TRANSCRIPT

 THE HON PETER COSTELLO MP

TREASURER

Press Conference

Treasury Place, Melbourne

Friday, 10 September 2004

12 noon

 

TREASURER:

Today I am releasing the Final Budget Outcome for the financial year 2003-2004.

It is the outcome as at 30 June 2004. The Australian Government recorded

an underlying cash surplus of $8 billion in 2003-2004.

This was $3.5 billion higher than estimated at the time of the Budget.

Half of that was on the revenue side, about $1.8 billion, mainly from unincorporated

small businesses, which showed higher profitability than we expected at

the time of the Budget. The other half of it was on the expense side, that

is expenses were about $1.7 billion less than we expected.

This was right across the board in the take up of programmes, and also

in the take up of pharmaceuticals.

The consequence of that higher cash surplus for the year ended 30 June

2004 is that Government net debt fell again, and it has now been reduced

by $73 billion over the term of the Coalition Government.

The Commonwealth net debt to GDP of 2.9 per cent is the lowest since 1977.

So, our net debt to GDP is the lowest in something like twenty-six years.

The Pre-Election Fiscal and Economic outlook, which is being released today,

updates projections for the current financial year, that is 2004-05, and

across the forward estimates.

Coming off that stronger than expected outcome in 2003-04 the pre-election

fiscal outlook updates the expected bottom line on the basis of decisions

already taken, and projects an underlying cash balance in 2004-05 of $5.3

billion.

The revisions up in relation to that are primarily on the revenue side,

coming off the stronger than expected result in 2003-04.

Today I am releasing a statement on ‘Investing for the Future’. This statement

sets out the way in which the Government proposes to use Australia’s strong

economic position to invest in the future. We propose setting up with future

surpluses, a Future Fund . A fund which could be used to

invest in assets, and start funding future superannuation liabilities, which

the Government is incurring now, but don’t have to be paid for twenty, thirty

or forty years. Our net debt is now low, at 2.9 percent of GDP. And so we

have now determined that future surpluses will be invested in a fund which

will be available to begin funding the Commonwealth’s unfunded superannuation

liabilities.

The Commonwealth had unfunded superannuation liabilities of $88 billion

as at 30 June 2004. And that is amazing numbers. We would have to pay $88

billion, and it means that over the forty or fifty years that you will crystallise

the value on one day, that is what the Commonwealth’s liability would be.

The Commonwealth Government has never fully funded its superannuation liabilities.

We are paying the superannuation liabilities which occurred thirty and forty

years ago, out of today’s recurrent expenditure. The plan was always that

we would pay the superannuation which we are incurring today, in forty year’s

time out of the recurrent revenue of forty years time.

What we are now planning to do is to establish a Future Fund

which will start funding those obligations for ten, twenty, thirty, and

forty years time, with the investment of the Government’s surpluses.

We know from the intergenerational report that a huge gap is going to open

up in ten, twenty, thirty and forty year’s time, between revenues and expenses.

If we start building a Future Fund now, we can start narrowing

this gap.

This is the most dramatic response to the intergenerational report which

we can now put in place as a consequence of Australia’s strong economic

position. We will be setting future generations up by funding the liabilities

that are being incurred today, with money from today, rather than leaving

the future generations to find it.

Most of the State Governments have already begun doing this, and our aim

is, with our Future Fund to be in a position to fund our

superannuation liabilities by 2020, as we begin to develop from now on.

The results which you see in the final Budget outcome in the pre-election

statement indicate that Australia’s economy is strong. Our Budget position

is strong and now is the time to invest in the future. To respond to the

ageing of the Australian population by strengthening the future and providing

better opportunities for all Australians.

JOURNALIST:

Treasurer, are you talking about entire surplus going to this fund, or

part of it?

TREASURER:

I’m talking about future surpluses, up until now, with surpluses what we

have done is we have retired debt. We have now retired $73 billion of that

$96 billion debt we inherited. What I am talking about now is future surpluses,

instead of continuing to retire the debt to build assets. To build an asset

in a Future Fund which can pay for the liabilities that

we are currently incurring that have not been provided for.

JOURNALIST:

So the whole lot?

TREASURER:

Well as the surpluses are available, yes to invest in the future.

JOURNALIST:

What about the money for this year though Treasurer?

TREASURER:

The money for this year is gone to retiring debt, and that has contributed

to the $73 billion retirement of debt.

JOURNALIST:

What guarantee is there if you need the money, so you don’t go back in

and ….

TREASURER:

Well, this is going to be important to future proof against future Governments.

To put it into legislation, and to lock it away for twenty years, so that

future irresponsible Governments can not try and get their hands on it,

and waste it.

JOURNALIST:

(inaudible).

TREASURER:

The aim is to invest in financial assets.

JOURNALIST:

(Inaudible) roll back into that fund?

TREASURER:

Yes.

JOURNALIST:

And what about the $3.5 billion that we’ve learned about today? Is that

going to debt retirement or will that be carried over into (inaudible)?

TREASURER:

The outcome, the increased outcome for the financial year 30 June 2004

has gone to paying down debt. That is the reason why net debt has now been

reduced further than we expected and is 2.9 per cent of GDP. And why we

have now repaid $73 billion of the Labor Party $96 billion debt. So we are

talking about establishing a Future Fund and investing

future surpluses.

JOURNALIST:

And that applies Treasurer to the entire amount that you have announced

today? You are saying that you won’t be dipping into this amount for any,

to fund any campaign promises over the next month?

TREASURER:

Oh well, I am not announcing what we are going to be doing in relation

to policies now. But I am telling you that future surpluses, and we believe

the Government should be running future surpluses, and we have laid out

a programme where we can run future surpluses. We don’t have to pay down

further debt because our debt now is so low. We have paid, we have repaid

$73 billion so what we would be looking to do in the future with those surpluses

is invest for the future in a Future Fund .

JOURNALIST:

Mr Costello in the past you have said that if there are surpluses available

after all requirements are met they should be returned to taxpayers in the

form of tax relief. Is that still your position?

TREASURER:

Well I have laid down the principle that if a government can adequately

fund its social obligations in health and education and security, if the

government can balance its budgets then the government should look at reducing

taxes which is what we have been doing.

JOURNALIST:

Is this…

TREASURER:

I also made the position that when you get a very strong financial position,

and we are now entering a strong financial position, we have repaid $73

billion of Labor debt. It is a lot of money. We can take the opportunity

now to build a Future Fund .

JOURNALIST:

Mr Costello, with the PEFO statement it has a, it reveals there’s I think

$20 billion extra above all over parameter changes over the next four years.

Does that indicate that there is scope for further tax cuts?

TREASURER:

Well, parameter changes essentially over (inaudible).

JOURNALIST:

Yes.

TREASURER:

And the reason why the estimates have been revised is we had a very strong

outcome. So essentially what they do is they see this strong outcome and

they make an assumption about what that means for the future and they revise

their parameters.

JOURNALIST:

It looks like there is some more money so do you…?

TREASURER:

Well it looks like because of the strong outcome they have revised up estimations

for future years. But…

JOURNALIST:

(inaudible)

TREASURER:

…if you are asking me to announce any new policies I am not going

to.

JOURNALIST:

Isn’t this a new policy? I thought the decision had been made today that

no new policies would be announced in the wake of the bombing yesterday.

Why are you announcing this today?

TREASURER:

Well because the Pre-Election Fiscal Outlook by law has to be released

today. And as part of that, to put it in context, the Final Budget Outcome

which has to be released by the 30^th of September is also released.

And because we are releasing the Final Budget Outcome it is necessary to

describe what will happen in relation to future surpluses.

JOURNALIST:

Mr Costello how would you distinguish your Future Fund

from the Intergenerational Fund proposed by Mr Crean in his Budget Reply

speech?

TREASURER:

Well there is no Intergenerational Fund.

JOURNALIST:

Who will be the fund manager of this new superannuation?

TREASURER:

It is, as we say in relation to the document, it is anticipated that management

of funds will be outsourced.

JOURNALIST:

And how do you lock that away from future governments?

TREASURER:

We will have to legislate it to keep it at arms length from future governments

which may seek, which may seek to waste it.

JOURNALIST:

So you’re happy (inaudible) at the moment?

TREASURER:

Well look, net debt to GDP is 2.9 per cent. 2.9 per cent. The OECD average

I think is 50 per cent.

JOURNALIST:

So there won’t be any more repayments of the debt? We have finished this

programme, this aggressive repayment of it?

TREASURER:

Well we released a report at the time of the last Budget or maybe it was

the one before that said that we would keep a gross position out there because

the financial markets need it for pricing. And once we have to have a gross

position out there then you will have to build an asset position otherwise

you wouldn’t have enough stock out on the market for liquidity purposes.

JOURNALIST:

Treasurer so you will maintain, (inaudible) the existing bond market at

the current levels roughly is that what you are saying?

TREASURER:

Yes. We will maintain the existing bond levels at the around about $50

billion.

JOURNALIST:

And will there be say $2-3 million of bonds released each year just to

sort of keep it ticking over or is there some idea like that?

TREASURER:

Oh yes. We have a programme to keep stocks with the varying maturities

out for 10, 15, I think for as long as 17 years.

JOURNALIST:

The Sydney Futures Exchange has had to limit some contracts because of

fears of manipulation as the bond markets contract. Is that a worry for

you?

TREASURER:

Yes. We want to keep liquidity in all Commonwealth Benchmark Bonds for

the purposes of pricing in the market and that requires an overall gross

position of around $50 billion.

JOURNALIST:

Will you legislate though just to say that 100 per cent of every surplus,

could you say how much of a surplus has to go to this new fund? Is it all

of it or is it…?

TREASURER:

Well it would be expected that future surpluses would be invested…

JOURNALIST:

100 per cent?

TREASURER:

Yes. That would be expected.

JOURNALIST:

Treasurer middle Australia won’t find this terribly sexy…

TREASURER:

Sorry?

JOURNALIST:

I wouldn’t have thought middle Australia would find unfunded super liabilities

terribly sexy. They might have been hoping for a further tax cut instead

from you?

TREASURER:

Well it is not my purpose to be sexy.

JOURNALIST:

Do you find these figures sexy?

TREASURER:

You know, we have got our Final Budget Outcome, we have got our Pre-Election

Statement, it raises the question about financial management. I am not trying

to be sexy, these are large sums and they have major implications for capital

markets. And I thought the best thing to do would be to indicate to you

the way in which we intend to deal with those issues.

JOURNALIST:

Mr Costello…

TREASURER:

And there are huge, can I just say, we are talking about very large sums

of money in Australia’s capital markets here, we are talking about, and

this is not sexy, it is a way in which you actually manage liquidity. And

we are talking about having $50 billion of bonds out there for financial

management purposes. Now, what are we going to line up as against that growth

position, and I am just announcing, having reduced debt by so much, having

now repaid $73 billion of the Labor debt, it is time to invest in the future.

JOURNALIST:

Mr Costello what about the forecasting ability of the Treasury, I mean

it only had a few months with the Budget and the figures, you have got billions

and billions of dollars that their forecasts are all out?

TREASURER:

Look, the Budget is a $200 billion Budget. A one per cent variation is

$2 billion. So, you are looking at a one per cent variation. Now these are

very large sums that we are dealing with here, you know, I am sometimes

amazed that in relation to future estimates they can get to 99 per cent

accuracy. See, a one per cent variation is a 99 per cent accuracy. Now,

would we like 100 per cent? Of course we would, but these are very large

sums.

JOURNALIST:

The figures coming out today show that inflation is starting to creep up

again, any concerns on that front?

TREASURER:

No, well, the statement that is made in the course of this document is

that high oil prices will feed into petrol prices, we know that, I have

said that over and over and over again. And the question becomes how long

will oil prices be as high as they are? Now, if you look at futures, people

are still expecting them to come down but if they don’t, yes, that is going

to feed into higher petrol prices and that feeds into your CPI basket and

the estimation that has been put here in this statement factors that in.

JOURNALIST:

And that feeds into pressure on interest rates as well?

TREASURER:

Well, you know, you always try and go one step too far, in my view, I have

told you what I have told you, it feeds into petrol prices.

JOURNALIST:

Treasurer, 3 ½ per cent growth and an $8 billion surplus, is it

fair to say now the economy is going gang-busters?

TREASURER:

I wouldn’t call it gang-busters, but I would say this; look, over the last

eight and a half years, the Australian economy has been as strong as any

other economy in the Western world and stronger than most, nearly all. And

that is because over the last eight and a half years we have had a very,

very active reform programme. It got us through the Asian Financial Crisis

and the US recession, and a hundred year drought. But you know, we have

got new challenges, haven’t we? We have got terrorism challenges, we have

got security challenges, we have got to keep our economy strong to get through

those. There are challenges that are going to come at us over and over and

over again. The challenges of today are going to be the security and terrorism

challenges. You know, how are we going to secure our country? We need a

strong economy to do all of these things.

JOURNALIST:

The PEFO…

TREASURER:

You have had a lot of questions, any one else want to have one before…

JOURNALIST:

Treasurer…

TREASURER:

Sorry, I will take two last questions and then you.

JOURNALIST:

…what about the impact on interest rates, do you expect there to

be any at all?

TREASURER:

Of what?

JOURNALIST:

Of today’s announcement about the extra surplus.

TREASURER:

Well, you know, I would have thought that today’s announcement just shows

that the Australian economy is strong and we are in a strong financial position.

JOURNALIST:

Treasurer, can you understand why some people would be concerned…

JOURNALIST:

(inaudible) these figures seem to cement your Government’s place as the

highest taxing in Australian history, is that the case, and is it somewhat

paradoxical for a Liberal Government to be in that position?

TREASURER:

Of course it doesn’t cement it. I mean, revenue, go to page 1, of the FBO,

revenue to GDP, 2002-03, 23.3 per cent – outcome this year, 23.1 per cent.

Tax fell in 2003-04 as a proportion of the economy. Go to the PEFO, the

PEFO forecasts in 04-05, for it to be 22.9 – in 05-06, 22.6. We are, according

to the Treasury figures, forecasting revenue to GDP to fall over the course

of the forward estimates, just as it fell in 03-04. You know, with all due

respect, and I know there are some people who you know, repeat that claim,

that is wrong, completely wrong. On a consistent basis, revenue to GDP is

falling.

JOURNALIST:

Treasurer, can you understand why some Australians would think that our

Government’s involvement in the war on Iraq played a part in us being targeted

in Jakarta?

TREASURER:

Look, you know, I don’t believe that is true for a moment. The Iraq deployment

was in March of 2003. The Bali bombing was in October of 2002. Australians

were bombed in Bali, in Indonesia and killed, 88 of them, before there was

any engagement in Iraq. And to say that Iraq could have contributed is quite

wrong. We were targets in Indonesia, in Bali, before there was any deployment

in Iraq.

JOURNALIST:

Do you think it has something to do with Afghanistan then, Treasurer?

TREASURER:

No I don’t. Inside the terrorist mind, there is a sickness that regards

free people as somehow a threat. Terrorists don’t like free people. They

don’t like secular governments, they don’t like open societies. They want

to establish closed societies, where women are suppressed, and they resent

those societies that don’t abide by those rules. We are a terrorist target,

not because of what we have done, but because of who we are.

JOURNALIST:

Shouldn’t we…

TREASURER:

We are a freedom loving people who believes in an open society and these

are sick people. They regard that as a threat. They are not logical people.

JOURNALIST:

Treasurer, there is some suggestions that the attacks could impact the

Indonesian economy, would that make Indonesia more of a threat?

TREASURER:

I am not going to go into economic (inaudible).