Doorstop Interview

Senate Courtyard

Parliament House, Canberra

Wednesday, 28 February 2007

11.30 am

SUBJECTS: Global stock market downturn, global economy, nuclear energy, economic management, Budget, Productivity Commission inquiry into red tape

TREASURER:

When the Australian stock market opened this morning it fell by around 3 per cent, following leads overnight from other stock markets in turn triggered by events in China. What this illustrates is the interconnectedness of global financial markets. Whilst many shares will have dropped very considerably in value it is important to bear in mind this is a stock market which has increased around 19 per cent over the last year and fallen about 3 per cent this morning. The stock market is never a one-way bet, stocks can rise and stocks can fall, but the events in world financial markets illustrate how external events can trigger events in this country. I have spoken before about how external shocks can put pressure on the Australian economy, that is why we run an economy which is focussed on growth, employment, balanced budgets and low debt to make sure that we can withstand external shocks coming from other parts of the world.

I would expect that following events in China there will be a volatility on equity markets for some time, but Australia being one of the strongest performing economies in the world of course, is well braced to deal with those shocks which may be coming from overseas.

JOURNALIST:

Would you describe it as a rational exuberance on the markets (inaudible)?

TREASURER:

Well you have got to put this in context. The Australian stock market has gone up about 19 per cent over the last year. This morning it retraced by 3 per cent. So, of course it is still a long way in front of where it was a year ago. But anyone who thinks that a stock market is a one-way bet, that it always rises under all circumstances, has not looked carefully at equity markets. People have to be careful with their investments and the Government has to be careful with managing the economy. This is an event which started in China. It flowed into US financial markets and it flowed back into Australia today. And it illustrates just how globally connected financial and equity markets are around the world.

JOURNALIST:

Do you think it has any wider ramifications for the economy?

TREASURER:

Well I think that the lesson that I would draw out of this is that the stock market is not a one-way bet, there is no such thing as a one-way bet in terms of investment. That is the first thing I would draw out of it. The second is it is an illustration of why we have to concentrate on getting fundamentals right in Australia. If an event in China can trigger a 3 per cent fall within 24 hours in the Australian stock market, just imagine what bigger external shocks could do to our economy. That is why you have got to make sure your economy is strong.

JOURNALIST:

Treasurer, are you worried that this volatility, if it is extended, could have an impact on voter perceptions of the Government, of the quality of the Government’s economic management?

TREASURER:

Look, the Australian stock market has been so strong for so long that even in the last year alone you have had a 19 per cent rise and a 3 per cent correction. So, what, in net terms it is still up over

16 per cent for the year. You can draw your own conclusions about that. I think what underpins the Australian stock market is profitable companies, very strong employment, low inflation and I think another factor that is emerging now, the amount of money under management that has to be invested somewhere, and a lot of it is being invested in the Australian stock market.

JOURNALIST:

But doesn’t, with voters now having so much money as you say indirectly or directly invested, aren’t they going to be worried?

TREASURER:

I think the Australian public follows the stock market very closely. Directly and indirectly we have a larger proportion of our population that owns shares than any other country in the world. And that share market has gone up very, very considerably over recent years. You have seen a correction today which has been triggered by events in China, but the more important thing for Australia is the fundamentals – where is the economy going, where is growth going, where is employment going, where is inflation going – and what does all of that mean for the fundamentals of business.

JOURNALIST:

Mr Costello did you have any discussions with Ron Walker about his plans to set up a company to explore nuclear energy and if so, when?

TREASURER:

Well he certainly told me that he was setting up a company that was going to look at nuclear energy. I can’t tell you precisely, I would have thought it was sometime last year, probably about the same time as he told the Prime Minister. It was no great secret.

JOURNALIST:

And sources close to that company have suggested that a feasibility study found that it wasn’t, the economics didn’t stack up of nuclear power plants in Australia. Does that underline some of your warnings about how long it would take to set up nuclear power in Australia?

TREASURER:

Well what I have said over a consistent period of time is that as of today nuclear power is more expensive that the power we are currently using. And that being the case, why would you set up generation of more expensive power? But I do believe over time the economics could change, and if you are looking out 10 or 15 years in that kind of framework, maybe it will become commercial but I don’t think it will be commercial in 10 or 15 months.

JOURNALIST:

Does it need a carbon tax or carbon trading?

TREASURER:

Well you know, when you say, does it need it, I am sure if you are in the nuclear energy business, anything that made coal more expensive is in your interests. And so if you were in that business you would most probably want to make coal more expensive. You know, it is like if you make Holdens, you would like a new tax on Falcons. It is that simple.

JOURNALIST:

Treasurer, do you have concerns about the strength of China’s economic growth and whether that will continue to lift Australia?

TREASURER:

I think what you are going to see in China is you are going to see fits and starts from time to time but overwhelmingly it is going continue to grow. You will have a burst and then maybe a correction, and a burst and a correction, but overwhelmingly it will continue to grow its economy. It will continue to grow its economy because it is moving through industrialisation. It is moving through urbanisation and it is moving away from socialism to free market capitalism. Now when you put all of those things together it is going to grow an economy. Now, it won’t be perfect, it won’t be seamless. You won’t get year on year steady growth. There aren’t many economies that do that and China will have corrections because the authorities will take measures as they did yesterday. The financial markets are quite immature still, economic and financial policy is not as developed as you would see in a western country so you will get starts and you will get corrections. But I have no doubt that the growth of the Chinese economy has a long way to go.

JOURNALIST:

Treasurer, (inaudible) those corrections on Australia?

JOURNALIST:

I am being pushed around.

TREASURER:

I am sorry.

JOURNALIST:

What do you think the effect of those corrections on Australia?

TREASURER:

Leave the baby alone.

JOURNALIST:

Exactly.

TREASURER:

The economy will continue to grow and that will be good for the Australian economy. And it means that we have a complementary economic relationship which will be good for them and good for us, but you will get some volatility.

JOURNALIST:

Mr Costello, when Mr Walker told you about his intentions to set up a nuclear company, did you express any views to him about the merits of him proceeding down that path?

TREASURER:

I think I said, ‘good luck.’

JOURNALIST:

Are you surprised that you can remember your conversation and the Prime Minister can but the Industry Minister either can’t remember or actually didn’t have one? Are you surprised that he didn’t know about it?

TREASURER:

Well you would have to ask him as to…

JOURNALIST:

11 times.

TREASURER:

…who he spoke to but you know, Ron Walker is quite a memorable chap and I generally remember speaking to him, he is one of those people in life I have to look up to actually, when I talk to him.

JOURNALIST:

Treasurer, have you received any advice on the Qantas bid yet from FIRB?

TREASURER:

No. Not yet.

JOURNALIST:

Are you worried about the impact of the correction on private equity deals, like Qantas?

TREASURER:

Well, it is a point I think I made some time ago that you have got to factor in external shocks. And an external shock can come from anywhere in the world. Here you see correction on the Australian stock market because of events in China. I can remember the last time that there was a blowout in interest rate spreads of enormous dimensions, it was caused by a default in Russia. So, anybody who is in business today has got to factor in an external shock which can come from anywhere in the world, particularly if you are borrowing on global markets.

JOURNALIST:

Mr Costello, isn’t the Government walking both sides of the street on the nuclear power debate? You are talking it up as to use as a battering ram against Labor. Yet you yourself admit what Wayne Swan does, which is, the economics don’t yet stand up.

TREASURER:

Well I don’t like being compared with Wayne Swan, I think that is terribly unfair.

JOURNALIST:

But aren’t you walking both sides of the street?

TREASURER:

Well, I mean that is comparing me with Kevin Rudd – that is even more unfair.

JOURNALIST:

Speaking of Kevin Rudd – how frustrated are you that he has been able to, in effect blot out your very sterling efforts to sell the virtues of economic management under the Government and as matters of reason why voters shouldn’t shift come the election?

TREASURER:

Well you see Kevin Rudd’s policy is to say that he agrees with the Coalition – and I suppose that there is some flattery in that – imitation is the highest form of flattery. People say ‘well what is your policy on the Budget?’ ‘Oh it is Peter Costello’s policy.’ ‘What is your policy on Reserve Bank interest rates?’ ‘Oh, that is Peter Costello’s policy.’ But I would say to people – he didn’t think of these things, he opposed them when they were introduced and now he says he has been converted to them. And behind him are a whole lot of people who do not agree with any of these propositions. So if you want the policy, come to the authors, not the imitators. Because the imitators can disappear very quickly. The moment there is a bit of heat, Mr Rudd will fall apart on economic policy, just like he voted against it in the past.

JOURNALIST:

It seems essentially working if the polls can be believed though (inaudible).

TREASURER:

Well, there is a way to go yet Jim, there is a way to go.

JOURNALIST:

Mr Costello (inaudible)…

TREASURER:

Two last questions.

JOURNALIST:

…there is only about two and a half weeks of sitting and then we are into the Budget later in the year – some Backbenchers talk about being a circuit breaker, perhaps bringing Mr Rudd back to earth. Are you seeing this as very important Budget for yourself?

TREASURER:

Oh look, every Budget is important. The Budget is a statement of what Government will raise and what it will spend and how it will manage the macro-economy. A Budget is a statement of over $200 billion for the year. And it is a statement of how you are going to manage a $1 trillion economy. And I see that as important. I take it very seriously. I will be working every day and every night between now and then to put together what I think is necessary for the Australian economy.

JOURNALIST:

Will the red tape review for farming expose a lot of federal red tape by the Productivity Commission?

TREASURER:

The Productivity Commission is looking at red tape. It is our purpose to reduce unnecessary Government regulation. We are starting in relation to agriculture, I think we can ease the regulatory burden for Australia’s farmers. That will involve looking at both State and Commonwealth red tape and if there are regulations and a regulatory burden that we don’t need, they are going.

JOURNALIST:

Mr Costello, will you be watching with special interest the battle in Bennelong?

TREASURER:

Well, I watch the battle in every seat very, very carefully and not the least the battle in my own, I can tell you. Last question – Jim.

JOURNALIST:

Treasurer, how much of a factor in your thinking in framing the Budget will be Glenn Stevens’ warning of last week I think it was about the danger of too much expenditure and too much demand leading to renewed inflationary pressures – you do have less freedom to move as far as spending is concerned this election year than you did in 2004 don’t you?

TREASURER:

It is my purpose to bring down a Budget which will be in surplus; which will be adding to the savings rather than drawing down the savings. That has been a huge part of our success over the last decade and we are not going to give that away now. Thank you.