[The Australian] The boom we had to have

The boom we had to have
Dennis Shanahan
February 25, 2006

Peter Costello reflects on his 10-year contribution to Australia's fine economic record. He speaks exclusively with political editor Dennis Shanahan

WHEN Peter Costello turned up for parliament this year his demeanour had changed. He appeared content, happy and satisfied. His performance in question time was of its usual high standard but there was an ebullience about his manner.

Everyone noticed it. Everyone noticed not just because it was so obvious but also because it was not the mood expected of a Treasurer facing his 11th consecutive budget and a leadership aspirant who had clearly signalled that after 10 years as John Howard's deputy, he intended to leave the second-longest serving prime minister to make up his own mind on when he retired. It was not the demeanour of a Treasurer facing a 12th and 13th budget.

Just before Christmas, Costello swept aside speculation about his future, and that of Howard, by saying he would be delivering the budget some thought he'd never deliver, and that there was no deadline for a Liberal leadership challenge.

His public statements, more guarded than the political message they conveyed, changed the political dynamics within the Liberal Party, and killed any plan for a coup attempt after next Thursday's 10th anniversary of the Howard Government, and gave Howard a secure platform for his ministerial reshuffle.

There may have been an element of relief for Costello, having lifted the weight of expectation of a challenge from his shoulders, but there is a further explanation. Without the immediate distraction of leadership challenges, Costello looked back at his achievements as Treasurer and liked what he saw.

Suddenly a Treasurer who had mainly been seen as a prime ministerial successor looked at a record of unprecedented economic success in Australia and realised he'd achieved success beyond his wildest dreams.

Economic prosperity is at the heart of the success of the 10 years of the Howard Government, it has delivered electoral security, frozen Labor out of the national debate, made Australians feel relaxed and comfortable and more secure about their future than they have for decades.

In the Howard-Costello decade, Australians have experienced their greatest accumulation of personal wealth while the nation has become free of government debt.

For Costello, Australia is no longer a colonial relic, the white economic trash of Asia, a risible member of APEC, but the regional strongman and an international economic template. With the anniversary in his mind, and a sense of history, Costello claims to have outperformed the golden era of Robert Menzies and left his old nemesis Paul Keating for dead.

"I think if you had said to me in 1996, 'Do you think you could be a treasurer in a country that balances budgets, has retired all its debt, locked in 2 per cent inflation, reduced unemployment to a number with a five in front of it?', I would have said, 'Not possible in this world,"', Costello tells Inquirer.

"The aspirational target of unemployment of 5 per cent used to be laughed at. When these things do happen it's not human nature to sit back and say, 'Wow, that's a mighty achievement.' It's human nature to say, 'Why haven't you made things [even] better?"' he says, resigned to not being recognised in his owncountry.

"If you had said to me in 1996, outcomes like this are possible, I honestly would have said no; to see that we have had such outcomes is quite an achievement," he says.

Costello points to the role of the economy in all four of the Coalition victories and claims a personal ownership stake on the key to those victories.

"My view is that a big part of the reason for our election in 1996 was the memory, still fresh in people's minds, of the Keating recession and the 17 per cent interest rates of the late '80s early '90s. Certainly I believe our re-election in 1998, 2001, 2004 largely revolved around the fact that people thought we were doing a good job managing the economy, that they had much better job opportunities, that their children were getting better job opportunities, that their interest rates were substantially lower than they had been under the Labor Party and it was us that could be trusted with economic management," he says.

"When [Bob] Hawke and [Neville] Wran did their investigation as to why Labor had lost the 2001 election, and you can pull it out, they said Labor was not trusted on economic management, Labor was not trusted on interest rates, that Labor had to get credible on the economy.

"During the Menzies period we had recessions. We had the '61 credit squeeze and we also had recession in the early '50s. So this is a period of economic management which actually outruns the Menzies period," he says pointedly after Labor started to say economic success was purely a result of luck and the resources boom.

While giving credit to Hawke and Keating on the floating of the dollar and tariff cuts, Costello is scathing of claims he is living off their work and points to a triple of economic decisions that he says laid the foundation for the success.

"The critical decisions which we took were as follows: an agreement between the Treasurer and the Reserve Bank Governor on an inflation target and on the independence of the bank, the determination to balance the budget over the course of the cycle and the program of debt reduction.

"We decided to set medium-term fiscal objectives for the Australian economy - a target inflation rate, a target fiscal policy and a target balance sheet condition," conditions he says meant Australia survived the Asian financial crisis in 1997.

For Costello, who prides himself on chairing the G-20 economic group, Australia was regarded as a joke at the first APEC finance ministers' meeting.

"We were regarded with amusement. A relic that was declining, a colonial relic that was declining in comparison to the emergence of Asia," and he agrees we were seen as the white economic trash of Asia and only "tolerated for historical reasons".

"All of that changed after the Asian economic collapse. Not only did the tigers collapse but we came through it and we became the strongman of the region."

He regards the consequent international respect as one of his greatest achievements.

Once again, a theme emerges of Costello taking comfort and pride in recognition overseas for the job he has done in Australia.

Apart from his triple of economic fundamentals Costello regards the GST as Australia's greatest tax reform, the Coalition's biggest political challenge and a scarifying personal experience.

As the front man for four years in the GST debate, Costello admits to being scarred by the experience and haunted by a birthday cake: he lived in fear of a re-emergence of the birthday cake with candles that John Hewson couldn't explain in terms of a GST in 1993.

"The GST was a very important reform. It was in practical terms the hardest issue that we have had to cope with. I will be scarred for life by the GST experience - there's no doubt about that," he tells Inquirer with a pained expression.

"It became a raging monster in the minds of the public because it had been around so long, it was the focus of the 1993 election, it had begun to assume mammoth proportions. I lived with that GST from the day we announced we were going to do it," he says and the "population was in a completely febrile state over the GST".

"As somebody who has done the biggest tax reform in Australian history, it's made me aware of one point: that while everybody will assent intellectually, even those calling for it, when you are doing it, will not resist the opportunity to highlight the difficulties. That's what it taught me," he says.

"This was a huge political issue: 'Would a can of Coke go up or down under the GST?', and if it could be proven that the can became more expensive, in the febrile atmosphere we were in that was considered to be a fundamental blow to the GST, if it could be proven it would go up."

Costello is haunted by more than a birthday cake from this period, with a deeply held belief that the states have failed in their responsibility on spending after being given the first growth tax in a 100 years.

"I think, as you look back on it, the most generous aspect of our tax reforms was the allocation of GST revenues to the states - untied. The object of doing that was to essentially give the states a revenue base for which they would take responsibility and out of which they would accept their expenditure obligations.

"It hasn't happened, and you would have to say that element was a failure," he says, for the first time admitting a flaw in the GST.

"The fundamentals changed but the states never changed the . I think this is one area, the most generous and one of the most fundamental changes, the allocation of a growth tax to the states, which has not proved successful."

Given that Costello originally argued for a broad-based GST with no exceptions, exceptions Howard bartered with the Democrats to get the GST through the Senate, there is a rueful message here for the commownealth.

After the 2001 election Howard told The Australian: "The states cannot have it both ways. They can't pocket the benefits of the GST and then ask the commonwealth to increase specific-purpose funding for things like increased public hospital spending."

So, while the GST's intent may have soured Costello, he holds close his own contribution to the economic success of the Howard years and shows no sign of giving up.

"I'm not ready to hang up my boots for the historians yet. No, there are still things to be done. While there is life there are things to be done," he tells Inquirer.

And with a touch of Robert Frost's miles to go and promises to keep before he can sleep, the Treasurer adds: "There're still things to be done. Don't you worry about that ... oh, don't you worry about that."