TRANSCRIPT
of
THE HON PETER COSTELLO MP
Treasurer

Press Conference
Canberra
Tuesday, 3 September 2002
12.00 pm

 

SUBJECTS: National Accounts; Iraq; Defence; sugar industry; ethanol; interest

rates; Professor Fels; Medibank; drought; APEC Finance Ministers’ Meeting

TREASURER:

Today’s National Accounts show that the Australian economy continued to post

solid gains in the June quarter growing by 0.6 per cent and by 3.8 per cent

through the year, about twice the growth rate of the rest of the developed world.

Our growth was underpinned by strong consumption and by investment. Household

consumption increased 1.5 per cent in the June quarter and in year average terms

3.9 per cent. Dwelling investment continued to grow in the June quarter and

is around about 30 per cent higher than a year ago, although we think that that

has peaked and should come off in the quarters in the remainder of this calendar

year.

Business investment was a very strong driver of growth rising 8.1 per cent

in the June quarter and 15.8 per cent through the year. And that strong business

investment was found both in construction and in plant and equipment.

Incomes were moderate through the year but were underpinned by very strong

labour productivity. In year average terms productivity grew 4.1 per cent through

2001-02 and was 2.8 per cent higher through the year to the June quarter of

2002.

Very strong productivity growth with moderate wage outcomes is keeping inflation

low, and the measures of inflation in these National Accounts showed through

the year inflation of 2.2 per cent. And if I may say so, the indication that

we see is that as long as wage outcomes are moderate and as long as labour productivity

continues at the very high growth that we have seen, the inflationary pressures

should remain subdued.

The performance of the Australian economy comes at a time when there has been

very difficult international conditions. The American recession of 2001, the

enormous volatility on Wall Street, mean that, if anything, conditions internationally

are probably a little weaker than was previously expected.

In addition the very bad seasonal conditions – drought through a good part

of Australia – represents another growing effect in relation to the economy.

But notwithstanding that, at a growth rate of 3.8 per cent, the Australian

economy continues to be growing stronger than nearly every other country of

the developed world. We are one of the strongest growing economies in the world.

Our prospects through 2002 and 2003 are strong. Our economic policy must continue

to be supportive of good reform, good prospects in a very difficult world trading

environment.

JOURNALIST:

Mr Costello, what is the biggest risk to the Australian economy? You say it

is in good shape at the moment. What are the potential risks that exist?

TREASURER:

Well, the biggest risk I think is the international environment. That has begun

to affect our exports, net exports – that is exports less imports – subtracted

from growth. And I guess the biggest risk to the international environment is

still the American economy. The American economy was in recession in 2001. We

are forecasting it to bounce back in 2002 as are most other forecasters. But

you have seen an enormous and massive loss of wealth in the stockmarket in America

which, if it feeds into consumer confidence and business confidence, could shake

that economy, not back into recession but make it grow in a much more sluggish

way than was hoped. And that is the engine of global growth and that is the

biggest risk that we are facing here in Australia at the moment. We, but let

me put that in context, we have been facing that risk in 2001. We came through

a US recession in 2001. We may have to go through another bout of US weakness

in 2002 but the biggest risk that I see is still the international economy.

JOURNALIST:

What would be the effect of a war on Iraq, with Iraq?

TREASURER:

Well, the first thing that I would expect it to do in relation to prices, is,

you would expect that it would increase oil prices and that would have an effect

on production. The American military build-up has had a very big effect on the

fiscal position of the United States Government. They are now forecasting a

deficit of something like $US 380 billion. The US Budget is now in very deep

deficit. That is a consequence not just of the military build-up but the recession

of 2001. Now $US 380 billion, that is about the size of Australia’s GDP, just

to put that in context. So, that would obviously have an effect in relation

to their fiscal position. So, I mean, those are the economic effects but let

me put it in context, I mean the human effects are much greater.

I do not want to be understood to only think of these things in economic terms,

the human effects obviously would be much greater. And there would be undoubtedly

human effects that would have to be taken into account as well.

JOURNALIST:

Would we have to go into deficit if we went to war in Iraq?

TREASURER:

Well, I am not speculating on war in Iraq. I think the Government has made

its position clear. There are so many ifs. If there is an international effort,

if Australia is asked to make a contribution, if it is in our national interest,

then we will consider our commitment. And I am certainly not going to speculate

on that today.

JOURNALIST:

These National Accounts show a slowing compared to the last quarter, the previous

two quarters have been revised down, the July retail sales are out today showing

an actual fall in retail sales. Have we passed the top of the business cycle?

Are we actually heading towards a much slower period?

TREASURER:

I think the way I would constitute this is solid growth. I think three months

ago when I was here you were all asking me whether or not the economy was overheating.

And I said I didn’t think it was overheating. This is solid growth. By world

standards, very strong. By Australian standards, solid. And what I think is

underpinning this and what will underpin growth in the next year is business

investment. Business investment is very strong. But the housing cycle will come

off and it should come off. And we have been forecasting it to come off. And

it is at very strong peaks, so that will come off. You saw in relation to retail

trade today, and these figures bounce around, but you are not seeing any overheating

in relation to retail trade. So I think the composition of growth is probably

going to switch a bit out of the housing cycle, perhaps a little bit out of

consumption, more into investment. And that is part of the import story really,

that imports are strong particularly in capital goods. Now, this is not a bad

thing. One of the things that is behind this import story is the, Qantas I think

have got something like six new planes on order in 2002, a couple of billion

dollars. That’s actually a good story. Qantas is renewing its fleet. Qantas

is a profitable airline. But very strong imports is part of the explanation

for that export net detraction that’s going on. So, I would describe this as

solid. It’s solid growth and underpinned by business investment growth for the

future, and by world standards, as good as any developed country in the world.

JOURNALIST:

Treasurer, …(inaudible)… and housing is slowing …(inaudible)… as you

described, and investment is the driver now. Isn’t that a recipe for not needing

to do anything too dramatic more with interest rates?

TREASURER:

Well, look I always get into trouble when I comment on interest rates but,

and as you know I studiously decline from doing so, but this is solid growth

and it is not, we are not seeing inflationary signs, 2.2 per cent, either at

the moment or down the track.

And the key I think to keeping inflation low is going to be moderate wage outcomes,

which we’ve got, and labour productivity. And if you can keep labour productivity

growing at the rate that it is, then you can have wage increases and you can

cope with those moderate increases, and that would be a pretty good outcome,

particularly in a world where there aren’t that many countries that are doing

that well at the moment.

JOURNALIST:

Mr Costello, household savings are down to just 0.9 per cent of earnings. Does

that concern you at a time when maybe we need a few dollars in the bank to pad

the economy during a period of uncertain …(inaudible)…

TREASURER:

Look, as the Bureau always makes clear, the household savings ratio is based

on historical data which hasn’t been updated for a long period of time, and

it says caution should be exercised in interpreting this ratio in recent years,

and explains why, there on page seven. So we come to this with caution. That’s

the first point. The second point is, you’ve got to bear in mind that a lot

of people have had an enormous wealth effect, either on the stock market, not

in the last couple of months but certainly over the last couple of years, or

particularly in property prices. And when you’re looking at household income,

it’s not taking into account capital gains, and I think a lot of people are

either spending against capital gains or borrowing against capital gains and

it should be put in that context. But having said that, I’m not dissuading people

from saving, certainly not. In fact I’d make this point, that with low inflation,

it’s a good time to save. You can actually protect your real position. So I’m

not dissuading people, but I’m just saying we have to have some caution when

interpreting those figures.

JOURNALIST:

Treasurer, just on the international factors again, psychological sort of factors,

do you think as the anniversary of September 11 comes up, that’s having an impact

on, some psychological impact in the States on confidence?

TREASURER:

Look, I was last talking to policy makers in the United States late last year

after September the 11^th and they emphasised to me how big an effect

they thought September the 11^th would have. Their economy had been

in recession before and was probably just ready to emerge when you had the events

of September 11^th, which affected consumer sentiment and business

sentiment. And in a very direct sense, insurance markets and aviation markets

and all those other markets. I think it has taken them a while to get over that

and I think probably they are just sort of emerging and now you’ve got the scandals

on Wall Street and you’re getting another, another dose. So I think that sentiment

in the United States is quite precarious, actually. Even if you look at the

growth rate, I think through the year their growth is about 2 per cent, their

last quarter was 0.3. People were hoping that in 2002 they might rebound to

a 2-3 per cent growth rate. That’s under review. The only thing I’d say, is,

the good news is they’re growing, which is better than last year when they were

contracting. We’d like to see the United States get back to the kind of growth

rates that we have in Australia as it was in the mid to late nineties, but it

looks as if that’s going to take a while. And can I say I’m going to the APEC

Finance Ministers’ Meeting this week and it will give me my next opportunity

to speak to US policy makers and to get a take on the US economy.

JOURNALIST:

Treasurer, are you concerned at the $5 billion budget over-runs in some of

the major defence projects? Sixteen of the top twenty Defence ac quisition projects.

TREASURER:

Well let me make a few points. I mean the two large over-runs, the Collins

Class submarines and the ANZAC frigates, the contracts which were entered into

by the Labor Government and I’m very concerned about the overruns. I think the

Collins Class submarine and the contract that was written at the time was one

of the most difficult contracts, that in terms of public finance, that we’ve

ever had to deal with. Cleaning up the mess of the Collins Class submarines

has been one of the most difficult issues in procurement and contract that any

Government has ever had to face.

JOURNALIST:

…(inaudible)…

TREASURER:

And, well let me come to the big one, the $3 billion are the Collins Class

submarine and the frigates. And I think we’ve got numbers and numbers of legal

opinions asking why it is, when we had a contract for the building of these

Collins Class submarines, that we have to pay extra to actually get submarines

which are capable of doing the job. And it’s the same in relation to ANZAC frigates,

contractual variation. Now you’ve got to live with those things. In addition,

as you say, is a Seasprite helicopter contract, which is also another contract

which has been, the monies under which have been mostly dispersed, nearly totally

dispersed I think and we’re still arguing about the level of the product. So

I, so of course I share a frustration in relation to Defence contracting over

a very long period of time.

JOURNALIST:

As you say it is over a long period of time, why is it that it keeps happening,

that we keep getting these procurement contracts in Defence, where they keep

having to be renegotiated, they’re not delivered, we pay the money and there

seems to be no punitive clause.

TREASURER:

Well I’ve asked the same question myself. And the people that entered the Collins

Class submarine contract will say, it was an error. And I’m not quite sure about

the ANZAC frigate contracts. They will also say to you that, Collins Class which

is the biggest Defence contracting blunder we’ve had, you know, and the contract

was entered into I think in the mid-80’s, when I’ve asked all of those contracts,

they’ll say that a submarine like this has never been built before, that they

were contracting for something that didn’t actually exist, that they were trying

to look down the barrel for 10 or for 15 years to try and anticipate what would

be needed then. Maybe that they should have had clauses in there, which were

fixed pay-for-price contract. It’s no comfort to me, you know. All of this was

entered into long before I was in the Parliament and long before our Government

was in office, but you’ve got to deal with these things, you’ve got these submarines,

you’ve got to try and make them work.

JOURNALIST:

Will establishing a monopolistic ship-building industry in Defence solve those

problems Treasurer?

TREASURER:

Not necessarily.

JOURNALIST:

So you don’t think it’s a good idea?

TREASURER:

I didn’t say that, I said the monopoly would not necessarily solve the problem,

that doesn’t mean it wouldn’t be a good idea for other reasons, it might be

a bad idea for other reasons. But let me Laura, turn my mind to that when I

have fully grappled with all of the facts. You throw these curly ones up at

me.

JOURNALIST:

On curly subjects – sugar. Do you think it is a good idea to have a levy on

sugar consumption and to mandate ethanol levels in petrol sold at the pump?

TREASURER:

Look, the Government is discussing all of these things, I’ll just make one

point. Ethanol at the moment does enjoy a very considerable tax break over petrol,

it is 38 cents a litre, but there is no excise on ethanol. And if it can use

that 38 cents-a-litre tax break to become competitive, well and good. I think

the proponents of mandating ethanol, which presumably would be done for environmental

reasons, concede that if you mandated it, that is it became compulsory, it would

have to be taxed at the same rate as petrol, I think that’s conceded. The question

is, even if it were taxed at an additional 38 cents a litre and it were mandated,

would it still be competitive with petrol? And as – we are obviously seeking

advice with that, but it could well still be more expensive.

JOURNALIST:

Are you disappointed that Professor Fels isn’t seeking to be re-appointed?

TREASURER:

Look, I have worked very closely with Professor Fels, I re-appointed him. I

think he did a fantastic job in relation to the New Tax System. And I think

that is when the public really became aware of the tenacious side of Professor

Fels, when we went through a whole New Tax System, every good and every service

in the country, and Professor Fels was absolutely tenacious in ensuring that

there wasn’t any profit taking. And I pay tribute to him in relation to that

and in relation to other areas. But let’s not hasten his demise too quickly.

He has still got two years of his term to go and I hope they will be two very

fruitful years. He has given notice he will not be seeking another term so the

Government will consider alternatives. All appointments come to an end, one

day or another.

JOURNALIST:

What qualities will you be looking for in a replacement and do you have anyone

in mind two years out.

TREASURER:

I think you would be looking for somebody who is prepared to enforce the law

without fear or favour, whether it be corporations, whether it be unions, whether

it be monopolies, somebody who believes in competition, somebody who is capable

of ensuring that the benefits of competition flow to consumers. I think this

is a very important point, the whole concept of consumer policy has changed

in recent years to giving it a competition focus. It is the Australian Competition

and Consumer Commission. We try and help consumers now by having competition

so that competition drives prices down and competition drives services up. Sometimes

you hear people say, oh I don’t like competition – competition is what gives

consumers lower prices and better services and it starts right back in the chain

long before the thing actually gets onto a retail shelf. So we would be looking

at somebody who has a vigorous attitude to competition.

JOURNALIST:

Treasurer, will Medibank’s, Medibank Private’s losses this year impact on its

sale price, do you think?

TREASURER:

Look, what the Government said in relation to Medibank is that we would do

a scoping study to look at its sale. We haven’t announced a sale. What we would

do is we would do a scoping study and then we would make a decision. So, let’s

see what the scoping study says and we will make a decision which is both in

the interests of people who are looking for good medical insurance and financial.

I think the argument’s run away from itself. It is almost as if it is assumed

that this is up for sale. That is not the case. We are doing a scoping study

and obviously the scoping study would look at that. One of the things you would

take into account would be price.

JOURNALIST:

Treasurer there are reports this morning that international television productions

are boycotting Australia because they can’t get tax rebates. Are you looking

at reconsidering this at all, or re-thinking that process?

TREASURER:

I am not familiar with those reports but we’ll have a look at it. I think we

operate a pretty good tax system in relation to film production at least…

JOURNALIST:

(inaudible)

TREASURER:

…so if anyone wants to make a complaint we’ll have a look at it.

JOURNALIST:

Can I ask you about the drought Treasurer, in recent times you have underplayed

or down-played the impact of the drought on the economy overall. These National

Accounts show it is having an effect. Can you quantify, obviously the drought

is still dire and getting worse, can you quantify the impact it would have?

TREASURER:

Well, as I said repeatedly in the House of Representatives over the last month,

the impact of the drought, it will affect production, and it will affect farm

incomes, and as I said earlier, although I would say that the biggest threat

to the Australian economy is the international situation, domestically one of

the adverse things we have got is drought, which is very severe and is going

to affect rural production and it is going to affect rural incomes. Now, there

has got to be drought relief and that’s always got to be tailored to make sure

that it affects these situations. Other than that what we need is rain, and

what farmers need is rain, and you know, for their sake we hope that it comes.

Okay, thanks very much.

JOURNALIST:

…APEC…(inaudible) is there anything happening there this week that is

of interest to suburban Australia?

TREASURER:

The APEC Finance Ministers’ Meeting in Mexico, I expect that the focus of that

will be on the world economy, particularly the United States, the free-fall

of the Argentinian economy, the extreme difficulties in Brazil. There will be

a lot of work done on anti-money laundering, particularly in relation to terrorist

threats, and that will be a big focus of the conference. While I am in Mexico

I hope to finalise a Double-Tax agreement with Mexico and to also launch the

Mexican 20 peso note which is being printed by Australian technology. The technology

that we use to print our notes is now being exported to 19 countries around

the world, it is a great export earner for Australia. We are now printing for

Mexico as well, we are going to be printing their 20 peso note and I hope to

be able to launch it while we are over there. A great export story, great technological

product that we have taken to the world. Thank you all very much.

JOURNALIST:

Will it be printed here?

TREASURER:

Some of it, yes, some. We are printing some of it here, we are printing some

of it here and we are licensing them to use our technology to print some of

it over in Mexico.