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 12/11/06

Interview with Barrie Cassidy
Insiders


Sunday, 12 November 2006

SUBJECTS: Interest rates, inflation, tax cuts, G-20, carbon trading, stem cell legislation

CASSIDY:

Treasurer, good morning.  Welcome.

TREASURER:

Good morning, Barrie.  Good to be with you.

CASSIDY:

Do you still maintain that interest rates are low?

TREASURER:

By comparison with the Labor Party, of course, they're low.  The Labor Party average mortgage during its term of office was 12.75 per cent.  That was the average.  So at 8 per cent, we're well below the Labor Party average of 12.75 per cent.

CASSIDY:

Are they low by today's standards as opposed to comparing them with the Labor Party, by today's experiences?

TREASURER:

When I became Treasurer, the mortgage interest rate was 10.5 per cent and today it's eight.  Now, that's not as low as it was, say, three or four years ago, but, by comparison with the situation which the Government inherited, yes, it's lower.

CASSIDY:

But the figure that Kim Beazley talked about there, that a percentage of household disposable incomes, 9 per cent now, was 6 per cent 15 years ago.  That's what really matters to people.  They wouldn't think they're particularly low.

TREASURER:

Let me make a couple of points about that.  First of all, when you do average interest to average income in an economy, you're not just looking at owner occupied housing.  There's a component in there of investor housing.  You have to actually strip that out to get a fair comparison.  The second point I'd make is, obviously, if the interest rate now is 8 per cent rather than Labor's average of 12.75, your interest payments are less.  The point the Labor Party is trying to make is people have borrowed more, and a lot of people have borrowed more in order to upgrade their housing or, in some cases, to buy investment properties.  So you're not entirely comparing like with like.  When you compare like with like, you compare interest rate with interest rate. The interest rate today is lower than it was when the Government was elected.

CASSIDY:

But, even allowing for that, it's true to say, it's harder to service a mortgage now than ever before?

TREASURER:

Barrie, the interest rate is lower.  The question is, if people have taken the opportunity to borrow more because interest rates are lower, then your payments go up.  That's because you've got a much greater capital sum, a capital sum that buys a better house, or, in some of those loans, a capital sum which is used for an investment property.  Let me give you a figure.  Although people have borrowed more, the asset increase in this country means that, in net terms, that is, assets after borrowings, wealth has increased every year over the last 10 years, with the exception of one year.

CASSIDY:

Why is this pressure coming on inflation and do you take responsibility for any factor involved in that?

TREASURER:

I think there are two factors.  One is there are global factors.  That's the oil market and the effect that's had in petrol prices, which works its way through all of the Australian industry.  The second is more domestic.  And the fact is - and I said to you earlier that the mortgage interest rate was 10.5 per cent when I became Treasurer and it's 8 per cent today.  But, in the interim, in the interim, even though the mortgage interest rate has gone down, 1.9 million jobs have been created.  Now, what that's telling you is that, rather than have unemployment, an excess of labour, what we've probably got now is, in some areas, an excess of jobs.  That is, more jobs than people. Now, of course...

CASSIDY:

And a skills shortage.

TREASURER:

...of course, and you will hear this word, "economy running near capacity."  Can I tell you, Barrie, that's not a bad thing?  That's the object of economic policy, to get people in work.  But, as you get people in work, as their position increases in the bargaining power they have, that is, more jobs than people, you always find in an economy that that provides some tightness on prices.

Now, to be frank with you, Barrie, you can look at that and you can say, "What a tragedy?  1.9 million more people in work.  That's increased their wage bargaining.  That's put some pressure on prices."  A better way of looking at it is saying, "Well, after 10 years, we're finally getting near to where we've been aiming for, and now it gives us a new set of problems."  Our problem now is not mass unemployment.  We never had a problem with inflation when we had mass unemployment, when you had a million people out of work.  Our problems change.  Put 1.9 million people in work, your problems change.  You now have a bit of price pressure in the system, but, as problems go, Barrie, this is a better one to have than mass unemployment.

CASSIDY:

You add to the price pressure when you ran all those tax cuts during the year.  It seems, to some economists, you gave the tax cuts and the Reserve Bank, responsibly, had to take them back?

TREASURER:

No.  In fact, I know there was speculation about that in the paper, and the Reserve Bank Governor Ian Macfarlane made it entirely clear that that was not an influence in relation to his judgment.  What happened was, Barrie, that we were able to give tax relief and keep the budget in surplus.  Let's be clear about this.  There's only one level of government in Australia that's running surplus budgets at the moment.  That's the Commonwealth Government. State governments are collectively in deficit.  So, we were able to keep the budget in surplus and give tax relief.  By the way, if we hadn't done that, household budgets would be tighter today.

CASSIDY:

Do you accept though that that limits your options going into next year, in terms of tax cuts?

TREASURER:

What I think is there are a new set of problems which will take very careful economic management and considerable experience.  The new set of problems is price pressure coming from low unemployment, price pressure coming from oil increases, price pressure coming from the drought, managing simultaneously a rural recession and a strong mining sector. These are difficult problems and they'll take a lot of experience to match.

CASSIDY:

But how does that ... on whether or not tax cuts a good idea?

TREASURER:

Well, I'm hardly going to announce next year's budget on your programme today.

CASSIDY:

No, but you could give us a sense of whether it would be economically responsible to give big tax cuts.

TREASURER:

I will give you this sense: there's a new set of problems and they'll require careful management and they'll need a lot of experience to deal with them.

CASSIDY:

I take it that means we're unlikely to have a repeat of this year's...

TREASURER:

I will take that that you better come to next year's budget.

CASSIDY:

All right.  Let's move on to the G20 now and its involvement next weekend under your chairmanship.  90 per cent of the world's economies under one roof, but could you identify one key result you would like to see emerge from the conference?

TREASURER:

First of all, let's say, Barrie, this is the biggest financial conference Australia has ever hosted and ever will.  This organisation, where Australia not only has a seat at the table, of the 20 most important economies of the world, but is chairing it, that brings together the developed world and the developing world, is important in itself.  That's significant in itself. I think one of the most important things that will come out of the discussions that we're going to have next weekend is over this area of energy.  We know oil prices have gone up.  We know commodity prices have gone up.  We know that there is incredible demand coming out of China and India, in particular.  How does the world satisfy those economies that there will be continuity of supply at realistic prices, with no need to lock up supplies or have cartel activity which will rig those international markets?

If we can get an agreement on adequate supply, adequate security, proper international pricing, then I think we can actually ensure that what could otherwise become jostling and instability over resources over the next couple of decades will be taken out of the system.  Prices would be better and that will benefit consumers.

CASSIDY:

But can the G20 do that?  One of the recommendations out of the last G-20 was that they work towards stable oil prices, and we had a period of volatility.

TREASURER:

Sure.  Well, who else can do it, other than the G-20?  Let me make this point: the G-7, G-8 summits, you don't have the world's great consumers.  You don't have China and India, you don't even have the world's major oil supplier, Saudi Arabia. Next weekend we will have the world's key consumers, China and India, we will have the world's major supplier, Saudi Arabia, Russia.  We can bring them together at one table, the forum of the world, where they sit at the one table.  Will we get a breakthrough?  Well, in my experience internationally, breakthroughs take time but, I will tell you what, this is the best forum to take these issues up in the globe.

CASSIDY:

What do you say to the protesters who will no doubt turn up in their hundreds, perhaps thousands, as they have in the past?

TREASURER:

Well, I don't know why.  You see, there are some radical groups that say that somehow a G20 summit is against the world order.  You can't appeal to those people.  There are some that say it doesn't give enough of a voice to the developing world, but, I'd make this point, the developing world's at this summit.  We have China, we have India, we have South Africa, representing the African continent.  If you're concerned about aid and poverty and the developing world, this is a summit you should be demonstrating for.  This is the summit where the developing world gets a seat.

The G-7, the G-8 doesn't include the developing world.  So, whatever the pattern of demonstration is against the G-7 or the G-8, it's not a pattern that's applicable to this wider group of 20 people.

CASSIDY:

Okay.  On the changes in the United States now, and, with the Democrats having the numbers in the House and the Senate, you would think there may be new policies emerging on climate change, in particular.  Do you expect that, and is there any room for Australia to move on that?

TREASURER:

Well, I think, in Australia, we've got to keep a careful eye on this.  I think the ground is changing.  I think it is important that we bring new countries into this discussion.  And I think, from Australia's point of view, if the world starts moving towards a carbon trading system, we can't be left out of that, that Australia has a role...

CASSIDY:

You think the world is moving towards that system?

TREASURER:

I think the weakness up until now, Barrie, has been that key consumers, such as China and India, have not been in this. But, as the world moves towards a carbon trading system, Australia, obviously, can't stand out against the rest of the world, that we ought to be in there negotiating what this system would look like, so that we protect our own interests, obviously, but, also, we ensure that it's broad ranging, wide encompassing and effective.  And I think that's actually the next chapter.

The next chapter is bringing the key consumers in, China and India, the kind of countries that we're trying to bring into the world financial system...

CASSIDY:

Under what umbrella would that happen?

TREASURER:

And then looking at the shape of a carbon trading system,

CASSIDY:

Under what sort of umbrella though?  Would it be a Kyoto-type of umbrella?

TREASURER:

Well, Australia has an initiative such as AP6.  There are a new round of discussions which are about to start in Kenya, I believe, and I think the world will move in that direction.  As it moves in that direction, Australia won't be able to stay out. Australia will have to come in, and Australia will have to come in with wide ranging technical expertise to shape the way in which this system emerges.

CASSIDY:

How soon do you think that will happen before business, industry in Australia, has to accept some sort of carbon trading regime?

TREASURER:

Well, it's not immediate.  The Kyoto is going from 2008 to 2012.  So you're probably talking about the next decade, and, bear in mind, greenhouse is something that's believed to increase temperatures, say, two degrees over 50 years.  I mean, the thing about greenhouse emissions is - all of the evidence is that they're emerging but it's not something that's going to emerge tomorrow.  It's something we have to work out over 10, 20, 30, 40, 50 years.

CASSIDY:

And take industry with you.

TREASURER:

And take industry with you.  People say "We had a hot day today. It must be greenhouse."  No.  Greenhouse is an overall average climate change over 50 years and 100 years.  That's why I'd say to people, "Yes, it's real, yes, we need to adjust. We have time, and we ought to do so in an orderly way."

I think the crisis thinking, the thinking that says if we haven't done it tomorrow, we've failed, will actually hamper efforts.  I think we have to be very realistic about this.  It's a long-term thing.  We're now looking at the post Kyoto world, which is the next decade.  And I think that's where we ought to be focusing technological improvement and much broader global responses.

CASSIDY:

Just finally, have you made up your mind how you will vote on stem cell research?

TREASURER:

I have a pretty fair idea, Barry.

CASSIDY:

Do you want to give us a bit of a steer on that?

TREASURER:

I think the right thing is to talk to the House of Representatives about that.

CASSIDY:

But the numbers are fairly clear, aren't they, that it will go through?

TREASURER:

Well, it's gone through the Senate.  I don't engage in numbers counting on these sorts of issues.  Here's my view.  It's not easy.  There are strong arguments on both sides and people of goodwill come to different conclusions.  I just think it's something we ought to let each individual wrestle with and decide according to their own conscience.  I don't hold it against people.  I don't count numbers, I don't strong arm people, I don't like being strong armed.  I will make my views known in the appropriate place.

CASSIDY:

We'll know soon enough.  Thanks for your time this morning.

TREASURER:

Great to be with you, Barrie, thanks.