The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Peter Costello

Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 07/03/01

Transcript No. 2001/018

Transcript
of
Hon. Peter Costello MP
Treasurer

Press Conference
National Accounts
Wednesday, 7 March 2001
12.00 pm

SUBJECTS: Economy

TREASURER:

Today’s national accounts show that in seasonally adjusted terms, GDP declined by 0.6 per cent in the December quarter, a very disappointing result. Through the year growth was 2.1 per cent and in trend terms, removing short term volatility, GDP grew by 0.1 per cent in the quarter and 2.5 per cent through the year. Household consumption grew by 0.5 per cent, which was a slowing in the rates of growth for most of the previous quarters in 1998 and 1999. Retail trade increased in the December quarter following a fall in September as the effect of the change to the new taxation system unwound. That is, the new taxation system led to a decline in September, but that seems to have been unwound in the December quarter. Dwelling investment fell by 15.4 per cent in the December quarter and the fall in dwelling investment alone detracted 4.7 per cent from the December quarter. Now there are obviously transitional effects caused by the new taxation system in relation to dwelling investment - a point that I’ve been making now for some time, that obviously there was a big bring forward in dwelling construction in the March and the June quarters. There was a fall in September followed by another very significant fall in the December quarter. And that fall alone accounts for the full amount of the detraction in the December quarter.

However, forward indicators in the housing sector have generally strengthened and point to improved activity levels for around the middle of this year. That will be supported particularly by lower interest rates. And as you know the Reserve Bank cut interest rates by 0.25 per cent this morning, meaning that since February, we’ve now had reductions of 0.75 per cent in interest rates in the last month.

First of all, I call on all of the banks to pass that interest rate cut on immediately. Last time, when interest rates, official rates were cut by 0.5 per cent the banks were able to move much quicker than they have been in the past. I think there was a general expectation of a rate cut this morning and the banks should be in a position to move. On a standard $100,000 loan, that is a further reduction of about $20 a month to home buyers. And taking into account all of the interest rate reductions since the Government came to office, there are now savings on a $100,000 loan of about $270 per month. So, in relation to the housing sector, today’s interest rate cut will be positive. Trends in approval and finance appear to be picking up and by the middle of this year we would expect the transitional effects of the new taxation system to have washed through the system.

Our net exports made a positive contribution to growth in both September and December quarters. So we’re coming off in consumption, but exports is picking up some of the slack and that has contributed to a sharp decline in the Current Account Deficit which is a little more than 3 per cent in recent quarters. Inflation remains very low in Australia, with the national accounts showing that it is of the order of about 0.3 per cent in the December quarter in line with the CPI. The favourable signs for growth in the current and future quarters are an accommodative monetary policy and budget policy, particularly income tax cuts which took place on 1 July. Trends showing that housing construction should be picking up by the middle of the year, inflation remaining very low and net exports contributing to growth, particularly in relation to the exchange rate, although obviously the international environment, both the United States and Japan continue to be revised down. The December quarter detraction of 0.6 per cent is a very disappointing result. There are a number of one off and transitional factors that have been taken into account in relation to the December quarter, but the economy shows no serious imbalances and in fact positive signs in relation to particularly exports and a turning in relation to dwelling investment.

JOURNALIST:

Are we heading for a recession Mr Costello?

TREASURER:

This is a negative quarter. It’s one negative quarter. You have negative quarters. We have a history of having negative quarters which are turned around by positive quarters thereafter. Obviously it is disappointing to have a negative quarter, but policy is directed towards producing continuing growth in the course of 2001. That’s what we’d be….

JOURNALIST:

What about another negative quarter. I mean is that an impossibility, can you be that confident at this stage?

TREASURER:

I’m not, I’m not in the business of forecasting future quarters. These figures bounce around a lot and they are quite often revised. And so you’d be foolish to actually make predictions, but the positive signs are one, that the one off and transitional factors which are the new tax system and the Sydney Olympics, should by now have passed through the system. December was always going to be affected largely by those factors. You have an accommodative monetary policy and you have a competitive export sector and no serious imbalances in relation to corporate profits or in relation to the availability of credit.

JOURNALIST:

(inaudible)…Reserve Bank…(inaudible) confidence which would continue to dampen growth. Now aren’t these serious concerns?

TREASURER:

Well, let me just find what the Reserve Bank said. The Reserve Bank’s decision was of course to cut interest rates, taking into account a number of factors including the inflation rate and including where it thought the economy was. But as I recall in its statement, in the last paragraph, the Reserve Bank made the point that it considered that prospects for growth were quite favourable. I think it referred to the fact that the profit share was quite strong, that company balance sheets were in a good position, that there was an availability of credit and if you read the last paragraph in that statement, I think, they indicated they had a pretty benign view of the economic prospects.

JOURNALIST:

Treasurer, do you believe that the, do you believe that the rate increases of last year, with the benefit of hindsight, were (inaudible)?

TREASURER:

Well, the last rate increase was some seven months ago. And it was six months after the last rate increase that the first reduction in this cycle took place in February. You’d have to say that views of the economy have changed pretty considerably since August of last year. What’s changed? Well, first of all, in July and August of last year there was a surge in employment. Nobody thought that would continue, I think 100,000 new jobs in July and August and discounts were made. But probably that influenced opinion at the time. The second thing is that the world outlook has been very seriously revised since August of last year. Through July and August people were continuing to revise up growth prospects in the United States, now they’re scrambling to revise them down. What caused a change in appreciation of the economic situation from August to now? I think one of the factors in all of the Western economies, ourselves, Canada, the United States, possibly Japan, was the world oil price. I think that the world oil price has had an effect throughout the industrialised world. I think probably policy makers didn’t fully anticipate the effect that the world oil price would have on activity and on consumption. I’m not talking just about Australia here, I think it was one of the big things the authorities in the United States are now saying, what changed US sentiments so dramatically in December of last year, and one of the views now amongst policy makers in the United States was that the world oil price and the effect that that had on consumption had a larger effect than people expected. It certainly has had a big effect in Australia because it has affected consumption. So, if you look back to August of last year, which was only seven months ago, when monetary policy was being tightened, obviously there has been a reappraisal, particularly in relation to the world economy and particularly in relation to the way in which that will effect growth prospects.

JOURNALIST:

Treasurer Costello, the Bulletin poll today has put the Coalition on its lowest level of support ever. Why do you think…

TREASURER:

Oh look, the Bulletin poll, as I recall, has always been a pretty negative poll for the Government and I’m not going to give you a blow by blow description of polls.

But I think, as I said earlier, one of the things that affected spending patterns and affected sentiment in the December quarter was the world oil price and petrol prices. I think the world oil price, which has pushed petrol prices up 10 cents and more, has meant that people have spent more on petrol and consequently less on other things. I think for the household which has got a limited spending budget, the truth of the matter is if you spend $15 or $20 a week more on petrol, you spend $15 or $20 a week less on something else. And people just don’t have the discretionary spending so that if the petrol price goes up they maintain their spending in other areas. I think that’s had a big effect in Australia, I think it’s had a big effect on activity certainly in the United States and other areas as well, and I think that has had an effect on consumer sentiment. The second point I would make is this - you’ve got to remember throughout the course of last year, commencing in February of last year, about a year ago, interest rates were raised from February of last year to August by 1.25 per cent. Now, obviously that has had an affect on sentiment. The good news is that they’ve now been cut by 75 basis points and that’s put money back in the pockets of homebuyers. But, I think there were two factors that would have affected people’s discretionary spending in the course of 2000 - one is petrol prices, and the other was the fact that interest rates were being tightened last year.

JOURNALIST:

Treasurer, the Opposition says the GST has also had an ill affect on spending and also on the economy generally, but they’re not the only ones saying it, some sectors of the business community are saying it too, that the new tax system has had a negative effect on growth and on the economy. Do you accept that?

TREASURER:

Well, let the Opposition speak for itself…

JOURNALIST:

What about business?

TREASURER:

Well, you asked me about the Opposition.

JOURNALIST:

No, no, my point is that the Opposition is saying and business is saying….

TREASURER:

Well, hang on, well, you know, I don’t want to interrupt you. But I’ll answer the first part of your question and I’ll come to the second part of the question. This is what the Opposition in fact said last year - Kim Beazley, the 3rd February: "….the net fiscal stimulus in this tax package of more than $6 billion in the first year alone, and around $20 billion over three years, runs the risk of fuelling consumption and overheating the economy". Lindsay Tanner: "With economic growth at around 4 per cent, an annual fiscal stimulus of around $6 billion over three years is not appropriate at this stage of cycle. It is likely to cause policy difficulties and have monetary policy consequences. The GST stimulus is likely to feed consumption growth". So, the Opposition spent all of last year saying that they were opposed to the Government’s tax package because it would overheat the economy. That was their attack on the tax package. It would overheat the economy and income tax cuts amounting to a reduction in tax overall of $6 billion was loose and overstimulatory. Now, this year, of course, the Opposition line is - no it wasn’t stimulatory and risking overheating, no, no it has had the reverse effect, it has actually reduced overheating or reduced growth. So, I think we can leave the Opposition’s attack out of this equation. You might just ask yourself incidentally what would have happened if we hadn’t cut income taxes as much as we did on 1 July 2000. I don’t think anybody today and, you know, we can all go back and see what was being said, would accuse those tax cuts of being too great. A lot people in this room probably did back on 1 July 2000. Certainly the Opposition did.

In relation to business, well, I don’t know who you are quoting in relation to business. But I think business would make the following points, I think they are fair points - that monetary policy was being tightened throughout 2000. I’ve never known anybody in business to support a tightening of monetary policy. That obviously had an effect. You had a natural slowing anyway coming off consumption which had been extraordinarily high in 1997, 1998 and 1999. I think the one area where you have had an effect from the new taxation system is in relation to the housing sector. I’ve been saying that for a long time. Cast your mind back to prior to 1 July 2000, builders had order books that they couldn’t fill. I remember talking to journalists here who were racing to try and sign contracts to get in before 1 July. And it had the effect of pulling forward construction and construction contracts and there was all this talk about builders being unable to finish their work, you recall, before 1 July, because there was this incredible pull forward in March and June, and in September and December there has been a very severe contraction. Building and construction were at twenty year highs and you have seen a very severe contraction in the September and December quarter, and that has been a big factor in today’s result. Now that is a transitional factor, that is a consequence of the taxation changes. Another transitional factor, which is not a consequence of taxation changes, is the Olympics. You’ve got the Olympics, were in the September quarter, remember December is measuring movement off the September quarter, and that is now working its way out of the system. So you’ve got some big transitional effects in this quarter and as I’ve been saying for some time now you won’t get a clear picture, absent transitional effects until you get into the March and June quarters.

JOURNALIST:

Is there more room for stimulation in this year’s Budget?

TREASURER:

I’m not going to discuss this year’s Budget. We are working on this year’s Budget as we speak.

JOURNALIST:

Mr Costello, you (inaudible) on the effect of fuel prices on both actual behaviour and (inaudible). Do you in retrospect admit that you contributed to the severe political problem by the price at which you, the price you struck for the excise, cut the price from which flowed pressure for change?

TREASURER:

The price at which we struck on 1 July 2000, as I recall, was 90 cents. And in the lead up to that, the average price in capital cities was below it – it was in the 80’s. We actually erred on the side of a high price.

JOURNALIST:

Everyone at the time said that was not the case……..

TREASURER:

No, no. The strike price, I don’t think anybody’s, there was a lot of argument about the methodology, but I don’t think anybody suggested that the strike price as of 1 July 2000 was too low. If you look at the all capitals’ prices throughout the course of June, they were actually below 90. In fact, if you go back further, they were significantly below. But what was happening all the way throughout the year 2000 was that petrol prices were rising as the oil price rose. By July of 2000 they were still marginally below 90. But by the time you got to December of 2000, I am talking about capital city prices here, they were closer to a dollar. It’s the world oil price, exchange rate movements, all the way through the year 2000 that petrol price was climbing. It wasn’t climbing because of tax changes…

JOURNALIST:

So, you made a mistake is that the bottom line…

TREASURER:

Well, hang on, it was climbing because the world oil price was climbing and exchange rates were moving. Now, we struck a price at ninety cents. Last week, we cut the fuel excise. When we cut the fuel excise last week we said we had changed our policy, we wanted to reduce the amount of tax. But I made the point when we reduced the amount of tax, and we reduced it 1.5 cents a litre, and we have abolished indexation, I made the point that this was not going to abolish the world oil price nor the exchange rate effect. What it was going to do, was, it was going to take 1.5 cents a litre off the excise, which was the right decision, which the public welcomed. People are saying, oh yesterday, prices went up. Yes, prices went up yesterday, not because of any taxation change but, because the drivers of the petrol price was still there – the drivers of the petrol price, the world oil price, the exchange rate and competition in the market.

JOURNALIST:

…(inaudible) there is a slowdown in these figures out today, does this change your thinking on the Budget and should you allow it to naturally go into deficit?

TREASURER:

Oh, look I am not going to talk about the Budget today, I never do. We are working on the Budget as we speak and you will see it on Budget night.

JOURNALIST:

(inaudible)…in surplus, you are absolutely sure that this year’s Budget will be in surplus?

TREASURER:

All of, yes, all of the indications to date are that it is, yes.

JOURNALIST:

Treasurer does the Australian dollar exchange rate accurately, does the Australian dollar exchange rate accurately reflect the current economic conditions and economic outlook for the Australian economy?

TREASURER:

Look, the exchange rate, as you know, is something that the Government doesn’t fix. We have moved to a floating exchange rate and as a consequence of that we accept that it will move up and it will move down. But, I refer you to the statement of the Reserve Bank that was issued today. In Australia, we are getting growth out of exports, our company balance sheets are in good shape, the profit share is quite high by historical standards, inflation is low, and there are strong reasons why the Australian economy will enjoy firm prospects.

JOURNALIST:

Mr Costello, you are saying that you’re confident that the economy will bounce back and will still be (inaudible), therefore, to include voter (inaudible) in relation to the Coalition. But what else should the Government do to improve that?

TREASURER:

I think the Government will continue to deliver a low inflation, which leads to a low interest rate environment, which will be good for home buyers, and it will be good for consumers. You have got to remember we are coming off a period where interest rates rose throughout the course of last year, and now they are coming down . That is good for families, that is going to be good for their consumption. We cut interest rates, we cut taxation rates on 1 July 2000. The Prime Minister gave an example in the House of Representatives, yesterday: single income family, three kids, earning $30,000, got a net improvement of $70 per week. That is going to be underpinning good consumption and that will flow back into consumption and will flow back by mid-year into housing construction.

JOURNALIST:

Mr Costello, you upgraded your growth forecasts by a quarter of a point to 4 per cent, which is over three months ago, it was right in the middle of this December quarter, which has now shown a contraction. Do you take responsibility for that decision or is it really the result of bad advice from Treasury?

TREASURER:

Oh look, we always take advice on these things, but we always make our own decisions. We always make our own decisions.

JOURNALIST:

Mr Costello, the Government has, the Government will stake its claim for re-election on, largely on the basis of it is the best equipped party to manage the economy. Isn’t that claim in tatters as a result of today’s result? Doesn’t this undermine your re-election prospects?

TREASURER:

Well, I think the Government’s record is a very strong record. And let’s compare it to Labor. The home mortgage interest rate today is 7.3 per cent, passing on today’s official interest rate cut. When we came to office it was 10.5 per cent. Today there are more than 700,000 Australians in jobs, that weren’t in jobs when we came to office. Today the Budget is in surplus and we have re-paid $50 billion dollars of Labor’s $80 billion dollar cumulative deficits in its last five Budgets. This is a Government which has reformed the Australian taxation system, which will give Australia long-term benefits. And the proof is in this pudding, regardless of what the Opposition says about the taxation system, there is one undeniable fact – if it ever gets elected it wants to keep it. Regardless of what they say, there is one undeniable fact, that they are desperate to keep the reforms that this Government put in place. Why? Because they know, through all of the rhetoric, that tax reform had to be done in Australia. The difference was, the Government had the courage to do it and the Lazy Party wanted to follow it. So, I think the Government’s economic record on interest rates, on inflation, on jobs, and in relation to the big structural changes in the Australian economy puts it in a very strong position. Let me ask you this question: after five years in Opposition, can you think of an economic policy of the Labor Party? They have had five years to come up with one now. The only thing they have done…

JOURNALIST:

They won’t sell Telstra?

TREASURER:

That’s an economic policy? They won’t sell Telstra? After five years that is their economic policy. Over five years in Opposition, the only thing they have ever come up with is, they are so against tax reform that they want to keep it. Now, you have got to ask yourself, with a record like that, what kind of managers would they be? I think we all know, deep down in our hearts, don’t we.

JOURNALIST:

Treasurer, what do you say to voters…

TREASURER:

This is the last question.

JOURNALIST:

Treasurer, what do you say to voters who would be inclined to judge the Government’s performance as economic manager, using a bench mark test for the Australian dollar exchange rate, and look back at the dollar in March 1996 and see it was about seventy-eight US cents, and see it today, it’s fifty-one, fifty-two cents US, and would (inaudible) the Government out against that measure.

TREASURER:

Well, I think, and I have said this over and over again, that the story of exchange rates in the last year, has been principally a story of the US dollar. That’s principally what the story has been. The US dollar in relation to other currencies. Now, there has been a huge capital inflow into the United States, sooner or later, that capital inflow – you would think – will come to an end. But, the story in international exchange rates, over the last year, over the last 18 months, has not been a story of the Australian dollar, it has not been the story in the exchange rate markets, it’s been a story of the US dollar. And I think I have probably spoken about that at length previously, so I won’t go any further.

Thank you all very much for your time.

Thank you.