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 01/03/2005

Press Conference
Treasury Place, Melbourne

Tuesday, 1 March 2005
12.20 pm

 

SUBJECTS: Balance of Payments, GST payments to the States

TREASURER:

The December quarter 2004 Balance of Payments indicates that the Current Account Deficit widened to $15.2 billion with an increase in the net income deficit to $8.2 billion and with an increase in the Trade Deficit to $7 billion.

The net income deficit which was perhaps the unexpected news in relation to this appears to be related to higher profits from Australian operations of multinational companies being repatriated. Only a small proportion of those profits are being repatriated but the fact that company profits have been strong, and a proportion of those increases in company profits are being repatriated, indicates that the net income deficit increased.

On the trade front, although exports increased by 1.3 per cent they have been flat over the year, indeed flatter than would have been expected for this stage of the economic cycle.

Australia’s terms of trade have moved strongly in our favour and mineral prices are much higher today than they have been for some time. But notwithstanding that, export volumes have been flat, partly caused by the fact that there are bottlenecks in the supply chain particularly in relation to mineral resources. As I have previously identified, Australia’s number one export is coal, 41 per cent of our coal trade goes out through Dalrymple Bay, Hay Point. There are 40 ships that are lined up that could take coal but underinvestment in that Port has delayed the volumes of Australian coal exports and you see reflected in these figures the impact that that has on the national economic effort, a very direct impact on the national economic effort.

Having said that the mining industry itself has lifted investment around $26 billion over the past three years and over time that capacity will come on line and exports will pick up. But notwithstanding that, the lag in investment and indeed some particular bottlenecks such as the Dalrymple Bay Hay Point Terminal are affecting our export performance.

Import volumes grew 3.2 per cent in the December quarter. That is consistent with the strength of national income in Australia.

Looking at these figures what they indicate is that Australia needs to lift its export performance. We need to deal with the Dalrymple Bay Hay Point Terminal and other bottlenecks in relation to exports and we need to continue economic reform to lift the productive capacity of the Australian economy. We are at a situation where unemployment is at 30 year lows but we cannot afford to relax in relation to economic reform, and we need a new round of economic reform particularly to lift Australia’s export capacity.

JOURNALIST:

As a percentage of GDP the current account deficit is probably as high as it was when Paul Keating made his infamous banana republic comments. Do you consider we’re heading towards the banana republic stage now?

TREASURER:

Well what we see in these figures is we see strong imports which is reminiscent of a strong domestic economy but flat exports. We need to lift our capacity for exports. In particular, we need to clear bottlenecks in the export performance. So, this should remind us of the importance of economic reform – reforming industrial relations; clearing bottlenecks at ports. Our economy is in a much stronger position than it was back in the days of Paul Keating. We have a much lower inflation rate, we have much lower interest rates and we have a much better Commonwealth financial position. So those indicators are much stronger than they were in the Keating days. But I don’t underestimate the significance of these figures. We need to lift our exports.

JOURNALIST:

Are you concerned that high interest rates could make things tougher for exporters?

TREASURER:

Well the thing that is making things tough for exporters at the moment, I have previously highlighted supply bottlenecks, we don’t want to overlook those things, but the thing that is making things more difficult for exporters at the moment is the very high exchange rate. We have an exchange rate which is above the long term average, considerably above the long term average, that is making Australian exporters less competitive than they were when the exchange rate was much lower.

JOURNALIST:

Are you concerned that high interest rates would push the Australian dollar up higher?

TREASURER:

Well I think the reason, the principle reason why the Australian dollar is high at the moment is that commodity prices are high but also the US dollar is weak. You have a US economy which has a very large budget deficit and as a consequence the US dollar has declined considerably and a big part of the reason why the Australian dollar is high is that it is measured against a US dollar which at the moment is weak, and the Australian Government or Australian economy has very little control over the value of the US dollar.

JOURNALIST:

The disparity between interest rates in the two countries does have a flow on effect?

TREASURER:

Oh no I don’t think the US dollar story is an interest rate story. I think the US dollar story is a story of a currency which has fallen considerably, principally because of concerns over budget deficits and current account deficits.

JOURNALIST:

The manufacturing industry said today they expect their exports to decline. They are not subject to the sort of bottlenecks that you mentioned for the resource sector. Do you think there is hope for the manufacturing export industry to improve its export prospects?

TREASURER:

Well the manufacturing industry is affected by the exchange rate and that will be something that will be playing on their mind. But having said that, I think it is important that we do what we can to get a more productive economy that the manufacturing industry can benefit from. Labour market reform would be number one priority for increasing the productive capacity of the manufacturing sector in Australia.

JOURNALIST:

Are you concerned about the rising proportion of the current account deficit to GDP (inaudible)?

TREASURER:

Well look, the story of the current account deficit here is you have got a strong domestic economy where imports are growing but exports are flat. Exports are flat partially because of the exchange rate which I have already spoken about, and there is not much that you can do about the exchange rate. But the things we can do something about are bottlenecks that are holding up the export performance. Our number one export is coal. We know where the biggest bottleneck in the country is, it is at Dalrymple Bay Hay Point. We have got 40 ships ready to load coal there at the moment. It is our number one export, and I have been warning about this, the Queensland Government owns that Port, it has got a lease on it and what it needs is new investment. The longer than investment is delayed, the longer that bottleneck will continue. But you are now seeing a practical example of how mismanagement of that particular Port is costing Australia export dollars.

JOURNALIST:

Does the private operator of that port have any responsibility to upgrade that infrastructure?

TREASURER:

Well I think that if the private operator were guaranteed a good rate of return it probably would. But this rate of return has been in the hands of the Queensland Competition Authority for 17 months - for 17 months for heavens sake. You have got to align the interests of the port operator with increasing volume and higher returns.

JOURNALIST:

Is there anything the Federal Government can do to step in to that?

TREASURER:

We have now spoken to the coal exporters and we have spoken to the lessees. The arbitration in the Queensland Competition Authority has got to be brought to an end, a decision has got to be made, and the rate of return has got to be such as will encourage investment. That is what has happened here at this Port. The regulatory arrangements which were put in place have not encouraged investments. The evidence is there for all to see. It wasn’t thought through properly.

JOURNALIST:

In relation to GST payments some academics and some of your colleagues have advocated one level of Government taking over some of the responsibilities in certain areas such a health and education. Are you in favour of an overhaulof some of those sectors (inaudible)?

TREASURER:

Well the point I make is that, the State Governments now get more revenue than they did ever before. Because the GST is delivering them large sums they have enough money now to run a proper hospital systems and proper education systems. What we have got to make sure is that they use that money to run them properly. There is no need to take them over if the State Governments properly administered those systems with their growing GST revenue.

JOURNALIST:

Will the Government look to use the Senate majority on the 1st of July to change the GST formula?

TREASURER:

No, the Government wants to ensure that the increased revenue which the State Governments are now receiving is properly accounted for, and well spent and in particular, that the money that the State Governments now have from increased GST revenue is used to reduce other state taxes. When the GST was introduced, it was introduced to give States growing revenues and with those revenues the States pledged that they would reduce their state taxes. They can’t have it both ways. They can’t have the increased GST revenue and increase their state taxes as well; this is where the accountability has got to come in. The GST as it grows, has got to be used to abolish a list of state taxes and to hold other ones.

JOURNALIST:

Do you regret giving the states so much power over the way they use the GST revenue?

TREASURER:

Well it was the most generous offer that the States have received since the Second World War. It is now delivering them more revenues than ever before, and those revenues have to be used to reduce other state taxes. You have got a situation here in Victoria where they are sitting on this growing GST revenue and increasing their land tax as well, in a way that is just putting people out of business. Now the reason for those growing revenues was so that they didn’t have to increase these other state taxes and so that they could actually abolish the number of state taxes. That is my point.

JOURNALIST:

But do you regret the way that the deal was constructed?

TREASURER:

Well no, I am going to hold the States accountable , that’s what I am going to do.

JOURNALIST:

But this was never mentioned in the first place, this was never part of the deal in the first place to reduce state taxes was it?

TREASURER:

This was the deal.

JOURNALIST:

This was to get rid of Federal Government tax.

TREASURER:

No I am sorry, this was not to get rid of federal government tax, this was to get rid of state taxes, and I have got a list of what they are. The Financial Institutions Duty – state tax. Bank Account Debits tax – state tax. Bed Tax – state tax. Stamp Duty on mortgages – state tax. Stamp Duty on commercial conveyances – state tax. Stamp Duty on marketable securities – state tax. The whole deal was to give States a growth revenue with which the States could abolish some state taxes and hold others. The whole deal. And you have put your finger right on the problem. The State Governments have willingly taken the GST growth revenues but there is another side of this equation.

JOURNALIST:

How do you do that? How do you make (inaudible)?

TREASURER:

Well first of all you let the public into the secret as to how much the money is.

JOURNALIST:

Where is it written down that stamp duty on mortgages would be removed as part of the GST deal?

TREASURER:

Intergovernmental Agreement.

JOURNALIST:

So they have signed that up? And this is the first time you are saying why haven’t you done it?

TREASURER:

No. I’ve been saying this for quite some time.

JOURNALIST:

What’s the mechanism to hold them to it?

TREASURER:

Public pressure.

JOURNALIST:

When you said you’ve said that for quite some time, so you have been putting those figures out?

TREASURER:

Stamp duty on commercial conveyances, stamp duty on mortgages, it is all in the intergovernmental agreement, and it is a public document. This is the agreement that the States have got to be held to.

JOURNALIST:

What’s the next step to hold them to it?

TREASURER:

Well, the first step of course, is to explain to the public the nature of the agreement. The second step is to increase public pressure on the States to abide by those agreements. Now, in March of last year when I had a meeting with the State Governments, I insisted that the Bank Account Debits tax, the State Bank Account Debits Tax would be abolished on 1 July. Some of the States have already done it but there are notorious laggers, and I had to hold them to it in March of last year. When we have our meeting this year, I’ll have to hold them to the programme for the abolition of other state taxes.

JOURNALIST:

But how, by threatening to withhold money from them?

TREASURER:

Well, I have an agreement with them, which I will insist they observe.

JOURNALIST:

Was there a commitment from the states to get rid of this at the meeting with them last year?

TREASURER:

Well I finally got an agreement to the abolition of the Bank Account Debits tax from 1 July 2005, some of the States have already done it. New South Wales has already done it but it was holding the other States in so that Bank Account Debits tax, that tax that you pay when you take money out, has to be abolished from 1 July.

JOURNALIST:

Are there penalties in the agreement if they don’t abide by their agreement to abolish state taxes?

TREASURER:

Well I am not going into that, I am just insisting that the States abolish the taxes that have been identified, that they do so at the earliest opportunity and that the wind falls that they are now receiving are applied to reducing the State tax burden as we have agreed.

JOURNALIST:

Is there a deadline for getting rid of say stamp duty on mortgages?

TREASURER:

Well there is an agreement as to the order and the agreement is as the GST revenues grow and this can be funded, that the revenues will be used for that purpose. Yes there is an agreement, absolutely.

JOURNALIST:

As it stands at the moment, what is the deadline for getting rid of stamp duties?

TREASURER:

Well it is a question of looking down at the windfalls, and applying the windfalls to the funding, this will be the subject of further discussions in March.

JOURNALIST:

Is the government happy to leave the states to administer these monies with certain conditions rather then taking over the responsibilities for certain areas such as health and education as has been floated?

TREASURER:

Well I am not going into the Commonwealth taking over new areas of responsibility, all I am saying is you now have a situation where, between the States and Territories, in 2004-05, they will have $35 billion. That is just for one year, and numbers of them will have extreme windfalls, and the windfalls are what can be used to find the reductions of other state taxes.

JOURNALIST:

You are unlikely to get your way given all the State Labor Premiers?

TREASURER:

Well we are always trying to get State Labor Premiers to reduce taxes. I know it is hard. Getting a State Labor Premier to reduce a tax is unbelievably difficult but my argument is this; between them they have $35 billion, and there is plenty of scope to do so.

JOURNALIST:

Did you make the Agreement too generous in the first place?

TREASURER:

The Agreement is an agreement, to give States a growth revenue. They have got it, and with that growth revenue to reduce state taxes. They have go to do it.

JOURNALIST:

Treasurer, there has been more leadership speculation in the last few days, do you still expect to take over from the Prime Minister next year?

TREASURER:

Well I am not sure that I have ever said that, have I?

JOURNALIST:

Do you expect that you will though?

TREASURER:

As I say, it is a funny question, you could point me to the quote. A trick question, but I got up early this morning. Thank you very much.