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National accounts, September quarter, Wednesday 3 December 1997, 12.30pm: transcript of press conference [National accounts, Asia, Tax reform]


TREASURER: Well growth in the Australian economy continues to strengthen with very strong growth at 1.5% in the September quarter as shown by today's national accounts. Clearly the pace of the economy has stepped up over the last two quarters and I've been saying for sometime that the economy was growing somewhere between 3 and 4%. You'd probably say in the light of today's numbers, more towards the 4 than the 3 but these are as I said very strong figures. The economic growth should stimulate employment into 1998 and reinforces a very positive outlook for the Australian economy. Australia is now a low inflation, high growth economy. This would be one of the highest growth rates of the developed countries of the world. Of course the growth is principally strengthening of the domestic side of the economy. But combined with sound economic fundamentals, appropriate policy settings, this puts us in a stronger position to weather external events, external events which are outside our control particularly the external events that we're seeing in Asia at the moment. In particular it reinforces the importance of the Government's Budget repair program. The important thing was to turn the Australian Budget around to lock in low inflation, to get interest rates down so that when growth strengthened as it now is we were able to run a higher level of growth than we would have been had we not engaged in the great task of Budget repair. There are of course, numbers of one off transactions that have to be extrapolated to get a fair picture of the accounts. For example, the large one off privatisations of Loy Yang B and DAS businesses which unwound abnormals in the last quarter and the ANZAC frigate and RBA gold transactions. Once you unwind those figures however you see that exports grew in the quarter by about 5 per cent and business investment increased by about 3.4 per cent in the September quarter.

The prospects for the economy are very strong. As I said earlier consumers have obviously come back with strength in the September quarter and all the indications to date are that retail sales have been strong in the current quarter, motor vehicle sales are at near record levels and we have very historically low interest rates and historically low inflation rates as a consequence.

What these national accounts show is that the success in locking in low inflation, the importance of engaging in Budget repair, the centrality of focusing on economic fundamentals are now setting Australia in a strong position and you would want to be in a strong position to be frank with the external events that are going on and will unquestionably have some influence on the economy in the future. These are very strong, these are very good national accounts and they bode well for increasing growth and employment opportunities during this quarter and during the early part of 1998.

JOURNALIST: Mr Costello, do these strong figures, as you describe them, indicate there's going to be another interest rate cut?

TREASURER: Well, as you know, I don't comment on future movements of interest rates. The one thing I will observe is that we've had five cuts in official interest rates, since our Government was elected - two and a half per cent. Obviously the low interest rates are doing quite a bit to stimulate consumer confidence and that's coming back with retail sales. In addition, of course, home mortgage standard variable interest rates have moved 4 per cent because there's been about a one and a half per cent squeeze on the margins. So I think probably what happened through the course of late 1996 and early 1997 is that as rates came down people probably held their mortgage payments and repaired their debt position. As the view has become more widespread through the community that rates are down and are likely to stay down and it wasn't just a flash in the pan, I think that's given renewed consumer confidence and in the September quarter, the retail trade figures which are fed through into these national accounts were record figures, the best since they started measurements in 1982, and all of the indications, the anecdotal evidence, is that in this quarter that we're currently in, the December quarter, that those very strong figures have held up.

JOURNALIST: So the interest rate cuts did their job?

TREASURER: Well interest rate reductions always work on a delayed time frame - I've always said that, 12, 18 months - just as the interest rate rises at the end of 1994 were slowing the economy into 1996, the cuts in 1996 were I think just starting to come on stream at the end of 1997 and will be felt more so in 1998.

But the important thing is to bear in mind that what gave us the opportunity for those interest rate cuts was locking in low inflation and what gave us the opportunity to lock in the low inflation was the agreement with the Reserve Bank, attending to the Budget repair, that gave us the opportunity to get the interest rates down and it's always been our policy to lower interest rates and to keep them low. We don't want to go through the roller coaster that we did throughout the 1980s and to avoid that roller coaster it meant that we had to engage in structural change and the big structural change was on the Budget. We had a $10 billion deficit in 1996, we're forecasting in this financial year that it will be under $4 billion and the next financial year we are aiming to put the Budget into surplus. Now that's in underlying terms. If you take into account asset sales we didn't borrow last year, we re retiring debt this year, we'll retire debt next year and by the turn of the century we'll have halved the debt to GDP ratio. These are big structural changes and they're big structural changes designed to give us the opportunity to bring the interest rate structure down and keep it down.

JOURNALIST: Mr Costello, you've just returned from Asia.....

TREASURER: Can I do Asia in a tick, I'll just finish the national accounts and I'll quite happily do Asia.

JOURNALIST: Mr Costello, do you see anything in these figures or other figures released recently the statistician that would suggest to you that investment intentions in the mining and agricultural industry are currently uncertain or at risk?

TREASURER: Well, as I said I think in the Parliament last week, the CAPEX investment intentions in the most recent survey were quite strong. I think if you actually look at these figures you will see that in the mining industry perhaps it's not as strong as it was earlier in the year and last year but I presume your question really comes down to whether or not the current debate on native title is having an effect on investment intentions. And I must say to you, anecdotally, it is. If you ask the miners themselves, the big mining companies, is the uncertainty regarding land tenure affecting their exploration and investment intentions they will tell you it is and they've been advertising to that effect. And I think it stands to reason and one doesn't have to look at too many big Australian mining companies to see that a large proportion of their recent developments have been out of Australia, particularly in South America. Now what determines a mining investment will be the grade of the mineral and the costs in extracting it, the world price and all the rest of it, but why would we want to make it more attractive for mining companies to invest outside Australia than inside Australia.

JOURNALIST: Mr Costello, I mean you've got investment intentions in the mining sector up something like 18%, aside from the anecdotal evidence that you've got, that's pretty strong investment growth isn't it in mining.

TREASURER: Well as I said earlier whenever you are looking at these factors you've got to take into account yes what the investment is but also what the investment would be under optimal conditions and how do you answer that question except by asking those who make the decisions. And look we measure all sorts of things by asking those that make the decisions - we measure capital expenditure intentions, we measure all sorts of things on the basis of intention. The point I'm making to you is if you ask the leaders of Australia's big companies, they will tell you one of the factors is making them more hesitant is the uncertainty about title.

JOURNALIST: They still increased their investment 19 per cent in the last year?

TREASURER: Well I think if companies can make a profitable investment with that uncertainty they undoubtedly will. I don't dispute that for a moment. The only point I'd make is if they could make more than they are currently making that to me says we should resolve the uncertainty regarding title.

JOURNALIST: Mr Costello, given the wages figures in today's numbers, do you think in fact that you have high wages growth shows that the Government is in fact a little too complacent about having locked in low inflation and looking through the rear view mirror, in terms of the inflation data, you should be looking more at the wages pressures in the system and what that will mean for future inflation?

TREASURER: Well sure, we look at both of course and we try and get a good picture. The National Accounts wages figures, I think as the statistician says himself, have a lot of hypotheticals in them, they certainly measure things like redundancy and severance payments and as a result in the wages figures they would look on this measure on the high side. But you've got to marry that up with other wages figures which we look at and think the most reliable one is the AWOTE figures. What the figures overall will give you a picture of is wages growth probably over four and under five. Now, I believe that is consistent with the inflation target, as long as you're getting productivity growth of around 2 per cent.

One of the good things about these National Accounts is that they are measuring increased productivity. I think this is an important point. We're not against high wages, we are in favour of high sustainable wages which don't lead to unemployment and the way you do that, the way you increase wages is by increasing productivity. You can sustain higher wages on higher productivity. If your productivity is low, you can't sustain any wage increase without having adverse affects on employment. So it's always a question of getting them in balance and the degree to which we can improve the output of the Australian economy is the degree to which we can sustain those wage increases. Now the Reserve has said four to five on a two per cent productivity expectation. I think that's about the situation that we're currently at, but let's not also forget the other part of the equation which is lifting Australian productivity.

JOURNALIST: Mr Costello, you said in Kuala Lumpur that you thought the economy had picked up in the December quarter. Does that mean that you're expecting a better result than this one in the December quarter and we might see annual growth getting close to or even over 4 per cent?

TREASURER: Well it would be hard to imagine too many better figures than this. This is 1.5 per cent for a quarter. The Americans would multiply that by four and say this is 6 per cent growth. I don't think that this measures 6 per cent growth in the Australian economy. Through the year it's about 3.6 but that's because the December quarter right back a year ago was a weak one. I think as the weaker quarters drop out what you're seeing is an economy which is towards the 4 per cent level. And certainly in relation to the next quarter, people will put down their own expectations but I would think at this stage you'll get an outcome which is consistent with a 3 3/4- 4 per cent growth through the year.

Now our budget forecast is 3 3/4 through the year. You would look at these figures and you would say well on the way on the basis of today's figures, not a downside risk on that figure. But let's wait and see what December does.

JOURNALIST: Treasurer, you talk about the figures stimulating employment growth into 1998. What is your expectation on unemployment will it come down on that basis?

TREASURER: Look, we forecast that it will be at 8 per cent by the end of the financial year which is June of next year. It's about 8.4 now. But I think employment growth is picking up. I don't think there's much doubt about that. The unknown is the participation rate and that's why we've got a figure of 8 per cent in there. Not because we think employment growth is going to be weak but we think as employment growth continues to pick up, more people are probably come back into the labour market. But growth figures like this bespeak well of employment generation. I think the last couple of months have seen strong employment growth and that's consistent with the picture of pretty flat a step up beginning in the early part of 1997, a strengthening particularly in relation to domestic demand at the end of 1997 and very good prospects for growth and employment in 1998.

JOURNALIST: Treasurer, what is the pick up in growth and particularly, the pick up in strong private consumption going to mean for the growth in current account figures. Do you think that's a risk in terms of that being revised up?

TREASURER: I don't believe so. The current account figures, I saw some of the papers were saying that this was a major step up in the current account figures that were released in the last day or so. The fact of the matter was that we were forecasting about $20 billion and I think it was 4.6 for the quarter. So four times 4.6, you know we're within the range. The step up was that we had an abnormal preceding quarter. Abnormally low because of the gold sales and the ANZAC frigate sales. So if you took that as your base you could say there was a step up. If you abstracted that, in fact the current account deficit was more or less in line with expectations. Now, in the past in Australia as growth has picked up, sure we've had a current account problem. And that is why the budget repair task has been so important. This is the structural change on the balance of payments. This is why, this is the most direct thing that a government can do to promote savings.

A government can become a saver itself. And a Government becomes a saver by reducing its own debt and in this year we are going to reduce debt, and next year and the year after and if we can realise our goal of halving the debt to GDP ratio by the year 2000 we will have made the big structural change which will contribute to sustaining a higher growth rate without that current account problem.

JOURNALIST: The Government appears to be saving, consumers appear to be spending more therefore saving less. So don't you think we've still got that risk of a spill over into the current account and I would have thought international investors given the recent events in Asia would now start not to dismiss, place less emphasis on your inflation results and your budget results and place far more emphasis on the fact that this Government has not improved the current account deficit position.

TREASURER:Well I, look, here you are you've got an economy growing up around the 4 per cent level. You've got an inflation of what 1.5, you've got official rates at 5, you've got a forecast current account deficit at 4 or below. We haven't been in this territory for decades, for decades. Now, I'm sure if you poke around enough you can find some black lining to the cloud, and I'm certainly not saying every problem in the Australian economy is fixed, but I will say this we are better placed now than we have been for numbers of years. Now I don't say by the way we have fixed our current account deficit problems. A point I've always made. We are by and large trading in a balance on goods and services. What causes Australia's current account deficit, our balance of payment problems, is the net income deficit. The money that we send out of the country essentially to service foreign debt. Now you had that huge build up of foreign debt over a decade. It doesn't go away. You build it up over a decade you don't repay it in a month or a year or three years. This is a problem that we are going to have to work at for years and years in order to solve our current account deficit. This is the Keating legacy for Australia, this is the Keating legacy and we will have to work at it for years and years.

JOURNALIST: ....Keating and Peter Walsh used to say that if Australia was to stabilise its total debt as a proportion of GDP that the current account deficit had to be reduced to a range of 2 1/2 - 3% of GDP, would you still support that analysis?

TREASURER: Well it is a bit of a curve ball that, asking me to agree with Peter Walsh and Paul Keating, I'll think about that.

JOURNALIST: Mr Costello how much do we need to review your budget projections given the events in Asia which you say are external factors. I mean you have just come back from Asia, can you give us a frank assessment about the best case scenario for Australia and the worst case?

TREASURER: Well plainly there is going to be a down turn of growth in the Asian region. There are now, I think, two particular pressure points. There's what is called the ASEAN Four. Three of whom are now in programs with the IMF. Philippines, Indonesia and Thailand. These countries take less than 10 per cent of our exports and, I think as I said at the time, the downturn in those countries will not have a big effect on Australia.

There is a second pressure point in Asia which is North Asia and particularly at this stage in Korea. Korea is a major export market for Australia and a down turn in Korea will have a more significant effect on Australian exports.

There are also obviously problems in the Japanese financial system and the Japanese economy which has been sluggish probably for the last five years is not showing positive signs of pulling out of that problem. And Japan is our major trading partner. Now as I said because Japan has been sluggish for about five years, the fact that it continues to be sluggish won't change things as far as we're concerned. But Korea is a very serious situation and the Koreans are negotiating with the International Monetary Fund. There are expectations that as early as today they will sign an agreement.

Now from our point of view there is not much we can do about Korea, we don't run domestic policy in Korea and we've benefited from strong Korean growth. We will pay the detriment of a downturn in Korean product.

What we can do, what this Government has always strived to do, is to effect the things that it can influence. What we can influence are our own domestic fundamentals and, frankly, I would want to go into a crisis like this with a budget coming back into surplus and an inflation rate which is now below 2 per cent, and historically low interest rates and a strong growth rate. I would not have wanted to go into this with a $10 billion deficit, an accumulating Government debt and a problem on my inflation account. What that says is that we will weather the external events, stronger than we would have if we had not have taken those remedial actions but we still must weather them. There will be an effect, particularly as a consequence of Korea.

JOURNALIST: Will you be revising your budget projections in the light of these external events?

TREASURER: Well we have got a forecast for 1997- 1998 of 3 3/4, you'd look at today's numbers and you would say well 3 1/4 doesn't seem to be any down side risk on that. Because we are having a strengthening in the Australian domestic economy at the moment. As you look out to 1998- 99 you may try and put in some kind of adjustment but the good news for us is that even out into 1998- 99 we are going to ret the benefits of good Australian domestic policy. Now there will be an effect out of Asia, we will sit down and we will try and make some kind of assessment of that but it's very early in the day. Just to give you an example, one or two months ago you could not have predicted the dimension of the problem in Korea that is now apparent. Until the IMF package is announced and is put in place you cannot now predict with any certainty what the outcome will be in Korea. So you could make daily diagnoses but they would not count for much, they change every 24 hours.

JOURNALIST: How concerned are you about the Japanese situation?

TREASURER: Well Japan is a very strong economy and has huge reserves, so that puts it in a different category. That's number one. Number two when we are talking about Korea or the ASEAN countries you are talking about countries that did have growth rates of 7 and 8, Thailand might go to zero, Malaysia might come down to 2, Indonesia might come down to 2. But with Japan they have never been above 1 or 2 in the last five years anyway so if they continue on at 1 per cent or 2 per cent, from our perspective not much changes.

What we loses is we lose the expected up turn of Japan which the whole world has been waiting for three, four or five years. Now the other problem in Japan, of course, is the financial system. They plainly have problems in some of their financial institutions and you've seen some securities houses and a bank which have essentially closed the doors. They are going to have to do a rather extensive clean up of their financial system as a result and that will be a very difficult political matter for them, very difficult.

I think the point about, the one thing that all of these countries now have in common, the ASEAN Four as they are called and the North Asian countries, is that this is now looking more and more like a financial system problem. That is that there were serve problems in the financial systems of these countries and the tie up between the financial institutions and the conglomerates has been a real problem and the problems are now coming home to them.

JOURNALIST: The Mortimer Report placed a lot of emphasis on the success of the Asian tigers and advocated similar strategies. Do you think recent events in Asia have made the Mortimer Report totally redundant and in effect irrelevant in terms of shaping the thinking in this Government on industry policy?

TREASURER: Well I think if you were looking at it today and I think that some of the people who have written on this do concede it, you wouldn't be extolling the virtues of this mode of economic operation like you might have been last year or even earlier this year. The models were good for a period but there are always underlying problems in these models. Just as Governments can pick winners they can also pick losers. And just as the financial system can be directed in to help particular companies when the companies go bad you're putting at risk not just the companies but the financial system and that model is now showing its soft weakness right throughout Asia and I think if people were looking at these things now I wouldn't expect many economists or business leaders would be urging that model at the moment, in the current climate.


TREASURER: Well perhaps you ought to have a talk to them.

JOURNALIST: ...the other area of structural reform in Australia that has not yet been completed and that's the question of the current account and national saving and the question of tax reform. Does the problem of the current account which you conceded is not solved mean that in tax reforms we'll see shortly unveiled by the Government we'll see a change proposed in the mix of taxes between direct and indirect taxes?

TREASURER: Well look I think, this is an important economic point. A country like ours which historically has had weak savings or at least has had weak savings over the last decade or two which have given us a problem on our current account, should make sure that all arms of policy are directed towards boosting savings and a tax system which taxes expenditures is directed towards that goal. I must say to you the Australian tax system would forward our economic goals much better if we taxed expenditures and encouraged savers. And that is one of the weaknesses of the Australian taxation system. What we do is we tax income earners very highly, we tax savers very highly because we tax them on the interest they earn on their savings and we don't tax high expenditures. Now why would you do that in a country which has a savings problem. It's one of the weaknesses of the Australian taxation system. This would be a much better taxation system if it encouraged savers.

JOURNALIST: Mr Costello, again on tax reform, can you give a guarantee that the Government will release its tax reform package before the election even if it's a double dissolution election?

TREASURER: Well, we've said that we'll put out our tax policy before the election, we will, yes. We will.

JOURNALIST: Even if it it's a DD?

TREASURER: Well yes, yes we will. You know I'm just sort of making sure that I've got enough time to complete it. But the plan is yes, to put out our tax policy before the election.

JOURNALIST: And what's your current thinking in terms of timing for releasing the tax package?

TREASURER: For announcing the tax package? My current thinking is to announce it before the election.

JOURNALIST: Did you say that you...(inaudible)... Europe for a change in the tax mix from direct to indirect?

TREASURER: I'm not getting into this sort of, this point about you know you get so much revenue out of this area and so much revenue out of this area and you know should you keep them the same. I'm not getting into dollar amounts. But I am saying to you I believe our tax system would be better if it encouraged savings. In fact, our tax system heavily taxes income earners and heavily taxes people who are savers because it taxes the income on their savings at high marginal rates. And we are of course going to do something about that from 1 July next year. But what our tax system does not do is that it does not tax a whole range of expenditures, high expenditures, and it would be better if it did because it would then be biased towards encouraging savings. And that is my view. And it's not just my view it is the view of practically every developed country in the world. It is the view of the OECD, it is the view the IMF, who for years have said to Australia you have a savings problem, you ought to re-design your tax system, to deal with that and I agree with them and I think most economic observers would. Last question.

JOURNALIST: Mr Costello you said ...(inaudible)... now are confident that the economy is growing strong, 1998 is going to better for the domestic economy. Would an early election, particularly on race, harm confidence, put at risk this economic growth?

TREASURER: Look, I don't think we need to be afraid of elections in this country. I don't think we should think that you can only deal with one issue at a time. I think we are seeing a very strong conjunction of economic events. Look, growth up around 4 per cent; inflation below 2 per cent; interest rates the lowest they've ever been; strong retail sales; a Budget which is coming back into balance; retiring of debt. The kind of fundamentals that you haven't seen in Australia frankly for decades. And I don't think that as long as we keep our eye on the ball and on the important economic fundamentals I don't think we can, nor should we be knocked off course. We know that the Labor Party will try and knock that off course, they don't want the Budget to go back into balance. How humiliating for them. They don't want to retire debt. They don't want to see strong growth and a low inflation economy, but I tell you this, we are not going to let them try and sabotage our economic policy because the benefits are going to be there for all Australians. Thanks.