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

6 February 2008

INTERVIEW WITH LEON DELANEY

Radio 2SM

Wednesday, 6 February 2008

SUBJECTS: Interest Rates, Inflation, Tax Cuts, Commonwealth Bank, Mitsubishi, Skills Crisis, 2020 Summit

DELANEY:

Treasurer, Wayne Swan, good morning.

TREASURER:

Good morning, Leon. How are you going?

DELANEY:

Very well, thanks. How are you?

TREASURER:

I'm pretty good.

DELANEY:

That's the way. The Reserve Bank of Australia put interest rates up yesterday, much to the disappointment of many people. Have they made the right decision to combat inflation?

TREASURER:

Well, that decision is going to hit a lot of families really hard, and of course it comes on top of something like six interest rate rises over the previous three years. But as you know, and we've discussed on many occasions, the Reserve Bank is independent and what the Reserve Bank responds to is the inflation that currently exists in the economy and unfortunately inflation in the months of October, November and December hit at 16-year high. And what the Federal Government intends to do is to tackle this problem with every lever we have available. We took ownership of this problem from day one and that's why the Prime Minister has announced his five-point plan to tackle inflation. But it took a long time to develop and it's going to take some time to deal with.

DELANEY:

What's driving that inflation? Where's it coming from?

TREASURER:

Well, the Reserve Bank again yesterday identified capacity constraints in the economy, particularly skills shortages, and part of that is also the infrastructure bottlenecks, all of that. We think it's also very important that the Federal Government shows some lead here because the Reserve Bank identifies a strong demand in the economy and one way to cut back on public demand is for the Federal Government to make savings. We put forward something like $10 billion worth of savings during the last election campaign and we intend to cut deeply again during this Budget process.

DELANEY:

Does that mean that people will be suffering some pain as a result of this Budget, perhaps expenditure they might have expected won't be delivered?

TREASURER:

We will meet our election commitments but we believe the previous government were, frankly, spending like drunken sailors so there is scope within the Budget to cut it back. We're going to take the tough decisions. We do need to front up and tackle this inflation challenge and I think everybody in the community needs to be honest about the size and the impact of this inflation challenge. I mean, we've got the Liberal Party at the moment pretending that inflation suddenly reappeared at 9.00 am the day after the election. Well, it didn't. We've inherited this problem but we are absolutely determined to deal with it and to tackle it in the long-term interests of working families.

DELANEY:

Given that you're looking for budgetary savings, is it irresponsible and inflationary to press on with the tax cuts?

TREASURER:

No, I don't believe it is irresponsible to press on with the tax cuts because they are also part of the solution. They encourage workforce participation, they put incentive into the system for people who work hard, they are a very important part of recognising that our workforce out there and working families have been working hard and we ought to provide the incentive for them to participate in the labour force and we do that through the tax cuts.

DELANEY:

Adjusting interest rates to combat inflation is a bit of a blunt instrument, isn't it? If we assume that inflation is driven by consumer expenditure it's the people who are contributing least to the problem who will suffer the most from the solution, isn't it?

TREASURER:

It certainly is a blunt instrument which is why it is all the more important that the Federal Government play its part in combating inflation. That's why it's important that everyone in politics understands the size of the challenge because if you don't understand the size of the challenge you can't deal with it. We do have a very significant challenge and that's why it's very important for the Federal Government to show restraint in its forthcoming Budget and to make the savings, the savings which will take the pressure off demand. But also to put in place the policy settings in the long term to deal with the skills crisis and to deal with the infrastructure bottlenecks.

DELANEY:

The pain is most significantly going to be felt amongst mortgage holders obviously. Now, already we see increasing mortgage defaults and repossessions, that's only going to increase. Who's to blame for that rise in mortgage defaults? Is it borrowers overextending themselves or lenders lending too exuberantly?

TREASURER:

The fundamental problem here has been the 10 interest rate rises and now the 11th which has really put a lot of people with mortgages under a lot of financial pressure. And why has that been happening? Well, it's been happening principally because inflation has been building over the last couple of the years. And the real culprit here has been the failure to deal with those inflationary pressures over the last couple of years. It is the inflation problem that is principally driving the interest rate rises.

DELANEY:

There are some who are saying that people who are bleating about losing their houses overextended themselves in the first place. Is that a fair and accurate accusation?

TREASURER:

No, I don't believe so. There are a lot of people out there that are under tremendous financial pressure as a result of interest rate rises over a substantial period of time. It makes it very difficult for them to make ends meet and there is a lot of pain out there, Leon, a lot of pain for people with mortgages.

DELANEY:

Well, that being the case, you must be exceptionally disappointed with the big banks? Already they've all moved to increase interest rates independently last month and now they've started to respond to the Reserve Bank's decision. Apparently, first cab off the rank is the Commonwealth not only matching the Reserve Bank's increase but exceeding it.

TREASURER:

Well, I think the Commonwealth Bank has got a lot of explaining to do and I've got a lot of sympathy for families who I think will be really furious today at the Commonwealth Bank for the timing of this announcement, taking the opportunity to further increase rates on the back of the Reserve Bank decision. I think people rightly will be furious with the Commonwealth Bank because families will take it very hard.

Now it's true, I think it is true, Leon, that lenders have faced increased borrowing costs due to the fall out from the sub-prime crisis but I think that banks need to be very conscious of the tremendous financial pressure that families are under.

So what I've said in the past, and I repeat it today, is that we want to have a competitive banking market out there and those institutions that seek to increase their margins at this time, I think will be judged very harshly by Australian families and by the government. And that's why I made the point a month or so ago that we wanted to put together a package that made the market much more competitive and gave people the capacity to switch their banks if they didn't think they were getting a fair go with their existing bank. And I'm working on that package and it will be delivered in the next little while.

DELANEY:

As far as I can see, the bank's profitability isn't particularly suffering, is it?

TREASURER:

No, the banks are very profitable and at this time for them to take the opportunity to further increase their rates on top of the 25 basis point rate rise imposed by the Reserve Bank yesterday is something that's really going to impact very harshly on families and I think a lot of people will take a very dim view of it.

DELANEY:

Is it purely a case of greed?

TREASURER:

Well, that's for the banks to explain. What I can do as the Treasurer of Australia is to make sure we make our banking market as competitive as we possibly can and I think people out there do need to have the capacity to vote with their feet, to switch their accounts and I'm working on a package to make sure they at least have that option.

DELANEY:

Without all of the costs involved in doing so at present?

TREASURER:

Yes, well that's right. I think what we've got to do is try and make it much more competitive so that people think that if they're not getting a fair go with their existing lender, they can move, and of course at the moment there are quite a few obstacles which inhibit that movement.

DELANEY:

In terms of the causes of inflation the Opposition is suggesting that the dismantling of Work Choices is only going to promote further inflation.

TREASURER:

There were many interest rate rises under Work Choices. I mean, the Opposition is just all over the place, all over the place.

The thing is this. The Liberals only have one strategy to combat inflation and that's to keep extreme AWAs which strip away wages and working conditions for hard working families. I mean, they are absolutely clueless when it comes to the fight against inflation.

Extraordinarily, you had Mr Turnbull the other day suggest that inflation was a fairy story. I don't know what planet Mr Turnbull lives on because around the kitchen tables, right around this country, families can tell you the story of the weekly struggle of trying to meet and pay their bills in an environment where inflation has been on the rise.

DELANEY:

If the removal of Work Choices results in better pay and conditions for workers isn't that in itself inflationary, because wages going up is part of the inflationary cycle, isn't it?

TREASURER:

We are going to put in place a fair system and balanced system where wage rises occur at the enterprise level and are matched by productivity gains and that is most certainly not inflationary.

What the previous Government was doing with their extreme AWAs was simply cutting and stripping away wages and working conditions for hard working families.

We're going to take that unfairness out of the system. We're going to move back to a system which is fair and balanced and where wage rises are matched by productivity gains.

DELANEY:

Shifting gears a little, how big a dent to the Australian economy is the closure of the Mitsubishi factory in Adelaide?

TREASURER:

Well, it's certainly devastating, isn't it, for those families in South Australia that are affected, which is why the Federal Government and the State Government have announced a package to first of all assist workers directly affected, but secondly to put in place a fund down there which can help promote new industry in South Australia and look for innovative ways for those workers to be employed in industries of the future. And of course this was one of the reasons why we put forward in the recent election campaign our green car fund.

We certainly do want to work with the manufacturing industry and the car industry in particular to put it in a position where it can meet many of the substantial challenges that are out there for that industry.

DELANEY:

Many people view the Australian manufacturing sector as being under threat because of cheaper manufacturing costs in Asia, because of reduced tariff protection, because of the so-called level economic playing field and globalisation. This seems to be more evidence to support the idea that Australian manufacturing is being undermined.

TREASURER:

Well, Australian manufacturing is doing it tough, there's no doubt about that at all, and we are very attentive to this. We don't want to have a country where we don't make many of those things that we've traditionally relied on in this country. But we've got to make that industry competitive which is why we're going to work with the car industry and why we've got to get to work on that productivity agenda that you and I have spoken about before. We've got to give ourselves an objective of becoming the most skilled, educated nation in the world. We've got to attend to our infrastructure bottlenecks with first-class infrastructure. All of those things need to be done to make us competitive. Some sections of manufacturing industry have done very well in recent years, despite problems like the high dollar. So it is mixed but we've got to work on it, and to work on it we need to really be attending to those issues which go to the heart of our productivity.

DELANEY:

Yes. When we lose manufacturing capacity we also lose the skills, don't we?

TREASURER:

Yes, we do, we do and we've got to work across a range of areas to put in place the basics, if you like, for a productive economy well into the future.

DELANEY:

Briefly, the Prime Minister's idea for a 2020 Summit, some people are suggesting we elect a government to make those decisions for us, you should know what you're doing.

TREASURER:

We do and we've got a very substantial agenda that we took to the Australian people at the last election and we began work implementing that on day one. And you will see in the forthcoming Budget us putting in place many of those promises that we took to the Australian people.

DELANEY:

So what's the point of the 2020 Summit then?

TREASURER:

Well, 2020 is the real import of the summit. It's a discussion about where we're heading in the very long-term and it will be a hallmark of this government that we will tap into the ideas and enthusiasm of the Australian people in new ways. We're not a closed shop when it comes to ideas, we don't think politicians have got a monopoly on ideas. We think there are a lot of good ideas out there and this is one means by which we can tap into those early in our government to take onboard constructive suggestions. We're not embarrassed about that, we think it's refreshing to have a summit like this where we get the ideas of the best and brightest from around the country, harness that energy and enthusiasm and put it to work.

DELANEY:

Wayne Swan, thank you very much for your time today.

TREASURER:

Good to talk to you.