Transcript No. 2000/36

TRANSCRIPT

of

Hon. Peter Costello MP

Treasurer

Press Conference

Consumer Price Index

Friday, 28 April 2000

12.30 pm

E&OE

SUBJECTS: Consumer Price Index, beer, reconciliation

Todays Consumer Price Index showed that inflation rose 0.9 per cent

in the March quarter. And that was largely influenced by rising petrol

prices, which contributed 0.3 per cent to that outcome. General inflationary

pressures in Australia continue to be low and inflation is still within

the 2 to 3 per cent target band. Over the year to the March quarter of

2000, world oil prices have increased by about 120 per cent and petrol

prices by around about 24 per cent. Which means that the petrol price

increase has fed directly into the quarters Consumer Price Index. Leaving

aside increases in petrol prices, the CPI rose by only 0.6 per cent in

the March quarter, to be 2 per cent higher than a year ago, which is of

course the lower end of the Reserve Bank target. The good news is that

oil prices, world oil prices have fallen since the March quarter and this

has been reflected in lower petrol prices at the pump. And as a consequence

we would be expecting in the current quarter, that is the June quarter,

for petrol to be a downward pressure on the Consumer Price Index. That

is, that the price pressure of petrol will have passed through in the

last quarter and in the forthcoming quarter rather than contributing to

an increase in inflation, you would actually expect petrol prices to be

a net detractor, or a detractor, or at least to have a downward pressure

in relation to the consumer price index. These figures today illustrate

that the Australian economy is still a high growth, low inflation economy.

That our inflation is well within our target of 2 to 3 per cent. That

its edged up as a result of world oil prices which are going to have

an effect in relation to domestic prices, but the better news in the current

quarter is that the prices seem to have come off a little bit, and obviously

I hope that they come down further over the course of the next quarter.

JOURNALIST:

Treasurer do you think the Reserve Bank and other policy makers in financial

markets should ignore the impact of world prices on these figures when

they make decisions about the future impact on the level of interest rates.

TREASURER:

Look, I think that when youre looking at inflation you look at what

the actual inflation is and then you look at what contributes to it. And

when youre setting monetary policy remember this, youre generally working

12 to18 months in advance. So youd be looking through these figures to

try and work out whether there were inflationary pressures down the track

in the next year or so. Now where world oil prices are going to go in

the next year or so is a matter of great speculation. I hope they come

down. It would be much better for our economy if they did. Weve seen

them come down a little over the last couple of weeks and I hope they

continue. But you do have to take into account where you think world oil

prices are going to be going in the next 12 months. Because if they go

up they do feed into inflation.

JOURNALIST:

Have you received any advice about what impact the increase in petrol

prices to date will have on the CPI in the next couple of quarters (inaudible)?

TREASURER:

Well the advice that I have is that because world prices have come off

a little in recent weeks, and petrol prices have come off a little in

recent weeks, that the petrol prices would have a downward pressure on

the consumer price index in this quarter. And if that continued youd

expect it to stabilise in the following quarter.

JOURNALIST:

So are you sticking to your forecast for inflation for 2000-2001 of 5.25

or 5.5 year – average?

TREASURER:

That was the forecast that we put in the mid year review and we will

do our next set of forecasts in the budget. But not terribly much has

changed since we did the mid year review I wouldnt have thought. There

probably has been in this quarter, higher oil prices than we were anticipating

in the mid year review. The question and the decision well have to make

in the Budget is, will the oil prices in the course of 2000-2001 be higher

than we thought at the time of the mid year review. And theyre off a

little bit at the moment. As I said, I hope they stay off, I hope they

fall further. But well do our next update in the Budget.

JOURNALIST:

So you havent finalised that figure in terms of what (inaudible).

TREASURER:

Oh Ive finalised it but I announce these things in budgets. Thats why

we have budgets. To announce these sorts of things.

JOURNALIST:

Oil prices aside Treasurer, (inaudible) wage outcomes are moderate, in

fact the figures yesterday suggest theyre up to 4 per cent a year (inaudible)

up from 3 per cent from the last quarter. You said theres a solid trend

in productivity growth, when in-fact productivity growth has been slowing

and all thats happening while the labour market is tightening (inaudible)

in Sydney in some parts, the unemployment rate is down to 2 to 3 per cent.

Doesnt that put upward pressure on inflation for the future, not the

past?

TREASURER:

Well your point is I think that if wages were to grow in an unsustainable

way, youd have pressure on inflation. And the answer is of course you

would, if they were growing in an unsustainable way. Weve always thought

that we can sustain wage growth at 3-4% as long as we are getting the

kind of productivity growth which were currently getting. And although

the AWOTE figures were higher than some expected, well have to get some

final, a final look at those figures, they were still only 4 per cent

throughout the course of the year. Now I make this point. Ive made it

on numbers of occasions. The expectation of employees in relation to wages

should be around that 3-4 per cent and wage claims in excess of 3 per

cent are not sustainable. Now thats the kind of outcome which on the

kind of productivity we currently have will sustain growing job opportunities.

And some of these claims that you see bandied around for shorter hours

and unsustainable wage increases will put pressure on jobs. And where

you have an inflation outlook which is down in the 2 per cents. A 2 per

cent wage increase maintains the real value of the wage. The remaining

increase is justified on the basis of the increase in productivity. You

can get a 2 per cent productivity increase, you can have a 4 per cent

wage increase. But you cant have more. You cant have more. And it will

be unsustainable to actually seek more. It will have effects on employment.

JOURNALIST:

Treasurer are these figures that came out yesterday and the CPI figures

that came out today, do they make life easier for you in preparing the

Budget for next year?

TREASURER:

I dont think they make it easier and I dont think they make it harder.

These are the kinds of outcomes which we have been factoring in. These

outcomes are pretty consistent with our mid year forecast. I think our

mid year forecast in relation to inflation, Ill just check this point,

was that we would have a CPI through 1999-2000, Ill just look it up for

you, of 2 per cent, year average. Now todays figures are consistent

with the year average 2 per cent.

JOURNALIST:

Does that means the starting point for the surplus for next year is still

$500 million?

TREASURER:

The starting point is the point which was reported at the mid year review

subject to any changes which have occurred since then.

JOURNALIST:

Changes which have occurred since then have been a substantial increase

in (inaudible)

TREASURER:

Well, it is true that some of the Government measures have been defeated

or modified in the Senate. The most recent one of which was the Governments

proposal for fringe benefits tax in relation to public hospitals and charities.

A policy which was put to the electorate which we sought to introduce

and a policy incidentally which was also put by the Labor Party. It was

not just our policy at the last election, it was the Labor Party policy

as well. We were elected on it, they were put into Opposition on it, and

they voted against it. $1 billion over four years was the measure which

the Labor Party sought to defeat. Now Ive come to an agreement with the

Australian Democrats that rescues some of that revenue. But the truth

of the matter is, that the Labor Party has been intent on sabotaging as

many measurers as they can. So, you know, I hear that theyre now going

economically responsible, that theyve forbidden, forgotten the wickedness

of their wanton ways. But I dont see any evidence of reformed characters.

JOURNALIST:

(inaudible) threatened by the Democrats in relation to beer prices, Treasurer?

TREASURER:

Well, its another attack on the Budget bottom line. And, these are measures

which we put out to the electorate, which we were elected on. These are

measures which are Budget measures and they are now being undermined.

Lets, nobodys sort of, thought to ask the Labor Party where it stands,

but we assume as per usual it stands for opportunism. So it will vote

to defeat those measures. So the Democrats, again, if they were successful

would threaten the bottom line. But let me make the point in relation

to beer. I think, I think its a very important point. That the Government

isnt doing anything outside of its policy. This is the policy which it

put in the ANTS document, A New Tax System to move packaged beer by 1.9

per cent. It moves the price of a beer over a counter by more because

that has a service component. The goods and services tax, goods and services,

GST it taxes services. And where you have a value add, a service, attached

to a product, it moves it more. Now the Democrats are apparently in favour

of taxing the service of a hamburger or taxing the service of wine or

taxing the service of a milkshake, but they dont want to tax the service

of a beer. What they are apparently seeking is some kind of carve out

for the service of a beer through excise or other arrangements. Now that

would lead, well I havent even seen what the proposal would be, but as

far as the Government is concerned, the Government will be implementing

its policy, and that policy will realise the revenue which has already

been factored into the Budget.

JOURNALIST:

(inaudible)Treasurer why have the Democrats suddenly become the drink

more beer party, and when did they inform you of this reneging from the

GST agreement?

TREASURER:

The question of taxing the service of a beer over the bar has not been

raised with us in any of our negotiations and when we settled up on the

legislation which taxes the service of a beer over the bar we implemented

the agreement in full and as you can see, and as youve seen, that was

not in the agreement. Apparently they wrote a letter on the 6 April to

the Prime Minister which raised a number of things but not this specifically.

I became aware of this particular issue when I read the press release

yesterday.

JOURNALIST:

Why are they doing it?

TREASURER:

Well, Im seeking to try and clarify from them what their proposal is,

because the press release yesterday didnt actually have a proposal as

to what they would like to do and I would hope to explain to them that

there is no easy proposal which accomplishes that outcome.

JOURNALIST:

(inaudible) if you go ahead with what youve planned (inaudible) that

prices of all (inaudible)will effect CPI.

TREASURER:

No, the breweries accept the proposition that packaged beer under our

proposal, moves by 1.9%. They accept that proposition. And Ive had numbers

of meetings with them about that. The question is, what to do about the

price of a served beer. A packaged beer doesnt have much value-add but

a served beer, in order to have a served beer youve got to have premises,

youve got to have kegs, youve got to have somebody serving, youve got

to have a glass, youve got to wash the glass, youre going to have the

labour involved. When you apply a goods and services tax which taxes services,

it moves the price of a served beer by more than you move the price of

the products simpliciter which is 1.9%. Now if you want to try and get

1.9% on a served beer under a goods and services tax you either carve

it out of the goods and services tax or youve got to think of some other

scheme. I know not what. But it wasnt carved out of the goods and services

tax in the legislation which was enacted through the Senate with the Democrat

consent.

JOURNALIST:

(inaudible) there is a still a vulnerable issue for you though still

requires Senate approval(inaudible)

TREASURER:

No the Goods and Services Tax currently applies to served beers. And

on the excise I think youll find and Ill be having some discussions

that, itd be quite hard to undo the Governments policy and an attempt

to do so could lead to a great deal of confusion.

JOURNALIST:

Treasurer is it a case that if you just did a straight GST/Wholesale

sales tax swap and all other factors including excise stayed constant

the price of beer would fall both packaged and over the bar. And instead

now weve got some sort of wowser excise tax to make sure the price of

beer in fact goes up.

TREASURER:

Youve always had a “wowser” tax on beer Malcolm. And thats

been in the form of an excise. Food never had an excise. So youve always

had a “wowser” tax and the second thing you had in addition

to excise was that you had a wholesale sales tax of 37%. 37 per cent.

The standard rates of wholesale sales tax as you know and have heard me

talk about this – 12, 22 and 32. You had 37. Now when you abolish the

37% wholesale sales tax and you replaced it with a 10% GST and nothing

else happened your prices would dramatically fall. The same would happen

incidentally in relation to wine. The same would happen incidentally in

relation to tobacco. Anything that had the so called “wowser”

taxes as you put it. The Governments view was and always has been that

at a time when you are applying a GST across the board which would put

up the price of a takeaway hamburger, or put up the price of a takeaway

milkshake, you couldnt say the one product that we will take out and

give price reduction to, the one product thats more important that childrens

clothes and nappies and tampons that deserves particularly special taxation

treatment is the beer across the bar. You know that the most important

product in Australia which should be singled out for the best taxation

treatment as against the tampon and the nappy and the milkshake and the

pie is the beer across the bar. That was the Governments view. The Governments

view was that that should be treated in an equal way. And to price rises

we say this, that people will be having more in their pocket through income

tax cuts and family allowances to pay any price rises. Just as they will

to pay the price increase on a nappy or a milkshake or a pie. This sort

of the raising of the beer across the bar to the heights of an icon not

enjoyed by any other product or service in the community, you know it

may strike a chord with people like you Malcolm.

JOURNALIST:

The one thing(inaudible)

TREASURER:

He might be after all of this.

JOURNALIST:

(inaudible) from future budgets in anything like she wants to do at the

expense of government revenue.

TREASUER:

Like who wants to do?

JOURNALIST:

Like Meg Lees wants to.

TREASURER:

Well I am not entirely sure what they want to do.

JOURNALIST:

[inaudible] price rises for beer served at a bar, no higher than beer

served in packages

TREASURER:

I am not sure what the Democrats want to do. Nor am I sure it is possible

to do it. There was a suggestion yesterday of a beer equalisation tax.

Its now what 26^th of April. We are talking about arrangements

which are going to apply on 1 July. Somebody is talking about a tax which

has not been yet thought up let alone designed, let alone put into legislation,

let alone passed through the House of Representatives, let alone passed

through the Senate, let alone implemented in any of these accounting systems.

There was then a proposal about some kind of excise change as a possibility,

which again would involve, just from looking at it, a level of complexity

which would be extreme. Now I know people sort of like to make political

points and all of that, but it is now the 26^th of April and

we are talking about tax changes which have to be implemented, up and

running and implemented on 1 July and I just say that its just a little

bit late in the day for complex new taxes.

JOURNALIST:

.Government outlays.[inaudible] growing at fastest rate since 1991

recessionedging up inflation and putting pressure on interest rates.

TREASURER:

Ah no, I dont believe it is. I dont believe there is any evidence at

all that outlays are putting up inflation. I think if you read the figures

today, you will see that inflation has been primarily driven at the moment

by petrol prices. You will also see some of the other things that contributed

to the factor, a big one was the housing market from memory, and I dont

think you can blame the strength in the housing market on government outlays.

I dont think there is any basis at all to blame government outlays…

JOURNALIST:

core inflation is still edging up, while we have very strong growth

in government spending in a very strong economy.

TREASURER:

Extracting housing and oil your core inflation is probably below 2 per

cent. Now you described that as edging up. Edging up to what?

JOURNALIST:

0.6 times four is 2 .

TREASURER:

Edging up to what? Edging up to our band which is 2 to 3 per cent. It

is a good day when people talk about inflation rising to 2 per cent, but

its a luxury isnt it? Its a luxury. Throughout the 1980s inflation

average, per annum, 8.2 per cent. 8.2 per cent on 8.2 per cent on 8.2

percent. Under 13 years of Labor Government, it averaged over 5 per cent,

5 per cent, on 5 per cent, on 5 percent. You can make the point that inflation

is edging up to 2 and that is, but it is edging up to a very, very low

amount. In fact its edging up into our target and I dont think anybody

who had been around Australia for a long period of time would say shock

horror, inflation outbreak when it hits 2 per cent or even 2.5. Remember

our band, our target is 2-3 over the course of the cycle. That is, we

expected that it would be higher at the peak of the cycle, lower at the

trough of the cycle, but that it would average two to 3. We havent even

been in the band over the last two years, not withstanding 4 per cent

plus growth.

JOURNALIST:

petrol prices interest rates

TREASURER:

Well look, they price in rate rises, if they get them right, they make

money, and if they get them wrong they lose money and they take the risk.

And I have noticed with financial markets that could price rises in sentiment

terms and price them out again. And they vary from day to day and they

have that luxury and they are good at it, they make money out of it, and

if they dont they lose money, but I dont wake up in the morning and

ask myself the direction of national economic policy on the basis of whats

priced.

JOURNALIST:

are your discussions with Democrats on beer amicable

TREASURER:

Sure..

JOURNALIST:

taken aback by late claims.

TREASURER:

Well I had discussions with Senator Murray today, I hope to have some

discussions with Senator Lees. But, you know I make the point that the

Government is going to be introducing a policy which it put out in A New

Tax System which it, and it has informed the industry, has been working

to, which has now been legislated in relation to Goods and Services Tax

and I want the industry to know very clearly where they will be on 1 July.

They will be on 1 July where we have been telling them they will be for

the last 6 months, thats where theyll be. I want them to know that without

a shadow of a doubt. Now late proposals have the capacity to create some

confusion about all that. But I want them to know unequivocally the Government

will be implementing the policy which it has told them on numbers of occasions

and face to face, and in meetings with the Treasurer and the Prime Minister,

that is the policy we will be implementing.

JOURNALIST:

you are reliant on the Democrats to allow those (inaudible) measures

through the Senate.

TREASURER:

I am not quite sure that is right.

JOURNALIST:

(Inaudible)

TREASURER:

I have taken, well I will make a few points. I have taken some legal

advice on this and I am not quite sure that we are reliant on such measurers.

Number one. Number two no other system can be implemented except with

the Governments approval. No other system can be implemented except with

the Governments approval. So if the Government isnt approving any new

system it leaves the industry either with the Governments proposal or

I know not where, but I am pretty confident in my legal advice. Last question,

last question.

JOURNALIST:

As acting Prime Minister do you intend to walk across the Sydney Bridge

and attend the Opera House reconciliation ceremony and from your point

of view, who would you like to formally accept the Declaration of Reconciliation

on behalf of the Australian people.

TREASURER:

Well I am not sure I have been asked to walk across the Bridge but obviously

if I were asked, and it were appropriate, obviously I would do it, yes.

The question of who actually receives it, is a question for the Government,

and the Government advises the Governor General on these matters. And

I think as the Prime Minister said, the matter is still under consideration

and once the Government has decided its position, advice will be rendered

to the Governor General and that will be the outcome. I think I am right

in saying under our Constitutional system the Queens representative acts

on the advice of the Government and these are matters on which I am sure

the Governor General would be seeking advice and I have no doubt after

its been considered by the Government it will be given. Thanks very much.