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Election 2007: Treasurer discusses rising interest rates; industrial relations; consumer price index; and inflation.

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Wedne sday 7 November 2007

Election 2007: Treasurer discusses rising interest rates; industrial relations; consumer price index; and inflation


MARK COLVIN: Who do you trust to keep interest rates low? That line helped win the 2004 election for the Coalition and now, six rate rises on, it's risen from the dead to haunt the 2007 campaign. 


But if you thought the Howard Government was about to back away from the line, think again. 


After a brief pause to acknowledge the pain that rate rises inflict on the indebted, the Prime Minister claimed again today that interest rates had been, and would be, lower under him.  


The Treasurer joins us now to speak to our Chief political correspondent Chris Uhlmann. 


CHRIS UHLMANN: Peter Costello, good afternoon. 


PETER COSTELLO: Thanks Chris. 


CHRIS UHLMANN: Now that last voter in the seat of Lindsay said that saying you were sorry was an admission that you got it wrong. Did you get it wrong? 


PETER COSTELLO: Well, I think what John Howard was saying and I was saying too, nobody likes interest rate rises and that will cost home-buyers and for that we are sorry.  


But I would go on and I would say in an economy where unemployment is now at its lowest in 33 years, where there real challenges coming from overseas, including high oil prices, instability in global markets, the risk of economic policy being mismanaged by the Labor government and Kevin Rudd and Wayne Swan and Julia Gillard ought to be a real risk playing on peoples’ minds.  


CHRIS UHLMANN: But haven’t we seen, for the sixth time, today, that you have no control over interest rates, so what makes them any different from you? 


PETER COSTELLO: Well, the policy that we’ve put in place in relation to balancing the budget, paying off debt and improving industrial relations has all contributed to a lower interest rate environment. 


Kevin Rudd opposed balancing the budget, he opposed paying off debt and, really worryingly, he wants to change industrial relations, and he will change industrial relations in a way which will lead to inflation breaking out and that will lead to higher interest rates. 


CHRIS UHLMANN: But that’s your definition of what would happen under Labor, and they of course would say that that wouldn’t happen… 




CHRIS UHLMANN: …with enterprise bargaining agreements, most of which, of course, Australians now enjoy. 


PETER COSTELLO: Yeah, well, just have a look at what did happen under Labor. When Labor was in office, unemployment wasn’t as low as it is today, it wasn’t at four per cent. They got it below six per cent at one period of time and the home mortgage interest rate was 17 per cent. They couldn’t even manage five per cent unemployment without interest rates being at 17. How would they manage four per cent unemployment with home mortgage rates being at 8.5? 


CHRIS UHLMANN: When we look at what we see in interest rates today, it doesn’t take into account the ratio of debt to disposable income, which now stands at 161 per cent. The Reserve Bank of Australia has said that there’s no precedent for that in Australia. People are under enormous stress, so they’re feeling this rate rise worse than they have at other times. 


PETER COSTELLO: Well, Chris, when you’re actually looking at debt, the best measure of debt is to compare debt with assets. Because debt and assets are on the capital account. When you actually look at debt and assets, you’ll find that people have much greater assets than they’ve ever had before. In fact, the ratio of assets to debt is about five to one… 


CHRIS UHLMANN: They can’t spend it, though, can they Treasurer? 


PETER COSTELLO: Well, this is the point that the Reserve Bank keeps on making, and you’re not arguing with me, by the way, you’re arguing with the Reserve Bank here, because the Reserve Bank’s argument is that people who are borrowing - this is what the Reserve Bank says - are the people who are in the best position to do it. And it says it’s not worried about this because it believes that the borrowings are being handled particularly by those who are able to take it out. 


Now, you’re not arguing with me here, I’m just telling you, the Reserve Bank made its decision today, if you were to put that very question to them, that’s the way they would answer it. 


CHRIS UHLMANN: Did the Reserve Bank get it wrong, because you seem to be arguing again the toss today on the rate of CPI (Consumer Price Index). 


PETER COSTELLO: No, there’s no argument about the CPI, the CPI’s below two per cent. There’s no argument about that. There are other underlying measures of inflation which are up… 


CHRIS UHLMANN: Which are up… 


PETER COSTELLO: Up towards three per cent. And what is our target? Our target is consumer price inflation, two to three per cent on average over the cycle. Now, you can look at that and you can say, oh, well, we’re up towards the upper level of the band, and we are, and you can take a decision as the bank did today, which I accept. 


CHRIS UHLMANN: And did they get it right? 


PETER COSTELLO: Well, they make the decision, which I accept. 


CHRIS UHLMANN: But you don’t seem to believe that they got it right. 


PETER COSTELLO: But the important thing is, where do you think inflation will go in the year ahead? Now, we think it’ll average two and three quarter per cent.  


CHRIS UHLMANN: And the Bank doesn’t think that. 


PETER COSTELLO: No, I’m not sure they don’t. Chris… 


CHRIS UHLMANN: Well, the Bank seems to be suggesting it doesn’t… 




CHRIS UHLMANN: Are you saying the Bank’s not saying that they’ve got a problem with inflation… 


PETER COSTELLO: Well, I think… 


CHRIS UHLMANN:'s with interest rates? 


PETER COSTELLO: I think we should look very carefully at what the Bank said. The Bank said they thought that in the March quarter, the measure would go above three per cent. But I don’t think they actually published a year average… 


CHRIS UHLMANN: They’re saying by the March quarter of next year, both headline and underlying measures of inflation are likely to be above three per cent. 


PETER COSTELLO: Yeah. By the March quarter. But they didn’t publish a year average. But the important thing here, Chris, if I may say so, is I’ve been listening very carefully to Mr Rudd all day. Mr Rudd complains about inflation and so the journalists are starting to say to him, “Well, what do you say should be done, Mr Rudd?” And he says, spend more money on education. 


Now, I’m not against spending more money on education. Let’s suppose we started spending more money on education tomorrow, what, in six years time, high school students would be entering the work force. Let’s suppose we spend it on primary students, what, in 10 years time they’d be entering the work force. Let’s suppose we spend it on pre-school, what, in 20 years they’d be entering the workforce. Mr Rudd doesn’t have any answer at all for next year or the year after or indeed the parliamentary term that’s… we’re now going into elections for. 


CHRIS UHLMANN: But what’s your answer to that? 


PETER COSTELLO: His answer is, “Oh, I’ll do something that might have an effect in ten or fifteen or twenty years!” 


CHRIS UHLMANN: But what is your answer to this? 


PETER COSTELLO: Well, my answer is… 


CHRIS UHLMANN: How would you make sure that inflation doesn’t continue to go up and interest rates rise? 


PETER COSTELLO: Here’s my answer: the first thing is we need to keep our industrial relations system, because if you go back on that, you’ll be right back where we were during other periods of low unemployment. And Kevin Rudd ought to think about it very carefully.  


My second answer, of course, is to make sure that the huge investment that’s going on in Australia now works out in increased capacity. You know this yourself, Chris, because you were the one that barrelled Kevin Rudd on this point. He used to run around saying, “Oh, productivity’s falling,” and I said, “That’s because we’ve got huge investment,” and you know yourself, because you were the one that barrelled him, how poorly he understood the issue. 


CHRIS UHLMANN: Briefly, we’re almost out of time, do you really believe that the line in the Governor’s statement today on monetary policy, that growth and the labour costs has been constrained so far is actually an endorsement of your IR policy, is that the way you read that? 


PETER COSTELLO: Yeah, well, what the Bank is saying is this: for a four per cent unemployment rate, we haven’t had a wages breakout, and I said to you earlier, in previous periods of economic growth where unemployment hasn’t been as low as this we’ve had much bigger wages breakouts than this, and what the Bank is saying is the Industrial Relations policy has avoided the excesses that we had in the seventies and the eighties and even the nineties, and that’s why we’ve managed to keep interest rates at 8.5 per cent when unemployment has fallen to near four per cent. 


CHRIS UHLMANN: Treasurer, thank you. 


MARK COLVIN: The Treasurer, Peter Costello, speaking there to our chief political correspondent, Chris Uhlmann.