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Australia is enjoying its best inflation result in 35 years

MARK COLVIN: The Treasurer, Peter Costello, is crowing tonight. Australia is enjoying its best inflation result in 35 years. According to the Treasurer, our economic growth prospects are about the best in the world and, for the moment, our dollar is looking up. Indeed, according to the Treasurer, we are the strong man of Asia. But there's underlying concern beneath the rhetoric in the Treasurer's first public address of the year. The Government's mid-year economic forecasts, released just one month ago, may already be out of date. Our economics correspondent, Peter Martin, reports.

PETER MARTIN: Your reaction to the figures today?

PETER COSTELLO: Today's underlying inflation rate of 1.4 per cent for the year is the best measure since we started taking measurements in 1972.

PETER MARTIN: The headline annual inflation rate of minus 0.2 per cent is actually the best measure since 1963.

PETER COSTELLO: At a time when you're seeing very severe financial instability in our region, we're forecasting this year 3.75 per cent growth. That will be probably the highest growth of any country in the developed world, in Australia, in the forthcoming year.

PETER MARTIN: And presumably the highest growth rate in much of the developing world as well, given the appalling prospects for growth and recession in Asia.

PETER COSTELLO: You're beginning to see the benefits in relation to jobs. You're seeing the benefits for home buyers, and you're seeing the benefit in relation to economic activity.

PETER MARTIN: Does what's happened in Asia, just in the last month, change your forecasts? You changed them, I know, a month ago, but since then things have got worse.

PETER COSTELLO: We put out our mid-year review just before Christmas and we downgraded our expectations of growth in Asia. We downgraded it, actually, by about a third. The developments since Christmas have been no brighter news - put it that way.

PETER MARTIN: A sobering truth for a Treasurer who in most of his public presentation to the Committee for the Economic Development of Australia, today, was up-beat about opportunities for Australia as a result of what's been happening in Asia. Thanks to his government, Australia is the strong man of Asia on fiscal policy.

PETER COSTELLO: The IMF program to stabilise economic conditions in Thailand, Indonesia and South Korea requires those countries to produce fiscal surpluses. Under a Labor policy, we couldn't have matched that. We would have stood out in South-East Asia, not as the strong man, but the weak man, on fiscal policy.

PETER MARTIN: Australia can now take advantage of the contrast between it and the weak men of Asia.

PETER COSTELLO: We have the opportunity now to promote Australia as the best state-of-the-art regulation, low cost, place for doing business in this region.

PETER MARTIN: But it could never happen under Labor. Indeed, if the Australian Labor Party had its way, an organisation such as the IMF might have to intervene here too.

PETER COSTELLO: Last week, at its conference in Hobart, it committed billions of dollars on unfunded promises across a range of areas. Its program could almost have been a recipe for external intervention. Their economic spokesman said: 'The message here is that we have to be understood to be walking both sides of the street.' Kim Beazley pledged to maintain: 'Labor's best tradition of economic management.' That is a matter for serious concern. It will be necessary this year for all those who say they believe in tax reform to show they mean it. In times of major external challenge, the last thing we need to do is to walk both sides of the street. One side of the street will do and the important thing is to walk on the right one. Thank you very much.

PETER MARTIN: And when it comes to the question of taxation, what is the right side? Today, the Treasurer gave some clues.

PETER COSTELLO: I know there's a lot said about this, that some small businesses wouldn't like a broad indirect tax system. My experience is that once such a simple and transparent system is introduced, they love it.

PETER MARTIN: And we might one day grow to love this intriguing idea as well.

PETER COSTELLO: I think if we had a strong PAYE tax system with a strong interest withholding tax system, we could kick most Australians out of the necessity to file an income tax return.

MARK COLVIN: The Treasurer, Peter Costello, possibly laying some groundwork for a possible election later this year.