Kelly:
The Treasurer is off to Bali next week along with Kevin Rudd for the UN sponsored climate talks and he joins me this morning from Sydney.
Kelly:
Treasurer good morning
TREASURER:
Good morning Fran. How are you going?
Kelly:
I'm very well thank you. Congratulations.
TREASURER:
Thank you very much.
Kelly:
Look we'll get to climate change in a moment, but I just wanted to begin with your response to the US President's move to stabilise the American housing market over night. President Bush has announced an interest rate freeze, a 5 year interest rate freeze, and refinancing that could help more than 1 million home owners in America. Do you think this will soften the impact of the sub-prime crisis on Australia?
TREASURER:
I think that remains to be seen because the sub-prime issue is a far greater issue in the United States than it is in Australia. So what it is doing is causing liquidity issues in global financial markets and that is of course putting upward pressure on rates here and around the world.
Kelly:
Are you still concerned that the sub prime credit crunch (..inaudible), that we could still be looking into the face of that global tsunami, economic tsunami, that the Treasurer, the former Treasurer was warning us of.
TREASURER:
Well it's certainly a concern, but all the advice that I have, all the advice that I have is that we are well placed to cope with the fallout from all of those issues because we have first class financial regulators in this country. We do have some domestic economic issues but we are dealing with those. All the advice that I have is that the second and third round effects on growth internationally would have some impact, but given that there is still strong growth in Asia, and that strong growth in Asia is expected to continue despite all of this, then the outlook for us is far better than some have said in the last few weeks.
Kelly:
OK well we'll get to some of those domestic economic issues in a moment. If we can turn to climate change first though because as you are off to Bali next week. Australia is yet to commit to a 2020 carbon target. Is Australia though considering cuts of between 25 and 40 per cent as quote 'an agreed position to negotiate around'. Are we saying no to this target range or are we still trying to figure out where we want to be within the range. Is that the issue?
TREASURER:
Well the situation is that we have a target of 60 per cent on 2000 levels by 2050.
Kelly:
Ok
TREASURER:
And what we have done is to put in place domestically the Garnaut review to tell us the safest economic pathway by which we can reach that goal. You see because the previous government did not take climate change seriously and had not done the serious economic work, had not done the serious modelling that is required for us to work out the best economic path to achieve that long term goal of 60% on 2000 levels by 2050. Now that work is progressing and it's going to progress much more quickly now, because previously Ross Garnaut had been working only with State Governments and now we can bring to bear the full force of the Federal Treasury and the whole Federal Public Service in this exercise to map out the safest economic pathway to reach that goal. But can I also just point out that these reports about the Vienna Declaration…
Kelly:
That's the 25 to 40 per cent by 2020?
TREASURER:
Yes that's right - all of the signatories to that IPPC report have signed up for that. They don't necessarily sign up to that target, they just acknowledge that there are a range of ways to get to the ultimate goal. So there is not from anyone who's a signatory to the Kyoto process an absolute commitment to any of those targets that are mentioned. They are part of the discussion, of course interim targets are required. We are going to set our interim targets through the Garnaut process.
Kelly:
Ok and that Garnaut process now that the (inaudible) has the full assistance of Treasury behind him could be sped up, could we commit before June next year?
TREASURER:
Well can I tell you Fran that I went over to the Federal Treasury the other day and they have increased their efforts in this area in recent times and the Treasurer's office over there is now partly occupied by Climate Change modellers.
Kelly:
And that's a change is it?
TREASURER:
Well it started before the government changed. As you know the government in 2003 had refused to introduce an emissions trading system. We forced them in the last 12 months or so to backflip in a number of these areas. But as you know, they would not come even to a target of 60% by 2000 levels by 2050. We're getting cracking on this agenda. We understand that dangerous climate change is perhaps the biggest economic challenge that this country faces in the long term. It does require a comprehensive response. We're serious about that response. Serious about that response and that is why we are going to Bali and that's why we have put in place a whole series of policies to deal with the issue.
Kelly:
And it sounds as though Professor Ross Garnaut is serious about it too. If this speech he gave last week is any indicator. He is likely to come up with some tough targets. He said that climate change is already more advanced then the world realises and tackling it could present diabolical policy challenges. Is that the same advice you're getting from Treasury?
TREASURER:
There are certainly substantial policy challenges, but what we do know from this Stern Report is that the cost of inaction is far greater than the cost of action. I mean we got the reports out there today from ABARE about the impacts of climate change on farming. Before you even get to the impact of climate change on tourism and a whole host of industries. There are very substantial economic costs for this country that we will have to live with, and our children will have to live with, unless we come to grips with this problem and we are determined to do that.
Kelly:
Well you mentioned Nicholas Stern, he described climate change as a result of the greatest market failure the world has ever seen.
TREASURER:
Too right.
Kelly:
That was a statement Peter Costello didn't have much truck with at the time but if Stern is right, then the solution must be market driven. The solution to climate change is economic not environmental. We have to take some economic pain here, which is what Brendan Nelson was alluding to yesterday wasn't it? He's got some pain attached to this.
TREASURER:
Brendan Nelson wouldn't face up to this problem in government. He sat around the cabinet table that wouldn't agree to an emissions trading system. He sat around a cabinet table that wouldn't even agree to targets of 60% by 2050. We're serious about dealing with the issue. It is a big economic issue which is why we are devoting considerable resources to it. It has to be market- driven, that is why we do need an emissions trading scheme. That's why we have a target of having an emissions trading scheme in place by 2010. We are working around the clock on the issue because we understand the significance of the issue. The Opposition doesn't understand the problem and therefore they have never been part of the solution.
Kelly:
Well let's get to our domestic economy at the moment because that's what you're going to be managing over the next three years and despite all the talk about the economy experiencing bottlenecks and capacity constraints, it's still managing to expand. The national accounts this week showed GDP got 4.3 per cent per annum which is rocketing along.
TREASURER:
That's right.
Kelly:
You've got a big job ahead of you in terms of your commitment to bring down inflation, to help the [Reserve] Bank keep inflation in control to avoid yet another interest rate hike possibly as early as February is what pretty much everyone is suggesting now.
TREASURER:
We are in the middle of the strongest world economy in a long time. We're in the middle of a mining boom and the government had not been putting in place the policies to head off the inflationary pressures that are building in the economy. So as a consequence we are now facing a very considerable inflationary challenge. And what Kevin Rudd and I have been talking about over the past week is a range of policies to put downward pressure on inflation. We have been talking about the need for strict budget discipline. We've been talking about the need to get rid of wasteful spending. The government in the last few years had no fiscal discipline at all and we're determined to put in place some strict budget discipline because of the inflationary challenge. And the other reason we've got the inflationary challenge is the skills crisis that is out there. So we are going to put in place a range of policies to ensure that we can get skilled workers out there and into the workforce.
Kelly:
Let's talk about that strict budget discipline. Do you now wish you hadn't rolled out quite so much during the election?
TREASURER:
We didn't do that.
Kelly:
Well hang on, let's look at the $31 billion in tax cuts (inaudible) implicit criticism in the Reserve Banks minutes released this week for the first time of the level of pre-election spending by both sides, particularly of the tax cut pledge.
TREASURER:
Fran, the tax cuts go to the core of labour force participation which goes to the core of dealing with the skills crisis and labour shortages that are out there. It is very important that these tax cuts go forward because they will lift labour supply. Every business in the country tells me that their number one problem is getting skilled workers and in many cases getting workers at all. That's why we've got to lift labour supply. That's why the tax cuts are important. But that's also why it's important that we've got to have very strict budget discipline elsewhere in the budget and during the election campaign we put up $10 billion worth of savings and we've said publicly, and we've said it very clearly, that there has to be further savings found in the budget because of the inflationary challenge.
But the other challenge is to rearrange and modernise our spending. The government wasn't spending the money in the right areas. We've got to invest in skills to deal with the skills crisis, and indeed with the ageing of the population. We've absolutely got to do something about the infrastructure bottlenecks out there. So we've got a whole programme to expand the productive capacity of the economy, to rearrange and modernise spending. And to do all of that in this environment we have to have strict budget discipline which we haven't had in this country for a long period time.
Kelly:
I know we've talked about this before, but getting on to the skills crisis, getting on to infrastructure is longer term. Have you spoken to the Reserve Bank Governor or Treasury about what you might do in the very short term to try to head off at least two interest rate rises that most economists agree are headed our way in the first half of next year.
TREASURER:
Well firstly strict budget discipline. Getting rid of that wasteful spending. Secondly a number of measures to enhance labour supply and particularly the child care initiatives that we announced in the campaign are very important. There are something like 100,000 parents out there who would be in the workforce or would work extra hours if they could get affordable quality child care. That's an important part of the solution. Many of the training places we're talking about can come on stream in a relatively a short period of time. But I openly acknowledge Fran that what is required is long term solutions. There are some things we can do in the short term but the most important thing we've got to do is put in place the long term solutions because this problem took a long time to develop and it won't be solved overnight.
Kelly:
What about the impact of the ABARE forecast which suggests that climate change could knock five per cent off Australia's GDP by 2050 - which is a huge amount and could have much sooner than that a dramatic effect on our crop yields and our exports. It will have a big impact on this economy and it is suggesting that the Australian Government needs to work with farmers to help them become more water efficient, more efficient in their practices generally. Is that something which you're going to really take on board and get on to?
TREASURER:
Too right we will and Kevin Rudd will be doing some of that today. It's very important we recognise the impacts of climate change on the farming and rural communities more generally and as someone who comes from a regional state and grew up in a rural area I've got great affinity with the problems that are occurring out there so we've got to be on that case. We've talked about a particular fund to assist farmers in this area during the recent election campaign. And we are working very hard on a range of solutions. So all of this demonstrates the very important point that the cost of inaction on climate change is far, far greater than the cost of action and that's why we have to get down to a broad range of solutions to deal with dangerous climate change.
Kelly:
Wayne Swan you've got the job ahead of you. Thanks for very much for joining us.
TREASURER:
Good to talk to you Fran.