Doorstop Interview

Treasury Place, Melbourne

Thursday, 25 July 2007

12 pm

SUBJECTS: June quarter Consumer Price Index, election, Kevin Sheedy,

Murray-Darling Basin, housing affordability

TREASURER:

The Consumer Price Index grows by 1.2 per cent for the June quarter of 2007, to be 2.1 per cent higher over the year.  This is the lowest Consumer Price Index rise we have had for three years, since March of 2004.  Underlying measures of inflation are within the band that the Government has agreed with the Reserve Bank of 2 to 3 per cent.  The biggest contributors to price rises in the June quarter were in the fuel area, with petrol prices contributing about 0.4 of the 1.2 per cent increase, and food contributing about 0.3 of the 1.2 per cent increase.  The food increase is largely driven by increases in fruit and vegetable prices.  Partly this is again the influence of banana prices.  It is also possible that the higher vegetable prices reflected the impact of drought.  Some areas of prices actually fell during the quarter, as you would expect with the strong exchange rate. Travel fell, computing equipment fell, even breakfast cereals fell in the June quarter.  Notwithstanding Australia’s strong employment position and the strong Terms of Trade, the Consumer Price Index remains very constrained at 2.1 per cent.  This is consistent with Government forecasts of moderate inflation over the year ahead.  If we can keep inflation moderate, then our economy can continue to grow and job creation can also continue.   

But inexperience in economic management, wrong turns on economic policy, would represent a very big risk in this economy.  Nobody should think that the risk has been taken out of this economy.  Economic conditions have improved very significantly in the last ten years, but they are not risk free.  And the fact that you now have unemployment at 33 year lows, the fact that you have stronger Terms of Trade means that the economic challenges change but they are not abolished and the economic challenges require careful management.  A wrong turn on industrial relations for example would see building costs rise. As the most recent economic report on the effect of the Building and Construction Commission has shown, that Commission has reduced costs of building.  A wrong turn on the abolition of that Commission would put up building prices, would add to inflationary pressures. There are a lot of challenges in this economy that require careful management.

JOURNALIST:

The market is now factoring an 80 per cent chance of an interest rate rise in August, how would that hurt with an election looming?

TREASURER:

Well, our interest rate policy is directed at keeping inflation low and today’s figures show that the Consumer Price Index is the lowest it has been for three years and on underlying measures the inflation is within the band of 2 to 3 per cent, so I see this result today as very much consistent with our inflation target.

JOURNALIST:

So if there was an interest rate rise (inaudible) overall economic management?

TREASURER:

No, what I think I said was that I see these results very much consistent with our inflation target, and interest rates are directed towards getting inflation into this band of 2 to 3 per cent.

JOURNALIST:

Are you concerned, you mentioned that there were a few products that were down, breakfast cereals and the like, is there concerns that there’s not more cheaper imports flowing into the market with the dollar so high?

TREASURER:

Well, it is nice to have price falls, but we don’t want too many imports coming into the country.  Many of the imported goods such as computing equipment, audio visual and the like have come down, you would expect that with a stronger exchange rate.  I think as the crops recover from the drought you will see the price of cereals come down.  But the recovery from the drought has a different effect say in the meat market. What’s now happening I think is with recovery from drought farmers who were de-stocking are now holding onto stock to rebuild their herds again, that means that meat becomes more expensive.  So you get these different effects going on as Australia starts to come out of drought.

JOURNALIST:

Treasurer, what role do you think the high dollar has played in keeping inflation constrained and do you think that if it weren’t for the rise of the dollar this year we would have seen interest rates rise by now?  And secondly are you concerned about the ramifications of the high dollar for the Current Account Deficit?

TREASURER:

Well, I think the increase in the exchange rate has certainly shielded us from other price rises which have been going on around the world, particularly in relation to oil.  Oil prices have been rising very strongly around the world and as you know petrol has gone up in this country but it would have gone up more if the exchange rate hadn’t been strong.  So it had shielded us from some of the international events but of course the converse of that is the dollar is rising because commodity prices are strong and they in themselves have an inflationary effect.  So, it is true that the exchange rate shields you from some effects but another way of looking at it is the exchange rate is caused by some of the effects that also feed in.  On your second question, I think that is a good observation actually, that of course the fact that the exchange rate rises it does actually mean imports are cheaper and that does actually affect the balance of your trade.  A lot of people say, well how could it possibly? Well it is because the exchange rate mediates that you can actually get increased import volumes at a time of a high exchange rate.

JOURNALIST:

Mr Costello, after what Mr Howard said yesterday do you think you will ever be Prime Minister?

TREASURER:

I think I have said all that I want say on the subject over ten years.  I don’t have anything to add.

JOURNALIST:

If the Prime Minister stays on for another two years as he’s indicated and the Coalition wins government will you commit to spending two years as Treasurer?

TREASURER:

Well look I have made my position entirely clear over ten years in relation to these things, and I’m focused on the election and not much else.

JOURNALIST:

Just on Kevin Sheedy, were you disappointed that he’ll no longer be coaching at Essendon?

TREASURER:

Look, Kevin Sheedy has been a great coach of the Essendon Football Club.  He has a games record, when you add together the matches he played and the matches he coached, he has taken Essendon to four premierships.  He has been one if the greatest characters of the game.  I think he has done something like 27 years and he will be hard to replace.  But I wish him well as he moves on to the next stage of his career.  I wish the Club well as it looks at alternatives.  All Essendon supporters will want to see the Club go on to great success in the years which lie ahead.

JOURNALIST:

Treasurer, you just mentioned that the coming election was the focus of all your energy.  The Health Minister, Mr Abbott said last night said similar things, basically calling off negotiations with the States on health issues, saying that he needs to concentrate on the next election.  Has the Government shut down ahead of the possible November election?

TREASURER:

Very much not.  We are working night and day on things that are of importance to the Australian public, like strong economic management, job creation, keeping inflation low, improving water allocations in the Murray Darling Basin, announcements in relation to emissions trading and greenhouse.  I think if you look at what the Government has done over the last several months: cutting income tax, providing bonuses to self-funded retirees and pensioners, changing the assets test, another change which is going to come into effect in September.  I think if you actually look at the output, that has reached a tempo that I have never seen before.

JOURNALIST:

Treasurer, would you like to see the Murray-Darling Basin system privatised?

TREASURER:

No, that’s not the Government’s ambition at all. The Government’s ambition is to have the Murray- Darling Basin which crosses at least four States under a national plan, a national control.  This idea that a river system that runs through four States can be regulated at a State level has been shown not to have worked, because Queensland will try and take water out of it for Queensland uses without paying proper regard for New South Wales and Victoria and New South Wales. And Victoria will look after their interests without proper regard for South Australia.  South Australia, which ends up at the bottom of the river system, is left with whatever is there.  I think an interstate river system which crosses the continent and at least four States should be managed on a national basis.  I cannot see the logic in saying each state will run a different system with different entitlements in the name of State rights.  I mean the water doesn’t belong to a particular State.  The water is part of the great waterway system of the nation where at least four States have a vested important interest in management and the idea, frankly, that one State can go it alone – so what, we are going to have a national plan supported by New South Wales, Queensland and South Australia and Victoria is going to go it alone on the Murray-Darling Basin?  You can’t have it.

JOURNALIST:

Mr Costello it is John Howard’s birthday tomorrow, do you have any special plans?

TREASURER:

Do I have any special plans?  Well yes I have special plans to come to work and to work very hard tomorrow.

JOURNALIST:

No plans to mark the occasion?

TREASURER:

Me?  Well I’ll mark my own birthday; it is what I normally do.

JOURNALIST:

Have you sent Mr Howard a birthday gift or anything like that?

TREASURER:

I’ll wish him a happy birthday.  He will as far as I know not actually be in Australia tomorrow.

JOURNALIST:

Treasurer, other than lawyers, who are the winners out of the situation that has now developed over the Murray-Darling?

TREASURER:

Well if it can’t be resolved then water users would be the losers, but I think a plan that involves the Commonwealth, Queensland, New South Wales, South Australia would mean that water users and the environment will be the winners.

JOURNALIST:

But Mr Bracks has said that you don’t have the power to do it, do you believe you do?

TREASURER:

Well of course the Commonwealth does, I don’t think there is any doubt about this.  The Commonwealth will legislate, it will legislate with support from New South Wales, Queensland and South Australia and the federal legislation will extend to Victoria, so what is the Victorian Government’s plan here?  To have Queensland, New South Wales, South Australia and the Commonwealth operating under one system and Victoria under the other.  With all due respect, the Murray doesn’t even flow through Victoria.  The Murray is a border of Victoria and flows through South Australia and the idea that just one government can do it all on its own, I just do not think it is going to work.

JOURNALIST:

Mr Howard and Mr Turnbull say that the reforms now won’t go as far as what they want them to, are you disappointed by that?

TREASURER:

Well it could have been a much better reform. If Victoria had agreed along with the Commonwealth and Queensland and New South Wales and South Australia, it could have been a much better reform.  For whatever reasons they think that they can go a different way to the rest of Australia in an interstate waterway.  This waterway starts in Queensland and it flows down through New South Wales into Victoria and into South Australia and to say that we will carve Victoria out and we will have a different system just for Victoria and everybody else is under the one system, I do not think it will work.  I do not think they have thought about this very carefully at all.  Now the Victorian Government of course is trying to help Kevin Rudd and so obviously they are staying out of a sensible reform, but I’ll make this prediction, in five or 10 or 15 years time do you think there will be a different system in Victoria to the rest of the country?  I don’t think so. I think we will have national legislation and I think whatever they are saying now that will be the outcome of this.

JOURNALIST:

Will you be confident then that any High Court challenge by Victoria will fail?

TREASURER:

The High Court will uphold Commonwealth power in the area it is just a question of how far.  I don’t think there is any doubt that the Commonwealth has power. It may not have the power to go 100 per cent to a national system as it will be able to in Queensland, New South Wales and South Australia, but it will go a long way.  And whatever is left at the end of it, Victoria won’t be running the Murray-Darling Basin, it can’t, because it has got no power in Queensland or New South Wales or South Australia.

JOURNALIST:

Treasurer do you think that it is appropriate for a Minister to refuse to negotiate with State Ministers on the basis that there may be a change of government coming up and he has to spend all his time focusing on getting his government re-elected (inaudible)?

TREASURER:

Well the Commonwealth Health Agreements, under which the Commonwealth funds the States, do not expire until what, July of next year? And so you have to have an agreement in place before July of next year – plenty of time to do that before July next year.  And of course either party that gets elected will have the responsibility of administering that.  In fact it is I think very sensible to allow the negotiations to be completed in the new year when you have got an idea of which government is going to be administering these grants.  It is not as if it is not done today it can’t be done 1 July next year.  We will have an election presumably at the end of this year and then you will have six months to put that agreement in place, I don’t see any problem with that at all.

JOURNALIST:

Mr Costello, you mentioned earlier that with the lowest rise in the CPI (inaudible) but the fact is the market was actually expecting the inflation to be variable or to decrease, are you surprised that it has risen?

TREASURER:

Was I surprised?

JOURNALIST:

It had risen, that it had actually risen against market expectations.

TREASURER:

No, that doesn’t surprise me.  Market expectation is just what economists guess. Sometimes they guess it right, sometimes they guess wrong.  Does it surprise me that sometimes they guess wrong?  No. I have seen it a few times over the last 10 years.

JOURNALIST:

Treasurer an 0.8 per cent increase in housing costs, tomorrow Kevin Rudd is holding a summit in Canberra on housing affordability is this a blind spot for the Government?  The Government has failed to look at measures to improve affordability and also for renters.

TREASURER:

Kevin Rudd is going to have a summit tomorrow on housing affordability.  First thing I would say is you will have to come out tomorrow and pledge to keep the Building Construction Commission in place in perpetuity, because that Commission has reduced building costs.  And if he persists with this policy of abolishing that Commission he will be promising to put up building costs, let us make no bones about this.  The second thing that I expect Kevin Rudd will come out with tomorrow is a pledge from all the Labor State Governments to cut stamp duty because stamp duty is just a tax on buying your first home.  And because the States neither cut rates nor index thresholds, young home buyers are paying more than ever before in stamp duty.  And just a quick look at some of the material that the invited UK panellist has previously written indicates, this is Mr Williams, indicates that he thinks stamp duty is a big problem for housing affordability.  So I expect an agreement will come out tomorrow from the Labor States to cut stamp duty. Mr Rudd will have engineered that already I presume and he will be announcing that tomorrow.  And I welcome such an announcement – we have been trying to get the States to do it. 

The third thing that I would expect to come out tomorrow is measurers that really would slash the cost of new homes, and I welcome the announcement today by Deputy Premier and Treasurer of Queensland, Anna Bligh, who has today announced that Queensland will set up a government authority which aims to bring down the price of new homes by $20,000.  This authority is called the Urban Land Development Authority.  It will examine state owned land, carry out planning and approvals and offer it to developers under strict conditions.  Now that it a very practical thing, Queensland is now identifying state owned land, getting approvals and getting it out into the market.  Anna Bligh thinks that doing that will slash the price of new homes by $20,000 in Queensland and I welcome that.  I think that if we work together to identify new land around Australia which can be released, cut the time of planning approvals and get it onto the market, together with cuts in stamp duty together with a Building Commission which can cut construction costs, these are the most practical possible things that you can do to reduce the price of homes to first home buyers.  And I would like to see Mr Rudd endorse all of those measurers.

JOURNALIST:

Treasurer, one more if I can on Kevin Sheedy, how did you feel when you heard that he had been sacked?

TREASURER:

Well I don’t know that it is quite right to say that he has been sacked.  His contract is coming to an end and it will not be renewed, so you know I don’t think it is quite right to say that.  How did I feel when I heard that he would not be offered a new contract? It is the end of an era, it has been a great era for the Essendon Football Club.  Four premierships, a record of games as coach, as captain and I pay tribute to Kevin Sheedy he has been a wonderful, wonderful servant of the Essendon Football Club.  And for the club we enter a new era and the club has to make sure that it gets the best coach and we are going to a new era which I hope will bring the club as great success as we have had in the last 27 years.

JOURNALIST:

Do you believe James Hird to be up to the job?

TREASURER:

Of coach?

JOURNALIST:

(inaudible)

TREASURER:

Look, James Hird is one of those people who can do just about anything he sets his hand to.  But I am not sure he is that interested in coaching.  I think the list will be people who have had some experience already.

JOURNALIST:

(Inaudible) Bomber Thompson Treasurer?

TREASURER:

I do not want to put the moz on him.

JOURNALIST:

In sport like politics, people can hang around too long and maybe go past their use by date?

TREASURER:

Gee I wonder why I didn’t see that question coming. Thank you all for your time.