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

25 January 2012

Press conference

Brisbane

SUBJECTS: Consumer Price Index; World Economic Outlook; Australian economy; interest rates; Queensland election

TREASURER:

We've got a few things to cover today. I want to talk about today's inflation data. I also want to talk about the IMF report which was out overnight and of course I'm happy to answer any of your questions on other topics.

Really the welcome news today is that CPI inflation has moderated and underlying inflation is contained. Today's figures show CPI inflation was flat in the December quarter, moderating from 0.6 per cent in the September quarter. Through the year to December CPI inflation ticked down to 3.1 per cent. The decline in headline inflation reflects mainly fruit and vegetable prices coming back down after the floods of last year, particularly bananas. And of course as crops return to normal levels after the floods and cyclones of last summer we're seeing much more normal pricing when it comes to fruit and vegetables, but particularly bananas. Fruit prices fell by 13.4 per cent in the quarter, detracting 0.2 percentage points from the quarterly outcome. Now it's particularly encouraging to see fruit and vegetable prices returning to more normal levels because bananas are now back down to between $2.00 and $3.00 a kilo. That's fallen something like 46 per cent in the quarter. On top of this there were seasonal declines in health prices which fell 1.2 per cent in the quarter.

Now today's figures also show that underlying inflation remains well contained and well contained within the Reserve Bank's target band at 2.6 per cent through the year to December. Now it's encouraging to see that underlying inflation is contained but we also understand that there are cost of living increases which are still impacting on household budgets and, in particular, in the figures today we've seen increases in the price of domestic holidays and also housing which is particularly driven by the strength in rents. But despite this, I think today's figures are a very timely reminder of our strong economic fundamentals that set our economy aside from other economies in the developed world at a tough time in the global economy.

I think we all know that 2011 was a disappointing year for the global economy and, of course, 2012 is shaping to be even more challenging than 2011. The IMF report highlights these challenges in their updated forecasts which were released overnight. It shows that the sovereign debt crisis in Europe has intensified and that global growth prospects have weakened and that there is a risk to the global outlook from events which are occurring in Europe. So as a result, the IMF has downgraded its global forecasts and now expects Europe to fall into recession. Now these IMF downgrades come as no surprise to the Australian Government or indeed, I believe, to the Australian people. In fact they echo our own mid-year economic review of last November which did forecast a recession in Europe and our domestic forecasts were based on the type of outcomes we've seen in the IMF data overnight.

Now this European crisis is being felt right around the world. It's certainly adding to difficulties in the United States where President Obama is trying to kick-start the United States economy and to build a more sustained and shared recovery. It's important in every economy, from the United States to Australia, that economic growth translates into stronger and fairer communities that reward everyone, not just the wealthy few. Now the President will, no doubt, be talking about some of these challenges in his address in a few hours time. The point I want to make is that these global headwinds are affecting countries right around the world and we've seen the impact of these global headwinds most particularly on the Australian economy. In particular, the events in the global economy, and particularly Europe now, have wiped something like $140 billion from government revenues but then of course the global turbulence is clearly adding to existing stresses within our economy particularly in those parts of the economy which aren't in the fast lane. In our patchwork economy, the tourism industry for example, as well as the auto industry feels the full impact of these stresses in the global economy but we need to keep all of these stresses and strains in perspective.

We must have confidence in the strong fundamentals of our domestic economy which puts us in a completely different league from the rest of the developed world. We've got solid growth, we've got very strong public finances, we've got low unemployment, we've got a huge pipeline in investment, principally in resources, but spreading out from there as we could see in the National Accounts of last year. And on top of that we've got contained inflation which has created room for two interest rate cuts last year.

Now these interest rate cuts mean a great deal to Australian households an families. If you've got a $300,000 mortgage, you're now paying $3,000 a year less in mortgage repayments than under the previous government. Now, at a time when family budgets are tight $3000 a year of interest rate relief is important and this is one of the reasons why the Government is absolutely determined to maintain fiscal discipline and to bring our budget back to surplus in 2012-13.

Now, I think we've seen over the last little while a lot of people, principally the Liberal Party, talking down our national economic prospects and trash mouthing the fundamentals of our economy. I just want to go back into what those fundamentals say about the future of the Australian economy. To begin with we've got solid growth. We've got an economy which is still expected to grow at trend this year. That's a very substantial outcome for Australia when you look at what's happening in other developed economies and around the world. We've got a low unemployment rate of 5.2 per cent. Many other developed economies are experiencing rates of 8, 9 and 10 per cent plus more. We've got an unprecedented investment pipeline of $455 billion in resources alone and that is a bedrock of strength for our economy in these volatile economic times. We've got very low debt: net debt less than a tenth of the level across major advanced economies and now, as we can see very clearly in the figures today, moderating inflation with underlying inflation sitting squarely in the RBA's target band which does create room for further interest rate cuts into the future.

So I think we just need a bit of perspective here. These figures are part of a reality check that we should all think about when we look at the Australian economy. The key pillars of our strength, along with the record of dealing with global instability in the last couple of years, mean that Australia is uniquely placed to deal with the stresses and strains in the global economy that are reported by the IMF today.

From the Government's point of view, we'll keep up our strong economic management. It's kept our economy strong, it's kept unemployment low. And we do that because we understand that good, sound economic management is looking after the living standards of low and middle-income earners in our community who are doing it toughest. Over to you.

JOURNALIST:

Treasurer, what do you say to those named earlier who would attempt to compare Australia to the situations of Greece or other struggling European economies?

TREASURER:

Well, that's just deeply irresponsible language which is damaging to the country. Talking our economy down in these circumstances is simply not justified by the fundamentals. If you look at any report on the Australian economy from the IMF and their reports last year, from the World Bank, from the OECD, they all say that the fundamentals of the Australian economy are the strongest of just about any other developed economy in the world.

If I just could quote from the IMF spokesman this morning who was talking about Australia in the context of the growth forecasts that they published overnight. This is what the IMF spokesman said on ABC Radio this morning: “There is no advanced economy, or maybe there are one or two, that is as well placed as Australia to combat a deeper slowdown”. And that is so true. So for the Liberal Party in particular to ignore these basic facts, to go out and publicly run down our economy and try to erode confidence in our economy is deeply irresponsible and what they can justifiably be branded as doing is trying to wreck economic outcomes for their own political gain. I don't believe the Australian people want that sort of behaviour from the Liberal and National Party. They understand that there is a great deal of global economic volatility out there. It does have implications for our economy but the last thing we need in that environment is for the Liberal Party to go out and trash our economy and trash our economic fundamentals and to talk our economy down.

JOURNALIST:

Treasurer, the Westpac Melbourne Institute report on leading indicators, which came out exceptionally weak. It seems we're getting a lot of these figures now which show that there's a fair bit of cooling out there. How would you respond to that?

TREASURER:

Well, I had a look at those figures from Westpac as well. I think what they really show is that we're on track to achieve trend growth over the next year. Now there was a lot of analysis there, but I think the bottom line that you'll see there is that we're still on track to achieve growth around trend.

It is true that there has been a softening in employment growth in Australia but keep this in mind, in the past four years Australia has created something like 700,000 + jobs. No other country in the world has had a record of job creation like that during this most difficult period. So the fact is, despite all of these headwinds, we are sitting here today in Australia with an unemployment rate of 5.2 per cent. In the United States it's 8 per cent plus. Across Europe the average is 10 [per cent] and in parts of Europe it is 15 [per cent] and in Spain youth unemployment is 50 per cent.

There's been a lot of inaccurate commentary about the labour force figures of last week. The fact is you cannot compare an unemployment rate of 5.2 per cent to what occurred in Australia in the early 1990s when unemployment was 11 per cent. We are currently in our 20th year of economic growth. We sit here with an unemployment rate of 5.2 per cent – that is something that should be valued by all. It doesn't make the Government complacent however about the threats to growth in our economy. It is why we must continue to put in place a range of policies which on the one hand stimulate growth and jobs and, on the other hand, put in place the appropriate fiscal discipline which is required for an economy which is growing at trend and in particular to do that in a way which sends a message of confidence to the world that Australia takes fiscal discipline seriously. That's why on the one hand we are so committed to bringing our budget back to surplus when the economy is growing to trend and, on the other, still so focused on supporting growth and jobs in our economy.

JOURNALIST:

Treasurer, you stress the flow on effect of the European crisis here. Some of that obviously is being felt in the banking sector.

TREASURER:

Sure.

JOURNALIST:

You can see that with the price that is being demanded for their covered bond issuance. Given that their margins do appear to be shrinking, will you cut them a little slack should the Reserve Bank move and they don't follow all the way through?

TREASURER:

First of all, could I say the reason there is covered bond issuance is because of a reform of this Government to ensure that our banks were less dependent upon overseas financing and were able to attract financing either domestically, or internationally, in an easier way given we unlike many other banking systems didn't have the vehicle of covered bonds; a fundamental reform put in place by this Government understanding the nature of the financial crisis globally and knowing that covered bonds were a very important instrument to ensure the funding of our banks and the stability of our financial institutions.

Secondly, our banks are among the most profitable in the world. Their returns on equity are exceptional. We need a strong, healthy banking system and we need one which is profitable, but we also need one which is competitive and that's why the Government has put in place a range of reforms including the abolition of mortgage exit fees, the one page fact sheet and a whole series of other reforms, the introduction of covered bonds and so on. So that if people are unhappy with the behaviour of their banks on what they may do on any particular issue, they've got the capacity to walk down the road and get a better deal. And I'm pleased to say as a result of a whole range of reforms that we've put in place people now have that ability in Australia.

So if a bank in the future is behaving in a way which upsets their customers it's now much easier for someone to simply pack their bag, go down the road, and get a better deal. In particular, pack their bag, go down the road and get a better deal from say, for example, the mutual sector, the credit unions and so on, who are now a real viable competitive alternative in this environment and many people are going there.

JOURNALIST:

Given the legitimately shrinking margins of the banks, will you cut them a little bit of slack?

TREASURER:

I'm sorry they are at record levels of profitability. They have a return on equity which is virtually unequalled by any other bank in the world.

JOURNALIST:

Shrinking interest margins.

TREASURER:

Well, the net interest margins are still at about the same level as they were prior to the global financial crisis. What their argument is is a different one. Their argument is that their future funding needs are going to be priced in at a higher price from the funding that they are rolling over. Okay, that's their argument. It's not my case to go on and continue to make their argument. But counterbalanced against that, I would make this point, they are now raising more funding locally through domestic deposits. They are less dependent upon offshore funding, but yes it is the case that funding is not going to be as cheap as we go forward as it maybe has been in the past prior to the global financial crisis, but in an environment where their net interest margins are back to where they were prior to the global financial crisis they're going to really work hard to prove their case. There would be a lot of people out there in Australia who will judge them harshly if they take actions that they deem to be unreasonable in the current environment when they are so profitable. But at the end of the day the Government doesn't regulate these rates. What I can do is speak up about it, outline the facts, and make the system more competitive so that if people are unhappy with their banks they can walk down the road and get a better deal.

JOURNALIST:

Finally Treasurer, what do you expect this brainstorming session before Parliament to achieve?

TREASURER:

I saw that story today which I thought was pretty humorous because I've been in Parliament a few years now and it is generally the norm that at the beginning of every year there is some form of meeting over and above a formal caucus meeting where these sorts of things happen. And I've participated in a number of them over the years but the notion that this is some sort of special event which has got some sort of particular role in our current political circumstances is rubbish. It's an opportunity for caucus people to interact with the Cabinet. It's an appropriate time to do it at the beginning of the year and it's something that's entirely normal. It's not out of the ordinary for these sorts of discussions to take place. The Labor Party is in the ideas business. The Liberal Party is in the business of saying no. Because we're in the ideas business, we get together and we debate these issues openly in areas like our National Conference as we did last December and then we have a fair dinkum discussion in our Caucus as we will do in a couple of weeks' time. Thanks.

JOURNALIST:

Any comments on the Premier's decision to call the election?

TREASURER:

Well, Anna Bligh is a great Queensland leader. She has led this state through some of our darkest hours. Her performance during the floods last year was exceptional. It demonstrated that she has the tenacity and the character to lead, but over and above that, when it particularly comes to economic policy, she's got the guts to take on the big difficult questions and to put the policies forward for the good of the state, not just in the short term, but in the long term.