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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

10 April 2008

Interview with Fran Kelly

ABC Radio National Breakfast

Canberra

10 April 2008

SUBJECTS: Global Economic Conditions; Inflation; RBA; Budget; Foreign Investment; Washington IMF Visit

KELLY:

Treasurer, the IMF has predicted world growth will slow and a mild US recession by mid-year. Is that slightly more optimistic than you might have expected even?

TREASURER:

Well I think it shows what a difficult international environment we confront as we're framing this forthcoming Budget. This is a very substantial downgrade, if you like, of their growth forecasts, and of course what no one is really sure about is the ultimate impact of the slowdown in the US and its flow-on effects to the developing world.

One encouraging thing in the report is that they are still quite optimistic relatively about growth in the developing world, particularly China. And of course that's good news for Australia because if China is to remain strong, then that has flow-on effects for this economy.

So we have these countervailing forces in the international economy. We have a slowdown in the developed world and the continuing impacts of the US sub-prime crisis – the increase in borrowing costs that flow on, and so on. But on the other hand, still relatively strong growth in China, and that's good news for Australia. So we're well placed but we're certainly not immune.

KELLY:

I'll get to our outlook in just a moment, but as you say, there's still some unknowns, and the IMF said there is a one-in-four chance of a global slowdown. It says the current credit squeeze could still mutate into a full blown credit crunch. This is the tsunami that Peter Costello was predicting, wasn't it, in the run-up to the election?

TREASURER:

Well certainly if that were to occur, that is the worst case scenario. The actions of the Federal Reserve and the US Administration in recent times do appear to have put a floor under the events in the United States, and we all hope that that plays out for the better in the United States. But there's still a chance that these events could play out badly. We're all hoping that that doesn't happen.

KELLY:

What will be the impact of a mild US recession on the Australian economy?

TREASURER:

Well, we're going to have slowing world growth. That's what we see in the IMF forecasts this morning. But the IMF is saying that Australian growth will still be relatively strong next year. So whilst we're not immune, and the impacts of the world economy are felt here, we're still well placed to grow relatively strongly in the year ahead.

KELLY:

I guess what I'm asking is, do you say that with confidence? Do you accept, I mean obviously you accept what the IMF is saying, but do you accept that's the full story, because when the IMF says that the world slowdown will have a limited impact on Australia, many would argue it could be far worse than that. The US is a key trading partner for us.

TREASURER:

Well I prefer to be an optimist, Fran. But what I can say is that of all the countries in the world, we are well placed to withstand the fallout from these events that are occurring in the United States and having a flow-on effect elsewhere in the developed world. At this stage we are very well placed to withstand those, but we're not immune from them. We've already seen the flow-on effects from increased borrowing costs faced by our banks when they borrow offshore, and that's impacting on domestic mortgage holders and businesses. So we've already had those effects on the economy and the second round effects come from a slowing in world growth and that impact upon our overall growth.

KELLY:

As you say it's a complex story. There's a two speed global economy out there, that's what the IMF's talking about. But there's also dual tracks for us too, and the IMF says the biggest problem facing Australia is reining in demand. Its going to raise its forecasts for inflation in Australia. Yet only last week, wasn't our Reserve Bank governor saying that the Bank was likely to lower its forecast for inflation?

TREASURER:

No, I think the Bank and the IMF are both pointing to the challenge in this country of reining in inflation, which is outside the Reserve Bank's target band. And if we are going to continue to grow strongly we have to tackle inflation to put downward pressure on inflation and therefore downward pressure on interest rates. That's our central domestic challenge, because if we don't do that we'll have higher interest rates well into the future, and the impact of that on families is there for all to see.

KELLY:

Is it the challenge that it was a couple of months ago though when you declared war on inflation? Is the pressure off a little as you finalise this Budget because of this global slowdown?

TREASURER:

No, the pressure is not off the challenge of tackling inflation, because if we don't tackle inflation it simply eats away at confidence in the economy, it erodes living standards, and it produces higher interest rates, and all of the impacts that those higher interest rates are having, particularly on mortgage holders in places like Western Sydney in particular, but also higher business borrowing costs. We've got to tackle this inflationary challenge if we are to continue to grow strongly into the future.

KELLY:

Isn't there signs already though that the heat is coming out of our economy. I mean the consumer confidence figures yesterday, over the last three months – a dramatic drop in consumer confidence?

TREASURER:

Yes there's certainly signs, or early indications, that demand is moderating, but it is early stages so far. The central challenge of putting downward pressure on inflation remains. We've got to enhance the productive capacity of our economy. We've got to invest in skills and education more broadly, tackle those infrastructure bottlenecks out there which are strangling our cities and bedevilling our exports though our ports. These are central challenges that we must tackle for the long term to enhance our productive capacity, and enhance our capacity to create wealth and to grow strongly without inflationary pressures.

KELLY:

So to continue that fight, would you suggest, or would you defend the Bank if it thought that even further interest rate rises were required?

TREASURER:

Fran, you either support the independence of the Reserve Bank and its inflation-targeting regime, or you don't. We fully support the independence of the Reserve Bank and its inflation-targeting regime. The question that Mr Nelson and Mr Turnbull have to answer is: do they support the independence of the Reserve Bank or not?

KELLY:

Can you support the Bank but still be critical? I mean Brendan Nelson said the Reserve Bank's gone too far, too fast.

TREASURER:

You can be critical, but you either support the independence of the Reserve Bank and the decisions that it takes, however tough they are and however inconvenient they may be, you either support that independence or you don't. We support the independence of the Reserve Bank because it is so important to maintaining a lower inflationary environment and keeping downward pressure on interest rates in the long term.

KELLY:

You're still committed then, from everything you say, to, as I say, declaring war on inflation which suggests some pain in the Budget. You're still committed to achieving those spending cuts of up to $14 billion to take the pressure off?

TREASURER:

Well I don't know where you got the figure of $14 billion.

KELLY:

Well how many billions is it?

TREASURER:

We outlined $10 billion dollars.

KELLY:

$10 billion – let's go with $10 billion. Still committed to that?

TREASURER:

$10 billion dollars worth of spending cuts during the election campaign, and we've said that we will be making further cuts through the Budget process. We've also indicated that we've set a surplus target of at least 1.5 per cent of GDP, dependent of course on international circumstances.

KELLY:

The reason I ask is that all the talk seems to be about spending, not cutting. I mean we're going to be spending on the high speed broadband roll-out, that's $4.7 billion. We know we're spending on the pensioner one-off payment and the carer one-off payment, which in my view is a terrific thing. There's lots of calls now for instance for $100 million, which seems like a drop in the ocean compared to everything else, to address youth homelessness this week.

TREASURER:

Well there are plenty of pressures out there when it comes to spending, but what we've got to do is we do have to cut back on public demand because of inflationary pressures in the economy, first of all. Secondly, what we have to do is rearrange our spending priorities. So as we go through this Budget process we will be examining the previous government's priorities and making room for our spending priorities. And what are our spending priorities? Education – absolutely critical to enhancing the productive capacity of this economy in the long term. So we'll make room for our priorities by rearranging priorities within the Budget and cutting back on spending as well.

KELLY:

Are there still going to be as much pain in the Budget as you and Lindsay Tanner were warning of just a few months ago, despite the slowdown?

TREASURER:

Fran, there is no doubt there will be some tough decisions in this Budget. We do need to take those decisions for the long-term economic health and wealth of this economy.

KELLY:

Treasurer, reports suggest that a Chinese state-owned firm is taking a look at buying up a stake in BHP. That's then from China's concerns at the high prices being demanded by some of our resource companies. Are you concerned about the prospect of a Chinese Government owned company taking a stake in our biggest miner? Is that in our national interest?

TREASURER:

Well Fran, the first point I would make is that I am charged with taking decisions under the law in terms of the national interest on these foreign investment propositions, so as a matter of practice I don't comment on any proposed takeover or forecast takeover of any particular entity.

KELLY:

It will be your decision though?

TREASURER:

Yes it certainly will.

KELLY:

And the former Treasurer Peter Costello said this is like the scenario he faced with the Woodside deal, when Shell was interested in Woodside and he says the Rudd Government must do what's in our, Australia's, best economic interests.

TREASURER:

I think you can be in no doubt that we will be taking decisions absolutely in the national interest on these questions.

KELLY:

Is it something that you expect the Prime Minister, or you've had a word with the Prime Minister about? He's about to have talks with the Chinese leadership over the next 24 hours.

TREASURER:

Well we published some months ago a set of foreign investment guidelines which would apply in terms of foreign government investment or investment by their entities, and those guidelines are out there for everybody to see. And there's no doubt that these have been the subject of discussion by many people – foreign governments, corporations, and so on. We put them out there for everybody to see, so people could see what would be the approach of the Rudd Government to these questions.

KELLY:

Just finally Treasurer, you're off to Washington. The Budget's only four weeks away. It says to me perhaps the Budget's done and dusted. Is it?

TREASURER:

Going to Washington is part and parcel of the Budget process, Fran, because framing this Budget is impacted upon by what's happening in the world economy and most particularly, what's been happening in the United States.

KELLY:

So it's not put to bed?

TREASURER:

Certainly not finished yet, but we've done a lot of work. We've been locked in the room for many weeks through the recent period, and that will continue while I'm away, and when I get back.

KELLY:

Treasurer, thanks very much for joining us.

TREASURER:

Thank you.