TREASURER:
Well before I begin, I just want to make some comments about the international trade in goods and services. The international trade in goods and services, which came out today for March, indicate an improvement in Australia’s trading position. Exports grew at 2 per cent and imports were steady. And that was a better number than was actually expected and shows, as the Government has been saying, a strengthening position on the export front which is being led by stronger world growth. And that is consistent with the Government forecast, the current account deficit over the course of this year and next year, would be expected to decline as the world economy strengthens and Australia’s export market grows.
Now, obviously the announcement this morning by the Reserve Bank, that it was lifting official interest rates by 0.25 per cent, had a lot to do with international factors, as the Bank made clear in its statement. The strengthening world economy and inflation prospects, the tightening of monetary policy which has now been lifted in this cycle, 125 points in the United States and in Europe. And Australia has now lifted monetary policy by 125 points, 1.25 per cent in this cycle, so that our official interest rate is now at 6 per cent, the same as the United States, the United Kingdom and New Zealand. Obviously for mortgage holders that will mean an additional cost, around about $21 a month on the standard Australian mortgage. But even after that is factored in, the person on a standard mortgage is still paying something like $225 less a month than they were paying when the Government was elected in March of 1996. Even after today’s increase, which we would expect on a standard $100,000 mortgage to lead to an increase of $21 a month, a person would still be paying $225 less per month than they were when the Government was elected in March of 1996. The task of economic policy at the moment is to ensure that Australia continues to grow, and to grow in a sustainable way, and to create new jobs. The benefits of 3 to 4 per cent growth over the last four years since the Government was elected has been 650,000 new jobs. If we could grow the Australian economy over the next three to four years at the same rate, you could get another 650,000 new jobs, but the task is to keep it growing. I’m not saying that’s going to be an easy task, but that is the benefit if we could replicate in the future the kind of performance we’ve had in the past.
JOURNALIST:
Mr Costello, are you at all worried that, despite the interest rate falls under this Government, mortgage holders will have the perception that they are getting tax cuts which will only just cover the recent increases in their mortgage costs?
TREASURER:
I’ve said previously, that running interest rate policy and tax policy into each other is not a proper analysis. You’re trying to mix apples and oranges. What you do when you’re looking at tax policy is, you look at the position before and after tax changes, because before and the after the tax changes gives you the effect of the tax policy. The interest rate cycle runs anyway. And you wouldn’t be any better off if the interest rate cycle was running and you had no tax cuts.
JOURNALIST:
But don’t homeowners just look at the bottom line?
TREASURER:
Well, if you want to bring into a tax assessment, interest rate rises, presumably you’d also be bringing into the tax assessment, wage rises. I think the average person on average wages over the last year, as a result of a 3 per cent increase in wages, after tax will have $32 a week more. So, if you want to bring everything into a person’s position – mortgage, tax, medicare, welfare – presumably you’d be bringing wages in as well. But, as I’ve said, that’s not the way you ought to assess a tax change. You ought to assess a tax change on a person’s position before the tax change and after. That’s the way you assess whether a tax change has benefitted people. And the tax change which is being introduced on 1 July, unequivocally makes Australian families better off.
JOURNALIST:
Treasurer, do you think it’s wise for the Reserve Bank to link this interest rate rise with the need to provide support to the dollar, and do you agree with it?
TREASURER:
I think what the Bank said in its statement today, and let’s make this clear, Australia has an independent Reserve Bank which sets interest rate policy, and the reasons for it setting the policy are always set out in its statement. It referred to a number of domestic conditions such as strong growth. It also referred to the fact that internationally the world was picking up. And it also made some reference to the currency, I think it noted the currency. Now obviously it has noted that and taken that into account in its decision, but I think you ought to carefully read what it says before drawing any conclusions that there is some link. In fact, I think the Bank said in its statement, did it not, that there was no mechanical link in relation to exchange rates and interest rates.
JOURNALIST:
Treasurer, do you believe that the present economic growth will remain strong enough to see at the end of another financial year, in other words mid next year, further falls in the unemployment rate?
TREASURER:
Well, I don’t want to pre-empt anything I might be saying next Tuesday. And I feel a little at a disadvantage, at the moment there are some people that are out making hay while the Treasurer is muted. I notice out in the media with all sorts of prognostications about what the fiscal position is going to be, and what the economic position is going to be, and I’m muted until next Tuesday. But I’ll ask you a question in a historical way, that is, in our Mid-Year Review we were predicting, I believe, growth around 3, 3 , 3 -, and we were predicting that that would create employment growth and reduce unemployment. So if the position is judged on the basis of our mid-year assessment, yes, the answer to your question would be yes. I can’t answer your question on the basis of next Tuesday’s figures.
JOURNALIST:
Since the mid-year assessment interest rates have been raised by a full percentage point.
TREASURER:
Since the mid-year review there’s been interest rate raises, and you would have to take that into account looking at your growth forecast. But one of the reasons why there’s been interest rate rises is that the Bank’s taken the view that the world economy is strengthening, which would have an effect on Australia as well. In fact, I think from memory the statement that was made by the Bank referred today to a pretty strong domestic economy. So, growth in Australia between 3 and 4 per cent is the long term average, and in most of the world growth of 3 to 4 per cent would be considered extremely robust growth, magnificently robust growth.
JOURNALIST:
Do you think the Reserve Bank is holding up its side of the agreement it made with the Government when you came into office, which was that inflation should be 2 to 3 per cent over the cycle. It seems that their position is, it shouldn’t go above 3 per cent at all?
TREASURER:
Well, I don’t think that is Australia’s target. The target that we’ve set the Government and the Reserve is 2 to 3 per cent over the cycle. Consequence of that is that at some points it can be below 2 per cent, and at the peak of the cycle it could be above 3, as long as it averaged 2 to 3 per cent over the cycle. It’s not a target that says it can never go above 3, and it can never go below 2. The evidence is, for example, the last two years it’s been well below the bottom rung. In fact, it’s only recently got into the target.
JOURNALIST:
Yes, but now that it looks like it, it’s only just come into the middle of the target in an underlying basis, yet we’re getting an interest rate increase. Why wouldn’t they be giving it a bit more slack, given the evidence of the slowing in the economy that I think they refer to in the statement?
TREASURER:
Well, you ask me whether I consider the bank is adhering to its agreement with me? Yes I do. And I take the opportunity to explain what the agreement means, and I have no doubt that the Governor fully understands that as well . . .
JOURNALIST:
Treasurer . . .
TREASURER:
. . . I want to make this point clear. That one of the reasons why I went to the lengths that I did to enhance the independence of the Bank, was to assure investors that there was an independent bank free from political interference which would be running monetary policy. In the long term that gives confidence to a monetary policy. And that was my side of the agreement, and I intend to scrupulously adhere to it, and I do. The Bank’s side of the agreement was that it would target inflation, and I have every reason to believe it is scrupulously adhering to its side of the bargain. And as an independent organisation I respect its independence.
JOURNALIST:
Given the concern the Bank has with inflation do you think it’s pussyfooting around with relatively small rate hikes? Don’t you think it should send a stronger message, or for you it will be death by a thousand cuts, won’t it?
TREASURER:
Well, I mean, I find your suggestion intriguing. I obviously don’t agree with it . . .
JOURNALIST:
They are only small rises though.
TREASURER:
Well, hang on. In this cycle the Bank has raised rates 125 points, 1.25 per cent. That is the same amount as the European Central Bank, it is the same amount as the US, it is less than New Zealand, and probably the average of the Western speaking Anglo economies. So I don’t think you could describe that as pussyfooting. I think the way you would describe it, is, in line with international movements.
JOURNALIST:
Treasurer, isn’t fiscal policy an issue in these rate rises? When the Reserve Bank cut interest rates in ’96 it gave you credit for the tightening of fiscal policy, surely the proposed tax cuts from July 1 are a factor behind these rises?
TREASURER:
Well, of course they’re not. When we were putting the Budget back into balance, we were coming off deficits of $17 billion, $13 billion, $10 billion, as I recall. That is, you were adding $17 billion to Commonwealth debt, $13 billion, $10 billion. The five Budgets before I became Treasurer, the cumulative deficit was $80,000 million under Labor. 80,000 millions of dollars. We put the Budget back into balance, that is, we stopped running up debt and we started paying it back. This Government has not borrowed a dollar since it came to office. We have not increased Commonwealth debt by net one dollar, coming off five years where the cumulative borrowing was 80,000’s of millions of dollars. Now, that was an incredible fiscal turnaround, and it’s one that we intend to build on. We’ve now had three surplus Budgets in a row and our policy is, on next Tuesday, to make it four, and while economic growth continues to make further surpluses in the future. But, this has given us an incredibly strong position in paying down Labor’s debt. Again, I’m restricted because I can’t go into what’s going to happen next Tuesday. But, not only have we not borrowed a dollar in net terms since we were elected in March of 1996, but we have substantially paid down the Labor debt, which was $80 billion when we were elected. Now, that is an incredibly strong fiscal position . . .
JOURNALIST:
Isn’t the case . . .
TREASURER:
. . . and we intend to maintain it. And at the same time do the big structural changes which will set this economy up for a long time into the future, the big tax changes which will secure the revenue base for decades. May I make one last point, and I’ll close on this. If we hadn’t done the big structural changes which are going to take place on 1 July, let’s make this point, then our indirect tax, which was based on a declining part of the economy, would’ve declined in proportion to the economy year by year inexorably. Inexorably. And you would not have been in a position to run a balanced Budget in five, ten, fifteen or twenty years. The thing that’s going to save the Australian Budget in five, ten, fifteen or twenty years is an indirect tax base that is on the whole of the economy, goods and services, and grows in proportion to the economy. Now you hear some people say, oh well, tax reform is costing, and it is. It’s certainly costing $1.8 billion more than I wanted it to cost. That was a result of Labor opposition and compromise with the Democrats in the Senate. But because we are doing a big structural change, it is going to secure the revenue base for Australia in five, ten, fifteen and twenty years. And the inheritors of this big structural change will have an opportunity which would not have been possible for Australian Treasurers in five, and ten, and fifteen years if we had an indirect tax base on a shrinking share of the economy. So what we’re doing is, not only are we running at the moment a strong fiscal position, for all of the reasons which I’ve given you, we are putting in place the structural change which will secure Australia. And just as we were fought every step of the way when we were putting the Budget into balance by the Opposition, just as they try and knock out every single measure in the Senate, whilst maintaining they’re in favour of surplus budgets, they’ve fought us every step of the way on the one tax change which is going to secure the fiscal position for the decades ahead - whilst hoping to inherit it, whilst hoping to inherit it. That’s the big structural change that’s happening in the Australian economy. Thanks.