TREASURER:
The Australian economy showed robust growth in the March quarter, growing by 1.6 per cent to be 3.8 per cent stronger through the year. This is the strongest quarterly growth since 2003 and when you bear in mind that we are in the middle of a shocking drought with production which has fallen 22, 23 per cent, this is indeed very robust, very strong growth.
Growth was led by household consumption, which of course is supported by strong employment growth, security in employment with more people in work than ever before, and unemployment at a 32 year low. Dwelling investment also contributed to growth. And we do see business investment growing very strongly, continuing to grow very strongly. And I have been remarking on this for a year or so – that we are in a very strong business investment cycle.
Corporate profitability, the profit share to the economy, is now at an all time record at 28.1 per cent. So you are seeing companies which are very profitable, the company profit share which is very strong going through a very big investment phase. And that investment phase is now working out in higher production and exports are strengthening.
We saw exports rise 1.4 per cent in the March quarter and are 4.7 per cent higher than a year ago. And when you bear in mind that this again is in a period of drought, where rural exports are falling you are beginning to see the export growth come back in strength - led by resources, but also exports of elaborately transformed manufactures are 6.7 per cent higher than a year ago. So you are seeing export growth across the board.
The really good news is that although this is strong growth and puts Australia as one of the faster growing economies of the developed world, inflationary pressures are quite moderate with the inflation measure, the consumption chain price index growing only 2.2 per cent over the year.
The Australian economy continues in its longest expansion yet recorded. Real wages have increased 20.8 per cent since 1996 and the fact that inflation pressures are low, notwithstanding very strong terms of trade, indicates just how important industrial relations changes have been. If we had not had industrial relations changes we would not be managing this improvement in our terms of trade in a low inflationary way. And I cannot stress enough: any movement away from Australian Workplace Agreements back to collectively bargained outcomes, with unions moving wage claims across the whole economy, could undermine everything. It could undermine this expansion and it would certainly undermine the low inflation.
Sound economic management means that Australian households are now enjoying the lowest unemployment rate in 32 years, real wage increases of around 20.8 per cent since 1996, solid growth in the midst of a devastating rural downturn, and are doing that in a period of low inflation.
Now is the time to lock in these gains and to go forward, to continue this expansion, to continue the job creation and to continue wages growth.
JOURNALIST:
Treasurer, you spoke there about wages, are you, you are pleased are you that the wages share is continuing to decline, does this show that WorkChoices has done its job?
TREASURER:
Well what shows you that industrial relations reform is working is the fact that we have more jobs than ever before, higher real wages than ever before and yet we don’t have a breakout of general inflation.
JOURNALIST:
So you are happy about the equivalence between the profit share and the wages share, are you? Is that about, that recalibration is about right, is it?
TREASURER:
Well Jim, I am happy about the fact that companies are profitable and the reason why I am happy that companies are profitable is that it means that they can create more jobs and not only create more jobs, but increase real wages. So I think if we look back 10 years ago and said, ‘do you think such an outcome is possible in Australia?’ Nobody would have said that it was. But having got to where we are, do we stop? No. We are no more going to stop now than we decided to stop five years ago. Let’s keep on going…
JOURNALIST:
So more workplace reform are you saying?
TREASURER:
…let’s keep the economic expansion going, the job creation going, the real wage increases going and the economic expansion going. That is what I am talking about.
JOURNALIST:
Would you like to see wages as a share of total Australian income fall even further?
TREASURER:
I would like to see real wages increase.
JOURNALIST:
No, I am asking as a share…
TREASURER:
I know, I know, I know, it is a trick question. I would like to see real wages increase and that means that whatever the share of the economy, people are better off.
JOURNALIST:
Why is that a trick question? I mean I am not an economist, it seems like a fair enough question.
TREASURER:
Well, he is trying to say, I think, that because corporate profitability is high, this must mean that wages are somehow low.
JOURNALIST:
And the lowest level on record…
TREASURER:
Yes, but wages aren’t low. Wages are 20 per cent higher than they were. It is not that anybody is…
JOURNALIST:
(inaudible).
TREASURER:
Yes, real wages. Real wages, on average, are 20 per cent higher than they were. It is like saying you had a 20 per cent wage increase, but because profitability has boomed, the wage share is small, therefore somehow wage earners have been done wrong. They haven’t been done wrong. There are more of them, earning more money, in real terms, than ever before.
JOURNALIST:
Would you like to see the wages share fall further, that is what I asked?
TREASURER:
I don’t think I said that I would like to see anything fall. I think I said I would like to see real wages increase.
JOURNALIST:
Treasurer, productivity has been very weak for the last couple of years, it is pretty strong in the latest quarter, to what do you attribute the improvement to?
TREASURER:
Yes well I think this is a very important point, because GDP per hour worked in the market sector, which rose 1.4 per cent in the December quarter, rose again 0.6 per cent in the March quarter. So over those two quarters you have seen strong growth and what this shows you is that productivity is accelerating in the Australian economy. And if you bear in mind, this is at a time when we are in the middle of the worst drought in a hundred years and a rural downturn, if the rural sector returns to more normal conditions you will see even further acceleration. And what you are now seeing is that we were going through a period of huge investment, and at a period where you are having huge investment before you got increased production, it looked like productivity was turning down. Now that the production is starting to flow, the productivity has picked up and when this production comes into full flower off this business investment, you are going to see very strong productivity. This is what I have been saying now for about two years – that this was a consequence of a strong investment (inaudible) – and to some degree drought – but if the investment works out in production, we are seeing it now, and if we return to more normal conditions you are seeing acceleration in productivity.
JOURNALIST:
It is raining at the moment I think, in South East Queensland, we had good rains in New South Wales and Victoria, how long does it take to get through the system that you know, people are seeing rain now, they might say, ‘oh well, we are almost back to normal conditions.’ Does it take longer than that to…
TREASURER:
Oh it does. Look, we had a really bad drought in 2002 and then there were some rains and a few normal years, but with one abnormal season in 06-07, you know, we were right back in the worst drought for a hundred years. In other words, we never fully recovered from 2002, we saw a bit of a downturn put us in very deep trouble in 2007. Now, with a bit of rain in 2007, we might return to more normal conditions, but you really need five, six, seven, eight years of normal rains before we pass the danger. And I welcome the fact that it is raining and I think agricultural production will return to more normal levels, but you know, it can take three, four, five or more years to really come out of a drought like this.
JOURNALIST:
What (inaudible) reforms do you think are needed to reduce the current account deficit?
TREASURER:
Well, I think a lot of the investment will work out in boosted exports, but I think the reforms that we need to improve Australia’s export performance are principally structural. It is a disgrace that Queensland Rail, the monopoly provider which is under invested, can’t get our number one export – coal – down to the port. It is a disgrace that we have 50 ships sitting off Dalrymple Bay. It is a disgrace that investment took so long to upgrade the port at Dalrymple Bay. I think one of the things that would help Australia’s export performance is if the States accepted the Commonwealth’s offer to take over pricing and access in relation to major export ports. I think one of the things that would improve our export performance would be proper investment and opening up of land transport rather than keeping it under capitalised State monopolies. I think it would improve if we didn’t have governments focussing on dividends from State owned monopolies, so that they allow these instrumentalities to properly invest in expansion. I think there is a lot of things that can and should be done. And I have been rattling on about this for years now, and even if we started fixing all of these things tomorrow, it would still take years.
JOURNALIST:
What about those manufactured exports, I think the St George Bank is, they are concerned about the increase in, or the stubbornly high current account deficit and have linked it to Australia’s productivity. Although productivity has improved, do you think that there needs to be another look at not just ports and infrastructure, but the actual way that manufactured exports are marketed?
TREASURER:
Well, the goods news here is that we have seen a rise in elaborately transformed manufactures which increased 4.4 per cent in the quarter. Now, one of the things that will be making it tough for manufactured exports at the moment is the exchange rate, I acknowledge that. I don’t think there is much you can do about the exchange rate. Well, the fact that we have a floating exchange rate, so we don’t do anything about the exchange rate. But I acknowledge the fact that the Australian dollar is so high, it will be making it tougher for exporters generally and manufacturers in particular, but I think that there is some good news here and certainly we would be encouraging manufactures to move further up the value-add chain.
JOURNALIST:
Treasurer, have you had a look at the ACCC and whether it should look at the marketing arrangements for gas renewals for the north-west shelf?
TREASURER:
Whether it should look at marketing arrangements for the north-west shelf by…
JOURNALIST:
The fact that they market as a single body, which is creating problems (inaudible) domestic gas supply (inaudible) Western Australia?
TREASURER:
I don’t, I can’t tell you whether the ACCC has had a look at that, I am sorry.
JOURNALIST:
Have you been approached to ask them to look at it?
TREASURER:
It is not on my radar screen.
JOURNALIST:
Mr Costello, you talk about Dalrymple Bay there, Queensland Premier, Peter Beattie has announced a review, do you welcome that…?
TREASURER:
It is good that he is having a review. That is good and I hope it leads to something. But let’s suppose the review reports that they need more investment – maybe making another track or duplicate tracks, or let’s suppose it says that there should be competitors that are allowed to come on to the line. Let’s suppose after the review you started working on that immediately, you’re still talking years. And meanwhile every day 50 ships set off to port waiting to take one of Australian’s most important exports to markets where willing buyers have the highest prices we have seen in a generation.
JOURNALIST:
Do you expect the strength of the economy to result in an improvement in the Government’s standing in the polls?
TREASURER:
Look it’s all too complicated. Here is what I think the Government should do: so manage the economy that people can get work, and increased wages, keep their houses, look after their businesses, and see their children have good standards of education and health. That is what I focus on. And I am a great believer that if you get the basics right the politics follows. And I know that there are other people in Australia who say that the important thing is to cut the commercials and have the focus groups and proclaim themselves economic conservatives. I think substance wins out in the end and I am going to be appealing to the Australian people on the grounds of substance.
JOURNALIST:
Why did Treasury only start modelling (inaudible) climate change measures (inaudible) weeks ago?
TREASURER:
Well these models, you know, don’t run out of a computer. These models have to be constructed. And there are various private sector models some of which are good, some of which are bad. ABARE has its own models. What the Treasury is going to try and do, it is going to try and bring together the best features of the best models and construct something which will take an incredibly long period of time. There is no historical experience in this. People have been modelling economies for half centuries and centuries, retirement incomes for 20 and 30 years, but this is new ground.
JOURNALIST:
Would have been good if they started in 2003 when you took the emissions trading submission to Cabinet?
TREASURER:
Bear in mind this Paul, that I think the Emissions Trading Scheme is due to come into effect around about the end of this decade, or a bit after. And Kyoto, the Kyoto target which Australia has, we are on track to meet up until 2012.
JOURNALIST:
We’re not actually, we’re one per cent over it.
TREASURER:
Well let me stop you there okay? Let’s accept your figure: one per cent over, okay. Canada, how much? 65 per cent over. The Europeans, 35 per cent over, the United States…any advances?
JOURNALIST:
(inaudible).
TREASURER:
Let’s suppose we’re one percent over, you know, and we have got to 2012 and we are still able to take measures between now and 2012. We would be amongst a handful of countries in the world which would meet that target, amongst a handful. Where some of the other countries that ratified Kyoto are nowhere near their targets.
JOURNALIST:
Treasurer isn’t the point though that the Emissions Trading Taskforce put the disaster scenarios about how all cars will have to leave the road, blah, blah, blah. Isn’t the modelling that Treasury is doing actually looking at what the costs of cutting back on greenhouse are and given governments are warning that this is all going to be terrible for the economy, shouldn’t you have started some work on this some time ago?
TREASURER:
Well I think, you know, you can say if the rock star target is to be met, you can say the emissions that would have to be forgone would be all of our coal fired power stations and all of our cars. I think you could say that. Now if you want to ask a different question, which is what would GDP be? What would inflators be? What would consumption be? You are asking a whole set of different questions and a whole set of different questions will require quite a lot of work, and that work is being done.
JOURNALIST:
The Government now accepted in principle the need set a long term aspirational emissions reduction target and will do so after Treasury knows the cost. What about an intermediate target in principle on the same conditions, if we understand the cost, do you think there is a need to set a target between now and 2050, or will the annual target and the five year rolling target (inaudible)?
TREASURER:
Well I think that the Government’s position is that we will follow the recommendations of the Emissions Trading study group and what that provides is the ability to recalibrate, and I think it is very sensible. You will have the ability to recalibrate and that will be built into the model in order to get certainty. So, you know, the important thing, I think, is to make sure that you make progress and you make progress in a way that is sustainable. I must say to you, if you set your target first and the consequence of that target is mass unemployment or GDP decline, no Government working to the target will survive and the target just won’t be met.
JOURNALIST:
Yes, I accept that but the question I asked though was if we understand the cost and Treasury goes through the process, and we understand the costs of a 2050 target, is a 2050 target sufficient or do we need a 2020 target or 2030 target?
TREASURER:
My argument was I think we ought to have the ability to recalibrate as the Emissions Trading Group has recommended and I gave the reasons why.
JOURNALIST:
Mr Costello at the weekend you laughed off some questions about leadership speculation. Noted in the media today there is continued talk that you might be tapped on the shoulder if things get worse and that (inaudible). Would you care to rule out once and for all taking over in any circumstances before the election?
TREASURER:
Well I have said that already Michelle.
JOURNALIST:
(Inaudible).
TREASURER:
Absolutely, I said that last year. I think, you know, and I am not going to do it on a daily basis. I said it last year, the situation is the same. I said last year that I would go to the election as the Treasurer and I will.
JOURNALIST:
Is that, is it still your position that you rule it out?
TREASURER:
Absolutely. You know, I am not going to go through this on a daily basis. What I said last year and what I have said every single day since and what I say today is the same.
JOURNALIST:
Are you flattered that the Labor Party is scared of you becoming leader before the election?
TREASURER:
I will make this observation: when the Labor Party releases its so called ‘secret research’ which is warning the Coalition of errors that it should not fall into, I don’t think the Labor Party is doing it because they have an altruistic interest in Coalition success. And I just say to journalists, when the spin doctors of the Labor Party come around with their ‘secrets’, just think to yourself there may be a reason why they are being run past you.
JOURNALIST:
But surely (inaudible)?
TREASURER:
Absolutely, absolutely. But you and I know that we don’t come around with ‘secret research’.
JOURNALIST:
Treasurer, just looking at the GDP – it says here household private consumption expenditure 0.9 per cent. Given the economy is running pretty well at capacity, is this one of those good problems you have got – in other words it is putting some pressure on?
TREASURER:
This is strong growth in the middle of a terrible drought. And it is strong growth on an unemployment rate which is 4.4 per cent. The economy is delicately poised. Extremely delicately poised. If you had a wages breakout or an inflation breakout on strong growth and 4.4 per cent unemployment, which has happened repeatedly in Australian history, right back from the days of the Korean War war wool boom, you will get a bust. And I can’t think of anything more irresponsible in a growing economy with 4.4 per cent unemployment to say, ‘we are going back to union negotiated collective bargains.’ You go back there you will go right back where we were in the 50s and the 60s and the 70s and the 80s and the 90s. This is very, very delicate and it is going to take quite a lot of management. Now, to answer your question – is this a good problem? Yes. Managing an economy which is near full employment, and in some parts of Australia is full employment, is a good problem – it is better than managing an economy on an 11 per cent unemployment rate. But it is delicate.
JOURNALIST:
Speaking of busts Mr Costello, how concerned are you about the Shanghai share market?
TREASURER:
Well I’ll make this point: that in an interconnected world, a movement in any financial market can have knock on consequences. We saw, what, about a month ago I think, a steep fall in the Shanghai stockmarket rebound through Wall Street and from Wall Street into the Australian Stock Exchange. Now it has improved a minor fraction. But what that showed you is the interconnectedness of the world, and I would expect the volatility on the Shanghai stockmarket will cause volatility on the stockmarkets around the world. I would expect that. But the important thing is to strengthen the fundamentals so that you can withstand those shocks in the real economy.
JOURNALIST:
Are you concerned about Telstra’s decision to shed large numbers of jobs in regional Australia or do you just think this was a commercial decision that they had to take?
TREASURER:
Well, I don’t like it and I don’t welcome it. I think that for those people that are affected it will be very, very difficult and damaging for them. But I can’t explain to you Telstra’s thinking. Telstra has to defend itself. It has got a big public relations department and a very voluble PR person and I suggest you ask that person to justify this decision. Not me, I didn’t make it.
JOURNALIST:
So you are saying you might…
TREASURER:
I don’t front up for this company. This company has got to explain its own actions.
JOURNALIST:
So it doesn’t appear justifiable to you, is that what you are saying?
TREASURER;
Well I don’t know all of the ins and the outs, Jim (inaudible) and explains it all to me and show me the financials. I look at it from the outside, I know it is going to create hardship. It is not my job to give you an explanation and I’m not going to. I’m going to direct you to the company.
JOURNALIST:
Something completely different, do you think Archbishop George Pell has overstepped the mark with his veiled threat to the Catholic MPs in Sydney?
TREASURER:
Look, I have a lot of respect for Cardinal Pell. He is somebody of great standing in the worldwide Catholic Church and he is the senior cleric of the Roman Catholic Church in Australia. And I have always found him to be a person who thinks very carefully and very deeply about these issues. He is entitled to his view. He is entitled to put his views. Simultaneously the MPs are entitled to their view and they will have to vote according to their consciences. So I would say he is behaving entirely properly and they are behaving entirely properly. But I put my own views in relation to the stem cell Bill here in the Parliament. As you know I am not a Catholic, but I was very interested to know what Cardinal Pell’s views were. At the end of the day I made my own decision. I think that is probably what will happen in New South Wales.
JOURNALIST:
But there is a difference isn’t there Treasurer, between making your views known and actually trying to deprive the people of access to the Church for expressing their views?
TREASURER:
Yes but you see, the Church regulates itself. The Church has got its own rules. The Church has got its own theology. It has got its doctrine. And the Church is entitled to propagate its doctrine. That is what churches do and it is not the role of the civil government to tell a church how to manage its affairs on doctrine and practise and custom. That is what churches do and, if I may say so, they have been doing it for thousands of years. Long before civil and secular powers of our dimension came along.
JOURNALIST:
Treasurer, do you reckon there is any merit in requiring companies, even small ones, to offer salary sacrificing to employees and wouldn’t that boost national savings? Isn’t it unfair that some employees get it and others don’t?
TREASURER:
Well look, it is entirely legal to engage in salary sacrificing up to a limit. The Tax Office does say that there should be some limits. This is a matter between employers and employees. I don’t think you can force people to do it. I would recommend that employers think about it and I think enlightened employers will offer it because it is a very effective way of helping their employees. But I don’t think it is a matter for the Government to force it.
JOURNALIST:
Treasurer you have mentioned that we are in the midst of our worst drought in 100 years, but on the flip side we are also in the midst of the best resources boom that anyone has seen. On the terms of trade question again, and I know Budget says we are forecasting 7 per cent fall in the next year, but it just seems that it is a never ending…
TREASURER:
What, terms of trade?
JOURNALIST:
Yes, terms of trade.
TREASURER:
Now, can I say and I think this is a very important point – one of the reasons why the terms of trade are improving is that import prices are falling. I think in Australia we have focused on one side of the equation, which is our export prices are going up, but even more significantly in these terms of trade is it is the import prices that are falling. That is, the prices particularly of manufactures and, by the way, that is improving the whole developed world’s terms of trade. One of the keys over the last year is that everyone has focused on increased resource prices that China has brought the world. The other side of it is the lower import prices that China has brought the world. And of course if we hadn’t have opened ourselves up to that by reducing trade barriers we’d have never got the benefit of that side of the terms of trade. And it is a very, very important part of the terms of trade improvement.
Let me just say in relation to this terrible train accident at Kerang. This is a terrible tragedy, this is a shocking loss of life and my heart and that of my colleagues and the Australian Government goes out to the families of those who have lost a loved one or had a loved one injured. The Australian Government stands ready to assist the Victorian Government in any way it should ask. That offer has been made yesterday and continues. We hope that the accident scene can be finished and all those that are missing accounted for. And we hope that the medical staff and hospitals are able to do everything they can for the seriously and critically injured.
JOURNALIST:
When you say you are prepared to do anything, does this include some financial measures in Victoria to upgrade rail crossing in Victoria to a level commensurate with other States in Australia? It is far behind and has been for a long time.
TREASURER:
Our focus is on the victims, the accident investigation, securing the scene, and medical care. If the Victorian Government asks us for assistance we stand ready to assist. Thank you.