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Transcript of Treasurer Paul Keating's press conference - Tuesday, 31 January 1989

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KEATING i Thank you very much for coming. I thought I would start off by giving you some introductory comments about the CPI and then invite questions. Well let me begin by saying that this is a disappointing number but there is a measurement problem with this particular number. Indeed, it was evident

to some extent in the last CPI. Essentially, the Consumer Price Index reflects costs, which most Australians bear, running at around 1.5 percent for the quarter. But the CPI is published at 2.1 percent for the quarter. When an examination of the bulletin is undertaken you find that the measure of most of the sensitive commodities has recorded prices falling, particularly in relation to beer which the Government sought

to reduce by changing its excise arrangements. Petrol has been falling. The problem we had with, seasonal problem with fresh fruit and vegetables has been unwound and those things have been falling. But those falls have been.masked by a measurement problem with housing and I'11 deal with that in a

few moments. There is, of course, a problem with housing prices. In a sense, the problem with the measure is measuring it in relation to the costs which some people bear, but which most people do not bear. But in relation to new home owners,

there is particularly a problem with housing prices and this is evidenced by the data in the bulletin which indicates, for instance, that the CPI for all goods in Sydney is 9.2 percent; where, for instance, in Darwin it's 4.5; or in Melbourne, I

think 6.6. So that we're seeing in Sydney particularly, by this measure, a jump in the CPI reflecting the increased costs of housing in the Sydney area. Now this, of course, is not related to Sydney only. It's also true, but to a lesser extent, of Melbourne and other cities. So, as a result of this continuing trend, and I might just make another point, let me make it in the least, that is, that the measure of housing prices has also lagged by one quarter so the December quarter CPI is actually measuring the housing price lift in the September quarter in Sydney when Sydney housing prices were rising very strongly. So it is evident that we do have a substantial supply problem in housing, particularly in Sydney than in some of the other cities. And I'm indicating that the Prime Minister will be convening a meeting with Premiers, as soon as it's possible, to talk about land supply, both from the Commonwealth and the States' point of view, and also to look at regulations governing development in the cities and the region of the cities, particularly in relation to housing density. This, of course, would be aimed at particularly relieving the problem for that minority of people who are bearing it in the main and that is, of course, first-home buyers. I should also indicate that in relation to the


measuring problem, which I referred to earlier, the Statistician indicated to me this morning that he will be reviewing the methodology of the measure in consultation with the groups who first reguested a more substantial inclusion of housing in the CPI index and that is the ACTU and employer groups. And I've had an opportunity to speak to the ACTU and they would welcome the opportunity to participate in such a discussion and I'm sure when I speak to employer groups this afternoon they will indicate the same. So I just make these

final points that if you look at the last two Consumer Price Indexes, that's September and this one. Removing this measuring element in relation to mortgages, we would have the CPI running at 1.6 percent for September and 1.5 for December.

In other words, now half way through the financial year, the CPI would be 3.1 percent. Instead of that we have 1.9 in September and 2.1 for this quarter which has the CPI running at 4. Now, you know, so removing the mortgage component, that

is, including rent, but not mortgage costs. And if we were to include some mortgage cost in relation to increases in interest rates on mortgages there would be some slight increase in that figure, but less than a decimal point. So at 3 percent for the year, if it is possible to resolve this particular problem, one could pear through the data and see that the likely outcome of the CPI for the year would be consistent with the 5, in the 5 to 6 percent area, on the basis of the last two CPI's as they affect most people. But with this particular problem arising, that is, measuring housing in this way and the relation, and particularly in the

context of a housing price boom, has introduced this much higher number than would indicate, than would support the kind of consumer price outcomes which we've been talking about since Budget time. So I think with those few remarks, I'd be pleased to invite questions.


J : Mr Keating, the press statement says that without the home ownership costs the interest would be 1.4 per cent, though you have used 1.5 per cent.

T: It is 1.4 Laurie, but I put 1.5 on the upside to include any associated costs with new mortgages. But you might notice in the release that when looking at the change in costs over the quarter, the Statistician

says mortgage costs increased 2.4 per cent over the quarter, but 8.5 per cent for house prices right. That 8.5 is weighted into the housing inverted commas, the housing element. This indicates that the interest mortgage component is 2.4. In putting my 1.5 number to you I'm notionally including something for mortgages.

It would be less than 1.5, somewhere between 1.4 and 1.5. Now given the fact that most people own their home, what is happening here is that the measure is imputing to them a mortgage cost relating to the new value of their home but which of course is occurring

without any necessary rise in their mortgage. So someone who for instance has had a mortgage for 5 or 6 years and has seen their home price double, this measure is measuring their mortgage as though it doubled, and it hasn't doubled. So again, the point

I'm trying to make in looking at the underlying rate as it effects most people, that is their cost of living. Their cost of living measured here is between 1.4 and 1.5 per cent. Now, I'm not saying I'm happy with those

figures, we need a continuing deceleration of inflation, but at least they would be consistent with a number probably in the 5 to 5 1/2 per cent area by years end which is now inconsistent with the kind of CPI number we have got today.

J: Do we need higher interest rates in the short term, Mr Keating to slow down the housing boom of loan prices?

T: Well I think that all that will do is exacerbate the problem. I think monetary policy is sufficiently tight for the economic conditions Australia faces.

J : So no tightening of monetary policy, no higher interest rates?

T: No I don't see any cause why monetary conditions ought to be tightened.


J : Was the Prime Minister right the other day when he said that there would be no further rise in housing interest rates?

T: Well I can't remember his precise quote but he was talking about the prospect of some declines at the end of the year and that is possible. It depends what happens with the current account deficit and conditions

in the economy generally. But I don't see any cause why official interest rates should be increased which would have the effect of putting further pressure into housing loans. That is the question I have been asked,

and I’m saying I don't think there is a real need for that.

J: Mr Hawke made his comment in the context of the Western Australian election, do you think today's figure is (inaudible) in the Dowding problem?

T: The Western Australian Government is responsible for the national inflation rate and in fact if one wants to look at Perth, I think Perth is running at 7.7 for the ‘ all groups CPI, it is running a lot better than the

Liberal Government in NSW which has got the CPI running near at 9.2.

J : It is the second highest figure.

T: Maybe but it is at the average, I don't have a copy of the bulletin with me, but I think you will find the average is 7.7 and Perth is on the average, but NSW is way above the average.

J: Will this figure add to the pressures on the wages system?

T: Not necessarily because I think in terms of the real costs which are being borne by wage and salary earners, the more substantial reflection is in the remarks I have just made.

J: Do you think they will accept that?

T: I think it is a reasonable proposition and it is open to their own analysis. The evidence of it is there, I think just from my discussions with the ACTU this morning, they do regard the housing measure as



J: Mr Keating, surely this figure must give further strength to George Campbell's position, there should be a cost of living adjustment in addition to award restructure ......

T: Well George Campbell is on his own in the media basically and the fact of the matter is that the ACTU through its processes has determined upon a course of award restructuring which is in the longer term

interest of their constituency and the workforce. It is in that context that we will be discussing with the ACTU reductions in taxation, that is looking at the question of disposable incomes. But we've said, and I

repeat, that were we to have an outcome of the kind which would be facilitated by the kind of policy being espoused by Mr Campbell and others then obviously the Government would react differently in those discussions.

J : So you don't see any need to compensate for the cost prices, for the price increases through the wage system next year?

T: One thing what they ought and may say the inflation rate is and what cost is actually being borne by most wage and salary earners. And what this bulletin is saying is that the cost being borne by most wage and

salary earners is in the ballpark of the figures we have always had on the table, broadly, with the ACTU over the course of this year.

J: When you produced the Budget, Mr Keating, you presumably knew how the Statistician calculated this, so is it fair to say that you messed up your forecasting?

T: Well no. I think this measure has been in I think about one year.

J : But the Budget was a year ago.

T: Yes I know. But it is very hard to be making judgements about the CPI and how a particular methodology may distort in the context of an accelerating rise in house prices. What we are seeing

in Sydney is basically a double or tripling of prices in a year and it is that feature alone which is basically playing havoc with the quarter by quarter forecast we had to begin with.

J : But the Budget forecast (inaudible) worth anything.


T: Well in terms of inflation, again I repeat the point I just made. If one looks at all of the measures which, if we were comparing apples with apples, that is the consumer price index that has been operating since this Government has been in office, the Budget forecasts are

somewhat astray of the mark. But nothing like that which is indicated here today.

J : Will the figure put any further pressure on the Government for spending cuts in (inaudible). Mr Hawke (inaudible)

T: No he didn't. All he said is made the obvious point and that is the Government has the option at any stage of introducing a statement announcing reductions in Commonwealth outlays.

J : Mr Keating, are you (inaudible)

T: No. I don't think there is any need for us to be changing the stance of fiscal policy. That is not to say that we won't do the normal housekeeping job on the outlays. I think we still seek to do that. That is not either to let them run away or to look at areas where economies might be effected. But in terms of a major statement dramatically changing the stance of

fiscal policy, I just don't think it would warrant it.

J: Is it the fact that the cut in the top rate will now be postponed until somewhat ....

T: That presumes, Russell, that we had in our mind to cut the top rate this year. That has never really been in our mind. I think what is in our mind is to reduce the top rate and perhaps to reduce it to a point where there is an equation with the company rate. But that

requires further consideration by the Government. But the Government has made it clear, I have made it clear, the Prime Minister has made it clear that the priority this year will be direct tax relief to lower and middle

income earners. Particularly middle incomes.

J : Mr Keating, the price of housing in Sydney has really been accelerating rapidly for 18 months now and you are still talking about possible action by the Government haven't you basically been caught with your pants down?

T: Well I think everyone is surprised by the level of prices prevailing in the Sydney market. The last time we saw a rise in prices in Sydney was 1981, it just started to move in 1987, 6 years later. And obviously


the real values of properties had declined with the inflation rate over that period. It was not unreasonable to assume that they may correct somewhat. But they have done more than correct, they've risen very dramatically. And what is becoming evident is with the demand for housing in Sydney, the supply is

simply not meeting the demand and that is a problem particularly for the NSW Government. I mean it is not this Government which is responsible for housing supply in Sydney. Indeed housing starts under this Government's policies this year will be at a record,

150,000 plus across the nation. But there is a particular Sydney problem. And the problem is about supply, that is both land availability and particularly density. But the problem with Sydney is that it is

basically locked between the sea and the escarpment of the Blue Mountains.

J: Mr Keating, do you believe that the Griener Government will actually cooperate with you to solve your problem here?

T: Well this problem of housing in Sydney is being sheeted home as a Griener government and will be unless it acts to deal with this bottleneck on supply. There is just no possible way that this Government is going to wear

responsibility for land inadequacy or shortages in the Sydney basin.

J: They are going to the polls in four years ....

T: Well let me just say this. When we became the Government we inherited a massive budget deficit, an uncompetitive economy, then not long later a terms of trade collapse. What Mr Greiner inherited is a massive housing problem and he must deal with that problem as we have had to face our responsibilities.

J : Mr Keating, even Mr Greiner can't move the Blue Mountains or the sea, what do you want him to do?

T: Well that was obvious from my remark. I said that the Sydney housing market suffers by being locked between the sea and the Mountains.

J: Well what would you do?


T: What I said earlier, was that one of the things he must focus on is land supply within that region and density levels. And density goes basically to his attitude towards I think the whole basis of municipal planning. That is given the fact that higher density in the 60s was so unpalatable and so unsightly that maybe the NSW

government will have to look at a regulatory framework including visual and aesthetic standards as well as building standards which will encourage the public of Sydney to support higher densities rather than see any metropolitan council which supports higher densities defeated on a banner of low density which has been the pattern now for 15 years.

J: Mr Keating, what extent is the housing problem also due to the tax advantages (inaudible) and can you do something about it?

T: Well it is not uniform across the country. So if that were the analysis we would see the problem everywhere. I mean the problem is I think the supply problem.

J: So there is no problem with the (inaudible).

T: I don’t think so and particularly as marginal rates come down, when once under the Liberal 60 per cent marginal tax rate, negative gearing in property meant you got 60 per cent of the negative cost back, that is

now 49 at the top rate, 40 at the middle rate and as rates decline that is less of an opportunity, an attraction. No I think the problem is one of supply and when people drive through suburbs with very low density levels they are driving through an area which might otherwise given the services accommodate more


J : Mr Keating, you have banned the foreign investment in established real estate, do you think there is scope to ban foreign investment in land as well to help ease the pressure on prices?

T: I don't think foreign investment in development property is doing anything other than basically lifting the supply which is what is needed. And as the foreign investment policy now obtains a foreign investor can

sell half the properties if it is in a multi-unit development off the plan to foreigners. But our


experience is that nothing like half are being sold foreigners, they are mostly going to Australians. But that foreign involvement has been meaning more supply. Not less supply. So I wouldn't accept the premise that

an involvement by foreigners in development real estate is doing anything other than having an influence which may be diminishing costs.

J: Mr Keating, do you think it is fair that the appreciation of the Australian dollar is simply not flowing through with these lower prices that imports contributed positively to the Bureau's result this time

around. Is there anything the Government can do there to try and solve this problem?

T: Well obviously I have said before last time I spoke to you about this subject and I'll say again today. One would like to see a bigger price effect coming off the appreciation of the exchange rate but the economy is

running strongly. We have had a coincidental lift in the terms of trade worth about $10 billion and when you through in an economy this size $10 billion and ask people to go and fight about that, split that up amongst themselves, you will see obviously lifts in activity which means that the market in view of some people can be at prices higher than their cost structure.

J: But doesn't $5 billion worth of tax cuts give you (inaudible) Australian debts are on fire?

T: Well I think you need to see the tax cuts as part of an ongoing economic policy and given the fact that these will be the first reductions in this Parliament I think that is both reasonable and in the context of maintaining reasonable wage outcomes entirely

appropriate. I think it is worth recording never have we been through a terms of trade lift particularly of this proportion without wages in double digits. Without a wage explosion.

J: And they are not about to break down over the next few months?

T: Well, we've been through a period of very accelerated growth and activity and we have still got wages running pretty much at forecast. And that is in part because of the fact that the Government has up the track this

strategy in relation to tax changes.


J : The ACTU now seems to be aiming for a considerably higher wage outcome and the award restructuring seen to be in place 6 months. Do you still expect to be able to get wage growth down to the level of our trading countries?

T: Well we will try to get them as low as we can possibly have them. But if Australia can go through a terms of trade lift like this without blowing the game once more like we did in 1974, like we did in 1981, then when we come through and come out the other side, we then must

be looking at a better supply side capacity in the economy. That is a better import replacement and exporting capability and hence a lower current account, a better inflation performance and then of course over time, a better wage performance. So I mean we are going through a period of great stress in terms of

these pressures. But the flip-side of that is the economy is so much more robust. If indeed we'd taken 10 billion more in terms of our national income, but

the current account is not materially changing, it means that there is another 10 billion on the import side of the economy, much of that is in equipment. That means the basic strength and the basic frabric of

this economy is going to be much stronger. That is when we come out of this period we are going to be much stronger.

J: The wage rise suggests that might not do nearly as well as you could around Budget time ...

T: Well I think the economy is simply much stronger than we thought around Budget time and that the wage outcome may be higher than we thought around Budget time. But within the current experience and certainly way, way

better than anything we have ever had in similar conditions in the last 20 years.

J : What happens if you do blow the gun and there is a wages explosion?

T: Well I don't think there will be. And the evidence of that is the performance of the wage market today.

J: For the Budget at the end of this financial year, what would you have precisely in view?

T: Well it is very hard to estimate it with these figures and I would like to at least see what the Statistician may resolve in relation to these measures.


J : So as of now there is no forecast for inflation ....

T: No. But you are not entitled to get off the top of my head CPI forecasts. Overtime we may construct another one and at the appropriate time we may tell you what it is.

J: Mr Keating do you think that workers would accept the lower inflation figure merely resulting from fiddling the figures in the .... ?

T: I think that is a very ill advised term to use -fiddling the figures - I mean it is quite obvious here that we have, this is beyond doubt, beyond argument amongst any of us, those of you who have read the bulletin, that we have imputed to home owners a cost of mortgages they do not pay. That is a property for

instance in Sydney which might have been worth $100,000 18 months ago and is now worth $250,000 or $300,000 which may have had a mortgage of $40,000 or $50,000 then, has imputed to a mortgage of $100,000 or

$150,000. Even though that mortgage does not exist. That is a methodology problem. It is not a matter of fiddling the figures and I only repeat the point, were we looking today at CPI measures comparing the CPIs with which this Government has lived since 1983, we would be looking at measures in the main on track with

the Government's broad inflationary targets.

J: I don't necessarily dispute that, what I'm saying is if you go from the position where you have got 7.7 per cent of inflation and suddenly it transforms to 6, are you going to be able to explain that to the

average worker and expect people to ....

T: I think so. But the main point I'm trying to communicate to you is in terms of the costs which the average person bears, some on their existing mortgage, it is not that people have just acquired one in the

last 6 months or so, they are a problem. But for the great majority of people who do not have a mortgage at all or those that have an older mortgage, that is the great majority of the workforce, the cost structure that they are living under, the cost burden that they are bearing is of the order of about 1.5 or

1.4 per cent for this quarter.


J : Have you or the Treasury considered changes to the taxation of interest to try and boost the national saving?

T: No. We ran all of that past the tax summit and the White Paper back in 1985.

J: Mr Keating, getting back on taxes, isn't it the political reality that no matter what happens to wages you have got to give tax cuts?

T: The reality is that the Government's primary responsibility is to manage the economy properly. We have succeeded in operating an Accord now for just on 6 years and it is worth recording that many people said

the Accord wouldn't last more than year and when it did, it was going to collapse in the next 6 months, so then we had many of the economic bulletins of this country out there forecasting its demise 6 months since

for 5 1/2 years. It is now nearly 6 years and the management of that key relationship of wages and costs has been I think a successful one. And part of that has been a wage/tax trade-off in 1984 which was

particularly directed on low income earners and a wage/tax trade-off in 1989 as well as tax reductions in 1986 and 1987. And in that context, we have made it clear that we will expect a reasonable wage performance

from the workforce and the economy and in that context consider sensibly reductions in taxation to lift disposable incomes other than by resort to higher wage, nominal wage outcomes. I think all of that is

basically in prospect still.

J: You can see the economy is running a lot stronger than when you put that ........ in the middle of last


T: I think if we could have the benefit of hindsight now looking at the Australian economy in calendar 1988, by the time you get the national accounts and see them adjusted for a couple of years I think we will find this year GDP has been growing very strongly. But this happens whenever you get a coincidence of substantial shifts for the better in economic policy and a lift in the terms of trade. And there is a tendency to think this is a shocking thing but if we are housing more people, if we are making the supply side in the economy

stronger, it is not without its benefits. The problem always is to get the balance right. It is very hard to do that when international economic conditions have been as buoyant as they have and we have seen such a

sharp lift in commodity prices. So we have taken the obvious steps, perhaps obvious to the point that most other governments in the past didn’t take them, that is we have the tightest fiscal policy Australia has ever

had right now and as well as that we have a reasonably tight monetary policy and a reasonably tight wages policy.

What is your latest estimate for the Budget surplus this year?

I don't know yet. We published the half year review I think that is 5 1/2 billion. I think many commentators think it would be higher than it will in fact be, because we have lost quite a bit of revenue from crude oil and I would suggest if anything the budget surplus will be nearer to the forecast than billions above it

as some commentators might have thought.

Does that reduce the scope for the tax cuts, Mr Keating?

No. Because I think we have been working on our basically forecast outcome for the surplus in contemplating the tax cuts and it may in the minds of those who thought the surplus might have been billions

above the forecast reduce the scope for tax cuts but not in our minds.

Well does that mean that you can still give tax cuts but reduce the size of the budget surplus you might have had in mind?

That will depend upon what we think the budget surplus will be in outcome for this year and in prospect for next year and that is a bit early to say.

Mr Keating, you say in your statement here that increased subsidies in the housing area will plainly fuel up the pressure on prices, does that mean there will be no increase in the first home owners scheme?

Well we have not considered changing the first home owners scheme at this point. My colleague, Mr Staples, Minister for Housing, is looking at that scheme amongst other support the Commonwealth provides to housing

particularly in the public area. But the point I make there is, if there is an inadequacy of supply more money chasing fewer properties would simply mean higher prices. And so I think the supply problem is the

principal problem, particularly as I say in NSW.


j : But supply problem can’t be improved that quickly between now and 6 months hence. Surely this is an argument against increasing the first home owners scheme.

T: Well it may well be and that may be the balance of the Cabinet's view.

J: Mr Keating, this view by the Statistician, if he discovers that he cannot exclude existing property owners from the CPI measure, will you drop it?

T: To be fair to the Statistician, what he has sought to do, there had been a number of approaches to him and his predecessor about the inclusion of mortgage costs more adequately in the CPI measure, particularly from

the ACTU and other bodies in the last 5 or 6 years. The measure he has chosen I think, he has sought to chose a measure which reflects the costs which are actually borne by mortgagees. But it is perhaps not as well known to all of you, perhaps just some of you that

one of the most difficult elements of any CPI basket is an adequate measure to reflect a contemporary cost of negatives and it has been a matter of debate about what methodology ought best be used. I think all that the

experience here is bringing out is that in the context of a very substantial lift in housing prices, this particular methodology distorts the measure of the consumer price index by imputing to mortgagees a mortgage cost at a mortgage level that they do not

have. But in fulfillment of what was the state of an original objective, that is to have a CPI measure which more adequately reflects the actual contemporary cost of a mortgage, it is possible I'm sure to actually

arrive at a measure which does that. Maybe more possible in the light of this experience.

J: Mr Keating, are you conserned that high interest rates are making the dollar a one-way bet for foreign exchange markets?

T: Oh well the foreign exchange markets will have its tos and fros over the years.

J: Interest rates have gone up this morning and the dollar perversely has jumped even though this is perceived as a bad figure. Doesn't that create problems for us on our trade competitiveness?


T: A lift in the trade-weight diminishes ones competitiveness but it is one of the swings from round about to be lived with I think in the general shift in economic conditions and policy. I mean interest rates

are rising in the United States and in Britain and in other countries as well. There has generally been a tightening in monetary policy world wide. This has had some impact on exchange rates. It has here I think in part. But one of the substantial reasons by the exchange rate is higher I think is the terms of trade

lift. While that is reducing competitiveness for producers it is also lifting the income of producers with higher prices.

J: So you are prepared to live with the higher dollar?

T: Well the higher dollar in some respects does moderate national income, which itself is a measure to moderate the buoyancy of the economy. That is not to say I endorse any particular exchange rate. Obviously the more competitive we are the better. But again, whenever governments have sought to sell down their • exchange rate they have pumped their money base along

and very quickly the inflation rate starts to bounce off that, so that leaves the then even higher interest rates which over time may lead to an even higher exchange rate. So I don't think there is any simple or easy way of dealing with those problems. You may say - well would we have been better with a delayed increase

in the terms of trade - the answer to that is probably yes because the structural change we began and was undergoing for 1983 and particularly for 1985-86 when the terms of trade fell would have probably been better

seen to its logical end point in more moderate terms of trade than we have. But again as I have said to you on other occasions when world markets want to press into this country a lift in incomes you can't refuse it. You can't say - oh no, thank you for that but we wish

to be poorer - you must take the income but when you take it you take the buoyancy with it. But it makes the economy so much stronger, I mean the Australian economy I think in the last 2 or 3 years has in terms of its sheer strength and robust qualities expanded and grown in strength enormously. Part of the price of that is that you don't get all that you want in declines in the consumer price index or the current account deficit. In other words, you are delaying those changes but what you have in return is a much more robust place. That is why we have had very strong employment growth, we've got quite strong migration growth and those things produces pressures but benefits. A better workforce, a more fully employed society, a stronger economy.


J: How long do you think this robust growth in the world economy will continue to drag us along?

T: Well from the evidence, at least the next 12 months.

J: Mr Keating, you didn't see fit that in the release of last quarters figures to mention the anomaly in the measure of housing costs. Could it be said that you just want an excuse for it?

T: I don't know whether we mentioned it in the release but we certainly mentioned it to journalists. I know my colleague, Senator Walsh mentioned it publicly, I'm not certain whether I did. But we did mention it. We knew

there was a problem there but I think the magnifying effect leading to this distortion, really I didn't think it was evident until this last quarter now.

J: Mr Keating, I gather you are taking no role in the WA campaign. Is that because you didn't want to be linked with WA much?

T: Well I've been on leave until the last week. ‘

J: Well you've had a week....

T: Well I may do, it just depends how the opportunities arise.

J: Not worried about being associated with the WA Government.

T: I'm quite happy to be associated with the Western Australian Governement. Look, Western Australia, like Australia was an industrial ruin in 1982. Sir Charles Court had all these promises of big mineral projects which never developed, a gas pipe contract which was

sending the State into bankruptcy and the result is under 6 years of Labor government the place has never looked back. They have never been more robust, never been more strong and living standards there have never been better than they are today. So I mean, you know,

the Prime Minister has campaigned for and on behalf of the government of Western Australia as Prime Minister of this Government and I think thats been volume to what we think about Western Australia under Labor.

J: But as Treasurer, you are not concerned about the Rothwells affair?



T: Well they are matters for the State Government, they are not within my responsibilities. They are for them to resolve and for the public to make judgements about those things. But the judgement is on the broader measure of confidence and prosperity compared to say,

the NSW Liberal government as a track record than I think the Western Australia Labor should and will be returned.

J : Do you believe there is any more fat to cut from the States this year?

T: Well I think State budgets have all grown, State revenues have all grown much more than their forecast because of the general buoyance in the economy. And I think they will all have very comfortable years and I have written to Premiers about 2 months ago saying that the Commonwealth does intend to make certain that the States continue to play their role in reductions in the public sector borrowing requirement and general economies of Government.

J : Do you see any scope to cut back spending by the States, loans to the States in the Premiers' Conference this year?

T: I think we will be quite hard at the Premiers' Conference about State's borrowings and State recurrent programs and recurrent spending for the States. I think their position has been an advantageous one given

the kind of general strength the economy has enjoyed.

J : Won't the States respond and force up charges and therefore contribute to the CPI?

T: Well they can cut spending and stop the proliferation of services. I mean that is the option we had and it is the option we took. But if one accepts the States have the right indeed the duty to go on lifting programs well it naturally follows they will then

recover with their revenue but what we wish of them is that they make the States sector smaller. We want the States sector smaller. We want the Government sector of Australia smaller. Now on the Commonwealth side, we've got Commonwealth outlays to GDP this year running

at around 25 per cent. They were just on 30 when the Government came to Office. If we had a concurrent and consequential reduction in State outlays to GDP well then it would make the whole savings equation much better in Australia and therefore better for investment.


J : But for example, you have got the Dowding Government in Western Australia going to the people with promises of 1000 more police and various other spending measures.

T: Well they've got to make judgements about what additions to services are necessary. But within the context of the kind of general economic parameters we have been obliging them to meet for some time and which we will continue to oblige them to meet at the

forthcoming Premiers' Conference in the middle of the year.

J: Mr Keating, what is your present position on whether there will be cuts in government spending in a May Economic Statement?

T: Well I was asked that earlier. What I was saying is that the Government will probably do the general housekeeping job on the outlays that we normally do. But we have no intention at this stage, of dramatically

shifting fiscal policy with a major outlays statement portending cuts in Commonwealth spending.

J: How important is it to you politically, Mr Keating, that interest rates come down before the next election?

T: We I think at the last election when we went to that election with the problems of the terms of trade, the current account, with interest rates. We said to the public to support us to see the job to completion, that

is the fundamental reconstruction of the Australian economy which secure for them higher incomes and employment security over time, that I think was the principal issue which secured the Government's

re-election, I think it will again.

J: But you also promised during the campaign that interest rates would come down.

T: No. We said that we thought they would come down and they did. But again, I think the public weigh things which governments say about interest rates or the like, but look at the more general influences. And I think

it is on those more general ones that the Government will be returned again.

J: Do you think it was wise for the Prime Minister to depart with the policy of not speculating on interest rates through forecast before the Western Australian election that they would come down this year?

















Well he is entitled to give a view if he is asked.

Why do you think he departed from this?

Well I don't think he did, I think he has given it whenever he been asked in the past.

No. That is not true.

Well he did in the last Federal election.

But he hasn't in between.

Well we haven't had an election in between.

Obviously you are not endorsing his view at this press conference?

Of course I am. What he was asked was there some prospect for declines in interest rates over the period up to the next election and he said yes, and I think that is right. ;

You are saying here on page 2 that any fall in interest rates feeds into demand and housing prices.

No. I was also asked earlier did we see at this time any cause why monetary conditions ought to be tightened which I said no I think right at the moment but I would also say I don't think there is any particular cause why they should be slackened now.

Mr Keating, you forecast earlier that agricultural exports would rise and they have. But we still have a very big current account deficit. What are the prospects for an improvement?

The current account deficit?


Well again let me make the points I made earlier. What does the level of the current account currently imply in the context of these terms of trade. Firstly, that we are now enjoying about another 10 billion in

national income. If the current account is only modestly falling it means that we have on the imports side, lifted our imports to neutralise much of that terms of trade lift. But how importantly have those

imports performed. In the main, they have supported a higher level of investment in Australia which will make


the Australian economy over time much more stronger and much more robust. So the price of marking some time or living with a slower decline in the current account deficit is over time a much stronger supply side to the

economy. Now as that supply side capacity goes into place a moderation of demand conditions and imports will see the current account decline. The policies we have in place will moderate those conditions. That is

a tight fiscal policy and tight monetary policy. So we will take some time to see but will see a continuing decline, substantial decline I think in the current account deficit. Indeed we will see a decline I think

this year as a proporation of GDP.

J: Mr Keating, I just want to clarify the interest rates thing, I know you wouldn't deliberately edge on something like this. So can I ask you, the voters who are going to the polls in Western Australia on Saturday, should they expect interest rates to fall before the end of the year?

T: It is not for me to say what they should expect or otherwise, but if the question is as I think the question was put to the Prime Minister, is there some prospect of interest rates declining by years end, I

think the answer is in the affirmative.

J: Mr Keating, I was there. The question was quite specific and Mr Hawke answered quite specific, he said they will fall this year so there is no equivocation. Do you agree with that?

T: I haven't seen the answer and I would need to look at it.

J: So do you agree with that?

T: No. But I wasn't there like you.

J: will interest rates fall by the end of the year, Mr Keating?

T: Well, there is a possibility that they may fall, but it depends importantly on international economic conditions. But if the Prime Minister said that is entirely possible, he is entirely right.

J: Surely it would just fuel the housing market even further and then send interest rates up even further?


T: Well it depends what happens with housing starts and the pipeline of housing construction in the meantime. And obviously that pipeline will start to thin out as those approvals start to range. And we will get back

to a level of more sustainable construction levels.

J: The ABS figures for November on housing finance due out today show that housing loans actually increased by 7.5 per cent in November, that suggests there is still a very long pipeline in the housing area.

T: I think there is and I think we have seen in the last few months a slowing in the number of approvals that will mean over time, a slowing in the construction pipeline. I accept your point, quite a long pipeline

there. But that means many more Australians will have homes. I mean it is as if there is sort of a problem about this, saying this is a shocking problem people

are getting houses. Well it is all part of getting it together.

J: If the pipelines say in Melbourne are in the demand to pent up between the mountains and sea, how can you say the policy will keep?

T: Well, the whole world does not live in Sydney, my friend as you know, you live here. And other people live in Perth and Adelaide and Brisbane and these places. But there is a problem in Sydney and it is not

a problem which is going to be cured by for instance particularly by enhanced Commonwealth spending on housing but the Commonwealth may be able to play a role with the State Governments particularly NSW in looking

at land availablility supply. One of the problems of being in Office is you wear the problems. The biggest problem in the State of NSW at this point in time is housing supply. And the NSW government must face that problem.

J: (inaudible)

T: No. I think prices have peaked, but that just simply means people have withdrawn from the market. It doesn't mean to say there is no supply problem.

J : So there is no political problem in all the seats of Brisbane, Melbourne, Adelaide or Perth?


T: I don't think any more of a problem than most governments have lived with over the years.

J: So you will be releasing some large parts of Commownealth land, particularly in Sydney.

T: Well I think we mentioned in the release there Mr West, my colleague is already undertaking a review of land utilisation for the Commonwealth which may be released. And I think NSW may be doing that. My

recollection is they may be doing that. I would urge them to do that. Let me say this, as far as the NSW government is concerned, any attitude we may adopt towards them on this problem will be entirely constructive. An entirely constructive one because I think this is a problem for people in that vacinity of Australia. It is perhaps less felt in Melbourne

because it has further opportunity to expand.

J: The Prime Minister also said last Friday that he thought interest rates would rise again before they fell later this year. Do you- think that is accurate?

T: Well I think you might have asked me earlier, is there a need for rates to be higher now, and I said no. And I cannot see any other condition which might arise which would mean that they would need to rise.

J: As a result of today's figures, some banks are already forecasting a 0.5 per cent increase in housing interest rates within 4 to 6 weeks.

T: Oh well, some may. We did see some talk some time back how all banks were going to be lifting by now at a certain level. It hasn't happened. Some have risen, some have not. They're commercial judgements. Housing

interest rates are set in a very open market now. There is no longer that ceiling applying to new loans and the book of most of these banks would be now about 60 per cent in deregulated loans. So they have got a commercial judgement to make. They can get deposits if

they can lend enought commercial.

J: Mr Keating, the housing cost component was only included 2 years ago.

T: I was about a year.

J: Has the Statistician (inaudible)


T: Well I don't want to say he has got it wrong. He has attempted to get a more adequate contemporary measure of mortgage costs for the consumer price index and it may be that the measure that he has chosen distorts in

the face of these kind of price conditions. And he is indicating he might take the opportunity of reviewing it. Well that is entirely reasonable as far as I'm concerned.

J: Did you ask him to do that?

T: I spoke to him about it but he said that he thought there was a problem with it and that a review of it was appropriate.

J : It was his suggestion entirely, you didn't encourage him to have a look at it?

T: No. He intimated that the current measure may not be adequately reflecting the thing and it could be looked at and I said that yes I think that is an entirely appropriate thing to do.

J: Do you always talk to the Statistician after these figures are released Mr Keating?

T: No. Not always.

J: What happened? Did you call him over today?

T: No. I just spoke to him on the phone, but I have spoken to him on other occasions about ....

J: Why did you speak to him today?

T: Why I spoke to him today is because there is an obvious distortion here. The CPI measure is a very important measure in this economy. I mean you have got leasing prices in real estate across the nation set in some measure in relation to CPI. You have got Commonwealth

payments. It is a very important measure and the credibility of the measure is very important.

J: But you just said he raised it, not you. That is contradictory isn't it?

T: Not its not.

J : So you are telling me you rang him because of it, yet you say he raised.


T: I rang him but he said that he recognised it as a problem here.

J: I'll have to think about that one.

T: No, no. It doesn't take a gigantic mind like yours Laurie, you will be across it in a milli-second. It would require only the contents of two simple facts, that I spoke to him and that he admitted to me that he

thought that there was some (inaudible) with the measure and that perhaps some review of the measure was appropriate which I thought was a very good idea.

J: But you raised the problem?

T: I raised with him but he was aware of it because in discussion this morning with his office and my office about some of the disaggregation of the numbers he was aware of I think what we regarded as a concern. So in

a sense I would need not have even called without him knowing that we thought there was a problem.

J: Would it be fair to say that he knew by that time that you weren't happy?

T: Know, he would have known that my staff were enquiring about the disaggregation and methodology of some of the figures. But in fact let me just say that there is a continual discussion between the office of the Treasury

and the Statistician about some of this methodology and about some of the measures and this is par for the Bureaucratic course as I may put it.

J: Did you speak to him about it last quarter?

T: No. But I think there was communication between my office and his about it and also between the Treasury and his office about it.

J : Did he express disquiet then?

T: No. But it is a measure which he has constructed and I think he probably wanted to see how it went.