UHLMANN: Prime Minister good morning.
PM: Morning Chris
UHLMANN: Is inflation still the biggest economic challenge facing Australia today?
PM: Well we have got to deal with two challenges; one is inflation, as I indicated in my speech on this subject in January this year just after having become Prime Minster. And the second is the contractionary challenges across the global economy.
Those two factors were real in January when we framed the Budget, they are just as real now.
UHLMANN: But the public enemy number one in January was inflation, you weren't talking about contractionary forces then.
PM: Oh I think if you look at that speech closely Chris it refers to the fact that the Australian economy then, as now, is subject to two sets of forces operating in different directions. And that is the impact of the world financial crisis which is rolling through to negative growth numbers across many OECD economies, that's on the one hand.
And secondly, a domestic inflation challenge, which as you know when we took over office at the end of last year we had inflation running at 16 year highs, 10 interest rate rises in a row and the second highest interest rates in the developed world.
We have had to deal with both of those challenges, we think we have got our policy settings as right as possible in responding to a very difficult economic environment.
UHLMANN: Well given it is difficult and they are conflicting forces do you spend now, is now the time for the Government to start spending?
PM: Well the key thing and the most responsible thing to do is to have delivered as we did through the Budget in May a sizable Budget surplus, some $22 billion, 1.8 percent of GDP. And that was to provide us with a buffer for the future and that buffer, in part is directed towards our future investment funds for infrastructure, for education and for hospitals.
And we believe that if we roll out a responsible investment program in each of those areas in the period ahead, what we are then doing is investing in long term productive capacity for the economy. We think that's the right thing to do and that's the course of action we will be embarking on.
UHLMANN: But the dollar's falling that means that we will import some more inflation. You are planning to spend $76 billion, business plans to spend $100 billion, the States billions more, what will that do to inflation?
PM: The key challenge here Chris is how you actually deploy budget surpluses. What our predecessors have done in terms of their use of the public revenue, which has come out of the resources boom, is to effectively use that for consumption.
What we have said instead is that we need to save those surpluses for the purpose of then directing them into long term productive investments. This has been the sustained advice, in multiple warnings by the Reserve Bank of Australia, some 20 warnings over many years about the capacity constraints in the Australian economy but also the Business Council of Australia, the Australian Industry Group, (inaudible) we need to invest in productive capability. Why is that necessary? To boost long term productivity growth which is of itself non inflationary growth. That's what we are on about, that's what we intend to do.
UHLMANN: All right speaking of consumption, household spending went backwards for the first time in 15 years in the national accounts. Is that a good thing?
PM: Well households are obviously responding to the fact that we have had real challenges through the impact of 10 interest rate rises in a row. That has an effect on consumer confidence. And you see that clearly evidenced in the national accounts figures which came out during the course of this week for the June quarter.
The key challenge for us however is to make sure our long term responsible economic strategy remains in place, which is why dealing with the irresponsible actions by the Liberals in the Senate, to blow a $6 billion hole in the Budget surplus, has to be confronted.
UHLMANN: When you talk about that, you talk about luxury cars against working families, big oil, big supermarkets. Are you saying that business is the natural enemy of households?
PM: Of course we believe that the way to manage the economy is to address the needs to every sector of the economy. That means that households, we need to make sure that they are properly supported by a set of economic policies which put maximum downward pressure on interest rates because that affects the cost of credit whether its on mortgages, or whether its in terms of consumer credit.
Businesses, we have got to make sure that the overall state of the economy remains as strong and as robust as possible. And one of the things that business has asked for us for the long term is to make sure that we are investing in long term productive capacity in the economy: in our ports, in our roads, in our infrastructure, in our high speed broadband.
We believe we can get both those challenges right, its difficult, its hard but we have got a clear strategy for handling it.
UHLMANN: The little run of rhetoric you have at the moment when your hammering the Liberal Party is to say they are backing big oil, they're backing big supermarkets does that mean that you think that business is the natural enemy of working families?
PM: Let's take one example that was part of your question before which is the luxury car tax and just address that in its essential detail. Its $555 million which the Liberal party has chosen to preserve for the purposes of those buying Porsches, for those buying Rolls Royce's, for those buying luxury cars, as opposed to that half billion dollars going into a infrastructure investment fund for the future which, subject to the views of Infrastructure Australia, could be directed towards public transport.
So it's half a billion dollars for Porsches as opposed to half a billion dollars for public transport. The choice is pretty clear here.
UHLMANN: Prime Minister just a couple of quick things do you have any more information on the health of the Australian troops that were injured earlier this week?
PM: I spoke last night to the Chief of Defence Force about the soldier that we are most concerned about. The Chief of Defence Force told me that he had arrived in Germany, but beyond that I have not got an update this morning as to his condition.
As the Defence Minister said in Parliament yesterday, he has been seriously wounded and we in the Government and the Australian Defence Force family remain deeply worried about him.
UHLMANN: And one last thing Prime Minister, do you support the US incursions into Pakistan when you are fighting the Taliban, do you think that, that's something that needs to be done?
PM: Well that's an interesting question from left field. Ok Chris in dealing with the challenges of the Taliban in Afghanistan this is not a simple, neat military operation where problems concerning the Taliban's ability to operate across the border with Pakistan can simply push to one side.
We need to adhere to the principals of international law, but I am confident that our American ally has acted appropriately in its dealings with the Government of Pakistan. It's difficult, it's hard, but my responsibility together with other heads of Government of those participating in the war against the Taliban is to be effective. And to be effective means dealing with the challenge that a number of Taliban continue to find safe haven across the border in Pakistan.
UHLMANN: Prime Minister we will have to leave it there thank you.
PM: Thank you