KGB INTERROGATION: Wayne Swan

Climate change, the Garnaut Review, the two-speed economy and interest rates as well as foreign investment in Australian companies were all on the agenda when the Treasurer sat down with Business Spectator.

Alan Kohler: The Reserve Bank said this week that it’s reasonably comfortable with the inflation rate, but as long as demand continues to moderate. Also this week, tax cuts came into force. Are you still confident that given the amount that the tax cuts will add to demand, that it won’t put pressure on the Reserve Bank to increase interest rates?

Wayne Swan: Well as the Reserve Bank observed in its last set of minutes, the impact of the budget is one that is, I think to use their term, mildly contractionary. We have now got fiscal policy settings that are supporting the Reserve Bank in pulling in public demand. We cut back spending over the forward estimates by $33 billion. $7 billion in 08/09 and every single dollar, every single dollar of new program expenditure was matched by a saving elsewhere in the budget. We have not adopted the approach of the previous government, which was when inflationary pressures were building, to simply go on a spending spree. We’ve created room in the budget to deliver our additional support for families, education tax rebate, the additional child care assistance and to make sure that we could deliver the tax cuts. We think they’re entirely responsible and their delivery will reward the hard work of a lot of people who haven’t had a decent tax cut in a long time and also, with enhanced labour force participation and in an environment where we’ve got skills shortages and more endemic labour shortages more generally, that’s the responsible thing to do.

So our Budget is one which is entirely appropriate for the times that we are in. If you look at the budget papers for example there’s a long discussion there of the countervailing forces impacting on this economy. We’ve got underlying inflation at the highest levels in 16 years, because on the one hand the previous government spent irresponsibility and on the other was inattentive to capacity constraints in the economy putting further upward pressure on inflation. If you put those challenges in this budget, we’re pretty proud of where we landed, because it’s also given us the capacity to have a huge surplus which maximises our flexibility in an environment where the international outlook is quite uncertain.

AK: Trouble is, as you say, it is very uncertain and earlier this week the Bank of International Settlements’ (BIS) Annual Report which was pretty gloomy, talked about the dangers that lie ahead. So given that and the opposing forces that the RBA talks about, is there an optimal policy mix do you think that you might need to adjust in some way?

WS: I think we’ve got the settings right for the times. I mean, because on the one hand whilst there’s slowing world growth, particularly in the developed world, growth in the developing world is still relatively strong which is producing huge increases in our terms of trade so you know, of all the countries in the world, we are perhaps better placed to withstand the challenges of those countervailing forces than virtually any other country. I’ve just returned from a visit to Europe and to London where I saw the UK Chancellor. I then went on to the G8 Finance Ministers’ meeting in Osaka in Japan and it is very clear that times are difficult internationally. So if you take international financial market turbulence and the increases in borrowing costs that flow from that, and put on top of that, super-impose on it, a global oil shock, these are difficult times for the international economy. But in receiving substantial increases in the terms of trade, we as a country are in a far better position to handle all of those various influences than many others. But the report from the Bank of International Settlements doesn’t gel all that well with the recent reports from the IMF. The recent reports from the OECD meeting I went to in Paris are all a bit more bullish in terms of world growth.

Stephen Bartholomeusz: Treasurer, you referred to the explosion in the terms of trade. There’s been a lot made of the two-speed economy and the disparity in conditions between the resource states and the industrial states. Do you see the economy in those terms and if so, is there an approach to managing those differences?

WS: Well the first point is that the terms of trade increase we’ve seen in recent years has spread out much more evenly than many people are saying. If you actually look at the aggregate figures on a state by state basis, certainly you’d have a more dramatic impact in my home state of Queensland and in WA, but it has been spreading throughout the wider economy. You’ve got to bear in mind that when inflation hits 16 year highs, the experience of that isn’t just confined to Queensland and Western Australia. It’s the whole economy. So businesses right across the country are not only beneficiaries of an increase in the terms of trade, but also face the challenges that capacity constraints and income surge pose.

AK: There was a huge fall in new home sales. I realise you wouldn’t want to focus too much on individual statistics, but just as an interesting kind of side light or indicator of it, the new home sales figures out today, five per cent down nationally, 9.5 per cent down in New South Wales, but two per cent down in Queensland – big difference there.

WS: I think Alan, you should take and heed your own warning. I mean that’s one set of figures. Look, the economy is slowing on the back of eight interest rate rises in years, slowing on the basis of the increase in borrowing costs flowing through from the international financial market turbulence, particularly for businesses and also households and the impact of that is occurring throughout the country and it may be higher in some states than others but I wouldn’t be just quoting one figure.

AK: If the gloomier assessments of the world economy continue to come true, then commodity prices won’t keep going up as they are and the terms of trade will possibly go into reverse. I just wonder if you need or have a Plan B, in case the terms of trade do fall, because the budget would very quickly go into deficit and the economy would potentially collapse.

WS: I’m not entertaining those sorts of options Alan, you’ll be pleased to hear. There are various reports out there and I was talking to a very senior economic regulator today who was familiar with the BIS report. It’s in a long tradition that has come from that body, but if you take the recent updated outlook from the IMF, the recent updated outlook from the OECD, they are much more optimistic about the future. But we ought not underestimate just how difficult conditions have been in international financial markets and the potential for that to flow on to the real economy. The great thing about this country however, is that we don’t have direct exposure to the sorts of problems that are emerging or that have occurred in the United States and are now emerging in parts of Europe. And that’s a good thing. It reflects well on the economic regulators in this country. But we are not immune from those effects. And that’s one of the reasons why we wanted to build a very strong surplus – because it sits there also as a buffer in times of international uncertainty.

SB: Treasurer, you referred a moment ago to our immunity from what’s gone on in the rest of the world. There have been some impacts from the sub prime crisis on our markets and institutions. The most notable is the closure of markets for securitised debt and the effect travelling down to the non-bank sector. Is there anything you could do or plan to do that would deal with those sorts of developments?

WS: Well, we took some steps. We’ve increased the value of Treasury bonds on offer. I don’t have the figures in front of me, but I can get it for you. We’ve put a bit more liquidity in the market and a bit more certainty in to the pricing of risk. We think that was a very important thing to have done, as you know, and I’ve said this in a very long statement to the Parliament. You should have a look at the statement I made to the House about the financial claims scheme, the banking sector and the decision to put more bonds into the market. All of those were moves we made to enhance the stability of the financial system.

SB: But there's still no liquidity at all in those securitised debt markets.

WS: Well that’s not true actually.

SB: Well minimal…

WS: ... I mean I agree with you that they’ve been very tight, but I think one large company got away with securitisation only last week. It was very expensive, but it’s an encouraging sign though.

SB: There are all sorts of people though putting their hands up asking you to help out by creating something like an Australian version of Fannie Mae [the US Federal National Mortgage Association]. Have you looked at that?

WS: We’re not going down that road.

SB: Why not?

WS: Because I don’t believe it’s the way to go. I’ve made a study of those bodies in the United States and they themselves have been beset with many difficulties over a period of time.

AK: The hot issue at the moment is emissions trading. The Garnaut Review comes out today and the government’s Green Paper not long after, so does the government remain committed to an emissions trading scheme as opposed to a carbon tax?

WS: The government is committed to an emissions trading scheme. It’s what the Green Paper is about. It will look at all of the issues involved for the construction of an emissions trading scheme. We’ve got a period of consultation through the second half of the year following which the government will take its decisions after a lot of consultation with both households and the business community and we are committed to, as we committed during the election campaign to the commencement of such a scheme in 2010.

AK: Is there even the slightest chance that the transport fuel will be carved out of that?

WS: Well I’m not going to pre-empt the discussion that will come in the Green Paper. We’ve made it clear however and I’ve said this on many occasions that the scope of the scheme should be as broad as possible.

SB: Treasurer, you would have seen the threats of brownouts being raised in the newspapers. If coal-fired generators aren’t compensated in some fashion for the introduction of carbon pricing, is that scaremongering? Or do they have a legitimate case?

WS: Look we’re going to sit down and talk to all of the strongly affected sectors and the trade-exposed, emissions intensive industries and work our way through all those issues and that’s what the Green Paper’s about as well.

AK: Do you think the whole thing is somewhat analogous to the GST?

WS: No I don’t.

AK: In terms of the need to broaden the base as much as possible and possibly the need to negotiate it through the Senate?

WS: Well, that applies to just about any discussion. We have to get all our legislation through the Senate. You may have noticed that there have been a few people trying to sabotage our budget up there. I don’t see the analogy with the GST. This is a very major economic reform, the aim of which is to reduce the emissions intensity of our economy over time and to put this country in the best possible position to take a share of the jobs of the future and to prepare the country for the challenge of dangerous climate change. In that sense, I don’t think it’s got anything to do with what the previous government did with the GST which after all was only another tax.

SB: With oil prices where they are, does that mean that you’re going to have to be a little bit more careful about the way you introduce it?

WS: Look, this is a very big, hard and tough reform and the government makes no bones about that, just as we make no bones about putting up our hand to do something about it, because if the previous government had acted four or five years ago when they were asked to act, then an emissions trading scheme would have been operating in a completely different environment from the one that we’re in now. The whole country would have been a lot better off and the cost of that in action over that time has cost the country dearly, so we’re going to put up our hand. We’re going to tackle the tough reform. We’re going to do what’s responsible and we’re going to do what’s right and we’re going to do it after we’ve consulted widely with the community.

AK: What sort of feedback are you currently getting from business on the subject?

WS: Oh a variety of feedback. I mean the whole of industry is interested… and the government understands how important that is and that’s why we’re tackling the challenge.

AK: The other hot-ish topic on your desk at the moment is foreign investment in particular Chinese investment in Australia. We’ve got 50 per cent of Macarthur Coal now in the hands of its customers. Do you see that as a problem?

WS: Oh well, as you saw in early February, I published some guidelines about investment from sovereign wealth funds or government bodies and their entities and there were six principles there and one of them was to the degree to which these investments impacted upon competition. Essentially, those guidelines really brought together a series of principles that have been applied by the previous government across a range of areas. If it is the case that investment has the potential to substantially reduce competition in an industry, that is very relevant to my application of a national interest test.

AK: What do you mean by substantially reduce competition? Do you mean because customers control the business?

WS: Well, I mean what I just said – substantially decrease competition. What the guidelines and our guidelines have always talked about, when we’ve talked about applying a national interest test, is maximising the return to the country of that investment. Now, we are very welcoming of foreign investment in this country and this is a government that welcomes foreign investment and as you know foreign investment in our mining sector is somewhere between about 50 and 70 per cent of the sector, depending on how you calculate it. It’s merely a question of what maximises the national interest and we take our decisions on those investments on a case by case basis and those principles that I outlined in terms of investment by foreign governments or their entities are a further amplification of the approach.

AK: Do you think that the sorts of percentages you’ve just mentioned are about as high as they should go? Do you have in your mind a sort of a level of…

WS: No, no. We need foreign capital to develop our resources sector. If you have a look at the budget you’ll see a map of a whole lot of planned projects for the country and those projects are really important to our future prosperity and that will take a lot of foreign capital. What we’re going to do is strike the balance in those investments to maximise the interests of this country and that’s what the government will continue to do on a case by case basis.

SB: Treasurer, the FIRB (Foreign Investment Review Board) has been asking some of these state-owned enterprises to withdraw their applications for investment in Australian companies….

WS: I wouldn’t necessarily accept as fact everything you’ve read in the paper about this…

SB: Well, certainly a number of the foreign, state-owned enterprises have said that they’ve been asked to withdraw and resubmit to give FIRB more time.

WS: I draw your attention to a speech that I gave in China on this very topic only about three weeks ago, which takes you through the facts. Large numbers of projects have been approved since I’ve been Treasurer. Projects are, however, assessed on a case by case basis. It is not unusual to have applications withdrawn and it happened under the previous government and it happens from time to time now.

SB: But the market has interpreted that as you buying some time to develop a more prescriptive policy. Is that the case or do we rest with the guidelines?

WS: I refer you to my speech in China which very clearly outlined our current approach and what that speech said was there had been a very big increase in applications from Chinese companies investing here and that, more than anything else, was a factor that had just slowed the process down basically, because there was a whole surge of them that came in at once. There is no uniform approach which says we’re doing this or that. We are doing a case by case approach, as the previous government did, and we’re trying to process the applications as quickly as we possibly can so we can apply it, and apply a national interest test.

SB: A slightly different question about foreign investment. There is a land grab occurring in the Queensland coal seam gas sector as global players try to secure gas reserves for export of LNG. Are you comfortable with that or are you concerned about what it might mean for domestic energy security and prices?

WS: Well I don’t necessarily accept the premise of that question…

SB: Which part of the premise?

WS: Let me make the point that with those investments, as with others, we will apply our guidelines. As I made clear before, we certainly need foreign capital to invest in this country and particularly in the resources sector, but it’s got to be investment that fits into our general approach and as someone who may have to take decisions on some of those projects or proposals, I don’t intend to outline my views because it’s all very market sensitive and to the extent that it is before the Foreign Investment Review Board it’s commercial in confidence.

SB: Is there any sort of heightened sensitivity, particularly with carbon pricing coming, about energy security and domestic energy security?

WS: Oh I think more generally, I said this in a speech somewhere in the last little while, that energy security is very important and the government is working in that area through Martin Ferguson and of course the accident that happened at the Apache site a few weeks ago demonstrates how important all that is.

Follow @AlanKohler on Twitter

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