COLVIN:
Well, the Australian Treasurer, Peter Costello is back in the political fray after his holidays. He plunged into the debate about war with Iraq today, but it's not only Iraq that would be on the Treasurer's mind. There's been a series of reports including official statistics and business surveys that are suggesting that the Australian economy is heading for an unexpected slowdown throughout the year ahead. And what will George Bush's latest deficit Budget do to our prospects? The Treasurer joins me now from our Canberra studio. Mr Costello, thanks for joining us, and we will come to the economics very shortly, but I have got to ask, begin by asking you about a report on the Nine Network tonight which says that they have got hold of a leaked foreign affairs record of a conversation between your colleague Alexander Downer and the New Zealand High Commissioner in October, in which Mr Downer apparently said that Australia would prefer UN backing but was not in a position now to withdraw our presence from the Gulf and this was not a point that could be made public. Can you comment on that please?
TREASURER:
Well obviously I wasn't present at the discussion and I haven't seen the memo. But the Government's position is that we would prefer action to be taken and authorised by the UN Security Council. There is a fair argument that it has been already. That is the point that the Prime Minister made in the Parliament today, he will be making it in Washington. And I think it is really now up to the UN Security Council if it wants to enforce the non-proliferation of weapons of mass destruction it will be taking strong action.
COLVIN:
But does this piece of paper actually confirm that Australia is locked-in now come what may in the UN?
TREASURER:
Well, I haven't seen the piece of paper but I wouldn't think that was the case at all. The Australian Government has made its position clear, which is that we believe that the UN should act, we have a strong preference for it to act, we think that the onus is now on the UN but we believe that the international community must face this and Australia will be part of any action which we believe is in our national interest to secure Australian citizens and international peace.
COLVIN:
Tony Blair said in the last twenty-four hours that he was risking everything politically over Iraq, that he was staking his future. Is John Howard doing the same?
TREASURER:
I think that John Howard is doing what he believes is responsible in the circumstances and taking a long-term view. The easy thing here would be to ignore the threat that these weapons pose and heaven forbid if one day one of them was used, then the public would want to know why its leaders hadn't put in place all measures that were available to them to protect their citizens.
COLVIN:
Do you believe then that Saddam Hussein might let some of these weapons of mass destruction out to terrorists or is there not a greater danger that the aftermath of war might be a more fruitful time for terrorists to get hold of them?
TREASURER:
Well, 8,500 litres of anthrax, why would Saddam Hussein need that?
COLVIN:
Indeed, but the question I am asking is...
TREASURER:
When one milligram can kill millions of people, now...
COLVIN:
But the question...
TREASURER:
Now suppose one litre...
COLVIN:
The question I am asking is whether they are more likely to get to terrorists in the current situation or in the chaos that may follow a war?
TREASURER:
Well, just let me ask you rhetorically why do you need them in the first place? What is to be done with these litres of anthrax? Well what we say should be done is that they should be handed over to Hans Blix who should destroy them. What Saddam is apparently doing is hiding them and certainly not accounting for them. Whilst they exist they are a danger. And the only way of securing public safety is to bring the destruction of these weapons of mass destruction about. That is what the UN Security Council has called for to be done, it hasn't been done, and now it is up to the Security Council to announce it's response with the co-operation of countries that believe it's important to disarm these weapons of mass destruction.
COLVIN:
I know this is the question that always follows you around. But what is all this doing to your leadership aspirations? Is John Howard, potential war time leader, effectively now concreted into the Lodge?
TREASURER:
Look, we don't determine policies and leadership through the prism of particular interests. What all of us do is we determine what is right and in the long term interests for the country. And that is what is motivating me and that's what's motivating John Howard in his decisions on this matter.
COLVIN:
Well, let me ask you, as flagged, about the $300 billion plus, I mean that is just such a mind boggling figure, deficit, put forward by George W. Bush. You're not in favour of deficit budgeting, what do you think of this one?
TREASURER:
Well, it's a very large budget deficit. It's about 3 per cent of GDP, US GDP. If our budget were in the same position as the US budget we would be experiencing, or calling for, in this financial year a budget deficit of $20 billion, rather than a balanced or surplus budget. So it's a very large sum. It illustrates that the Australian fiscal position is much, much stronger than the United States.
COLVIN:
And obviously we are dependant to some degree on the economic health of the United States. Do you go along with the conventional economic wisdom that big deficits depress investment and also are likely to raise interest rates?
TREASURER:
Well, the US economy is not growing as well as Australia and as a response the Government in the United States is budgeting for a large deficit which should be stimulatory. They have official interest rates at 1 ¼ per cent. Now, it can't go much lower than that so that should be stimulatory. From Australia's point of view, a US economy which has been in recession and sluggish is a problem, not just for us, but for the world. And if stimulation will encourage growth in the US economy, and therefore the world, we would welcome such growth. Now...
COLVIN:
(inaudible)
TREASURER:
...it's been a difficult period for us. We have come through a US recession. Australia has been kept out of recession because it has been an economy which has grown stronger than the United States. But we would certainly like to see the United States return to growth.
COLVIN:
Speaking of deficits, what explains our $3 billion trade deficit?
TREASURER:
Well, there are really two factors involved. One is that the drought is now eating into our rural exports. And the second is that business investment is very strong and you saw in those figures the import of Qantas fleet - four new aeroplanes in the one month. Qantas must be, I guess, one of the most profitable airlines in the world. Its got a big capital upgrade. The fact that it is engaging capital investment is a good thing long term because it will make profits and return income to the country. But...
COLVIN:
But if the...
TREASURER:
...you will see showing up on the trade figures that capital investment.
COLVIN:
On the export side though, if it is all about the drought, why has our export growth been essentially flat for the last couple of years before even the drought started to bite?
TREASURER:
Well, Australian exports at 21 per cent of GDP are higher in the last 2 years than they have ever been. That is, the export proportion of the Australian economy is higher than it's ever been. So, what you are seeing in the December month, and it won't just be December - I have said this - it will be in the months in the new year as well, you are seeing the reflection of the worst drought at least since 1982, possibly since the 1940's. So, the Australian economy is actually holding up, as I said earlier, better than the United States, notwithstanding a very severe drought. The United States doesn't have a drought you know, and that is not the cause of US weakness and it's the non-rural Australian economy which is keeping our growth going and strong capital investment. Now, you know, we can look at the problems of the world, and the US has its problems, and Japan, and Germany, and France, and Britain, and it is a pretty tough world out there. But the only thing I can say is, by comparison, the Australian economy still continues to lead. It will not be immune, it will not be immune from international developments but we still continue to lead.
COLVIN:
Business confidence doesn't look too happy at the moment. What have you got to say to the business community that would increase their confidence then?
TREASURER:
Well, business expenditure has been quite strong this year and what I would say to the business community is that we have good conditions for investment, we have good consumer demand, we have interest rates which by historical standards are low. We have a strong fiscal position, we have a good debt position, our inflation is still within the band that we are targeting. Our company tax rate is reduced to 30 per cent, we have full dividend imputation which the United States is now looking like it will follow us and emulate our tax system in relation to dividend imputation. So, conditions there for business investment are good in Australia. I don't discount the fact that the international environment is, is difficult, but business conditions in Australia are good for investment and I encourage businesses to keep on doing it.
COLVIN:
And at the Mid-Year Economic Statement you were forecasting 4 per cent growth. What are you forecasting now?
TREASURER:
Well, we will update our forecasts in the Budget so what I am forecasting is precisely what I forecast in the Mid-Year Review.
COLVIN:
And when you update the forecast what will that do, though, to your other projections?
TREASURER:
Well, I think that, as I said earlier, the non-rural economy in Australia has held up surprisingly well and business investment is good as is consumer demand. So, sure the drought is a terrible problem, and probably worsening over the last couple of months, but the non-rural economy is keeping people in jobs.
COLVIN:
And for the rest, like an awful lot of Australians, you're praying for rain?
TREASURER:
Look, rain, not just for the sake of the farmers, but for the towns that depend on them and the sake of the economy, we hope this drought breaks. If it doesn't break in March or April then it will be into another planting season. All I can tell you is that the meteorologists still say better chance than not of the drought breaking. Let's hope that it does.
COLVIN:
Treasurer, thank you very much for joining us on PM tonight.
TREASURER:
Thank you.