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Keep spending in check, says Howard -

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Keep spending in check, says Howard

Reporter: Kerry O'Brien

KERRY O'BRIEN: The Prime Minister, now setting sail for his fifth election win next year, is
particularly sensitive to interest rate movements, given his promise at the last election to keep
rates low. We recorded this interview with Mr Howard in Brisbane just a short time ago. Prime
Minister, you and the Treasurer have been talking a lot about external price factors like bananas
and oil driving inflation up. But the Reserve Bank governor made clear today that interest rates
are really going up because of other factors in the economy. Do you now accept the bank's judgment
that this rate rise was necessary because of those other factors in the economy?

JOHN HOWARD, PRIME MINISTER: Well, I certainly have today, Kerry, accepted, regrettable though it
is, that there was a strong economic case for the interest rate rise today. I don't like it, I'm
sorry about it, but I don't think the bank had any alternative. In the governor's statement, one of
the reasons he gave was the increase in commodity prices. Well, oil is a commodity. There are other
price increases and obviously the price of fuel is seeping into the cost structure of many
businesses and that is certainly part of it. Look, on bananas, I think we all accept that bananas
are in one quarter and out the next. Bananas were a cause of the inflation rise last week, but the
bank, quite rightly, looked through that and said, "Well, that's a one-off factor and it will
disappear in the next quarter."

KERRY O'BRIEN: The bank has noted that both individuals and business are continuing to borrow and
spend, despite the last rate rise in May. Isn't the bank also now having to factor in, looking
ahead, the tax cuts that are now washing back into the economy?

JOHN HOWARD: They didn't mention the tax cuts.

KERRY O'BRIEN: But you would have to assume that that's a part of their equation, looking ahead,
surely. They are not insubstantial?

JOHN HOWARD: Well, before the last increase, the governor of the Reserve Bank said that we could
afford some tax cuts. He was actually asked that question at a parliamentary inquiry and he said we
could afford tax cuts. It would be wrong for people to have the view that the Reserve Bank was
against tax cuts in the last Budget. The governor said the opposite.

KERRY O'BRIEN: I imagine, though, that it might cause you to think twice about another round of tax
cuts in your election budget next year, particularly if the suggestion is of another possible rate
rise before the end of this year?

JOHN HOWARD: We are a long way off next year's Budget, Kerry. Look, there is some inflationary
pressure in the system. It's not serious. If the bank had not acted today, it might have become
more serious, and that's why I accept, painful politically, though, interest rate increases are,
that what the bank did was responsible and could well have pre-empted or obviated the need for even
more unpopular action in the future. You can't assume in a strong economy, that every piece of news
is going to be good news. Every so often, corrective measures do need to be taken to contain cost
pressures and these are the pressures of a strong economy. They are not the pressures of a

KERRY O'BRIEN: In the last election campaign, you promised to maintain record-low interest rates
and here is a graphic from your party election ad during the campaign. We've highlighted the
reference to interest rates. But rates have now gone up twice since that promise was made, with
another rise, as I said, tipped before the end of the year. In truth, that was an impossible
promise to keep, wasn't it - record-low interest rates?

JOHN HOWARD: Well, without being too pedantic, average interest rates over the last 10 years have
been lower than at any time during the previous two or three decades and interest rates now are
still lower than what they have been at any point since financial deregulation. But, Kerry, the
phrase that I constantly used in my interviews - I think probably some with you - was that we could
keep interest rates lower than the Labor Party, and that is undeniably the case. I think many
people still remember how they peaked at 17 per cent when Mr Keating was in charge. The average
housing interest rates under the last 10 years have been about 7.25 per cent, and under the
previous 13 years, they were 12.75 per cent. That's a whole 5 percentage points difference.

KERRY O'BRIEN: OK. But housing interest rates are now moving up to the variable rate, up to 7.8 per
cent. If there is another rise, that will put it over 8 per cent. Now, that is substantial,
particularly when you take into account that household debt has almost doubled since interest rates
were last at this level in 2001. That surely means that many people's capacity to pay must be
seriously deteriorating. Would you agree?

JOHN HOWARD: Kerry, I don't deny for a moment that any interest rate increase creates difficulties
for people. Look, I wish....

KERRY O'BRIEN: Particularly in this climate where, as I said, household debt has almost doubled in
the last five years?

JOHN HOWARD: That is true. One of the reasons for that, of course, is the value of the assets have
gone up over that same period of time, and people feel more willing, because of the stability of
the economy, the continuation of low inflation, the still very low interest rates, compared with
the '80s and early '90s, and the increase in the value of their homes - they feel able to go deeper
into debt. People borrow more when they feel safe and secure, and that is the reason why many
people have gone heavily into debt. When people talk about the high debt burden we have, they ought
to look at the high asset values we have because...

KERRY O'BRIEN: But they are also having to look, aren't they, at their capacity to repay and isn't
it a fact that while I think in the last 10 years the national median price of a house has gone up
by 144 per cent and so therefore so have mortgages, at the same time wages have risen, on average,
by 56 per cent. So if people are borrowing more to chase the price of the asset, then their
capacity to pay must be diminishing.

JOHN HOWARD: Well, in the case of some people the answer to that is yes, and I would take the
opportunity of counselling people not to go too heavily into debt. I think some people do go too
heavily into debt and I think some people do overgear themselves.

KERRY O'BRIEN: Does it bother you that the banks seem to keep finding new ways to sell people
loans, regardless almost of what collateral they have got now? That certainly seems to be the
message, doesn't it? Hasn't there got to be a day of reckoning in the economy when the country is
afloat in so much debt?

JOHN HOWARD: Well, I don't believe we are anywhere near that situation. We have a lot of debt
because people feel prosperous and they feel able to make commitments they didn't feel able to make
some years ago, and I think some people do overextend themselves. The question of whether the banks
throw loans at people, I think maybe some of them do, but in a deregulated financial environment, I
don't think it's the role of the Government to run the rule over every single proposition. But if
the Reserve Bank thinks the banks are going beyond the pale, well, they have a role in relation to
it. But the fundamental point is that people should not overextend themselves and I think the
interest rate rise today is a reminder that people should not overextend themselves and that whilst
we can expect a continuation of the good times, we can't expect them to get better and better and
better all the time without there being some hurdles along the way and some price to be paid. I
think, in a way, the bank's move today is a reminder to the whole community that whilst we are
living in very prosperous times with low unemployment and booming business investment, terrific
exports of our resources, we nonetheless have to be careful that we don't overextend ourselves.

KERRY O'BRIEN: On your decision to seek another term in office, Mr Howard, I have never asked you
about your wife's views before, but this presumably was one instance where this might have been a
shared decision. Was it a shared decision? And how enthusiastically did Mrs Howard embrace the idea
of you staying on for another term?

JOHN HOWARD: Well, I don't think Janette would mind me disclosing that of course, I talked to her
extensively. I also talked to my three children whose advice I value. It was a joint family
decision. The view was taken I was fit and well, touch wood so far, that there was a clear feeling
in the party that I should continue, and I felt very strongly I had something to offer over the
next little while for the Government and the party. It won't be easy. I mean, in some respects, the
easier decision would have been to have walked away?


JOHN HOWARD: Simply because you've had four election victories behind you. I could easily have done
that, but I took the view that the right thing to do by the party and by the nation was to stay and
that's why I did, and certainly Janette supported it very strongly.

KERRY O'BRIEN: When you say that the decision might have been easier to go, why?

JOHN HOWARD: Well, some people have said to me, "Look, well, John, you've had four wins and
everything," but I don't sort of operate on that principle. I still am very committed to the job -
I like it. I feel I've got a lot to offer, but it's going to be quite tough. I think the next
election for the Government will be tough. It will be the fifth time around, and there are some
challenges and we've had one today, and I understand all of that, but the party was very strongly
of the view that I should lead it to the next election, and very strongly of the view that the team
of myself as leader and Peter Costello as deputy should be there, and...

KERRY O'BRIEN: Very briefly, because we are just about out of time, but it's interesting to
contemplate whether age is any sort of barrier in the collective mind in the electorate. The only
time I think it has been tested was Menzies at the age of 69 and the voters gave him a tick. Had he
had chosen to go...

JOHN HOWARD: He actually got an increased majority.


JOHN HOWARD: You are talking about the 1963 election where he actually went from a majority of two
after the '61 election, to a majority of 20. You're quite right. Now, I'm not suggesting for a
moment that that's going to happen. I think the next election will be very tight, indeed.

KERRY O'BRIEN: But had Menzies chosen to go at 72 or 73, who knows, he may well have got the tick
again. I've checked out a few other leaders. Reagan was 77 when he finished. De Gaulle was 79.
Mitterand was 78. So the sky is almost the limit, Mr Howard.

JOHN HOWARD: I don't want to get carried away with that. I'm committed to leading the party to the
next election, I'm very committed and I'm very dedicated to the task, and I will work very hard to
get all of my colleagues re-elected, but it will be very hard.

KERRY O'BRIEN: John Howard, thanks for talking with us.

JOHN HOWARD: Thank you.