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Terrorism; Defence; Commonwealth Government Securities Market options; Labor; Sugar


Interview with Catherine McGrath


Wednesday, 30 October 2002

8.15 am

SUBJECTS: Terrorism; Defence; Commonwealth Government Securities Market

options; Labor; Sugar


Treasurer, good morning…


Good morning.


…if we can start with the issues of terrorism, defence and Australia’s prospects.

The Defence Minister has said that we might need a billion dollars to support

our defence capability for the future. There is also prospects of possible engagement

in Iraq. What is your bottom line about Australian spending especially as the

drought is impacting on the economy?


Well, there has been an enormous build-up in defence spending by this Government

over the last three years. In addition to the normal Defence budget the commitment

in East Timor was about a billion dollars per year and it continues.

We then announced White Paper funding of $23 billion over 10 years, an increase

that was over and above the normal budget, and over and above East Timor.


Will there be more though, I guess that is the question now, is there more for

the future?


Well, I am just going through it. We then announced in the last Budget another

$1.4 billion build-up for security matters over five years. And then in addition

to that, the commitment in Afghanistan, so, the defence build-up in spending

terms – all perfectly legitimate and justified in my view – has been very strong

over recent years. Now, I think the $1 billion extra figure that was put out,

was actually put out by Paul Dibb, not by the Defence Minister. But obviously

in the light of events in relation to terrorism, in the light of events in relation

to Iraq, the Government will look very carefully at whether or not additional

resources are needed.


Treasurer, the future of Commonwealth bonds, a boring topic perhaps to some,

but crucial to the markets and to the Australian economy in general. Now, as

debt is reduced you have indicated that there may be no further need for bonds,

but you have so far failed to fully outline what your specific preference is.

There will be a Government Options Paper today. Can you tell us now what is

your option?


Well, we’re releasing an Options Paper today as to how we would manage the Commonwealth

debt market in the future as we continue to pay down debt. As you know, when

the Government was elected the Commonwealth debt was $96 billion, and we have

now managed to repay $60 billion of that Labor $96 billion debt. Now some in

the market say, well, because you have re-paid so much debt there are not enough

bonds on issue to keep the market liquid. And superannuation funds like buying

these bonds, although they are not high yield bonds, they are safe and they

want to keep the bonds going, not because we need the borrowing but because

they see them as a useful investment for their members and a useful investment

to price interest rates. So, today I am releasing a paper to fairly and squarely

raise this issue as to whether we need a bond market at all. If we had the capacity

to re-pay debt, I would prefer to repay all our debt. If our privatisation programme

were to continue, we would have the capacity to re-pay all of our debt. But

I want to raise that fairly and squarely, let the financial markets put in their

bids, and see whether or not they can convince us that we do need to keep that

bond market. Now I stress that this is not something that is going to happen

next week or next month, this is something we would face in a year or two and

particularly as our privatisation programme proceeds.


Well, it is a crucial issue though because ending the bond market would be,

as I understand it, a world first. One of the other options put out is that

you could issue bonds for unfunded Commonwealth superannuation liabilities.

Do you favour that option?


Well, the other alternative to re-paying all of our debt is to keep the bonds

out there, because superannuation funds and others like to buy them, and then

build an asset portfolio which we could use to fund superannuation for public

servants. So, let’s suppose you had $50 of borrowings out there you would have

$50 billion of borrowings out there, you would have $50 billion in equities

or other investments against superannuation. Now, that would be a bit tricky.

I mean, there are three things that worry me about that. One is, if you have

a large asset portfolio you can take big losses, and we have seen that with

some of the States. Secondly, if you had such a large portfolio out there, the

Commonwealth would be a very large player in financial markets and could move

those markets. Thirdly, of course, you have got to factor into your thinking

that one day, you could get a Labor Government back in power and it would then

have the ability to run down that asset portfolio, sell the money for its pet

projects, so you would have to try and think of a mechanism of keeping that

away from future Governments to waste.


Treasurer, the key factor here though, is, is debt going to continue or is debt

going to end. You know, if Telstra is sold will you remove all debt? What is

your preferred option on that?


Well, as I have already said, my preferred option, as we have the capacity to

pay down more of that debt, is to do so. But, the markets say they would prefer

you would to hold out bonds matched by assets. Now, I have published this Paper,

I have put in this Paper, which I will be releasing today, the pros and the

cons and I have said to the markets, you persuade us as to the need to keep

out those Commonwealth Government bonds. If you can you have got a fair hearing,

if you can’t we will proceed with our debt repayment programme.


Treasurer, can we move on to the sugar issue? A new tax, 3 cents per kilogram,

the industry says it stinks basically?


Well, the industry representatives have protested as I expected they would,

and that is fair enough. We have situation where the sugar growers, particularly

in north Queensland, are facing prices which are ruinous to them. The Government

has announced a re-structuring package to help some of those get out of the

industry or get out into other crops. Now, I want to make this entirely clear,

this is not just income support. This is a re-structuring package to try and

fix the problems that have been bedevilling the industry…


Can I raise a point…


… and of course you have to fund that. Now, we have said that the fairest

way to fund it, is with the levy on the price, because it is the low price at

the moment that is causing the growers all of this difficulty.

So, if you have a 3 cents on the price with the money going for re-structuring

of the industry, at the end of the day when the levy comes off and the industry

is re-structured, the farmers are put onto a commercially sustainable footing.


Now, Labor says this morning that this is just a Wholesale Sales Tax all over



Well, Labor said it would support it, then Labor said it may not support it,

and then this morning they say that they wait to be convinced. Well, we will

put this into the Parliament. This not money that is going to the Government.

This is money that is going to the sugar farmers. And if Labor wants to say

that it is against re-structure for sugar farmers in north Queensland, let them

do so. But all I have heard them say to date is that they are in favour of it

they just don’t want to pay for it. The truth of the matter is if you want to

re-structure you have got to pay for it.


This is a difficult one for you to argue because you argued against it in the

Cabinet and the Australian Chamber of Commerce and Industry have made this point,

that you must fully understand, they say this undermines the continued micro-economic

reforms of the past 20 years. Now that is exactly the sort of thing you talk

about when you make speeches?


Well, absolutely I do, and you are obviously better informed as to what goes

on in Cabinets than me, Catherine. But, and I don’t agree with the pre-supposition

of your question at all. But the point I have consistently argued is this: that

if you want to get the sugar industry onto a sustainable basis, it needs re-structure.

This has been one of the most regulated industries in Australia. They used to

determine how much you could grow, who you had to sell it to, where you could

grow it and all of this kind of thing. It is clear that there are many people

who do not see a viable future and want to be re-structured out of the industry

and the Government is making $45,000 grants available to them. The idea is to

get the farming community of north Queensland and New South Wales as well, the

sugar-cane farmers, on to a sustainable basis. Now, to re-structure that industry

you need funds and the fair way to do it, I think, is in relation to the price,

because it is the low price that has actually caused their difficulties.


Treasurer Costello, we will have to leave it there, thanks for your time.


Thank you.