TRANSCRIPT

of

THE HON PETER COSTELLO MP

FEDERAL MEMBER FOR HIGGINS

Interview with Karen Tso and

Squawk Australia, CNBC

9.30 am

E & OE

SUBJECTS:  Economic stimulus package

KAREN TSO:

Peter Costello was at the helm of the Australian economy for 11 years and does join us now live from Canberra.  Good morning to you Mr Costello.  We do appreciate your time this morning.  And we are very interested on your thoughts – 45 year low for interest rates and $42 billion thrown at the economy.  Are these measures enough from where you’re sitting?

MR COSTELLO:

Well I think the monetary policy response has been very important.  It is good that the Reserve Bank has acted as it has in recent months although of course in the early part of 2008 it was still tightening monetary policy.  As you look back obviously that was a mistake to be tightening in 2008 but it has reversed direction and I welcomed the news very much yesterday.  The fiscal package – well it is 4 per cent of GDP.  It is a huge spend, although over a number of years, and I think that the quality of the spend is not what we really would have wanted.  The Government is…

KAREN TSO:

Sorry just on that Mr Costello if we can talk about the mixture of spending there $28 billion of it for infrastructure but the way that’s spent is on maintenance of schools, building of schools and green projects.  Is this how you would have spent the money to stimulate the economy and set it up for the long term?

MR COSTELLO:

No.  As I said I think it is a low quality spend.  Of course there is nothing wrong with improving schools but normally when you are having a fiscal package designed to stimulate an economy you would expect money to be directed towards business, lowering costs of employing labour, lowering taxes so that businesses could put on extra staff.  It is good to have school buildings repaired but it’s not going to be adding to job creation in the way that you could have done with a 4 per cent spend of GDP.  Now insulating houses for example, it’s all very nice if you have your house insulated, but other than for the people that make the fibreglass insulation it’s hard to see huge benefits growing in terms of job creation.  So I would look at that package as something that has been cobbled together very quickly.  It has got poor quality spend and I don’t think that package is going to make a very big difference to Australia’s economic prospects.  The economy is definitely slowing.  If it goes into recession this package won’t save it.  If it survives a recession it won’t be because of this package.

KAREN TSO:

We have got Sri Jegarajah here now in Singapore just joining the conversation.  Sri you wanted to put a question to Mr Costello?

Sri Jegarajah:

Yes.  Good to see you sir.  Given that the commodoties and resources industries are such an essential part of Australia’s revenue generation goes into the GDP do you think the spending should have been targeting in that part?

MR COSTELLO:

Well the interesting thing about the statement yesterday is that revenues in fact won’t be dropping off very much in the current financial year.  There will be drop-offs in revenue in future financial years but the reason why the Budget in Australia will move from surplus to deficit is new spending measures.  Measures we are talking about to repair school buildings and insulate homes and the Government’s also announced a whole series of cheques, $950 cheques that it will send to various people in the Australian economy.  Now today I think if a family gets a cheque for $950 that is good, but many of these families will save these cheques at a time when the economy is moving into recession and unemployment is rising.  If people get extra income what you actually tend to do is save it.  If you really want to get money out quickly into job stimulation you normally do it by giving incentives for labour, cutting the costs of labour, cutting the costs of tax, that is why I would say it is a poorly directed spend.

KAREN TSO:

Just on that spending package, we did see the $10 billion disappear last time arguably into the pockets of the retailers and also into some poker machines.  This time round there are suggestions that households might save more of that.  Would that be welcome?  Would you accept that the de-leveraging process is going on as a welcome sign for the Australian economy if households did take that approach?

MR COSTELLO:

Well personally I can understand it.  I think if a household feels under financial stress they have got unpaid bills they will use additional income to pay off those bills.  This doesn’t by the way generate extra demand because the demand is already there in the form of the service for which the bill has been rendered.  And so they will pay off bills.  They might put some money into a bank account.  Personally I understand that and really at a time when business is trying to de-leverage you can understand households trying to de-leverage.  But of course this is not the reason why the money is being given.  The money is being given to families the Government says to try and get them to consume more – to life their expenditure and this is why I think the fiscal measures themselves they won’t have a dramatic influence on Australia’s growth prospects.  If the Australian economy continues to grow and the Government is forecasting that it will, that is it will avoid a negative growth year, but it won’t be because of this package.

Sri Jegarajah:

Mr Costello in your mind what would have been the best course of action for the administration to have taken there Mr Costello?  You say that this spending hasn’t been targeting correctly, it is poor quality spend.  How should it have been targeted?

MR COSTELLO:

Well I think it would have been better if the Government had done something to bring forward tax cuts which have already been legislated.  I think benefits which would have encouraged additional labour to be put on, some of the employment costs, I think the Government should have announced at this point that it won’t be proceeding with industrial relations changes which are anti-job creation and I think that would have been warmly welcomed by the business community.  The measures that it’s taken it seems to have been cobbled together because the money can be got out the door quickly but for the reasons I have already said I think it will actually be low quality public expenditure.

KAREN TSO:

Yes.  This is a good point you make, only $2.7 billion in breaks for small businesses which is obviously a very small chunk of the $42 billion.  I just want to move down to government debt because this is something that you spent years paying off.   Now on the back of these deficits this string of deficits that the Rudd Government will now run they have to try and fund this by lifting the $75 billion cap on the stock of Commonwealth Government bonds to finance it.  What are your thoughts on that and has that positions, Australia’s Budget position and finances?

MR COSTELLO:

Well of course one of the things that put Australia in a very strong position is after running 10 surplus Budgets we managed to reduce Commonwealth Government debt to zero.  That is in net terms the Commonwealth Government had no debt.  But we used to issue some bonds just for the sake of the market and that’s why we had a limit on the issuance.  Of course now that we’re going into deficit and we will be running deficits for several years and in my view probably quite longer than the Government hopes there will have to be very large borrowings by the Commonwealth Government.  It could be in excess of $100 billion over the next few years.  So that of course will put Australia right back where we were before we ran all of those surplus Budgets.  Having cleared our debt the Government has now put Australia on a course where we will be right back in it.  And from my point of view the hard work of the last 10 years has been more or less reversed in the last 10 months. Now I suppose from a financial markets’ point of view it will mean that there will be a lot more Australian paper out there.  The financial markets used to complain to me that there wasn’t enough bonds on issue that they in fact actually wanted some more so the financial markets might actually see an opportunity there.

KAREN TSO:

A bit of a silver lining in that indeed.  Mr Costello we do thank you for your time today and do appreciate your thoughts and your commentary on (inaudible) of the Australian economy.  So thank you for chatting with us today.  Mr Costello used to be the Treasurer of Australia.