Doorstop Interview

Senate Alcove Courtyard

Parliament House, Canberra

Monday, 7 February 2005

2.30 pm

SUBJECTS: ANZ job advertisements; RBA Statement; industrial relations; economy; Pharmaceutical Benefits Scheme; tax cuts; interest rates

TREASURER:

Although the ANZ Job Advertisement Series was down somewhat this month, it

is consistent with continuing good employment growth at about 17,000 per month.

And if Australia were to get employment growth of that dimension then the unemployment

rate which is currently at 30 year lows could fall even further.

Now this means that it is very, very important that we are careful in this

situation. We have not had unemployment this low for 30 years and in some areas

we now have shortages of labour. It is a much better problem to have than mass

unemployment. But it brings a new set of problems and we must ensure that particularly

in the wages area that wages do not overshoot. That we do not engage in an unproductive

round of wage increases.

We can have wage increases if they are based on productivity improvements.

If we have wage increases that are not based on productivity improvements then

we run the risk that inflation will increase. And having contained inflation

to the 2 to 3 per cent band it is important that we keep it there.

The most important thing that we can do in this strong economic climate is

to engage in industrial relations reform. Industrial relations reform is the

absolute key to providing the basis for sustainable wage increases which are

based on productivity improvements and increasing the capacity of the economy.

If we do not have another round – a strong round, a vigorous round – of industrial

relations changes then in a situation where we have got the lowest unemployment

in 30 years and some skill shortages we could see inflationary pressures emerge.

And we do not want that to happen in Australia.

So it is important that Australia re-dedicate itself to industrial relations

reform, increasing the capacity of our economy and keeping inflation low.

JOURNALIST:

So without IR reform interest rates would rise?

TREASURER:

If you were to get, in a very low employment economy, wage rises which were

not based on productivity and if that were to move into inflation then obviously

we would have to take action to contain inflation. But the important news is

that we can manage these expectations with a round of reform in industrial relations.

And that is the policy response which is needed more than ever today.

JOURNALIST:

Mr Costello, the Reserve Bank is suggesting the Current Account Deficit is

going to hit 6.75 per cent of GDP. What are you going to be doing about this

problem?

TREASURER:

Well it is important firstly that we ensure that our export industries are

as competitive as possible. And it is quite possible that with full employment

type outcomes, I would not go so far as to say we have got full employment,

but those kind of outcomes that we have been seeing it is possible that skill

shortages are holding back exports. We have to clear the skill shortages, we

have to clear the ports. It is quite clear to me that there has been underinvestment

in some ports and it is very important that we get to the bottom of the reasons

for that and improving capacity.

What we have to do is we have to make sure that the Government plays its role

in adding to savings in this country. That is why it is important to keep our

Budget in surplus. I would say this – even to some business groups, some of

whom are calling for massive new Government expenditure – the massive new Government

expenditure in a situation like this would detract from savings. It would be

precisely the wrong response in a situation where you have got a strong economy,

where you have very strong employment outcomes, to all of a sudden engage in

strong new expenditures for whatever purpose which was likely to put the Budget

into deficit.

JOURNALIST:

Mr Costello, cutting marginal tax rates would also be a means of boosting

productivity. Are you giving that sort of process the same strength you are

giving to labour reform?

TREASURER:

I will make this point again, if you were to engage in very large reductions

in revenue in a strong economy, with low savings, it could actually be quite

irresponsible. It could be quite irresponsible. Because what you would do is

you would be getting the Government into the business of borrowing, a business

which we have not been in for nine years. And so I would make this point, that

your tax policy has to be very, very consistent with your Budget policy. Now

what that means is to the extent that you run a sound Budget position you can

keep taxes low. That is our policy. But I always say this, we are going to fund

health, education, Tsunami relief, the war on terror, we are going to fund our

troops in the field and we are going to balance our Budgets, and when we have

done all of that we are going to keep taxes as low as is consistent with that.

JOURNALIST:

Time is not right just yet? Is that what you are saying?

TREASURER:

Well let me make this point, is the time right for tax reductions? It is right

for moderate tax reductions which we are doing on 1 July. We are reducing tax

on 1 July. We are raising the threshold for the top rate and the second top

rate. We are reducing tax for mature aged workers. We are reducing tax for new

business start-ups. We are reducing tax for parents who are paying childcare

expenses. But anybody who thinks that in the current climate it would be responsible

to go above and beyond times 2 or times 3 what we are already doing I think

has mistaken the state of the economy.

JOURNALIST:

Treasurer, on WMC and Xstrata, will the Government at all need to extend the

consideration time for that bid? Or have you got enough time under the current

sort of phase that you are in?

TREASURER:

In relation to Xstrata, look the application is before the Government, interested

parties are making submissions and after they have all finished we will make

a decision within the time frame if we can, if we can’t we will extend

the time.

JOURNALIST:

Treasurer the prospect of an interest rate rise, Labor is saying that in a

sense you have broken the election commitment to keep interest rates low or

that you will be if the Reserve Bank puts up rates as is foreshadowed in its

statement?

TREASURER:

Well which interest rate rise was that?

JOURNALIST:

If rates go up as foreshadowed in the statement from the Reserve Bank.

TREASURER:

Well look Labor can say what it likes. But the truth of the matter is that

in Australia’s near full employment economy, 5.1 per cent, with inflation

between the band of 2 to 3 per cent, with an economy which is still growing,

I think interest rates have been stable for 14 months and at historic lows.

From memory the home mortgage interest rate was at 6.25 I think and when Labor

left office it was 10.5, so draw your own conclusions.

JOURNALIST:

So is there room for an interest rate rise?

JOURNALIST:

Treasurer, …getting to the bottom of the under investment in ports,

what specifically do you have in mind that the Federal Government might do?

TREASURER:

Well the Federal Government doesn’t own some of these ports, some of

them are owned by the private sector and because the private sector owners are

not confident about supplies, they may be wary about new investment. That’s

one of the matters that they’re reporting. It is also suggested too that

some of the investors in ports say that they are not being allowed adequate

returns. The ports where the mining companies themselves invest are going to

experience a great deal of new investment. RTZ in Dampier is an example. But

in relation to other ports (inaudible) are made and it’s very important

that we do an analysis of that which we are doing.

JOURNALIST:

Do you see interest rates remaining stable?

TREASURER:

Well I never comment – and I haven’t for the last nine years on future

movements in relation to interest rates – but I’ll make this point, that

they’ve been stable for 14 months and they are at lows and it’s

important that we as a country continue to run an economy which grows and produces

more jobs but produces in a sustainable way. I don’t accept that 5.1 per

cent is the lowest unemployment can go. I think we ought to see if we can go

lower than this.

JOURNALIST:

How low can it go then?

TREASURER:

Don’t know. Nobody would have thought 5.1 per cent was sustainable nine

years ago. We have got to 5.1 per cent, we will see if we can go any lower.

JOURNALIST:

Treasurer, I notice that the pharmaceutical companies are lobbying the Government

to change its election promise on generic drugs. Will the Government stand firm

or will there be a change to (inaudible)?

TREASURER:

The Government will be proceeding with measures which will allow generics

to come to the market and allow generics to reduce prices, and by reducing prices,

cut the costs of the Pharmaceutical Benefits Scheme.

JOURNALIST:

So there will be a 12.5 per cent cut will there, which was promised on October

1st last year?

TREASURER:

The Government will be delivering its generic pricing policy.

JOURNALIST:

Unamended?

TREASURER:

And that will allow, where you can bring a generic, and I ought to make this

point, which has the same therapeutic effect, people shouldn’t be worried

that these generics won’t have the same effect, it is only where they

will have the same effect, but because they are not brand, but they do the same

thing, can come to market cheaper and that will reduce the Government’s

subsidies and will it give a lower cost to the taxpayer. And we will be delivering

on that.

JOURNALIST:

If the Government were projected to save something like $800 million over

the four years, if it were then the case to save more, would the Government

take that extra saving or will you calibrate it so that it nearly gets the $800

million.

TREASURER:

Look, to be frank with you Jim, you can’t calibrate these things that

closely. The actual savings that you get will always be estimates because you

will have to have estimated what conduct would have been without this measure,

what this measure has done in terms of conduct. You can’t actually sit

down and say to the last dollar that we know what it’s actually saved.

But I want to make this clear. We’ll be delivering on our policy and we’ll

be looking for savings. And if it’s an effective saving, so much the better

as far as I’m concerned.

JOURNALIST:

Treasurer, just to clarify on tax are you saying the way the books look at

the moment, there is no room in this coming Budget for any further tax relief

on top of what’s already been announced and promised.

TREASURER:

No, I’m saying in this Budget we’ll be reducing taxes by increasing

the threshold for the top two rates.

JOURNALIST:

But on top of what’s already…

TREASURER:

No, let me make it clear. This Budget will be delivering tax reductions. The

tax reductions will be increases in thresholds, tax cuts for mature age workers,

it will be tax cuts for new business start ups, and there will be tax cuts for

families incurring child care rebates. And if I have my way, there will be the

abolition of the Bank Accounts Debits tax. None of those things have been delivered

before. None of those things have been paid for out of any Budget before and

this Budget will be the Budget which will deliver those things and that is a

very, very active tax cut agenda.

JOURNALIST:

For this year that’s the extent of it? Nothing further?

TREASURER:

The extent of it? You know, if you could do all of those things that would

be a very, very significant tax cut Budget and it’s a question of delivering

on all of those things which we intend to do.

JOURNALIST:

Back on interest rates, Mr Costello, does today’s RBA Bulletin mean

that Australia’s honeymoon with low interest rates is over?

TREASURER:

Well if you have an interest rate at 6.25 per cent then that is a honeymoon.

When this Government was elected, it was 10.5. When I bought my first home,

it was 17.5. If you see a home mortgage interest rate with a 6 in front of it,

it’s not a bad honeymoon.

JOURNALIST:

Mr Beazley claimed that…

TREASURER:

Now, you of course have had wonderful honeymoons through the course of your

life, but 6 per cent is quite an achievement.

JOURNALIST:

Mr Beazley claims that the numbers are starting to run out on the Howard Government,

that the current account, a few figures that are coming through, some of the

economic data, retail sales, are starting to run-out. Are the good times, is

the gloss starting to go off the economy a bit?

TREASURER:

Gee, I reckon if the numbers turned against us like they did Mr Beazley, we’d

have a $10 billion deficit, wouldn’t we? The last time he was in office,

the Budget was $10 billion in deficit. I would have thought that’s a number

that runs against Mr Beazley, particularly when he promised there would be a

surplus. Whoops Mr Beazley, he only missed by $10,000 million.

JOURNALIST:

Treasurer…

TREASURER:

So I think you should look very carefully at his credentials. Thanks very

much.