MOORE:
Treasurer, good afternoon.
TREASURER:
Good afternoon, Ali.
MOORE:
A big cut, half a per cent in rates in the US overnight. How worried should we be about the state of global markets?
TREASURER:
Well global markets are very unstable at the moment. You have got the situation with the sub-prime housing market in the United States which has really been collapsing and the consequence of that is that the American economy will be weaker and that is why the Federal Reserve in the United States has moved to cut interest rates. The knock-on effect of this will be that people are much less willing to lend money to each other and some financial institutions will get into trouble. There is the Northern Rock bank in the UK where you have seen long lines of people queuing up to get their money out and there will be a lot of pressure on institutions that raise their money in the United States markets.
MOORE:
We have also had rumours, completely unfounded, about financial institutions in this country. You have absolute confidence in the state of play here?
TREASURER:
Well we have a very strong regulatory system. We have the Australian Prudential Regulatory Authority which regulates the banks and makes sure that they have adequate capital and we also have the Reserve Bank of Australia which supplies liquidity in the market. And we recently had an announcement by the Reserve Bank to extend the class of instruments, that they would make liquidity available, and they were positive measures. But the important thing to bear in mind is that the banking system in Australia is very profitable, very well capitalised.
MOORE:
Do you think that we will get another interest rate rise in this country or do you think that with the uncertainty people are seeing around the world, the credit crunch, the lack of desire to lend, no rate movement is now necessary?
TREASURER:
Well the fact of the matter is that around the world there is a lot of instability. And you have seen the United States Federal Reserve respond to that overnight with a cut of half a per cent. And I think we will be watching very, very carefully the fallout from this instability. We will be watching very, very carefully as to how this flows in the real economy. And the thing that I would say is we have to be on our guard here in Australia, we are not immune, totally immune from international events, that we do have to be on our guard to keep our economy strong. Fortunately, our Budget position is much better than the United States of America. We have a much better debt position than the United States of America. Our economy is growing at a higher rate than the United States of America but there is no room for complacency.
MOORE:
What about the flow-on from the higher funding costs? Do you think that mortgage originators will up their interest rates and do you think if they do, the banks will follow?
TREASURER:
Well some mortgage originators have increased their rates already. This is because they borrow money in the United States, they are paying more to get their money, therefore they have to lend it out at a higher rate to Australian borrowers. I don’t believe that the Australian banks are in the same situation however, the Australian banks have a deposit book, they are highly profitable, they are well capitalised. There is no reason whatsoever for Australian banks to move their interest rates as a consequence of the fallout from the American sub-prime market.
MOORE:
When you look at what is happening with mortgage originators and you look at the people who have been traditionally attracted to the business that they offer, none of this helps, does it, when you have got a housing affordability crisis and a crisis that has been named now as a top election issue.
TREASURER:
Well I think what has happened in previous years is that mortgage originators have been offering very, very low rate loans to people and you won’t see those low rate loans continuing this much. Of course, the flip-side of that is because people were finding it very easy to get low rate loans out of mortgage originators, probably prices were stronger. So the fallout from this will have effects different ways and we will just have to wait and see what effect there is in the Australia market. The good thing for us is that we don’t have anything like the exposure to the sub-prime market that the United States has. It is about 15 times larger in proportionate terms, the number of people who are on sub-prime loans are about 15 per cent of the market compared to about 1 per cent here.
MOORE:
Sure, but when we look at the issue of housing affordability this clearly doesn’t help. Let me ask you, can you name your number one top priority to address that issue?
TREASURER:
Oh the only thing which will improve housing affordability is to increase the supply of houses, units and flats…
MOORE:
The only thing?
TREASURER:
It is, well other things which increase demand, if you only increase demand without increasing supply you will just drive house prices higher. If you want to stop house prices rising and we don’t want to stop demand, then you have got to get the supply of houses and flats and apartments up. We don’t want to cut off demand. We don’t want people to stop wanting to buy houses. We don’t want unemployment, that cuts off demand. So if you want demand to be strong in a strong economy, you have got to increase supply.
MOORE:
Treasurer, I can’t let you go without asking a couple of questions about the election because we have been most keen to speak with you with events of recent days. If we look at the election, you are the anointed leader now, you have got the higher profile with this campaign. How do you and the Prime Minister ensure that you both sing from the same song sheet now that there is effectively, two leaders, two leaders that make the team?
TREASURER:
Well we have to work very closely on policy to make sure that we discuss policy and after careful consideration decide upon it. And this is in fact what we do do. We have had a number of announcements in recent weeks and obviously we will have more in the weeks to come. And we are discussing policy announcements very, very carefully to make sure that a) it is good for the country; b) it is good for electors; c) it is affordable and d) it is consistent with good economic policy.
MOORE:
It is a tough sell in some ways though isn’t it, because for example I know in recent days you have talked a lot about what you stand for, for example, lifting the standard of our universities. You have been in government 11 years, I mean, you could easily ask the questions, why has it taken you so long to realise that only two of our unis are in the world’s top 50?
TREASURER:
Well it is not just a question of talking about it, it is a question of doing something about it.
MOORE:
Well you have had 11 years.
TREASURER:
And I have just set aside $6 billion…
MOORE:
In the 11th year.
TREASURER:
…in an Endowment Fund which will give us a capital sum, the income from which will be used to power the universities for generations to come.
MOORE:
But Treasurer, do you acknowledge that none of the issues that you raise arose yesterday?
TREASURER:
Well if your question is, why didn’t you set aside $6 billion 10 years ago, I will tell you. We couldn’t set aside $6 billion 10 years ago because we owed $96 billion. The Labor Party left the Government $96 billion in the red. It took us most of the last 10 years to pay off that debt. We couldn’t invest in an Endowment Fund because we were still trying to pay off our debts. Now, having paid off Labor Party debt – which was $96 billion by the way, not $6 billion, $96 billion – we are now in a position to invest. And having cleared Labor debt we are now investing and that is where we got the $6 billion Endowment Fund from.
MOORE:
But Treasurer, do you acknowledge, whether you are talking about education, whether you are talking about minor or major issues, whether you are talking about health, whether you are talking about Aboriginal child welfare, not one of these issues are new and it does seem that they all have grabbed so much attention in the lead up to a federal election.
TREASURER:
Well, obviously health is a big issue and we have been working to improve health for a long period of time. And the investment that is going into health now is at record levels. That doesn’t mean that every problem has been solved but when you look at some of the things we have been able to do, which is to get the bulk billing rate up, to introduce the safety net, to bring new pharmaceuticals within the reach of people, there has been good progress and there is more to come.
MOORE:
More to come?
TREASURER:
I don’t want to you to think that a) nothing has been done; and b) everything has been fixed. There has been good progress and there is more to come.
MOORE:
More to come. When is the election?
TREASURER:
Well, sometime between now and the end of the year.
MOORE:
Come on, be a bit more specific. Before or after the Melbourne Cup?
TREASURER:
Well we are at the end of September now, so it can only be held in October, November or the beginning of December. So…
MOORE:
Give people a break, this has gone on for so long. Don’t you think people just want to know?
TREASURER:
It is a very small window, Ali, a very small window and I think people have got a pretty fair idea that we’re probably already in a phoney election campaign.
MOORE:
Well we are, so why not just call it, stop the phoney?
TREASURER:
Well it is just a question of which date and that will be announced when all of the things that have to be attended to, have been attended to.
MOORE:
Next week?
TREASURER:
I don’t think I said that, Ali.
MOORE:
Peter Costello, thank you for your time.
TREASURER:
Thanks very much.