AM - Wednesday, 24 September , 2008 08:09:00 Reporter: Alexandra Kirk TONY EASTLEY: Because of the size and reach of the American economy no country is immune to events unfolding in the US.



Already Australians have seen their superannuation's earnings plummet.



But the International Monetary Fund says Australia's sound macroeconomic framework should permit Australia to weather the storm.



That's music to the ears of Federal Treasurer, Wayne Swan. He says it vindicates the Government's economic management and the fiscal position outlined in Labor's first Budget.



Mr Swan is in our Canberra studio and he's speaking to Alexandra Kirk.



ALEXANDRA KIRK: Treasurer good morning.



WAYNE SWAN: Good morning Alex it's good to be with you.



ALEXANDRA KIRK: You heard Rupert Murdoch's concern about the deepening crisis in the United States also Leon Panetta, the former Clinton chief of staff says that the US is facing an economic 9/11.



Are you confident what the US financial chiefs are proposing will rescue the American economy?



WAYNE SWAN: Well Alex, we are facing the toughest global circumstances in a very long period of time, it's impacting in the United States, it's impacting around the globe, so substantial action is required by the US authorities.



I'm not going to go into buy into the domestic US debate but at the core of this problem is toxic debt in the US banking system and any long-term, sustainable solution has to deal with that toxic debt in the US banking system because the consequences of not dealing with it are more substantial than I think the costs of dealing with it.



ALEXANDRA KIRK: But the strategy's been dubbed "a financial socialism" and the world-renowned economist Jeffrey Sachs says that there is no plan, that it's just a few paragraphs long and the financial bosses don't know what they're doing, the rescue package won't fix bad mortgages and get them off the books, do you know more than he does?



WAYNE SWAN: Well I'm not going to buy into the domestic United States debate, I've been talking regularly to the US authorities, our regulators are also talking regularly because what's going on in the United States can't be divorced from what's happening elsewhere in the world.



The US authorities have proposed a course of action that will go through its normal course in the US congress as it should but at the end of the day, the United States needs and the world needs a sustainably solution to this problem which is one of the reasons why the Prime Minister is in the United States at the moment, because global action when it comes to systemic problems in the international financial system is essential if we are to avoid a repeat of these events in five, ten or 20 years time.



ALEXANDRA KIRK: But knowing what you do about the financial bailout, do you expect unemployment in Australia for example, to rise dramatically?



WAYNE SWAN: Well there's no doubt that the world economy is slowing and events in the United States are pushing up borrowing costs for both households and for businesses, that is impacting on Australia because it comes on top of 10 interest rate rises in a row under the former government.



ALEXANDRA KIRK: And what do you think is going to happen to unemployment?



WAYNE SWAN: And what that is doing, what that is doing is slowing our economy, we were upfront in the May Budget, we forecast a modest increase in unemployment in our Budget and as you will note Alex, the IMF has commended our May Budget for its prudent fiscal policy, for its attention to a future reform agenda and singled out for mention the strength of our banking and regulatory system.



So we are in a better position to withstand the fallout from these events than perhaps any other country in the world, but we are not immune and it will certainly have an impact on domestic growth, that certainly has an impact on employment growth and we will see on our current Budget forecast, a modest increase in unemployment.



We've been upfront and frank about that because, you see Alex, in the May Budget we did talk about the countervailing forces impacting upon the Australian economy, the Prime Minister and I were acutely aware that things internationally could take a turn for the worse and we did take that into account in our settings.



ALEXANDRA KIRK: But there are warnings in the IMF report that Australia is in the midst of a resources boom that won't last forever, that Australia's productive capacity is increasingly stretched, that underlying inflation is the highest in more than a decade and that banks while they may have demonstrated a soundness there are some vulnerabilities.



WAYNE SWAN: Well these were all challenges we recognised as we went through the economic debate last year before the Government was elected.



And inflation in the months of October, November and December last year hit a 16-year high, the economy has been bedevilled with capacity constraints over recent years because of the failure of the previous government to invest for the future.



These were all issues that were front and centre in our May Budget, and you would note that the IMF also commends the Government for the creation of the investment funds to expand the productive capacity of the economy, to also put downward pressure on inflation and therefore interest rates in the long term.



ALEXANDRA KIRK: Well you say the economy's in good shape, isn't this the best time then to be helping pensioners? That it's unlikely to get any better in terms of fiscal position?



WAYNE SWAN: Well the best time to have had that intervention was actually some stage in the last 12 years under the previous government, we've made it very clear, we are going to take additional measures, additional measures to those that we put in the Budget, the $500 bonus for aged pensioners, the increase in the utilities allowance.



But it has to be done in a measured way because this is a very big expenditure item, it has very significant implications for the Budget long term and we will act on the report from Mr Harmer, but we'll do it in a responsible way, it can't be done in a short term way, it's got to be done in a long term responsible way.



ALEXANDRA KIRK: Isn't that argument undermined though because Treasury documents show that the Prime Minister Kevin Rudd recommended a pension measure over and above the extra utilities allowance and that the Government considered a $30 a week pension increase, exactly what the Coalition's been calling for?



WAYNE SWAN: No, it is most certainly not the case, we had a look at all of the options in the lead-up to the Budget which is why we opted to pay the $500 bonus that had not been budgeted for by the previous government, it's why we opted to increase the utilities allowance and to pay it to all pensioners, not just to some and to go through the Harmer process because a one-off change without sufficient preparation would have adverse consequences for many people in the system.



We're going to get this right, we're going to get it right for the long term, we'll get it right for the pensioners of Australia.



ALEXANDRA KIRK: Wayne Swan, thank you.



WAYNE SWAN: Good to be with you.



TONY EASTLEY: The Federal Treasurer Wayne Swan in Canberra's studio speaking there with Alexandra Kirk.