Press Conference

Parliament House

Canberra

Wednesday, 6 September 2006

12 noon

SUBJECTS: June Quarter National Accounts, interest rates, tax cuts, FOI

TREASURER:

In the June quarter the economy grew by 0.3 per cent. It grew by 1.9 per cent through the year and in year average terms grew by 2.7 per cent, a little higher than our Budget forecast. What today’s National Accounts figures show is that consumption remains quite moderate but that growth is being led by business investment. New business investment grew again in the quarter and is now 11.8 per cent higher than a year ago. It has been particularly strong in relation to engineering construction and although dwelling investment is starting to grow again it is still lower than it was a year ago. Whilst exports grew in the June quarter, imports also grew and the net deficit detracted from growth in the June quarter. Farm GDP is lower than it was a year ago and we are still seeing the impacts of very bad seasonal conditions and difficulties with rain.

The indicator of Consumer Price Indexes or the indicator which is the closest to the Consumer Price Index showed that prices grew 3.4 per cent through the year. This index in the National Accounts does not have the heavy reliance on bananas that the CPI does although it does have a reliance on petrol prices and shows that petrol prices are having an effect in relation to consumer prices.

We see in these National Accounts very much a two track economy in Australia. State final demand in Western Australia in particular grew very strongly, it is now 14 per cent higher than it was a year ago. Queensland grew very strongly but to a lesser degree and the big States of New South Wales and Victoria much slower.

Investment in the mining industry is exceptionally strong, over $32 billion since the start of 2004, and this is in response to high prices. But we are still to see the volume increase coming through in relation to the mining industry. So the construction is going in but we are yet to see the big boost in production. What we are getting is we are getting higher prices on the production that is being undertaken and the terms of trade are running Australia’s way. Our terms of trade are the strongest they have been since 1974.

The good thing about these National Accounts is that we are seeing rebalancing of growth particularly into investment, it is investment which will set us up for years to come. We will get in the next quarter a bounce back in relation to some of the one-off factors that have moderated growth here. We are seeing an economy which is laying down capacity for the future, which has the lowest unemployment in 30 years and which still, not withstanding very, very high fuel prices, has moderate inflation.

JOURNALIST:

Treasurer, if growth is so slow (inaudible) why is inflation so high at the moment?

TREASURER:

Well as I said, petrol prices are the principle reason why you are seeing an effect in relation to prices, not just because petrol itself is in the basket of prices but petrol is a cost of transport and distribution, that is feeding to some degree in relation to consumer prices. We are living through the third oil shock. This is the third oil shock the world is now living through, the highest oil prices on record. Now there may have been a little bit of relief in the last couple of weeks but when you look at prices at the bowser of $1.30, which is what the average was in the last quarter and it is about what it is now in the metropolitan capital cities, these are extremely high prices, when you are looking at an oil price of $US70 a barrel. I can remember when it was $11 a barrel, I was Treasurer, that is a seven fold increase.

JOURNALIST:

Treasurer, of any one off factors that will drop out next quarter, which ones could you overcome?

TREASURER:

Well, there was a big detraction from growth this quarter on inventories, that is inventories were run down quite significantly and from memory as a consequence of that they detracted 0.8. Now what that shows you is that sales were better than the people who are directing production thought, and next quarter as they re-build their inventories that is just growth in the bag. That one-off factor which was the biggest detraction from growth will reverse itself out. I would hope that the export volumes will start lifting over the course of the next quarter. This is an outcome which is consistent with what we said in the May Budget, it is 2.7, we said 2 ½, and we are forecasting growth to be 3 ¼ in 2006-07.

JOURNALIST:

Treasurer, on mining if you could touch on (inaudible) production is there any other factors you know that could explain this large drop?

TREASURER:

Yes, we had a big drop in mining volumes in the last quarter and that was cyclones principally, when they were closing down production up in the north west, in the Pilbara and the north west of Western Australia. There is a bounce back this quarter, it is positive, but it is not as positive as we would have expected, to be frank. We think that the first week of the quarter could have been still affected by the cyclones but when I look at that figure, intuitively I think it is low and it may well be adjusted. It looks low to me that production in relation to mining.

JOURNALIST:

Treasurer, notwithstanding the fact and indeed ignoring the fact you never speculate on the future levels of interest rates, these figures out today are they likely to make it more like or less likely that interest rates will go up again this year?

TREASURER:

Well ignoring the ignorance and ignoring of your question, look what I would say about these figures is it’s moderate. It is 0.3 for the quarter. Now personally I think the underlying strength is a bit more than a 0.3 tells you, we have discussed mining. There is strong business investment, there is strong growth in wages but when you see 0.3 for a quarter it doesn’t give you the picture for a boom.

JOURNALIST:

Mr Costello, in relation to the consumer demand and the tax cuts in the Budget do you think that there was room for bigger tax cuts in the Budget?

TREASURER:

Well I know some newspapers certainly thought there was. I thought the interview that the Governor gave yesterday put it about right. He said that he had no problem at all with the May Budget. He said that the reporting had been – I think the word was shamefully misquoted in relation to him and what he said is that he, like I, had been attempting to bring some sanity to some crazy ideas. That was his words crazy ideas in the lead up to the Budget and the Budget itself was extremely responsible. And what we did was we cut tax and we cut it in a responsible way. But you will have to go back and look at what people were demanding. You know, the demands that were growing at that point were for $20 or $30 billion per annum. That is what some people were saying. And the Governor, like me, was saying this would be irresponsible. And when we delivered responsible tax cuts some people then turned around and said that was too much and sometimes they were the people who were demanding a lot more.

JOURNALIST:

Mr Costello, the Governor said in relation to the crazy comment, he said, all of these people who (inaudible) tax cuts and you have got people in the Liberal Party, people in the Labor Party, you have got the press led by The Australian , they want these huge tax cuts, who do you think he was referring to amongst the Liberal Party and do you agree with The Australian’s assessment this morning that Ian Macfarlane gave credit for the Budget tax cuts to The Australian ?

TREASURER:

I must say it was chutzpah of the first order when I read that column this morning as an endorsement. I would invite independently minded people to read what the Governor said and draw their own conclusions.

JOURNALIST:

Treasurer

TREASURER:

And I, you know, I hope, I am sure it will be as fairly reported tomorrow as it was today.

JOURNALIST:

Who in the Liberal Party (inaudible)?

TREASURER:

Well look, you know, let’s not rake over the coals, I think the Governor was misquoted twice. I think when he gave his commentary before the Budget, what he was saying was that reasonable tax cuts were affordable and would not complicate monetary policy. He was over reported as demanding huge tax cuts. When the tax cuts came, which were reasonable and affordable, he was over reported as saying that these had somehow put pressure on monetary policy. He said, I have been shamefully misquoted.’ And he was. Twice. Now, surprise, surprise, both episodes of shameful misquoting were used to criticise the Government. That is the only common theme of the double misquoting.

JOURNALIST:

Did he misquote you Treasurer, when he said that you used his remarks on tax cuts to say that he was urging tax cuts?

TREASURER:

I have never used his remarks to say I was urged to do anything.

JOURNALIST:

That is what the Governor said.

TREASURER:

Well I invite you to look at all of my transcripts because, and you know this because you follow monetary policy, I have never said any such thing. What I said before the Budget was we weren’t going to drive the Budget into deficit, we weren’t going to introduce tax cuts which would undermine the surplus which I thought should be about 1 per cent of GDP, but we had room to cut tax which would leave the Budget surplus around 1 per cent. We did that. That was responsible. That is what the Governor thought was responsible and I must say, he has been misquoted two times, both in an attempt to criticise the Government. He comes out yesterday and I think in the clearest way possible says that what he was talking about then was reasonable tax cuts, that what he is talking about now was reasonable tax cuts and that is what was delivered. Now, can I tell you, I don’t get my ideas in relation to tax from the Governor. The Governor and I talk about the economy on a very regular basis and we both know what each other’s view is in relation to what is and what is not responsible. But I don’t get my ideas from him and the tax cuts that were contained in the Budget were a) responsible; b) they were consistent with our fiscal policy and c) they were a major structural improvement to the tax system and that is why they were done.

JOURNALIST:

Treasurer

TREASURER:

Sorry I am going to get some more in. We will start from the right and go to the left.

JOURNALIST:

On the High Court’s finding with regards to the McKinnon FOI case, as you know it said that the Administrative Appeals Tribunal acted, made a ruling in accordance with the law but it made the point that the Minister in this case, yourself has the ability to decide what is in the public interest. Isn’t there something wrong with an FOI law that allows a politician to decide what the public interest is without some level of review as is being promised by the Labor Party?

TREASURER:

No, let’s be clear about this. A conclusive certificate can be issued where there are reasonable grounds that disclosure would be contrary to the public interest. The AAT found that there were reasonable grounds, the full Federal Court found that there were reasonable grounds and that decision was upheld by the High Court. That is what happened. The High Court said that the AAT got it right.

JOURNALIST:

I am aware of that, but the question was

TREASURER:

Now, the other thing that I have heard again from one of the parties to the case, is that this is somehow unprecedented. Can I tell you, every Treasurer with the exception of John Kerrin who wasn’t Treasurer for very long, has issued conclusive certificates since the Act came into existence. Paul Keating not only issued conclusive certificates but when he was found to have not had reasonable grounds he ignored that. John Sydney Dawkins, Ralph Willis, George Gear, Brian Howe signed them in relation to Treasury matters, I don’t quite know why. Between 1982 and 1986 there was 55 conclusive certificates issued and then the AGS stopped keeping a count.

JOURNALIST:

But Mr Costello, does it concern you that it wasn’t a majority decision, that the Chief Justice of the Court doesn’t support your position?

TREASURER:

Please. A court makes a decision, you know, when the court makes a decision, that is the decision of the court. This idea that you actually look behind the majority decision, you know, and somehow it is, you know a majority doesn’t mean a majority, please.

JOURNALIST:

Tim Fischer use to say was the case with (inaudible), I think.

TREASURER:

Well I don’t know what Tim said, but please look, 55 certificates in 4 years and then they stopped counting. Every Treasurer except John Kerrin, how long was John Kerrin Treasurer, I don’t know? Not that long

JOURNALIST:

Six months.

TREASURER:

six months, okay, he wasn’t there long enough to sign one. Paul Keating, John Sydney Dawkins, Ralph Willis, George Gear and Brian Howe. It went to the AAT, the AAT decided the matter and the courts said that the AAT got it right.

JOURNALIST:

What do you think of Labor’s proposal to abolish

TREASURER:

Sorry.

JOURNALIST:

Could you explain why it is against the public interest to release the, to release information on (inaudible) or fraud involving the First Home Owners Grant?

TREASURER:

Well you see, can I just say, I think it is very important that you read the case. Because you know, you might have heard that that is what the case was about, but it is very important to read it. These are working documents, these are not final documents, final documents are releasable, these are working documents, these are drafts which are replaced. And because they are drafts, quite often they are not even accurate and that is why the FOI has an exemption for working documents. It would be like saying to the judges who brought down their decision, release the drafts of your decision, not your final decision but your drafts. The drafts will change.

JOURNALIST:

(inaudible) Labor’s proposal to abolish conclusive certificates?

TREASURER:

Well I will believe it if I see it. But if Labor believes that then eight State Labor and Territory Governments will be introducing such legislation tomorrow, won’t they? Let me ask you this question. If that is the Labor Party policy, why are there eight State Labor and Territory Governments that don’t follow it?

JOURNALIST:

Do you agree with?

TREASURER:

There’s an interesting question. Let’s forget the Federal Opposition because the Federal Opposition has the great comfort of knowing they are not in government. Let’s go to Mr Bracks, Mr Beattie. Ask Mr Beattie to announce that policy for his re-election. I don’t think so. And can I say to you, you know, it is all very well for the Labor Party to say that now, but could we please have an explanation of Paul Keating, John Dawkins, Ralph Willis, George Gear, Brian Howe. Come on.

JOURNALIST:

Treasurer, just on interest rates again if I may, you have said that 0.3 is moderate and yet you said that it masks a stronger economy at the moment, the year average is 2.7 per cent which is above the Budget forecast and the banana-free CPI Index is 3.4 per cent, still outside the Reserve Bank band. Why shouldn’t homeowners think these figures today mean an interest rate rise is more than likely in (inaudible)?

TREASURER:

Interest rates in this country are directed towards inflation. The important thing is to keep inflation low, the important thing is to look through one-off factors and see what the situation is in the general economy. In relation to the general economy it would be of concern to us if we had generalised price rises, or generalised wage rises off the back of petrol increases. The important thing is to keep inflation moderate.

JOURNALIST:

Do you think we will start to see that Treasurer, you know the effects of (inaudible) on economic growth, do you think that will become more widespread?

TREASURER:

Look, the oil prices, as I said, have gone to record highs, the petrol prices followed it. This is causing great hardship for people at the petrol pump and it is no good for the economy. The one bright spark in a very gloomy scenario is that the petrol price has not kept going up in this quarter. Seems to have stabilised at $1.30. If it stabilises at around $1.30, and that is the metropolitan capitals’ price, maybe even if it comes off a bit, then that will ease the pressure. But unfortunately I cannot tell you and I cannot tell the Australian people whether this is just a temporary lull or whether we have seen the peak pass. I hope we have seen the peak pass but just as we did not predict this massive increase in oil two years ago I am not going to make a prediction as to where oil will be in two years time. I hope the peak has passed.

JOURNALIST:

Mr Costello

TREASURER:

One, two, three and four and that is it.

JOURNALIST:

Mr Costello, have you got concerns about the divergence between the resource rich states and New South Wales and Victoria, which is quite apparent now in the way WA is growing quite strongly in particular?

TREASURER:

Well the good thing about the growth in WA of course, is it is contributing to national growth. WA is getting the benefits of the mining boom and that is a good thing. State final demand through the year in WA grew 14 per cent, in Queensland it grew 7 per cent, in New South Wales it grew 1.1 and Victoria it grew 1.1. So there you have a two track economy. Now, that is the converse of where we were six years ago. Six years ago mining prices were down the cellar. People were talking about Australia as an old economy. The dollar was below 50 cents. Some of your newspapers were portraying this as economic Armageddon. What was keeping the Australian economy growing back in 2000 was strong consumer demand, particularly in New South Wales and Victoria and weakness in WA. So you know, different parts of the country contribute to the overall growth rate in different conditions and different times and the good thing is that Western Australia and Queensland in particular are able to take advantage of the mining improvement now.

JOURNALIST:

Do you have concerns by the dive in productivity particularly the inflationary consequences of that?

TREASURER:

Well the trend productivity actually, labour productivity, trend GDP, per hour work, market sector, increased 0.4 per cent in the June quarter to be 2.3 per cent higher through the year in trend terms.

JOURNALIST:

If the High Court has ruled that (inaudible) that Australians shouldn’t know the full impact of bracket creep, for instance, what is the FOI good for?

TREASURER:

The Australians do know the full impact of bracket creep. There was a full report in the Budget. And I have answered questions on this over and over and over again. Australians do.

JOURNALIST:

Should the Government…

TREASURER:

No no no, what Australians should know are the facts and the final documents and I think in the Budget papers, once we have worked out the final facts we have reported them. I have got up in Budgets and talked about them. This Government has more than returned bracket creep. What is the figure if we had indexed the threshold for the top marginal rate to the CPI, today it would stand at 64,000 and it stands at 150,000, and what’s more the top rate has fallen. These are not disputed facts.

JOURNALIST:

So you’ve given a challenge to read the full document, I have read the finding released this morning, and from my reading the case did not turn on whether the release of these documents was in the public interest, it turned on whether the law said that all that was required was for you to demonstrate reasonable grounds to argue that it was in the public interest. So the question is, do you think that it is appropriate and fair, not withstanding all those other former Treasurers, that a politician need only demonstrate reasonable grounds to argue a case in the public interest instead of some other tribunal having some sort of say in what is in the public interest

TREASURER:

I’m sorry, the AAT decides whether there are reasonable grounds. The AAT decided there were reasonable grounds

JOURNALIST:

For you.

TREASURER:

and the High Court upheld that decision. The independent Administrative Appeals Tribunal decided there were reasonable grounds

JOURNALIST:

For you to hold the view

TREASURER:

Not me, the AAT decided that there were reasonable grounds. And it was the decision of the AAT that was appealed. Now I gave you, this is very instructive, the example of Mr Keating. Mr Keating issued a conclusive certificate and it was found by the AAT that he did not have reasonable grounds. You know what he did? He refused to revoke the certificate and tabled an explanation as to why in the Parliament. So, a Minister can even uphold a conclusive certificate where there are no reasonable grounds. That is what Mr Keating did. We would not compare ourselves to Mr Keating because the Independent Tribunal said that there were reasonable grounds and the full Federal Court said they were right and the High Court said the full Federal Court was right. Thank you all for your time.