Multi billion deal breaks Australian deadlock

Updated September 7, 2010 21:23:23

The return of the Gillard government comes at a price - the support of the two independents was secured with around ten billion dollars worth of government promises for non-metropolitan regions. The funds are likely to go primarily to hospitals, education and transport services.

Presenter: Karon Snowdon, finance correspondent
Speakers: Saul Eslake, director of policy, Gatten Institute; Wayne Swan, Australian treasurer; Peter Freyberg, chief executive officer, Xstrata Coal

SNOWDON: If stock markets are any barometer, then Sydney's closed with a sense of relief that the ordeal was over. Shortly after the news, Australia's major index regained its losses of earlier in the day.

Economist Saul Eslake is the director of policy at the Gatten Institute.

ESLAKE: None of the initially expressed fears about a period of uncertainty have actually come to pass. I think, markets will be pleased that the uncertainty has now been resolved and that commitments have been given by independents and cross benchers to ensure that the government will be able to govern, that is that its budget bills will be passed and there won't be any no confidence motions supported if they are moved by the opposition.

SNOWDON: The question now is where the money is to come from, given the government's undertaking of budget responsibility.

It will be drawn from savings elsewhere, but the treasurer, Wayne Swan, says much is already in the pipeline.

SWAN: The regional infrastructure fund is something that we put in place earlier in the year, before these events unfolded, when we launched the Henry Report and talked about how we needed to respond to the challenges of mining boom 'Mk II'. And the regional infrastructure fund is a very, very important part of all of that.

SNOWDON: There's to be a tax summit to give the treasury secretary Ken Henry's tax review a new lease of life.

SWAN: We're happy to have a structured discussion about that. We talked about it through the campaign. The tax cuts for small business, for example, the cut to the corporate rate, they're all factored into our budget.

SAUL: I think, overall, if the government is able to keep the net impact on the budget of these additional promises to a minimum, then markets probably won't be too phased by that. Especially since we've learned in the last 24 hours or so that Australia's AAA credit rating has been affirmed by S&P, who concluded that the outcome of this decision making process wouldn't really matter to the standing of Australia in the eyes of international investors.

SNOWDON: Six billion dollars of the ten billion in promises especially for infrastructure will come from the Resources Rent Tax.

One of the reasons for the dumping of former prime minister Kevin Rudd, the proposed tax level was reduced in talks under prime minister Julia Gillard with the country's three biggest mining companies, BHP Billiton, Rio Tinto and Xstrata Coal.

Some miners claimed it threatened investment in the resources sector.

Xstrata's Peter Freyberg told a business meeting earlier in the day his company's plans for AU$20 billion worth of additional investment in Australia alone are on track.

He says the tax debate is over, but he wants industry input into key policy areas which the government will be tackling in coming years.

FREYBERG: Here in Australia there are a range of policy and regulatory issues that will continue to impact not only Xstrata's growth ambitions but those of the industry more broadly. That could prevent the minerals sector realising future growth over the next decade - climate change, national infrastructure, tax reform, and industrial relations are some of the challenges we are currently facing.

SNOWDON: The new government was confirmed the day the Reserve Bank opted to keep interest rates unchanged at 4.5 per cent.

It noted inflation was close to target but that the global outlook remained uncertain.

Added uncertainty will creep in around the ability of the minority government to get its policies quickly into legislation.

Positive signs of renewed business and consumer confidence are probably fragile.

Saul Eslake says the Reserve Bank also has an eye on Australia's biggest export market, China.

ESLAKE: Probably what's of most importance is the outlook for conditions in China and there it seems as though the authorities are on the way to pulling off a soft landing. But, of course, there continues to be some uncertainty about that as well, which the Reserve Bank will obviously take into account in coming meetings.