TREASURER:
Today's national accounts show that growth eased in the December quarter but it remains very solid. Real GDP growth rose by 0.6 per cent in the December quarter to be 3.9 per cent higher through the year. Domestic final demand grew by 1.6 per cent in the quarter to be 5.7 per cent higher through the year.
Consumption growth over the year has been supported by strong growth in household incomes, reflecting growth in both employment and wages.
New business investment remains strong, rising by 0.6 per cent in the December quarter and 11 per cent through the year.
Net exports detracted from GDP growth in the December quarter, reflecting ongoing weakness in export volumes and strengths in imports, This strong growth in exports is further evidence that domestic demand continues to outpace domestic supply, I think highlighting, yet again, the importance of the Government's supply side policies.
Now, while domestic demand has been growing strongly, it has not been matched by increases in the economy's productive capacity. The national accounts show there was no productivity growth whatever over 2007 – zero productivity growth in 2007. And over the last five years, average productivity growth has been lower than in any other equivalent period in the last 16 years as you can see there from the graph.
So, these figures show our economy in the rear-view mirror. Really, what we're looking at here is October, November and December. So, they do paint a portrait of the economic landscape that we inherited. So, what we do have is a relatively strong economy but one that is absolutely shackled by very poor productivity growth and by capacity constraints that are pushing up inflation. That is the economic story in these figures today.
The productivity outcome for the Costello/Turnbull years was simply zero growth. And as you can see from the other graph that when productivity began to turn down inflation began to tick up. And that is the story that the Rudd Government is dealing with.
These figures underscore the importance of the Rudd Government's approach, our determination to lift productivity, our determination to increase the supply potential of the economy so that we can grow strongly with low inflation. That's the lesson here. We do need to lift the productive capacity of the economy. We do need to lift productivity growth if we are going to continue to grow strongly with a low inflation outlook.
That's our challenge. It's a challenge we accepted on day one and it's the one we've been working on from day one. Over to you.
JOURNALIST:
Mr Swan, your predecessor claimed that the low productivity was because the economy's going through an investment phase. Do you see some investment figures recently which show they were a bit strong? Do you think this will start to self correct when investment comes through?
TREASURER:
What you can see here is a long-term decline in productivity. And thank you for the question, Paul, because we did have a debate about this right through last year. It is the case that there has been an investment phase where a lot of investment has come through the system and we haven't necessarily seen all of the outcome of that. But the truth here is that the decline in productivity growth is broadly-based, it's across the board and it's been going on for a long time. And that's why we have talked so much in recent years about measures to lift productivity growth to enhance the productive capacity of the economy. Because the outcome of the situation we've got at the moment is that demand has been exceeding supply precisely at the time that our productivity growth was going down. Now, to avoid the situation where in we've got to lift that productivity growth, we've got to invest in the drivers of productivity which is what our agenda is about. We've got to enhance the supply side capacity of the economy. That's why the tax cuts are important, for example, to enhance labour force participation.
JOURNALIST:
Didn't the Treasury papers in the Budget last year talk about the fact that there'd been a bit of a take-off in productivity in some sectors like mining where you're starting to get the benefits of investment?
TREASURER:
Sure, there is some pick up in some sectors but what this shows is that over a five-year period across the board, we are performing very poorly and the figures today show zero.
JOURNALIST:
What does it also say, Treasurer, about the wages outcomes that were achieved under the former government's industrial relations reforms? Have you been able to get detailed work done yet on whether you were getting productivity gains from those negotiations?
TREASURER:
There is no evidence to indicate that at all. And as you know, the various measures of wages growth in the economy, including the measures in the accounts today, show wage outcomes at the higher end, just like they have with all the other data. They're higher here as well, although less than the wage price index which we received, I think, last week.
JOURNALIST:
Mr Swan, you've made clear that you're in the process of cutting spending in the Budget. If we go to state budgets, should they also be looking at savings except in areas which add to capacity?
TREASURER:
Well, our general principle is that we should have taxes as low as possible consistent with the provision of quality public services. And for any good government, that ought to be an objective that we have. So, I think any good government ought to be out there on the lookout for wasteful expenditure, to be eliminating it, and to be directing it towards enhancing the productive capacity of the economy.
JOURNALIST:
Do you think there's a lot of scope for that in state budgets?
TREASURER:
I'm putting together a Federal Budget at the moment and part of that Federal Budget is a very big package relating to reform of Federal/State relations. We've talked constantly for the past year about how we can put in place a framework which will encourage the states to engage in reform in areas like health and education. They're critical and a very important part of this story about lifting the productive capacity of the economy.
JOURNALIST:
The terms of trade picked up again in the figures and Malcolm Edey this morning was talking about terms of trade perhaps up five per cent. What's that going to do in terms of 07/08 Budget and 08/09? Are you going to be sitting on far more money than you had anticipated (inaudible) back in December?
TREASURER:
There are swings and roundabouts here. That may produce additional revenue but there are other events occurring in markets which will impact on the revenue as well and will head in the other direction. So, it's a bit early to give you the final revenue outcome but I think there are swings and roundabouts. Unquestionably the country will benefit from the increase in commodity prices. But on the other side of the ledger some revenues will be down as well.
JOURNALIST:
Are you thinking revenues might be showing up on the share market?
TREASURER:
Yes, and financial markets.
JOURNALIST:
Are you going to see less profit?
TREASURER:
Well, I think we'll see less there and we might see more on the other side of the ledger but its early days yet. These figures do bounce around and all of that will be presented on Budget night.
JOURNALIST:
On rates, what increase above 0.25 percent by the banks would be unacceptable?
TREASURER:
I've made it very clear that the banks should be mindful of the financial pressure that Australian families are under. They've had eight interest rate rises in the last three years. That's a very big burden for a lot of people struggling out there. So, I'd ask them to be mindful of those financial burdens that their customers are under and one of the reasons I put in place the account switching package over a month ago was to give consumers the capacity if they were unhappy with the behaviour of their bank to more easily shift their account. We're serious about that and that process is being implemented at the moment.
There's also the complicating factor that the borrowings the banks make to fund their activities are under pressure. That is part of the fall out from the US sub-prime crisis and it is occurring at the moment.
They have to strike the right balance between the interests of customers on the one hand and shareholders on the other but I'm an advocate for people, for the national interest and I would be asking the banks to be very aware of the tremendous financial pressure many people are under at the moment.
JOURNALIST:
Mr Swan, your predecessor used to get on the phone and talk to the banks about interest rates. Have you been doing that?
TREASURER:
Well, he wasn't very successful, was he?
JOURNALIST:
Have you been on the phone to any of the CEOs?
TREASURER:
I've been constantly on the phone talking to people in the financial services sector through the whole of January and February as the fallout from the US sub-prime crisis worked its way through financial institutions and impacted on a number of institutions in this country. So, I've been talking to them all the time.
JOURNALIST:
Have you specifically urged them to show restraint on interest rates?
TREASURER:
Yes, I have and they can speak for themselves. You will recall back in January I did urge restraint. Some banks exercised restraint at that time and others increased their rates over and above what I deemed to be a reasonable amount at the time and I called it for what it was.
But there is no doubt that there is pressure out there on their borrowings caused by the fall out of the sub-prime crisis. The question is the fine judgement that they must make between the needs of their customers and the needs of the shareholders.
JOURNALIST:
Do you think they should accept lower profits? Aren't they going to have to pass on the costs or accept lower profits?
TREASURER:
We don't run a centrally regulated planned economy here, Tim, but what I will say is, I will ask them to be mindful of the financial burdens on people with mortgages out there. We've had eight interest rate rises in three years.
I was talking to a lady at the Community Cabinet on Sunday and it would just break your heart. She came up. She had her two young children with her. The young boy said to me, he said 'Mr Swan, what can we do about inflation'? And I thought, this is an interesting question from someone who's about 11 or 12 and I said 'why do you ask'? And his mum chimed in and said that she's paying 60 per cent of her income in mortgage repayments. And this is obviously the cause of an enormous amount of stress and discussion around the kitchen table.
JOURNALIST:
Can you get more competition into the banking sector? You've talked about tackling the issue of exit fees to make it easier for people to go…
TREASURER:
Too right we have.
JOURNALIST:
Do you expect more competition in the banking sector? Is that a goal, and do you believe it's achievable?
TREASURER:
Steve, it's always under review. It's important that we do have healthy well capitalised banks. I'll make that point. It's also very important given what is going on in international financial markets at the moment.
But secondly, it's important that we have strong competition and indeed after we had the debate in January about the capacity for people to move their accounts across banks, one bank – and I won't name that bank – put forward a new account which did abolish exit fees.
Now, as you know, as part of the package that I brought down about a month ago, we've got an ASIC review of entry and exit fees and they are off performing that task at the moment. But everything that we can do to make our banking system more competitive, we will do.
JOURNALIST:
Does the pressure though, that the banks are facing in increased borrowing costs justify a 0.3 percent rise, for instance? What is the balance you refer to that they have to strike?
TREASURER:
They will have their assessment of what their funding cost increases have been and they move around all of the time. This was part of the debate we had back in January. There is a debate about what the marginal cost increase is compared to the average cost and which should be applied. These rates internationally are moving all over the place at different times. We are about mark three or four of the fall out of the US sub-prime crisis and what it means for the availability of credit. So, it's a moving feast. I'm not going to nominate a particular figure.
JOURNALIST:
Now that you've had a chance to look at what's happened with the sub-prime crisis (inaudible) met with the Council of Economic Regulators and the Industry Group, have you thought about the possibility of looking at a wider ranging enquiry into the financial sector particularly, given Labor's interest in creating a financial hub, and whether one way to improve competition is actually to get more banks into the field?
TREASURER:
Well firstly, there will be lessons to be learned in terms of our regulations and the operation of our authorities from the US sub-prime crisis and all of its fall out on markets but I think it would be premature to be committing to a Wallace type enquiry at this stage while these events are still unfolding.
I've been receiving reports regularly from the major regulators, from the Reserve Bank, APRA, ASIC and the Treasury. We are watching this like a hawk and we are taking our time to gather all the material.
I'm due to receive a report, I think late this week or early next week from ASIC about some events recently in markets. We will look at that but we will look at it in a considered and measured way and when we've done that we'll announce our response.
JOURNALIST:
Do you have any concerns about Australia's foreign debt level which has now passed the $600 billion mark?
TREASURER:
I have in the past expressed concerns about levels of foreign debt and I've also expressed concerns about our current account. I've done that in the context of arguing that we need to make our economy much more productive. We need to make our economy much more productive because we do need to be competitive in the world. We need to lift our export performance. But the flip side of all of this is also that in recent times we have become more open to the world and the world has become much more open to us.
And what we've seen and what is reflected in the balance of payments yesterday is also the surge of inward investment that was being referred to before which has gone particularly into mining but other areas of the economy which also partially explains the current account deficit that was recorded yesterday. So it's swings and roundabouts.
JOURNALIST:
Can I just ask you about the burden of these interest rate rises. It seems that it is not very equitable that 30 per cent or so of people who have mortgages will shoulder most of the pain of the fight against inflation.
TREASURER:
Sure.
JOURNALIST:
What measures are you looking at as Treasurer to share that burden among higher income earners? Are you looking at Family Tax Benefit B? Are you looking at means testing benefits to high income earners? How are you sharing the pain?
TREASURER:
Well, first of all, monetary policy is a blunt instrument, a really blunt instrument. Unfortunately, the previous government just left all the work to the Reserve Bank. And it didn't use fiscal policy to put downward pressure on inflation. It, in effect, backed the Reserve Bank into a corner so we had eight interest rate rises. Seven interest rate rises, now eight in a relatively short period of time. So, what we have said from day one is that the Federal Government has to lead by example. Lead by example by getting rid of reckless spending and acknowledging the role that that has played in pouring fuel on the inflation fire. So, $10 billion of savings during the election campaign and more to come, more to come during this budget process.
We said personally as politicians and representatives of the community that we would exercise some restraint, which is why the Prime Minister put the proposition he did about parliamentary salaries to our Caucus a couple of weeks ago.
We are absolutely and acutely aware of the financial pressures on average families who are struggling with a mortgage, who are trying to feed, educate and house their children. Which is why, firstly, we are emphatic that we will be delivering our tax cuts, absolutely emphatic, for a couple of reasons. Firstly, it rewards the hard work of the great bulk of lower and middle in this country who have worked to make this economy strong, who haven't a fair share of tax cuts in my view in recent years. They have earned them. They will be delivered, and they will be delivered at a time when these people are under when these families, working families, are under such tremendous financial pressure.
It's also wise to put forward our proposal in terms of the out-of-pocket child chare expenses, the 50 per cent rebate. That's a very important measure, not only to ease the cost of living pressures, but also in conjunction with the tax cuts to enhance labour force participation at a time when there are chronic labour and skill shortages in our economy, which are putting upward pressure in inflation.
So, those two measures combined with the forthcoming education tax rebate are all ways which we can assist working families out there with cost of living pressures. And you will recall. During the campaign as you will recall we cancelled $3 billion of tax cuts for high income earners. We did that in recognition of the fact that we had to make some savings and that high income earners could afford to contribute to those savings given the extent to which tax cuts had gone to that group in recent years. That was very much in our mind even before we got to the point of finding that inflation in Australia had hit a 16-year high in the months of October, November and December.
Our search for all of the possible policy solutions to tackle this inflation challenge continues. And as you know we put out our five-point plan. Our five-point plan which is a new era of fiscal restraint encouraging private savings, dealing with skills, dealing with infrastructure and enhancing participation will be reflected in our budget. And hopefully, in that budget the proposals we put forward will be a very big instalment in tackling the inflation challenge and taking the inflation monkey off the back of those householders out there who have been belted with interest rate rises. Because if we don't deal with inflation which attacks family living standards, erodes savings, and really, if you like, is a threat to prosperity. Then everything else we aspire to as a nation becomes much more difficult.
JOURNALIST:
(inaudible) Do you now rule out raising petrol taxes in the budget? And given the inflationary aspect of that, would you consider cuts in petrol taxes?
TREASURER:
Good question, Paul. I don't speculate on budget measures either way. So, you can't read into my answer a yah or a nay. I made this point yesterday. I have made it at every doorstop since I have been Treasurer. And undoubtedly I will make it at the next 20.
JOURNALIST:
Treasurer, there are figures out today from (inaudible) their employment index. The employment index talks about softening in employment. Now, is that in line with what analysis you're getting from Treasury? And given what you said today about an easing of growth, do you expect that that softening in employment to continue?
TREASURER:
Well, I made the point about the figures today that they reflect what has been going on in October, November and December. And, of course, the figures today would not necessarily reflect the impact of probably the last three official rate rises as well. But nevertheless, there are countervailing forces out there as well, and one was mentioned before, increasing commodity prices and so on. I notice that one of the Opposition has been saying that somehow we have to choose between strong growth, low unemployment and low inflation. Well, that is just a complete nonsense. What we have to do is deal with the inflation challenge left to this Government and we have accepted full responsibility for dealing with it. But what the Opposition ought to do is to accept some responsibility for the fact that there is an inflation challenge in the first place. And if they don't think that inflation should be tackled, then they should say so. And if they have got a positive alternative about how we can deal with inflation, they should say so. But the most important thing that we can do, as a Government, is to deal with the inflation challenge if we want to get strong growth outcomes and strong employment growth.
JOURNALIST:
Treasurer, you're accepting responsibility for that. You are not accepting Labor, you know 100 days in, the fault is all theirs? The blame squarely lies with them?
TREASURER:
It doesn't matter. I spend very little time thinking about the opposition. I spend a lot of time waking up in the middle of the night worrying about families that have had eight interest rate rises in three years. That's what worries me. Because this is very important. This country put a lot of time and effort many years ago into breaking the back of inflation. We cannot let this inflationary surge continue. It has to be tackled. The health of the economy depends on it. The jobs of Australians depend on it. And we're focused on it 100 per cent.
JOURNALIST:
As a Treasurer determined to show restraint. Do you have any qualms about Joel Fitzgibbon kissing goodbye (inaudible) with the canning of the Seasprite helicopter project?
TREASURER:
I haven't got any comment on the Seasprite, except to say this, where we can find savings in the national interests we should.