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 08/11/06

Press Conference
Treasury Place, Melbourne


Wednesday, 8 November 2006
12.15 pm

SUBJECTS: Interest rates, inflation, Ted Baillieu, stamp duty

TREASURER:

As you already know the Reserve Bank at its meeting yesterday decided to increase the cash rate to 6 ¼ per cent, moving it by 25 basis points.  The consequence of that is that you would expect the standard variable mortgage interest rate to go to around about 8.05 per cent, many people of course will have lower rates than that because they would have taken products other than the standard variable mortgage interest rates.  In making the decision, the Reserve Bank cited continued expansion in the global economy and the fact that inflation in Australia is nudging around 3 per cent after you take out one off factors.  As you know that target which the Government has for inflation is 2 to 3 per cent over the course of the cycle and this has been an extremely long cycle where we are in a situation where we have had well over a decade of continuous economic expansion.  Our inflation rate over that decade has averaged around 2 ½ , 2.6 per cent and it is important that we keep inflation low on average, over the cycle, between 2 and 3 per cent, because that is the secret to continued investment, continuing the expansion and continuing increase in jobs in Australia.  The outcome of this, to push the standard variable mortgage interest rate up to 8.05 per cent will bring financial difficulty for many people, but it is important that we keep inflation low and of course 8.05, the standard variable mortgage interest rate is still considerably below what it was when the Government was elected and considerably below 12 ¾ per cent average interest rate which applied under the last Labor government. If we can continue economic growth in Australia, we can continue jobs growth, we can keep unemployment low and our economic expansion which is already the longest in Australian history can continue.
 
JOURNALIST:

Treasurer, how do you think this will affect a state like New South Wales which has been a bit rough on growth (inaudible)?

TREASURER:

Well, I think when the Reserve Bank cites the strong global economy as one of the reasons for its decision, what it is really talking about is strong commodities.  That is how a strong global economy affects Australia - through strong commodity prices. Where we get high prices for our commodities that adds to incomes, but in Australia as we know it particularly adds to incomes in states like Queensland and Western Australia, not so much in New South Wales and Victoria.  So you have the resource rich states strongly growing, contributing to house price increases, contributing more so to rising incomes and therefore contributing a little more to concerns about heat in the economy, you have other states such as New South Wales and Victoria, which are not as resource rich, they do not have the rising incomes or the rising property markets to the same extent, therefore are not contributing to the same extent, but you have one monetary policy for the whole of the country.        

JOURNALIST:

Treasurer, what do you say to people who are mortgaged to the hilt and will be particularly hard hit by this rise?

TREASURER:

Well we have a rise of .25 per cent and it increases the mortgage interest rate to 8.05, if you are paying the standard mortgage rate, although some people of course will be paying less than that,  the consequence of that is that it will make household budgets tighter.  But the longer term effect of running proper economic policy and keeping the economic expansion going makes jobs safer.  And so you have got to make sure that you take the right medium and long term decisions to keep people in work, the fact is that this decision will make household budgets tighter but it is important that we make sure we can keep economic growth continuing in this country.  

JOURNALIST:

So you think it was the right decision?

TREASURER:

Well, I don’t get into the scorecard because if I do there will be occasions when I will have disagreements and there will be occasions when I have agreements.  I will simply make this point - it was my decision to set the target and to give the Reserve Bank the independence to make these decisions and when they make these decisions after carefully considering all of the evidence then it is important that it be understood that it was done independently and the reasons for the outcome. And they make a statement as to the reasons, they cite two factors; a strong global economy, which no one could disagree with, although it is probably cooling a little; and the outlook for inflation which is up towards 3 per cent which it undoubtably is.  

JOURNALIST:

Treasurer, in their statement today, the RBA said the risks of inflation staying 2 to 3 per cent over the medium term remains significant, now that sounds like they are considering another rate rise, a warning for another rate rise potentially in the new year?  

TREASURER:

I think it is important that you understand the target which has been set by agreement with the bank, 2 to 3 per cent over the course of the cycle, and I have to repeat this over and over again, there will be times when it is below 2 per cent, there will be times when inflation is above 3 per cent. What we are shooting for is an average and the average over the last decade has been about 2 ½ , 2.6 so we have been bang on target.   You will see in future quarters that headline CPI come off quite a bit because some one off factors that are in the current CPI will right themselves, so it is an average that we are shooting at and because you are shooting at an average you are also looking down the track, you have got to try and think of what inflation will be doing in 12 months to 18 months time, how that will affect your average before making further decisions.    

JOURNALIST:

(inaudible) do you think that the RBA could have waited just a bit longer to see what the impact of the drought particularly (inaudible) surely that is going to make the economy cool? 

TREASURER:

Look the drought is going to cut a significant amount off growth.  The Australian economy in this financial year will grow lower than its long term average.  You will have one part of the Australian economy which will be in severe recession, in fact farm production will be in depression.  You have another part of the Australian economy - the mining part of the economy - which is still strong, then you have the bulk of the Australian economy which is goods and services, retail, wholesaling, transport, which is probably at about trend.  And so strong mining, a recessed agriculture and the bulk of the economy probably on trend and you have got to make a decision that takes into account all of those factors.   

JOURNALIST:

Would you have preferred if they had held off a bit longer?

TREASURER:

I’m the person who gave the Reserve Bank the independence and who set this target so I respect their decision…

JOURNALIST:

(inaudible)

TREASURER:

… I don’t second guess it.

JOURNALIST:

Treasurer do you believe Ted Baillieu should put his share holdings in a blind trust to end the conflict of interest controversy around his share holdings? 

TREASURER:

It is a matter for him.  I don’t have any advice, it is a matter for him. It is a matter for the parliamentary register, he has taken his decision and he has taken it after advice and so I support his decision.

JOURNALIST:

You yourself have used a blind trust I believe…?

TREASURER:

I have never used a blind trust. Not that I know of.  Unless it was so blind that I couldn’t even see it.  No, I have never used a blind trust.

JOURNALIST:

And will you be speaking at his campaign launch on Sunday…or attending?

TREASURER:

Yes I will be there.

JOURNALIST:

But you are not going to speak?

TREASURER:

Well I don’t know if I have been asked to.  If I am asked to, of course I will.

JOURNALIST:

How do you think he is going on the trail?

TREASURER:

I think he is going well.  I think the important thing is to put the policies in front of the Victorian people.  And I think the policies that he has put down in relation to roads have been very, very strong policies.  And I think that the stamp duty policy, although the full detail of it hasn’t been announced yet, is absolutely right.  Let me make this point, we have lived through the biggest appreciation of property values in Australian history.  The Victorian Government has not cut a rate or a threshold since 1998.  The Federal Government in that time has cut income tax in 2000, 2003, 2004, 2005, 2006 and so the Bracks Government has been sitting on the biggest accumulation of stamp duty windfall that we have ever seen in Victoria and done nothing about it.  And the policy that they announced the other day, which of course has nothing in it for property holders above $500,000 won’t hand anything like the windfall back.  In fact next year they will even collect more.  And this is a Government which has been living off the fat of the GST.  So, it is about time that this Government was held to account in relation to stamp duty, in relation to land tax which has been driving businesses out of Victoria. Ted Baillieu and his team with their stamp duty policy I think have put before Victorians a real policy which will help Victoria and which will do a lot for this State which I thoroughly support.

JOURNALIST:

Do you believe stamp duty will be more of a disincentive for a first home buyer than the latest interest rate rise?

TREASURER:

Well, the rates in Victoria are triple other Australian states.  Now if interest rates are the same all around Australia that affects all homebuyers equally.  There is one thing that affects you much more buying a house in Victoria – stamp duty.  You will be paying triple what you pay in Queensland.  Your mortgage bill might be the same, the price of your house might be the same but your stamp duty will be tripled.  How is that fair?  And people wonder why the house building industry is booming in Queensland – stamp duty might have something to do with it.

JOURNALIST:

But do you think this interest rate rise is going to make it hard for Bracksy – using (inaudible)?

TREASURER:

Look, what I would say about the Victorian State Government is it has lived through the biggest accumulation of property and stamp duty in Australian history and done nothing about it.  It hasn’t cut a rate and it hasn’t adjusted the threshold.  If this happened at the Federal level there would be outrage and yet they have got away with it in Victoria and they have done that at a time when the GST receipts have been booming.  Let’s be clear about this – the Victorian Labor Government did nothing to put GST in place.  It opposed it.  And after all the heavy lifting had been done they demanded more of it.  Now, you know, what would you think of somebody who opposes all of the hard work and then demands all of the benefits.  You would say to yourself well gee they do have a responsibility to do something and something in relation to stamp duty is what they should have done.

JOURNALIST:

Have you been briefed on what Mr Baillieu is going to promise and will you be there when he announces it and do some campaigning with him?

TREASURER:

Oh well I will be at the launch on Sunday.  So let’s keep our powder dry.

JOURNALIST:

Just back on the economy Treasurer, today’s rate rise – is this enough to put the inflation genie back in the bottle?

TREASURER:

Look, inflation is getting towards the upper end of the 2 to 3 per cent band.  When you adjust it for all of the one-off factors, the one-off factors will start to drop out next quarter and the quarter afterwards and you will see therefore the headline “CPI Come Back”.  But we are looking at underlying inflation – underlying inflation is up towards the top of the range and it is an assessment of where you think the economy will go over the next 12 months.  Undoubtedly there are still high prices in relation to commodities but I think you will see a correction in the years to come.  And you will also see the impact of drought.  Now drought incidentally will actually affect some prices – it will drive up some prices – but again you will have to adjust for that.  Drought – and it could well cut meat prices as farmers destock and then it could well increase them as farmers restock and so you have got to adjust for all that.

JOURNALIST:

With the benefit of hindsight would the Government have been better off to restrain it’s spending in the last couple of years?

TREASURER:

Well I think I have brought down 11 Budgets, 9 surpluses, which is more than any other Treasurer in Australian history.  So we have brought down 9 surpluses, the Commonwealth Government’s Budget surplus this year will be over $10 billion and the States will have combined deficits of $5 billion.  So here’s the Commonwealth Government running a strong fiscal policy – saving.  State Governments are running deficits.

JOURNALIST:

So do they take some of the responsibility for this rate rise?

TREASURER:

Well Michael you know if I was looking for loose fiscal policy in Australia I wouldn’t start by looking at the level of Government that had a $10 billion surplus – particularly when there is another level of Government that has a combined $5 billion deficit.  Now I am not making any bigger point than that.  You asked me about fiscal policy – is the Commonwealth fiscal policy strong?  Yes.  And the reason I mention the States is to illustrate how strong it is, much stronger than the States.  And of course I am talking in fiscal balance terms, where New South Wales, Victoria, Queensland, South Australia, Tasmania, the Northern Territory and the ACT are all running deficits.  Thank you.