Peter Costello

Media Transcripts

IMF/World Bank Meeting, International Economy, Australian Economy, Exchange Rate

TRANSCRIPT

of

HON. PETER COSTELLO MP

Treasurer

Press Conference

Australian Embassy,
Washington DC

Sunday, 29 September, 2002
12.30pm

 

SUBJECTS: IMF/World Bank Meeting, International Economy, Australian Economy, Exchange Rate

TREASURER:

Thank you ladies and gentlemen for coming out today. As you know the annual meeting of the IMF/World Bank is just winding up here in Washington. The principal areas that have been under discussion are the world economy, particularly the threats to the world economy from the very substantial fall in equity prices around the world, and the fact that the expected recovery in the United States economy in 2002 has been weaker than hoped. The corporate governance scandals have affected confidence to some degree, and also the large structural problems in the Japanese economy have been under discussion, with the difficulties in the Japanese banking sector continuing, and Japan, as you know, still in a very weak state. The IMF outlook is for Australia to continue to be one of the strongest performing economies in the developed world and we concur with that. We've managed to avoid the American recession of 2001. We don't want to be complacent because we know that there are still great challenges in front of us, and it's important that we keep our reform program going. But as I said at the annual meeting today, the Australian experience does demonstrate the importance of economic reform and it can bring higher productivity and stronger non-inflationary growth. We want to continue to produce outcomes such as those.

From here I'll be going to New York to open the Merrill Lynch investment conference for investing in Australia, and to talk to a foreign policy association in relation to prospects for economic growth in Asia.

JOURNALIST:

Treasurer, first, how much discussion if any have you had at this meeting about the possible economic effects of military action in the Middle East by the United States, perhaps early in the New Year.

TREASURER:

Well, if there is instability in the Middle East you would expect that from an economic point of view that will have an effect on oil prices, and rising oil prices is a negative for growth in the developed world, so that's something to bear in mind when you're looking at the prospects. To some degree, we've already seen those price rises. The point I'm making here is that it's not necessarily just military intervention, but it's volatility and instability that effects its way into prices, and higher oil prices are not good for the American economy or indeed the Australian economy or any developed world economy. We lived through a period of rising oil prices in 2000 in Australia, and that was not good nor conducive for economic growth.

JOURNALIST:

Having had a chance to get a sense of the world community, other Finance Ministers' views on this, do you think it's a major concern at the moment?

TREASURER:

I wouldn't rate it as the major concern. I think the falls on world equity markets are the major concern for growth both in the United States and the developed countries generally. You've had a situation where in the United States, also in European stock markets, prices have fallen by about 25 per cent this year. That's an extraordinary number of people that have lost an extraordinary amount of money. And you would expect that to affect consumer sentiment and also business investment. That's the big story in world markets at the moment, that's the difficulty that we're confronting. Now the Australian stock market has fallen. It hasn't fallen anything like the falls in the United States or Europe, and partly that's because we avoided the excesses of the bubble on the way up. But the outworking of this incredible volatility is the big economic challenge that countries are facing at the moment.

JOURNALIST:

What chance that conflict, or just the instability perhaps, but certainly conflict in the Middle East, might force the Howard Government to consider a levy to cover the costs of ... an Australian contribution?

TREASURER:

Well, I'm not speculating at all on a levy, because that rather assumes something that hasn't occurred. No military action is being taken in Iraq. The Australian Government has not determined to engage in that, so obviously I'm not going to speculate on what our response would be.

JOURNALIST:

In terms of the discussions this weekend with the Finance Ministers, how likely do you think is their planning and forecasting towards military action in the Gulf? How much was that in their consideration when looking forward?

TREASURER:

You mean amongst Finance Ministers generally, or amongst American ...?

JOURNALIST:

Both, especially the Europeans and the ...

TREASURER:

Look it's one of the risks that you have to take into account in your economic planning. I think it's been referred to in the communiques, the fact that instability, and I again emphasise it's not necessarily war, just instability in the Middle East, can have an effect on oil prices and it has already to some degree. The price of oil has gone up quite substantially in recent months, so it's one of the risks to the world economic outlook. Is it the largest? No I don't believe it's the largest at the moment, but it's one of the downside risks that you would factor in your thinking.

JOURNALIST:

The other side of that of course is the US deficit, and many people are speculating that if there is instability in the Middle East or a war in the Middle East, then that deficit would be further increased. Is that a factor in peoples' forecasting?

TREASURER:

Well there's been a huge turnaround in the position of the United States which a year or two ago was looking at substantial surpluses and now has quite a substantial deficit. The reason for that turnaround is principally the US recession. Nothing undermines a budget position like a recession. But in addition to that was the build-up of expenditure in response to the events of September 11. Now further military action could also have a further effect. The point about all of that is that the US budget was already in deficit, principally as a consequence of 2001. You wouldn't say that this has had an inflationary effect because if you look at long-term yields they're exceptionally low at the moment, but it's something that policy makers in the United States I know are referring to and keeping an eye on.

JOURNALIST:

What is your view as a senior Australian minister, do you think that Saddam Hussein should go regardless of the cost?

TREASURER:

The Australian Government position is that full access should be made by Saddam Hussein for inspection of all weapons of mass destruction, and that weapons of mass destruction in Iraq should be destroyed. That is, it's not just the inspection, it's the ending of the program to develop the weapons of mass destruction and the dismantling of those weapons of mass destruction that are already there.

So our view is that the regime should end its program of weapons of mass destruction. That's what we call on the Iraqis to do, and we call on them to open to full inspection so people can satisfy themselves that that's what is occurring.

JOURNALIST:

The British and the Americans at the UN obviously are trying to get a resolution up, but they've flagged that there's a prospect of action if they don't get a resolution. Baghdad has said yesterday it's not interested in the new resolution. What's Australia's position? That there could be action regardless of the lack of a UN resolution?

TREASURER:

We hope that the Iraqi regime will comply with what the international community is demanding, and we hope that the UN will clearly state the requirement that there be full inspection towards the dismantling of the program. And we don't go any further than that at this stage because we hope that the forums of the UN will be able to accomplish that.

JOURNALIST:

So you don't say whether the failure of Iraq to comply with any resolutions should be met with military action?

TREASURER:

We call on Iraq to comply. That's the stage that we're at. We call on them to comply with, one, the inspections, and two, the dismantling of the program.

JOURNALIST:

But given that Treasurer, do we believe, is it the position of the Australian Government that existing resolutions in the UN are sufficient if Iraq were to fully comply, or do we subscribe with what is clearly Washington's view that we need a new resolution?

TREASURER:

We think that Iraq should have been complying with existing resolutions. The whole international community thinks that. It was back in 1998 that Iraq threw out the inspectors and said it was no longer going to comply. We think it should have been complying. We think the UN had in place a program for this which we support. But the UN is now being asked to look at a new resolution, and we welcome that fact, and we don't anticipate what the outcome of that is going to be. We await the outcome of that, and in the interim we ask the Iraqi regime to comply. You say to me what will happen if that doesn't occur? Well, if that doesn't occur then we'll be announcing our response.

JOURNALIST:

Is there do you think any way the Australian Government would support a military action in Iraq that did not have some support of the United Nations Security Council?

TREASURER:

I'm not going to speculate on that either. At the moment it's in the UN and we're awaiting the outcome of those discussions.

JOURNALIST:

Treasurer, can I ask you, I understand a lot of the discussion at this meeting is centred on the failure of the market model, the failure of the economic model of the 1990s very largely. Yet Australia seems to have defied that trend. Do you get a sense of Australia being the odd pupil out here or not?

TREASURER:

I think it's widely recognised in the meetings of the international economic bodies that Australia in the last 4 or 5 years has been one of the stand-out economies of the developed world. That during the Asian financial crisis the Australian economy shrugged that off and continued to grow, and during the US recession of 2001 and the general global downturn, we still continued to grow. And there aren't many countries in the world that have that record. There's a lot of interest in what we've done in Australia. How we've managed to shrug off both of those international difficulties, and I think that's put down to a lot of the structural reforms that we've been doing. The very strong budget position, the repayment of debt, the big tax reform of 2000, the importance of reform in our labour markets. Whether you call that the model of the 1990s or not I'm not sure, but that's a big part of the Australian story. We have a flexible economy which is high productivity. I look back on that and I say those reforms of years ago have given us results today, and it's the reforms of today that will give us the results of tomorrow. That's why we've got to keep on going with economic reform.

JOURNALIST:

One of the factors has also been the low Australian dollar. With the size of the US deficit, if this blows out further, what do you envisage happening vis-a-vis the Australian-US dollar ratio?

TREASURER:

Well the big issue here I think is what's going to happen with the US dollar. The US is running a very large current account - five per cent of GDP. Very high by historical standards, in absolute dollars enormous sums of money. The United States is now requiring other peoples savings to fund their current account gap. Now that could affect the US exchange rate at some point. It depends on a couple of factors. How long this continues, what the sentiment is, what peoples' belief is as to investment prospects in this country.

JOURNALIST:

A war in the Gulf would not be (inaudible)

TREASURER:

Other than to observe that all of those factors affect exchange rates, I'm not going to make predictions on the future of the US exchange rate any more than I make it on the future of the A-dollar.

29 Sep 2002

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