TONY JONES: Earlier this evening, in our interview, the PM, John Howard, entered the debate over the comments by both the Pope and Cardinal George Pell. He was critical of the angry reaction in the is Islamic world to the Pope's comments, and he championed the right of Cardinal Pell to defend his religious leader. He also spoke the Australian values test, the killing of Canadian troops in Afghanistan, terrorism and global warming, and he debated the link between tax cuts, inflation and interest rates. But we began the interview with the reported rejection of Australia's free trade initiative by the European Union's Chief Trade Negotiator, Peter Mandelson. Mr Howard was in our Sydney studio.

Prime Minister, thanks for joining us.

JOHN HOWARD: It's a pleasure.

TONY JONES: The EU's trade boss, Peter Mandelson, is saying, and if he's right there is no way that your trade plan will be accepted by the Europeans. So that has implications for the DOHA round. I'm wondering where it leave the Cairns Group Initiative?

JOHN HOWARD: Well the Cairns Group Initiative will still go ahead. We are used to rejection by the Europeans.

TONY JONES: And the Americans?

JOHN HOWARD: Well, more so the Europeans. It should be said, in defence of the Americans, that they did make quite a big offer in this latest set of negotiations. It's our judgment that the failure of the Europeans to respond adequately to the American offer was one of the reasons why the negotiations fell over. That is not to say that we think the Americans are lily white when it comes to agricultural subsidies; plainly they are not. But on a scale of transgression in the area of subsidies, the European transgression is the greater.

TONY JONES: Now, Mr Mandelson has told the Fin Review that you're not even handed about this, you're not in touch with the changes in Europe, he says. This is Tony Blair's former spin doctor, we should bear in mind. He's playing hard personal politics here. Is he actually personally putting in danger the free trade agreement?

JOHN HOWARD: I don't feel that he is playing personal politics. He's wrong when he says I'm not in touch. I know the levels of protection in Europe, and they are much greater than those in the US. But it has to be said again that when you look at Australia compared with the US, the European Union and Japan, the level of protection for agriculture in this country is miniscule, sort of, what, 3 or 4 per cent. It's in the 20s in the US, in the 30s to 40s in Europe, and higher than that still in Japan. So this country does not run high protection in agriculture. Other countries do, and we've always argued that that's the root cause of our complaint. But even more importantly than that, we argue that dropping trade protection in agriculture would help the developing countries, because often that's all they've got. If they could get more access, they could lift their living standards.

TONY JONES: Very briefly, though; if Europe rejects your proposal from the Cairns Group, it's dead, isn't it?

JOHN HOWARD: Tony, nothing is ever dead in the area of trade negotiations. You've got to keep at it and at it and at it, and eventually one hopes there will be a breakthrough. But we have been used to being knocked back in the past and I'm sure that will continue to be the case, but eventually there will be a breakthrough. Eventually domestic constituencies in countries that have high agricultural protection will say, "We're sick of bearing the cost of this and we want some change."

TONY JONES: Now, PM, let's move on to other issues: As you'd be well aware, the Pope has provoked anger in the Muslim world after quoting a 14th century emperor who accused the Prophet Mohammed of inspiring evil and inhuman human ideas and spreading his word by the sword. Now Australia's leading Catholic has called, again, for an examination of whether the Koran, and what the Koran, in fact, has written about violence.

JOHN HOWARD: Yes.

TONY JONES: Do you think Cardinal Pell has a point in focussing on what the Koran has written about violence?

JOHN HOWARD: Well I think the cardinal has a point in making the point that it's a strange form of restraint to respond to words you disagree with, with demonstrations and threats of violence. The Islamic community is perfectly entitled to criticise the Pope and the Pope is perfectly entitled, and other religious leaders are perfectly entitled, to express their views about other religions. But we're all meant to believe in peace and we're all meant to adhere to peaceful religions and I just think it's very strange and disappointing that whenever the Pope says something that people, or on this particular occasion, let's stick to this, he has said something that people don't agree with and that provokes demonstrations. Now, we are all meant to be bound by a belief in free speech and free expression, and my, I suppose, exasperation would be that of many of the people in Australia, that, okay, they may not like what His Holiness said and whether he should have said it or not is, in a sense, beside the point, but we are meant to believe in free speech and we are meant to not overreact. I think it's very important with these things that people don't overreact. I'm sure the great bulk of Catholics around the world want good relations with Islam, and the Catholic Church, itself, cops a fair amount of abuse on a daily basis. If Catholics rioted every time people attacked the Catholic Church, you'd have riots on a very regular basis.

TONY JONES: Let's look at what Cardinal Pell is saying because he's talking to Muslims here in Australia about examining, or re examining what the Koran says about violence. Have you read the Koran? Or at least have you read the sections of it that Cardinal Pell seems particularly to be focusing on, the war verses?

JOHN HOWARD: I don't know whether I have specifically read the bits that Cardinal Pell is referring to, but, Tony, I'm not going to get into an adjudication of a statement made by Cardinal Pell, I mean it's not my role. He's entitled to make statements, and whatever statements he makes he will justify and defend. But from a public policy point of view, as the PM of a country that obviously is greatly influenced by the Judaea Christian ethic, but nonetheless respects other religion, and indeed the people who have no religious belief at all, I think we should all take a deep breath on these things and all have a sense of proportion. We seem to be living in a world where people have no sense of proportion. Okay, they don't like what was said, I'm sure that the Pope was not intending to attack Islam. He has expressed his regrets and I think we should really move on, to use that rather hackneyed phrase of the modern world.

TONY JONES: Do you mean Cardinal Pell as well when you ask people to move on? Because asked if there are links between religion and violence at the heart of Islam, Cardinal Pell said he would, "... welcome clarification from our Islamic friends on that point." It's dangerous territory, isn't it?

JOHN HOWARD: I think what the cardinal was doing was defending the head of his church, and so he should. I'd defend the head of the church if I were in Cardinal Pell's position; I'm not. But as an observer and knowing Cardinal Pell, who is a great believer in religious tolerance and religious understanding in the Australian community, I'm sure he wasn't intending other than to defend His Holiness, and that's very understandable.

TONY JONES: Can you ask open questions like this about the violent past of Islam without, in the same breath, acknowledging the violent past of the Christian Church, for example?

JOHN HOWARD: I think I've heard him say that the Christian Church has been guilty of transgression. I mean all religions, well let me put it this way: People have committed evil in the name of all of the world's great religions. At the moment, however, the problem is that a common thread in terrorism around the world gives the indication of Islam as a sanction, or a blessing, on acts of terrorism, and that is the common thread. I don't, at the moment, note terrorist groups killing people and invoking the authority of the Catholic Church, or indeed the Christian Church, of which the Catholic Church is clearly a dominant part, as some kind of authority. I mean that's the difference. Sure, people have done evil things. The Third Reich was inaugurated, as I remember years and years ago, in a church building. I mean, all sorts of evil things have been done under the cover of religion. But the problem we have at the moment is that the common thread of all of these terrorist attacks is that the terrorists claim the authority of Allah. Now that's a blasphemy on Islam. It's because they do blaspheme Islam that many of us, myself included, like to see moderate leaders attacking terrorism. I'm very pleased at the response of many of the Islamic leaders in the past little while in Australia on that very issue. They know that terrorism is no part of Islam, they know that the beliefs of Islam are incompatible with murder and terrorism and hatred. The commonality between all of the world's great religions is enormous.

TONY JONES: Let's talk about the common thread you were talking about earlier, because I'm wondering if it's reflected in your reasons for talking about an Australian values test. You say it's got nothing at all to do with Islam, but it was never even mooted before the threat of Islamic fundamentalism, was it?

JOHN HOWARD: Tony, I have been talking about the need for a common adherence to a set of Australian values for years. Now, come on, Tony, you can go back, you've got plenty of archival footage here, and I've been talking about the need to avoid zealous multiculturalism, I've been talking about the need for there to be an overriding commitment to Australian values for years and years and years. Don't anybody try and put it to me that I've only started to talk about these things since terrorism became an issue.

TONY JONES: This is what's given it the momentum to actually become a major issue, isn't it?

JOHN HOWARD: It may be in the minds of some commentators and even interviewers. But that's drawing a very, very long bow, to say that I've only been on about Australian values and the common bonds that unite us as Australians.

TONY JONES: I don't think anyone is saying that. What people are saying is that the Australian values test seems to be linked to this fear of Islamic fundamentalism. That seems to be pretty clear.

JOHN HOWARD: I think that's a link that some people might seek to draw, but it's much broader than that.

TONY JONES: Okay. Mr Howard, fighting Islamic extremists in Afghanistan, four Canadian soldiers have been killed in the past 24 hours, another 12 were injured. That means 36 Canadian soldiers have been killed in Afghanistan, overall 28 in this past year. My question for you is, would you have the resolve to keep Australian troops on the ground in Afghanistan if we were getting the same sort of casualties as the Canadians are?

JOHN HOWARD: Tony, I'm not going to answer a hypothetical question based on something that I hope and pray never happens, and that is just not a question I care to answer. I will say this; that the Canadians have suffered enormously and I feel very deeply for what's happened. They are carrying a very heavy burden in Afghanistan, and I think we all have to understand that Afghanistan has gotten a lot more dangerous and our own forces are exposed to a lot of danger, the British are, the Americans are and they're carrying a very heavy burden and they're fighting in some of the very dangerous areas. But we have to maintain our commitment in Afghanistan because even the Labor Party supports us in relation to Afghanistan. They're critical of our position in Iraq, although we find the same issues are at stake in both countries. We find we that to leave either to the control of the terrorists would be an enormous blunder. But it's quite difficult, but I really don't want to hypothesise about the number of Australian deaths. That really is not something I want to do.

TONY JONES: Alexander Downer is urging the Canadians to stay the course there, not to be spooked by these numbers of casualties. Is that something you also endorse?

JOHN HOWARD: Obviously we want all of the countries that are involved Afghanistan to stay there. We would like to see a still greater European contribution, we certainly would. There is a very heavy contribution from the British, and we are working with the Dutch in our part of Imruzkin Province, and we would like all of those countries to stay, as we would like those countries that are Iraq to stay there, as we will stay there until we assess that our mission has been completed.

TONY JONES: What do you see as the biggest threat to Australia in the future, terrorism or global warming?

JOHN HOWARD: I think terrorism is a greater threat because I think we are doing things about global warming. We're doing things about terrorism, but terrorism is more arbitrary, it's far more capricious, and of course its immediate consequences on the people it touches are more hideous.

TONY JONES: You'd be aware that that was a rhetorical question that Al Gore asked in his film.

JOHN HOWARD: Yes, (indistinct).

TONY JONES: Precisely, because he is saying that the difference is that the actual fate of the planet is at stake with global warming, not with terrorism.

JOHN HOWARD: Well, I will see the film, he sent me a copy and we had a brief discussion about it. But whilst believing that the planet is getting warmer and whilst accepting some, I don't accept all, and I believe that the methods that he proposes will do a lot of short and medium term damage to the Australian economy. It will send industries offshore, send Australian jobs to countries like China and Indonesia. I think we can tackle the problem in a different and equally effective way.

TONY JONES: You might be aware, I don't know, that there is a strong, sort of, rumour, it has been reported widely now that President Bush is about to do a huge U turn.

JOHN HOWARD: I've seen some reports.

TONY JONES: Would that influence you if he did?

JOHN HOWARD: We make our own assessment of these things. Our own assessment is that if Australia were to sign the Kyoto Protocol, we would damage our country's interests because the arrangements would impose obligations on us that would not be imposed on countries like China and Indonesia. Therefore it would be less costly for industry to invest in those countries and they'd take their investments from Australia elsewhere and we lose jobs.

TONY JONES: Okay. Mr Howard, let's move on again to the economy in this case.

JOHN HOWARD: Sure.

TONY JONES: In Singapore at the weekend the Treasurer warned that inflation would remain above the Reserve Bank's comfort zone of 2 to 3 per cent for some time to come. If he's right, Australians should prepare themselves for another round of interest rate rises, should they not?

JOHN HOWARD: I'm not going to speculate about future interest rate rises, except to make the obvious point that they'll always be lower under a Coalition Government than a Labor Government, and we've got a lot of field evidence to support that. The monetary policy agreement was that inflation should remain between the target of 2 to 3 per cent over the cycle. That means that on occasions it can go above that, and on occasions it will be below it. It's an average over the cycle. I think you have to bear that in mind in looking at Peter Costello's comment.

TONY JONES: On 18 August, in his last appearance before the House of Representatives Economics Committee the former Reserve Bank Governor said, "... the market forecast of more rate rises to come is probably about the right assessment." That's a quote from him. It's more likely there will be than there won't be?

JOHN HOWARD: Tony, I'm not going to speculate about what the bank may do in that area, except to make the obvious point that it has responsibilities to manage monetary policy in an intelligent fashion, and we, as a government, have a responsibility to contribute to a framework that keeps inflation as low as possible, and that's what our policies have done.

TONY JONES: It's a political for you problem for you, though, isn't it, if people start focusing on some of Ian MacFarlane's other comments and comparing them to what the Government has said?

JOHN HOWARD: I don't mind people focusing on Ian MacFarlane's comments. They can do that as frequently as they choose, and I think you were just about to do so.

TONY JONES: I am. The obvious example is the last round of tax cuts in July. Mr MacFarlane says the Reserve Bank was worried those cuts would be inflationary. The Treasurer's suggestion that he endorsed big tax cuts was a misrepresentation.

JOHN HOWARD: Yes, but then the governor subsequently made another statement that sort of cancelled that out. The governor has made a lot of statements, and if you look at all of them you'll find that, on balance, he didn't criticise the Government's tax cuts. In fact, my recollection is that right at the end he said the opposite.

TONY JONES: I'm focusing on what he said to the Parliamentary Committee.

JOHN HOWARD: I know, but he said something later on.

TONY JONES: Presumably he wasn't under any pressure to say anything else, and before the Parliamentary Committee

JOHN HOWARD: When you say 'pressure', I mean nobody has put pressure on the former governor. What are you talking about?

TONY JONES: There was public criticism of him.

JOHN HOWARD: People are entitled to answer criticism of them when those criticisms are made. If you're talking about the statements we made during the election campaign, we don't retreat from those statements at all.

TONY JONES: I'm not talking about what. I am talking about is, this is what he said to the committee: "I even see now that my words are being used by the Treasurer to say, 'Oh, but I was urged to do it by the Governor of the Reserve Bank.' It's a very funny game, it's a funny game we're playing here on fiscal policy, and it is a game." Now that's pretty serious, isn't it?

JOHN HOWARD: No, I don't think it is. I think, Tony, he's using 'game' not in the literal sense. He's using 'game' in the sense that people often, in a political environment, say they're in or out of the game. You know that as well as I do. He did make some other statements about tax cuts that had the effect of, certainly in our view and in the view of many others, neutralising those earlier statements to the Committee.

TONY JONES: But the earlier statements were pretty profound.

JOHN HOWARD: But in politics...

TONY JONES: Why do you think he turned around and said the opposite of what he said to the Committee?

JOHN HOWARD: I'm not here answering for him, and can I say, I think he was a first rate Reserve Bank Governor. I think his 10 years as the head of the Reserve Bank were very successful and I think he is entitled to see his tenure in a very positive light. However, if you look at the totality of what he said, including remarks he made after those remarks before the House of Representatives Committee, I think you'll agree with me.

TONY JONES: It's very confusing, though, when you're looking at his statements and they all conflict with each other.

JOHN HOWARD: I'm not accountable for other people's statements.

TONY JONES: I understand that.

JOHN HOWARD: I have to defend accusations made about my statements. My position is very clear on these things.

TONY JONES: It's six months to the next budget, it's 12 months or so to the next election. Given all of this and given the original statements that MacFarlane said about the inflationary impact of tax cuts, do you now rule out having tax cuts before the next election?

JOHN HOWARD: Tony, don't ask me to start ruling things in and out. I'm not going to do that. But what I am going to say is this; that the tax cuts we gave in the last budget were significant. They were not only significant in size, but the structural character of the changes we made to the tax scales, of really pushing down the rates for the middle and higher income earners to put more incentive into the scale, and also providing relief at the lower end. Whilst I'm not ruling anything in or out, I'm making the point that the tax relief we gave in the last budget, which was widely supported and eminently responsible from the fiscal point of view, was significant. As to what we do in the next budget, Peter and I haven't even begun to think about that.

TONY JONES: You're looking at the forward estimates. You must have a clue of what's going to be available?

JOHN HOWARD: I look at forward estimates the whole time. But Tony...

TONY JONES: Is tax relief, effectively, over because of the inflationary impacts?

JOHN HOWARD: Tony, Tony, please, let's not waste time. This is a game. If you're trying to get me to...

TONY JONES: That's what the Former Reserve Bank Governor said.

JOHN HOWARD: I'm making a comment on your question.

TONY JONES: It isn't a game to the people who are looking for tax cuts, and it won't be a game if it causes inflation.

JOHN HOWARD: Tony, I think people understand that in the last budget significant tax cuts were given. I'm not going to start speculating about next year's budget, but I do emphasise that the tax relief in the last budget was very significant, it was long term, and very welcomed by the Australian community, as were the historic reforms to superannuation.

TONY JONES: Prime Minister, we'll have to leave it there, we're out of time. We thank you very much for coming in to join us tonight.

JOHN HOWARD: It's good to be here.