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National Accounts; Budget;executive salaries; Medicare; petrol prices; bond market; currency swaps; ACCC




Press Conference

National Accounts, December Quarter 2002

Wednesday, 5 March 2003

12 noon

SUBJECTS: National Accounts; Budget; executive salaries; Medicare; petrol

prices; bond market; currency swaps; ACCC


Well, today’s National Accounts showed that in the December quarter the Australian

economy grew by 0.4 per cent and 3 per cent through the year led by strong investment,

particularly business investment in engineering machinery and equipment.

Leaving aside the drought the non-farm economy grew by 0.8 per cent in the

quarter and 3.9 per cent over the year. Now considering that is against global

weakness, rising oil prices and the threat of war, it was a very, very resilient

outcome. As I said, it was lead principally by business investment with a 14

per cent surge in new machinery and equipment, very large engineering projects

with a great deal of work still to be completed. Household consumption moderated

a bit, growing by 0.6 per cent and net exports detracted from growth as a result

of two factors, strong capital imports and, of course, weaker exports.

But the National Accounts in many respects are two stories, a strong resilient

non-farm economy, but a farm economy which is dramatically affected by drought,

the worst drought probably in a century.

Agricultural production fell 14 per cent in the December quarter and is 24

per cent lower than a year ago. Rural exports declined 3.3 per cent following

a 5 per cent decline in the last quarter. Grain exports fell 30.8 per cent in

the December quarter.

Employment in the farm sector fell by another 19,000 after a fall of nearly

40,000 in the previous quarter. And the impact of the drought which has flowed

through particularly in the September and the December quarters, as you can

see from the table which is attached, the seasonal adjustment regions will not

show up so much in the next quarter, the March quarter, but will have continuing

effect into the June quarter.

Now, if the drought breaks, and there are signs, then we should get a positive

contribution towards the end of this year. But we have taken a very big impact

in both the September and the December quarters and there is at least one other

quarter of impact. And we have seen this in all sorts of other areas of the

National Accounts including the household savings ratio, which as the ABS notes,

includes farm incomes, because farm incomes are down so much farmers are spending

more than they have in terms of income, which contributes to a negative savings


So, it is very much a story of a strong resilient non-farm economy, which is

the bulk of the Australian economy, and a farm economy which has been dramatically

affected by drought and which has detracted in the last two quarters and will

continue to detract for the remainder of this financial year at least.

The growth rate of 3 per cent indicates that we are likely to achieve the MYEFO

forecast which was growth of 3 per cent in 2002-03, inflation remains very moderate

indeed measured according to the National Accounts at 2.7 per cent through the

year, and as the OECD noted, you are seeing evidence of a very resilient economy

responding to external shocks, which are war and oil prices, and very severe

internal shocks, which is drought.


Treasurer can you explain this graph here why they, the Bureau estimates we’ll

get a, I suppose it’s the Bureau, why we’ll get a positive, a slight positive

impact of the drought in the March quarter?


That’s taken off the actual table on page 14 of the National Accounts. It is

just putting in bar form what is in this particular table. And you will see

Gross agricultural product at market prices in millions of dollars declining

from $4.8 billion in September to $4.1 billion in December, more or less static

at $4.1 billion in March and then falling again in June. It relates to the way

in which the winter and the summer crops fall and the seasonal adjustment process.

So, what the Bureau is trying to tell you there is, the big hits through the

seasonal adjustment process have been in the last two quarters, they wont flow

through for statistical reasons in the March quarter but there will be a big

hit built in into the June quarter. Whether you would get a positive by September,

you may get a small positive if the drought breaks but you wouldn’t really get

big production increases until, or I should say, significant production increases,

until December at the earliest.


Mr Costello you said the growth forecast was on track to meet the mid-year

predictions, does that also apply for the forecast for the surplus for this

financial year and next financial year?


Look, we only make Budget predictions twice a year, once at Budget and once

at Mid-Year, we report financing on a monthly basis.

But we will be looking very carefully at the financial position for the next

year. Since the Mid-Year Review, this is my impression; the non-farm economy

has probably been a little stronger, the impact of the drought has been more

severe and the world has turned down. You would have expected with the world

turning down that would have meant that our non-farm economy turned down, but

it has been surprisingly resilient and particularly in relation to business

investment, machinery and plant, as you have seen in these figures, are quite

strong. Now there is a couple of reasons for that, one is interest rates are

low, that is good for business investment. Secondly the New Tax System means

that business doesn’t pay any embedded tax on investment. The New Tax System

made business investment much more competitive and of course during much of

that period, we had a very competitive exchange rate.

Now I have pulled out some figures on the impact of world oil prices. Since

the Mid-Year Review, the relevant oil prices have gone up around 40 per cent,

since the Mid-Year Review, the Australian dollar has appreciated around 10 per

cent against the US dollar. What that means is, notwithstanding an appreciation

in the $A, in $A terms, oil prices are about 30 per cent higher now than they

were at the Mid-Year Review. So, the appreciation of the $A has set off to some

degree the increase in world oil prices, but not nearly completely, and the

effective rising oil prices, as we know, generally has a dampening affect on

the economy. Now, we haven’t seen that in these figures.




Well it doesn’t mean much in revenue terms, because as I have already indicated,

the Petroleum Resource Rent Tax is in line with mid year forecasts, but probably

because it slows overall economic growth, rising oil prices probably detract

from revenues overall.


Treasurer, given the strength of the non-farm economy and growth still puts

us ahead of most of the rest of the world, why do you think it is that Australian

investors continue to see the value of their investments, particularly reflected

in share prices, being so low and one horror story after another?


We lived through one of the great bull markets of history in the late nineties,

where it looked like share prices just continued rising year after year. Australia

kept itself out of some of the excess of that, the real excess was in the United

States which really developed as a bubble economy during the dot com frenzy.

The correction in the United States has been much more severe than Australia,

in fact although the Australian market is down it’s probably the best performing

in the world, because it is down by less than the US markets, the European markets,

the German markets and what you are seeing is a correction. Now, if you look

over ten years they are probably still in front but over the last two years

there have been net negative returns and that’s the principle reason why, stock

markets are correcting.

It’s been worse incidentally, for those that went offshore, because they’ve

had a larger fall in the US or foreign markets, and there has since been an

appreciation in the dollar, so they’ve actually got the two factors that have

started working against them.


Do you think though that quality of management or otherwise has had any impact

at all?


In relation to superannuation funds?


In relation to companies, in relation to the fact that although we have got

this quite strong growth you are still seeing…


There have been some companies that have made management mistakes. For example,

if you were a company that bought a British business, and relied on returns

from the British stock market to fund your obligations in the United Kingdom,

you have had very significant losses, very significant losses.


(inaudible) Treasurer…


There are other companies, and I never try and give out investment advice but

I can think of other Australian companies that have gone into the US market

and done pretty well because they had quality investments, some companies have

made bad decisions, yes, and if you make a bad decision that’s the effect of

it, other companies have made good decisions.


Stan Wallis is giving his money back to AMP, do you think that all those other

AMP directors should pay their money back, and should the Government, and why

hasn’t the Government taken up Labor’s option which is to give shareholders

greater say in setting the framework for executive remuneration?


First of all can I say I think what Stan Wallis did has set a good example

to corporate Australia. I think it was the right thing to do and can I say that

I am sure that most Australians do, I am sure his shareholders do and it’s to

be welcomed and credit to him for doing it. What other directors do is a matter

for them, he has set an example and it’s a matter for them as to what they want

to do, they’re legally entitled to these amounts, it is a voluntary decision

for them. Now, in relation to directors, there are two separate points here.

There’s directors remuneration, and that’s the Wallis case. That’s set by the


Then there is Executive Officers remuneration which is set by the directors,

although of course the shareholders can direct the directors on what to do,

and we have disclosure obligations, but there are two different levels. The

Australian Stock Exchange is looking at listing rules at the moment to tighten

disclosure and require disclosure at the time these contracts are entered into,

I think it is very good work that they’re doing, and it will have every encouragement

from us. Now bear this in mind, there’s something we are proposing at the moment,

we are proposing infringement notices or on the spot fines for breaching stock

exchange directives, so a stock exchange requirement backed by an infringement

power from the Australian Securities Investment Commission would be a pretty

tough regime.


Mr Costello can I just speak to you about the drought again. Given these projections

from the ABS today, how confident are you that you have already built in and

(inaudible) expectations about the impact of the drought overall on the economy

and how that is going to play into your Budget forecasts?


We will be looking at our Budget forecasts for 2003-04 in the lead-up to the

Budget. Bear this in mind, the information we got today is what happened in

the December quarter 2002. This will be the last National Accounts we will have

before the Budget. The Budget has got to try and figure out what will happen

in, the September, December, March and June quarters of 2004. So you are looking

six quarters in advance on only two quarters out of the preceding year. So it

is a pretty tough business doing that and we revise it once during the year.

So we have got to start thinking about what is going to be happening in 12 months

time or 18 months time. Now I said at the time of a mid-year review, you have

got to take a view on what will happen with drought. The view we take is that

the drought will break. I think some of you thought that that was too optimistic

at mid-year review, you probably think that it is a more reasonable assumption

now because there have been some rains. We have to take a view on what will

happen in Iraq, and in relation to oil prices. You might think it’s easier to

take a view in relation to that, but these are forecasts, and you make the best

assumptions you can, and you get one chance to revise them. I don’t have the

luxury of these market economists who can appear on television programs with

new forecasts on a daily basis.




Well for this year we’ve forecasted 3 per cent growth, and that is more or

less in the bag. It would have to be a very, very unusual March or June quarter

not to achieve it. We are half-way through the year, what’s happened already

in the year means that the 3 per cent growth for this financial year is more

or less in the bag.


The Bureau of Statistics (inaudible) drought from 0.6 per cent GDP to 0.9,

it says you can’t estimate the indirect effect because its all too hard. Has

Treasury made any attempt now that we are clearer on what the drought is likely

to be in terms of severity and duration?


(inaudible) I think we took 1 per cent off it.


Yes, but still that…


…in front of the Bureau, (inaudible) direct and indirect, so we are a little

in front of the Bureau, we are not updating our forecasts at the current time



(inaudible) forecasts for the petroleum resource rent tax, you said they are

pretty much on line, how can that be if the oil prices have risen (inaudible)

per cent?


Well, there’s a lot of things that are taken into account in relation to the

resource rent tax. The resource rent tax is a tax on super profits after all

of your expenses are taken into account. The idea is to try and encourage some

of these people that put new production through or engage in capital investment

or whatever it is, it’s after all of your expenses are deducted, the super profit

is taxed. What I am saying to you is that it is on the forecast. We’re three

quarters of the way through in terms of collections. But there’s another part

of all this too, which is that everybody else is paying higher oil prices which

is an expense to their business which is reducing their profit, which is reducing

company tax. This idea that you can just focus down on the collections in one

area and say, oh well that must mean you are exceeding forecasts, it’s not how

it works. It’s like GST if I may say so. GST is overall tax on consumption.

If people are spending more in one area and as a consequence less in another

the GST take is the same, because it’s on overall consumption. The only time

you get a variation is if spending somehow switches out of a taxed area into

a non-taxed area, but there aren’t that many non-taxed areas. Food.




Sorry, Mr Bonjiorno.


Thank you very much Treasurer. There are reports today that the Government

is looking at a 4 year billion dollar package in regard to Medicare bulk billing.

Following on what you said yesterday that you wouldn’t necessarily be looking

at this sort of expenditure in the Budget, can the Government afford this package

in the near term or is it further out?


No, the Government believes that Medicare should be a universal service that

is available to everybody. Bulk billing has never applied to 100 per cent, never

has. But it is important that bulk billing be available to all low income earners,

pensioners. And to the degree that there are supply problems or there are problems

in rural areas, or whatever, and people on low incomes or pensioners can’t get

it, the Government wants to make sure that the situation is improved, that is

what we are looking at.


Treasurer, just following up on Paul’s question, I’m not asking you to go through

the details of what you’re proposing but can you tell us whether this will be

new money or re-allocation of monies within the Budget?


Well, Jim, you’re asking me to tell you where I am getting money for a policy

which hasn’t yet been announced so…


But have you decided?


…well, Jim, you’re bowling up curly ones to me trying to get me to…


That’s my job.


…Jim, you do your job very well, but I must say there are a couple of assumptions

in that question which make it impossible for me to answer.


Are you able to rule out means testing for bulk billing?




Bulk billing will not be means tested?


No, we have not proposed, I heard Mr Crean saying that the Government is proposing

to means test Medicare. That is not what the Government is doing at all. The

Government believes that Medicare should be universal, that is, the rebate available

under the Medicare system is available to everyone. That does not mean that

everybody will be bulk billed, it never has. There are two different concepts


There is Medicare which gives 85 per cent of the scheduled fee, for everybody,

that is universal. There is bulk billing which has never been universal. Bulk

billing is where there is no additional doctors fee over and above that 85 per

cent. There always has been areas. I think when Medicare came in I think it

was the majority of areas where doctors charged a fee. Even today there are

large areas where doctors charge a fee. Nobody, to my knowledge, has ever said

they are going to get 100 per cent bulk billing. Now if Mr Crean wants to say

it’s his policy to have 100 per cent bulk billing, and that involves, as the

AMA says, a doubling of the scheduled fee, and that involves at least two or

three billion dollars more, then he better come clean about the increase in

the Medicare levy which is required to fund it. We think it’s a 50 per cent

increase in the Medicare levy that he has got in mind. Right, so if you want

to guarantee 100 per cent bulk billing you had better come clean on the increase

in the Medicare levy and tell everybody the additional taxes that they are going

to be paying.


Should it be made easier for doctors to charge non-pension payments a co-payment?




Should it be made easier or streamlined to help doctors charge non-pensioner

payments a co-payment over and above the…


No. I have just said the Government believes that pensioners and low income

earners should have the access to bulk billing…




…that is what I have just said. Pardon?








No, I, look, I would like everybody to have the option of not paying for health

care. But you’ll have to get doctors somehow to reduce their fees by a very

large amount or you will have to increase the Medicare levy. I don’t think you’re

going to get doctors to reduce their fees. But if doctors suddenly said we’ll

reduce our fees and offer universal bulk billing, I wouldn’t attempt, in fact

we would warmly welcome it. But they are not going to reduce their fees, so,

the only other way to do it is to pay them more. To absorb, for the tax payer

to absorb the current additional fees that they are charging. That is a 50 per

cent increase in the Medicare levy for starters, and that means every Australian

who pays income tax will pay more tax…




…you know, that might be the Labor policy but they ought to come clean on

it, they ought to tell you. Anybody who is telling you that that is their policy

better tell you how much tax you’re going to be paying.


So Treasurer, the Government has not been contemplating, nor will contemplate,

any financial incentives or disincentives in the application of bulk billing

to different segments of the population?


It is not the Government’s policy to introduce a means test or to take away

the universal application of the Medicare system which is 85 per cent of the

scheduled fee to everybody.


Mr Costello, I think the concern is, Mr Costello, is that your policy is going

to stop some doctors, encourage doctors to stop bulk billing those people that

they don’t get an incentive to bulk bill. Can you guarantee that that won’t



We want to give doctors a lot of incentive to bulk bill, yes we do, but you

have got to do it in a way which, make sure you have got an eye on taxes as



Treasurer, to the bond market, have you been persuaded that there are good

reasons to keep the bond market as opposed to just thinking it’s not a good

time to necessarily, deliberately get rid of it?


Let’s go back a stage. We re-paid something like $60 billion of Labor debt.

With the proceeds of T3 we would have the capacity to retire all debt.

And the question then became, would you like to keep some debt out there backed

up by an equities portfolio, or would you like to retire all debt. Now, let

me just say as an aside let’s suppose the Commonwealth had gone into equities

two years ago with the proceeds of Telstra. How do you think people would be

looking at us now?




Now hang on…




…well, can I finish please? T3 is not going to be sold any time soon, so

there is no prospect of retiring all debt, or indeed, going into the equities

market. It’s a nice question and sooner or later I suppose we’ll resolve an

answer but it’s not a practical question, it is not a practical question. the

United States went through this question during the Clinton administration and

Alan Greenspan gave speeches on whether or not the US needed a bond market and

concluded that the US, if it could, should try and retire all of its debt. Is

anybody talking about retiring US debt at the moment? I mean they have got a

fiscal debt of 3 per cent of GDP, $300 billion in this year alone added to the

US bond market. It was a problem that they fixed by other means, this will not

be a problem for us with T3. Now, we will still go on and we’ll consider it,

but it won’t be happening any time soon.


(inaudible) market’s going to dwindle, market’s going to dwindle?


Well, whilst we have a market, obviously, and this has been our policy all

along, whilst we have a market it has got to be a market that has sufficient

liquidity. We have been in a position to reduce gross debt further than we actually

have, and we have taken the view that whilst there is a market it has got to

be a market which is sufficiently liquid. And that will continue to be the situation.

Now, if the circumstances change in relation to T3 we will consider this problem

again. It is a nice problem to have but it is not a problem we have any time

soon. I’m sorry, I cut you off.


I was just going to say, isn’t it possible that…


This is obviously the last question.


…didn’t you, you said that, you know, you didn’t want to be in equities because

of what’s happened over the last few years. But isn’t it possible that you could

have a non-financial asset portfolio?


Well what would it be?


Well, capital investments things, such as education, things which…


Yes, but that is spending. You know, people say, oh well, if you have a surplus,

why don’t you spend it on this. The moment you have spent it it is not a surplus,

that is spending, that is expenditure. A surplus is what you have got left after

you have finished your expenditures, not what you’ve got before you start them.

And you’ve then got an asset and you want to put this asset to a return which

keeps its value. Now, you know, I can understand the argument about a bond market.

I, you know, I have probably thought about this longer than most. But you have

also got to think about what you would do with your money. You could spend it,

and that gets rid of your problem because you have got no surplus. But if you

take the view that with a surplus you ought to invest it and maintain it, you

have got to put it somewhere. Now, the obvious area to put it is in the equities

market. Now, the only point I make is that I think the public would be very

unforgiving on Governments which went into equities and lost, you’ve heard Jim

talk about what the public thinks about superannuation funds? And I think the

public would be quite unforgiving if Government lost large sums. Now we can

mount the intellectual argument, could we not, about why it was necessary to

do it, but do you think you’d all be sympathetic to me on the front pages of

your newspapers if the money disappeared into the equities market?


(inaudible) currency swaps.


Well, very interesting point, very interesting point, very good reasons, very

good reasons. And of course was there a great sort of interest in technical

reasons? Didn’t find it.


Treasurer, will you still nominate Louise Sylvan to the ACCC or will you have

to wait until you’ve leveraged Graeme Samuel in to the chair?


Well, we will resolve the situation in relation to the chair first and then

we’ll also resolve the situation in relation to the deputy. But we don’t want

to resolve the situation in relation to the deputy before we do the chair. I

don’t think that’s the right way to go about it.

Thanks very much.