Transcript No. 99/29

Hon Peter Costello MP

Doorstop Interview

Thursday, 6 May 1999

12:15 pm

SUBJECTS: Retail trade, dollar, interest rates, Reserve Bank report, growth, Senator

Harradine

TREASURER:

Well I welcome today’s retail trade figures which show 2.3 per cent growth in

retail trade, about 9.4 per cent for the year. And what it shows is that the strong

growth in the Australian economy which we experienced throughout last year is continuing

into the early part of this year. We’re looking I think, in year average terms in

1998-1999 at growth which will be over 4 per cent and higher than was forecast in our

mid-year review which we brought out in December last year.

What it shows is that the Australian economy is growing strongly. We are still amongst

the fastest growing economies in the world and the pace of consumer spending and

confidence by consumers has kept up throughout the early part of this year. We

shouldn’t get complacent however. We are still in a difficult international

environment, prices for our exports and our commodities are at historic lows, that means

even though our exporters have been doing a very strong job, our prices have been down and

with a strong domestic economy, imports have been up. And that means that our current

account deficit is wide. We can handle it. It’s wide, but it means that we have to

keep an eye on that and it means that we need a firm Budget, responsible economic position

to make sure we keep an eye on the current account deficit.

The dollar today. What do you think about that going up?

Well, the Government doesn’t target a particular level for the dollar as you know.

Clearly sentiment towards Australia has changed quite considerably, that there’s a

lot of international confidence in the Australian economy at the moment. You get stories

like last week in the Wall Street Journal which talks about Australia as the “roaring

economy” of Asia. That obviously makes a positive sentiment for Australia and that

obviously has an effect, but from the Government’s point of view we don’t target

a particular rate during the course of the last year. We let the rate come down very

substantially and over the course of the last couple of weeks of course, it has come back

very strongly.

The revenue that came out of faster than expected growth, can you afford to spend if

you need to win the support of the Senate for your tax package?

Well I’ve seen some, some wildly wrong estimates in relation to revenues. To make

sure that you get the right revenues there are so many factors that have to be taken into

account. It depends where growth is, it depends on time lags on growth, it depends on

whether it’s real or whether it’s nominal and some of the guestimates I’ve

seen put out recently are wildly wrong. What we can say is in 1998-99, the current

financial year, Australia will in my view grow more than 4 per cent. It will be, if not

the fastest growing in the developed world, certainly in the top two or three.

In 1999-2000 we would not expect that growth to keep up. I’ve said we would be

expecting as a result of the world economy, growth to be in the 2 to 3 type range and I go

on to make this point. If the bottom part in the midst of an Asian financial crisis and

slow world growth, if we bottomed, we bottom growth at 2 to 3 per cent that will be a

fantastic outcome. These are some of the best conditions we’ve seen in Australia

since the 1960s.

Treasurer, the Australian dollar went up to 67 cents this morning, with all these good

economic conditions do you see it going any further, is there room to move?

Well as I say the Government doesn’t target a particular rate in the Australian

dollar. What affects the dollar in the long term are fundamentals. And I think I made the

point when the dollar was at 55, that was not reflecting fundamentals and over time it

will correct itself. But, in the short term what moves the dollar around is sentiment and

I don’t want to add to that. I note what creates the sentiment but I’m not

creating sentiment one way or the other.

Treasurer, the Reserve Bank and financial markets seem to be indicating there’s a

bit of a floor under interest rates. Would you be urging homeowners to perhaps lock their

loans now into fixed rates?

No, I‘ve never sought to give advice to homebuyers on interest rates because, if I

gave the wrong advice they’d all be legitimately upset with me. But the advice I give

to homebuyers is that whilst the Government can keep inflation low we can keep interest

rates low. Now, we’ve got an inflation rate down in the low ones. This is the lowest

inflation rate we’ve had since the days of Menzies and we have the lowest home

mortgage interest rates since man walked on the moon. We’ve got the lowest home

mortgage interest rates since the 1960s and that’s because we’ve got the lowest

inflation rate. Now, we keep inflation under control we can keep interest rates low and

that’s the Government’s objective.

The Reserve Bank gave a very bullish assessment of the economy, is that something that

you would endorse, particularly their references to things like structural changes in the

economy perhaps giving us at least a temporary lift in the growth limit of the economy?

I think that’s right, yes I do. I think if Australia makes structural changes in

the first part of the next decade we can lift long term growth averages for the country. I

think that we’re on the eve, if we make the straight structural changes of a very big

lift in Australia’s economic performance and a lift in living standards. I think that

the first decade of the next century could be a great decade for Australia but it will

only happen if you make the structural changes. If you do the changes in relation to the

new tax system, you do the changes in relation to the new industrial relations system, if

we build on the changes we’ve made in relation to the Budget, you know, taken the

Budget out of deficit, putting it into surplus, reducing our debts, making sure that

people don’t have to pay taxes to service interest bills on past debts. All of these

things have the potential to lift the speed limit and if the speed limit on the Australian

economy lifts it’s higher living standards, more jobs and better opportunities.

Treasurer, what’s the speed limit now on the Australian economy?

Well you’ll see my most up-to-date forecasts and projections next Tuesday so . .

Are you, Treasurer, given what you’re saying about the need to maintain firmness

of fiscal policy, has this message been conveyed directly to Brian Harradine and do you

think he now understands that the money isn’t there to structurally modify the ANTS

package?

Well, I think all Senators will obviously be looking carefully at the Budget. And the

Budget, which comes out next Tuesday, will have the best estimates not only of the next

year, but of the year after that. Now bear this in mind when you’re looking at the

tax package, the tax package comes in in the financial year 2000/2001, the Budget that

we’re focusing on now is for the next financial year 1999/2000. There’s a lot of

people that are making wild statements, some economists, about the situation in 1999/2000.

That’s not when the tax package comes into effect. It’s in 2000/2001. We’re

looking right down the time tunnel in relation to tax reform. Now when the Budget comes

out on Tuesday we’ll have forward estimates for those periods, but I want to make

this point. Already in 2000/2001 as part of the new tax package, the Government is cutting

tax by $5 billion. The tax package cuts the overall tax, which is collected by the

Government by about $5 billion. And so people that are talking about increasing the costs

are talking about increasing the costs over and above the first $5 billion. That’s

the point to be borne in mind here. Now $5 billion, which is the net cost, is a

substantial fiscal stimulus to the economy already. And so you have to bear in mind that

you’re not coming off a zero starting point, you are coming off an already quite

significantly reduced tax take.

Thanks.