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National Accounts: transcript of press conference: National Accounts, interest rates, Budget, petrol excise, world economies, border protection, credit card debt, Productivity Commission reports.



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TRANSCRIPT of

HON PETER COSTELLO MP Treasurer

Press Conference

National Accounts

Wednesday, 5 December 2001

12.00 pm

 

SUBJECTS: National Accounts, interest rates, Budget, petrol excise, world economies, border protection, credit card debt, Productivity Commission reports

TREASURER:

Well let me just make a few brief comments about, first of all about today's cut in official interest rates which cut the official interest rate to 4¼ per cent. I welcome the fact that the major banks and mortgage originators have indicated they will pass that cut on in full. That will represent a saving on a $100,000 loan of about $20 a month. And on the same loan, the new rate which is a little over 6 per cent compared to 10½ per cent when the Government came to office means that on an average loan of $100,000 a family is now saving about $4½ thousand a year. And that I believe is one of the reasons why consumer spending has been strong over the course of this year and the savings are flowing back very directly to families. The major banks have also passed on a cut in credit card interest rates. Some are earlier than others. And I'd say to people who hold credit cards, have a very careful look at when the credit card cut is going to come into effect because some banks are more responsible and more prompt in passing those cuts on than others.

Can I come now to today's national accounts? And today's national accounts show that in the September quarter of this year, the Australian economy grew at 1.1 per cent, which was very robust growth. Very robust growth indeed, building on growth in the March and June quarters of 1.8 per cent. Strong economic growth in Australia, one of the strongest growing economies in the world was accompanied by low inflation.

The growth that we saw recorded in the September quarter, was underpinned by solid household consumption which rose by 0.8 per cent and a very large increase in dwelling investment, which rose 13.7 per cent the largest quarterly increase on record. Dwelling investment of course was led by two factors, one was the low interest rates and today's standard variable mortgage interest rate of 6 per cent is the lowest since the decade of the sixties. And let me make this point, you can go back, you can find a variable mortgage rate around 6 back in the sixties but credit was rationed. Most people had to have cocktail loans. They couldn't get the standard 6 per cent on their mortgage interest rate. And if you actually averaged, averaged the cocktail it was a higher average rate than 6 per cent. So, that's the lowest in thirty years, since, and I am sure some of you weren't even born thirty years ago. You'd have to go back before when your parents were settling down and becoming young homebuyers to find an interest

rate like that.

The housing dwelling investment increase of 13.7 per cent comes off two factors, the low interest rate as I said and also the Government's First Home Owners' Scheme which was an additional $7 thousand dollars for new homes which runs until the end of this month and then begins to taper off.

Private new business investment also grew in September with new machinery and equipment expenditures increasing.

Exports detracted in the September quarter. A lot of our growth had been coming out of exports over the course of the preceding financial year but with the downturn in the world economy exports actually detracted.

The national accounts show that inflationary pressures in Australia are almost nil with the deflator for September at zero. So, not only did we have this strong growth but we had strong growth accompanied by low inflation and production was up across most sectors with strong increases in construction, agriculture, finance, cafes and restaurants, and manufacturing.

The Australian growth rate is significantly higher than any of the G7 countries. In fact over the course of 2001, calender 2001, the Australian growth rate has been about 5 times the average of the G7. As you know, the US is now in recession. Japan is in recession. Europe is slowing and many of the economies in our region are contracting. Particularly severe has been contractions in those countries in South East Asia which are geared to the US business cycle. And we've got a table at the back of the press release which will show you over the course of the year in Singapore the contraction has been about 8 per cent and in Taiwan about 4 per cent. These were economies that are geared in manufacturing, particularly ICT-type manufacturing, to the US business cycle have been very severely hit by the American downturn.

So the story is of an Australian economy which is growing strongly in the midst of a global downturn with a synchronised downturn in America, Europe and Japan, as serious as anything we've seen in the last two decades. The point I keep making is we will not be immune from these developments. This is a very, very difficult world situation. And it will start to detract from Australia's export performance over the course of 2002.

But the domestic economy has strengthened at a time when the international economy has turned down. That has been good for economic growth here in Australia. I believe that the domestic economy has quite a good deal of robustness left in it. The housing cycle should continue through this quarter and into next quarter. We would hope that the world economy would change, particularly that the American economy will pull out of recession in 2002. And if that is the case, then the world economy should come back.

But, notwithstanding figures which I think all Australians will welcome, I do want to underline the seriousness of the world economic situation, we should not fool ourselves.

It is a very grim outlook, but if the Australian economy can keep on growing with the kind of strength and resilience that it has shown, through the course of 2002, we may be able to do significantly better than the rest of the world.

JOURNALIST:

Mr Costello, given the strong figures today and the world situation, what is the appropriate (inaudible) taking in to next years Budget?

TREASURER:

Can I make this point, when we came to office in 1996, the economy was then growing strongly and had been for a number of years, coming out of the 1990 recession. And we thought at that time, the important thing was to drive the Budget into surplus, to reduce our debt and to strengthen the Australian economy for the challenges which would come. The first challenge that came was the Asian financial crisis, and Australia managed to grow through that. This is the second great challenge, this is a world economic slowdown. There were some people that were saying in the course of 2001, calendar 2001, that we should be building bigger surpluses. That was not my view. My view was, as the world economy slowed down it was actually quite appropriate for us to run smaller surpluses. It was quite appropriate for us to let fiscal policy make a contribution. And we did. Fiscal policy made a contribution in a number of ways. Overall we cut taxes by about $5 or $6 billion, and then we cut petrol excise. And fiscal policy, I think, as you look back through the course of 2001, made a good contribution. Now, we are coming into challenges in 2002, again, a synchronised world downturn, and that is why I am not focussing on building large surpluses, I don't think it would be right. We built the large surpluses in the past for insulation at times like this, but I can promise you, we will be running a responsible fiscal policy.

JOURNALIST:

So will you be returning that surplus as further tax cuts?

TREASURER:

Well, we are not actually forecasting large surpluses in the next financial year, as you would have seen. We built large surpluses in 96, 97, I think we had an all time Australian record in 1999-2000, we cut taxes that gave us insulation on fiscal policy through 2001-2002. We are not focussing on large surpluses in 2002-2003. But the point I make to you, is, to my way of thinking the great unknown at the moment is what is going to happen in the world in 2002. The US economy went into recession in 2001, the big issue is, when will the US come out? Now, there was a school of thought that said that the United States would start coming out of recession early 2002. When I was at the G-20 - IMF meeting in Ottawa two weeks ago US authorities were saying maybe late 2002. I believe the US will turn, it will come out of recession but, and I wish it were tomorrow, frankly, if I had my way, but the big unknown is when will the US economy turn. . .

JOURNALIST:

(Inaudible).

TREASURER:

. . .and that will determine what happens in the world situation, and that will effect the Australian economy, and that is the biggest unknown. But I think I can say to you through the course of 2001, through the course of fiscal 2001-2002, there is still a lot of strength left in the Australian economy. What happens in fiscal 2002-2003 really depends to a large degree on international developments.

JOURNALIST:

Is the outlook so grim that you need to look at more fiscal involvement to a point of even putting the Budget in deficit?

TREASURER:

Sid, the international outlook is very grim, but the domestic economy is very strong. I don't want to underplay what is happening in the world, I think it is very, very grim. And if you had sat with me at the G-20 meeting in Ottawa, as we went around the table you would have come out, as I did, very depressed. And then you come back to an Australian economy, where we have the lowest interest rates in thirty years, consumer demand very strong, housing kicking in, a 1.1 per cent growth rate, I think with every confidence that the December quarter is going to be strong, leading us through 2001-2002, and if the US comes back, we might defy again what has happened in the world. I am not going to proclaim that now because I can't tell you when the world will turn. I hope it is earlier rather than later.

JOURNALIST:

But aren't you saying, Mr Costello, that you have spent this year trying to ensure that Australia is insulated, the sort of stimulus you put in place is generally believed to keep us in good stead until the middle of next year, by the end of this current financial year. And doesn't that mean that your Budget task has got to be to be putting some more insulation or protection in place for next year?

TREASURER:

Not necessarily, no, it, but it. . .

JOURNALIST:

When do you make the decision?

TREASURER:

When do I make the decision? When I do next year's Budget.

JOURNALIST:

(Inaudible) start (inaudible).

TREASURER:

That's right. And when I have done next year's Budget and I'm ready to tell you what the strategy will be for 2002-03, I'll do it then. What I'm saying to you, is, as we look back in retrospect in 2001-02, fiscal 2001-02, which we laid down in May of last year, I think fiscal policy was right. There were a lot of people at the time that said it was wrong. I thought it was right. And it played its part and you are now getting figures like a 1.1 per cent growth rate in the September quarter, and I think December which is now two thirds over so, you know, we've got a bit of a feel on the December quarter, will be quite strong as well. You are asking me what my strategy for 2002-03 will be, it will be to so pitch fiscal policy that it will be right for the times as well. You are asking me what it will be, I'll tell you at the time.

JOURNALIST:

Will a deficit be an option?

TREASURER:

We don't like deficit Budgets, no. We don't, . . .

JOURNALIST:

(Inaudible).

TREASURER:

. . . we've, look, we haven't worked so hard to put Australia back in the black and to repay debt, just to go back into deficits. But what I am talking to you about, is the size of surpluses. I thought in 1999-2000, I think our surplus was something like $13 billion, I think that was about it, it was something like that. It was the largest in both nominal terms and percentage terms for about thirty years. We came into 2001-02 and we weren't looking at surpluses of about $13 billion, I think we were looking at surpluses about 1, 1 and a bit, something like that. You know, that was a big fiscal stimulus, and I think it was a right fiscal stimulus. Some people at the time were saying, oh you should have kept running these 2 per cent surpluses. I don't think that was right. I think it was right to put fiscal stimulus back into the system, and we did that with tax cuts.

JOURNALIST:

Mr Costello, given the size of the spending initiatives in the lead up to the election much of which will go through to the out years, forward estimates. Isn't the reality (inaudible) in terms of this year's Budget and next year's Budget, in terms of new spending, I mean, basically haven't you announced it all in the election context?

TREASURER:

We have announced all of our policy initiatives which we, which the Budget will, as a first priority fund and introduce . . .

JOURNALIST:

. . . a (inaudible) to the next few years?

TREASURER:

. . . and then we will probably do some other things as well, and we will pitch overall fiscal policy at an appropriate level. The point I am trying to make here on fiscal policy, I think, is, you know, the days of -I don't want people to think that the days of fiscal policy being used, are over. I think there still is a role to play in fiscal policy. It is a longer term thing, the time lags are longer, it requires legislation, and that is why monetary policy is much more easily moved, it does not have to go through the Parliament, you know, it can, and so, I think there is a view getting around that the only lever left in a modern economy is monetary policy. Now, monetary policy is quicker and more immediate, and all of those things, but I think there is still a place for fiscal policy, and the way in which we have used fiscal policy, is we have used it to build up large surpluses in growth times so we can run small surpluses in difficult times. In years gone by, what you used to do, is, you used to run large deficits in bad times so you could run small deficits in good times. Now we have changed the paradigm, but we are still using fiscal policy.

JOURNALIST:

Treasurer, will the government be getting a windfall from petrol excise because of the fall in petrol prices and the abolition of automatic indexation?

TREASURER:

Getting a windfall? Because of the fall in petrol prices?

JOURNALIST:

Yes, (inaudible).

TREASURER:

How would we get a windfall from a fall in petrol prices?

JOURNALIST:

Because, previously petrol excise was automatically indexed up when petrol prices rose, did it fall when petrol prices fell?

TREASURER:

No.

JOURNALIST:

The excise per litre, I am asking.

TREASURER:

No. The excise per litre, once you abolished indexation, remained at the same amount. It is around about 39 cents a litre, something like that. Don't hold me to that figure, but, it is cents per litre. When there was automatic indexation, in nominal terms it used to go up. Now, the fact that we don't do that does not mean that we do not have a windfall.

What it probably means is in nominal terms, sorry, in real terms, in nominal terms it is steady, in real terms your excise collection is probably falling. So it does not give you any windfall, if anything it gives you a windloss.

JOURNALIST:

Sorry, can I come back to Ottawa and the impression you felt about the prospects for the US economy. What sense did you get of the outlook for Europe, cause it is sort of roughly similar, sort of, magnitude, and there is a much more mixed picture in Europe it seems.

TREASURER:

Well, let me report to you the tenor of the discussion. The G20 meeting is twenty central bankers, twenty finance ministers, and they sit around, it is a very, very useful forum. The twenty, sort of, systemically important countries, and it is a very useful forum. Obviously there was a huge interest in the United States and Japan. The view on Europe, I think, was, to summarise the discussion, that Europe has probably stalled. I don't think anybody was saying that Europe would go into recession, but Europe was stalled. That is, it was not growing, unemployment was rising, there was a bit of a discussion about the fact that the European Central Bank had recently cut interest rates which were seen, which were welcomed, I think, as stimulatory. But, whilst you would not say the current situation in Europe was as

bad as America or Japan, the feeling was that it had stalled. And there was a lot of discussion about monetary policy. What makes the current global downturn significant, is that the three great centres of world economic growth have simultaneously turned down. And we have lived with the Japanese downturn now for the best part of a decade, and we have lived with European downturns, but now we have the three simultaneously turning down. And that is what makes the international situation very difficult.

JOURNALIST:

Mr Costello, given that the Budget surplus is tight and you have had a number of spending promises out of the election, and the Government's now been in 6 years, do you think that the next Budget provides the occasion for an overhaul of some existing programmes on the spending side?

TREASURER:

I think we ought to, yes, I think we ought to look at all of our spending priorities in the context of a Budget. I think there is a chance, after each election just to sit down and make sure that the money that you are spending is going to priority one, rather than priority five. And I think it is important for Governments to continue to do that.

JOURNALIST:

Mr Costello, can you tell us yet what the cost of the new border protection policies and the war on terrorism is, to the Budget?

TREASURER:

Well, as we said in the Mid-year Review, additional to the Budget, what we had in the Budget, the border protection was of the order of about $100 million, I have not got the precise figure in front of me, but it was of that order. Now, what you have got to remember, is, that was in addition to what we had already budgeted. I think we would have already budgeted several hundred million. Now, the way in which the drivers work is that, I know it sounds a funny thing, but, each year we budget for so many unauthorised boat arrivals. We know how much it costs us and we budget according to the number. If you can drive that number down you save money, if the number goes up, in budgetary terms, it costs you money. My belief is, that we have not seen, because of the measures we have taken, we have not seen any explosion, so I think that is the most accurate estimate at the moment. See, part of our strategy, in relation to unauthorised boat arrivals, is to make the point that this is not an easy entry into Australia. And we think once that point is made to the smugglers, and the people who operate the supply chains, that the number of unauthorised arrivals will decline, and you will actually have savings, financial savings.

JOURNALIST:

Mr Costello, you mentioned first on credit card interest rates earlier, you also mentioned the prospect of a strong December Quarter, that is strong Christmas shopping. Do you have any particular advice for consumers not to be trapped into buying too much, by low interest rates now, but the prospect of a grim year ahead?

TREASURER:

Well, I think, Dennis, consumer confidence is an important thing and I like to see consumer confidence

and retailers are reporting strong sales. And, you know, it may well be that, as I joked the other day, that the world economic recovery will be led by Harry Potter. We could have a Harry Potter consumer-led recovery around the world this Christmas. Apparently the merchandising and the film rights, and the books are significant by world standards. And if Harry Potter is enough to break the US consumer spending, well, that is a wonderful thing. But I would say to people who buy on credit, to be careful, people who are buying on credit. These credit card rates are quite high, in fact, and you know, you can think that Christmas is a bit like Christmas dinner, isn't it, you can enjoy the spending at the time but it comes back to haunt you afterwards. And some of these. . .what's that?

JOURNALIST:

Christmases past.

TREASURER:

Is that right? Some of these credit card rates, if I can just turn them up, are very high. . .I don't know if I can turn them up, but I would say to people, remember this, that if you are buying on credit you have got to pay it off eventually and the credit card rates are very high. And I would say to people who maybe, like buying on credit, do exercise some caution in relation to that because it can become a real problem in February and March.

JOURNALIST:

Mr Costello with the new Finance Minister Minchin, do you foresee a, sort of, tougher ERC process or, you know, more aggressive sort of approach to cost cutting, more spending priorities reviewed?

TREASURER:

Well, I think Senator Minchin is a formidable person and I think he will be very, very formidable in ERC, and he will have my full support. And I expect Senator Minchin will be looking for waste in Government and the measure of his success will be seen in the May Budget. And I can promise him, he will have my full support in ironing waste out of the Commonwealth account.

JOURNALIST:

(Inaudible)

TREASURER:

You have got to start from the premise that there is. I don't think that you should ever go into a Budget round thinking that we have ironed out every dollar of waste. The Government is such a huge institution, there are so many people, so many programmes that get set up because there is a need at the time. But maybe the need changes, you know I think, I wish governments could be more dynamic and flexible - a need, we set up a programme, we fix up the need, we get out of the programme, we move our resources into another area of need. But, you know what the Commonwealth account is, you have set up a programme, the programme seems to live forever, even after the need goes away, and I wish we could be much more flexible and dynamic. And so I think every now and then you get the chance to go through and say, does the need that this programme was set up to meet still exist, if it does not, let's withdraw from that programme and let's go into a programme where there is a greater need.

JOURNALIST:

Can you think of any examples?

TREASURER:

Well, I will be suggesting some examples, no doubt to Ministers in the ERC process, whether they agree with me or not, will be up to them. Sorry, Mr Cleary, last question.

JOURNALIST:

Mr Costello, you said it was good policy to go from a big surplus to a small surplus because of the slower world economy. In the event that the world economy is not recovering in the middle of next year and we have the housing sector which will ultimately, eventually start to slow towards the end of next year. Why wouldn't it also in that case, also be good policy to go from a small surplus to a small deficit?

TREASURER:

Well, there are so many 'ifs' in there that I think it's. . .

JOURNALIST:

There are only two.

TREASURER:

Yes, but it is if by if, it's if squared, you know, it's, these things are squared and you are compounding interest and so my answers have been wound up to the nth degree.

JOURNALIST:

But the housing recovery will wind down, it has too.

TREASURER:

Well, that is your observation, which is fair enough, but is there a question at the end of it?

JOURNALIST:

Well, in the event that we don't get the growth that you were talking about from the world economy, wouldn't it also be good policy to go from a small surplus to a small deficit.

TREASURER:

Look, we fought very hard to put the Australian account into surplus to pay down debt. And I think that has been good policy. You know where we come from, we come from the area of responsible economic management. I promise you, and I am not going to announce where we will go in the May Budget, but I promise you it will be a very, very economic, economically responsible management in the May Budget. Mr Farr, last question.

JOURNALIST:

Have you settled on a new process for the Productivity Commission to deliver its reports without

surprising ministers who are the subject of them?

TREASURER:

Well, the existing process, Malcolm, is, that Ministers get advance copies. . .

JOURNALIST:

Mr Vaile didn't?

TREASURER:

Well, without going into the detail, I think Ministers do get advance copies and I think that procedure has been followed. And that process will continue. We always ensure that Ministers get advance copies, I think the question then becomes, can departments get advance copies? I do not think there has ever been any question, Ministers do get advance copies, I think the question that was being raised, was whether departments should get them. But I can tell you that I have been informed and believe that Ministers always have, in respect of all of those documents.

So, thank you all very much.