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Transcript of press conference: Melbourne: 5 August 2008: car sales; economy; economic reform; interest rates.

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5 August 2008


SUBJECTS: Car Sales Figures; Economy; Economic Reform; Interest Rates

JOURNALIST: Mr Swan, new car sales are down 2.7 per cent in July - further evidence that the economy is under real strain, and yet you continue to talk up the robust nature of the economy. Isn’t all of the data that’s coming out, the new car sales figure being the most recent, further evidence that the economy is in real trouble?

TREASURER: There’s no doubt that economic growth is slowing. It was forecast to slow in the Budget, and there’s no doubt that that’s occurring first of all on the back of eight interest rate rises in just three years, and also now on the back of these additional global influences that have impacted so heavily on our economy. The huge surge in the oil price, for example. The increase in borrowing costs which are flowing through from the international financial market turbulence, which are also impacting on households and business. All of these things are having an impact on the economy.

But I think we do need to get these figures into perspective. There are underlying strengths in the Australian economy. The world economy is slowing, which impacts on our economy, and we’re not immune. We’ve got a strong Budget surplus. We’ve put in place, and I think struck the right balance on the one hand, between tackling inflation in the Budget and investing for the future and building up a surplus of $22 billion in terms of providing a buffer against the international uncertainty that’s certainly out there now.

You’ll recall that in the Budget we spoke at length about the powerful countervailing forces impacting on the Australian economy. And I have to say, at the time, I don’t think people quite read that with the detail that maybe they should have.

We have been acutely aware that this economy will be impacted upon by global influences. The surge in the oil price and the resurgence of the international financial market turbulence have been added to all of those other forces.

So, it’s not surprising that economic growth is slowing. But on the other side of the ledger we’re a country which has got record commodity prices at this time, a strong Budget surplus, a capacity to invest in the future, and we have the major advantage of our banking system not being directly affected by the sort of sub-prime issues that are impacting so badly elsewhere in the world.

So, what I say is let’s just keep all this in perspective. If you wanted to be a county in the world in these circumstances, most countries would say, I’d like to be Australia. But there’s no doubt we are not immune from what is going on and economic growth is slowing.

JOURNALIST: Treasurer, do you believe that you need to do anything different at this point to avoid a hard landing for the economy? Now, whether a hard landing is a recession or not, economists are talking of the possibility of a hard landing.

TREASURER: I don’t think it’s helpful to use those terms, I’ve said this consistently. We also just need to be a little cautious about using one-month figures. But it’s true, the economy’s slowing, you see that through a range of indicators. I don’t, for a minute, say that’s not the case. But then to attach a whole lot of commentary to that which builds the sort of story that Steve was talking about, I don’t think is helpful.

I believe we struck the right balance - and so does the IMF, for that matter, and many others - in our Budget. At the time we were criticised by some for not cutting a lot harder in that Budget. And at the time we said we found the right balance between the countervailing forces internationally, the storm that was brewing internationally at that stage, and our need, domestically, to tackle inflation.

You talk about a slowdown in the economy - the principle factor bringing about that slowdown has been inflation at a 16-year high which produced eight interest rate rises in three years. We inherited that 16-year high in inflation and as a country we have to deal with it. We put in place the settings on the one hand to tackle inflation, to take pressure off inflation and interest rates, and on the other hand, build up that surplus to give us the capacity, should we need it, to cope with international uncertainty.

JOURNALIST: Just further to David’s question, though, isn’t there a strong economic argument for the Government to consider bolstering the surplus in the mid-year economic forecast? Are you looking to do further reforms to try and give you a stronger bottom line?

TREASURER: I’m not going to speculate about the mid-year economic review. I think we’ve got our settings right in the Budget and we are always looking at reform. We’ve just been talking about it here at this (APEC Ministers’ Meeting on Structural Reform) meeting. But the reforms we’re talking about are ones that are long term. They’re difficult but they are absolutely necessary. And for a long time we didn’t have that investment in the productive capacity of the economy that we required. We didn’t invest in the skills and education of our people. We ignored critical economic infrastructure. All of these things are

still at play. You see, you talk about a slowing economy - it is - economic growth is slowing, but on the other hand we still have in parts of the country labour shortages and skills shortages as well. So, there are swings and roundabouts here and we will calibrate our settings as we go through. But we believe we got the settings right in the Budget. And as for the mid-year economic review, well, you’ll see that when it comes out.

JOURNALIST: Can I come at it another way? You’ve said that the Budget forecasts the economy to slow. Do you think what we’re seeing at the moment is consistent with what the Budget forecast or is there a real danger that it’s going to go beyond what the Budget…?

TREASURER: I’m just not going to speculate on that. We’ve seen a round of data in retail sales and so on which indicates in some sectors of the economy there is a slowing, and a significant one. But it is not comprehensive. And when we take policy decisions we need

to do them in a measured way, and I don’t think we should be making policy based just on the interpretation of one or two pieces of data, and we’re not going to.

JOURNALIST: By saying that as well, (inaudible) agreed to what they were (inaudible), regardless of retail sales, Qantas is cutting jobs, Gloria Jeans (sic) is shutting stores, you know…

TREASURER: Not every change that is going on out there in the economy is directly attributed necessarily to government policy, and I don’t know that you can necessarily attribute what’s going on in [Starbucks], for example, to domestic policy settings. There will be other things that you may wish to. But a number of those things are events which are occurring unrelated to some of the data that we’re talking about at the moment.

JOURNALIST: No, I’m talking about your economic growth forecast. Is it more…?

TREASURER: Gemma, we go through this in a measured way. There are processes which the Treasury works through, also with the Reserve Bank, in terms of forecasting and so on, and these things are re-evaluated from time to time. And we will go through that process in a normal way.

JOURNALIST: Mr Swan, the previous government never used fiscal policy as a tool of macroeconomic management. With this Budget you…

TREASURER: They used it as a tool of mismanagement. That’s actually what happened. They used it as a tool of mismanagement - reckless spending which is what has put upward pressure on inflation and given us a 16-year high in inflation precisely at the time we’ve had a conjunction of international events which have put further pressure on the system.

JOURNALIST: In the last Budget you used fiscal policy as a tool of management to try and reduce pressure on inflation.

TREASURER: Yes we did, and we were successful in doing that, I might say.

JOURNALIST: Would you consider using fiscal policy as a tool for stimulating the economy if the occasion required?

TREASURER: I’m not going to buy into those hypotheticals, David. You’ve been round for a long time.

JOURNALIST: No, but do you believe in the use of fiscal policy?

TREASURER: I’m not going to buy into that, David. I believe in responsible fiscal policy.

JOURNALIST: Brendan Nelson’s taken an overseas trip. Do you think that that’s going to heighten leadership tensions in the Liberal Party?

TREASURER: I think the Liberal Party’s problems are a matter for them, and they’re far deeper than one individual.

JOURNALIST: Treasurer, you mentioned that you may calibrate your policy in the light of events worldwide. What’s at the top of your mind as you…?

TREASURER: No, I didn’t explicitly say that. I said calibrating policy is something you do do from time to time. I didn’t say I would be calibrating policy, but we take into account events as they change which is what MYEFO’s all about. So, the next event, when it comes to those figures, is MYEFO.

JOURNALIST: There’s been a suggestion that Brisbane should apply to host the Olympic Games. Do you think that would be a good idea?

TREASURER: I’m not going to buy into that. I haven’t heard that suggestion and I’m from Brisbane.

JOURNALIST: Treasurer, the RBA decision at 2.30pm - I’m not asking you to speculate on rates - but how do you as a government require the commercial banks to pass on any rate movements to borrowers?

TREASURER: Well, we don’t regulate rates. That went out the door many years ago. But I tell you what we do do; we keep an eagle eye on the competitive aspects of our banking system and we’ve got a very close eye on it. And that was early this year when I announced our bank switching policy was precisely because we’d entered that period where pressure on the costs of banks was leading them to put up their rates higher than the official cash rate. And I determined then that we needed a new element of our armour in competition policy in this environment, and that new element of the armour was the bank switching policy. And that’s due to start in full in November. But that may not be the end of our approach to competition policy in the sector if we think that it’s not competitive enough or if we think that circumstances mean that competition is not working properly.

JOURNALIST: Graeme Samuel’s grocery inquiry (inaudible) tomorrow, would the Government be prepared to undertake reforms if that was recommended?

TREASURER: That’s the responsibility of Chris Bowen. I’m not going to buy into that.

JOURNALIST: (Inaudible)

TREASURER: I’m not saying any of those things, Steve. What I am saying is there is a slowing in economic growth. That has an impact on retail sales. It does have an impact on employment. I’ve said that repeatedly. But what I am saying is that you can’t necessarily take one example and say that is directly related to a general slowing in the economy.

Businesses will change their arrangements from time to time for a whole variety of reasons and I didn’t see in any of the material I saw on [Starbucks] an indication that it was directly related to current economic conditions. It may well have an impact, but what I did see was a company that had perhaps taken some decisions which didn’t work out for them, just as the banks took some investment decisions which were poor decisions and for which they’ve had to make provision.

Now, those things aren’t directly related to government policy at all. But I do accept responsibility for government policy. That’s why we’ve worked so hard in our Budget to put down the settings that we did.

We knew the circumstances we were in back in May and we believe we struck the right balance between tackling inflation on the one hand, which is putting upward pressure on rates, which in itself is slowing the economy, and on the other hand understanding the nature of the international conditions we were in and their unpredictability.

You might recall at the press conference I gave on the day of the Budget and the next day, I was repeatedly asked by people, well why didn’t you cut harder? And I said because we have to be mindful of the countervailing forces impacting on this economy. And they have now evolved in a way which it wasn’t clear they were going to evolve back in May. International financial turbulence has returned with a vengeance, putting further upward pressure on rates around the world, sapping confidence, affecting stock markets. These are all things that aren’t within the power of government policy.

What I will do is use all the levers, and what our judgement will do, is use all the levers that we have, that we control, to get the desired outcomes.

JOURNALIST: Treasurer, you mentioned trade liberalisation earlier. In the context of this meeting and also in light of what’s happened with the Doha talks, do you think it’s important for Australia to stick to the trajectory on removing tariffs in the auto industry and the TCF sector?

TREASURER: I’m not buying into that.

JOURNALIST: Can I just ask a quick question? Asciano had a takeover approach yesterday from two private equity groups. Does that require FIRB approval?

TREASURER: I don’t speculate about events in the market or takeovers. I don’t know the answer to that, but I certainly don’t speculate on anything that does require approval.