The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 05/03/2003

TRANSCRIPT

THE HON PETER COSTELLO MP

Treasurer

Press Conference
National Accounts, December Quarter 2002
Wednesday, 5 March 2003

12 noon

SUBJECTS: National Accounts; Budget; executive salaries; Medicare; petrol prices; bond market; currency swaps; ACCC

TREASURER:

Well, today's National Accounts showed that in the December quarter the Australian economy grew by 0.4 per cent and 3 per cent through the year led by strong investment, particularly business investment in engineering machinery and equipment.

Leaving aside the drought the non-farm economy grew by 0.8 per cent in the quarter and 3.9 per cent over the year. Now considering that is against global weakness, rising oil prices and the threat of war, it was a very, very resilient outcome. As I said, it was lead principally by business investment with a 14 per cent surge in new machinery and equipment, very large engineering projects with a great deal of work still to be completed. Household consumption moderated a bit, growing by 0.6 per cent and net exports detracted from growth as a result of two factors, strong capital imports and, of course, weaker exports.

But the National Accounts in many respects are two stories, a strong resilient non-farm economy, but a farm economy which is dramatically affected by drought, the worst drought probably in a century.

Agricultural production fell 14 per cent in the December quarter and is 24 per cent lower than a year ago. Rural exports declined 3.3 per cent following a 5 per cent decline in the last quarter. Grain exports fell 30.8 per cent in the December quarter.

Employment in the farm sector fell by another 19,000 after a fall of nearly 40,000 in the previous quarter. And the impact of the drought which has flowed through particularly in the September and the December quarters, as you can see from the table which is attached, the seasonal adjustment regions will not show up so much in the next quarter, the March quarter, but will have continuing effect into the June quarter.

Now, if the drought breaks, and there are signs, then we should get a positive contribution towards the end of this year. But we have taken a very big impact in both the September and the December quarters and there is at least one other quarter of impact. And we have seen this in all sorts of other areas of the National Accounts including the household savings ratio, which as the ABS notes, includes farm incomes, because farm incomes are down so much farmers are spending more than they have in terms of income, which contributes to a negative savings ratio.

So, it is very much a story of a strong resilient non-farm economy, which is the bulk of the Australian economy, and a farm economy which has been dramatically affected by drought and which has detracted in the last two quarters and will continue to detract for the remainder of this financial year at least.

The growth rate of 3 per cent indicates that we are likely to achieve the MYEFO forecast which was growth of 3 per cent in 2002-03, inflation remains very moderate indeed measured according to the National Accounts at 2.7 per cent through the year, and as the OECD noted, you are seeing evidence of a very resilient economy responding to external shocks, which are war and oil prices, and very severe internal shocks, which is drought.

JOURNALIST:

Treasurer can you explain this graph here why they, the Bureau estimates we'll get a, I suppose it's the Bureau, why we'll get a positive, a slight positive impact of the drought in the March quarter?

TREASURER:

That's taken off the actual table on page 14 of the National Accounts. It is just putting in bar form what is in this particular table. And you will see Gross agricultural product at market prices in millions of dollars declining from $4.8 billion in September to $4.1 billion in December, more or less static at $4.1 billion in March and then falling again in June. It relates to the way in which the winter and the summer crops fall and the seasonal adjustment process. So, what the Bureau is trying to tell you there is, the big hits through the seasonal adjustment process have been in the last two quarters, they wont flow through for statistical reasons in the March quarter but there will be a big hit built in into the June quarter. Whether you would get a positive by September, you may get a small positive if the drought breaks but you wouldn't really get big production increases until, or I should say, significant production increases, until December at the earliest.

JOURNALIST:

Mr Costello you said the growth forecast was on track to meet the mid-year predictions, does that also apply for the forecast for the surplus for this financial year and next financial year?

TREASURER:

Look, we only make Budget predictions twice a year, once at Budget and once at Mid-Year, we report financing on a monthly basis.

But we will be looking very carefully at the financial position for the next year. Since the Mid-Year Review, this is my impression; the non-farm economy has probably been a little stronger, the impact of the drought has been more severe and the world has turned down. You would have expected with the world turning down that would have meant that our non-farm economy turned down, but it has been surprisingly resilient and particularly in relation to business investment, machinery and plant, as you have seen in these figures, are quite strong. Now there is a couple of reasons for that, one is interest rates are low, that is good for business investment. Secondly the New Tax System means that business doesn't pay any embedded tax on investment. The New Tax System made business investment much more competitive and of course during much of that period, we had a very competitive exchange rate.

Now I have pulled out some figures on the impact of world oil prices. Since the Mid-Year Review, the relevant oil prices have gone up around 40 per cent, since the Mid-Year Review, the Australian dollar has appreciated around 10 per cent against the US dollar. What that means is, notwithstanding an appreciation in the $A, in $A terms, oil prices are about 30 per cent higher now than they were at the Mid-Year Review. So, the appreciation of the $A has set off to some degree the increase in world oil prices, but not nearly completely, and the effective rising oil prices, as we know, generally has a dampening affect on the economy. Now, we haven't seen that in these figures.

JOURNALIST:

(inaudible).

TREASURER:

Well it doesn't mean much in revenue terms, because as I have already indicated, the Petroleum Resource Rent Tax is in line with mid year forecasts, but probably because it slows overall economic growth, rising oil prices probably detract from revenues overall.

JOURNALIST:

Treasurer, given the strength of the non-farm economy and growth still puts us ahead of most of the rest of the world, why do you think it is that Australian investors continue to see the value of their investments, particularly reflected in share prices, being so low and one horror story after another?

TREASURER:

We lived through one of the great bull markets of history in the late nineties, where it looked like share prices just continued rising year after year. Australia kept itself out of some of the excess of that, the real excess was in the United States which really developed as a bubble economy during the dot com frenzy. The correction in the United States has been much more severe than Australia, in fact although the Australian market is down it's probably the best performing in the world, because it is down by less than the US markets, the European markets, the German markets and what you are seeing is a correction. Now, if you look over ten years they are probably still in front but over the last two years there have been net negative returns and that's the principle reason why, stock markets are correcting.

It's been worse incidentally, for those that went offshore, because they've had a larger fall in the US or foreign markets, and there has since been an appreciation in the dollar, so they've actually got the two factors that have started working against them.

JOURNALIST:

Do you think though that quality of management or otherwise has had any impact at all?

TREASURER:

In relation to superannuation funds?

JOURNALIST:

In relation to companies, in relation to the fact that although we have got this quite strong growth you are still seeing...

TREASURER:

There have been some companies that have made management mistakes. For example, if you were a company that bought a British business, and relied on returns from the British stock market to fund your obligations in the United Kingdom, you have had very significant losses, very significant losses.

JOURNALIST:

(inaudible) Treasurer...

TREASURER:

There are other companies, and I never try and give out investment advice but I can think of other Australian companies that have gone into the US market and done pretty well because they had quality investments, some companies have made bad decisions, yes, and if you make a bad decision that's the effect of it, other companies have made good decisions.

JOURNALIST:

Stan Wallis is giving his money back to AMP, do you think that all those other AMP directors should pay their money back, and should the Government, and why hasn't the Government taken up Labor's option which is to give shareholders greater say in setting the framework for executive remuneration?

TREASURER:

First of all can I say I think what Stan Wallis did has set a good example to corporate Australia. I think it was the right thing to do and can I say that I am sure that most Australians do, I am sure his shareholders do and it's to be welcomed and credit to him for doing it. What other directors do is a matter for them, he has set an example and it's a matter for them as to what they want to do, they're legally entitled to these amounts, it is a voluntary decision for them. Now, in relation to directors, there are two separate points here. There's directors remuneration, and that's the Wallis case. That's set by the shareholders.

Then there is Executive Officers remuneration which is set by the directors, although of course the shareholders can direct the directors on what to do, and we have disclosure obligations, but there are two different levels. The Australian Stock Exchange is looking at listing rules at the moment to tighten disclosure and require disclosure at the time these contracts are entered into, I think it is very good work that they're doing, and it will have every encouragement from us. Now bear this in mind, there's something we are proposing at the moment, we are proposing infringement notices or on the spot fines for breaching stock exchange directives, so a stock exchange requirement backed by an infringement power from the Australian Securities Investment Commission would be a pretty tough regime.

JOURNALIST:

Mr Costello can I just speak to you about the drought again. Given these projections from the ABS today, how confident are you that you have already built in and (inaudible) expectations about the impact of the drought overall on the economy and how that is going to play into your Budget forecasts?

TREASURER:

We will be looking at our Budget forecasts for 2003-04 in the lead-up to the Budget. Bear this in mind, the information we got today is what happened in the December quarter 2002. This will be the last National Accounts we will have before the Budget. The Budget has got to try and figure out what will happen in, the September, December, March and June quarters of 2004. So you are looking six quarters in advance on only two quarters out of the preceding year. So it is a pretty tough business doing that and we revise it once during the year. So we have got to start thinking about what is going to be happening in 12 months time or 18 months time. Now I said at the time of a mid-year review, you have got to take a view on what will happen with drought. The view we take is that the drought will break. I think some of you thought that that was too optimistic at mid-year review, you probably think that it is a more reasonable assumption now because there have been some rains. We have to take a view on what will happen in Iraq, and in relation to oil prices. You might think it's easier to take a view in relation to that, but these are forecasts, and you make the best assumptions you can, and you get one chance to revise them. I don't have the luxury of these market economists who can appear on television programs with new forecasts on a daily basis.

JOURNALIST:

(inaudible)

TREASURER:

Well for this year we've forecasted 3 per cent growth, and that is more or less in the bag. It would have to be a very, very unusual March or June quarter not to achieve it. We are half-way through the year, what's happened already in the year means that the 3 per cent growth for this financial year is more or less in the bag.

JOURNALIST:

The Bureau of Statistics (inaudible) drought from 0.6 per cent GDP to 0.9, it says you can't estimate the indirect effect because its all too hard. Has Treasury made any attempt now that we are clearer on what the drought is likely to be in terms of severity and duration?

TREASURER:

(inaudible) I think we took 1 per cent off it.

JOURNALIST:

Yes, but still that...

TREASURER:

...in front of the Bureau, (inaudible) direct and indirect, so we are a little in front of the Bureau, we are not updating our forecasts at the current time sorry.

JOURNALIST:

(inaudible) forecasts for the petroleum resource rent tax, you said they are pretty much on line, how can that be if the oil prices have risen (inaudible) per cent?

TREASURER:

Well, there's a lot of things that are taken into account in relation to the resource rent tax. The resource rent tax is a tax on super profits after all of your expenses are taken into account. The idea is to try and encourage some of these people that put new production through or engage in capital investment or whatever it is, it's after all of your expenses are deducted, the super profit is taxed. What I am saying to you is that it is on the forecast. We're three quarters of the way through in terms of collections. But there's another part of all this too, which is that everybody else is paying higher oil prices which is an expense to their business which is reducing their profit, which is reducing company tax. This idea that you can just focus down on the collections in one area and say, oh well that must mean you are exceeding forecasts, it's not how it works. It's like GST if I may say so. GST is overall tax on consumption. If people are spending more in one area and as a consequence less in another the GST take is the same, because it's on overall consumption. The only time you get a variation is if spending somehow switches out of a taxed area into a non-taxed area, but there aren't that many non-taxed areas. Food.

JOURNALIST:

(inaudible)

TREASURER:

Sorry, Mr Bonjiorno.

JOURNALIST:

Thank you very much Treasurer. There are reports today that the Government is looking at a 4 year billion dollar package in regard to Medicare bulk billing. Following on what you said yesterday that you wouldn't necessarily be looking at this sort of expenditure in the Budget, can the Government afford this package in the near term or is it further out?

TREASURER:

No, the Government believes that Medicare should be a universal service that is available to everybody. Bulk billing has never applied to 100 per cent, never has. But it is important that bulk billing be available to all low income earners, pensioners. And to the degree that there are supply problems or there are problems in rural areas, or whatever, and people on low incomes or pensioners can't get it, the Government wants to make sure that the situation is improved, that is what we are looking at.

JOURNALIST:

Treasurer, just following up on Paul's question, I'm not asking you to go through the details of what you're proposing but can you tell us whether this will be new money or re-allocation of monies within the Budget?

TREASURER:

Well, Jim, you're asking me to tell you where I am getting money for a policy which hasn't yet been announced so...

JOURNALIST:

But have you decided?

TREASURER:

...well, Jim, you're bowling up curly ones to me trying to get me to...

JOURNALIST:

That's my job.

TREASURER:

...Jim, you do your job very well, but I must say there are a couple of assumptions in that question which make it impossible for me to answer.

JOURNALIST:

Are you able to rule out means testing for bulk billing?

TREASURER:

Yes.

JOURNALIST:

Bulk billing will not be means tested?

TREASURER:

No, we have not proposed, I heard Mr Crean saying that the Government is proposing to means test Medicare. That is not what the Government is doing at all. The Government believes that Medicare should be universal, that is, the rebate available under the Medicare system is available to everyone. That does not mean that everybody will be bulk billed, it never has. There are two different concepts there.

There is Medicare which gives 85 per cent of the scheduled fee, for everybody, that is universal. There is bulk billing which has never been universal. Bulk billing is where there is no additional doctors fee over and above that 85 per cent. There always has been areas. I think when Medicare came in I think it was the majority of areas where doctors charged a fee. Even today there are large areas where doctors charge a fee. Nobody, to my knowledge, has ever said they are going to get 100 per cent bulk billing. Now if Mr Crean wants to say it's his policy to have 100 per cent bulk billing, and that involves, as the AMA says, a doubling of the scheduled fee, and that involves at least two or three billion dollars more, then he better come clean about the increase in the Medicare levy which is required to fund it. We think it's a 50 per cent increase in the Medicare levy that he has got in mind. Right, so if you want to guarantee 100 per cent bulk billing you had better come clean on the increase in the Medicare levy and tell everybody the additional taxes that they are going to be paying.

JOURNALIST:

Should it be made easier for doctors to charge non-pension payments a co-payment?

TREASURER:

Sorry?

JOURNALIST:

Should it be made easier or streamlined to help doctors charge non-pensioner payments a co-payment over and above the...

TREASURER:

No. I have just said the Government believes that pensioners and low income earners should have the access to bulk billing...

JOURNALIST:

(inaudible)

TREASURER:

...that is what I have just said. Pardon?

JOURNALIST:

Non-pensioners?

TREASURER:

Non-pensioners?

JOURNALIST:

Yes.

TREASURER:

No, I, look, I would like everybody to have the option of not paying for health care. But you'll have to get doctors somehow to reduce their fees by a very large amount or you will have to increase the Medicare levy. I don't think you're going to get doctors to reduce their fees. But if doctors suddenly said we'll reduce our fees and offer universal bulk billing, I wouldn't attempt, in fact we would warmly welcome it. But they are not going to reduce their fees, so, the only other way to do it is to pay them more. To absorb, for the tax payer to absorb the current additional fees that they are charging. That is a 50 per cent increase in the Medicare levy for starters, and that means every Australian who pays income tax will pay more tax...

JOURNALIST:

(Inaudible)

TREASURER:

...you know, that might be the Labor policy but they ought to come clean on it, they ought to tell you. Anybody who is telling you that that is their policy better tell you how much tax you're going to be paying.

JOURNALIST:

So Treasurer, the Government has not been contemplating, nor will contemplate, any financial incentives or disincentives in the application of bulk billing to different segments of the population?

TREASURER:

It is not the Government's policy to introduce a means test or to take away the universal application of the Medicare system which is 85 per cent of the scheduled fee to everybody.

JOURNALIST:

Mr Costello, I think the concern is, Mr Costello, is that your policy is going to stop some doctors, encourage doctors to stop bulk billing those people that they don't get an incentive to bulk bill. Can you guarantee that that won't happen?

TREASURER:

We want to give doctors a lot of incentive to bulk bill, yes we do, but you have got to do it in a way which, make sure you have got an eye on taxes as well.

JOURNALIST:

Treasurer, to the bond market, have you been persuaded that there are good reasons to keep the bond market as opposed to just thinking it's not a good time to necessarily, deliberately get rid of it?

TREASURER:

Let's go back a stage. We re-paid something like $60 billion of Labor debt. With the proceeds of T3 we would have the capacity to retire all debt.

And the question then became, would you like to keep some debt out there backed up by an equities portfolio, or would you like to retire all debt. Now, let me just say as an aside let's suppose the Commonwealth had gone into equities two years ago with the proceeds of Telstra. How do you think people would be looking at us now?

JOURNALIST:

(inaudible)

TREASURER:

Now hang on...

JOURNALIST:

(inaudible)

TREASURER:

...well, can I finish please? T3 is not going to be sold any time soon, so there is no prospect of retiring all debt, or indeed, going into the equities market. It's a nice question and sooner or later I suppose we'll resolve an answer but it's not a practical question, it is not a practical question. the United States went through this question during the Clinton administration and Alan Greenspan gave speeches on whether or not the US needed a bond market and concluded that the US, if it could, should try and retire all of its debt. Is anybody talking about retiring US debt at the moment? I mean they have got a fiscal debt of 3 per cent of GDP, $300 billion in this year alone added to the US bond market. It was a problem that they fixed by other means, this will not be a problem for us with T3. Now, we will still go on and we'll consider it, but it won't be happening any time soon.

JOURNALIST:

(inaudible) market's going to dwindle, market's going to dwindle?

TREASURER:

Well, whilst we have a market, obviously, and this has been our policy all along, whilst we have a market it has got to be a market that has sufficient liquidity. We have been in a position to reduce gross debt further than we actually have, and we have taken the view that whilst there is a market it has got to be a market which is sufficiently liquid. And that will continue to be the situation. Now, if the circumstances change in relation to T3 we will consider this problem again. It is a nice problem to have but it is not a problem we have any time soon. I'm sorry, I cut you off.

JOURNALIST:

I was just going to say, isn't it possible that...

TREASURER:

This is obviously the last question.

JOURNALIST:

...didn't you, you said that, you know, you didn't want to be in equities because of what's happened over the last few years. But isn't it possible that you could have a non-financial asset portfolio?

TREASURER:

Well what would it be?

JOURNALIST:

Well, capital investments things, such as education, things which...

TREASURER:

Yes, but that is spending. You know, people say, oh well, if you have a surplus, why don't you spend it on this. The moment you have spent it it is not a surplus, that is spending, that is expenditure. A surplus is what you have got left after you have finished your expenditures, not what you've got before you start them. And you've then got an asset and you want to put this asset to a return which keeps its value. Now, you know, I can understand the argument about a bond market. I, you know, I have probably thought about this longer than most. But you have also got to think about what you would do with your money. You could spend it, and that gets rid of your problem because you have got no surplus. But if you take the view that with a surplus you ought to invest it and maintain it, you have got to put it somewhere. Now, the obvious area to put it is in the equities market. Now, the only point I make is that I think the public would be very unforgiving on Governments which went into equities and lost, you've heard Jim talk about what the public thinks about superannuation funds? And I think the public would be quite unforgiving if Government lost large sums. Now we can mount the intellectual argument, could we not, about why it was necessary to do it, but do you think you'd all be sympathetic to me on the front pages of your newspapers if the money disappeared into the equities market?

JOURNALIST:

(inaudible) currency swaps.

TREASURER:

Well, very interesting point, very interesting point, very good reasons, very good reasons. And of course was there a great sort of interest in technical reasons? Didn't find it.

JOURNALIST:

Treasurer, will you still nominate Louise Sylvan to the ACCC or will you have to wait until you've leveraged Graeme Samuel in to the chair?

TREASURER:

Well, we will resolve the situation in relation to the chair first and then we'll also resolve the situation in relation to the deputy. But we don't want to resolve the situation in relation to the deputy before we do the chair. I don't think that's the right way to go about it.

Thanks very much.