Standard and Poors rating upgrade

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APEC Finance Ministers’ Meeting
May 16, 1999
Tax reform
May 20, 1999

Standard and Poors rating upgrade

Transcript No. 99/39


Hon Peter Costello MP

Doorstop Interview

Tuesday, 18 May 1999

11.00 am

SUBJECTS: Standard and Poors rating upgrade


Well today in Australia Standard and Poors announced a foreign currency rating

upgrade for Australia to the second highest level, recovering a rating downgrade which was

made in 1989. This is a recognition by an international ratings agency of the strength of

the Government’s budget policy. As the ratings agency announced, it’s a

consequence of good economic policy and it means that Australia is again being regarded

internationally as a very strong economy. I welcome the fact that the currency upgrade has

occurred. It’s taken us 10 years to get back from the position in 1989. It’s a

consequence of good economic policy and it means that Australia is now very highly

regarded around the world.

It also means that Australian companies will find it easier to borrow at lower rates.

It will be good for economic growth and that will be good for jobs in Australia.

The statement that was released by Standard and Poors noted the contribution that the

Budget had made, that economic reforms have made, that low inflation had made, that the

operation of our financial system had made and it indicated the importance of continuing

economic reform.

The only negative that the statement noted, and I accept it, is it said that economic

reform by the current Government could be complicated by minority representation in the

Upper House. I accept that is a problem in Australia. But great news today. Australia has

been revised upwards to the second highest rating. It’s something that reverses a

decision 10 years ago. It’s a consequence of long, hard, good economic work by this

Government and it shows the benefits that economic reform will have.


How imperative is it then that the reform package go through?


Well it’s very important. You see we are seeing now the benefits of economic

reform in the last three years. We see today Australia is upgraded. We were downgraded a

decade ago. Our Government was elected in 1996. We put in place economic reforms.

We’ve returned. Now the reforms that we put in place now are going to govern our

opportunities in the next five and 10 years. If you want to go right back up to the AAA,

to the top rating in the world, you’ve got to keep the reform process going and if we

slow down now our opportunities will just be less. We stand on the eve of some really good

opportunities in Australia if we keep economic reform going and that’s what the

Government wants to do.


What should the Democrats take from this then?


Well I think there is a very interesting part of this statement. It says this:

“…efforts to reduce Government debt or bring about further industrial and

economic reforms by the current Government could be complicated by minority representation

in the Upper House”. I mean that is the truth. A government is elected to govern. Our

Government has put in place reforms. It is paying dividends. We have low inflation, our

credit has been upgraded, we are recovering what we lost in the 1980s. But you can put all

of that at risk, all of that at risk, if you have minorities in the Upper House which

won’t let governments get on and govern. And, you know, we have an elected government

in Australia. We had an election in October of last year. We were elected to engage in

economic reform. We should be entitled to do it.


What’s your message to Meg Lees then on Thursday?


Well my message to Senators Lees would be there are benefits for Australians in good

economic policy. They’re more jobs, they’re lower interest rates, a stronger

economy, there’s respect. You can put that at risk if you go out and try and defeat

economic reform. If you defeat economic reform in Australia there will be slower growth,

less jobs, worse living standards, high interest rates and we want to keep the reform

process going.


Mr Costello, Brad Cole, Bloomberg News. This upgrade has happened in an environment

where interest rates around the world are rising. Indeed the benchmark Australian 10 year

government bond is up over 100 basis points in the year to date. What has the rise in bond

yields, what effect does that have on your economic growth forecast?


Well in Australia over the course of the last three years we’ve seen the margin

between the Australian bond and the US bond fall from about 350 basis points to about 30.

Now what that means is that you’re no longer penalised. Australian bonds are accepted

because we have a low inflation environment. Obviously as bond prices move around the

world you will see some effects in Australia but the key thing is the margin. The margin

is low. That is a pay-off for good policy. It’s a pay-off for a low inflation

environment. And even in this environment, for Australians to have interest rates at

current levels is to have the lowest interest rates in 30 years.


You don’t honestly believe though that news like today is going to suddenly make

the Democrats decide that they’re going to fall in line over the GST, do you?


Look the important thing to remember in Australia is this. Governments are elected to

manage the economy and you know I would concede that when an Australian Democrat

government is elected with a majority in the Lower House then they should have the right

to manage the economy. But an Australian Democrat government hasn’t been elected.

They haven’t won a seat in the House of Representatives. Now it’s a very tall

ask for them to demand the right to implement the responsibility of an elected government.

We elect governments to run economic policy. We elect governments to manage the economy.

And I make this point. If the economy is not managed well, our Government will bear the

responsibility. That’s why our Government should have the right to manage the


Let me remind you of the past. Three years ago we said the Australian budget had to be

brought back into surplus, that debt had to be retired. We were fought every single inch

of the way. By who? By Labor and the Democrats. Today you get international recognition of

good economic policy. Australia recovers the respect that it lost a decade ago. If the

Democrats had been running things, this would never have happened. And you know I say for

the future that it’s the reforms now that will give us the benefits in the future.

That’s what we want to get.


But a poll today seems to indicate there is a hardening of public opinion against the



Well you know what we want to do in Australia is reform the whole tax system. If you

want to take some of that out, you can produce particular results. But if I ran a poll in

Australia “Do you support income tax cuts?” I’m sure it would get a

very high majority. That’s a big part of our tax reform. If I ran a poll in Australia

“Do you support increased family benefits?” I’m sure that would get

a big tick of approval. That’s a big part of our tax reform. You can change the

questions but at the end of the day you’ve got to see the overall strategy.

The overall strategy is lower income taxes, a better indirect tax base to fund our

social welfare needs, increased benefits for families and a change in Commonwealth-State

relations. That’s great news for Australians.


So no compromise at Thursday’s meeting?


Well, as I said earlier, I’ll deal with Thursday’s meeting on Thursday when I

get back to Australia.


Mr Costello, what do you think could be the possible reduction in rates as result of

the upgrade?


Well rates will still be governed by a whole list of factors. They’ll be governed

by sentiment in relation to the Australian economy, they’ll be governed to some

degree by international developments, they’ll be governed by a whole range of

factors. But what this will do is it will reduce premiums on Australian rates so that the

difference between Australian rates and world benchmark rates will be kept narrow.

That’s what this will do. It will also improve confidence because it means that there

is a new confidence in foreign currency borrowings and it will make access to finance

easier. And that will be good for Australian corporate.