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

Interview with Philip Clark

Radio 2GB
Sydney

Wednesday, 23 January 2008

SUBJECTS: CPI, US economy, stock market

CLARK:

The Treasurer of the country, Mr Wayne Swan. Mr Swan, good afternoon to you.

TREASURER:

Good afternoon, Philip.

CLARK:

Are we headed for another interest rate rise, given today's CPI figure?

TREASURER:

Well, that's a matter for the Reserve Bank. It takes its independence very seriously and it won't necessarily be pressured. But what these figures really show is we are facing an elevated level of inflation. That's certainly something they will be looking at. I certainly hope we don't have an interest rate rise but the fact of the matter is that what we've got to do from the Government's point of view is to put all of the policy settings in place to put downward pressure on inflation. That's the lesson from these figures today.

CLARK:

We've seen overnight, of course, what can only be described, I suppose, as an emergency rate cut in the United States. Are they on the right track?

TREASURER:

Well, certainly, that's a decision taken there by the Fed in response to the US sub-prime mortgage crisis. But the dilemma here is that we have inflationary pressures here which are putting upward pressure on interest rates while the rest of the world is, in fact, moving the other way. That just makes it all the more urgent that the Government deal with inflationary pressures in the Australian economy to give the Reserve Bank the flexibility, in the long-term, to respond to these international movements.

CLARK:

There are plenty of people who were telling us yesterday of course in the wake of the sharemarket crash since the start of the year, particularly Monday, Tuesday this week, that that would make a decision by the Reserve Bank for it to raise rates very much less likely. Do you agree with them?

TREASURER:

Well, it's entirely a matter for the Reserve Bank. They'll take their decision. They won't be pressured by anybody out there. But what will influence them is the level of inflation in the Australian economy which has been building progressively for the last couple of years. And that's really why from day one, the Prime Minister and the Government have been saying we've got to deal with this in the short-term, the medium-term, and the long-term for the long-term economic interests of the country.

CLARK:

Are you concerned by what happened at the start of the beginning of the year in the sharemarket? This going to have ripple effects in the economy. You can't rip that much out of the system without it having some effect. People have obviously been forced into more debt as a result of all this. It's going to have effects for you, isn't it? I mean, it may have effects on growth and that's going to affect the Budget bottom line.

TREASURER:

Well, certainly, it may affect [growth] and we will take all of that into account as we go through the process of putting together our May Budget. And there's no doubt all of these factors are also taken into account by the Reserve Bank. But the most important thing we've got to do with the country and as a community is to get this inflation problem under control. It's been building for a long time, that's obvious from the figures today. It's going to take some time to deal with it but we haven't got a minute to spare. I think the figures today demonstrate the urgency of dealing with this inflation problem.

CLARK:

Is the US in recession?

TREASURER:

Well, not technically at the moment but…

CLARK:

I mean, I suppose I'm seeking your views on the advice that you're getting.

TREASURER:

Well, certainly the advice I'm receiving from the responsible authorities is that US growth is projected to slip and perhaps slip more than was previously thought. So, there's certainly going to be a knock-on effect from the slowing of US growth around the world, no doubt about that.

CLARK:

And that's going to affect us, isn't it? I mean, it's got to affect us. It's got to affect China, which is of course, an enormous exporter to the United States and demand drops in the United States, it's got to affect China, it's got to affect us.

TREASURER:

Well, one of the good things about our position in the world economy, particularly given the fact that we have abundant supplies of energy and the fact that we are close to Asia with those abundant supplies of energy, is that it means that we are perhaps one of the best countries in the world to have the economic settings that is able to withstand the full impact of a US slowdown. Growth in developing companies, and in both China and India, is certainly propelling our economy ahead. It will be impacted on by events in the US but it certainly does insulate us somewhat from those events.

CLARK:

I wonder whether, in the markets, pay overly that much attention to what is going on in the United States, given the fact that, economically at least, our future lies much more in this region than tied to the United States. I mean, it may have once been the case. It's no longer, is it?

TREASURER:

We'll, certainly, we are the significant beneficiaries of a once in a generation mining boom which is fuelled by growth in India and China, but also growth elsewhere in the developed world. That is one of the fortunate things about our economic situation at the moment and that is what means our fundamentals are very strong. The one problem we've got is this inflationary problem and if we can bring that under control and get it down, it will put downward pressure on interest rates but it also means that we can look forward, in the long-term, to a secure future.

CLARK:

The growth issue is an important one, though, isn't it? You've said you'd like to keep the surplus at one point, or you would like to get the surplus to be 1.5 per cent of GDP. You also said, of course, that you would like to make some cuts as part of that fight against inflation. I mean, that depends, to some degree, on reasonable growth figures as well. The stock market fallout is going to make that job harder?

TREASURER:

Well, certainly, it will complicate the process of putting the Budget together but we believe that we can meet that target of 1.5 per cent of GDP. We do believe that it is very important when it comes to restraint that the Federal Government puts up its hand and acts decisively. That's what we intend to do. But it is not just the Federal Government showing some restraint. What we need to do is to modernise and rearrange our spending priorities to deal with the skills crisis and to act particularly on infrastructure bottlenecks. Those are the two factors that have been putting upward pressure on inflation over the last couple of years and indeed, that is the program we put forward at the last election. We were very, very aware that we would be facing an elevated period of inflation for some time to come as a consequence of the previous Government's failure to deal with those two areas.

CLARK:

Treasurer, if you read the paper this morning, and indeed over the last few days, a nervous reader might conclude that the world is about to end. We are constantly getting predictions of economic gloom and doom ahead – US recession, etc. How do you see it? I mean, what do you say to people this afternoon who have been quite unnerved over the last couple of days about events, particularly on the stock market, in relation to our economic future here in Australia? Are we well placed? Is it going to be a rocky next 2 or 3 years?

TREASURER:

Look, we are certainly well placed but families, I think, can be confident that the prospects for ongoing growth in Asia and the region are still strong. They will be impacted upon by the fallout from what is occurring in the US and in Europe, but we are well placed, given those events, to ride it out.

CLARK:

We don't have the same problems that America does, do we?

TREASURER:

No, we most certainly don't. We don't have directly the sub-prime problem but we do face the knock-on effects like the increases in the cost of borrowing, for example. The problem we have is, superimposed over that, is an elevated level of inflation. So, whilst interest rates around the world are going down, our level of inflation is putting upward pressure on rates. That is why it is so urgent we deal with this inflationary problem that we've inherited.

CLARK:

Good to speak with you, Mr Swan.

TREASURER:

Good to talk with you.