Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Treasurer discusses present economic situation; value of Australian dollars dropped overnight to US 67 cents; says that the Government will not increase tax to GDP and tax policy stands independent of budget policy

PETER CAVE: [break in transmission] ...prices in the wake of the Asian economic crisis has knocked more than one US cent off the value of the Australian dollar in the last 24 hours. Overnight it dropped below US 67c, at the end of a week in which Australia's foreign debt has jumped to a record high and in which we've learnt that Australia's trade account with the rest of the world has swung back into the red. At the same time, Australia is enjoying one of the fastest rates of economic growth in the world, with wage growth and inflation low.

Our guest on AM this morning is the Federal Treasurer, Peter Costello; he is speaking to our economics correspondent, Peter Martin.

PETER MARTIN: Treasurer, has the Asian crisis sullied what would have otherwise been a magnificent week of economic news for you?

PETER COSTELLO: Well, the news on the economy has been good; as your introduction said, one of the fastest rates of growth in the world. Our January labour force figures showed that we have the lowest unemployment since Mr Keating's recession, since 1990. We've got the lowest inflation in 30 years, but we also acknowledge that we've got an external challenge, one that we haven't had before in our region in relation to Asia. Now, what that means is that we won't break any records which we otherwise might have done.

PETER MARTIN: Is it really a dangerous time, Treasurer, for an economic boom of the kind we have been having? Imports climbed 4 per cent, as you know, in the last three months of last year, at a time when exports scarcely grew at all.

PETER COSTELLO: Well, people say, 'Oh, well, it's a dangerous time to have a strong domestic economy when you've got these adverse external events going on,' but put it round the other way: if we didn't have a strong domestic economy and we had a downturn in the region, we would be in a worse position, wouldn't we?

The good news is that we've managed to strengthen the Australian economy at a time when we're not getting external stimulus. What that's meant is that we've been able to keep growth up - we won't break records in the way we would have otherwise - and to get good jobs growth as well. So it's in fact been a boon to be able to have the domestic events off-playing the external downturn.

PETER MARTIN: Will that current account deficit, which is widening dramatically now, put downward pressure on the dollar?

PETER COSTELLO: Well we've ... I wouldn't use the word 'widening dramatically'. We've forecast that the current account deficit will widen. You would expect that when you have an external downturn and strong domestic growth.

PETER MARTIN: Would you expect downward pressure on the dollar now?

PETER COSTELLO: Well, let me put it in context. We're forecasting a current account deficit of around 4 - a little over 4 - in the current financial year. But the current account deficit problems of Australia in the '80s were when we had current account deficits of 6.6, 6.8 per cent. We're nowhere near that territory and, what's more, when we went into the labour current account deficit problems of the '80s, we were doing it on inflation rates of 8 per cent.

Now, where you've got, I think, the lowest inflation probably in the developed world - we're down in the low ones, 1.2, 1.4, depending on the measure - you are in a much stronger position. But you would want to be in that stronger position as you have this cyclical widening of the current account deficit.

PETER MARTIN: That stronger position has brought with it a record net foreign debt. When it was $10,000, Treasurer, per woman, man and child in the country, you said it was - two years ago, I think, this week: 'The final indictment of the mismanagement of the Keating years.' It's now $12,000 per man, woman and child in the country, what does that say about how you've been able to manage the economy?

PETER COSTELLO: Well, it says that we inherited this terrible debt position and it says....

PETER MARTIN: It's got a lot worse.

PETER COSTELLO: No, it hasn't got worse....

PETER MARTIN: It's grown.

PETER COSTELLO: As a proportion of GDP it is actually less. See, you can say ... well, in nominal terms, foreign debt has increased but in nominal terms GDP has increased; in fact as a percentage of GDP it has got less. But having said that, foreign debt is a problem in Australia.

We allowed 13 years of a build-up of foreign debt and, as I have said, it's not going to be brought down in 13 months. But what it does say is, it says that we have to work hard on our budgets in this country.

Look, we have the opportunity in this next year, for the first time in a decade, to put Australia into the black. For the first time in a decade, to put Australia into the black. We have the opportunity to pay our way if we maintain our budget settings and the tightness of policy.

PETER MARTIN: I am wondering whether those tax changes you're planning will get in the way of that budget discipline? You have promised cuts in personal income tax. Will you fund any of those from the proceeds of privatisation, or from spending cuts, or will they be the genuine result of those tax changes you're talking about?

PETER COSTELLO: We said, as a result of our tax policy, we are not going to increase tax to GDP and that tax policy stands independent of our budget policy.

Now, let's get first things first - Budget in two months' time. We have a historic opportunity to put Australia into the black if we maintain discipline.

There are people running around, including the Labor Party, who want to spend all sorts of money they don't have. Let me make this clear: if Labor policy were followed and Australia were driven back into the red at a time of a cyclical downturn in the current account, in an adverse external situation, you would be right back into the debt deficit, high interest rate cycle that Labor gave us last time. That's why we say first things first: let's get Australia into the black.

Now, once we've done that Budget, which is coming up in two months time, we are then going to turn our attention to the tax system which we are working on now, and we are going to independently put down a proposal for a new era of tax in this country. And what that is going to be about is giving better opportunities to exporters, better opportunities to families, and fairness in the taxation system which is now lacking.

PETER MARTIN: Finally, Treasurer, you said something intriguing, yesterday, which would create a lot of interest in the proposal for a GST, which is that the single rate of the GST would be set in concrete. A lot of people are worried that a GST could increase. What did you mean by that?

PETER COSTELLO: What I meant by that is if you're going to take seven rates of current indirect tax and broaden the base and introduce one single lower rate, the object is to set it into concrete so that it won't be moved so that the people....

PETER MARTIN: Do you mean a legislative mechanism that would keep it in concrete?

PETER COSTELLO: I mean firm entrenchment so that people know that we're never going to go back to the current system of seven rates and multiple exemptions.

PETER MARTIN: Is this something semi-constitutional, are you talking about perhaps needing agreement with the States or....?

PETER COSTELLO: I am talking about mechanisms which can protect people and protect the achievements of tax reform. I won't go into it any further at the moment, Peter, because you'll get my whole policy out of me.

PETER MARTIN: I am looking forward to it immensely. And you're clearly terribly excited by what you have the opportunity to do. When will we know?

PETER COSTELLO: Well, as I said, we've got a Budget in two months' time and we're working night and day on the Budget at the moment. We've got our submissions in on tax reform and we're going through them. Once we get the Budget out of the way we get the opportunity to start drawing and tying down the final elements of the tax package.

PETER MARTIN: So by mid-year, perhaps?

PETER COSTELLO: Well, Peter, it all depends on whether we can work 16-hour days rather than 14-hour days.

PETER MARTIN: Treasurer, thank you.

PETER COSTELLO: Thank you.

PETER CAVE: The Treasurer, Peter Costello, was speaking there to our economics correspondent, Peter Martin.