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4 Treasury Place, Melbourne, 23 July 1997: transcript of press conference [Consumer Price Index, 1996-97 preliminary Budget outcome, economy]

EMBARGO

EOE

TREASURER: Today I announce the preliminary budget outcome for the 1996- 97 financial year, that is, the year ending on 30 June. The preliminary outcome is nearly two billion dollars better than we forecast at budget time. At budget time we thought that in the 1996- 97 year the outcome would be around $6.8 billion of deficit. Preliminary figures indicate it has come in at $4.9 billion and that is less than one per cent of GDP. What that means is that when we came into office the 1995- 96 outcome was 10.3 billion dollars, and by the end of our first year we had halved it. We had halved the Commonwealth budget deficit.

To put that in some kind of international context this is very good by world standards. For example, the G7 average is around three per cent, and the OECD average around two per cent, and the preliminary outcome for Australia one per cent in this financial year just past. Even more importantly, however, it indicates that we are well on track to achieve our goal, which is to put the Australian budget into surplus in 1998.

A statement will be released as part of the Commonwealth Financial Transactions indicating the preliminary outcome. Of course it may change to a minor degree before we have final figures, but we wouldn't expect a great deal of change in relation to that.

I also make some comments on the Consumer Price Index. The Consumer Price Index for the June 1997 quarter in headline terms was actually 0.2 per cent, a fall of 0.2 per cent, and in headline terms an inflation rate through the year of 0.3 per cent. This is an exceptionally good result. Of course that has been led by falls in the cost of mortgages. We now have home mortgage rates as low as they have been since the 1960's, and as a result since our government was elected the average Australian is saving on their mortgage $290 a month. Over $3,000 a year on their mortgage. What that means is that led by falling mortgage costs, falling mortgage costs, the Consumer Price Index is now as good as we have seen it.

In relation to the measure of underlying inflation, that is taking out factors such as mortgages and the falls in relation to mortgage interest rates, over the course of the year underlying inflation is now 1.7 per cent. Again, that not only meets but it beats the target for underlying inflation which we've set at two to three per cent. So those Consumer Price Index figures and the measures of underlying inflation are exceptionally good results, and we warmly welcome them. In relation to the headline figure, the basket that we measure the purchasing power of people's dollar, what it means is that your dollar will buy more in this quarter just past than it did in the first quarter of 1997. The purchasing power measured against a basket of goods of a dollar is now higher in the second quarter of 1997 than it was in the first, and of course, as I said that is led principally by the falls in mortgage interest rates and the way in which home buyers and the cost of housing have benefited as a consequence.

What does all this add up to? What this adds up to is a very good climate for investment, historically low inflation, historically low interest rates, a budget which is on track to put the Commonwealth into a position where it will be a saver, and it will keep the pressure off interest rates, and as a consequence it is a very, very good investment climate through 1997 and 1998.

JOURNALIST: Treasurer, you say today's figures the underlying rate is below the Reserve Bank and the government's comfort zone of two to three percent. Because of that and the good economic conditions, do you believe that we should be doing more for another interest rate cut? I'm not asking you to say what you think's going to happen with interest rates, on these conditions, the independent Reserve Bank should they be considering another rate cut?

TREASURER: Well, as you know, whatever I say will be interpreted as giving an indication as to the movement of rates. I don't want to give any indication in relation to the movement of rates, but I do want to put up, take up one point that you made. You said that this was below the comfort zone. That's not really the right way of looking at it. We've said we don't want inflation to go above that two to three per cent band and it hasn't. This is better than we targeted. This is a better result than the target, we have exceeded our target. There's nothing uncomfortable about a 1.7 per cent underlying inflation rate. I guess those of us that have lived through the last twenty years probably didn't expect to see that kind of outcome, but when you do get that kind of outcome it is an exceptionally good result, and what it means for people is that the value of their money is not declining on them. In fact in the second quarter the value of their money actually increased over the value in the first quarter. What does that mean for the average Australian? What it means for the average Australian is that they can save with the confidence of knowing that their savings are protected because inflation is at the levels that it now is.

JOURNALIST: Treasurer, would you attribute to the improvement (inaudible) in the underlying, narrowing in the underlying budget deficit in the last fiscal year, what is the main factor in that?

TREASURER: Well, it's stronger than expected revenues in company tax and in other individuals, but particularly in the company tax area, and in addition lower than expected outlays, so revenue was about $1.4 billion higher than we were expecting at the time of the May 1996, in relation to the May 1997 Budget, the budget we've just gone through, and outlays were lower than we thought they would be in May. So you've got lower outlays, better revenue, a $2 billion improvement in the outcome, bear in mind this is an outcome, for 30 June 1997 in respect of the 1996- 97 year.

JOURNALIST: Does a result like this give (inaudible)?

TREASURER: Well, the interesting question now is getting a better than expected result in the financial year just past. What does that mean for the financial year we are currently in? Now it's too early for us to say what the implications would be. It could be that this is just a one- off better than expected in respect of the financial year just gone by and it wouldn't necessarily feed in to the 1997- 98 year. That could be the case, and until we actually analyse the returns we can't tell whether this is a one- off factor. If, however, it indicates that the base for revenue projections in 1997- 98 has improved, that means that the outlook for 1997- 98 could also improve, that is, that the budgetary position could improve in the forthcoming year. It's too early for us to say that, and we won't be up- dating the forecasts in relation to the budget until we do our mid- year review. But I certainly don't see any downside in respect of the 1997- 98 financial year.

JOURNALIST: Treasurer, on the Consumer Price Index, on May 23 the Reserve Bank cut interest rates, do you believe that past rate cut they were doing that because they knew of today's figures and will future rate movement depend on what's going to happen to inflation down the track and particularly wages and (inaudible) constraint.

TREASURER: I think when the rates were last cut it was made clear at the time that they were cut because there was no apprehension at that time that there would be a regrowth in inflation, that there was at that time reason for being quite confident in relation to wages, and that as a result there was room to cut rates. Now when you're looking at monetary policy you are looking at 12 to 18 months down the track, and that's the thing that will be focussing our minds in relation to these figures. These are exceptionally good figures. They show what the situation was in the June quarter of this year, we now look down the track to see whether we can see any challenges to that down the track and that's why it's important to keep an eye on wages, because wages could be a challenge. Why do I say that? I say that for this reason, that once you get to results of this order which are historically so good, you don't want to fritter them away. We have go to a position where we have inflation back at the levels of the 1960's. We haven't been in this territory for decades. Having got there we don't want to fritter away low inflation. It's a policy of this government to get inflation low and keep it low. And I think you'd have to say as a result of today's figures that there are very good prospects in relation to inflation.

JOURNALIST: Does that mean that tomorrow's wages figures will be a very important indicator of what the Reserve Bank might do?

TREASURER: Wages figures are always important indicators. They're another piece in the jigsaw. We've made it clear that we want to see wages stay around that four per cent mark, and I think it's worth explaining why. To the employees of Australia you don't need wage increases now to chase prices. Prices are not moving against you. You don't have to go out and look for a two or a three per cent wage increase to keep up with your prices. Prices are not moving any more in underlying terms than 1.7 per cent, and in headline terms your dollar is actually buying more than it was in the first quarter of 1997, so I think this is a very important factor for people to get in to their thinking, both employees and employers actually. I think it's very important for employers to realise that we have low inflation. And for many employers what that means is that they can't get price rises that maybe they used to be able to get, they now can't price rises. That means that they've got to be vigilant on the wages front as well.

JOURNALIST: Treasurer, I suppose coming back to the interest rate point and the last rate cut. Do you think that the last rate cut was a reward already for today's figures and I suppose most people who, you know, the battlers if you like, are out there will see you saying this and read it in the papers tomorrow. They're going to look at all this and say, fine, I've got a home loan, you know, what should I do? You know, should I be locking in my rate now or, I know you can't give advice, gut they're looking to you as the elected official to give some idea.

TREASURER: Well, look, if they're sitting out there and they want some advice on whether to lock in their interest rates or not, I suggest that they go and speak to their bank manager or their credit union or their mortgage provider and have a chat to them, because we can't, as you say, get in to the business of giving out financial advice. The interest rate cut back in May was a reward for low inflation and an improving budgetary situation and the effects of that are still, I believe, to fully flow through into the business community. They did not, as it turned out, flow through to all of the customers of the major banks. The ANZ Bank flowed it through. In fact, the ANZ Bank did better in relation to that cut, but it did not fully flow through from all of the major banks, and obviously I've had quite a bit to say about that over recent months. But the fact of the matter is that the benefits of that are just now starting to be appreciated, because a lot of the banks of course in relation to home mortgages, although there was a cut in official rates in May, are factored it in to borrowers from July, so you know it's just starting to come on stream. And in relation to those interest rates people should now be starting to notice, home buyers in particular, a bit more money in their pocket and what's more in a low- inflation environment money that's worth something in your pocket, so that is a very good conjunction of events.

JOURNALIST: It sounds like you're suggesting that perhaps we don't need another rate cut yet, we should get the effects of this one first.

TREASURER: Well, you began all of your questions by saying you knew that I wouldn't give any hint as to where interest rates are going, and with respect I agreed with that proposition.

JOURNALIST: Treasurer, if the Mortimer Report recommends that we should set growth targets, what's your response likely to be?

TREASURER: Look, I don't think there's any point in sitting around and having particular numbers for growth targets. I don't think any government's done that in Australia for a long time and I don't believe any would. What you say in relation to growth is, you want growth to be as strong as possible, and you want it to be as strong as possible in a sustainable way, that is, to get growth going and sustainable going, and to keep it going for a long period of time. And I want to explain that the thinking of our government is to run a very long- growth cycle. We've had enough - right through the 80's and the early 90's: pump up the economy, go into a downturn, pump up the economy, go into a downturn. Bad climate for investment, our downturns were always more severe than the previous one, and so what we want to do is we want to get sustainable long- term growth in this country. What's going to produce sustainable long- term growth in this country? Low inflation, good savings, low interest rates, the kinds of things that are coming together now and will create a very good investment climate for Australia. This is the kind of investment climate that we haven't seen for quite some time.

JOURNALIST: Treasurer, given that the inflation is now coming better than budget forecasts, what do you think of prospects of economic growth for 1997- 98 coming in better than budget forecasts as well, exceeding 4 per cent?

TREASURER: Well, we're forecasting I think over the course of the financial year at three- and- three- quarter, and I must say that what we see to date is quite consistent with that. We've seen, in the last day we've seen the release of the leading indicators which give us an indication that growth is strengthening throughout 1997 and into 1998. We now have a better inflation outlook and we now have a good interest rate outlook. I am not going to return to our budget forecasts for 1997- 98 until we do the mid- year review. We'll be doing the mid- year review probably just before Christmas, but I must say it's a good climate that is developing.

JOURNALIST: How do you think these figures are going to (inaudible)?

TREASURER: Well, over the course of 1997 and into 1998 with a growing economy, with low interest rates, no inflation challenge and a budget which is coming back into surplus, these are going to create very good prospects for long- term jobs, and it's the long- term jobs that we are after, and I must say it's a gathering, confident environment that's coming together. What we want to make sure is that it's sustained through 1997, 1998, 1999 and into the next century, and that's the focus that we've got.

JOURNALIST: ..(inaudible)..free trade zones (inaudible)?

TREASURER: Oh well, what's going to help unemployment in this country is sustained growth in the Australian economy and a much better system of industrial relations which we are now putting in place, and a good investment, low- interest rate environment. That's what is going to make the big inroads into unemployment in this country and that picture is starting to come together.

JOURNALIST: So no (inaudible) ...economic.(inaudible)

TREASURER: Oh well, look, I think the government's indicated that it looks at all of these proposals. I think I said the other night that there are advantages in free trade and rather than just have an advantage in this area or that area, let's try and get the advantage for the whole country.

JOURNALIST: Treasurer, what's your view on one of your backbenchers, David Hawker, suggesting that the RBA might publish their minutes of their meetings some one month or two months after the RBA Board meets to clarify the role each member plays in decision making to bring us into line with the UK and the US. Is that something the Government's considering at this stage?

TREASURER: No, that's not something that the Government is considering at this stage. We have a transparent approach to the Reserve. The Reserve announces its decisions and it publishes reasons for them at the time and that is of much more assistance than after a time lag getting views of individuals or raking over the embers of personal views after the event. The Reserve in Australia comes out, announces its position and published the reasons. You can't get any better than that, and it is quite independent in the discharge of its activities, and what's more we now have an agreement between the Government in the person of myself, and the Bank in the person of the Governor as to how we are going to target monetary policy. It's very transparent, very open, and it's been a great improvement and you know, let's look at some of the benefits. When we were elected the margin on the US long- term bond and the Australian long- term bond was about 250 points, and it's gone as low as 30 or 40. Now what that shows is that there's a lot of confidence in the way in which monetary policy is being conducted, and it also shows that there's a lot of confidence about the Australian inflation situation and that confidence was well placed, witness today's figures.

JOURNALIST: Has the investigation into the missing briefing papers been concluded as yet?

TREASURER: No, that investigation will proceed, and it'll proceed, as I said, on Monday.

JOURNALIST: Mr Costello, when did you first read the report?

TREASURER: Well, look, there's going to be an investigation as to those officers that were involved and we'll await the investigation.

JOURNALIST: Mr Costello, before you re- appointed Mr Hugh Morgan to the Reserve Bank Board this month, did Mr Morgan draw your attention to the possible problems surrounding gold sales and did he provide a satisfactory explanation of WMC's forward sales to you?

TREASURE: I think Western Mining's forward sales in relation to gold were publicly reported right throughout last year and into this year. That they were reported on a quarterly basis and they were out there in the public domain for anybody who wanted to know about them. Mr Morgan has issued a statement as to his conduct as a director of the Bank and the Governor has issued a statement as to his conduct of the board of the Bank, and I think that that makes it clear that everybody on the Bank Board behaved with propriety and I have no qualms whatsoever about that, and the position that was taken by Western Mining was taken with full disclosure to the markets and anybody else that wanted to know. And I believe that Mr Morgan makes a strong contribution to the activities of the Bank and I look forward to him continuing to do so.

Thanks.