TREASURER:
Good morning Greg and congratulations on the program. The state base program that is certainly very welcome.
CARY:
Thank you very much for that. Some of this news you are hearing today is not quite so welcome. Stuart is saying that we are not in any way isolated from what is happening in the United States where they are increasingly talking recession. What is your take on that?
TREASURER:
Well, we are not isolated. Australia isn't immune from the fallout from the US sub-prime mortgage crisis. Just this morning actually Greg I spoke at length to US Treasury Secretary Hank Paulson about a number of issues and also just to get an update on how he saw the US economy going. And, of course, the US economy is slowing — there is no doubt about that and there are substantial problems in their financial sector caused by the US sub-prime mortgage crisis. He remains optimistic that the US can ride it out. But if there is any country in the world that can ride out a crisis which has been induced in the US it is this one. Now, financial institutions are in pretty good shape. You will recall that a couple of days ago I had a meeting in my Brisbane office with officials from APRA, officials from the Reserve Bank of Australia, and Treasury officials to once again talk through all these issues, and I did that at some length and essentially, our regulatory bodies which are world class, are satisfied about the financial health of our major deposit taking institutions.
CARY:
Treasurer, what is it that you can do in an active sense though with the banks themselves. It now turns out that the big four have a billion dollar direct exposure to the US sub-prime mortgage market. I think in the early stages, they indicated that we weren't all that exposed at all.
TREASURER:
I would like to check the details of that story today but as Stuart Washington said before, I don't think that there is a very substantial direct exposure on the part of Australian institutions, but our regulatory authorities are looking at these issues all the time and when I met with them only a couple of days ago they were of the view that there wasn't any substantial direct exposure. It is the indirect effects that we are facing — the indirect effects of borrowing money on international capital markets. You see, our major banks to fund their book do source a substantial amount of their loans off-shore and that has involved an increased cost for all of our deposit taking institutions and lenders. The debate we had earlier in the week is what was justified by the impact of this US sub-prime crisis. I made it pretty clear that the officials that I was talking too had presented evidence to me which indicated the sort of rise that may be justified by the sub-prime crisis was much closer to the rise that was put in place by the NAB than it was to the rise that was put in place by the ANZ. And I expressed my view very strongly that I thought the increase from the ANZ was excessive and I asked all the banks to be very mindful of the fact that Australian families with mortgages and indeed Australian businesses do carry substantial debt levels and to be mindful of all of those factors when they were taking their decisions in a commercial market.
CARY:
You can ask them and you can firm in how you are asking them and you can ask them in good faith on behalf of all Australians in that situation, but they don't necessarily show an inclination to listen. If they don't listen, what can you then do?
TREASURER:
Well, there is a free market out there but I expressed a very strong view and I note that the rise consequent to that that was announced by the Commonwealth Bank was less than the previous rises that had been announced, and it is a matter for the Commonwealth Bank to comment as to why they took the decision that they did. But essentially what I have to do, and this is a very important task for the Rudd Government, is to get the inflation challenge that we have inherited from the previous government under control, because we do face for a period of time an elevated level of inflation at or above the Reserve Bank's target band. And dealing with that is terribly important if we are going to keep downward pressure on interest rates in the long term and assist the Reserve Bank when it takes its independent decisions about the official cash rate.
CARY:
Treasurer, how do you do that. I heard you at one point during the week saying we need to pull our belts in. Exactly who does and to what extent?
TREASURER:
I made a couple of points, and I said we all needed to show we all need to show some restraint. But I made that comment particularly in relation to the decision made by the ANZ, but I didn't believe that they had shown the restraint that they should have given the evidence that I had presented to me about the increase in the average cost of their fund. But it applies more generally in a higher inflation environment such as we face. We do need to tackle that because higher inflation is not good for anybody — it is not good for working families, it is not good for business, and it is not good for savings. The point I was trying to make is that dealing with that inflationary challenge which has been building for a long time is a very significant priority for the Rudd Government and the first thing we announced that we would do is that we would make our contribution to restraint by finding further budget savings in the budget which is to be delivered in May. But also, I think what we need to do, and I know you are passionate about this, we need to be investing in our people, we need to be investing in skills, and we need to be redirecting spending away from some areas in the budget right through to those productive areas where the previous government didn't make the investment and the consequence was upward pressure on inflation and upward pressure on interest rates. So, investing in education was a key priority we outlined in the campaign and we got to work straight away dealing with the skills package and education more generally and, of course, infrastructure bottlenecks which are also pushing up the costs of doing business and pushing up inflation.
CARY:
Treasurer, let me ask you this. Based on the discussion we are having, are you talking about an increased likelihood of another interest rate rise in February? Do you envisage that raising interest rates for those that have mortgages are necessarily the best and most creative ways of achieving the ends that you are talking about? It is only targeting a small percentage of the Australian public and even those that have mortgages may still be well placed to spend I guess…..?
TREASURER:
Well I think what we have learnt from the last 20 years or so is that we do need an independent Reserve Bank with its chartered a target inflation and keep it within the target band if we are to have long-term wealth creation. So they are matters for the Reserve Bank and which is why one of the first steps we took was to make the Reserve Bank more independent by a couple of decisions that we took. But we have to back up in Government the Reserve Bank when we look at our fiscal policy more generally. And that is why we have said that the path that the Government has to play, which the one the previous Government was complacent about is making sure we lift productivity in our economy and that comes back to those critical investments in skills and education more generally, and coming to grips with infrastructure bottlenecks which means coming to grips with Federal/State relation. All of these things are the long-term challenge to producing a lower inflation outlook and a more productive economy which will in the end make us all wealthier.
CARY:
I know you need to be elsewhere but just to finish, a question without notice, Ricky Ponting and the Australian Cricket Team are getting hammered from all angles. What is your take?
TREASURER:
Look, I have a much more balanced view of it all. I mean, I have got a lot of respect for Ricky Ponting I have got to say. I think he is coping a bit of a rap at the moment but nevertheless I am really pleased that we have seen some common sense come forward and there has at least been some solutions nutted out. I think the most important thing is to get these people all talking again, to get these recent events behind us and get on with the game of cricket because I tell you what, for all us passionate cricket fans out there, I just want to see them on the field playing cricket.
CARY:
I look forward to talking throughout the year. Our Federal Treasurer, Wayne Swan, thank you.