Nomination Of Australian Alternate Director To The Asian Development Bank
March 6, 2001Interview with Susanne Latimore, Sky News – Economy
March 8, 2001
Transcript No. 2001/018
Transcript
of
Hon. Peter Costello MP
Treasurer
Press Conference
National Accounts
Wednesday, 7 March 2001
12.00 pm
SUBJECTS: Economy
TREASURER:
Todays national accounts show that in seasonally adjusted terms, GDP declined by
0.6 per cent in the December quarter, a very disappointing result. Through the year growth
was 2.1 per cent and in trend terms, removing short term volatility, GDP grew by 0.1 per
cent in the quarter and 2.5 per cent through the year. Household consumption grew by 0.5
per cent, which was a slowing in the rates of growth for most of the previous quarters in
1998 and 1999. Retail trade increased in the December quarter following a fall in
September as the effect of the change to the new taxation system unwound. That is, the new
taxation system led to a decline in September, but that seems to have been unwound in the
December quarter. Dwelling investment fell by 15.4 per cent in the December quarter and
the fall in dwelling investment alone detracted 4.7 per cent from the December quarter.
Now there are obviously transitional effects caused by the new taxation system in relation
to dwelling investment – a point that Ive been making now for some time, that
obviously there was a big bring forward in dwelling construction in the March and the June
quarters. There was a fall in September followed by another very significant fall in the
December quarter. And that fall alone accounts for the full amount of the detraction in
the December quarter.
However, forward indicators in the housing sector have generally strengthened and point
to improved activity levels for around the middle of this year. That will be supported
particularly by lower interest rates. And as you know the Reserve Bank cut interest rates
by 0.25 per cent this morning, meaning that since February, weve now had reductions
of 0.75 per cent in interest rates in the last month.
First of all, I call on all of the banks to pass that interest rate cut on immediately.
Last time, when interest rates, official rates were cut by 0.5 per cent the banks were
able to move much quicker than they have been in the past. I think there was a general
expectation of a rate cut this morning and the banks should be in a position to move. On a
standard $100,000 loan, that is a further reduction of about $20 a month to home buyers.
And taking into account all of the interest rate reductions since the Government came to
office, there are now savings on a $100,000 loan of about $270 per month. So, in relation
to the housing sector, todays interest rate cut will be positive. Trends in approval
and finance appear to be picking up and by the middle of this year we would expect the
transitional effects of the new taxation system to have washed through the system.
Our net exports made a positive contribution to growth in both September and December
quarters. So were coming off in consumption, but exports is picking up some of the
slack and that has contributed to a sharp decline in the Current Account Deficit which is
a little more than 3 per cent in recent quarters. Inflation remains very low in Australia,
with the national accounts showing that it is of the order of about 0.3 per cent in the
December quarter in line with the CPI. The favourable signs for growth in the current and
future quarters are an accommodative monetary policy and budget policy, particularly
income tax cuts which took place on 1 July. Trends showing that housing construction
should be picking up by the middle of the year, inflation remaining very low and net
exports contributing to growth, particularly in relation to the exchange rate, although
obviously the international environment, both the United States and Japan continue to be
revised down. The December quarter detraction of 0.6 per cent is a very disappointing
result. There are a number of one off and transitional factors that have been taken into
account in relation to the December quarter, but the economy shows no serious imbalances
and in fact positive signs in relation to particularly exports and a turning in relation
to dwelling investment.
JOURNALIST:
Are we heading for a recession Mr Costello?
TREASURER:
This is a negative quarter. Its one negative quarter. You have negative quarters.
We have a history of having negative quarters which are turned around by positive quarters
thereafter. Obviously it is disappointing to have a negative quarter, but policy is
directed towards producing continuing growth in the course of 2001. Thats what
wed be .
JOURNALIST:
What about another negative quarter. I mean is that an impossibility, can you be that
confident at this stage?
TREASURER:
Im not, Im not in the business of forecasting future quarters. These
figures bounce around a lot and they are quite often revised. And so youd be foolish
to actually make predictions, but the positive signs are one, that the one off and
transitional factors which are the new tax system and the Sydney Olympics, should by now
have passed through the system. December was always going to be affected largely by those
factors. You have an accommodative monetary policy and you have a competitive export
sector and no serious imbalances in relation to corporate profits or in relation to the
availability of credit.
JOURNALIST:
(inaudible) Reserve Bank (inaudible) confidence which would continue to
dampen growth. Now arent these serious concerns?
TREASURER:
Well, let me just find what the Reserve Bank said. The Reserve Banks decision was
of course to cut interest rates, taking into account a number of factors including the
inflation rate and including where it thought the economy was. But as I recall in its
statement, in the last paragraph, the Reserve Bank made the point that it considered that
prospects for growth were quite favourable. I think it referred to the fact that the
profit share was quite strong, that company balance sheets were in a good position, that
there was an availability of credit and if you read the last paragraph in that statement,
I think, they indicated they had a pretty benign view of the economic prospects.
JOURNALIST:
Treasurer, do you believe that the, do you believe that the rate increases of last
year, with the benefit of hindsight, were (inaudible)?
TREASURER:
Well, the last rate increase was some seven months ago. And it was six months after the
last rate increase that the first reduction in this cycle took place in February.
Youd have to say that views of the economy have changed pretty considerably since
August of last year. Whats changed? Well, first of all, in July and August of last
year there was a surge in employment. Nobody thought that would continue, I think 100,000
new jobs in July and August and discounts were made. But probably that influenced opinion
at the time. The second thing is that the world outlook has been very seriously revised
since August of last year. Through July and August people were continuing to revise up
growth prospects in the United States, now theyre scrambling to revise them down.
What caused a change in appreciation of the economic situation from August to now? I think
one of the factors in all of the Western economies, ourselves, Canada, the United States,
possibly Japan, was the world oil price. I think that the world oil price has had an
effect throughout the industrialised world. I think probably policy makers didnt
fully anticipate the effect that the world oil price would have on activity and on
consumption. Im not talking just about Australia here, I think it was one of the big
things the authorities in the United States are now saying, what changed US sentiments so
dramatically in December of last year, and one of the views now amongst policy makers in
the United States was that the world oil price and the effect that that had on consumption
had a larger effect than people expected. It certainly has had a big effect in Australia
because it has affected consumption. So, if you look back to August of last year, which
was only seven months ago, when monetary policy was being tightened, obviously there has
been a reappraisal, particularly in relation to the world economy and particularly in
relation to the way in which that will effect growth prospects.
JOURNALIST
:
Treasurer Costello, the Bulletin poll today has put the Coalition on its lowest level
of support ever. Why do you think
TREASURER:
Oh look, the Bulletin poll, as I recall, has always been a pretty negative poll for the
Government and Im not going to give you a blow by blow description of polls.
But I think, as I said earlier, one of the things that affected spending patterns and
affected sentiment in the December quarter was the world oil price and petrol prices. I
think the world oil price, which has pushed petrol prices up 10 cents and more, has meant
that people have spent more on petrol and consequently less on other things. I think for
the household which has got a limited spending budget, the truth of the matter is if you
spend $15 or $20 a week more on petrol, you spend $15 or $20 a week less on something
else. And people just dont have the discretionary spending so that if the petrol
price goes up they maintain their spending in other areas. I think thats had a big
effect in Australia, I think its had a big effect on activity certainly in the
United States and other areas as well, and I think that has had an effect on consumer
sentiment. The second point I would make is this – youve got to remember throughout
the course of last year, commencing in February of last year, about a year ago, interest
rates were raised from February of last year to August by 1.25 per cent. Now, obviously
that has had an affect on sentiment. The good news is that theyve now been cut by 75
basis points and thats put money back in the pockets of homebuyers. But, I think
there were two factors that would have affected peoples discretionary spending in
the course of 2000 – one is petrol prices, and the other was the fact that interest rates
were being tightened last year.
JOURNALIST
:
Treasurer, the Opposition says the GST has also had an ill affect on spending and also
on the economy generally, but theyre not the only ones saying it, some sectors of
the business community are saying it too, that the new tax system has had a negative
effect on growth and on the economy. Do you accept that?
TREASURER:
Well, let the Opposition speak for itself
JOURNALIST
:
What about business?
TREASURER:
Well, you asked me about the Opposition.
JOURNALIST
:
No, no, my point is that the Opposition is saying and business is saying .
TREASURER:
Well, hang on, well, you know, I dont want to interrupt you. But Ill answer
the first part of your question and Ill come to the second part of the question.
This is what the Opposition in fact said last year – Kim Beazley, the 3rd
February: “ .the net fiscal stimulus in this tax package of more than $6
billion in the first year alone, and around $20 billion over three years, runs the risk of
fuelling consumption and overheating the economy”. Lindsay Tanner: “With
economic growth at around 4 per cent, an annual fiscal stimulus of around $6 billion over
three years is not appropriate at this stage of cycle. It is likely to cause policy
difficulties and have monetary policy consequences. The GST stimulus is likely to feed
consumption growth”. So, the Opposition spent all of last year saying that they
were opposed to the Governments tax package because it would overheat the economy.
That was their attack on the tax package. It would overheat the economy and income tax
cuts amounting to a reduction in tax overall of $6 billion was loose and overstimulatory.
Now, this year, of course, the Opposition line is – no it wasnt stimulatory and
risking overheating, no, no it has had the reverse effect, it has actually reduced
overheating or reduced growth. So, I think we can leave the Oppositions attack out
of this equation. You might just ask yourself incidentally what would have happened if we
hadnt cut income taxes as much as we did on 1 July 2000. I dont think anybody
today and, you know, we can all go back and see what was being said, would accuse those
tax cuts of being too great. A lot people in this room probably did back on 1 July 2000.
Certainly the Opposition did.
In relation to business, well, I dont know who you are quoting in relation to
business. But I think business would make the following points, I think they are fair
points – that monetary policy was being tightened throughout 2000. Ive never known
anybody in business to support a tightening of monetary policy. That obviously had an
effect. You had a natural slowing anyway coming off consumption which had been
extraordinarily high in 1997, 1998 and 1999. I think the one area where you have had an
effect from the new taxation system is in relation to the housing sector. Ive been
saying that for a long time. Cast your mind back to prior to 1 July 2000, builders had
order books that they couldnt fill. I remember talking to journalists here who were
racing to try and sign contracts to get in before 1 July. And it had the effect of pulling
forward construction and construction contracts and there was all this talk about builders
being unable to finish their work, you recall, before 1 July, because there was this
incredible pull forward in March and June, and in September and December there has been a
very severe contraction. Building and construction were at twenty year highs and you have
seen a very severe contraction in the September and December quarter, and that has been a
big factor in todays result. Now that is a transitional factor, that is a
consequence of the taxation changes. Another transitional factor, which is not a
consequence of taxation changes, is the Olympics. Youve got the Olympics, were in
the September quarter, remember December is measuring movement off the September quarter,
and that is now working its way out of the system. So youve got some big
transitional effects in this quarter and as Ive been saying for some time now you
wont get a clear picture, absent transitional effects until you get into the March
and June quarters.
JOURNALIST
:
Is there more room for stimulation in this years Budget?
TREASURER:
Im not going to discuss this years Budget. We are working on this
years Budget as we speak.
JOURNALIST
:
Mr Costello, you (inaudible) on the effect of fuel prices on both actual behaviour and
(inaudible). Do you in retrospect admit that you contributed to the severe political
problem by the price at which you, the price you struck for the excise, cut the price from
which flowed pressure for change?
TREASURER:
The price at which we struck on 1 July 2000, as I recall, was 90 cents. And in the lead
up to that, the average price in capital cities was below it it was in the
80s. We actually erred on the side of a high price.
JOURNALIST
:
Everyone at the time said that was not the case ..
TREASURER:
No, no. The strike price, I dont think anybodys, there was a lot of
argument about the methodology, but I dont think anybody suggested that the strike
price as of 1 July 2000 was too low. If you look at the all capitals prices
throughout the course of June, they were actually below 90. In fact, if you go back
further, they were significantly below. But what was happening all the way throughout the
year 2000 was that petrol prices were rising as the oil price rose. By July of 2000 they
were still marginally below 90. But by the time you got to December of 2000, I am talking
about capital city prices here, they were closer to a dollar. Its the world oil
price, exchange rate movements, all the way through the year 2000 that petrol price was
climbing. It wasnt climbing because of tax changes
JOURNALIST:
So, you made a mistake is that the bottom line
TREASURER:
Well, hang on, it was climbing because the world oil price was climbing and exchange
rates were moving. Now, we struck a price at ninety cents. Last week, we cut the fuel
excise. When we cut the fuel excise last week we said we had changed our policy, we wanted
to reduce the amount of tax. But I made the point when we reduced the amount of tax, and
we reduced it 1.5 cents a litre, and we have abolished indexation, I made the point that
this was not going to abolish the world oil price nor the exchange rate effect. What it
was going to do, was, it was going to take 1.5 cents a litre off the excise, which was the
right decision, which the public welcomed. People are saying, oh yesterday, prices went
up. Yes, prices went up yesterday, not because of any taxation change but, because the
drivers of the petrol price was still there the drivers of the petrol price, the
world oil price, the exchange rate and competition in the market.
JOURNALIST:
(inaudible) there is a slowdown in these figures out today, does this change your
thinking on the Budget and should you allow it to naturally go into deficit?
TREASURER:
Oh, look I am not going to talk about the Budget today, I never do. We are working on
the Budget as we speak and you will see it on Budget night.
JOURNALIST:
(inaudible) in surplus, you are absolutely sure that this years Budget will
be in surplus?
TREASURER:
All of, yes, all of the indications to date are that it is, yes.
JOURNALIST:
Treasurer does the Australian dollar exchange rate accurately, does the Australian
dollar exchange rate accurately reflect the current economic conditions and economic
outlook for the Australian economy?
TREASURER:
Look, the exchange rate, as you know, is something that the Government doesnt
fix. We have moved to a floating exchange rate and as a consequence of that we accept that
it will move up and it will move down. But, I refer you to the statement of the Reserve
Bank that was issued today. In Australia, we are getting growth out of exports, our
company balance sheets are in good shape, the profit share is quite high by historical
standards, inflation is low, and there are strong reasons why the Australian economy will
enjoy firm prospects.
JOURNALIST:
Mr Costello, you are saying that youre confident that the economy will bounce
back and will still be (inaudible), therefore, to include voter (inaudible) in relation to
the Coalition. But what else should the Government do to improve that?
TREASURER:
I think the Government will continue to deliver a low inflation, which leads to a low
interest rate environment, which will be good for home buyers, and it will be good for
consumers. You have got to remember we are coming off a period where interest rates rose
throughout the course of last year, and now they are coming down . That is good for
families, that is going to be good for their consumption. We cut interest rates, we cut
taxation rates on 1 July 2000. The Prime Minister gave an example in the House of
Representatives, yesterday: single income family, three kids, earning $30,000, got a net
improvement of $70 per week. That is going to be underpinning good consumption and that
will flow back into consumption and will flow back by mid-year into housing construction.
JOURNALIST:
Mr Costello, you upgraded your growth forecasts by a quarter of a point to 4 per cent,
which is over three months ago, it was right in the middle of this December quarter, which
has now shown a contraction. Do you take responsibility for that decision or is it really
the result of bad advice from Treasury?
TREASURER:
Oh look, we always take advice on these things, but we always make our own decisions.
We always make our own decisions.
JOURNALIST:
Mr Costello, the Government has, the Government will stake its claim for re-election
on, largely on the basis of it is the best equipped party to manage the economy.
Isnt that claim in tatters as a result of todays result? Doesnt this
undermine your re-election prospects?
TREASURER:
Well, I think the Governments record is a very strong record. And lets
compare it to Labor. The home mortgage interest rate today is 7.3 per cent, passing on
todays official interest rate cut. When we came to office it was 10.5 per cent.
Today there are more than 700,000 Australians in jobs, that werent in jobs when we
came to office. Today the Budget is in surplus and we have re-paid $50 billion dollars of
Labors $80 billion dollar cumulative deficits in its last five Budgets. This is a
Government which has reformed the Australian taxation system, which will give Australia
long-term benefits. And the proof is in this pudding, regardless of what the Opposition
says about the taxation system, there is one undeniable fact if it ever gets
elected it wants to keep it. Regardless of what they say, there is one undeniable fact,
that they are desperate to keep the reforms that this Government put in place. Why?
Because they know, through all of the rhetoric, that tax reform had to be done in
Australia. The difference was, the Government had the courage to do it and the Lazy Party
wanted to follow it. So, I think the Governments economic record on interest rates,
on inflation, on jobs, and in relation to the big structural changes in the Australian
economy puts it in a very strong position. Let me ask you this question: after five years
in Opposition, can you think of an economic policy of the Labor Party? They have had five
years to come up with one now. The only thing they have done
JOURNALIST:
They wont sell Telstra?
TREASURER:
Thats an economic policy? They wont sell Telstra? After five years that is
their economic policy. Over five years in Opposition, the only thing they have ever come
up with is, they are so against tax reform that they want to keep it. Now, you have got to
ask yourself, with a record like that, what kind of managers would they be? I think we all
know, deep down in our hearts, dont we.
JOURNALIST:
Treasurer, what do you say to voters
TREASURER:
This is the last question.
JOURNALIST:
Treasurer, what do you say to voters who would be inclined to judge the
Governments performance as economic manager, using a bench mark test for the
Australian dollar exchange rate, and look back at the dollar in March 1996 and see it was
about seventy-eight US cents, and see it today, its fifty-one, fifty-two cents US,
and would (inaudible) the Government out against that measure.
TREASURER:
Well, I think, and I have said this over and over again, that the story of exchange
rates in the last year, has been principally a story of the US dollar. Thats
principally what the story has been. The US dollar in relation to other currencies. Now,
there has been a huge capital inflow into the United States, sooner or later, that capital
inflow you would think will come to an end. But, the story in international
exchange rates, over the last year, over the last 18 months, has not been a story of the
Australian dollar, it has not been the story in the exchange rate markets, its been
a story of the US dollar. And I think I have probably spoken about that at length
previously, so I wont go any further.
Thank you all very much for your time.
Thank you.