TRANSCRIPT
THE HON PETER COSTELLO MP

Treasurer
Doorstop interview

Washington DC
Saturday, 24 April 2004
6.30 pm

SUBJECT: IMF, US-Australia Free Trade Agreement, China, Federal Budget,

Mark Latham

TREASURER:

Well, today’s IMF meeting is focused on the global economy, in particular

some of the risks that are expected in the next 12 months. There seems to be

a general consensus that the world economy is strengthening, led by a recovery

in the United States. Some of the risks that may emerge over the course of the

year involve some countries, particularly the US, which is facing very large

budget deficits and current account deficits, how economies respond to that,

how economies respond to what could be a new interest rate climate during the

course of the year, and in particular there was a great focus at the IMF meeting

today on the dangers of trade protectionism rearing its head again and a determined

commitment from all of the Finance Ministers there to progress the free trade

agenda. As you know, Australia is working on a bilateral basis with the US Government,

with our Free Trade Agreement, but also on a multilateral basis, to work towards

liberalizing world trade. So, in an environment which is strengthening, challenges

remain. It’s important that countries focus on economic reform and I can

assure that’s what we’ll be doing in Australia.

JOURNALIST:

Treasurer, just in your address to the IMFC. You made some rather upbeat comments

about China’s economic performance. I’m just wondering what discussions

were made in relation to China? Is there any indication that they are taking

the necessary steps to try and cool their overheating economy?

TREASURER:

We think that China is … the growth of China, the emergence of China,

is a positive thing for the world economy. We make no bones about that. As you

know, China is a very important trading partner for Australia. And the fact

that growth is strong, and demand is strong, is good for Australia. It’s

good for the region. There have been some sentiments expressed in the United

States and elsewhere that Chinese growth could be leading to exports, which

are giving the Americans an over-reliance on Chinese imports. We don’t

think that that’s necessarily a problem because the efficiencies that

are now coming out of China means that world costs in manufacturing of goods

are being held down. It could actually be a good thing for world inflation.

But as the Chinese economy matures, they’ll have to come to grips with

their financial system. And I think as they modernize their financial system,

you’ll get a situation where you’ll get more flexibility in relation

to exchange rates and the like.

JOURNALIST:

On the issue of exchange rates, do you think that the Chinese should be encouraged

to move more quickly in that direction, towards greater flexibility?

TREASURER:

The way I expressed it today is that the end of a process should be a flexible

exchange rate. But you can’t do it overnight. You need sophistication

in a financial system before you can have a fully floating exchange rate. And

if you just moved to a floating exchange rate without getting (inaudible). In

fact, I shared the Australian experience at the IMF today of … we floated

our currency some 20 years ago. In the early days, it wasn’t successful.

There were many Australian banks that didn’t know how to cope with it.

Many of them nearly lost their shirt. And it took us quite a while to develop

some of the sophisticated instruments that are required to go along with a floating

exchange rate. So, whilst I think the end of the process for China will be a

floating exchange rate, I don’t think they should be pushed into doing

that immediately. I think developing the sophistication of their financial system,

the prudential regulation of their banks, is something that will have to come

first before it ends up there.

JOURNALIST:

Do you expect US interest rates and international interest rates to start moving

up this year and is that a good thing?

TREASURER:

Well, let me say, I’m not responsible for interest rates in the US. But

there seems to be a general view that as the American economy emerges from recession,

the low level of interest rates that apply at the moment cannot be expected

to continue indefinitely. So there will be a movement in American interest rates,

which is generally expected. I don’t think anybody can say to you when

that will be or how fast. But you should bear in mind that the US dropped its

interest rates very quickly and it’s quite conceivable that when they

start moving they could move fast the other way.

JOURNALIST:

Have you talked to any of the Americans about interest rates?

TREASURER:

Well, I talked to the Americans. Yes, I did. And we discussed views on their

economy, on our economy.

JOURNALIST:

And do you think that this expected rate hike or rate hikes in America will

change the views of the RBA in terms of people are saying maybe one more rate

hike in Australia, and that they would probably want to wait until after the

Americans do.

TREASURER:

I’d say this. That if interest rates go up in the United States, that

will put pressure on savings around the world. And it may get a response in

other areas of the world but I think Australia is in quite a different position.

You see, we didn’t have a recession. We managed to keep Australia out

of recession. We didn’t follow the United States into recession. And as

a result, our monetary policy varied from the American. And so we’ve got

a lot more insulation than many other countries. So the way I would express

it is, yes, there will be a worldwide effect, but Australia stands as well placed

as any country in relation to responding to those international developments.

JOURNALIST:

So you’re saying Australia may not necessarily have to have a rate hike

following an American rate hike?

TREASURER:

I’m not putting a view on the future direction of Australian interest

rates. I’m not now, and I haven’t for the last eight years. But

I’m saying that there will be worldwide pressure in relation to interest

rates, and Australia stands as well placed as any country in the world to respond

to that.

JOURNALIST:

Treasurer, with these expectations of rate rises, particularly in the US, has

come a pretty significant rise in the US currency over the past three to four

weeks. I’m just wondering, do you welcome that rise in the US currency

and what it affords the Australian economy, particularly the exporters?

TREAUSRER:

Well, I make this point. Since the beginning of last year, the Australian dollar

has risen nearly 40 per cent against the US dollar. And that has made life pretty

tough for our exporters. Now the good news for our exporters is this. If the

world economy picks up, demand for their products should improve. The fact that

the currency has risen, has been a negative. But the fact that world demand

is coming back is a positive. And that may ease some of the pressure that they’ve

been under. But I understand the pressure that Australian exporters have been

under with the movement in relation to our exchange rate. All we can do, however,

is make sure that we keep our economic fundamentals strong. And that’s

what we will be doing.

JOURNALIST:

Similarly, with the expected narrowing of the rates spread between US and Australia,

if the US goes, will that help, you know, take some of the lustre off the Aussie

and help those exports?

TREASURER:

Well, let me put it this way. A big part of the movement in the Australian

dollar has not been an Australian dollar story; it’s been a US dollar

story. I remember saying when the Australian dollar went down, that it was as

much as anything a US-dollar-rise story, and when the Australia dollar came

back, it was as much as anything a US-dollar-falls story. So obviously if the

US dollar were to move, you would have a commensurate effect on the Australian

dollar.

JOURNALIST:

Mr Costello, what was Bob Zoellick able to tell you about how well on track

the Free Trade Agreement is to get into the Congress and get through to the

election cycle here?

TREASURER:

It was certainly a hope here in the United States that the Free Trade Agreement

could go into the Congress in June, as early as June. Mr Zoellick was quite

positive in his discussions as to how this will be handled in the US Congress.

I was able to reaffirm to him the Australian Government’s absolute commitment

to this Free Trade Agreement, and to say to him that we are quite positive that

there had been some domestic opposition but we are quite confident that we can

answer the critics in Australia. And my message would be this. We’re a

country of some 20 million people. The United States is a country which is nearly

20 times bigger. If you get access to a market which is 20 times bigger than

your own, you are getting a real improvement in your trading opportunities.

In fact, it’s more important for us than it is for them.

JOURNALIST:

Did Mr Zoellick express confidence that they’d get it through Congress

this year? I mean, did he indicate to you that he was pretty optimistic about

it?

TREASURER:

Well, he indicated to me that he was making his best efforts, absolutely. That

he wanted to progress it. That they hoped that they could do that some time

in June. The Congress gets up for a while in July, then comes back, and then

shortly after that, it will be election season. So I thought he was quite positive

and cautiously optimistic.

JOURNALIST:

But no promises?

TREASURER:

The promise is, he’ll be doing his best. And that’s a pretty good

promise.

JOURNALIST:

Did you discuss who’d actually sign the document on the 14^th

of May, 13^th of May or 14th?

TREASURER:

I think that’s still being discussed between the relevant people in Australia.

JOURNALIST:

Treasurer, just on the issue of the Budget, obviously coming up fairly soon.

I’m just wondering, the pundits are suggesting a surplus in the order

of $1.5 billion for next fiscal year. How would you characterize or describe

those expectations?

TREASURER:

Pundits always pundit, and sometimes they’re right and sometimes they’re

wrong and…

JOURNALIST:

Which is going to be the case this time, do you think?

TREASURER:

I wish I could have a dollar every time they were wrong.

JOURNALIST:

Are they right to think that some tax cuts are going to be diminishing that

surplus next year?

TREASURER:

Look, the situation is this. That we think it’s important that the Australian

Budget remain in surplus. We will in this Budget have to fund Australia’s

commitment in Iraq, increased domestic security. We have commitments in relation

to health and education. Consistent with meeting those commitments and keeping

the Budget in surplus, if we have the opportunity to return to taxpayers, we

would like to do that. But it’s important that we meet our expenditure

obligations and that we keep the Budget in surplus. And that’s the way

that we’ll be framing this Budget.

JOURNALIST:

Has any member of the Administration expressed any concern to you about Mr

Latham’s policies?

TREASURER:

There are, well let me say this. I think that people in Washington are aware

of MrLatham’s views and it will be up to him to explain them.

JOURNALIST:

Have they expressed concern to you about those views?

TREASURER:

Well, you know, I think the important thing is this. It’s not what other

people think of MrLatham, it’s what Australians think of Mr Latham. And

I think that Mr Latham will have a lot of explaining to do to Australians as

well.

JOURNALIST:

But Australia’s reputation in the United States is also important, isn’t

it?

TREASURER:

I think that having a strong alliance with the United States, which is after

all the world’s largest economy, it’s the world’s largest

military power, brings enormous benefits to Australia. You can see that countries

from all over the world would like to develop the kind of relationship that

Australia has. And when you do develop that kind of relationship, and you realize

what an advantage it is, you also realise that you shouldn’t throw it

away carelessly. And these things are hard won, but they can be easily damaged.

Now, I think it’s a robust alliance. And I would say to both sides of

politics in Australia, there’s no cheap advantage in fracturing what is

so important for Australia.

JOURNALIST:

Who that you’ve met with has raised Mr Latham?

TREASURER:

Oh, various people have raised it. But it’s not what they think of Mr

Latham. At the end of the day, it’s what Australians think of Mr Latham.

And my argument would be, there is no cheap advantage in fracturing a relationship

which many, many other countries in the world would like to emulate.

JOURNALIST:

(inaudible)?

TREASURER:

Well, you’ll have to ask the Americans how they see it. But I would say

that this is the world’s largest economy. It is the world’s largest

military power. There are something like 150 countries represented here in Washington

this weekend. All of them would like to develop a close relationship with the

United States. And for those countries that have, like Australia, it’s

something that others would like to emulate.

JOURNALIST:

Would it be a good idea for Mr Latham to come to Washington to engage directly

with people in the Administration?

TREASURER:

I think it would have been a good idea if he’d engaged a bit more directly

before he made some of the comments that he did.

I think some of the comments that he made about the Administration and the

President, and some of the comments that he made about the Government’s

relationship with the US, were ill-considered when he made them. And maybe he

should have engaged a bit more before he made them.

JOURNALIST:

Speaking of Iraq, Mr Costello, what was the discussion like in terms of its

impact on the US deficit and also on the oil price?

TREASURER:

Well, the US Budget is in considerable deficit. You get different assessments.

It’s probably about 4 to 5 per cent of GDP. That is a very deep deficit.

And part of that is funding Iraq. I don’t believe the major part of that

deficit is funding Iraq. I think the US Budget was in significant deficit before

Iraq. But that will add to costs. In relation to the oil price, there is concern

about the oil price and the effect that this will have on global growth. And

there was considerable discussion about oil prices. Many of the developed nations

were urging the oil producers to do what they could to alleviate the situation.

The oil producers themselves believe that the current price is warranted. But

I can assure you that the developed countries were encouraging them in relation

to production.

JOURNALIST:

What is the concern about oil prices?

TREASURER:

That they’re high.

JOURNALIST:

Is inflation now the risk that (inaudible)?

TREASURER:

I don’t know that it’s inflation. But the fact is, the oil price

is high. We’ve been shielded a little bit in Australia because our dollar

has risen. But in US dollar terms, the oil price is very high. And that will

be a drag on growth.

JOURNALIST:

You mentioned before that it’s more important what Australians think

of Mark Latham. When will Australians get their opportunity to publicly express

their views?

TREASURER:

At the election.

JOURNALIST:

I just want to get clear on what you’re saying about Mr Latham and what

the Administration, the people you’ve spoken to. How would you characterize

this? Are you saying that their concerns are serious?

TREASURER:

I would say that his remarks have been noticed, that the people who look at

the security relationship know that he would take a very different attitude,

and that he would not be as supportive as the current Government has been in

matters of mutual interest, in particular, the reconstruction of Iraq. Now this

is well known. Our Government believes that Australia should be part of the

reconstruction of Iraq with other countries from around the world. We believe

that whilst we have an important role to play, we should stay there and play

it. This is not the view of Mr Latham. And people know that.

Okay. Thank you.