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 John Stanley

Radio 2UE
Sydney

Wednesday, 23 January 2008

SUBJECTS: Reserve Bank, Interest Rates, Inflation, Skills Shortages, Infrastructure Bottlenecks

TREASURER:

Good afternoon, John.

STANLEY:

Your first big challenge. Do you think this makes it inevitable that interest rates will rise?

TREASURER:

Well, John that is entirely a matter for the Reserve Bank. I mean, I hope interest rates don't rise. But the Reserve Bank will take its decision independently and it will base it on a number of factors. One of those factors is, of course, the level of inflation. And what the figures today show particularly is that underlying inflation is above the Reserve Bank's target band. And that will be something that they will take into consideration. And that is why we have said from day one, that we have got to deal with the inflation problem that we have inherited. And that is why the Prime Minister, for example, reiterated his five-point plan to tackle inflation in Perth on Monday. This is urgent. We haven't got a minute to lose. It is a big challenge but we are up to it.

STANLEY:

If interest rates do go up, and then based on what the Reserve Bank has said it would seem to be inevitable, what can you do after that to prevent them going up again or have them come down?

TREASURER:

Well, the most important thing that we can do is tackle the inflation challenge. The Reserve Bank will take its decisions independently. And that is the way these things happen. What we can do is give them a hand by tackling the inflation challenge by the Government itself showing restraint. That is why the Prime Minister has talked about a target of savings. That is why we have put forward $10 billion worth of savings during the last campaign, and why we are looking for more now. The Federal Government can lead the way.

STANLEY:

Just explain to people who might be looking at the possibility of higher home mortgages. Why is it that a rise in interest rates is good for them in terms of inflation?

TREASURER:

Well, I don't think a rise in interest rates is good for them at all. But a consequence of elevated inflation is when the Reserve Bank takes its decisions it will be looking at these figures today and other material before it. The most important thing we can do is to put in place a range of policies to put downward pressure on inflation because that will ease the pressures on the Reserve Bank when it takes its decision next week.

STANLEY:

But just so they understand it. The idea is that they have less money to spend and so that should have an effect of less demand for some of the goods and services and, therefore, prices will at least level out. Is that true?

TREASURER:

Well, inflation is the product of demand exceeding supply. And there are two critical areas where that is happening; in the skills crisis in our workforce and in infrastructure bottlenecks. That's why we've put forward a comprehensive program for the long term to deal with those two areas of public policy. To put downward pressure on inflation and downward pressure on interest rates and to do that you have got to expand the supply side of the economy. That's something the previous government wasn't attentive to. And that's the problem.

STANLEY:

Well, in the past we have had Peter Costello say he didn't think, for instance, that there was a case for an interest rate rise. You're saying on this occasion that there is or there isn't?

TREASURER:

No, I am saying it's a matter entirely for the Reserve Bank. In fact, Peter Costello said in the middle of last year that he had inflation right where he wanted it, when in fact the figures show that is was rising quite rapidly at an underlying rate. The problem was the Federal Government let these pressures grow, and they are backing the Reserve Bank into a corner when it takes its decision. What we can do at the Government level is to put in place a range of policies over time to put downward pressure on inflation. That's what the Federal Government can do.

STANLEY:

And with that big fall in interest rates though, overnight ¾ per cent in the United States, does that have ramifications? Our interest rates seem to be getting right out of whack with theirs.

TREASURER:

Well, they are getting out of whack because our inflation is much higher than inflation in that country. That's why we have got to work on this inflation problem. We have to acknowledge the size of the problem, something the previous government wouldn't do. And we have to put in place the plans to deal with it, something the previous government wouldn't do. All of these things are taken into account by the Reserve Bank, along with what's going on internationally.

STANLEY:

Okay, so you'd be putting your money on people (inaudible) on the bank rate? It would be a surprise, wouldn't it, if the Reserve Bank didn't raise it rates?

TREASURER:

I am not making a comment either way. I don't speculate on what the Reserve Bank decisions will be. What I can do is everything within my power to take pressure off inflation. That's something the Reserve Bank does take into account.

STANLEY:

Okay, so the next meeting of the Reserve Bank will determine what happens with interest rates. In terms of your Budget preparation, you've been getting, what, billions of dollars of bids? We read this week from various interest groups, it happens every year, who say more money needs to be spent because they have been neglected under the Howard Government. How many of them are you going to satisfy?

TREASURER:

Well, we are not going to be able to satisfy all of those. I mean, we've made it very clear, given the inflationary outlook, the Federal Government has to take the lead in showing restraint. And the Prime Minister has made it very clear we are going to do just that. So, we won't shy away from the tough measures that we have got to take to attack, if you like, this inflationary problem that we have inherited.

STANLEY:

Does that disappoint you as a new Labor Treasurer who would have hoped to be able to do something for some of these poorest groups in our society? Some of the homeless people, for instance, Kevin Rudd was meeting during the election campaign, are they going to get any extra assistance?

TREASURER:

Well, the most important thing that we have got to do is look after the long-term economic interests of the country. That will guide our decision-making processes. We will put together a Budget which does that. And hopefully, we will be able to put some initiatives in that Budget which helps some of those who have been neglected in recent years. But unfortunately, because of the inflation outlook we are not going to be able to satisfy everybody, nor should we try to satisfy everybody.

STANLEY:

Wouldn't you, six months ago, have been coming on after this interview and saying, that sounded like a heartless Tory talking?

TREASURER:

Not at all. Six months ago, we were drawing attention to the fact that the Federal Government was ignoring inflationary pressures in the economy by its failure to invest in skills and education more generally, and by its failure to work with the States in solving infrastructure bottlenecks. We have been highlighting the size of this problem for a long period of time. The previous government didn't understand the size of it, and therefore didn't deal with it. So, it falls to us to take the long-term decisions for the good of the country so we can have a healthy economy and so we can also direct the benefits of that economy to those who are most in need.

STANLEY:

Because everyone who's listened to what you have said about this acknowledges what you are talking about are medium to longer-term solutions to these problems.

TREASURER:

That is right.

STANLEY:

At what point do they kick in? At what point can we say, well it's now Wayne Swan's responsibility what's happening with interest rates and inflation?

TREASURER:

Well, we accept responsibility for solving the problems that we were elected to solve. It's true that we have inherited an elevated level of inflation that had been growing for over two years from the previous government. We have put our hand up and said we will govern in the long-term economic interest of this country. That's what we'll do. And from day one we have been working on this problem. We do accept responsibility.

STANLEY:

Well, is it six months, twelve months from now that we will say, okay they should have been able to do something and therefore, the results really all fall on your head?

TREASURER:

Well, John, these inflationary pressures took a long time to develop. They have been a slow burn. They have been growing particularly in the last couple of years and, frankly, it's going to take a long time to deal with. But we have started from day one.

STANLEY:

As Peter Costello talked about Beazley's black hole for years, we'll be hearing you talk about Peter Costello for a long time, I assume.

TREASURER:

Well, I think these inflation figures today give a fuller view of Peter Costello's report card. And it is not a flattering one.

STANLEY:

Okay. All right, we'll leave it on that. Thank you very much.

TREASURER:

Thank you.