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

3 February 2008

Interview with Helen Dalley

Sky Business Channel

Sunday, 3 February 2008

SUBJECTS: Inflation, US Sub-Prime Crisis, Budget, Interest Rates

DALLEY:

Treasurer Wayne Swan takes over the reins of the Australian economy as it faces one of the most challenging periods in the past decade. His predecessor, Peter Costello, has warned the Rudd Government it risks derailing the economy if the settings he put in place are changed. I asked the Treasurer if Mr Costello is right.

TREASURER:

Well, former Treasurer Costello has a selective assessment of the economy. The economy is strong but there's an enormous inflation challenge out there, an inflation problem left to us by Peter Costello. We've had the highest underlying inflation in 16 years and this Government is determined to deal with it and we've begun work from day one.

You see to really deal with the problem, you have to recognise the size of it to chart the way in which you deal with it into the future and that's what the Government's been doing from day one.

DALLEY:

So are you saying the former Government, and the former Treasurer in particular, dropped the ball on inflation.

TREASURER:

There's no doubt that the former Treasurer, the former Government, let the inflation genie out of the bottle. There were many warnings from the Reserve Bank to the former government about the skills crisis, about infrastructure bottlenecks putting upward pressure on inflation and therefore upward pressure on interest rates. They were the warnings of the Reserve Bank and we've had an elevated level of inflation now for two years. It's been on the march for two years, but in the middle of last year former Treasurer Costello said he had it right where he wanted it. Well, it wasn't where the country needs it, we're going to deal with it, we're determined to do that which is why the Prime Minister announced his five-point plan some weeks ago.

DALLEY:

But right through most of last year, even when the sub-prime crisis hit in mid-year, even when there was a credit crunch some time after July, the electorate was told that everything's going along swimmingly, we had record company profits, we had very low unemployment, very good growth in employment and also resources boom. Now, what's gone wrong?

TREASURER:

Well, we have been the fortunate beneficiaries of a mining boom. That's fantastic for Australia. And that mining boom, hopefully, will sustain us well into the future but the previous government ignored warnings, not only from the Reserve Bank about the inflation problem, but from the Labor Opposition who campaigned all year on a program of putting downward pressure on inflation and therefore downward pressure on interest rates, which is why we've put so much emphasis in our program on fiscal restraint, on dealing with the skills crisis and about doing something on infrastructure bottlenecks.

DALLEY:

Okay, we now have a lot of volatility in the share market, we have a lot of turmoil really in world financial, in the global financial system. How concerned are you about Australia's place in that turmoil?

TREASURER:

Well, we're not immune from events overseas and as we've seen they can unfold quickly and in an unpredictable way. What we say is that that strengthens the case for us to modernise our economy, to deal with our inflation problem and to put in place the policies which will drive wealth-creation well into the future. Because the only way we can deal with international volatility and adverse international events is to put our own house in order at home. And what we have to do first and foremost is deal with that inflation problem.

DALLEY:

Okay, well the US is obviously facing a period of, as our RBA Governor Glen Stevens said, below average performance, but for some people they are going into a full blown recession. Now, how adversely affected will Australia be by that?

TREASURER:

Well, all the advice that I've received from the authorities, and also talking to prominent Australian companies, is that what will carry Australia through this is the strength of the developing world, and most particular, the strength of Asia. So there is a view out there that a downturn in the US will not necessarily have the traditional impact that it may have once had on developing economies, particularly the Asian economies.

DALLEY:

So do you think China will, kind of, save our bacon?

TREASURER:

Well, it won't just be China. That's the advice I'm receiving but we are in a situation that is volatile. The most important thing we can do is to assess our strengths and to assess our weaknesses, to deal with the weaknesses so we strengthen our economy to cope with adverse international impacts when, and if, they occur.

DALLEY:

Can you put some sort of figure, some sort of impact on what that adverse impact is going to be?

TREASURER:

Well, we've seen, for example, the growth estimates of the IMF in recent days. They are still optimistic that world growth will be around trend or a bit below. If that is the case, that's very good news for Australia. You'll find other people out there who are somewhat more pessimistic but the official advice that I'm receiving from responsible authorities is that Australia will be affected but not necessarily as dramatically as some people are implying.

DALLEY:

Are you convinced that Australia won't be dragged down by those sorts of problems?

TREASURER:

Well, all the advice that I receive from our regulatory authorities is that Australia does not have a significant exposure in the way in which there are exposures in the United States and in Europe. But, what we'll have to do is to monitor the situation, our regulators are out there all of the time, I'm talking to them regularly and that advice remains the case.

But I think what's most important for us to do is to learn the lessons from what has occurred in the United States and in Europe and governments around the world are doing that. They're assessing the lessons from the sub-prime crisis and I certainly will be sitting down at the end of next week, talking to our regulators about the lessons, internationally, what we can learn from that and what implications it has for policy domestically.

DALLEY:

Okay, now the credit crunch globally though, may well have more impact on Australian companies, do you expect that more companies with heavier debt, those ones with heavier debt who therefore have increased costs in servicing that debt, could well experience losses or even go under?

TREASURER:

These are assessments that must be made in the market. They are not assessments that I can or should be making about any individual company.

DALLEY:

But people look to the Government, to the Treasurer, for some guidance about whether, are we out of the woods, is there still more turmoil to come, to affect Australian companies?

TREASURER:

What I can say is that we are in a very good position to handle the fall-out from the US sub-prime crisis but we are not immune from it and obviously there will be impacts on particular companies, particularly caused by increases in the cost of borrowing or the inability to access funds. That's why our local regulators have been so active behind the scenes working with companies who may be affected.

DALLEY:

Okay, now the US Federal Reserve has cut interest rates for the second time in ten days. Our Reserve Bank is independent, but do you think there are grounds for our Bank to raise interest rates next week?

TREASURER:

That's entirely a matter for the Reserve Bank. We just recently strengthened the independence of the Reserve, it takes its decisions independently. I, for one, hope there won't be an interest rate rise, but it will make its decision independently and when it makes its assessment it makes its assessment based on, not only on the inflation rate, but its expectations about the future course of inflation, and as I've said to you before, this is the reason why we, from day one, have said that we will take on the inflation challenge. We have to have a war on inflation, we have to get downward pressure on inflation so we get downward pressure on interest rates. That's the most constructive thing the Rudd Labor Government can do to protect Australian working families.

DALLEY:

Okay, well if you're saying you're very prepared to have a war on inflation, then surely you'd support it if the Reserve Bank decides to put up interest rates next week?

TREASURER:

No, I don't support or oppose Reserve Bank decisions because they are independent. They conduct monetary policy. What I'm responsible for is fiscal policy and I need to put in place, and the government needs to put in place, a range of settings which put downward pressure on inflation and therefore downward pressure on interest rates.

DALLEY:

All right, now the banks, the big four, make something like $18 billion in profit, surely you could urge them to say, don't put your mortgage rates up, you've got all that room to move in your profit margin?

TREASURER:

I made it very clear that I look very dimly upon excessive rate rises and I said that some of the banks, that moved in January, were putting in place rises which were excessive and could not be justified.

DALLEY:

So are they greedy?

TREASURER:

That's entirely a matter for them, their shareholders and their customers and customers who are dissatisfied with their bank should vote with their feet, which is why the government is committed to looking at a package to ensure that portability is easier for people who wish to shift their account.

DALLEY:

But do you expect there will be a lot more Australians who will be hurting with another rate rise next week which will flow on into mortgages?

TREASURER:

Well, there were six rate rises in the last three years. A lot of Australians are hurting and the reason those six rate rises took place, under the former government, was that inflation got out of control. That's why we've identified…

DALLEY:

It's been below three per cent until just this last few months?

TREASURER:

That's the headline rate. The underlying rate of inflation has been on the march for the last two years and it is the underlying rate of inflation that the Reserve Bank uses to make its judgment about future movements in interest rates. And the underlying rate of inflation for the December quarter - October, November and December - was well above the Reserve Bank's target range. That was what was so disturbing about that legacy left to us by Peter Costello and the former government.

DALLEY:

How are you actually going to get the inflation rate back down under three per cent if it has been on the march, as you say, for two years?

TREASURER:

It took a long time to get where it is today and it's going to take a long time to deal with, which is why we began work on day one, almost immediately.

DALLEY:

But you've said the genie is out of the bottle. Is it impossible to put it back in?

TREASURER:

Well, we have to and we must have measures which will put it back in the bottle in the long term which is why the Prime Minister announced his five- point plan. It's why we said that the government must provide the lead when it comes to restraint. That's why we've said we must have a GDP target of 1.5 per cent at least. That is, we are going to make savings over and above the savings we took to the people at the last election. The Federal Government must show restraint. The Federal Government must deal with the infrastructure bottlenecks. The Federal Government must deal with the skills crisis. We've had announcements in those areas in recent weeks and also, and most importantly, we've got a role to play in encouraging people to save more. That's very important in the current environment.

And finally, we need a range of initiatives which encourage workplace participation. They're all medium term, they're all long term. But there is no alternative if we're going to deal with this inflation problem.

DALLEY:

With such a dramatic skills shortage, as you're saying you want to focus on, you are focusing on, won't that lead to a potential wages blow-out?

TREASURER:

There's no doubt that in some areas of the economy, because of skills shortages, there are pressures on wages. That's why it's very important we have an industrial relations system where wage rises are related to productivity at the individual level or the workplace level. It's also very important, therefore, that we also have training opportunities available for people in those areas where there are shortages. All of these things are part of the long term solution.

DALLEY:

Just how much pain is there going to be inflicted in the May Budget?

TREASURER:

Well, there's no doubt that we have to have considerable restraint in the Federal Budget. We've already put forward $10 billion worth of savings and we have to find more and we've said we need a percentage of GDP around 1.5 per cent which means additional savings in this Budget. So there will be pain.

DALLEY:

Any areas you can lead us to expect where things might happen?

TREASURER:

Helen, that's for Budget night and that's the hard work that we've begun doing in Canberra and will continue to do over the next few months.

DALLEY:

You're saying that people, you know, we need to save more, will there, is that an indication there might be something in the Budget to encourage people to put even more into superannuation?

TREASURER:

I can't be in the business of ruling in or out, any particular initiative for this Budget. It will be a responsible Budget, it will be directed at the long term. It will be directed at doing something about the inflation problem and making the long term investments that we need to expand our productive capacity to put downward pressure on inflation. And over and above that, you'll just have to wait.

DALLEY:

You've taken over the job that one of the, the key jobs in the country really, running the economy, have the hands on the levers, all that sort of thing, at a time when Australia is really undergoing quite a deal of turmoil for the first time in really a decade. Are you nervous about that responsibility?

TREASURER:

No, I'm not. We've only been there eight weeks and there's been plenty of action but rain, hail or shine, we are determined to put in place an agenda which protects our long term economic interests and we won't be fazed by the events that are surrounding us. We have very good advisers, we have very good regulators and we have a country which has a very bright future. What we're determined to do is to put in place the long term settings which will guarantee prosperity well into the future.

DALLEY:

So what can you say to people who really, over the past few weeks, have been very nervous, they've been watching stock markets go up and down, many have been watching their superannuation going south, what do you say to them about what volatility you might still see, might be left for this year?

TREASURER:

What I say to them is take the longer term view. This country has a very bright future, given our location in Asia, given world demand for energy, given the skills and innovative capacities of our people, we are respected around the world, there is a bright future, there will be a few bumps up and down and along the road, but we will get there and we will ride it out.

DALLEY:

When you had your chat with Hank Paulson on the phone to the United States, did he ask for Australia's help in supporting any of their banks? A lot of other sovereign funds have come in.

TREASURER:

No, he did not. We had a broad conversation about the economic environment, both in the United States and around the globe and we also discussed issues to do with tackling dangerous climate change. It was very much an introductory conversation, I had met officials of the US Government when I was in Bali at the end of last year and that was a follow up with Hank Paulson. I've been talking to leaders around the world, I've been talking to Alistair Darling, the Chancellor, about the same issues and indeed, I've been talking to many business leaders in recent weeks just trying to tap into their assessments of where things are going. It's a very important part of the job, staying in touch nationally, but also staying in touch internationally.

DALLEY:

Just for those people who may have to wear another rate rise in their mortgage as early as next week, can you explain why it is so important that you are determined to try and get inflation back under three per cent? Why is that the magic figure? Why is it important to keep it so low?

TREASURER:

It is important to keep inflation down because the Reserve Bank's inflation targeting regime demands that it be below or around the target band.

DALLEY:

But what's wrong with four per cent, five per cent?

TREASURER:

What's wrong with it is that it punishes working families. High inflation leads to higher interest rates, higher inflation eats away at savings, higher inflation produces higher living costs. It's bad for working families and it's bad for business and you can't have sustained economic growth and prosperity in a high inflationary environment, and it's vital that we deal with the inflation problem short term, medium term and long term. We're determined to do it and we're putting the policies in place to do it.

DALLEY:

Treasurer Swan, thank you.

TREASURER:

Thank you.