TREASURER:
As you know, at its board meeting yesterday, the Reserve Bank decided to increase the cash rate by 25 basis points, 0.25 per cent to 6.75 per cent.If that is passed on in full by banks, you would expect the standard variable home mortgage rate, which is currently 8.3 per cent, to go to 8.55 per cent.No home buyer will welcome an increase in mortgage interest rates and that will increase repayments for all people who are on standard variable mortgage interest rates.
The reason that the Bank took the decision that it did is that it believes that inflation is getting towards 3 per cent and in March, on various measures, may nudge the upper limit of our band.The Bank did acknowledge that the CPI is in fact lower than the current target of 2 per cent but its judgement is that by the March quarter of next year, measures are likely to be above 3 per cent.And so its judgement is to take an interest rate rise to make sure that inflation does not substantially rise above 3 per cent.You might say that our judgements as put out in the Mid-Year Review are in fact that inflation will moderate in 2007-2008 to about 2¾ per cent.
The reason why inflation is towards the upper part of the band is that the Australian economy is very strong.That is, growth of the Australian economy has picked up and unemployment is very low.In fact, in some parts of Australia we now have labour shortages.That is, more jobs than there are people to fill them.Notwithstanding the fact that unemployment is very low, growth in labour costs has been contained.This of course is a testament to the industrial relations changes that have been put in place.In past periods of low unemployment, labour costs were not contained and inflation broke out and interest rates were substantially higher.In fact the last time that unemployment was as low as it is today, as you can see from this chart, was back in 1974 when inflation was 16 ½ per cent.And the fact that inflation is now at around 4 per cent – sorry unemployment is now at around 4 per cent – with an inflation rate of 2-3 per cent, indicates just how far the country has come.
Of course, the last time under the Labor Government when inflation bottomed below 6 per cent at 5.6 per cent, interest rates were at 17 per cent.So again, to get some perspective, to have an unemployment rate near 4 and a home mortgage rate around 8½ shows you how far Australia has come.And indeed if you look at that 8½ per cent standard variable mortgage rate, it is of course lower than when the Government was elected, notwithstanding the fact that unemployment has fallen from above 8 per cent to nearly 4 per cent.
And of course the trick is to make sure that unemployment continues to fall.We can only do that by continuing growth in the Australian economy.We are now back where we were in the 1970s but with much better inflation and lower interest rates.And when you are looking at policy, it is the inflation and the interest rate policy judged on the unemployment rate that counts.
Can I say in this particular economic climate, the worst thing that you could do would be to turn your back on industrial relations reform.This would take us back to where we were, when we couldn’t even manage a 6 per cent unemployment rate without interest rates going to 17 per cent.Or indeed back here where we couldn’t manage a 6 per cent interest rate, a 6 per cent unemployment rate without interest rates going to 13½ per cent.The fact that we can manage a 4 per cent unemployment rate on an 8 ½ per cent interest rate shows you how far we have come and industrial relations changes have been a very big part of that.
In addition to that of course, Australia is going through an investment surge at the moment.An investment surge which is building capacity in the Australian economy and which is certainly going to continue economic growth for many years to come.
Can I say that the important thing is that we continue to so manage the Australian economy as to keep it growing.And when you see these unemployment rates peaking, this is what happens in recessions.People lose their jobs.They lose their businesses and they lose their houses.The fact that we have had this long period of economic growth which has enabled us to manage to get unemployment to 4 per cent is testimony to the benefits that good economic management can bring.But if we turn our back on good economic management, if we turn our back on industrial relations changes, then you will see as we have seen in the past inflation breakout, interest rates breakout and it always ends in high unemployment.
The important thing as we face challenges, and we will face challenges right throughout the next years is that we have experienced management and good policy.Experienced management and good policy.And it is experience that leads to the good policy, it is the inexperience that risks bad policy.And in all of the challenges which Australia has to face, turning our back on economic reform and risking bad policy is one that we don’t need to make.
JOURNALIST:
Treasurer, there have been five interest rate rises since WorkChoices (inaudible), can you please explain (inaudible) fits in to that visual narrative?
TREASURER:
Well as you can see, since the introduction of WorkChoices, the unemployment rate has dramatically declined and 430,000 new jobs have been created.Now if we hadn’t have introduced that you wouldn’t have got that job creation.And your inflation and your interest rate will always be a function of the economic strength of your economy.You would always expect interest rates to be higher during a period of economic growth and lower during a recession.And this is the most extraordinary thing here – that I find extraordinary – our interest rate today is still lower, lower than it was during the worst recession in 60 years.
JOURNALIST:
(inaudible).
TREASURER:
Pardon?
JOURNALIST:
If we mapped household debt over that (inaudible), it would go straight off the chart, wouldn’t it?
TREASURER:
No but again, can I tell you, borrowing is also a function of interest rates.If interest rates are lower people borrow more.That is, you open up, if you cut interest rates, you open up the opportunity for people to borrow more and in fact, people do borrow more.One of the reasons by the way why you cut interest rates during a period of recession is that people do go out and borrow and kick start the economy.The two are intimately related.
JOURNALIST:
Treasurer, the Prime Minister today expressed his regret and said sorry to those home buyers who will feel the pain.Do you feel sorry for them as well or are you willing to apologise as well?
TREASURER:
Well as I said before, no homebuyer will welcome an interest rate increase.And I acknowledge that for homebuyers that will mean that their payments will go up.It is not somethingI enjoy and I know they won’t enjoy it.And what I would say to those homebuyers is I understand and I feel the increased payments and the pressure on the family budget.But I would go a step further and I would say, the important thing now is to have an economic team that can manage the challenges in the future because otherwise there could be a lot more pain on the family.
JOURNALIST:
But are you sorry?
TREASURER:
Well of course I am sorry that people have to pay more for their mortgages.Yes, of course I am.
JOURNALIST:
Are you concerned that ordinary voters will look at the rise today though and just see what they perceive rightly or wrongly to be a breach of a promise that the Coalition made three years ago?
TREASURER:
Well I would say to voters, have a look at the Labor Party’s 17 per cent interest rates.That is what I would say to them.And incidentally, that is when unemployment wasn’t as low as it is today.And I would say to them this ought to be a big flashing warning of Kevin Rudd and the Labor Party.If the Labor Party had interest rates at 17 per cent when unemployment was only down at 5 and a bit, where would they have them when unemployment is at 4 per cent?Where would they have them?
JOURNALIST:
Mr Costello, (inaudible) expect the economy to continue to grow, you want unemployment to come down even lower, isn’t that a recipe for further pressure on inflation and upward increases in interest rates?I mean what would be your forecast for interest rate rises under Howard-Costello government in the next term?
TREASURER:
Well, you made an absolutely key point:that the lower your unemployment rate, the more you would expect inflation in an economy.Absolutely right.You don’t get inflation when you are in recession.When you are in recession you’ve got mass unemployment.People aren’t going out and spending.They’re not buying.You would expect inflation to be low and you would expect interest rates to be even lower in a recession than in a period of growth.That’s why it is so extraordinary that our interest rates are still lower today than they were during the worst recession in 60 years.But if you want to get more people in jobs and if you want to take unemployment even lower, you have got to make sure you have settings in the economy which can handle full employment without unleashing inflationary forces.And this is what industrial relations changes are all about.To enable us to get full employment without unleashing inflationary forces.Now I take my graph back to the ‘70s when we were last at 4 per cent unemployment.Inflation then was 16.5 per cent.If you want to go back to the ‘50s when we had a terms of trade improvement and unemployment at 2 per cent, inflation was 22 per cent, 22 per cent.That’s where we used to be when we were in conditions of full employment.We had a much worse industrial relations system in those days.The fact that you can have an 8.3 per cent mortgage, home mortgage interest rate, or 8.55 after today’s decision, as we would expect it to go to, on a 4 per cent unemployment rate and a 2 to 3 per cent inflation rate shows you how far we’ve come.
JOURNALIST:
If further IR reforms are required to keep that, those settings in place, why are you ruling that out?
TREASURER:
Because we think the balance is right where it is at the moment, and we will not change it.The balance is right.The reform has been done…
JOURNALIST:
Even if those reforms…
TREASURER:
…The important thing is to keep it and we will not change it.
JOURNALIST:
Mr Costello, given that there is a correlation between falling unemployment and rising interest rates, could you argue that this is the interest rate rise we had to have?
TREASURER:
Well, I wouldn’t because that’s a Labor phrase, isn’t it?The Labor phrase was ‘This was the recession we had to have’ and they put unemployment above 10 per cent.And this is what Labor regards as its proudest achievement, to have put Australia into recession in order to get inflation down and when they put Australia into recession, you know how they did it, by taking interest rates to 17 per cent.That was when the then Labor Treasurer, Mr Keating, said we had to have a recession.And he gave us one.He took interest rates to 17 per cent.It worked because it got, it got unemployment above 10 per cent.
JOURNALIST:
(Inaudible)Treasurer, when you said the other day your Government had presided over more cuts than rises, that’s not literally true, is it, you’ve had your 12 cuts and 14 rises.
TREASURER:
Yes, but some of those cuts are 50 basis points.
JOURNALIST:
So that is how you’re…
TREASURER:
No, no, no, if you take every movement as a 25 basis point movement, there are 19 cuts and 16 rises and which ever way you look at it, the official cash rate is 75 basis points lower than when the Government was elected.
JOURNALIST:
Yeah, but the RBA doesn’t move them twice in the same day, they move them once.
TREASURER:
Well, hang on…
JOURNALIST:
…Sometimes by 50, sometimes by 25.
TREASURER:
Exactly right.I mean, if you look at the period that I’ve been Treasurer there have been more cuts than rises.Over that period the official cash rate is 75 basis points lower.There is no dispute about that.
JOURNALIST:
(inaudible).
TREASURER:
Sorry?
JOURNALIST:
Could the Government done more to avert this interest rate rise?
TREASURER:
Look, I think the Government has had a track record of reform which has enabled us to get unemployment at 4 per cent whilst you’re having a mortgage interest rate of 8½ per cent.That’s not been possible before.Back to ’74 and if I took my graph back, I’d be very surprised if it’s been done since the war, even the Great Depression.What allowed us to get unemployment to 4 per cent whilst the home mortgage rate was at 8½ was balanced budgets, getting rid of Commonwealth debt, improving the industrial relations system, making the tax system more competitive, heightening competition in the Australian economy, cleaning the docks up, getting efficiency in the docks.These are the things that allowed us to get to there.I mean, this is a place where Australia hasn’t been for at least 30 years, and I’ll go and check, I’d be surprised, 50 or 70.
JOURNALIST:
So you can say today to the home owners who will face an interest rate rise, you’ve done everything in your power to try and stop this?
TREASURER:
I can say to homeowners that no home owner would want a rise in interest rates.I don’t want a rise in interest rates.But the Government has been concentrating on containing interest rates in what is now nearly a full employment economy, containing them to 8½ per cent on an unemployment rate of 4 per cent.The last time we were anywhere near that, when unemployment was 5½ [per cent], interest rates were 17 per cent.Now what would you prefer - lower unemployment and half the interest rate.
JOURNALIST:
Treasurer, that graph, if I can say, does tell a terrific story on employment, can I take you back to the early ‘80s, the only point where interest rates and unemployment were rising in tandem, you mentioned (inaudible) was in the early ‘80s.As you look across that (inaudible) timeframe would you say you were a better Treasurer than Paul Keating and John Howard?
TREASURER:
The reason I’ve put that in, George, and I thought you might be interested in this, is I have heard Kevin Rudd falsely claim, falsely claim that interest rates were higher under the Fraser Liberal Government than they were under his hero, Paul Keating.That is not true.This is the home mortgage interest rate.Labor is the all-time record holders and I have heard him say that…
JOURNALIST:
(inaudible).
TREASURER:
…Exactly right, exactly right, and it was lower.And I have heard him make that claim over and over again and I just want to demonstrate to you that is a false claim.
JOURNALIST:
Mr Costello, should voters be cynical that you are using what is obviously bad news for them to gain some political traction?I mean you are obviously saying that people should rely on your Government on what is a bad news day economically to those families.
TREASURER:
Well, let me say again, no homebuyer will welcome an interest rate rise.I don’t welcome an interest rate rise because it means that homebuyers will have to pay more under their mortgages, where they are under variable mortgages, and most Australians are.But the art of economic management is to keep interest rates as low as possible consistent with giving everyone the opportunity to find a job.And you have to judge the two in tandem.And the point I make is this, that before, when we had 4 per cent unemployment, interest rates were double what they are now.When you have low unemployment, there will always be more pressure on inflation – you would always expect interest rates to be higher during a period of low unemployment than a recession.But we still have interest rates lower today than they were in the recession.And there is the graph.
JOURNALIST:
Mr Costello, Jon Faine went on radio this morning and said that (inaudible) interest rate rise in November.He said he remembers speaking to you (inaudible) election at the time when interest rates could rise and that you said they won’t be rising in November, take my word for it.(inaudible) comments today?
TREASURER:
Look, if he wants to ask me on interest rates he can ask me on air and I’ll answer his questions.And the transcripts are all there and I refer you to them.
JOURNALIST:
Mr Costello (inaudible)
JOURNALIST:
(inaudible) no interest rate rise?
TREASURER:
Look can I tell you – economic data moves on a daily basis.On a daily basis.And I am not going into what I may or may not have said because if Jon Faine wants to ask me a question he can ask me a question.
JOURNALIST:
(inaudible)
TREASURER:
Hang on, like you can ask me a question and I will answer it and it will be here for all of us to see and know.
JOURNALIST:
Why shouldn’t we discuss it though?You were quite happy when Peter Garrett said to Steve Price in an airport lounge.Why shouldn’t we discuss what you said to Jon Faine off-air?
TREASURER:
Because I’m not saying that the Federal Government will put out a policy and turn on it.I have never said to anybody I would change our policy.
JOURNALIST:
Some people might say that the (inaudible) interest rates (inaudible)
TREASURER:
No, I don’t think so.Peter Garrett said he was putting out a policy which he intended to change.
JOURNALIST:
What did you mean by that comment thought, when you made it to Mr Faine?
TREASURER:
Oh look, can I tell you – these things move a daily basis and if Jon wants to ask me a question on-air or anywhere else I am very happy for it to be recorded and transcribed and I will refer you to the transcript.
JOURNALIST:
Did you think at that point though that the…
TREASURER:
I refer you to the transcript.
JOURNALIST:
…Reserve Bank wouldn’t raise rates during an Election campaign because of the political…
TREASURER:
I refer you to the transcript
JOURNALIST:
Treasurer, would you prefer journalists stay out of election campaigns?
TREASURER:
I am very happy for journalists to be in election campaigns.
JOURNALIST:
(inaudible) because this is throwing supposedly (inaudible) about conversations into the white-heat of the election.
TREASURER:
No, no, no, look…
JOURNALIST:
(inaudible)
TREASURER:
Pardon?
JOURNALIST:
It’s not my idea of journalism by the way, just throwing an off-the-record comment into the white heat of the election campaign (inaudible)
TREASURER:
Well, you know, it’s up to journalists to make their own judgements in relation to this.I front up at news conferences every single day, anyone who wants to ask me a question, ask me a question.The cameras will record it.I am very happy to do that.
JOURNALIST:
Given the pressures in the economy, if you were going to look voters straight in the eye and tell them what you thought was going to happen to interest rates over the next short to medium term over the next year – what advice would you give homeowners?
TREASURER:
I would say to homeowners that the risk of a Labor election is very real, that the Australian economy is delicately poised.We have unemployment lower than at any period in 30 years – that naturally puts pressure on inflation.We also have world record oil prices.We have a lot of instability coming out of the United States.It’s not just a question of not having the experience to manage these pressures – it’s having the policies which are born of experience that is going to count.The policy of Kevin Rudd and the ACTU to change industrial relations will put pressure on inflation.And that will out pressure on interest rates.I don’t just make the point that is inexperience – I make the point, that is inexperience has led to bad policy.It has led to bad policy in relation to industrial relations.Now, Kevin Rudd says on other areas of policy he is the same as us.He says he has adopted Budget policy, my debt policy, that he has adopted my tax policy and I would say to people these policies, born of experience – the policies which he endorses – why go the imitator?I would also say this – I have not heard a single policy from Kevin Rudd in relation to inflation that would make any difference.If you were to say to Kevin Rudd today, what is your policy for managing inflation?He would probably say to you ‘well, I will spend more on education’ or ‘I will spend more on infrastructure’.Spending on education is a good thing and you might get dividends for secondary students in five or six years and for primary students in 10 or 12 years or pre-schoolers in 20 years.But it is not a policy for next year in relation to inflation.I am not saying it is a bad thing but it is not a policy for next year in relation to inflation.And I think a lot more scrutiny has got to be put on Kevin Rudd because Kevin Rudd always lapses into these broad generalisations but never explains what effect it would have in managing inflation next year or the year after or indeed during the next Parliamentary term.
JOURNALIST:
Mr Costello, if you are re-elected do you anticipate that interest rates will continue rising and do you think the necessary consequence of lower unemployment and people should just cop it if they want more jobs?
TREASURER:
The only way I can answer that question is to say to you that our forecast for inflation in 2007-08 are for a CPI of around 2 ¾ per cent - that is our forecast.And that is within our inflation bandwidth.
JOURNALIST:
(inaudible) interest rate rises?
TREASURER:
Well, that is the only way I can answer your question.
JOURNALIST:
Mr Costello, with the Reserve Bank saying that that it is going to get above three per cent by March next year, do you think Treasury is going to revise that inflation forecast upwards?
TREASURER:
I don’t think so.That is the Treasury’s forecast.I don’t even see, by the way, in what the Bank said today, a disagreement.What the Bank said today was that its measures on inflation are likely to be above three per cent in the March quarter of next year.Now, bear in mind the target is two to three per cent consumer price inflation on average over the cycle.It will go above three per cent at times, in fact it has.It will go below two per cent.In fact it is below two per cent now.Below two per cent now, so that is why you have an average objective.
JOURNALIST:
With your tax cuts coming in next year you don’t think that is going to put upward pressure on inflation?
TREASURER:
The reason why I released our tax policy in this election, now faithfully copied by Kevin Rudd, is that I believe we need a more competitive tax system and that is part of building the capacity of the Australian economy.And that is very, very important, to make this economy more competitive and to build capacity.Our modelling showed that our tax policy will get 65,000 more people into the work force, right?Now, you are looking at near-full employment.You want to keep the Australian economy growing.You have got to get more people into the workforce.Our tax changes are a key way of doing that.A key way of doing it.And if we didn’t get another 65,000 people into the workforce, incidentally, if you had 65,000 fewer people into the workforce, I think you would have greater inflationary pressures.
JOURNALIST:
Mr Costello, you seem to have been mixed message on inflation though – both you and the Prime Minister today have been emphasising at some points that the inflationary pressures and therefore experience is needed and Mr Rudd would be a risk and so on.On the other hand, sometimes today and during your press conference on the CPI, you were suggesting that all those pressures were contained, you referred again to the estimates.What is the message?Are we in danger of inflationary pressures or is it under control?
TREASURER:
When I did a press conference on the CPI I made this point: that consumer price inflation, the Consumer Price Index, on an annual basis, is below two per cent.That is a fact.And the point I was making was that again no consumer likes price rises but price rises in the last year were quite contained.Now, we had the statement from the Reserve Bank today, that it sees both measures of inflation going above three per cent in the March quarter.I think we can handle inflation with a four per cent unemployment rate or lower, providing we have the right settings.And the biggest right setting is our industrial relations changes.But we cannot handle, just like we couldn’t handle in the past, a four per cent unemployment rate with a single digit CPI around two to three per cent.In 1974 we couldn’t handle it – we were at 16.5 per cent.In 1951 we were at 22 per cent.We cannot handle going back to those old systems of industrial relations on a four per cent unemployment rate and keeping inflation low.I don’t think Mr Rudd, if he thought about that, would disagree.But he can’t afford to think about it because he is far too in hoc to the ACTU and that is his big economic problem.Thank you.