Interview with Chris Uhlmann

ABC PM Programme

Wednesday, 7 November 2007

6.20 pm

SUBJECTS: RBA decision on interest rates

UHLMANN:

Peter Costello, good afternoon.

TREASURER:

Thanks Chris.

UHLMANN:

Now that last voter in the seat of Lindsay said that saying you were sorry was an admission that you got it wrong. Did you get it wrong?

TREASURER:

Well I think what John Howard was saying, and I was saying too, nobody likes interest rate rises and that will cost home buyers and for that we are sorry. But I would go on and I would say, in an economy where unemployment is now at its lowest in 33 years, where there are real challenges coming from overseas including high oil prices, instability in global markets, the risk of economic policy being mismanaged by the Labor Government and Kevin Rudd and Wayne Swan and Julia Gillard ought to be a real risk playing on people’s minds.

UHLMANN:

But haven’t we seen for the sixth time today that you have no control over interest rates so what makes them any different from you?

TREASURER:

Well the policy that we put in place, in relation to balancing the Budget, paying off debt and improving industrial relations, has all contributed to a lower interest rate environment. Kevin Rudd opposed balancing the Budget, he opposed paying off debt and really worryingly, he wants to change industrial relations and he will change industrial relations in a way which will lead to inflation breaking out and that will lead to higher interest rates.

UHLMANN:

But that is your definition of what would happen under Labor and they of course, would say that that that wouldn’t happen…

TREASURER:

No, no.

UHLMANN:

…enterprise bargaining agreements, most of which of course, Australians now enjoy.

TREASURER:

Well just have a look at what did happen under Labor. When Labor was in office, unemployment wasn’t as low as it is today. It wasn’t at 4 per cent. They got it below 6 per cent at one period of time and the home mortgage interest rate was 17 per cent. They couldn’t even manage 5 per cent unemployment without interest rates being at 17, how would they manage 4 per cent unemployment with home mortgage rates being at 8½?

UHLMANN:

When we look at what we see in interest rates today, it doesn’t take into account the ratio of debt to disposable income which now stands at 161 per cent. The Reserve Bank of Australia has said that there is no precedent for that in Australia, people are under enormous stress. So they are feeling this rate rise worse than they have at other times.

TREASURER:

Well Chris, when you are actually looking at debt, the best measure of debt is to compare debt with assets, because debt and assets are on the capital account. When you actually look at debt and assets, you will find that people have much greater assets than they have ever had before. In fact the ratio of assets to debt is about 5 to 1…

UHLMANN:

But they can’t spend it though, can they Treasurer?

TREASURER:

Well this is the point that the Reserve Bank keeps on making and you are not arguing with me by the way, you are arguing with the Reserve Bank here because the Reserve Bank’s argument is that people who are borrowing – this is what the Reserve Bank says – are the people who are in the best position to do it. And it says it is not worried about this because it believes that the borrowings are being handled, particularly by those who are able to take it out. Now, you are not arguing with me here, I am just telling you the Reserve Bank made its decision today, if you were to put that very question to them that is the way they would answer it.

UHLMANN:

Did the Reserve Bank get it wrong because you see to be arguing again the toss today on the rate of CPI?

TREASURER:

No, there is no argument about the CPI. The CPI is below 2 per cent. There is no argument about that. There are other underlying measures of inflation which are up towards 3 per cent. And what is our target? Our target is consumer price inflation 2 to 3 per cent on average over the cycle. Now, you can look at that and you can say, oh well, we are up towards the upper level of the band – and we are – and you can take a decision, as the Bank did today which I…

UHLMANN:

And did they get it right?

TREASURER:

Well they make the decision which I accept…

UHLMANN:

But you don’t seem to believe that they got it right.

TREASURER:

… but the important thing is where do you think inflation will go in the year ahead? Now we think it will average 2¾ per cent.

UHLMANN:

And the Bank doesn’t think that.

TREASURER:

No I am not sure they don’t, Chris.

UHLMANN:

Well the Bank seems to be suggesting it, doesn’t it?

TREASURER:

No, no, no…

UHLMANN:

The Bank (inaudible) saying that they have got a problem with inflation…

TREASURER:

Well I think we should look very carefully at what the Bank said. The Bank said they thought that in the March quarter the measure would go above 3 per cent. But I don’t think they actually published a year average.

UHLMANN:

They are saying that by the March quarter of next year both headline and underlying measures of inflation are likely to be above 3 per cent.

TREASURER:

Yes, by the March quarter, but they didn’t publish a year average. But the important thing here Chris, if I may say so, is I have been listening very carefully to Mr Rudd all day. Mr Rudd complains about inflation and so the journalists are starting to say to him: ‘well what do you say should be done Mr Rudd?’ And he says – spend more money on education. Now, I am not against spending more money on education. Let’s suppose we started spending more money on education tomorrow. What, in six years’ time, high school students would be entering the workforce. Let’s suppose we spend it on primary students. What, in 10 years’ time they would be entering the workforce. Let’s suppose we spent it on pre-school. What, in 20 years they would be entering the workforce. Mr Rudd doesn’t have any answer at all for next year or the year after or indeed the parliamentary term that we are now going into election for…

UHLMANN:

So what is your answer to that?

TREASURER:

His answer is, I will do something that might have an effect in 10 or 15 or 20 years.

UHLMANN:

But what is your answer then?

TREASURER:

My answer is this…

UHLMANN:

How would you make sure that inflation doesn’t continue to go up and interest rates (inaudible)?

TREASURER:

Here is my answer: the first thing is we need to keep our industrial relations system because if we go back on that you will be right back where we were during other periods of low unemployment. And Kevin Rudd ought to think about it very carefully. And my second answer of course, is to make sure that the huge investment that is going on in Australia now works out in increased capacity. You know this yourself Chris, because you were the one that barrelled Kevin Rudd on this point. He used to run around saying: ‘oh productivity is falling.’ And I said: ‘that is because we have got huge investment.’ And you know yourself Chris, you were the one that barrelled him how poorly he understood the issue.

UHLMANN:

Briefly we are almost out of time. Do your really believe that (inaudible) the Governor’s statement today on monetary policy that growth and the labour costs has been constrained so far it is actually an endorsement of your IR policy? Is that the way you read that?

TREASURER:

What the Bank is saying is this: for a 4 per cent unemployment rate we haven’t had a wages breakout. And I said to you earlier, in previous periods of economic growth where unemployment hasn’t been as low as this we have had much bigger wages breakouts than this. And what the Bank is saying is that the industrial relations policy has avoided the excesses that we had in the ’70s and the ‘80s and even the ‘90s and that is why we have managed to keep interest rates at 8½ per cent when unemployment has fallen to near 4 per cent.

UHLMANN:

Treasurer, thank you.