Nb. This is an extended version of the interview that aired on 7.30 on Tuesday 15 May, 2012.

CHRIS UHLMANN, PRESENTER: Dr Ken Henry, welcome.

DR KEN HENRY, SECRETARY TO THE TREASURY, 2001-2011: Thank you.

CHRIS UHLMANN: Is making good public policy now harder than it used to be?

DR KEN HENRY: Well, I would say yes and no. There's a temptation to think the big policy changes that occurred in Australia in the 1980s and in the 1990s, that these were broadly accepted, well accepted by the community and well accepted politically. Yet I have to say to you having lived through those periods, particularly the second half of the 1980s my sense of it at the time was that the politically contest was very strong, just as strong as it is today.

So in that sense, no, I don't think it's harder. But there is a sense in which it is. And that is that in those days at least there was an understanding on both sides of politics of what changes would need to occur over time and one of the reasons for that was that there was a broad understanding in the Australian community that there were things that we were not doing well that things had to change.

There was a sense that Australia's economic performance was lagging and you could see it in if you like the international league tables, just looking at GDP per capita in Australia and GDP per capita in the OECD countries on average. It was evident in the way in which Australia had performed during a number of external shocks, in terms of trade shocks in particular. We had a history of very poor performance. So there was an understanding something needed to be changed. So in that sense it was easier but in the sense of it being easier politically I don't think so. My memory of those times was that the contest was very very strong.

CHRIS UHLMANN: So, do you think that it's more personal now? The contest in politics, is that making things harder?

DR KEN HENRY: It is very personal now, but I don't know if it's more personal either. I can remember some very personal exchanges in the parliament, even in the old parliament that's how far back I'd go, and I can remember some listening in because they weren't televised in those days, the exchanges, but listening in, in the parliamentary office, --- was coming in over the one little speaker in the office, it was very intense stuff. I think our parliament, question time in particular has always been a bit of a bear pit, that's certainly my memory of it.

CHRIS UHLMANN: Do you think there has been a retreat from some of the things where there were bipartisan settlements in Australian politics?

DR KEN HENRY: Well, again, yes and no. There are some issues which, there's a view today that there was bipartisan support for things where you know my recollection is that the things were actually contested. A lot of the reforms to Australian economic policy in the 1980s and 1990s were contested. I would say that all of the big tax policy changes for example were contested. I can't remember any of the big ones that had bipartisan support and when I'm talking about the big tax policy changes, I'm including things like fringe benefits tax, capital gains tax, intense political division on both those things and then right through to the Goods and Services Tax of course which again was a very major tax reform and of course now a conservative government proposing major tax reform, and again intensely political.

CHRIS UHLMANN: Can I take you back to when the Global Financial Crisis was unfolding and you of course were in an extraordinary position, you were head of Treasury, you also sat on the Reserve Bank Board, can you tell us what your worst fears were as that started to unfold?

DR KEN HENRY: Two. Two. Firstly, that it did look like we were not going to be able to avoid a recession, it did look that way. The point about avoiding recession is not avoiding recession for its own sake. The point is what it does to people's lives. I had lived through and seen close hand the recession of the early 1990s and the way in which that was handled in policy terms I mean, particularly in fiscal policy terms. And those, that experience was seared on my brain I think I was say. And I was very keen that we not have a repeat performance of that. In fact my recollection of that period of the early 1990s recession is that Treasury stood on the sidelines and as Secretary of the Treasury I was not going to stand on the sidelines.

CHRIS UHLMANN: And you had a famous saying didn't you? At least that's what we heard that you told Ministers in the way that they should respond?

DR KEN HENRY: Yeah, well, we had a discussion about the form of a fiscal response. And I did say to ministers, I said it to Prime Minister Rudd and other second ministers, that there was no point in going in soft. If you were going to use fiscal policy to avoid a recession, you should throw a lot at it. Secondly, that although there is a temptation to think that it would be highly desirable to having something concrete, maybe even literally concrete to show for your fiscal stimulus long after the period of crisis has past, an infrastructure project for example, that is almost impossible to roll that out in a timely fashion, to roll out sufficiently to avoid a recession. So, the advice was the best thing you can do in the time available is to provide cash to households. And then the third bit of the advice was, if you think you need to do it, the quicker you do it the better, don't wait. Don't wait until you see the whites of the eyes. Do it. Do it early.

CHRIS UHLMANN: So can you tell us exactly what you said in that little phrase?

DR KEN HENRY: Well I did say, 'Go Hard, Go Early and Go to Households.' I did say that.

CHRIS UHLMANN: And do you feel vindicated, particularly after that first stimulus package because you did see an effect on the economy which came very quickly?

DR KEN HENRY: Yeah, I think so, I do. It's not a personal thing. I must say that in the Treasury we had discussed this possibility years earlier. And we'd asked ourselves a question, senior group of people in the Treasury - what would we do if we were to be hit with another big negative shock and how would we respond, what would our advice to the Government be? And everybody in the senior levels of the Department was of a one mind on how the Department should provide advice.

CHRIS UHLMANN: Was there a problem not with the first stimulus package, but perhaps with the shape and delivery of the second one?

DR KEN HENRY: Well, a lot of people say that in hindsight. But you know when you're, when you're putting money out the door so to speak, and I know this is difficult for people to understand, it sounds counterintuitive, but actually if it's fiscal stimulus the most important thing is to get the money out the door. But how the money is, whether the money is in some sense wasted because there's overcharging or whatever, of course it's an important point but from a macroeconomic perspective it's very much second order, maybe even third order.

CHRIS UHLMANN: Was part of the problem, though, I know the slogan for the second one was 'Timely, Targeted, Temporary' but we're just seeing the ends of that washing through the system now. It hardly seems temporary?

DR KEN HENRY: This is a problem with packages that involve infrastructure construction. We had this experience in the early 1990s recession. You can't spend all the money in one month, in six months, in twelve months. You simply can't do it. And so there will be a tail on the fiscal stimulus and people will wonder if that tail really should, whether it should have been withdrawn earlier. But the tail is unavoidable. And so when you're taking the decisions that you're going to have a fiscal policy response of that form, one that involves infrastructure build, you need to be aware the tail is going to be there.

CHRIS UHLMANN: Do you worry that Government spending has in some way become infected because of problems with those programs, particularly I'm thinking of the pink bats program?

DR KEN HENRY: I don't know, I don't think so, I don't see any evidence of that. I think a bigger issue actually which goes to the point is whether concerns about public debt might be infecting in some way government decision. Not just Commonwealth but State Governments as well about infrastructure provision. I think that's a serious issue for the medium to longer term, not so much for the short term because the fact is that the economy in Australia is, is pretty close to a full capacity economy right now, not withstanding there are some sectors of the economy that are obviously experiencing very slow growth, indeed some experiencing negative growth.

Overall, the economy is fairly close to full capacity but the infrastructure issues are there for the medium term and long term. For example, we some years ago, many years ago actually had a national conversation about the implications of an ageing population. Keyed on by, or stimulated by, the First intergenerational Report published in 2002. The most recent intergenerational report published 2 years ago tells us, on reasonably conservative assumptions, within 40 years Australia will have a population that is 14 million larger than today's population. Not only that but almost half of that additional Australians will be aged 65 or more, almost half of the 14 million will be 65 or more. Think of the infrastructure requirements to support another 14 million Australians, almost half of whom are 65 or more. And it's not as if we'll be creating 2-3 new cities the size of Sydney or Melbourne for that additional 14 million Australians, or a city twice the size of Melbourne for the 6 or 7 million Australians aged 65 plus, if we were to do that it'd be a huge undertaking, that'd be a massive undertaking and there would be extraordinary infrastructure issues associate with getting services to those people aged 65 plus, aged care facilities, health services and so on.

But the fact is that the infrastructure challenge is much more demanding than that because those people will not be in one place, they'll be spread out across the country in places where at the moment the infrastructure simply doesn't exist.

CHRIS UHLMANN: I do want to come to that in some detail in a moment, but just to finish on the stimulus packages, do you fear the politics of this for the people involved leaves them with the sense that they get no credit. If people avoid a recession, the population doesn't understand the bullet that they have dodged?

DR KEN HENRY: There is no question about that but to their credit, my well my assessment at the time was that the Minister's were well aware of that, they knew it, they knew they'd get no credit for it.

CHRIS UHLMANN: And do you think the next time around they might think about that and pause?

DR KEN HENRY: I hope not. I hope not. I think not. The truth is of course that had there been a recession things would have been much worse for them.

CHRIS UHLMANN: And going to that time as well, a lot has been written and said about the leadership of Kevin Rudd particularly that group that was involved, the Gang of Four as it was called. What was your assessment of the leadership at that time?

DR KEN HENRY: in terms of, I don't want to talk about this too much obviously, and I'm never going to write a book about this period, I think it's quite unfair.

CHRIS UHLMANN: That's a pity.

DR KEN HENRY: I think it's quite unfair of people who have that special relationship of Government as an advisor to then sit back after the event and talk about how well they performed. And what they you know, which bits of my advice they took and which bits of my advice they ignored and only if they'd listened to everything I'd said how much better the place would be and a lot of people write that kind of stuff and I think it's unfair on the politicians of the time. But I will say this, the interest the intense interest that Prime Minister Rudd showed in the issues and the fact he got on to them so early is a great credit to him actually. The story has been told that as early as the 29th of February, 2008, which is, what, 6-7 months before Lehman's collapsed - he asked me straight out on a VIP plane flight to Gladstone, we'd just settled into the flight and leant across the table and said: "what's the worst thing that could happen?". And my brain was not in that space and it should have been and it took me a while to understand he was talking about the possibility of a Global Financial Crisis hitting Australia and how that would effect Australia. And I think that's to his very great credit that he was so far ahead of where well so far ahead of where the world was, and a long way ahead of where we were in the Treasury, even though we'd been thinking about these issues in the abstract.

CHRIS UHLMANN: One personal question - you were dragged into a lot of this economic debate in a way I can't recall a Treasury Secretary being before.

DR KEN HENRY: Yep, yep.

CHRIS UHLMANN: What did you learn from that, did you have too high a profile at that time do you think?

DR KEN HENRY: Oh, I think so but I don't know how on earth you avoid it. Look the situation is that we have senate estimates in this country and that's a good thing and it's a bad thing. But what it meant in this case was since the stimulus package was being so hotly contested politically it was such a big political issue, as soon as I walked into Senate Estimates I was going to be under the gun. So what do I do? Do I equivocate? Do I say 'oh well I'm not sure this is really needed', or it's inappropriate for me the senior economic, the most senior economic advisor in the country, it's again inappropriate for me to comment on whether the government is going to do the right thing or the wrong thing. I think when you're in that position you don't really have a choice, well you do, you do have a choice but to equivocate is to do damage to the effectiveness of the package.

CHRIS UHLMANN: Do you look at headlines, like the one this morning that JP Morgan has $2 billion worth of trading losses and wonder what we've learned and what we've done to ensure this never happens again?

DR KEN HENRY: I think it's a very serious issue actually, Chris. But you know it's a question about whether you can regulate this stuff, whether you can have a system of regulation which is so strong that it prevents those kinds of judgments being made by senior executives in those sorts of institutions. And it's not clear that you can. To some extent you can of course. And Australia's system of prudential regulation, the system of regulation that we have for our major financial intuitions, those that take deposits, so our banks, stands out, stands out head and shoulders above the systems of prudential regulation that we saw around the world prior to the global financial crisis, and that's the principal reason, not the only reason, it's the principal reason why the Australian financial system today is as strong as it is. And it is very clear that in other countries and particularly in the United States that the regulatory structures have not been as strong, have not been as robust.

You know, when I think about these issues I go back to the Asian financial crisis. And in the Asian financial crisis and you'll remember the events 1997-1998 when there was capital flight out of Thailand, out of Indonesia, and Malaysia locked the doors on cross border capital flows to prevent capital flight and I remember in meeting after meeting after meeting, American delegates to these meetings saying to the Asians the problem is your regulatory systems are no good. Your regulatory systems are not up to the mark. That is, Thailand's regulatory systems are not up to the mark, Indonesia's regulatory systems are not up to the mark, Korea's, Malaysia's. And when what we call the Global Financial Crisis hit I couldn't help but reflect on those conversations and the aftermath of the Asian Financial Crisis, nobody was asking the question, no one at all was asking the question is the regulatory system in the United States up to the mark?

CHRIS UHLMANN: And hasn't the financial crisis, too, exposed really big structural problems in places like Europe, perhaps insurmountable ones?

DR KEN HENRY: Yes. Well yes to both parts of that question. I think the problems are, this is a personal view obviously, in fact everything I've said to you is a personal view. But let me make the point that I personally, I've never seen how the Euro would work, I've never seen how it could be expected to work without a general fiscal union. People in Australia understand that without our system of horizontal fiscal equalisation, without fiscal transfers from one state to another state, this federation would simply not hang together, there's no way it would have hung together in the way it has without that system of fiscal transfers amongst jurisdictions. People understand that. People in Europe have not understood that and they need to understand it, the question is - whether it's too late? That's the question.

CHRIS UHLMANN: Well, they certainly understood it with the Maastricht treaty didn't they? They understood they had to have some kind of fiscal union if they were going to have monetary union?

DR KEN HENRY: No, no, no, actually, and this is a very important point.

CHRIS UHLMANN : The stability pact is what I'm thinking of.

DR KEN HENRY: Exactly, no no, ok, I understand. So the Maastricht Treaty which predates the Euro but was seen as a set of disciplines that should be applied to countries if they were going into the Euro, what that was designed to do and what the stability and growth pact in the Euro was designed to do was prevent governments like the Greek government from taking the easy way out and Greece did take the easy way out. So let me explain that. Here's the issue: if you have two countries that share the same currency and they have different rates of productivity growth, the only way to make that hang together, there are two ways: one is a fiscal transfer from a high productivity growth country to a low productivity growth country. So that's one plan, that'd be a fiscal union, if you don't have that then the only other way to make it hang together is for the low productivity growth country to go on a fiscal expansion.

What the growth and stability package was designed to do, was to stop the slow productivity country government from going on a fiscal expansion to constrain its fiscal policy to a deficit of no more than 3 per cent of GDP and debt of no more than - of GDP to constrain it so it'd have to do other things. That's the whole point so the whole point of what it was, that there be pressure on the low productivity country government to undertake the difficult microeconomic reforms that would lift productivity growth in that slower, growing economy. And of course as we all know that didn't happen, the pressure was there on paper, the pressure was not there in fact because nobody was monitoring the fiscal state in Greece. So what's happened of course is that the Greek government doing what you would expect it to do running an expansionary fiscal policy in order to try to retain something approximating full employment in this low productivity growth country, in competition with a high productivity growth country, like Germany with the same currency and at some point this was going to come unstuck and the Global Financial Crisis of course is the event which triggers it and why? Because the global financial crisis people in financial markets globally are asking the question of everything - is this sustainable? And when they look at Greece they say for heaven's sake, that can't possibly...

CHRIS UHLMANN: But it's almost impossible to see how the Euro survives because its fundamentals were never right and retrofitting it now would seem to be impossible?

DR KEN HENRY: yeah well that is my view. Yep.

CHRIS UHLMANN: And what does that mean for us?

DR KEN HENRY: And that is also a very good question. Interestingly enough if you look at global capital movements and how they have been effected in the post-war period, how they've been effected by shocks. Typically what's happened is when a shock has effected investor confidence, irrespective of where that shock originates, capital has flowed into the United States the US dollar has depreciated. This is what we've seen, in crisis after crisis after crisis. Ironically, when the global financial crisis hit, when Lehman's collapsed, even though the source of the problem was the United States - guess what? The US dollar appreciated because people had always when they got afraid they always put their money into the United States ,perverse in that case, probably perverse in earlier cases but nobody bothered to ask the question whether it was perverse or not, money just flows into the United States seeking a safe haven.

Now, the events occurring in Europe will also predate large capital movements, indeed they are, this extreme capital market volatility, not extreme I shouldn't overstate it but there's considerable market volatility at the moment, very important question. If the worse thing happens where does the capital go? It is quite possible of course on this occasion some of that capital will come into Australia, it is quite possible, it is quite possible o this occasion Australia will be seen as offering something of a safe haven for global capital movements. That'll be the first time in the post war period but it's possible to imagine it now.

CHRIS UHLMANN: So, Europe's collapse could be a good thing for Australia?

DR KEN HENRY: Well, depends, I'm an economist Chris so I'm always going to say on the one hand Chris but on the other hand no because what it'd mean is a high valued Australian dollar, that's what it would mean. Now it would mean, when you asked me earlier about the things I worried about when i was thinking about how the GFC would impact Australia, and we spoke about fiscal response, the other thing I was worrying about and this was the matter for Prime Minister Rudd that he was asking me about on that flight to Gladstone in 2008 was what happens if Australia is denied access to international capital? What happens if we can't actually fund out current account deficit? So the good news side of it is that it is possible, it's maybe even likely that any capital flow associated with problems in Europe would make it easier for Australia to fund it current account deficit, on the other hand it would mean a high valued Australian dollar and as you know that's an issue already causing some concern for some sectors of Australian...

CHRIS UHLMANN: Something you foresaw back in speech in 2007 how we would end up, in 2009 in fact how we'd end up with this two speed economy, we have seen pressures on manufacturing, but we have seen pressures like this on the Australian economy before and we have adjusted?

DR KEN HENRY: That's true, that's true and we shouldn't overstate the implications of these pressures. Mind you, those pressures are real Chris and it is no doubt the case that the business in Australia which is trade exposed, whether it's an exporting business or competing with imports, such a business if it was configured on an assumption of an exchange rate of the US dollar of let's say 72 cents which is really the post-float average of our exchange rate since December 1983, if you are running a business today that was configures on assumption of 72 cent exchange rate, you'd be feeling it, you'd have to be feeling it because the Australian dollar today is about 50 per cent above that, and that's a big loss of international competiveness for you, we shouldn't understate that, on the other hand we shouldn't overstate it either because there are adjustment mechanisms in the Australian economy that were not present in earlier terms of trade shocks that'll make it easier for those businesses to survive. The other thing I'd say Chris is that it's very likely for those businesses things will get better from here, if they are making a go of it now where the Australian dollar and thinking of competition particularly with China, it is likely that they will find the going easier.

CHRIS UHLMANN: One of the other perversities of this boom which you pointed out which is really interesting is that real wages have been flat, we look at the CPI, consumer price index but it's in fact producer prices that matter here, so over a decade real wages have not gone up and do you think that's one reason people are screaming about the cost of living?

DR KEN HENRY: Very probably. There is, it's not well understood even amongst economists

CHRIS UHLMANN: And people keep pointing to the CPI and say why are you complaining about the cost of living when the CPI is actually in hand?

DR KEN HENRY: Yeah wages growth has been quite muted. Except in the mining sector of course, wages growth has been strong in the mining sector except wages growth in the mining sector has been nowhere near the prices growth in the mining sector so for the miners they've had a real wage fall from the employers perspective a real wage fall, but those in the other sectors of the economy they've been doing their dandiest to hold real wages growth to zero or even negative. And the workforce is aware of this. In the what is being refereed to these days of Mining Boom Mark 1, that is the mining boom Australia experienced up to the GFC, one of the features of that mining boom was that there was a lot of revenue coming in, huge amount of revenue actually, it was a challenge for the Howard Government a real challenge of what to do with it, as you know they were targeting surpluses of about 1 per cent of GDP, they were then delivering big tax cuts, big increases in family payments, not only in budgets but between budgets and still delivering surpluses of 1.5 per cent GDP, there was a lot of money coming in but one of the consequences of that recycling of the revenue to the Australian household sector was that households actually felt quite good. They felt that they were getting something from this mining boom and of course in this mining boom Mark 2 the revenue is simply not there and it's much more difficult therefore for governments to make people to feel good.

CHRIS UHLMANN: And if people's wages are flat people are feeling it and that's a political problem?

DR KEN HENRY: That is a political problem, of course, always has been.

CHRIS UHLMANN: What do you hope to do with the Crawford school?

DR KEN HENRY: We'll address some of the longer term issues. We've spoken briefly about some of the issues Australia has with population aging, not just with population ageing but strong growth in population - another 14 million Australians, additional 14 million Australians over the next 40 years and how we're going to deal with another 14 million Australians the infrastructure requirements and so on, and not just hard infrastructure but health services, aged care services and how are government's going to relate to and provide services to that additional 14 million people, half of whom will be 65+ so that's a big issue, and it's an issue people in the Crawford school can help people in the public service and senior levels of the public service to think through but it's not the only issue. 00.57 we've been talking about the terms of trade boom and impact that has had on the Australian economy, we can talk more generally about the Asian century and the way the Asian Century will effect Australia, and I'm doing some work on that for the government, there's a lot of expertise within the ANU amongst the professors of the ANU thinking through the consequences and opportunities of the Asian Century.

In addition there are a number of highly significant environmental challenges that don't get talked about a lot in Australia or don't get talked about in some parts of national discourse , not core parts of national discourse, climate change obviously, water management obviously, soil management, biodiversity, bio-security, food security, the way we mange forests, these are big issues for Australia's future, fact is they've been big issues for us for 200 years, a lot of expertise in the ANU. 02.08 what I'd like to see is a much closer relationship between the senior academics at the ANU and these are amongst the country's best if not the country's best in most of the disciplines that are relevant to public policy - a much closer relationship between them and the senior people in the public service who are charged with the responsibility of thinking about the longer term challenges confronting the Australian economy and what sort of policies are going to be required to do it.

CHRIS UHLMANN: In 2009 in the speech you made talking about the four big things that were facing the country over the next 50 years and that was population, climate change, IT and terms of trade, when it got to the environment you said in a personal view you were pessimistic about how we'll deal with 14 million more people are you still pessimistic?

DR KEN HENRY: Yes I am. That isn't to say we can't do it, we can do it. The question is whether we can show sufficient resolve to do it and in order for this to be done we need a broad public acceptance that it does need to be done. And the problem with environmental issues that distinguishes them from most o the other issues we've been talking about is that today's generation can always think the condition of the environment is a problem for the next generation or generation after that. They can always push the burden onto future generations.

Quite striking in China you know and I've been there recently with the Asian century white paper. Quite interesting talking to senior policy people in China about environmental issues. The most striking thing is that they don't see it this way at all. They see environmental issues effecting future generations as being very much problems for the present generation. Economists would say that means they've got a low discount rate, whatever the technical jargon they really do think about it. And we in Australia to date have not shown a preparedness to think this way.

CHRIS UHLMANN: And do you think this way because you're the son of a timber worker?

DR KEN HENRY: I think that's part of it, I do think that's part of it, it clearly had a big impact on me talking to my father in unfortunately didn't live until a ripe old age that's a tragedy for me personally but talking to him in his later life about the work he did he was a sad man reflecting on what he'd done the things he'd considered himself responsible as a timber worker I would say to him not your fault, government's established the system you were working in, government's responsibility to look after the interests of future generations.

CHRIS UHLMANN: Alas we have to finish but one last thing, have we wasted the mining boom?

DR KEN HENRY: That's a question for future generations.

CHRIS UHLMANN: Ken Henry thank you.

DR KEN HENRY: Thank you.