O'BRIEN: Late today I spoke with the Prime Minister who was in his Parliament House office, an interview in which he would not rule out an early election if key elements of his Budget are rejected in the Senate.
Kevin Rudd, your plan to get the Budget back into surplus from massive deficit in five to six years and beyond is based substantially on the Treasury's very optimistic growth forecasts of 4.5 per cent a year, starting in 11-12 for six years. And you'd be familiar with their methodology because you've referred journalists to it. In arriving at those forecasts, what assumptions do Treasury make about global growth over these next few years?
PM: Well can I just go back one point there, Kerry? You're saying that our ability to return the Budget to surplus is based purely on growth projections in the two outer years of a five year cycle.
O'BRIEN: No, substantially. Substantially, not totally.
PM: Well, I'm just saying - no, I dispute the proposition to begin with. And secondly, we've brought about in this Budget $22 billion worth of structural savings which work their way through the system over time. That's the first point.
But secondly, going to your point about Treasury's methodology in calculating the growth forecasts for the two outer years of a five year cycle. Treasury, obviously, are a conservative bunch. They will work out their own methodologies for doing this. But what they've been doing in particular here is looking at how you best look at growth patterns over a long economic cycle.
They have moved for the first time to five years, not four, and what they are doing is looking at: how have we recovered in the past from previous recessions? That's the first point. Second, they've looked at what has been the overall trend growth over a seven to 10 year cycle. These are the broad parameters which have guided Treasury's underpinnings of those growth assumptions for the two outer years. And their argument to us -
O'BRIEN: Do you know what assumptions they have made about global growth over these next few years in arriving at these figures?
PM: Global growth in the Treasury's calculations are taken from a variety of sources; from obviously the IMF, they are also mindful of OECD data and there's also Treasury's own calculations about countries and economies of particular consequence to Australia, to wit China in our own region which is our number one trading partner. That's one factor.
The other is, as we've just discussed, is how you best calculate growth over a 10 year cycle. And against all the methodology that the Treasury's deployed, it is on balance a conservative methodology to do what they have done. Remember in the two previous recessions, Kerry, in the 80s and the 90s, the period that Australia was with below trend growth was about one year in one of those recessions, two years in the other of those recessions. What Treasury's projecting here is three years below trend growth. That is a more conservative assumption to begin with before they then go to the recovery trajectory which is again more conservative than has been the case in the past.
O'BRIEN: But this is a recession caused entirely by global forces. And even in its own Budget papers, Treasury quotes from IMF research to make the point that, "Recessions associated with financial crises, which this one is, or those that are highly synchronised across the world, as this one is, have been more severe and lasted longer than other recessions. And recoveries have been slower and characterised by weak domestic demand than the kinds of recessions Australia had in the 80s and 90s" that the Treasury has drawn on in the methodologies that you've just mentioned. You say yourself that this is the worst global economic crisis since the Great Depression.
PM: Absolutely.
O'BRIEN: Shouldn't we be taking those forecasts with more than a grain of salt?
PM: Kerry, the point that I just made before is that Treasury, conservatively, is looking at a three year time table of below trend growth because it does take seriously the proposition that this is deeper and longer by way of recessionary impact than either of the two recessions, one in the 80s and one in the 90s, because of the globally synchronised factors that you have at work. And remember, a three year below trend growth period is a substantial one. It is by definition more conservative than that which has been applied to the previous ones, and therefore Treasury is confident of its methodology. And as you know, they're an independent mob, they arrive at their own conclusions and they provide that to the elected Government of the day, as they did to Mr Costello in the past as well.
O'BRIEN: Your other means of returning to surplus is by promising to cap new spending growth at two per cent each year into the indefinite future, I think. Are you aware that, historically, since the 70s, and I acknowledge that includes the Whitlam years, Budget spending has grown by an average of four per cent a year? Do you understand how hard it's going to be to enforce that two per cent spending cap?
PM: Absolutely, Kerry. We've had a detailed discussion of this within the Cabinet as we were framing the final form of the Budget with the colleagues. This will impose enormous disciplines on all colleagues as we go forward to the year ahead and, if we are successful at the next election, beyond that as well. We are into a whole new period. And stepping back from it, what does it mean? A huge chunk of Australian national income has been taken out by the enormous revision to the terms of trade. We are part of a global and regional economy which has just taken an enormous whack, and as a consequence, we're going to have to adjust ourselves to doing more with less as far as government is concerned.
O'BRIEN: But also because of the spending you've committed yourself to. Just to illustrate what is meant by that two per cent spending cap: Access Economics has calculated that your new spending in the next financial year grows by 3.9 per cent. In dollar terms, that's a difference of $7 billion in one year, $15 billion in a second year and $24 billion in three years. That is a very tough discipline to meet. And I would imagine the Opposition would say, given the way you've been spending in your first 16-odd months of Government, you'd have to be suspect to being able to apply that discipline.
PM: Well I reject that proposition in its entirety, Kerry, as you would expect. And the reason we have engaged in significant investment now is for classical counter-cyclical purposes. We are in extraordinary times. Were we not injecting this activity in the economy now, given what we've faced in terms of this synchronised global downturn - 32 of the 33 advanced economies in the world suddenly contracting, eight of our 10 leading trading partners now in recession - if we weren't out there injecting this activity in the economy now, short term, finite programs - and they are - through stimulus, then the effect in terms of this recession would be deeper and harsher. That's why our performance so far in this time has been better than most other economies.
The second point relates to what you call structural and continuing investments, as opposed to the one-off investments which come off by way of stimulus and the infrastructure that we're currently investing in. When it comes to structural spending within the Budget, we've been entirely mindful of the need to offset our major structural spends, for example on pensions, by a parallel set of structural saves. And we have done that by yielding up $22 billion worth of structural saves across the forward estimates which offset for example the cost of the pension reform which comes in at about $16 billion. And then you add together the additional investments by way of in higher education research. We believe we have done the right thing there to bring about a long term structural balance in what we're seeking to do. But you're right, the disciplines will be tough.
O'BRIEN: Family First Senator Steve Fielding has accused you of looking for a trigger for a double dissolution bill by putting the alcopops tax bill back into the Senate in June after the required three month gap that would give you that trigger. Will you pledge now that you will serve your full term, that there will be no early double dissolution election?
PM: Kerry, the reason we're putting back the legislation into the Senate on alcopops is because that whole regime has proven to be effective in reducing teenage consumption in particular of that form of alcoholic beverage.
O'BRIEN: Then why not put it back into the Senate now?
PM: Hang on, I'm just explaining to you the reason for putting it back into the Parliament. And that is, we can see from the data produced by the various health authorities that it's resulted in a significant reduction in consumption of that form of alcohol, and that reduction is not explained by a take up in other forms of alcohol. There is a genuine impact here, and that's why we're committed to it.
On the broader question of our mandate to serve through this parliamentary term, I have said from the very beginning I have a fundamentally conservative approach to these things, a little like my predecessor. And that is, I believe that we were elected to serve a full three year term. However, I've got to say we've gotta ensure that the financial integrity of the Budget that we've just put before the Parliament through the Treasurer's statement last night is upheld, because it contains within it the disciplines you and I have just been discussing. So when people start cherry picking about one bit after another, you've got to be very, very careful that we do not put the financial integrity of the Budget long term at risk.
O'BRIEN: And would the same apply to your climate change legislation, your ETS legislation? As a Budget trigger? As an election trigger?
PM: Well, climate change - well, you seem to be building in some nice hypotheses into the question.
O'BRIEN: Well, you have very clearly opened up the possibility of an early election on the basis of protecting the integrity of your financial strategies.
PM: I did no such thing, Kerry. What I said was the Senate needs to be mindful of preserving the financial integrity of the Budget. It's precisely what we said prior to the last Budget being delivered. So, let me just correct precisely what I said and how you then re-rendered it.
O'BRIEN: Well, because it is in the context of a question that said, "Will you rule out an early election?," and you're not doing that.
PM: Well I've said I have a conservative approach to these things and our intention is to serve our full term. I'm equally mindful of the absolute importance of returning our budget medium term to surplus. That means implementing the list of saves we have within the current Budget that the Treasurer put to the Parliament last night. And we therefore will be adopting that approach as we seek to obtain its passage through the Senate.
You mentioned the carbon pollution reduction scheme. I think the Climate Change Minister Penny Wong has done excellent work both with the environmental groups and with the Australian Industry Group and the Business Council of Australia in getting a good, balanced package through. Australia needs that if we're going to go to Copenhagen with a good position at the end of year.
O'BRIEN: But are you prepared to protect the integrity, as you see it, of that legislation by going to an election if the Senate obstructs it?
PM: Again, my instincts on this, Kerry, as I've said throughout the time I've been Prime Minister, are conservative. That is, I want to ensure that we are serving our full term, but I'm equally mindful of the absolute importance of getting our legislative program through.
O'BRIEN: In other words, you will not rule out an early election.
PM: My intention, Kerry, as I've said time and time again, and not just in interviews with yourself, but elsewhere as well, is to serve the term for which we're elected. But we also have responsibilities -
O'BRIEN: OK.
PM: - and we'll continue to prosecute those. And I think there's one other responsibility here too, Kerry: there's a Budget reply due tomorrow night. Very interested to see what Mr Turnbull has to say on debt commitments, deficit commitments and all the questions you've been putting to me. We need to know, because that posture is reflected in what they do in the Senate, and that materially affects the ability of get our legislation through.
O'BRIEN: We're out of time. Kevin Rudd, thanks for talking with us.
PM: Good to be with you.