KING:
This morning a new phrase is being bandied about. It's the middle class poor. St Vincent de Paul and other charities are saying they're a new customer; families who once we thought were doing pretty well, a house in the suburbs, kids in private school, and a manageable mortgage. But the 12th rise on the trot by the Reserve Bank yesterday has turned things on its head and the person in the hot seat here who will be held responsible for where our economy is headed is the Federal Treasurer, Wayne Swan. Morning, Treasurer.
TREASURER:
Good morning, Madonna.
KING:
Welcome to 612 ABC Brisbane.
TREASURER:
It's good to be with you.
KING:
You'd probably prefer to be talking about your marijuana days than yesterday's interest rate hike?
TREASURER:
I don't think so, Madonna. I want to talk about all those things that are important to working families out there because I know many of them are going to do it really tough with this latest interest rate rise.
KING:
Well, let's start with this increase, a quarter of a percentage point. Is there any justification for a bank to pass on more than that to mortgage holders?
TREASURER:
Well, I've said that banks ought to be mindful of the tremendous financial pressures that families are under. There's been something like eight interest rate rises in the last three years and that's been really tough. The banks are facing an increase in costs in terms of their borrowing. So, what I said back in January when some banks, I believe, put up their rates excessively, was that we would put in place an account switching package so that customers out there could have the choice to vote with their feet if they were unhappy about what their bank was offering.
KING:
You can admonish them, say that people will be unhappy, that they should be mindful, but is there any real stick you can take to them?
TREASURER:
Well, Madonna, it's a deregulated market out there and what we can do is to make it as competitive as possible and that's why I put that account switching package out there over a month ago.
KING:
They make so much profit. An email I received this morning was saying, look, could you just ask Wayne Swan, does he think they should absorb some of this rise?
TREASURER:
Well, I think some banks have been absorbing some of the rises. They will make that point themselves. But they argue they are facing increased funding costs. They've got a choice here between, on the one hand their customers and their shareholders on the other. The banks are very profitable at the moment and generally the banks in this country are very well run. So, what I say to the banks is be very mindful in taking your decisions about the tremendous financial pressure that Australian families are under. And what I say to the banks is: is be good corporate citizens. Be as good corporate citizens as you can possibly be, given the amount of pressure that people are under.
KING:
You mentioned the phrase, 'corporate citizen'. What about the banks' role in the state some people now find themselves in? I've heard some amazing stories of how much banks have been willing to lend people and it hasn't taken into account one small rise or a change in their circumstances. Do you think banks could have been better corporate citizens up to now?
TREASURER:
Well, fortunately, we are not suffering from some of the problems that have occurred in the United States where there have been large amounts of money lent to people who clearly would have had difficulty in repaying it. What I would say to individuals who are really up against the wall at the moment, talk to your bank about your circumstances, explain to them where you are, and just see what they can do to assist you in the circumstances that you're in.
KING:
You don't think the banks have been over-lending people in Australia up to now?
TREASURER:
Well, certainly there has been some evidence of that at one part of the market, or in one part of the market, but not generally overall, no. But I do acknowledge that people are paying the highest proportion of their income in mortgage interest repayments in our history and after this latest interest rate rise, that means a lot of people are doing it really tough.
I was up at the Community Cabinet at Burpengary on Sunday and this lady came along with her two young children and she was paying in excess of 60 per cent of her income in mortgage repayments and she was really staring down the barrel of a very stark choice. But at least she'd been able to get into the housing market because the prospects for her in the rental market were probably worse. And Madonna, her young son said to me, he said Mr Swan, what can you do about inflation? And I said well, we're going to do everything we possibly can to tackle this inflationary problem so we can put downward pressure on interest rates in the longer term.
KING:
Were you able to give her any comfort? Did she go away happy?
TREASURER:
She understood that her circumstances were very grim and she was working two jobs to get by. And everything that her bank can do to assist her, they should be doing, and I spoke to her about speaking to her bank.
KING:
Like that woman, last night I heard St Vincent de Paul use this phrase, 'middle class poor', and over the past couple of days people have called in to explain what that means from the bottom of their hearts. This is Dave. Can I get you to listen to him? He called me yesterday.
DAVE: Well, we were just struggling with repayments every month so we just decided that the best option for us was to sell. We just simply couldn't afford the basic things. We'd owned our own home for 15 years and we're now renting. We'd probably put ourselves into the middle income. We're probably earning around about $70,000 a year.
KING: That's combined, you and your wife, yes?
DAVE: And we've got three children. You know, the prices of everything are going up. It's a struggle.
KING: It seems really odd, Dave, to be talking to someone with an income of $70,000 a year really struggling and making that choice that they can no longer afford a mortgage in Australia.
DAVE: I think a lot of people are on the cusp of doing exactly what we've just done because I've talked to a lot of people and they on the cusp of you know, either selling up or getting out or trying to ride it out. With the interest rates going up and up, it's just making it so much harder for everyone. I've seen a lot of people out there that are thinking the same thing I'm thinking, we just can't afford this, it's too expensive.
KING:
Treasurer, what do you say to the hundreds of thousands, possibly, of Australians like Dave?
TREASURER:
Well, it just demonstrates why we have to deal with this inflation challenge. Because it's eroding living standards, it's eating away at savings, it saps business confidence and it threatens growth, which is why we've said from day one our number one priority was to deal with the inflation challenge. Inflation in October, November and December hit a 16-year high and that's why we've got to tackle this with enthusiasm and work day and night to bring this inflation down as quickly as we possibly can.
KING:
Explain to us how that works. What causes inflation?
TREASURER:
Well, inflation is a situation where demand is exceeding supply and we've had some severe supply side constraints in our economy. That's why we've said we've got to deal with the skills shortages and the labour shortages more generally. That's why we've said we've got to deal with the infrastructure bottlenecks that are out there and it's why we've also said we've got to put in place some incentives to enhance labour force participation and to reward people who work hard or work a few additional hours.
All of those things will increase supply and on the demand side, what we've got to do is cut back on reckless Federal Government spending and that's why we put forward $10 billion worth of savings during the election campaign and in this Budget process we're looking for further savings to draw back on public demand from the Commonwealth Government.
Those two things combined are part and parcel of the five-point plan that the Prime Minister announced way back in January.
KING:
You are about to spend $31 billion in tax cuts.
TREASURER:
Yes, but it's the total Commonwealth spend that counts. I don't apologise for one minute, not for one minute for the tax cuts we are delivering, predominantly to low and middle income earning Australians who are under tremendous financial pressure as a number of your callers have indicated this morning. Those tax cuts will recognise the pressure they are under and it will relieve pressure in the wage system which is also very important but also it will enhance labour force participation and reward all of those people out there on modest incomes who have worked hard to make our economy strong.
KING:
You say it will enhance workforce participation. If the economy slows won't unemployment grow? If unemployment remains even, let's say on a growth rate of three percent, the Reserve Bank's desire to have less growth than that over the next couple of years surely will mean an increase in unemployment?
TREASURER:
Well, Madonna, it's not a choice between jobs and low inflation. We cannot have continued job creation unless we deal with the elevated inflation that we are facing. Inflation in the end destroys jobs. What we need to have is sustainable growth with lower inflation and if the task has fallen to us to deliver that, then it's a task that we've taken up and we're working very hard on.
KING:
Is the single best way to deal with inflation upping interest rates?
TREASURER:
Well, the Reserve Bank takes its decisions independently and unfortunately what has happened in recent years is that the Commonwealth Government just left all of the work to the Reserve Bank and they put in place a fiscal policy which was expansionary, where they went on a spending spree and they ignored the warnings of the Reserve Bank about the capacity constraints in the economy that were pushing up inflation. So, it's our job now to address those problems in the economy and that's what we're doing.
KING:
Bernie Fraser, the former Reserve Bank Governor, says the rate increase is not needed. He says inflation is being reined in by the US slowdown, the lack of credit and flagging consumer confidence. Is he wrong?
TREASURER:
Well, there'll be a variety of opinions out there. You can talk to any number of economists and former members of the Board and so on, but the Reserve Bank takes its decisions independently of the Government and what it does respond to is inflation. What the Commonwealth Government has to do is take some of the weight off the Reserve Bank and put in place a fiscal policy that deals with the inflationary pressures that are out there here and now. And that's what we're doing, Madonna.
KING:
Why is the impact of what's happening in the US – will what we do here have any real impact on our position or will it largely be dictated by what's happening elsewhere?
TREASURER:
Well, what's happening in the US is that it is causing a slowing in world growth and we are certainly not immune from the fallout of the US sub-prime crisis which as we know is pushing up the rates that local banks are paying for borrowed funds, putting further pressure on interest rates in this country. But fortunately for us, Madonna, we are in the Asian region and growth is still relatively strong here and we've just had a very substantial increase in commodity prices come through. So we are one country that is very well placed to withstand the fall out from the US sub-prime crisis although we're not immune from it.
KING: A question here from John who says he can't understand how raising interest rates might control inflation. He says he's only a layman not an idiot but if you raise interest rates, you're raising the cost of everything - mortgage repayments, rents, business costs will all be passed on to consumers.
TREASURER:
It's a very blunt instrument Madonna. It's not a perfect instrument but it's the instrument that the Reserve Bank uses and it is independent. What we have to do from a Government point of view is put in place a range of policies that put downward pressure on inflation so the Reserve Bank is not in the position that it is today.
KING:
Are you sure you're able to fix this?
TREASURER:
Well, it took a long time to develop Madonna.
KING:
Are you saying it's going to take a long time to fix then?
TREASURER:
It certainly will because inflation didn't happen overnight. It didn't just commence on the 25th November [last] year. Inflationary pressures have been building in the economy particularly since the beginning of '06 and our job now is to deal with them as quickly as we possibly can, as urgently as we possibly can, but they will take some time to deal with.
KING:
Commentators are saying already that we can expect another rate rise in May, the same month you're planning to hand down a fairly tough Budget. Can you see a reprieve for the group of Australians that you and your Leader are calling the 'working Australians'?
TREASURER:
Well we are going to do our best to assist working families not just through the tax cuts we're putting out there, but through a range of other measures that we're bringing in.
KING:
But the tax cuts themselves will be inflationary.
TREASURER:
No, they're not, Madonna. The tax cuts of themselves are not inflationary. It's the total Federal Government spend and we are going to make savings elsewhere in the Budget and eliminate some of the waste that the former government left there.
KING:
So, you're going to cut out more that $31 billion in the Budget to provide the tax cuts?
TREASURER:
Madonna we're not providing $31 billion worth of tax cuts in the coming year. That's over the forward estimates. But we are going to make other savings elsewhere in the Budget. We've made that very clear. We're going to attack reckless spending and wasteful spending and re-prioritise the spending approach of the Federal Government – put more money into skills for example, provide some political leadership when it comes to infrastructure. That's what we need to do to expand the supply side capacity of the economy to put downward pressure on inflation.
KING:
Can we expect with this interest rate rise that house prices will slow?
TREASURER:
I can't become a commentator on the future of house prices but we've got a real problem in the housing market as you were discussing earlier. There's really an affordability problem out there when it comes to both rents and when it comes to people who are buying. The Prime Minister has put a range of measures out there in recent times to address a number of these questions.
For example, we've outlined a First Home Savers Scheme to help first home buyers more quickly accumulate a deposit, and a larger deposit in a shorter period of time. That's one. But secondly, the Prime Minister when he was in Brisbane on Monday talked about measures to increase the supply of affordable rental housing as well and that's very important.
KING:
Treasurer, Wayne Swan, I appreciate your time. I've been inundated with questions while you've been on the line. At some stage, next time you're in Brisbane, will you pop in and allow listeners to ask their questions of you?
TREASURER:
Madonna, I always enjoy being home and I always enjoy being on your program.