The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

23 January 2008

Press Conference

Parliament House
Canberra

Wednesday, 23 January 2008

SUBJECTS: CPI, US Sub-Prime Crisis, Interest Rates, Budget Surplus, Tax Cuts, Jobs, Financial Sector, Superannuation, Infrastructure, Cost of Living Pressure

TREASURER:

Today I want to talk about the two big economic challenges the nation faces – the inflation problem and the fallout from the sub-prime issues in the United States. I think it's pretty clear there are conflicting currents in the Australian economy, and these conflicting currents steel the resolve of the Government to modernise the economy, to lift the productive capacity of the economy and also to put downward pressure on inflation.

Now, firstly, I want to say a few things about movements in international markets.

I think it's pretty fair to say that we're not immune, as we've seen in recent days, from turbulence in the United States. But all the advice I'm receiving is that we are well placed to withstand that international turbulence.

Today I've been briefed by the Treasury. I've been briefed by the Reserve Bank. And in recent weeks, I've held discussions with senior people in the financial sector, and also I've talked to people internationally.

I might say I welcome efforts from the US authorities to bolster growth in the US economy. And it's pleasing to see there has been a beneficial impact, initially, from the actions of the Fed in the United States.

I think it's pretty fair to say that Australians can be confident that the prospects for growth in Asia and developing regions will help us withstand the fallout from the events in the United States and elsewhere.

Meantime, the Government is getting on with the job of making good, long-term policy. And of course, that brings us now to the inflation challenge.

Now, I think today's CPI figures show why the Rudd Government has made tackling the inflation challenge a significant priority. And we began work on that priority from day one, and the Prime Minister outlined his five-point plan only last Monday.

Today's CPI figures, today's headline CPI figures show that inflation increased by 0.9 per cent in the December 2007 quarter to 3 per cent higher through the year. This is up from 1.9 per cent for the year through to September. Perhaps more concerning is that the average of the RBA's measures of underlying inflation accelerated rapidly, rising by 1.1 per cent to be 3.6 per cent higher through the year to December.

The RBA's weighted median measure of underlying inflation increased by 1.1 per cent in the quarter to be 3.8 per cent higher through the year. The trimmed mean measure of underlying inflation increased by 1 per cent in the December quarter to be 3.4 per cent higher through the year to December 2007.

Now, this is a very important point. The average of the RBA's underlying inflation measures are at a level not seen for 16 years. That is, the average of their underlying measures are at a level not seen for 16 years. This is the first time in six years that both measures of underlying inflation have exceeded the target band.

Now, it's pretty clear when you look at underlying inflation that these pressures have taken a long time to build. And of course, we have a chart which demonstrates that. You can see that these pressures have been building from the beginning of 2006. That is two years underlying inflation has been building. Now, this data is proof that elevated inflation is the Liberal Party's parting gift to the Australian people and Australian families.

Now, you can't deal with the problem and you can't fix the problem until you understand where it came from, how big it is, and how long it has been around. And there's no point in trying to sugar-coat this story.

As I said before, underlying inflation has been on the march since the beginning of 2006 and it's pretty clear that the primary cause of underlying inflation is basically the twin investment deficits, the twin investment deficits of skills and infrastructure, which is why the Prime Minister announced his five-point plan last Monday to deal particularly with those twin investment deficits.

It's very important that we get to work in the long-term to ease these inflationary pressures.

Over to you.

JOURNALIST:

Who were you briefed by at the Reserve Bank and what did they tell you?

TREASURER:

Well, I can't go through the detail of my discussions with the Governor of the Reserve Bank but I spoke at length to the Governor of the Reserve Bank today, I've been speaking to the Reserve Bank constantly throughout the break, as you would be aware. I've had a long conversation again today with the Secretary of the Treasury, as I've been talking to him constantly through the Christmas period. I've also been talking to leading figures in the financial sector about their views about what's happening out there, particularly in the financial markets. A couple of nights ago I had a long conversation with the UK Chancellor about events in Europe. And as you are aware, I had a conversation a couple of weeks ago with the US Treasury Secretary. These events have been unfolding. They are unpredictable, as we've seen in recent times, and it's very important that as a Government we keep a grip on what's happening domestically and internationally. And most importantly, our regulators, which are first-class, the Reserve Bank of Australia and APRA, have been following these developments very closely in the Australian context. And of course, as you know, the Reserve Bank Governor has been overseas and has been talking to his international counterparts as well. It's very important that we have accurate, up-to-date information in this environment.

JOURNALIST:

If interest rates go up, are you afraid that there'd be a danger of over-correcting the economy and then the international factors hitting harder than expected and…?

TREASURER:

Well, as you know I can't comment on future possibilities of interest rate rises. These are matters entirely for the independent Reserve Bank, and as you know, we strengthened their independence late last year. Look, of course nobody out there wants interest rate rises but that's why the Government got to work from day one on dealing with the inflation problem. We understand that there has been a substantial lift in underlying inflation over a long period of time. And you'll all recall the debate during the recent election campaign, and over the previous two years, while these underlying pressures were growing. We were constantly out there saying that the previous Government had been ignoring warnings from the Reserve Bank about capacity constraints in the economy. We've understood for a long time that these pressures have been building and we've been arguing for some urgency to deal with them and that's why we began work straightaway. But at the end of the day, this is a decision that will be taken by the independent Reserve Bank. And what government can do, and we are dedicated to doing with a sense of urgency and commitment, is dealing with the inflationary pressures. Because if we deal with the inflationary pressures over time, we give much more flexibility to our economy and much more flexibility to the Reserve Bank in the responses it may or may not make.

JOURNALIST:

Treasurer, does this harden your determination, as you prepare your first Budget, to cut spending? Doesn't this mean we're headed for, really, an austerity Budget outside of your delivery of your election promises?

TREASURER:

Well, let me make it very clear that our fiscal target has not changed. It's very important to deal with this inflation problem. We've got to give the Reserve Bank maximum flexibility to do its job. And what we can do is our job. And our job is to deal with these inflationary pressures. And step one is for the Federal Government itself to show some restraint, restraint that hasn't been evident in recent years. And also then to deal with the capacity constraints, which is why, this week, we dealt with Infrastructure Australia. It's why we've been out there talking about our additional training places. All of these things are part of the long-term solution.

JOURNALIST:

You'll have to put the razor through the Public Service, won't you? You're going to have to eliminate a lot of jobs, is that right?

TREASURER:

Well, we've announced our target. We've got the razor gang at work and we will announce the outcome of that on Budget night.

JOURNALIST:

Mr Swan, wouldn't it be much, in terms of tackling inflation, wouldn't the easier and more direct way be deferring the tax cuts due to come into place?

TREASURER:

Not at all. As you're aware, Steve, the tax cuts are very important in lifting workforce participation and rewarding the hard work of people who have worked hard to make the economy strong. They have a vital role…

JOURNALIST:

(inaudible)

TREASURER:

No, they have a vital role to play, a vital role to play in lifting workforce participation, which is critical when it comes to wage inflation in our economy. We understand that. That's why we're committed to those tax cuts. But we understand that the Federal Government in total must display some restraint, indeed as all sections of the Australian community have to display some restraint in these circumstances. Everybody's got a role to play and we're going to begin by playing our role upfront, which is why we've announced the savings we did last year, cognisant of the fact that we had a problem.

You might recall the Government went on a spending spree during the campaign. We did not match them. And we didn't match them because we understood the nature of the inflationary problem. And we now will build on that savings effort that we put in last year with additional savings.

JOURNALIST:

Mr Rudd, you said that everybody has a role to play. What role should the household sector play?

TREASURER:

Well, the household sector is out there working hard. That's why they are receiving their tax cuts. Everybody has a role to play, and I think I made this point a while ago in relation to some of our financial institutions. We don't need excessive price rises anywhere in our economy.

JOURNALIST:

What is your new target for savings, (inaudible) savings?

TREASURER:

We indicated that in the Prime Minister's speech last Monday. We're setting a target of at least 1.5 per cent of GDP for the surplus.

JOURNALIST:

And what will that translate into in terms of spending cuts (inaudible)?

TREASURER:

Well, that will be revealed on Budget night. That's what we're working on. That's the purpose of a Budget process. The Government is hard at work on the Budget process. We've been hard at work on this process right through Christmas.

JOURNALIST:

(inaudible)

TREASURER:

I'm not going to put a number on it. We've indicated that we would set a target of 1.5 per cent of GDP for our surplus at least.

JOURNALIST:

(inaudible) … until May, given the urgency of the situation, given the fact that inflation's so high up and the two twin deficits that you might (inaudible), investment of skills, will have a natural lag in terms of how long …

TREASURER:

Of course. Inflationary pressures took a long time to build and they will take some time to deal with. There's no doubt about that.

JOURNALIST:

Can we wait until May for your solution?

TREASURER:

We are working on this problem all of the time. But putting together a Budget in a methodical way is a very important part of solving it in the long-term. There's no shortcuts there.

JOURNALIST:

Mr Swan, you mentioned that you'd spoken to finance industry executives. Does that include any CEO's of the major banks, and if so, did you take them to task for their recent increases in (inaudible)?

TREASURER:

It includes a number of executives from banks I've spoken to at length and the views I expressed publicly at the time, I've expressed privately to them.

JOURNALIST:

The (inaudible) rates, Treasurer, what does that mean for currency (inaudible). How do you think that will translate?

TREASURER:

Well, I'm not going to speculate on movements of the stockmarket. I mean, the market's up today. Their movements will come and go and obviously the dollar will move around as well. But I'm not going to speculate on future movements in either stockmarkets or the dollar.

JOURNALIST:

(inaudible) … US facing a recession with (inaudible) emergency rate cuts overnight, yet as you said, inflationary pressures are building, bringing forward interest rate rises, (inaudible).

TREASURER:

That's right. That's our dilemma. You see, Scott, that is the dilemma and that's why we have to deal with the inflation problem that we inherited. That is precisely the reason why we need a government that acts urgently, and have a government that is acting urgently, on the inflation problem to give us the flexibility to cope with what occurs internationally. The fact that the previous Government didn't deal with inflationary pressures has restricted our flexibility in responding to what is occurring internationally and that is precisely why we do need to deal with the inflationary problems.

JOURNALIST:

Treasurer, what gives you the confidence that Australia's economy won't be as badly affected by what's happening in the US, that you focussed especially on Australia's ties with the Asia-Pacific and China. What is giving you that confidence that China will help protect Australia?

TREASURER:

Because a lot of the investment in this country in critical infrastructure, for example, has long lead times. There is an expectation amongst leading companies in the resource sector particularly that growth in Asia will continue to be strong and the developing world and they will continue with those investments. These are the things, the high terms of trade, the fact that we are such an energy-rich country that give us a decided advantage in insulating ourselves from the fallout of this crisis.

But we are not immune, we are absolutely not immune as we've seen in recent days, and that's why we must deal with this inflation problem that we inherited. It's been building for over two years, you can see that in the underlying figures there.

The previous Treasurer, for example, said, I think in the middle of last year, that inflation was right where he wanted it. Well, the graph gives lie to that statement.

We, unlike the previous Government, we understand the problem, we've defined the problem, we know we need to fix it and we know we need to put in place a range of solutions, short-term, medium-term and long-term.

JOURNALIST:

Treasurer, on infrastructure, your Government says it wants to get superannuation funds to invest in infrastructure. Superannuation funds say that they need a greater return and that that would require the application of more user-pays principles. Can consumers expect that your new infrastructure revolution is going to lead to a lot more charges levied upon them to use roads and other pieces of infrastructure?

TREASURER:

The superannuation industry will make its investments based on its commercial assessments of projects. It doesn't necessarily follow that that's the case at all. What they've been crying out for is a national body which will rank projects, which will provide benchmarks and which will provide a degree of certainty.

JOURNALIST:

But those things don't make an investment more attractive.

TREASURER:

I think there are many projects in this country which are very attractive.

JOURNALIST:

Mr Swan, in your statistics here you talk about automotive, fuel and housing prices going up quite high in the last quarter. In the election you talked a lot about petrol and housing. What's your message to voters now? Is it going to be harder than you thought to try and control these prices? You've talked a lot about (inaudible) taking pressure off working families…

TREASURER:

Too right. Well, there's two things happening here, Clinton. What you've got in the headline rate is the impact of fuel and housing but what you see in the underlying rate is the steady build-up of pressures across a whole range of other goods. And that's why we have these underlying measures – to strip out the volatility of some of the price rises that are around. And what the underlying measures go to is not what is just happening with petrol or housing, for that matter, but a general lift in prices across the economy which the Reserve Bank, on many occasions, has identified as coming from specifically the skills crisis, lack of investment in education more generally, and infrastructure but I'll come to the second part of your question.

What we are going to do about it is make sure that people don't pay a cent more when they're filling up their tank because there are not competitive arrangements in the industry, which is why we've said we'll appoint a Petrol Commissioner to the ACCC. That's what we said during the campaign, and the same goes for groceries. We're going to have a look at the structure of the industry, the whole supply chain, to make sure that the market is competitive and that consumers are getting value for money.

JOURNALIST:

How long are we expected to see these inflationary pressures that you say took a long time to build up? How long are consumers going to have to deal with this in your forecasts?

TREASURER:

Well, the Reserve Bank and the Treasury are forecasting elevated inflation, both headline and underlying, at or around the RBA target band for the next 18 months. That's the legacy of where we've been.

JOURNALIST:

And when do you start taking responsibility for that…?

TREASURER:

We've taken responsibility from day one.

JOURNALIST:

So, when do you stop blaming the legacy of the past Government?

TREASURER:

It's not my job to come here and lay the blame at the feet of the previous Government; it's obvious from the figures where it has come from. Our challenge is to define the problem, to begin work on the problem immediately and to put in place plans short-term, medium-term and long-term and that's what we've done.

JOURNALIST:

Mr Swan, on your savings plan, are all the savings that you've envisaged going to come from the spending side of the Budget or are you also going to (inaudible)?

TREASURER:

I'm not going to pre-empt the Budget, Tim. You've been around a long time…

JOURNALIST:

Treasurer, how concerned are you Australians are facing negative superannuation (inaudible) given the market's volatility, most people this year won't be seeing growth on their super balances?

TREASURER:

Well, investment is for the long-term and, you know, there are swings and roundabouts. So, it's very important that we deal with all of the issues I've been talking about today; to put the economy in the best space it can be to grow and to ensure continued profitability of companies that superannuation funds are investing in.

JOURNALIST:

We've seen the (inaudible) of Liberal Party legacy of this inflation. Does the Reserve Bank have to take some responsibility for what's gone on on inflation in this country over the last two years?

TREASURER:

Well, the Reserve Bank issued something like 20 separate warnings to the previous Government over a number of years and they were completely ignored and vilified. Well, today you see part of the outcome. But just remember this; there were six interest rate rises in the last three years. During the period that the Reserve Bank was warning the Government that they had to take action on the key capacity constraints in the economy, and they ignored the Reserve Bank, they ignored the Reserve Bank and the previous Government made the Reserve Bank's job even more difficult. What we're talking about, with a new era of fiscal discipline and attention to long-term investment in skills and infrastructure, is taking that advice seriously and putting it into policy in the long-term.

JOURNALIST:

Treasurer, you said a moment ago that (inaudible) 1.5 per cent target, I think you stressed it three times, was at least 1.5 per cent. Given most economists are saying that you should be able to do it, really the figures that you've targeted with your eyes closed, would you…

TREASURER:

Well, funny about that…

JOURNALIST:

Would you like to deliver something? How committed would you be to delivering an outcome above that?

TREASURER:

Well, two things, first of all we said at least 1.5 per cent and we also said, subject to what happens internationally because the situation can change, it's volatile as we've seen in recent days. But secondly, the previous Government only set a target of 1.1 per cent in its last Budget and 1.2 per cent in MYEFO. We're saying at least 1.5 per cent because we understand the importance of putting a figure down, planning and working towards it. If there are unexpected results on the upside or the downside, we'll know those as we get closer to the Budget. We've still got four months to go in the financial year.

JOURNALIST:

Is any section of Government immune to this cost-cutting, this additional cost-cutting? Defence for instance, will that be quarantined?

TREASURER:

I'm not going through a line-by-line item, discussion of…

JOURNALIST:

I'm not asking you to do that. Is Defence quarantined?

TREASURER:

Well, I'll leave those…

JOURNALIST:

The previous Government did quarantine Defence.

TREASURER:

I will leave those matters for Lindsay Tanner to deal with on a different occasion which won't be too distant from now.

JOURNALIST:

Should the States tighten their Budget policy too in the round of State budgets after the Federal Budget?

TREASURER:

Well, the States have got a number of difficult problems to cope with and one is to get in place that productive infrastructure that we need in the long-term to lift the productive capacity of the economy. We've made it very clear that we want to work with the States through the COAG process to put in place a new federal compact which makes sure we get real progress in terms of infrastructure, in skills and regulation and that's what we're working with the States on now. We began work on that over Christmas when I met with the State Treasurers a couple of weeks ago.

JOURNALIST:

So, by that answer, are you saying that their deficits are justified by the fact that (inaudible)?

TREASURER:

What I'm saying is that they are going to become a part and parcel of a process to lift the productive capacity of the economy and we will work with them to do so because a large part of this underlying problem we face springs from the fact that the previous Government wouldn't work cooperatively with the States to achieve the outcomes that we need.

JOURNALIST:

The sharemarket carnage that we've seen, the appalling sharemarket carnage, might have actually helped the battle against inflation in Australia.

TREASURER:

Well, I don't see how…

JOURNALIST:

… Well, I can point to a number of mechanisms; you'd probably know some of them yourself. One would be margin calls, of course, people would have less money to spend in the shops and another would be an indication that the worldwide economy was slowing down might have taken inflationary pressure off?

TREASURER:

The inflationary problem is defined by that graph in the underlying measures. And that's what the Government has to deal with and is dealing with.

JOURNALIST:

(inaudible) … ask for any assistance in the privatisation of the (inaudible) privatisation of Northern Rock?

TREASURER:

No.

JOURNALIST:

Mr Swan, you've been in the job a couple of months, it's a bit of a baptism of fire, is this what you expected and is the Rudd Government up to handling this?

TREASURER:

Well, we're certainly embracing the challenges ahead of us with energy and commitment. You know, rain, hail or shine, we're going to tackle these problems and that's why we began on day one.

JOURNALIST:

Treasurer, what would you say to workers and indeed their union representatives who might look at that and say, we're going to need higher wage increases to compensate for the higher cost of living?

TREASURER:

What I would say to everybody – employers, employees or unions – is that there will need to be some restraint to get us through this inflationary problem. That's what I say, I said it a couple of weeks ago and I say it again today. And that's why the Federal Government has to lead the way and that's why the Prime Minister outlined that target on Monday.

JOURNALIST:

Mr Swan, Peter Costello, in the relatively few public comments that he's been making post-election, has said that he bequeathed you the best economy in the world. Do these statistics today put a lie to that?

TREASURER:

Well, I think these figures today fill in Peter Costello's report card substantially and on this question, it's not a great record.

JOURNALIST:

Looking ahead, Mr Swan, I mean, we're going to see a (inaudible) this year than we've had the last two years economically. (inaudible)

TREASURER:

Well, there's no doubt that we will take all these factors into account as we move through to the Budget in May. And if there are dramatic changes it, of course, will affect some of the decisions we take. But that target of 1.5 per cent is very important in terms of tackling the inflation problem left to us by the previous Government. Thank you.