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The Australian revival: address to the National Press Club, Canberra: 1 March 2006 [and] Questions and answers.



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ADDRESS TO

THE NATIONAL PRESS CLUB

THE AUSTRALIAN REVIVAL

WEDNESDAY, 1 MARCH 2006

I want to take you back to the early 1990s to the kind of nation we were then - insecure, uncertain about our economic prospects, battered by recession, suffering high unemployment and job insecurity; and scarred by the recent experience of 17 per cent mortgage interest rates.

Bob McMullan, Parliamentary Secretary to the Treasurer wrote back then in the Canberra Times (5 May 1991):-

“I know that it is unfashionable to have anything positive to say about the Australian economy at present. However last week I had the opportunity to represent Australia at meetings of the International Monetary Fund…three things struck me during the course of these meetings. First, we should never forget our relatively favourable situation. As I have said before in these articles when compared to the problems of Mali, Peru or Bangladesh all Australians should rejoice in our good fortune - however much we are determined to improve our own position.”

On a visit to Australia in 1994 the former Prime Minister of Singapore Lee Kuan Yew reiterated a previous warning that Australia could become the “poor white trash of Asia”. This was partly a reflection on Australia’s economic state. It was also a reflection on the rise of the Asian Tigers. East Asians he said are highly competitive people “training themselves to win life’s marathons”. Australia looked at that time as if it had spent its best energies in the early part of the Century and was fading badly.

In 1996 Samuel Huntington published his famous work “The Clash of Civilisations and the Remaking of World Order”. He included an intriguing section on Australia. Huntington claimed that in the early 1990s Australia’s political leaders had decided that Australia should defect from the West and redefine itself as an Asian society. I do not think this was a correct analysis of the intentions of the then Government. But Huntington wrote as follows:-

“The case for redefining Australia as an Asian country was grounded on the assumption that economics overrides culture in shaping the destiny of nations. The central impetus was the dynamic growth of East Asian economies…”

The dynamic growth of East Asia was in stark contrast to the economic malaise of Australia. When the Government appealed for ‘enmeshment’ in Asia it was making an economic appeal. The thinking was that if we could join a region that was successful we could overcome our own weakness.

In 1992 in their book “Shutdown” Robert Manne and John Carroll claimed:-

“The most important contemporary example of economic success is Japan. It is widely accepted that the Japanese economic miracle is due to a very significant degree to the way the state guides economic development, principally through an elite bureaucracy which determines industry policy - the Ministry of International Trade and Industry (MITI). Japan and MITI have vital

lessons for Australia.”

This was a variation of the enmeshment policy. Enmeshment was designed to allow us to get the benefits of the so-called Asian economic model. Manne, Carroll and a whole host of industry policy advocates wanted Australia to adopt the Asian economic model.

And there were others who believed we should just accept a lesser place in the world.

The left wing writer Cassandra Pybus wrote in August 1997:-

“I fail to see why we should get so distressed at the idea of living in a third world economy”.

The rise of the Asian Tigers through the 80s and the comparative decline of Australia through the recession of the early 90s sapped our confidence as a nation. And what is more, it sapped the respect for Australia amongst our neighbours and the wider international community.

The Coalition Government was elected in March 1996. We laid down an economic programme setting out medium-term targets on fiscal policy, monetary policy and debt management. We commissioned an audit of national finances, we enshrined Budget accountability and reporting in legislation and we began working towards strengthening the Australian economy. By July 1997 we were on track to balance the Budget for the first time in seven years. It was a close run.

Beginning with mass capital outflow from Thailand in June-July 1997, financial contagion began spreading around the region. By Christmas 1997 Korea, one of the Asian Tigers, had run out of foreign reserves and its Government was appealing to citizens to give gold to a national collection campaign. Indonesia was the most severely affected by the crisis. The Government of President Suharto, which had been in Office since 1967, was swept away in May 1998.

Those in Australia who had marvelled at the growth rates and saving rates of Asian Tigers saw these countries stagger and reel. They could only shudder to think what would happen to Australia - considered by many to have a weaker economy. The drive to a enmesh Australia with Asia had been premised on dynamic Asian economic growth which would carry Australia with it. What chance would Australia have when that dynamic growth turned to collapse? It was widely anticipated amongst many in the local press that this financial collapse would affect Australia creating deep recession or worse.

But Australia did not succumb to the Asian financial and economic collapse. In 1997-98 our growth rate was 4.5 per cent. We produced the first balanced Budget in 7 years. Paul Krugman writing in Fortune Magazine in December 1998 dubbed Australia ‘the miracle economy’.

I bookend this chapter with the recollection of two very different regional meetings.

In March 1996 the APEC Finance Ministers met in Japan. It was the first APEC meeting I attended. We were given a polite welcome but we were not respected. Australia was tolerated much as a fading uncle is tolerated at Christmas dinner:- there out of politeness and past association rather than present or future expectation.

But we proved strong and resilient through the Asian economic crisis. We didn’t turn out to be a weak link. We turned out to be the strong man of the region. We survived and we offered financial assistance to badly affected economies in the region.

In May 1999 APEC Finance Ministers met at Langkawi in Malaysia. We were not the fading relation at this meeting. Australia had won a great deal of respect. The region knew Australia was a success story and they wanted to learn from its experience. Now we had people talking of the “Australian model”. Many Ministers who I had met at previous meetings were unable to attend - some were in jail, some were under house arrest, many had been dismissed. But Australia had shown itself stable, reliable and strong.

Since 1996 Australia has had continuous growth averaging 3.5 per cent per annum. During that period Singapore has had three recessions, Hong Kong has had three recessions, Korea has had one recession, Taiwan has had two recessions, Japan has had four recessions, the United States went into a recession in 2001.

Over the last 10 years Australia has earned a great deal of respect amongst its neighbours and the other economies of the world. Australia’s achievements have given its people a lot more self respect. The nation feels more secure about itself.

This is the Australian Revival.

The Australian economic revival has led to the revival of confidence and respect. And we can measure the economic revival against other developed nations. Through the 80s and 90s we fell below the average GDP per capita of the OECD countries. From the beginning of this decade we turned positive in the rankings.

Australia’s economic revival

(The difference between Australian and OECD average GDP per person)

* 'OECD' includes only the 24 oldest member countries Source: Groningen Growth and Development Centre and The Conference Board, Total Economy Database, January 2006, http://www.ggdc.net.

Since 1996 we have had eight surplus Budgets, we are on the verge of eliminating Commonwealth debt, inflation has been stable notwithstanding huge pressures from what in truth has amounted to the third oil shock.

Today briefly I want to recount some of the steps that were important in getting us where we are. Today I will not be comparing the Australian economy to Mali, Peru or Bangladesh. We can now afford to compare ourselves with developed economies.

As we know, the March 1996 election was fought on the basis that the Commonwealth Budget was in surplus. The December 1995 Mid-Year Review forecast a surplus of $115 million. Kim Beazley, then Finance Minister, repeatedly affirmed in the

campaign that the Budget was in surplus, for example, saying on 1 February 1996:- “…we’re operating in surplus, and our projections are for surpluses in the future.”

On the day after the election on 2 March 1996 the Treasury estimated the deficit at $9.0 billion (1.9 per cent of GDP). The outcome was in fact a deficit of $10.1 billion (2.1 per cent of GDP).

Immediately after the election the Coalition Government announced that it would legislate to prevent such deception ever occurring again. The Charter of Budget Honesty Act 1998 provides mandatory reporting standards and the preparation of a pre-election statement by the Secretaries of Treasury and Finance. Now the public is told the actual state of the Budget before the election campaign and is able to assess policy against agreed facts before they vote.

The new Government also announced an immediate Commission of Audit to identify all assets and liabilities of the Commonwealth including all contingent liabilities and unfunded superannuation to get a true picture of Commonwealth finances.

On 14th August 1996 upon the appointment of a new Governor of the Reserve Bank, the Governor and I entered an Agreement to set inflation targets, to direct monetary policy at those targets, and to guarantee the independence of the Central Bank. This was the origin of a medium-term framework for monetary policy.

On 20th August 1996 in the first Budget of the new Government the Government laid down a medium-term framework for fiscal policy. The objective was “maintaining an underlying balance on average over the course of the economic cycle. This approach will ensure that over time the Commonwealth Budget makes no overall call on private sector saving and therefore does not detract from national saving.” (Budget Paper No.1)

Later further objectives were added to the strategy - the objectives of:-

● halving the Commonwealth net debt to GDP ratio by 2000 (1998);

● improving the Commonwealth’s net asset position (1999);

● no increase in the overall tax burden from 1996-97 levels (2000).

In ten Budgets since 1996-97 there have been eight surpluses cumulating to an estimated $59 billion over 10 years. Commonwealth net debt will, this year, be eliminated. Net interest payments which were $8.4 billion (1.5% of GDP in 1996-97) will fall to $0.3 billion in 2006-07 (0.0% of GDP). And thereafter net interest payments will be negative. In 2006-07 1.5 per cent of GDP represents a saving of around $15 billion - this shows the value of our debt reduction strategy.

Net Government Debt

Source: Mid-Year Economic and Fiscal Outlook 2005-06

Few today would dispute the success of these policies. But monetary targeting, fiscal targeting and debt management were all vigorously opposed by the Opposition. Kim Beazley warned of the 1996 Budget:-

“The problem is that when you bring down your budget, you will ultimately be held responsible for those consequences. Those consequences are going to restrain growth. Those consequences are going to mean rising unemployment. Those consequences are going to mean, as a result of that, a lifestyle for Australians which they have not had to confront for a very considerable period of time.”

Labor went further in opposing the Government’s framework for monetary policy claiming the agreement was illegal:-

“…if Mr Costello is proposing to make the incoming new Governor of the Reserve Bank sign a letter which commits the Bank to a hard-line, ‘fight inflation first’ strategy, inflexible and excluding, in effect, the relevance or the applicability of the jobs or full employment criteria, we believe there is every chance that that course will prove illegal and be held to be determined to be so by the Courts and we will certainly be very closely scrutinising the terms of that letter and seeking legal advice to establish that.” Gareth Evans, Shadow Treasurer, 13 August 1996.

There are several other key policy settings that have made a difference. The first is tax reform.

From 2000 the introduction of GST paved the way for the abolition of:

● Wholesale Sales Tax

● Financial Institutions Duty;

● Bank Account Debits tax;

● Stamp duty on marketable securities;

● Conveyancing duties on business property;

● Stamp duties on credit arrangements, instalment purchase arrangements and rental (hiring) agreements;

● Stamp duties on leases;

● Stamp duties on mortgages, bonds, debentures and other loan securities;

● Stamp duties on cheques, bills of exchange and promissory notes; and

● Bed taxes.

The introduction of a uniform value added tax gives Australia one of the most streamlined indirect tax bases in the world. For example in the United States where indirect taxes are set at State and local levels with varying rates and bases, I am told there are 260 different systems to comply with. In Australia there is one single system.

The 2000 Tax Reform cut 12 family and childcare payments to 3. Taper rate reductions have eased effective marginal tax rates. From 1 July 1996 to 1 July 2006 the income tax rates have changed:

Personal Income Tax Cuts

Company tax has been cut from 36 cents to 30 cents. Capital gains tax for individuals has been halved.

Competition

The Government’s policy is to promote competition in all of Australia’s products and services markets. Since 1996 the Australian Government and the States have undertaken a comprehensive review programme of legislation that restricts competition. Those restrictions that cannot be justified on a public interest basis have been abolished.

We have brought maximum textile, clothing and footwear tariffs down from 37 per cent in 1996 to 17.5 per cent now, and due to fall to 10 per cent in 2010 and 5 per cent in 2015. We have reduced passenger motor vehicle tariffs from 25 per cent in 1996 to 10 per cent now and 5 per cent in 2010. We removed more than 250 nuisance tariffs in 1999, and have negotiated Free Trade Agreements with the United States, Singapore and Thailand.

Labour Market

The Government has now enacted several rounds of labour market reform - the first of which was 1997 and the most recent is to commence in March 2006.

Labour market reform has broken down centralised wage fixation. Enterprise bargaining has protected against the transmission of

uncompetitive wages out of profitable areas of the economy to unprofitable ones, a process which in the past promoted business failure and unemployment.

Employment

Of all of the economic indicators the one that means the most to me is the reduction in unemployment.

Having a job is not only crucial to people’s financial health, it is also a critical part of people’s sense of worth.

During the recession of the early 90s unemployment rose and the unemployment rate neared 11 per cent of our fellow Australians without a job. Nearly every Australian family was affected one way or another through family or friends.

The Minister for Employment (Kim Beazley) at the time stated that high unemployment was a permanent part of the landscape and that people should get used to this idea. This was defeatism. It excused inaction on the tough decisions that had to be made.

Economic growth is the most lasting solution for unemployment. As you can see from the graph a gradual steady decline in unemployment has followed from solid economic growth.

Unemployment Rate

Interest Rates

In March 1996 the standard variable mortgage interest rate stood at 10.5 per cent. The standard variable mortgage rate now stands at 7.3 per cent.

The reduction in interest rates over the past ten years has provided borrowers with substantial reductions in interest expenses. With the average new mortgage today at around $220,000, the fall in interest rates from the 1996 level of 10.5 per cent represents a monthly interest saving of $585.

Home Loan Interest Rates

Tax and Spending Policy

As you compare Australia with other developed countries it is clear that Australia is a low tax country.

We are the eighth lowest taxing country in the OECD.

Total Tax Revenue (as a percentage of GDP, 2003)

Source: OECD Revenue Statistics, 1965-2004, 2005 edition.

Our tax levels are actually in an even better position than the table would indicate, because our Budget is in surplus and Government debt is practically zero. Many of those countries shown in the table to have lower tax than Australia, like the US and Japan, have massive government deficits. What this means is that this component of lower tax levels now is only accomplished by postponing collection into the future. They have a nasty tax surprise coming around the corner, we don’t.

It should not surprise people that we are a low tax country, because we are a low spending country compared to international practice. The two go hand in hand.

Government Spending (as a percentage of GDP, 2005)

Source: OECD Economic Outlook No 78, December 2005

In the OECD Australia has the second lowest level of government spending as a share of GDP at 35.7%, lower even than the United States.

According to the OECD the Australian level of government spending as a proportion of GDP has declined from the 1996 level of 38 per cent to 35.7 per cent.

Some people may wonder - that tax and spending have declined as a proportion of GDP, when they see that the Government seems to be spending more.

This is an important point to understand is that the government has been spending more in critical areas but the rate of increase has been lower than the growth rate of the economy. And don’t think that reducing expenditure to GDP ratios is easy. Every pressure in a democratic system is to increase spending. Resisting calls for increased spending on worthy causes (and all causes are worthy in the eyes of those who want it) is a daily struggle - week in week out, month in month out, year in year out.

The results are coming in

What is the end result of all of this reform? Well, we are currently in the longest growth phase in Australian history. Longer even than the famous 50s boom which ended in recession in 1961.

People’s incomes have risen substantially, and more people are in jobs.

We are moving up the ladders of all the major international tables on well-being and incomes.

This work has been recognized by respected international bodies.

The most recent IMF report commended Australia for its “exemplary settings of economic policies”.

In its 2004 Survey of Australia, the OECD noted that Australia has become:-

‘a model for other OECD countries in … the tenacity and thoroughness with which deep structural reforms were proposed, discussed, legislated, implemented and followed up in virtually all markets, creating a deep-seated “competition culture”’.

The Financial Times editorialised last year praising Australia’s reform record and said that it was “hard to pick holes in Australia’s economic record.”

Reflecting on this

What do I think when I reflect on these ten years? Let me go through a few disparate thoughts.

Economic management is a weighty responsibility. People’s livelihoods depend on it. Their mortgages, their jobs, their businesses, turn on it. People can see the discipline and seriousness we have brought to the task. They can judge for themselves the results.

Aside from what we have done, it is important to also remember what we have not done.

We could have tried to jump on the Asian Tiger model and run a corporatist government - we didn’t. We could have been swept up by dotcom mania, as urged by many - but we didn’t. We could have miscalculated in the face of the Asian Financial Crisis, or the worst drought in 100 years, or in the face of threats from terror or war or SARS or the current oil shock. We didn’t. And while we have improved our position in the world we cannot sit back and relax.

The world economy is ruthless, competition unrelenting, and to compete in the future we need to make all of our policy settings first class.

We need to make every post a winner. In every area of governance across all portfolios our settings must be top grade. We need to be willing to re-examine our existing policies to see if they cannot be improved.

Here are the tasks for the future:

● Working within the framework laid down by Australia’s Intergenerational Report to deal with our greatest long-term

structural issue:- Ageing of Population; ● Establishing a Future Fund to invest for the future to give the young people of today a chance to meet their liabilities and

fund their future; ● Developing a Welfare to Work policy designed to increase participation rates in the workforce particularly for the older

members of society and those who would otherwise be classified as disabled; ● Labour market reform which will boost individual contracts create more flexible work practices;

● Technical training to create higher skills amongst young people;

● Regulatory arrangements which will allow competitive access to monopoly infrastructure whilst still promoting competitive

investment; ● A system of national economic regulation - in competition, in access arrangements, and in export infrastructure;

● Nationally integrated utility markets - in gas, electricity and water.

● The Bogor goal of free trade in our region.

● An energy freeway in the region linking producer and consumer nations.

In the economic domain we must strive for efficiency and flexibility, with taxes as low as possible and as simple as possible, with regulation limited to where it is strictly necessary, with welfare as a safety net not a feather bed.

We must ensure that Australian workers are skilled and educated enough to adapt to new circumstances and if necessary change jobs.

We must aim to lift those that remain marginalised or living in poverty or suffering health problems or disabilities. We must lift those Australians so that they can enjoy the wonderful opportunities that most Australians take for granted.

We must look at how to improve opportunities for women, create the most female-friendly environment in the world.

Our natural environment needs to be nurtured and sustained, and our dry continent needs solutions to our water shortage problems.

Our defence forces need to be well equipped, our health system needs to meet best international practices.

We have many, many issues to address.

Our future in Australia will be a positive one and an exciting one if we can continue to embrace change and adapt to new circumstances.

When you look at the record since 1996, the decisions the Government has taken have reflected our philosophy and values. We are a centre-right Coalition and I am a Liberal that believes in Liberal values. I came into Parliament with my priorities as helping families, helping the unemployed, and getting small business back to prosperity. My values were shaped as a youngster in a modest suburb - by my parents, family, school, church - it was a million miles away from fiscal policy and tax law and international finance.

But the simple principles are the most important, and even when dealing with the most complex and large issues I keep coming back to them - living within your means, working hard, being careful and not squandering your money - not bad principles for a youngster, not bad principles for an economy.

© Commonwealth of Australia 2000

NPC Q&A Costello 1-3-06.doc Page 1

This transcript is taken from a recording, and freedom from errors, omissions or misunderstandings cannot be guaranteed.

NATIONAL PRESS CLUB Questions and Answers

Wednesday, 1 March 2006

KEN RANDALL: Thank you very much, Treasurer. We have our usual period of media questions. The first one today is from Malcolm Farr.

MALCOLM FARR (Daily Telegraph): One of the things you have been wrestling with for a large chunk of those 10 years has been the Pharmaceutical Benefits Scheme. I don't know if you have wrestled it to the ground yet, but what do you see might be happening with the PBS, particularly given Cabinet's consideration of it on Monday?

PETER COSTELLO: Why don't you just ask this question: would you please tell me what Cabinet decided at its last meeting?"

Look, when we brought down the Intergenerational Report we showed that there was no area of government expenditure which would increase faster than health, not just because of the ageing of the population but because of technological advance—we're getting new treatments all the time. And within the health budget there is no area that would increase faster than pharmaceuticals, again, because of scientific advance.

Now, we've put in place a number of changes already. We increased the co-payment, we have announced changes in relation to the number of scripts before you activate the safety net. From memory, the rate of growth of pharmaceuticals, which we

thought a year ago was at 8.6 per cent per annum is now growing at about 6.8 per cent—something like that. That's an improvement. But 6.8 per cent on an economy which is growing at three per cent is still a real cumulative increase year after year and, in my view, not fully sustainable. And so I think we have to look again, particularly at this area of off-patent pharmaceuticals. We have to see if we are getting the best price for off-patent pharmaceuticals and whether we can release to the community therapeutic pharmaceuticals, which have the same effect and the same safety, at a cheaper price; cheaper to the consumer, cheaper to the taxpayer.

And although I'm not in a position to tell you what the Cabinet decided on Monday, we will be looking at those issues over and again because it's something that we are going to be wrestling with I think for 20 or 30 years.

MICHAEL BRISSENDEN (ABC Television): I am sure it hasn't escaped your attention—well, we know it hasn’t escaped your attention—that the Victorian Labor Party is having a few preselection problems at the moment, but I also understand that the Victorian Liberal preselections have been opened this week. Petro Georgio is one

seat that we understand he could have some threat to him. Will there be any others do

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you think that might open up, and what is your position? Will you be supporting Petro Georgio and what do you think about having someone like that who has copped quite a lot of criticism from your colleagues for his small ‘l’ liberal views in the party?

PETER COSTELLO: The way in which the preselections are done in Victoria is they open preselections for sitting members, then marginals and then, shall we say, less marginals. We don't give anything away in Victoria. And the preselections for sitting members are now open. Will sitting members be challenged? It's quite possible. I wouldn't know. I hope I'm not.

But there’s a funny thing about the Liberal Party—it actually has real branches with real people in them and they do actually meet and they do vote, and it's … you know, I would recommend it to the Labor Party, actually—developing a real branch network. It's quite a useful thing, and you can't stop that.

My view is that as the Deputy Leader of the Liberal Party and the senior Victorian, I should support all of my colleagues. That's my view, and I will. And I just make this point—I don't see why any leader of any political party can't do the same thing. It's not too hard to say, you know, and it's not too hard to do. And if you weren't afraid of

factional war lords it would be the easiest and most standard thing in your life which would happen. And all this nonsense they're talking about in Victoria about renewal— what?—one group of faded trade union officials replaced by a new group of faded

trade union officials. That's what's going on down there. Nobody is walking in off the street who has been enormously successful in another walk of life, and all of this goes back to the war lords controlling various union shifts of allegiance. And if you think that's the way to get new blood in the party, well, I think you're mistaken.

LINCOLN WRIGHT (Sunday Herald Sun): I was curious, Treasurer, about your comments that you wanted Australia to be the most female-friendly country in the world. Is it not the case now that we're not female-friendly, and do you think there is room for improvement and, if so, in what areas?

PETER COSTELLO: I think we are female-friendly but we've got to keep re-examining all these things and if there are areas where we can do better, we should do better. That's my view. Half of the population, which we're now finding is the more intelligent half of the population, if you look at university entrants and university

training, now with highly developed skills, because you've got a tradition of education and entering the workforce, still with the difficulty of balancing family and work— men also have that difficulty but it's worse for women I think. And we ought to be looking at making this the most female-friendly place on earth. And I think we would be in the front row of countries I would think in relation to that but if there are areas

where we can improve these things, I’d want to see that, and that's going to involve the work/family balance, it's going to involve child care, it's going to involve respect for abilities, and I think there are areas that we can actually improve things.

[INAUDIBLE]:

PETER COSTELLO: Look, Australia is not a perfect place. Nobody can say Australia is a perfect place but, you know, are we bad by international standards? No.

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We're actually quite good by international standards, and I think we can be quite proud that we have had a good tradition of female equality in this country but I just think it can be better.

MARK KENNY (Radio National): You quoted Hans Tietmeyer—the legendary German central banker I think you said he was—saying policy needs to be anchored to something. Am I right in concluding that that's essentially your problem with multiculturalism, that it's essentially relativist, it doesn't stem from a particularly anchored or agreed set of Australian values?

PETER COSTELLO: Well, when Hans Tietmeyer was lecturing the interim committee of the IMF on the need to anchor policy, I didn't immediately think of multiculturalism, I must say. It was more a speech on fixed exchange rate, inflation targeting and a balanced budget. So let me put Hans to one side and come to your question.

My point is this—we want Australia to be open and tolerant, with a robust respect for diversity. But I believe that in order to do that you've got to have some ground rules. You've got to have a framework within which people can exercise that diversity and expect and receive tolerance from others.

Now, what's that framework going to look like? Well, the first thing you're going to need if you want to have tolerance of all religious faith, you're going to have a secular state. It is an obvious point but a right one. You're not going to be able to tolerate different religions in a theocratic state. You need a secular state which doesn't favour between religions. You need a robust acceptance of the rule of law that governs everybody, regardless of their faith or their culture or their language. You need a respect for the rights and liberties of others because I’ll never be able to practice my religion and my culture if there is somebody that doesn't respect me. And if I want that person to respect me, I've got to respect that person. And we can only do this under an agreed set of facts of rights and liberty.

And then where is this rule of law going to come from? Well, in a democratic society, it's got to come from the people. So what I'm arguing very, very strongly is for framework within which we can have a robust diversity and tolerance. But if our tolerance moves to such an extent that we say it's actually optional, whether you have a secular state or it's optional whether your laws come from a democratic legislature, or it's optional to recognise the rights and liberties of even people you don’t agree with, then that will compromise all of us. So I'm actually for robust tolerance and diversity, but my point is we have got to have agreement on the values. And there are some values that are so important to that, that they are not optional values, and we've got every right to ask people to subscribe to those values.

If we want to have freedom of speech in this country, we’ve got every right to say to people: you're not allowed to bash up somebody because you disagree with their views. Every right to say that, because if we don’t say that we’re not going to have

freedom of speech. That's what I'm putting forward here. I think we have got to be quite unambiguous about those values. I think we've got every right to say them and I can assure you, I intend to keep on saying that.

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DENNIS SHANAHAN (Australian): On the weekend you said that the public and the people actually want tax cuts, not tax reform. Today you have said welfare reform is essential and one of the targets for the coming years, and simplification of the tax system also one of those targets. Surely you can't achieve both of those targets merely by returning bracket creep as tax cuts in each budget. What more has to be done?

PETER COSTELLO: Well, Dennis, we don't just return bracket creep in tax cuts. If I go to that diagram there—and I made this point before. If we had taken the $50,000 threshold at which the 47c rate cuts in, and indexed that in 1996, today it would be $64,000; in fact, on 1 July it's going to be $125,000. So this is not just a question of returning bracket creep. And as you can say, rates like the 20c, 34c and 43c rates are cut.

I feel that the tax debate, in the minds of some newspapers, has gone off on a funny tangent, and I keep reading ‘people aren't interested in tax cuts, they're interested in tax reform’. Now, the point I make is this: nobody is interested in a tax reform which is going to put their tax up—nobody. Never met somebody yet who has said: I want tax reform so I pay more.

People want tax reform which will cut their tax, and the important thing, I think, is to work to reduce taxes. And I'm not going to get involved in these long arguments about what is tax reform and what are tax cuts. I think the public knows what they want— they want taxes to be as low as they can, consistent with decent services: decent health services, decent hospital services, roads where traffic moves … that's a big thing they're demanding at the moment, consistent with low interest rates.

I hear some people say: oh, well, you don't need to balance your budgets anymore or you don't need to add to national savings. We're not going to give away our fiscal policy. That is anchored policy since 1996. We're not going to give away our fiscal policy but, consistent with that fiscal policy, consistent with good services, we are going to ensure that the tax burden is as low as it can be. And we're going to internationally benchmark that against … see, we don't benchmark against Male and Peru and Bangladesh anymore, or even Slovakia as I noticed was recommended in some newspapers. We tend to benchmark against the developed economies because we are a developed economy. And being a developed economy means that your level of social services will be higher because people expect, and they're entitled to, a certain standard of health and education and roads and pharmaceuticals. So we’ll internationally benchmark. We will find areas where we're doing okay, we’ll find areas where we're behind the pace and we will start working in those areas first.

ANDREW FRASER (Canberra Times): I was wanting to ask about perhaps the most important organisation over which you have responsibility, that being of course the Essendon Football Club. The club has recently implemented a new leadership structure in which they have replaced a proven, popular, premiership-winning captain with a relatively untried full-forward. However, the ex-captain remains in the run-on side casting something of a shadow over the new leader. I am wondering if you think this leadership structure could transfer to the world of government and particularly in what position Captain Costello would play ex-Captain Howard?

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PETER COSTELLO: Well, I don't think I’d play John Howard in the ruck if that’s … and I don't think I’d play myself as a rover, so we've got certain limitations there. And I don't think that I agree that the new captain is untried. I think the new captain is very well tried and has been a leading goal-kicker over a long period of time. I'm

talking about Matthew Lloyd here.

MICHAEL HARVEY (Herald Sun): I'm interested in the comments…

PETER COSTELLO: Normally you’d ask that kind of question.

MICHAEL HARVEY: I was going to ask about your proposal for the world football league, but we can … yes, another time maybe.

I'm interested in the remarks about multiculturalism and you talked today about framework for robust tolerance and diversity. Last week you talked about people who want to practice sharia law, for example, in Australia should go elsewhere to do that and be stripped of their citizenship—and that's fine. What about the detail of this? You talked about a lot of principles, but would this mean that families would have to be split? What if there is a father who is expelled in that circumstance? What if his daughter is an Australian citizen? What do you say about the detail? Are you prepared to countenance that sort of scenario?

PETER COSTELLO: Actually, I went into quite a lot of detail and in a flurry of media transcripts was asked all of these questions. Essentially what I put forward is if you are already a citizen of one country and you want to come to Australia but can't

accept its values, keep the citizenship of that country; that Australia has a pledge that in order to become a citizen of Australia you have to take that pledge and, in my view, should mean it. If you are not a citizen of another country, if you were born here, you have no other citizenship, then obviously there is nowhere else for you to go, and you are an Australian citizen. You are one of us and you have the rights—and here’s the rub—and the obligations of an Australian citizen … the rights and the obligations.

And to those people, as I said in my speech, we must appeal, explain our values and appeal to them to embrace them: loyalty to the country, respect for the rule of law, support for democratic institutions, respect for the rights and liberties of others. And we must call on leadership of goodwill that they respect to help us. But I don't think we can ignore the problem. That's my point. I think we've got to engage, we've got to engage leadership and we've got to explain our values.

MARK RILEY (Seven Network): In your speech you nominated the near-elimination of Commonwealth debt as one of the hallmarks of the last 10 years but surely the real explosion in private debt—personal and household debt—is also a hallmark of those years. What can and will you do to attend to that problem?

PETER COSTELLO: Well, the first point I’d make is the debt. And you're talking of foreign debt here, I assume? Foreign debt is now almost entirely I think 96 per cent held by the private sector. It's not government borrowing that has led to foreign debt. In fact, it is government saving which has actually led to that foreign debt being lower

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than it otherwise would have been. And this is a point I keep making about fiscal policy.

You heard what our target was. Commonwealth government will not detract from national saving. I’d would go further—we actually add to national saving. Why? If we weren't actually adding to national saving, foreign debt would be higher because the government would now be in the market of drawing down. At the moment it is the private sector and principally banks that are borrowing overseas and on-lending to their customers.

Now, that is not necessarily a bad thing depending on what it's used for. If a bank goes overseas, borrows money, lends it to RTZ, RTZ puts in another rail track up in the Pilbara, which increases its capacity, it's a good thing. If a bank borrows overseas, funds a toll road constructor who builds a toll road which relieves congestion—and that's the point, ‘which relieves congestion’, that can be a good thing. It’s not bad

things.

The critical thing is what the money was actually used for. It would be much worse if it were a government going overseas borrowing money to pay recurrent revenue. That’s of a totally different character. Our view is that in a competitive market, where the borrowing is between private borrowers, consenting adults, then it can be used for good outcomes in a way which boosts the economy.

So the point I'm trying to make to you is it's not just the level, it's the character of foreign debt which is quite important here, and the character of foreign debt today is much better than it was. Now, I keep on putting this caveat. Does that mean that I am unconcerned about Australia's current account? No. Would I like to see it narrow? Yes. But do I feel that it's the same kind of problem of the same dimension as it was back in the late eighties/early nineties, when the Government was adding to those borrowings? No. But do I feel we can relax on our fiscal policy and let the government get into the dissaving business? No. It is a very important point here. You've got to keep the government in the saving business. It is another way of saying we need to run budget surpluses.

LAURA TINGLE (Financial Review): You've put a lot of emphasis on competition policy in a rather ambitious agenda you've set out for the next 10 years or so. I just wondered whatever findings the Cole commission makes in the coming months, can we see what has happened with the Wheat Board and the fact that the government apparently didn't know or officials couldn't act to address the problems that have emerged. Do we see that as a sign of failure of monopoly regulation? What's your general view of the success of monopoly regulation under your government? And also, given your emphasis on competition, do you think it's sufficient to just leave as a stand-off, the position with Senator Joyce, on competition policy when it's blocking the remainder of the Dawson reforms being legislated?

PETER COSTELLO: Well, I think where you’ve got a monopoly you do have to be more careful with your regulatory arrangements because monopolies do not have the pressures of a competitive market. So you need to be more careful in the interests of

consumers, and also of course, where you have competitors, they can actually keep a

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watch on each other. There is somebody who does have an interest in keeping a watch on the other players in the market. So you do get a bit more disciplined in a situation where you have competition.

In relation to the Dawson reforms, they are good reforms, they are a balanced package, they have been put up to the Senate; the Senate has not passed them. Our view is that they will be a good addition if they are passed in their entirety but they will be lopsided if they're not passed in their entirety. So there is no point in putting it back into the Senate unless there is a change of view in the Senate.

Would the Trade Practices Act be improved if it went through? Yes. Would it have led to a huge change in relation to merger policy? No. And I have always made that point. I think the critics overstated the degree to which it would change things. It would improve, but it wouldn't be a major difference. So can the current situation continue? Yes, it can. And it will continue so long as the Senate is opposed to it. If any senators are thinking of reconsidering, or any of the lobby groups that argued against those changes are thinking of reconsidering, let me know.

KEN RANDALL: Treasurer, we will have to end there. I'm sorry about the other questions that were lined up, but thank you for the address today. Thank you for the past 10 years. Drink a toast when you get the chance.

PETER COSTELLO: Thank you.