FRAN KELLY:
Treasurer, welcome back to Breakfast.
JOSH FRYDENBERG:
Good morning. Nice to be with you, Fran.
FRAN KELLY:
Now, we all know because you told us that you spoke to the bank chiefs before yesterday's RBA decision on rates. You told them to pass on any interest rate cut in full. Two of them have flat out ignored you; Westpac and the ANZ. Is Jim Chalmers right? The banks have nothing to fear from Government because you've been too soft on them in the past?
JOSH FRYDENBERG:
Well, it's very disappointing that the ANZ have only passed on part of the rate cut; 18 basis points as opposed to the 25 basis point cut that the RBA announced. Westpac have passed on 20 basis points. But in doing so, I think they've let down their customers, but they've also ignored the expectation and the advice of the Reserve Bank Governor himself who has departed from usual practice in a speech last night and asked the banks to pass on this rate cut in full, which underscores that he knows that the funding costs of the banks have significantly come down and there is no reason why they shouldn't pass on this rate cut in full. Now, we welcome what the National Australia Bank and the Commonwealth Bank has done, but I think the customers of both the ANZ and Westpac can rightly feel let down by their bank today.
FRAN KELLY:
Okay, but what are you going to do about it? Because the Reserve Bank Governor, Philip Lowe, also made it clear last night there's likely to be another rate cut in coming months and he made that pretty clear. How are you going to make the banks do what you and the Reserve Bank Governor think needs to happen for the economy? One of listeners has said is will the Government use intervention powers with the banks as they are threatening to do with the energy companies if they don't cut their prices?
JOSH FRYDENBERG:
Look, we can't force the banks to pass on the full rate cut and their customers, though, can vote with their feet. Ultimately, people need to shop around and get the best possible deal.
FRAN KELLY:
That is much easier said than done, though. I've just been through that process. You know, it's difficult. It's time consuming. It's confusing. It's really not easy.
JOSH FRYDENBERG:
And at the end of the day, these are businesses that are listed on the Australian Stock Exchange who have shareholders and who have customers. But customers are discerning. Customers look for the best possible deal and if you're somebody with a $400,000 mortgage and you're a customer of the NAB or the CBA, you could see a $60 a month reduction in your interest payments, about $720 a year which is not insignificant. Now, the reason why the Reserve Bank has moved as explained by the Governor yesterday is that there is a belief that unemployment can come down further from the 5.2 per cent it is today, without raising concerns about inflation. So, the fundamentals of the Australian economy are sound, employment growth has been strong with more than 320,000 jobs being created over the last year and Australia has maintained its AAA credit rating, one of only 10 countries in the world to have a AAA credit rating from the three leading agencies, and we are in our 28th consecutive year of economic growth. But we do, Fran, face significant economic headwinds both internationally with trade tensions and domestically with a softening housing market and the impact of the flood and drought.
FRAN KELLY:
I'll come to the state of the economy in a moment. But just on this though, the Government is not planning any kind of intervention as you are threatening to do with the energy companies or you have a Bill to do that?
JOSH FRYDENBERG:
Look, we're not and what I would say though to the banks is that here was an opportunity post the Royal Commission to do the right thing by your customers and in the case of the banks that didn't pass on their rate cut in full, their customers and the Government are deeply disappointed.
FRAN KELLY:
Alright, let's go to the economy. There's little doubt now, as I mentioned, given the soundings from the Reserve Bank Governor, the cash rate will be down to 1 per cent by the end of the year. Predictions from some in the market, it could be half that within a year. We're not just talking historic lows, we're talking crisis levels of interest rates, aren't we? How does that point to sound fundamentals?
JOSH FRYDENBERG:
Well, again I point you to the speech given by the Reserve Bank Governor, a very thoughtful speech, where he detailed the rationale for the movement. Now, historically, full employment has been thought of by economists by around 5 per cent. But now, they're reconsidering that position and looking at around 4.5 per cent or below as where full employment is. So, with inflation at about 1.3 per cent today, which is below the band of two to three per cent, they can use monetary policy in the same way as they did yesterday to increase employment across the economy without raising concerns about inflation. So, the fundamentals of the economy are sound, there hasn't been a deterioration…
FRAN KELLY:
Just on that. You say the fundamentals are sound. Inflation in the last quarter was zero. Wages are just off flat. House prices are down. Retail sales have fallen again. Productivity is lacklustre. Every chance the China US trade war could get worse; that is separate to our fundamentals. But, you know, that is not such a rosy picture there.
JOSH FRYDENBERG:
Well, and I can point to you…
FRAN KELLY:
But do you agree it's not such a rosy picture?
JOSH FRYDENBERG:
I think there are some challenges faced by the Australian economy. We'd all like to see wages be higher, but at 2.3 per cent they have been growing and that has been growing above inflation. But, the key to higher wages is not higher taxes, its lower taxes. It's the pro-growth investment strategies that we're putting in place, it's the initiatives we announced in the budget to boost the productive capacity of the economy with $100 billion spent on infrastructure, with 80,000 new apprentices and with tax relief which will put into the pockets of hard-working Australians earning up to $126,000 a year, up to $1,080.
FRAN KELLY:
Let's go to that because the Governor has made it clear that the Reserve Bank can't do all the heavy lifting. In fact, you know, they're not going to have any shots left in the locker after the next rate cut, perhaps, and he says the Government needs to do more to get unemployment lower. But just looking still at one of the key fundamentals, the latest GDP figures will be out today. The markets are tipping about a 0.5 per cent growth for the March Quarter which brings it to up 1.6 per cent over the year, well short of the RBA forecast of around 2.75 per cent for next year. Where is all of this extra growth going to come from because income tax cuts aren't just going to deliver it, are they?
JOSH FRYDENBERG:
You are right to point out that the RBA have maintained and they did so yesterday their central scenario which is economic growth at 2.75 per cent both in 2019-20…
FRAN KELLY:
But we're a long way from that now. So, what is going to change?
JOSH FRYDENBERG:
Well, that's the plan that has been laid out in the budget. That's the infrastructure…
FRAN KELLY:
Just the tax cuts. Well, the infrastructure spending doesn't come on-line, much of it, for some years yet. That's not going to do anything next year, is it?
JOSH FRYDENBERG:
Well, that's not right. We have turned the sod on major projects. We have got about half of that $100 billion going out the door over the period of the forward estimates and beyond…
FRAN KELLY:
But next year and next year's growth?
JOSH FRYDENBERG:
Next year's growth, again, it's the economic plan that we have put in place as outlined in the budget. It's also the new trade opportunities that we're creating with the free trade agreements with China, Japan, Korea, but also with the Trans-Pacific Partnership and Indonesia. This is opening Australian businesses to billions of customers in the booming middle classes in our regions. So, there is a plan. There is strong employment growth and there is also the backing of small business which is the engine room of the economy.
FRAN KELLY:
If it's so important to get the stimulus into the economy right now, why not split the tax package and get as much through Parliament in July as you can because you'd get those $1,000 cheques into people's pockets within months if you did that?
JOSH FRYDENBERG:
Well, we are delivering with our $158 billion tax relief package as outlined in the budget, Fran…
FRAN KELLY:
But you're not delivering anything unless you get it through the Parliament.
JOSH FRYDENBERG:
Both immediate reform, which has bi-partisan support in terms of the up to $1,080 into the pockets of income earners up to $126,000, but also long-term structural reform which is important for the Australian economy. Now, we went to the election, an election which we won, where this was a central plank of our policy agenda. Now, the Australian people have spoken. Now, the Labor Party seems to be against aspiration. They seem to be against tax relief for low and middle income earners because we haven't changed the highest rate of tax, Fran, what we've done is we're reducing from 32.5 cents in the dollar down to 30 cents in the dollar. The tax rate for those who earn between $45,000 a year and $200,000, that's the vast bulk of taxpayers…
FRAN KELLY:
And some of that will go through to the highest earners and the Australia Institute, I've been through this with you before…
JOSH FRYDENBERG:
You have…
FRAN KELLY:
Says $77 billion will go to the highest earners in our economy. That aside, I understand the argument about the mandate but if the economy needs a stimulus boost now and that is what you agree, with the Reserve Bank Governor it does, and you've got the means to give it by just splitting the tax package and getting those $1,000 cheques into people's pockets now with the support of the opposition, why don't you just do that?
JOSH FRYDENBERG:
Well, we've made it very clear this is tax policy, tax reform that we took to the Australian people, that we will be presenting to the Parliament as a package. It will be the first order of business when the Parliament gets back and it's important that the Labor Party support the Government on this. Now…
FRAN KELLY:
They're not going to so what are you going to do?
JOSH FRYDENBERG:
Well, let's wait and see because we got it through the Parliament again against the wishes of the Labor Party when it came to last year's tax relief package. So, we'll continue to talk to the crossbenchers, we'll continue to take this through the Parliament, provide the briefings that are necessary so that people understand that our tax system needs to be simpler and stronger and that's what our tax reform package does.
FRAN KELLY:
Treasurer, thank you very much for joining us.
JOSH FRYDENBERG:
Always good to be with you.