KNIESCHEK: Mr Hockey you are on a roadshow in Europe because Australia shall become an international finance centre in Asia like Tokyo, Singapore and Hongkong. What are the advantages of Australia?
MINISTER: Well the advantages of Australia are a large domestic economy that is one of the strongest performing economies in the world. It is a diversified and robust economy. The Australian economy is larger than Singapore, Hongkong and Malaysia combined. Few people realise that about Australia. It is also the case that the perceptions about Australia are in many ways different to the reality. For example Australia is seen by some people as a large quarry for mining with lots of sheep around it. Whereas the reality is that 80% of the Australian economy is services and the financial services sector is now 8% of the Australian economy. Which is as large as agriculture and mining combined. Now, to build a financial centre you need three key criteria. First one is - people - and Australia is an excellent centre for education. We have a major education centre in Asia. For example we have 15.000 Hongkong students studying in Australia and about 15000 Singaporean students. Eduction is a major export. So we've got the human capital to be able to deliver financial services. Then you need IT and telecommunications and we are one of the most significant IT centres in Asia. And then the third factor you need is a regulatory system including tax and industrial relations and supervision of markets that is global that is competitive and we've now got that.
KNIESCHEK: Your are encouraging institutional equity investment but what about individual private and small equity investment?
MINISTER: Absolutely, I mean it's a major, one of the fundamental differences between the attitude of say, some European stock exchanges and the Australian Stock Exchange is that the Australian Stock Exchange focuses very heavily on encouraging retail investors into the market. Australia is now the largest share owning nation in the world. And we have done that because of privatisation, because of demutualisation of some big mutual insurers. We have halved capital gains tax for individuals, put in place major tax incentives for companies to purchase other companies and not script-for-script take over relief and we are focusing on how we can get information to individuals that allows them to make investment decisions and that includes now half a million Australians buying and selling shares over the internet, which for a population of 19 million people is very significant. One of the most interesting features of that is when Australia's major banks started up at the Internet stock broking services. You could see in rural and remote parts of parts of Australia, farmers were coming in from the cows or the sheep at 11 o'clock in the morning, they were trading shares from 11 am to 2 pm and going back out to the land in the afternoon.
KNIESCHEK: And private investors from abroad?
MINISTER: Private investors from abroad are most welcome to invest in Australian equities. The fact that we have a open opportunity to invest via the internet and of course there are a number of Asian funds that have major portfolios in Australian shares, managed funds that retail investors from the rest of around the world would be able to buy it to.
KNIESCHEK: 25% of the Germans invest in equities, 54% in Australia. What are the reasons for this huge difference?
MINISTER: Well, it is as I said the privatisation. The Government has put a very big focus on retail investment.
KNIESCHEK: But we have in Germany privatised too.
MINISTER: Well, maybe there hasn't been the same focus on encouraging first time investors. When we, for example sold the first two tranches of our telecommunications company, we had a very major incentive put in place for first time investors to buy shares, including having an instalment process so they didn't have to buy the whole lot up front. They could pay in two instalments and that was a major incentive for retail investors.
KNIESCHEK: But that cannot be the reason because we have privatised our Telecom by a 100 per cent and you buy Telstra by 49%.
MINISTER: I am not familiar with what is happening in Germany but politically we see this very important to have. As you know, in the 1950 Australia's Government prided itself on helping average Australians buy a home. Now this Government prides itself on giving average Australians a chance to own shares. And we want to continue to build and importantly diversify. There are a large number of people that own only one or two stocks. We want them to invest in others. We also want them to hedge the risk by investing in some depth and we want to create liquidity in the retail bond market. But the other factor is of course Australia has a compulsory superannuation. I don't know about Germany, but we have compulsory superannuation for workers and that contributes a large number of people indirectly owning shares.
KNIESCHEK: We are starting this. The Australian Bond Market is and was traditionally interesting for German investors. Which role does play the corporate bond sector or section?
MINISTER: The corporate Bond Market is growing. That's because the Government is paying off debt and I can give you some facts and figures for you. You can see here debts and the retail corporate bond market increasing its size as you start to wind down the Government Bond Market. The Retail Bond Market has increased from 22 billion in June 1995 to 72 billion in July 2000. Now we want to continue to increase the liquidity and provided incentives as I said, for the retail investors to start coming into the Bond Market. Please take this. (Hands over document)
KNIESCHEK: But corporate bonds are more risky and additionally you have a very weak Australian Dollar. That are two risky factors that are not attracting foreign investment.
MINISTER: The Australian Dollar is one of the most heavily traded currencies in the world. I think it might be number 7 or 6. It varies, at times it has been number 5 and in some ways it was seen as a surrogate currency for Asia. It's a very liquid currency.
HEINZ: But it has been weak
MINISTER: so is the Euro
HEINZ: during the year. Maybe the high inflation rate in Australia is the reason for the weakness. Or the inflation rate expectations are relatively high. The consensus economics forecast already is 4.7%.
MINISTER: It's a spike. It's got a one off spike for the impact of the GST. The introduction .
HEINZ: Well the general consensus economics forecast
MINISTER: No. The base inflation rate is within a range of 2 - 3% still. There has been an additional spike because we have just introduced the Good and Services Tax. Now the Reserve Bank and everyone else can tell you and in fact most domestic economists employed by international banks as well would say they look at the underlying inflation rate rather than one off impact of the GST. The underlying inflation rate is still on a sustained basis expected to remain at 2 -3 %.
HEINZ: But nevertheless the Dollar will be the object of speculation, as I said, it is one of the most traded currencies and that meant that the currency has fluctuated heavily in the past.
MINISTER: Yeah it does.
HEINZ: so maybe that influences for foreign investors .
MINISTER: ah it hasn't stopped many foreign investors from investing in Australia. I think 40 percent or near 40 percent of the Australian Stock Exchanges is held by foreign investors. So, I think, you know, its not for me to comment specifically on the Australian dollar but I think we are all feeling the impact of the world's focus on America and investment in America. But the fundamentals of the Australian Economy are very strong.
HEINZ: When I look at the Key Economic Indicators at the moment, Australia seems to me to be a little America.
MINISTER: It is stronger in some cases because we invest more in the IT than the United States as a percentage to GDP. We've had a higher productivity growth over the last few years than the United States. When 7out of our top 10 trading partners were in recession or depression Australia had one of the strongest economies in the world.
HEINZ: But you also have like the States a current account deficit. Maybe that is the problem for the dollar?
MINISTER: Oh well it's the other way. The Dollar is helping to improve the current account deficit. There is a general consensus outside of Government what people see is a lower Australian dollar will improve our current account deficit. One leads to the other
HEINZ: Could the monetary or currency union with New Zealand help the dollar? Is Australia interested in a monetary union with New Zealand?
MINISTER: New Zealand has not approached us.
HEINZ : No.
MINISTER : And look Australia is a much larger economy than New Zealand. We are focusing on what is important for Australia. Our Treasurer Mr. Costello has made it clear that we are not interested in the creation of a merged currency with New Zealand and if New Zealand wants to adopt the Australian dollar then they should move that way.
HEINZ: They could do that?
MINISTER: Well, its like Argentina approached the United States about the US Dollar. We are focusing on our domestic concerns and if New Zealand wants to adopt the Australian Dollar than they should. They are welcome to approach us.
HEINZ: What about interest rates in Australia? The fed funds rate is 6.25% at the moment.
MINISTER: It's again very dangerous to me to comment on interest rates. It's the same principle all around the world. Even though we are here in Munich. I get in trouble if I comment on interest rates.
HEINZ: The Australian Economy is overheated. Now after the Olympic Games?
MINISTER: No. There is no evidence of that.
HEINZ: Ian McFarlane said that interest rates will go up?
MINISTER: No, I don't know what he said in relation to interest rates but the Australian Economy, in our view, will continue to grow strongly with low inflation and improving productivity.
HEINZ: Yes.. but you had some quarrels with Ian McFarlane in the past because you always increased some taxes and the politics tell oh what are you doing.
MINISTER: You have been doing your research. This is a problem with the internet, you see. It allows Journalists to be able to get hold of all the information. The Reserve bank acts independently in Australia. There is no argument about that. From time to time I am sure there are differences of opinion but I am not privy to them. You know we feel very strongly that the Reserve Bank should act independently. And this is one of the most outstanding features of Australia's stability over the last few years. In the face of an Asian economic crisis, I mean the fact, we had an independent Reserve Bank that held its nerve when the region was in turmoil.
HEINZ: OK. Lets come a little bit up from this topic to the economy as a whole. The weak currency caused an export boom I suppose? Paul Krugmann described Australia a miracle economy of the world. Stronger than the US one.
MINISTER: He was being modest.
HEINZ: What are the reasons of your success story?
MINISTER: A number of reasons. One is we have undertaken a massive structural reform. The Australian economy has changed in the last 30 years from being a manufacturing and agriculture/mining economy to become a services economy. In effect our exports have lagged behind, our export are still heavily focused on mining and agriculture with a limited focus on services. Education and tourism are major focuses for export services. What we did was, 20 years ago free up the banking system and since then, in the last few years, the Government has run strong surplus budgets. We halved government debt in Australia. We have undertaken massive industrial relations reform. Only around 25 per cent the Australian workforce is in union movement and industrial disputation is at its lowest level in about 70 years. We have undertaken massive tax reform, introduced good and service tax, abolished other sales taxes, reduced personal income tax so that 80 percent of Australians pay no more than 30 cents in the Dollar in income tax. We've halved capital Gains Tax for individuals so that now the top rate of Capital Gains Tax is 24 per cent. For most Australians is around 15 per cent. We abolished a lot of financial taxes, including stamp duty on the transfer of shares, all taxes on banking services are being abolished over the next few years. So, that's tax reform and the other area is regulatory reform. In financial services we completely overhauled, we had a big report in 1996 the Wallace Report, and they recommended an overhaul of the financial system. So we replaced a number of different regulators with just two. Regulators are the corporate regulator and a prudential regulator. We have allowed banks to merge with insurance companies with funds managers and have allowed corporates to buy banks and now we are delivering a whole new corporate regulation. The reforms we have undertaken in the financial system have been adopted in Great Britain. The creation of FSA is born out of the Australian regulation and the repeal of Glass-Steagal in the United States was strongly influenced by what happened in the United Kingdom, which was influenced by Australia. Now our regulations are being followed in the rest of Asia. Singapore, Hongkong and some of the other jurisdictions are using these regulations. That has all contributed with a real change in the economy, that has contributed to a new Australia. The OECD put out a report on new economies. It said Australia is only one of six countries in the world that is a new economy by their definition.
HEINZ: But there are no miracles without some clouds in the sky
MINISTER: Sure.
HEINZ: For example the National Institute of Economic and Industry Research predicts a recession in 2000 or a recession by 2002. Because of the huge trade deficit, the overheated consumption and an extraordinary low private saving rate.
MINISTER: Laughing . Financial Institute of Economics? Well, economists are notoriously inaccurate. We no see evidence to support this suggestion. We said there would be a slowdown this year, a minor slowdown. So far there is no evidence to suggest that that has occurred.
HEINZ: Yes, but you have a simular situation in the States and in Australia. There you have a soft landing scenario and with an increasing oil price for example, and higher interest rates, a hard landing scenario with perhaps 20 percent or so.
MINISTER: Look I couldn't put a risk on it. If you say to me the United States goes into recession, will Australia be affected? Yes. Everyone will be affected. We are very reasonable about that. The answer is yes if there is a dip in the US we are affected like everyone else in the world. People predicted we would be wiped out by Asian Financial crisis. And we are waiting to see the impact. The key feature about the Australian Economy is there continues to good productivity growth. You can see it filter through in certain areas like Financial Services, which is gone from 6.8 % at the economy to 8% in the last couple of years. Because of productivity improvements in the sector. We don't see any black clouds on the horizon. We are realistic, we are focused. The other thing on energy - Australia is an exporter of energy. Few people realise this, we are net exporter. Energy because of our vast reserves.
HEINZ: But imports of oil?
MINISTER: Importer of oil, Yes. But we major exporter of natural gas with a lot more coming on stream. One of the things the World Economic Forum in Melbourne was talking about how, I think it was Jack Welch and you've got to check with GE, how one computer now takes up more electricity than one fridge. All these energy saving devices on a fridge are pretty meaning less when you have 3 computers in the house. Australia has a capacity to be an exporter major exporter of energy beyond what it is today.
HEINZ: We have checked the economic figures and have seen that for example the investment in buildings and machineries has been falling dramatically from 22% of GDP to 1.6% in 2000. I can show you. These are from Datastream.
MINISTER: It's in German. I am sorry.
MINISTER: There has been some reduction, because Australia has basically spent the last decade reskilling and basically retooling as part of the redevelopment of the new nation. As the economy slows down .
(Change of tape)
HEINZ: James Wolfenson who was born in Sydney said that Australia has to invest more in research and development to increase its competitiveness in the world market.
MINISTER: I have a lot of time for Mr Wolfenson.
The OECD recently put out a report stating that Australia has the fourth most generous R&D tax incentives in the world. We'd like to see more investment in R&D and have undertaken some major tax initiative which is starting to flow through particularly for venture capital, which is in itself an incentive for R&D. Perhaps the most significant incentive is halving Capital Gains Tax. That is still filtering through to the economy.
Previously we were given an enormous amount of cash as an incentive for the private sector to invest in R&D. We stopped that because it wasn't targeted enough. It was just subsidising what was already going to be invested in the private sector. What, more importantly, we are trying to do is change the culture in Australia, where businesses, instead of going stable and secure investments, are looking to invest in good ideas and the best way to do this for by lowering the capital gains tax.
HEINZ: My last question. Do you expect the privatisation of 51% of Telstra? Because it's a good opportunity.
MINISTER: Sure. There are a lot of good opportunities to invest in Australia. We are committed to the sale of the rest of Telstra. Its Government policy. There are many good investments in Australia. Why, because for example of our top 10 stocks 7 earn major amounts of income from offshore. Many are considered the cutting-edge of what they do. That's not just News Corporation or Telstra which is a very good telco. The Commonwealth Bank of Australia or the National Australia Bank are very good banks. There is a very good banking system in Australia.
HEINZ: But you can't say the month or year of privatisation of Telstra.
MINISTER: No. Sorry, we remain committed. There is still the potential for further 150 b A$ worth of privatisation from Federal and State Governments over next few years - covering electricity, water, airports, telecommunication. The interesting opportunities are in Australia in its capacity to become a major project finance centre for Asia because we have some of the best project finance skills and increasingly other parts of the world are seeing Asia, particularly South East Asia, as Risk capital. Now we say, now well we want to try and develop an infrastructure capacity. There is going to be a huge demand from Philippines to India for major infrastructure and there is huge opportunity for that to be funded out of Australia. And that is one of the major focuses. Because we've got quite a lot of public/ private infrastructure, tollways, private railways.
HEINZ: Let's go back to the economy again.
MINISTER: Sure.
HEINZ: You explained the soft landing for the Australian economy. Could it be a bit harder because of the high oil prices ?
MINISTER: No. Our projections for the economy will remain the same.
HEINZ: The oil prices are not going to have an impact?
MINISTER: Well, its too early to tell what the true impact is. The impact is not as dramatic for Australian business as it was. For example because when we abolished wholesales tax we decreased the price of petrol by 10 percent and added the 10% GST. Now, business does not pay the GST. It's a flowthrough tax, a tax the consumers pay. And so for the first time businesses are not absorbing the full impact. In fact, for example, for farmers and people in regional Australia, we also abolished the tax on diesel so the cost has been reduced. As it flows through to consumers, the questions is how it impacts. Well its too early to tell but what we are confident about is that we have a very competitive market place and that puts pressure on prices. With a fully developed market we have got a natural ceiling on what could be the rampant on impact petrol prices. I must say e-commerce over the Internet is increasing dramatically in Australia. I was really interested in the court cases here with retailers you know how they said they can't sell out of the internet here. Are you familiar with this? A couple of major e-commerce retailers lost court cases here and we were told that they are not allowed to sale outside of normal retail trading hours. And one said they are going off to England or the Netherlands. The other one said they will stay. That's a major step backward.
HEINZ : You mentioned public debt. And you have been very successful in reducing public debt. If the economy will slow, improvement will become more difficult in future.
MINISTER: We are very committed to maintaining surplus budgets.
HEINZ: Do you intend to pay back all the public debt?
MINISTER: YEAH.
HEINZ: When?
MINISTER: Part of it depends on Telstra, but our projection was 2002.
We are committed to maintaining liquidly in the bond market. But we are very committed to abolish Government net debt. The projection is 2002. It's true. It's not fanciful because we've halved it in the last four years.
HEINZ: But next year there will be elections in Australia?
MINISTER: Laughing. Is that right?
HEINZ : The argument is your colleague Peter Costello set the budget for the existing year but includes election induced spending.
MINISTER: Last financial year we brought down the biggest budget surplus since 1970. It's 2.4 percent of GDP. The OECD average is half a percent of GDP deficit. So we are at 2 percent GDP surplus last year. And our public debt is 8 percent of GDP. The OECD average is 45 percent.
Elections are important for projecting where you want to take your nation over the next 3 years. All of our policies will be fully costed, as will the oppositions. And I expect a certain amount of fiscal responsibility to be applied. We still need to run large surpluses to maintain the stability of the Australian economy. This insulates us from the volatility in our region.
We are not a big spending Government. The difference is that we are not big spending. We are focusing on making Australia a low tax and reasonable spend nation.
We are the lowest taxing nation in the OECD now, as a % of GDP. The US and Australia are both at the bottom around 30% of GDP. However, we are also a nation that focuses on having an appropriate safety net for people, in many ways similar to Germany.
HEINZ: My last question is quite different. The country has long and close relations to Great Britain. If Great Britain decides to join the European Monetary Union, which can happen, what would be the effect on Australia and the trade with Britain?
MINISTER: You should have asked this in 1970. Australia has an Anglo-Saxon heritage, a reasonable strong American-type culture and we are based in Asia. That is the makeup of our nation. We are a potpourri of the world and you saw a bit of it in the Olympics. There are nearly a million people in Australia that speaks Mandarin or Chinese or Cantonese at home every night. There are 2 and a half million Australians that speak a language other than English out of 19 million people. We are a very diverse nation, we are close to the United States, we are probably closer to the United States than we are to Great Britain. Australia learned a lesson in World War II when the Japanese were bombing Northern Australia and it was the Americans who came to help us. And since that time Australia has a great respect for Great Britain, thanked it for its contribution to our heritage but recognised we have to make our own way in the world. In terms of trade our no. 1 trading partner is Japan. Great Britain is way down the list. We can get you those figures. 7 out of our Top 10 are Asian. 8 out of Top 10 actually. And Japan has been our No 1 trading partner for quite some years. It has no impact. This is the bottom line.
HEINZ : My very last question. Rank 4 for Australia at the Olympics. The Australia All Ordinary Share Price Index has performed better than all the other stock markets. What is your explanation for this success?
MINISTER: It is Australia. Its People.
HEINZ: OK. Thanks a lot.
MINISTER: My pleasure.