.

Mr Costello, how hard is it to frame a Budget which is brought down in early May when both, on the revenue front, admittedly the long term revenue front, but the revenue front is entirely uncertain because of the tax packages fate in the Senate and for that matter Telstra too? Did this have practical implications for the framing of this Mays Budget?

Well, we can only frame a Budget, and we always do, on the basis of Government decisions. When I announce a Budget and say were going to, lets say, cut expenditure here, there or everywhere, our bottom line has all of those built in. They dont always go through the Senate, by the way, but you can only do a budget on that basis. You are budgeting Government decisions. And therefore when we do our forward estimates, particularly the big tax changes which occur in 2000 2001, not the coming year but the year after, the forward estimates will have our decisions in them. Which means that every defeated measure affects those forward estimates. Theyre not forward estimates on, you know, the assumption that the Government will be defeated. They are forward estimates of what the Budget will look like if Government decisions are put in full. Now this is always, I havent changed this, this has always been the way. Its the only way you can do it. I cant have two sets of forward estimates for 2000 2001, one if the tax package passes and another if it doesnt. I mean, youve got to do the work yourself to see what it would look like if it doesnt pass, or if somebody tries to blow holes through it. Now that is the way we do it. Now, theres a point I make to the minor parties in the Senate. You know, if you are a Government, you are actually accountable and you are trying to run Budgets, you just cant play around with these huge sums as if it has no effect. It will have an effect. It will have an effect on our Budget numbers, it will have an effect on the way in which investment is viewed in this country. It will have an effect on all sorts of things. Let me give you one very practical effect. There are a lot of businesses now that are entering into contracts to sell goods or services after July 2000. They are entering into those contracts as they are entitled to do, on the assumption as to what the tax system will then look like. If the Senate changes that tax system, they will be dislocating tens, hundreds of thousands of contracts. You know, you dont just turn the tap on and off on tax changes. You know, from the enactment of legislation, there are long lead times. We are already into those lead times. It is why, by the way, we said you would have to enact legislation by June of 1999 if you wanted to apply it from July of 2000. A tax, you know, a tax rewrite is not something that can be turned off or turned on at whim. There are long lead times, the water is in the pipe, the contracts are being entered into and if people think that they can just sort of, you know, cut it in half here or add bits there, there will be enormous commercial dislocation. And the point Ive been trying to make to the minor parties in the Senate, which is why, you know, which is why when it comes to Government Budgets and Government tax matters the accepted practice has always been that Government tax policy should be accepted by an Upper House.

(inaudible) that because theres a link between fiscal policy – and in particular the bottom line – and the current account, or the way in which its viewed, are you suggesting that one of the implications of uncertainty about future of the tax package and the possible sale of Telstra might effect the way in which Australias current account deficit is seen through the link with fiscal policy?

Well I think, one of the things that has been enormously good for confidence in the Australian economy has been our Budget position. To have the Budget in surplus and to have forecasts achievable, realistic surpluses, has been very important for international confidence. Now, I made this point before, if we had our Budget now in deficit, if wed gone into an Asian recession with a $10 billion deficit, things would have been savage for Australia. Now, flick that lesson forward and say that if we want to maintain confidence in the Australian economy we have to maintain those surpluses. And if we didnt maintain a decent Budget position you would burn up a lot of that confidence.

Mr Costello, do you see any merits in a heroin trial?

Look, let me say, that like all of the Government and I think probably like all Members of Parliament, I believe heroin is a scourge which we have to do everything in our power to meet. And the Government intends to do that under the leadership of the Prime Minister and I support all of the measures that the Prime Minister has announced and he will have my full support in implementing them at the Premiers Conference and elsewhere.

Mr Costello, a Newspoll has come out saying that the majority of people are in favour of a directly elected President. Do you think this spells the end of the referendum? Is it destined for failure?

No, I dont think so. You know my view. I think we should modernise our constitutional arrangement and you have an opportunity, we have an opportunity to do that and of course I will accept the peoples verdict. I wouldnt call it one way or another, but I would make one point. There are some supporters of directly elected Presidents that say, defeat this referendum and youll get a new referendum for a directly elected President which you can all vote for shortly thereafter. I wouldnt guarantee that. I wouldnt count on that. Takes a long time to get a referendum and to get a referendum youve got to get it through two Houses of Parliament and youve got to get a Government that will put it to the people. This idea that you can defeat one and snap your fingers and get another defies experience. It is not the Australian experience, once something has gone to a referendum and lost, that it be put back in the same or similar form. It generally dies and theres an awfully big assumption if you want to take the luxury of saying, if we dont like this one well get a different choice in the immediate future. That might be a really big luxury. Anyway, before this press conference goes too far, thank you very much.