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 April 2008

Press Conference at Parliament House

Canberra

23 April 2008

SUBJECTS: CPI; Inflation; Budget; Interest Rates; Petrol Prices; Foreign Investment Rules/Competition; Tax Reform; Peter Costello's Memoirs; Chartwell Enterprises

TREASURER:

I think these inflation figures are a stark reminder of the price pressures hitting Australian families. They're quite sobering and I think they demonstrate the pain that people are feeling around the kitchen table, because they're simply unacceptably high and they underscore the need for a responsible Budget that gets spending under control and that tackles inflation and interest rate challenges.

Let's just go through the figures. The CPI rose by 1.3 per cent in the March quarter, taking the annual rate to 4.2 per cent. That's up from 3 per cent in December 2007. Headline inflation is at the highest rate since December 1995, excluding the impact of the GST. The average of the RBA measures of underlying inflation rose further in the March quarter – up 1.2 per cent – to be 4.2 per cent higher over the year. That's underlying inflation. The components there are the RBA's trimmed mean – the RBA's trimmed mean measure of inflation was 1.2 per cent in the quarter and 4.1 per cent through the year. The RBA's weighted median measure of inflation was 1.3 per cent for the quarter, 4.4 per cent through the year.

Now, both of these underlying measures are at 16-year highs, both of the underlying measures. The major drivers of headline inflation in the March quarter were rising housing, food and fuel costs. And of course, on top of these price pressures, we have in the system rising terms of trade and ongoing high global energy and food prices.

Now, these pressures have taken some time to build and, of course, they will take some time to deal with, and that's why the forthcoming Budget is so important to put downward pressure on inflation by tackling spending. This will involve difficult decisions but they are decisions which must be made to put downward pressure on inflation and therefore downward pressure on interest rates.

High inflation produces high interest rates. That's why the Budget is so important – to deal with high inflation, to tackle that inflation to put downward pressure on interest rates.

JOURNALIST:

Treasurer, will you have to make even deeper cuts to spending than you had initially planned as a result of these figures?

TREASURER:

This will be a responsible Budget. The most important thing that we can do is put downward pressure on inflation. Spending has simply been far too high, in some cases reckless under the previous government. It hit new highs over a four year period, the highest also in 16 years. You've seen those figures out there. We need a responsible Budget to bring spending under control and to invest in skills and education and infrastructure. That's very important because, as you know, these pressures have been building for some time. They have been caused particularly by capacity constraints in the economy. There were numerous Reserve Bank warnings about those capacity constraints relating to skills and infrastructure; we have to address those over time. But also spending has been out of control. So, our task is to take the difficult decisions to bring spending under control through a responsible Budget because Australians out there who have faced interest rate rises in recent times deserve a government devoted to putting downward pressure on inflation.

Now, many of you were in Western Sydney, out in Penrith the other night and there was that gentleman who stood up and talked about the impact of rate rises in recent years. There have been eight rate rises in the last three years. And you know what he said? He said the impact on his budget – and both of them were working in the family – was such that he couldn't afford to send his children to competitive sport. That was the impact. And he was having trouble finding enough money to buy the nappies.

This is the price pressure that impacts on working families as a result of elevated inflation – high inflation produces higher interest rates, and not dealing with higher inflation produces higher interest rates.

This Government absolutely understands the central task of this Budget is to tackle inflation – tackle inflation for those hard-pressed working families being hit by successive interest rate rises and rises in the cost of living.

JOURNALIST:

(inaudible) ...will they cop it again in the Budget?

TREASURER:

What we have said is our Budget will be directed towards working families to implement all of our election commitments.

JOURNALIST:

But will they bear the brunt of the spending cuts in the Budget?

TREASURER:

What we will get in the Budget is a responsible Budget directed towards assisting working families out there. That's why we have been so adamant that working families deserve the tax cuts. That's why we have been so adamant that we will deliver on our childcare initiatives, because those initiatives do ease the financial pressure on working families who are being hit for six by a four per cent-plus inflation rate. We've simply got to deal with that.

JOURNALIST:

Do you think this proves the Reserve Bank got it right in raising interest rates?

TREASURER:

Well, as you know, Tim, I don't comment on Reserve Bank decisions. I fully support the independence of the Reserve Bank and its charter of targeting inflation and keeping it within the band.

JOURNALIST:

What would you say to people when they talk about that two to three per cent comfort zone that the Reserve Bank sets up? Where are we at now? It's obviously way above that.

TREASURER:

There's a lot of people out there hurting, Clinton. People are hurting. Why are they hurting? Because inflation is high. They're hurting because inflation is high. The Reserve Bank has an inflation targeting regime. The previous government didn't play its role in terms of fiscal policy; it left all the work to the Reserve Bank. Our task in this Budget is to take pressure off inflation.

JOURNALIST:

Treasurer, just to repeat David Speers' question, does this figure mean you're going to have to look harder than you're currently looking at cuts in the Budget?

TREASURER:

We will be taking difficult decisions in this Budget when it comes to spending. And we will do everything that we humanly can to protect the hardworking families of Australia who are being hurt by rising inflation and rising interest rates.

JOURNALIST:

Treasurer, the Opposition and some observers are saying that you would, without lifting a finger, you could have a budget surplus in the high teens. Is that true, and how high do you need to go to lift some of this pressure?

TREASURER:

Well, isn't it funny? The Opposition never used to budget for a surplus in the high teens, and they now claim that's easy.

There are also a couple of other things happening in the economy that we should talk about, because there are countervailing forces here. First of all, we've got the impact and fallout from the international financial market crisis. That's producing slower world growth on the one hand, and also impacting on stock markets here. It's also producing higher borrowing costs for banks domestically, further adding to interest rate pressures that are faced by Australian families.

Also, along with that internationally, is a rising level of global inflation, particularly in the developing world. And we have been the beneficiaries in recent years of importing deflation from the developing world, and that is about to end.

So, on the one hand, a series of pressures on the inflation front, a slowing of growth, pressures on the borrowing front for our banks, all caused by the international financial market turmoil. On the other, here the impact upon financial markets will impact upon revenue, for example, that the Government will receive in the Budget.

Secondly, simultaneously with that, we've got a rising level of the terms of trade. The terms of trade are rising yet again. So, that's on the plus side, in one sense, but with elevated domestic inflation and a rising terms of trade, it does further complicate the task of macro-economic management.

JOURNALIST:

Do you accept any responsibility for talking up inflation...

TREASURER:

Not in the least. Not in the least. I mean, Malcolm Turnbull doesn't even recognise there's an inflation problem. He wouldn't have a clue what it's like to sit around a

kitchen table with that family from Penrith the other night and try and make the bills add up, try and make the pay packet actually fit around the cost of living pressures. He would not have a clue. So, for Malcolm Turnbull to claim there's not an inflation problem, it just shows how out of touch he is, and I think really, disqualifies him from aspiring to any top job in Australian politics if he doesn't have an understanding of the most basic facts of life. But secondly, for him to deny repeatedly that underlying inflation is a problem, shows that he's simply unqualified when it comes to economics as well.

JOURNALIST:

Do you think the underlying inflation figure suggests that inflation is broadening, rather than remaining in the (inaudible) ...as housing and fuel?

TREASURER:

Of course it does. That's what the underlying measure does. It tries to strip out some of the volatile items that come and go. And the disturbing thing is, the sobering news is – and we talked about this three months ago when underlying inflation first hit a 16-year high, and it's now hit another 16-year high – that indicates inflation is broadly-based. That's the problem. If it were just a matter of a couple of items and they are hurting people – petrol is hurting people, we know that, and rents are up, we know that – but it is underneath all that more broadly-based. And that's why we, as a nation, have to tackle this challenge. Because you can't have strong jobs growth, you can't have strong wealth creation if inflation is not at a level which allows sustainable growth in the long-term and therefore wealth creation.

JOURNALIST:

Some time ago you set a target, or the Government set a target, of at least 1.5 per cent of GDP for the surplus…

TREASURER:

At least, yes.

JOURNALIST:

Do you think now, in light of the circumstances, that that target should be readjusted?

TREASURER:

No, we won't be changing that target.

JOURNALIST:

You've said you're going to look after working families. When you do talk about reigning in spending, does that mean you're going to hit the top end of town? Who is that now?

TREASURER:

Well, David, we'll just have to leave that until Budget night.

JOURNALIST:

But you won't give any guarantee that everybody will be looked after?

TREASURER:

I've said that the Budget is going to involve difficult decisions. But our priority is to look after those working families who are under financial pressure, and after all, have worked very hard to make this economy strong.

JOURNALIST:

Treasurer, petrol prices in Melbourne, I think, have hit $1.55.9 at the moment, obviously there is, a lot of that is international factors, but what does the current level of fuel prices around Australia say about the success or otherwise of the Government's early measures at trying to contain petrol prices?

TREASURER:

Well, we're still trying to get our scheme up and running, and we're working very hard at that. We've had the ACCC on the job to make sure that some of the uncompetitive conduct which can cost people a few cents a litre doesn't occur. And I think a lot of people out there, judging by the whinging of the fuel companies, would say that they've been doing that. But we've never claimed that we could change the international price of fuel. But what we absolutely commit ourselves to is the most competitive petrol market that we can get, so that when people are out there and they're on the way to work, they don't get ripped off because they don't have the knowledge of where the best price is.

JOURNALIST:

Why isn't that scheme starting till December? It's a long way off for motorists. We also have the issue of groceries, and we're hearing today that foreign companies will have five years to set up sites here in Australia. It's all very long-term stuff.

TREASURER:

Now, hold on. That is a complete misrepresentation of what we've done in the Aldi case. What we're trying to do is to get Aldi to set up more quickly and they haven't been able to get the land because their major competitors gobble it all up. This is a measure about making sure another competitor gets into the grocery market in more locations, more quickly to deliver better prices. I'll tell you what, how many people here shop at Aldi?

JOURNALIST:

(inaudible)

TREASURER:

I can tell you this, out there in my electorate, a lot more do. You want to know why? Because they get a better price.

JOURNALIST:

If you're serious about root and branch change to the tax system, how can you exclude the GST even in the discussion of it?

TREASURER:

Because it was a solemn promise we made to the Australian people.

JOURNALIST:

But are you serious about change?

TREASURER:

A solemn promise we made and I reaffirm and the Prime Minister has re-affirmed.

JOURNALIST:

How can you exclude it from the discussion?

TREASURER:

Because I know some people think that tax reform just means whacking up the GST so most ordinary punters get it in the neck. Well, I don't share that view.

JOURNALIST:

Following on from Michelle's question, should we be surprised if the Budget surplus has a two in front of it?

TREASURER:

I'm not buying into that at all. What I will say is the problem is that we've got an inflation figure which has got a four in front of it, and that's what I'm dealing with today and that's what the Budget has to deal with. We will have a responsible Budget, a responsible Budget that tackles inflation, but also safeguards the country against the international events which are now impacting on our economy at a variety of levels that I spoke about before.

JOURNALIST:

(inaudible)

TREASURER:

Entirely a matter for ASIC who will be investigating. My heart goes out to those people that are affected by it, but I won't comment on the individual details until I receive a report.

JOURNALIST:

Treasurer, in today's CPI numbers there were big increases in areas like health and education over which the Government has some influence. I note there's a 13 per cent jump in pharmaceutical prices. Is the Government using its administrative power to try and reduce the level of price increases in health and education services?

TREASURER:

Well certainly, David, it is the case that always in the March figure there is a seasonable spike in those two areas. But you can be assured across every arm of policy we will, as we go through this term of Government, have that objective out there. Making those markets more competitive, making them more transparent, investing in parts of them to build up alternatives, are all a very important part of our program when it comes to education. The massive program of investment we've got going on out there has got to be of benefit in the long-term but there's no instantaneous solution to those problems. But in the pharmaceutical area, that's something I intend to have a very close look at as we go through this period of Government.

JOURNALIST:

When are we likely to see the Tax Inquiry set up?

TREASURER:

Well, we'll take our time to respond to the 2020 Summit and we'll make those announcements in good time.

JOURNALIST:

You've ruled out lifting the rate of the GST. What about the base of it? Would it be expanded to food? Can you rule that out as well?

TREASURER:

I think I just did.

JOURNALIST:

So, the base won't be expanded?

TREASURER:

We gave a solemn promise to the Australian people on the GST and we will not be deviating from it.

JOURNALIST: Treasurer, (inaudible) a question that's been asked twice, but I'm not sure you've addressed directly, will today's inflation number make the measures in the May Budget more painful or not?

TREASURER:

What I can say about the May Budget is that it will be responsible, that it will, as fairly as we humanly can, take the difficult decisions and it will be aimed at protecting those people out there on modest incomes, basically working families. And to further go on in terms of the other part of your question, I'd make this point: that this inflation number has been one that as, in some ways, unfortunately been anticipated because that's what the forecasting started to show. And the last time that I think we spoke about this, I said that the expectation of the forecasters was that we would be in this very difficult position, which unfortunately we are now. So, the Government has framed this Budget taking into account the fact that we've inherited an underlying level of inflation at the level of four per cent. That is very firmly in our mind when we're framing policy.

JOURNALIST:

Do you think, Treasurer, it is as bad as it's going to get on inflation?

TREASURER:

I don't speculate about inflation numbers or Reserve Bank decisions or any of those things. My hope would be that we'd see some moderation over time. Every arm of policy that we have will be directed towards achieving that goal. That's the whole point. Putting downward pressure on inflation, you get downward pressure on interest rates.

JOURNALIST:

Treasurer, one of those arms of policy includes the 11 cent a litre tax on milk which you could axe tomorrow and take 11 cents a litre off the price of families going to do their shopping at Aldi or Woolies. Why don't you do that?

TREASURER:

Because I'm not entering into any speculation about any decision we're taking in the context of a Budget, are or are not taking in the context of a Budget. Just in case you missed it.

JOURNALIST:

Will you be looking at Peter Costello's memoirs for any advice, Mr Swan?

TREASURER:

Well, you know the chapter I wanted to read? "How inflation hit a 16-year high and why I said it was a figure that we really wanted – that we had it right where we wanted it." That chapter, remember back in July when he said we had inflation right where we wanted it?

JOURNALIST:

Mr Swan, it's difficult to see, looking at the numbers, just where the signs of capacity constraint are (inaudible), you can see prices that are going up because of the drought, you can see prices going up because of the international energy crisis, you can see prices going because of administrative decisions in pharmaceuticals, health and education. Where in the CPI do you see the main influence of capacity constraint?

TREASURER:

I think they're broadly-based. I think it's been a long time since we've had a fundamental round of micro-economic reform. I think we talked last time I was in the Blue Room about zero productivity growth.

JOURNALIST:

Which particular goods and services do you think are rising because of constrained capacity?

TREASURER:

I think most of them. And as you know, skill shortages are a very big part of that and that is very, very broadly-based. You can't leave this building without talking to someone out there in a business, big, small, medium, who doesn't talk about skill shortages, or even labour shortages for that matter. So that's part and parcel of it all. But it's the general efficiency of the economy which desperately needs a new round of economic reform which we've been talking about. All those businesses, for example, that, you know, have their vans stuck in traffic jams for hours and hours, and clogged up cities, all these sorts of things, this is all just feeding up into the system.

JOURNALIST:

Just on the use of future funds and the way spending money, but not spending it, spending it in a non-inflationary way, do you support the use of future services to put pressure on inflation by putting it into things like university future funds?

TREASURER:

Well, I'm not buying into Budget decisions.

JOURNALIST:

Mr Swan, there's been, for the last couple of weeks, a feeling that things were slowing down. And looking at consumer sentiment going down, you went to Washington and saw the US. How do you explain to people, we're hearing a couple of weeks ago that things are on the slow down, maybe in a recession, and now we're hit with these sort of figures?

TREASURER:

Well, it's a very difficult international environment. World growth is slowing. You saw all the forecasts from the IMF, but unfortunately coinciding with that, there are other events that are coming out of the world financial crisis, including the higher cost of money. That's impacting here at the same time as you've got slowing growth. And the problem we've got is at precisely the time we didn't need to have a high level of elevated inflation, we've got it. And these other events are now coming over the top and adding to it. Last question.

JOURNALIST:

Treasurer, you said that you've ruled the GST out of any root and branch discussion of tax reforms. Is there any branch you'd like to cut off? Are there any other no-go areas?

TREASURER:

Look, I have been an advocate of significant reform of the tax system for a long time, and I've probably spoken about it at great length to many of you over the years. There's plenty of scope to have a look at bits and pieces of the system but I'm not going to respond today. The Prime Minister made it very clear, we'll respond in due course and we will. Thanks.

JOURNALIST:

Labor fought tooth and nail against the GST (inaudible), pro-reformist, better than your predecessors?

TREASURER:

Well, judge us by our record. We haven't been there that long. I mean, Brendan and his crew had 11 years. We've just been dealing with the legacy of the last couple of years which is the highest inflation, underlying, in 16 years.