SPEERS: Prime Minister, welcome. Can I start with the hardest question first. Can you explain in simple terms how this financial crisis happened and why it's affecting us in Australia?
PM: There are two reasons it happened Kieran. The first is, loans were made in the United States many years ago coming off the period in the early 2000s - loans which could never be repaid by lenders and by mortgage holders who simply didn't have the assets or the capital to ever repay them. That's the first problem.
But the second cause was this - that you then had a whole series of other financial institutions around the world who then securitised, that is, spread the risk from those dodgy loans across a whole range of other financial institutions. And that spread right across the world and done in a non-transparent way.
So when the original mortgage payments couldn't be made the cancer didn't just stay local, it spread across the world to all the other institutions who'd been wrapped up in it, and that created a problem of confidence across the system and that's what we've been dealing with ever since.
SPEERS: I noticed you didn't mention there George Bush as one of the potential causes of all of this and yet in the United States both Barack Obama and John McCain do seem to agree that the Bush administration should have seen this coming, and should have done more to prevent it. Do you agree?
PM: Well, you know, in terms of the regulatory system of the United States which allowed this to happen, obviously there has been legitimate criticism from around the world on that.
But the key question is not to engage in some sort of finger-pointing exercise now - the key challenge for the moment is what do we do to fix that system of rules and regulations for the future and in the immediate term do two things.
First of all, rebuild confidence in the financial system now, so it's got enough liquidity, and secondly because this global financial crisis has now spread to the real economy, take measures like those we've taken in recent days to stimulate the economy, to underpin growth into the medium term and therefore underpin jobs in the medium term. That's the practical response.
SPEERS: Let's look at some of those measures. You've guaranteed all bank deposits and you've also given the economy a $10.4 billion sugar hit in the form of handouts to pensioners and families. As you know the Opposition is questioning how you arrived at this $10.4 billion figure. Can you explain that to us - it obviously wasn't plucked out of thin air.
PM: Well, the bottom line is this - the government, when it received the information about what had gone on in the United States in the last several weeks, in its discussions with Treasury concluded that we needed to bring in a stimulus package for our economy now because we didn't want to turn around in nine months time and say ‘Boy, I wish we'd given the economy a bigger buffer for growth and for jobs for the future'.
The second point is this - the most recent information from the International Monetary Fund in its World Economic Outlook pointed to a downwards revision in growth for the world economy and for the most advanced economies of one per cent. But that was just before the events of the last two to three weeks in America and across the world where we've seen stock markets go through huge losses.
Therefore, the conclusion we reached - it's better to act decisively and early to provide a buffer for our growth for the future, and we stand by the decision. It's the right thing to do. It's also designed to continue to underpin confidence in Australia as well.
SPEERS: You've mentioned the IMF forecast, but just to be clear, are there any new Treasury estimates of what's going to happen to growth and unemployment that you're not sharing with us or aren't there any new estimates as of yet from Treasury?
PM: When the Australian government, and this has occurred over many, many years - you have the budget forecasts and then six months later you have the mid-year forecast. They come out six months later. And they'll be released, of course, in November.
But of course the logic of the Liberal Party's position is this - they would say that you should wait until basically the car starts to sputter through lack of petrol in the tank before you put more petrol in, and you wait for final and conclusive evidence of that.
Now, if they were saying that you wanted final and conclusive evidence that would mean waiting for the mid-year economic forecasts which come out in November, that's six months after the budget, or wait for the future national accounts data, which comes out even much later, but guess what Kieran - by then it's too late.
You need to act decisively and early because it takes some time for these stimulus measures to flow through to the economy and that's why we acted in the way in which we have.
SPEERS: Now, just on the stimulus measures. There are handouts to pensioners and for families, but I want to ask you about those who are feeling the worst effects of this crisis right now - self-funded retirees. People who've worked all their life, invested for their retirement, but are now watching those investments crumble as the markets tumble. What are you doing for them?
PM: The first and fundamental responsibility we have for those Australians, and all Australians, but those in particular who are depending on super funds, who have investments in stock markets, is to maintain the stability of the Australian financial system and to work internationally to restore the stability of the international financial system.
That's the challenge because what we have here is problems in credit markets which then spill into problems in stock markets which spill into problems in the real economy. That's what we're dealing with.
So our measures in Australia, whether it's the guarantee to bank deposits, whether it's the guarantees to the banks for their term lending for the future, whether it's the other, regulatory decisions taken by the prudential regulatory authority, the Reserve Bank, and by the government in coordination with Treasury, has that as one objective.
Stabilising credit markets so that that in turn, over time, stabilises what we see happening in the gyrations on stock markets because that flows through to superannuation earnings.
SPEERS: You've also, Prime Minister, called for tougher rules on executive salaries in the financial services sector. Is it the size of the salaries that worries you, or is it the part of the salary that's linked to risk-taking, to encourage risk-taking by these executives. Or is it both?
PM: I believe, Kieran, the key thing - David I should say -
SPEERS: I was going to correct you -
PM: It's alright. I've been talking to him in Canberra here.
The key thing is this - to make sure that we have in corporate remuneration packages in the financial sector a set of rules which apply, which discourage excessive risk taking. At present, we believe the rules which exist need to be improved, need to be hardened. That's the first principle.
The second is we've got to make sure for the long term also that the Australian community maintains confidence in these arrangements for senior level executive remuneration in the financial sector as well because the Australian community is doing it tough, and we've got to make sure that if you're out there taking measures to support the long term stability of our banks and other financial institutions as well, that there is some fairness in this overall approach as well.
The primary objective, the primary objective, however, goes to the core stability of the financial system for the future. And that means having a set of rules for executive remuneration in the financial services sector which reduces risk taking to the greatest extent possible.
SPEERS: Just on the salaries themselves, is there a figure that you think is too much for an executive to earn? I mean, is $5 million too much? Is $10 million too much? Or aren't you willing to put a figure on it?
PM: What I've signalled quite clearly, David, is that the government, through the Australian Prudential Regulatory Authority and through the Treasury, will now in the months ahead work through the detail of a set of changes to the rules, rules which we will then seek to put on the international agenda too, because remuneration arrangements for financial institutions internationally are as important to what applies nationally here in Australia.
The key thing is to get that formula right so that we have a set of rules which discourage, as I said before, excessive risk taking. And you can link that to the prudential standards which are then applied to each individual financial institution.
We intend to get that right, we're going to be thorough about it, and that's why we're in the process of working through the detail with the Australian Prudential Regulatory Authority, and with the Treasury.
SPEERS: I want to ask you, Prime Minister, about what this crisis means for the global fight against global warming. Overnight, eight Eastern European countries, and Italy, have now walked away from their commitment to reducing emissions by 20 per cent by 2020. Italian Prime Minister Silvio Berlusconi says ‘now is not the time to be playing Don Quixote on climate change'.
Is this financial crisis a setback for the environment?
PM: It certainly makes the international environment tougher for dealing with what is already a tough set of negotiations.
But what I'd say to leaders around the world and to the community here in Australia is that the problem of climate change and global warming doesn't disappear because of the global financial crisis. It is there, it needs to be dealt with, and it also has a huge economic cost attached to it, it's called the economic cost of inaction. And that cost is greater than the economic cost of action.
Therefore, it's important for the international community, and Australia, to begin setting the rules for the future. Because unless we deal with this, the roll on consequences for the economy over time in the rural sector, agricultural production, and overall security of water supply, is huge.
And huge for the Australian economy because we are already the hottest and driest continent, therefore we have an acute national economic interest at stake in making sure there is an effective international set of rules.
SPEERS: And is that the message you'll be giving business leaders at the summit you're attending today?
PM: When I attend this meeting with business leaders in Sydney, we have a very clear objective which is to obtain their feedback about what needs to be done further in dealing with the consequences of the global financial crisis for the real Australian economy.
We announced the other day our approach in a $10.4 billion economic security strategy for the future.
That is designed to provide much needed stimulus for the economy in the immediate period ahead. That follows on a decision by the Reserve Bank to reduce rates by 100 basis points only a week or so ago. On top of that we have the measures that we have announced on the security of bank deposits and the guarantees to bank lending into the future, that is, , their term finance arrangements.
But you know, it is very important to hear directly from the business community on the ground about what is going on and about what further actions may be necessary in the future. Canberra is not the ultimate repository of all wisdom, I have said that many times before.
So we will be out and about talking with the business community and the general community over what is still going to be a very very tough time ahead.
SPEERS: A final question Prime Minister, are you willing to put the budget into deficit to avoid a recession in Australia?
PM: You know as well as I do David that the long standing economic policy of the Labor party in opposition and the Labor Party in Government is to maintain a budget surplus over the course of the economic cycle.
We have said that repeatedly in the past prior to coming to office. That is our position now and will be into the future.
Fortunately, we took a decision in the May Budget this year to set aside a substantial budget surplus as a buffer against the future, as a buffer against tough times.
Well those tough times have come and we now are drawing significantly on that surplus. But we will still be able to land through this financial year in a comfortable position. But we also remain determined, absolutely determined to take future action as is necessary with two objectives in mind: supporting the long term strength of the Australian economy, supporting continued positive growth in the Australian economy and supporting households on the way through.
We believe that is the right course of action in what is still going to be a very uncertain time ahead for the global economy and therefore its flowthrough impact on Australia.
SPEERS: Ok but a surplus over the cycle, your commitment there, that does mean you can go into deficit if necessary?
PM: Well as we have said repeatedly and the Treasurer has said repeatedly, it means maintaining a budget surplus over the course of the economic cycle. That is the responsible course of action, it is one we have committed to over many, many years, I have committed to since becoming leader of the Labor Party, since becoming the Prime Minister. The Treasurer has confirmed that, that will be our policy into the future.
It is the right policy, it is the responsible course of action and I believe through our conservative economic management in the period that we have been in office, we have demonstrated fundamentally our strong credentials on this matter.
SPEERS: Alright, Prime Minister, thank you.
PM: Thanks for having me on the program.