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National Accounts, Wednesday, 4 March 1998, 12.15 pm: transcript of press conference


TREASURER: ... An outcome of 0.5 per cent for the quarter and 3.6 per cent through the year to December of 1997. This growth is fully consistent with the Government's forecast growth for 1997/98 of 3 3/4 per cent. More recent indicators show that the momentum of growth in fact is continuing. You would have seen today the business survey of Yellow Pages, a very positive survey. Forward indicators in relation to retail sales for January of 2.1 per cent increase, again strong. Building approvals were strong yesterday. Business investment intentions with the CAPEX figures were also very positive for 1998.

Australia's growth rate at 3.6 per cent, the upper threes, up around that level, is one of the best growth rates in the developed world and continuing on into 1998 where it's expected that we'll be one of, if not the fastest growing developed country in the world.

Continuing strong growth up around this level, 3 3/4 per cent, is also consistent with growing employment opportunities. Over the last five months there have been 140,000 new jobs created in the Australian economy and this growth will support continued solid employment growth throughout the course of the year.

The national accounts show that growth in the Australian economy is underpinned by strong private demand and strong business investment and we are seeing grounds, with low interest rates, for those to continue. Again, the national accounts illustrate that the historic shift, the great shift in locking in low inflation into the Australian economy, confirming an inflation rate in underlying terms around 1.2 percent.

So the picture of the economy that we have out of these figures, a snapshot of where the economy was at the end of 1997: strong growth, low inflation, good employment numbers starting to come through underpinned by good consumer confidence, strong business investment, a low interest rate policy. The one glitch in the economic environment as I've said time and time again is the international scene. We are living through a downturn in Asia which we have never seen in our lifetime. Asia right throughout the period of the 1980s and early 1990s was a factor which was contributing to our growth. In fact when we were in recession in 1990, when Keating put Australia into recession in 1990, you were having growth rates of 6, 7 and 8 per cent, you were getting enormous external stimulus. Now we're not getting that stimulus but the good news is that the private domestic economy is strong and is counteracting that. And I think as I saw in the release which is put out in relation to the Yellow Pages today, if it were not for Asia we would be experiencing near boom conditions. So we have been able to weather the external events and from Australia's point of view that strengthening in private demand couldn't have come at a better time.

JOURNALIST: Treasurer you mention interest rates, the average Australian who doesn't really follow these figures and doesn't really pay attention to the day to day economic movements, what does this say for them in terms of where interest rates are going and whether they can get a job and have job security?

TREASURER: Oh look I'm not going to make a prediction about where interest rates are going, but let me put it in this context: our official interest rates at 5 per cent are as low as we've seen in the last 20 or 30 years and as you've heard me say before, home mortgage interest rates are the lowest since the 1960s. What you're seeing today is the picture of an economy which is nicely growing, with good jobs growth in a sustainable way, which is validating that low interest rate policy. And what you're seeing today is the picture of an economy which is not turning down, it's not overheating, what it is doing is moving along quite nicely down the highway in a way which can sustain jobs growth and which validates that low interest rate policy.

JOURNALIST: But hasn't our latest economic growth from the September quarter it was 1.1 per cent, now it's halved, it's 0.5.

TREASURER: In the September quarter in fact I think it was 1.5 and I think ...

JOURNALIST: (inaudible) ... revised down ...

TREASURER: Yes, I know. And I think I said to you at the time that these things get revised up and revised down. I think I said to you I didn't think you could say in September, 1.5 we were growing at 6, I said we were growing around 3 3/4 to 4. But on average each quarter, you know we're about one or a little under. It may well be in three months' time we look back on this 0.5 and they'll be saying to us oh it was really 0.7 or 0.8. But what I'm trying ...

JOURNALIST: (inaudible) trust the figures.

TREASURER: No, what I'm trying to say to you is that there were revisions all the way back, these figures are consistent with the picture which we are getting from all sources of an economy growing in the upper threes to 4 per cent. And our forecast for the year is for 3 3/4 per cent, these figures are entirely consistent with that. It's not an economy that is overheating, I think last time we were here many of you were asking me whether the economy was overheating. I said I didn't think it was. It's an economy which is growing strongly by world standards and it's an economy which is growing consistently with low inflation and validating our interest rate policy.

JOURNALIST: Given that the ... the Asia ... hasn't even reached the economy yet. Shouldn't we be doing better than 0.5 in a quarter particularly as you said that the major fallout would be happening during the later part of 1998.

TREASURER: I don't think I would say that Asia hasn't reached us. There has been an affect on our export performance to some degree out of Asia. We have, conversely to that, been able to pick up exports in other markets, in Europe and in America. But what we have been saying is that we would expect the fuller impact to be cutting in later. I wouldn't say there's been no impact. I wouldn't say that we've reached the full impact yet. We are expecting the fuller impact to cut in later. But the other point I'll make about Asia is this. That it's a moving feast. When I was here before Christmas the concern that was on everybody's mind was Korea. Korea at that point looked as if it was going to be the worst affected country and seriously affected. If you looked at Korea today the IMF program has been quite successful. The full impact today seems to be in Indonesia. I would say Indonesia is much worse than we were expecting at Christmas time, Korea is a little better. And so it's moving and I also believe that with the right policy responses the impact in Asia itself can be lessened. But you would have to say that judging events as we now know them there will be an affect, there's a little affect already and it will be greater over the course of the year. Yes.

JOURNALIST: Treasurer, unquestionably the current account will blow out this year, ... some figures ... the Mid Year Review and you talked about that again yesterday. Does that put pressure on the Government and the Treasurer to retain all of the Budget surplus that you have forecast for this coming financial year and later years to offset the impact?

TREASURER: Well, I'll begin by saying this. Everybody seems to think the Australian Budget is currently in surplus. It's not. It's currently, as you know, in deficit. That's in the current financial year 1997/- 1998. I have said that on current policy, if we hold the line on current policy that we can drive the Australian Budget into surplus next year. But that is going to take quite a deal of effort. It's not there yet. The great challenge for us in this Budget as I see it is to finally make good on the delivery of the surplus. And I'd make two points about that. One is that by delivering the surplus, we are doing the best insurance we can against a current account problem. The second is to say that delivering a surplus is not just an end in itself. The end at the end of it is to rescue our debt position. And it's only after you start delivering one surplus, two, three, four, five, six - decades of surpluses - that you will undo one deficit, two deficits, three deficits, a decade of deficits. Having come off a decade of deficits we would not be in the position that we were a decade ago until we've done a decade of surpluses. This is my point. It's not even just one surplus. It's surplus after surplus just to try and recover the situation back to where we were before the Keating recession.

JOURNALIST: Treasurer you talk about ... to get to surplus, still require extra effort to get to surplus. Are you saying that on a no policy change basis now, given the revenue and expenditure numbers that you're aware, of that you'd not make surplus'?

TREASURER: No, no. I'm saying to you as we set out in the Mid Year Review on all of our forecasts and on the no policy change basis we said we could do a surplus in 1998-99. All I'm saying to you is if we sat back now and let policy deteriorate, or if we went into a big spend, and there are pressures building up for spending all over the place, we would not make good. And I'm saying we intend to make good. We intend to make good. All I'm saying to you is I count a surplus when I deliver a surplus Budget and I haven't delivered yet, it's for May of this year and we are working on it and my message to everybody is this: it is not the time now to ease back and to say it's in the bag because it's not in the bag. It will only be in the bag if we continue to maintain the discipline and if we continue to strive towards the goal. Now that's always on a no policy change basis in itself. There are always intervening events. People say to me well what about insurance for product going up into Asia. I mean these are new events. What about drought exceptional circumstances. These are new events. Even without any policy change you have these intervening events that start coming in on you and my message is this: that we have to maintain the discipline of policy in order to deliver the goal and to achieve the outcome which is the surplus in 1998-99.

JOURNALIST: Mr Costello you said that going into the Asia crisis we are in a very strong position. Just taking one of these indicators here, the imports to sales ratio, that's already, on page 8, that's already up at a record high. Is there anything you think the Government needs to look at to protect the domestic economy from dumping?

TREASURER: Well the import sales ratio I believe is in nominal terms and one of the reasons why you'll find that spiking up is the exchange rate effects. And of course exchange rate effects can undo that spike just as they can put it there. But in relation to dumping, I think it is important that we do have a transparent and efficient regime, yes I do. Dumping is unfair trade. Dumping is a situation where you abuse a market power and I have no qualms at all about having an efficient system to prevent it.

I think it's important that it's transparent, so that everybody knows what's going on. But we must watch that. But in terms of responding to Asia, you know, you hear this little sort of line from Mr Beazley every now and then: "Oh the Government's complacent about Asia." You know, it's sort of his latest little line. Let me tell you what complacency about Asia would be. It would be a $10 billion deficit - the policy that he was arguing for two years ago. Let me tell you what complacency about Asia would be. It would be getting down into that Parliament and trying to knock off all the expenditure savings which were required to recover our financial position, which is what he's been at for two years. Let me tell you what complacency about Asia would be about. It would be about trying to stop waterfront reform when all of our exports are going out through the waterfront. Let me tell you what complacency about Asia would be about. It would be about saying that the Australian taxation system doesn't need any improvement. Here we have a mob of arsonists that are saying, "Look at the fire." And when we pull out the hoses, they try and turn the tap off. I mean, these people, honestly, the gall that they've got. Where would Australia have been if we'd have had $10 billion of deficit in '96-97 and $10 billion in '97-98 and forecasting $10 billion in '98-99? The IMF's going into all these Asian countries saying you've got to start producing surpluses. We'd be sitting down here as the world's greatest deficit runner.

JOURNALIST: But are you saying, Mr Costello, that aside from unfair trade practices that there's nothing we can really do to slow the flood of imports from countries that have experienced big devaluations in Asia?

TREASURER: Well we should take the measures that are available to us to prevent dumping and we are in fact working on measures to make that more efficient and timely. That's what we're doing.

JOURNALIST: [inaudible] blow-out in the current account deficit?

TREASURER: Well yesterday's figures showed that in the first half of the year the current account was about 10 l/2 billion and we have forecast for the full year about 23 billion. So that will give you some indication that we are expecting it to worsen on its current position. 10 1/2 is not half of 23. So we are moving into what will be a downturn in relation to the current account deficit. I've always made that clear. There are two reasons for that. One is that domestic demand is very strong. The other is we are facing an external challenge. It's not of our making but it's an external challenge that we have to face in Asia.

JOURNALIST: Could the figures already be out of date?

TREASURER: I don't believe so, Mr Lyneham, because yesterday was quite a substantive figure. It was greeted as quite a substantive figure but taken with the first quarter it still wasn't half of the projection for the year.

JOURNALIST: But aren't you worried that going into this current account blowout, based on these figures and quite a marked fall in the household savings ratio, it seems to have gone from about 5 per cent in 1996 down to 3.2?

TREASURER: Could I just make one other point about the current account. We've had in recent times three current account blowouts - Banana Republic in 1986, which was 6.6 per cent; the second Keating blowout in 1990 at 6.8 per cent; and the third Keating blowout in March '95 at 6.8. Now we're forecasting in this financial year 4. But there are significant differences. At the time of Banana Republic, inflation was 9.3 per cent. At the time of the second current account blowout it was 8.6 and at the time of the third, 3.9. One of the significant differences is now we have inflation down in the low 1's. And, of course, interest rates lower as a result. Now the reason I make that point is that one of the big structural changes has been locking in low inflation and that means that as you approach these cyclical events we have had one big structural change in relation to inflation. The other big structural change that I want to lock in is budget surpluses - not just the one-offs, not done by fiddling the asset sales. You see one of the things I never even take into account is the asset sales. I say we're in deficit and we are. But we are repaying debt right now, right this year, and repaying debt next year and the year after. Because if we can get that debt ratio down that will be another of the big structural changes. But the point I was trying to make to you before is that next year would be the first surplus. That's what we intend to deliver. But bear in mind ... And I ... It's a magnificent achievement. It is a magnificent achievement. I'm not taking anything away from that. But bear in mind one surplus after 10 years of deficit is only the start of the cure. And that's why we have to not only achieve our goals but to lock them in.

JOURNALIST: Does that mean you're matching Labor's pledge to have three budget surpluses after the next election?

TREASURER:Labor's pledge? Me matching Labor's pledge?

JOURNALIST: Well you were talking about ...

TREASURER: Labor's pledge isn't even worth the scrap of paper that it's uttered on. I mean why would they have to pledge three years of surpluses because they had the budget in surplus? They had it in surplus three years ago. That's what they said.

JOURNALIST: So what are you saying?

TREASURER: Well what I'm saying is that when Mr Beazley last time said he had a surplus it meant $10 billion worth of deficit and when he talks about it again that's probably what he means. If he means anything.

JOURNALIST: [inaudible] talk about the need for budget surpluses ...

TREASURER: I'm talking about the need to do what we have done over the last three years, which is actually get a surplus of revenues over outlays. That's what I mean by a surplus. I think Mr Beazley means a sort of a smoke mirage. You ask him one question. The last time Mr Beazley ever spoke about a surplus, it was in February of 1996 when he uttered these words: "We are in surplus." We were then $10,000 million in deficit. So you ask him what does he mean by the word surplus? And I'll tell you what he means. He means a canny little trick to try and deceive people into thinking that he won't be the kind of vandal that past experience tells us he will be.

JOURNALIST: Mr Costello, you said ...

TREASURER:Last question.

JOURNALIST: ... you said how important it is to have a surplus and how there's pressures building for a big spend. Are you promising that if you achieve your surplus in the May budget that you will not use any of that surplus or any future surplus to help fund tax reform?

TREASURER: Well I'm telling you, and I think I've told you on numbers of occasions, that I'm aiming to produce a surplus in this budget and in the budgets thereafter and I've laid down a path which is consistent with our goal by the year 2000-2001 to halve the debt to GDP ratio. That is my goal. And in relation to our tax policy, our tax policy is to produce a tax system which is consistent with good economic management, which is consistent with those goals. And I'm obviously not going to go into further detail in relation to that because I want you all to be excited when you come here to hear it when we're ready to release it.

Thanks very much.