National Accounts; world economy; debt management; US steel decision

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Joint Press Release: Federal Treasurer and New Zealand Minister of Finance
March 6, 2002
McMullan: More Misrepresentation
March 11, 2002
Joint Press Release: Federal Treasurer and New Zealand Minister of Finance
March 6, 2002
McMullan: More Misrepresentation
March 11, 2002

National Accounts; world economy; debt management; US steel decision


Interview with Kerry O’Brien
7.30 Report
Thursday, 7 March 2002
7.30 pm

SUBJECTS: National Accounts; world economy; debt management; US steel decision


Peter Costello, there was another Treasurer who used to, on occasions like this,

describe the sorts of figures you have got today, as a beautiful set of numbers?


Well, this is a good result for Australia, Kerry. We grew in 2001 at 4.1 per

cent. Not only was that a high rate of growth in itself, but compared to the

rest of the world, it was a stand-out performance. It is about ten times the

average of the other industrialised countries of the world, and when you think

that in the December quarter we were coming off Ansett, we were coming off September

the 11th, war in Afghanistan, the fact that Australian business kept

on producing and the Australian consumer kept on spending, shows that there

is a lot of sunny optimism in the Australian character.


It is just a year ago, virtually to the day you were sitting on this same programme

with something of a furrow on your brow, rather than a smile trying to explain

how Australia had stumbled into a quarter of negative growth.


Yes, well, if you were to go back twelve months ago today, you would see that

most of the press was predicting Australia would be in recession in 2001 and

that was before the US recession, and the Japanese recession, and the down-turn

in Europe and September the 11th. So, the fact that the Australian

economy shrugged that off and grew at 4.1 per cent, and grew so much faster

than the rest of the world is extraordinary. Now I think, and I said at the

time, I think you were pretty sceptical when I said it Kerry, that…


That is my job.


…the December quarter accounts, twelve months ago were heavily influenced

by the housing factor, the build-up before the GST and the fall-off afterwards,

and if you took that out those figures actually showed continuing, underlying

growth. Well when the housing came back the economy showed that it was continuing

to grow, those figures washed through the system. And the good thing for Australia

is that we are right about that and that Australia really, in terms of the industrialised

world, is the strongest growing economy around the globe.


What happens now, how do you keep it going, to what extent is it going to be

helpful that the, if the American economy really is recovering? When would you

expect that to kick in, and are we going to see growth beyond 4 per cent over

the next twelve months?


Well, if it had not been for a global recession, you would have seen it in

these accounts. The weakness, if there is a weakness in our economic position

at the moment, is the globe. It is not anything in Australia. We have got strong

domestic consumption, low interest rates, good business investments, high profits.

But, what is holding Australia back at the moment, is America has been through

a recession, Japan is in recession, Germany is in recession, Singapore is in

recession, and our trading partners are not buying as much of our exports as

they would under normal conditions. Now, if the global economy can come back

to near-normal growth, that weak spot will begin to go away, or our exports,

to put it another way, will begin to strengthen. And that will be even better

for the Australian economy. But I would not call the world down-turn over, yet.

The United States has been through a recession, it looks like the recession

has ended, but it is not going to be growing at anything like the rates that

the United States was growing at in the late 1990’s, so, it is going to be a

weak comeback, I believe, in the United States.


Given the healthy level of growth over Australia in the past twelve months,

why has unemployment actually gone up and when do you expect it to come down



Well I think if this kind of growth were to continue, if company profits were

to stay high, interest rates stay low, then employment, which lags business

confidence and business profitability, should start to come back towards the

latter part of this year and that would be good for job seekers. The good thing

is that the unemployment rate is still at 7 per cent, that is too high, but

there are better prospects, I believe, coming into next year.


One of the big things that has helped the Australian economy in the past twelve

months has been the high level of consumer spending. The flip side of consumer

spending is household debt of course. At what point do you begin to worry about

the negative impacts of Australians’ capacity to live beyond their means, particularly

if, in the not too distant future, interest rates actually start going up again?


Well I think that people have been spending because of low interest rates and

tax cuts in July of 2000, which put more money back into their pockets and that

has kept spending up. When you look at borrowing, sure people are tending to

borrow more, but that is because the value of their assets, particularly their

houses, have been going up. People have been borrowing against increasing assets.

The point I was making earlier today…


Credit card debt is not too flash either.


Credit card debt, but if you look at the overall indebtedness, and this is

the point that we would look at, is, what is the indebtedness to the asset position?

And although you have seen people borrowing more, you have seen them borrowing

more against assets which are rising faster so that their gearing ratio is not

of concern to us at the moment. But that is, you ask us what we keep under review,

that is what we keep under review.


I see the dollar has had a bit of a growth spurt too. Does it encourage you

to keep the Treasury gambling with those currency swaps?


No. The Treasury is winding down its currency swaps. That is a decision that

I put in place from December of 2000. They have a programme of winding them

down, an agreed programme with the Reserve Bank. We do not actually disclose

what it is for obvious reasons, but they will continue to stick to that as they

have been over the course of the last year.


But that wind down doesn’t just mean waiting for those swaps to fall due. It

is actually being pro-active in getting, in paying them out?


Yes, the swaps do not fall due, the swaps fall due between now and 2008. So

between now and 2008 according to an agreed formula they will be winding down

those positions.


So will we know as it happens what our losses are on that, on those currency



Well, you can only work out whether you have made profit or loss on these things,

on the day you unwind them, and you would be unwinding them, different ones

on different dates. You can’t actually put a figure on it and it could be losses

and it could even not be losses. You certainly can’t say that at the moment.


You did act on it eventually. But were you aware, as it was happening, that

the Commonwealth was losing money under this scheme at the rate of a billion

dollars a year from `97?


Well, this is a policy that was commenced in 1989 under Labor as…


I think the big losses only started kicking in in ’97, didn’t they?


…I think it is fair to point out that the policy commenced under the Labor

Party and the Treasury position was that it was actually a profitable position.

When I came into it, I decided whether it was a profitable or an unprofitable

position, it is not something that we should be doing and from December of 2000…


But hang on, when you came in didn’t you keep it going? But you came in ’96.


When I personally came into it, when I was asked for my view in relation to

this in November of 2000 I came to the view that it was not something that we

should continue and,…(inaudible)


Is it true that…


…agreement to wind it down.


Is it true that if you had brought yourself into it in ’96 and ’97 that you

might have actually realised some profits, instead of the billions of dollars

of losses we now face?


Not clear. They were getting market advice through ’96, ’97, 1998 to continue

it. So, that was the general view at that time. But my view was, regardless

of the market advice, that there was now no longer any need to continue the

policy. The policy was entered into when interest rates were high and Mr Keating

decided that he would try and take advantage of the fact that Australian interest

rates were high and overseas rates were lower. Our policy is to be making Australian

interest rates as low as they are overseas, so there was no reason to actually

continue it.


Do you now acknowledge a substantial risk exposure to interest rates swaps as

well as currency swaps?


Well, I do not want to go into interest rate swaps because the focus has been

in relation to currency rate swaps…


But isn’t it true that interest rate swaps represent…


…typical areas (inaudible)…


…isn’t it true that interest rate swaps potentially represent greater risk

than the currency swaps?


Well, Kerry, when you are managing a debt portfolio of $96 billion, which is

what we began, which is the debt portfolio the Labor Party gave us, $96 billion,

very small increments either way have big ramifications, and so you have got

to be very careful in relation to that, and I can assure you that the Treasury

will be very careful.


What did you feel, how did it impact on you when you heard for the first time

that George Bush was whacking a 30 per cent tariff on their steel imports?


Well I thought it was wrong. I thought it was wrong for America’s trading partners

to be penalised, as we will be, and I also thought…


It makes you wonder whether loyalty is a two way street, doesn’t it?


Well, I also think it is wrong for the United States steel industry because

at the end of the day, if it prohibits the, or gives comfort to the US steel

industry not to restructure, he won’t save it. So I thought it was wrong. I

thought it was wrong for America’s friends and allies, wrong for America’s trading

partners and more importantly, wrong for America itself. And what can you do

about it? Well, this is where the World Trade Organisation does actually have

a use. You will find a lot of people say they don’t like the WTO for one reason

or another, but it is the one mechanism that you have to take other countries

into a forum to put your case and to get a binding decision against them if

they have breached the rules. And the Australian Government is going to do this,

Kerry, with every argument at its disposal. The WTO will be asked to work on

behalf of Australia and the world’s interest in trade.


I guess it’s a pity it had to come to this?


Well, that is why we have it and at least we have got the World Trade Organisation,

without that what other avenues would we have?


Peter Costello, thanks for talking to us.


Thank you Kerry.