Press Conference

Parliament House, Canberra

Tuesday, 24 April 2007
12 noon

SUBJECTS: Consumer Price Index, Budget, drought assistance, climate change, emission trading schemes, AWB, housing affordability, Australian dollar, economy, Kelvin Thompson, Iraq

TREASURER:

Well today’s news is good.  The Consumer Price Index for the March quarter rose by 0.1 per cent, a very low rise indeed, and the Consumer Price Index has increased by 2.4 per cent through the year.  This shows that inflation in Australia is moderate and families will welcome the fact that prices hardly rose at all in the March quarter.  In fact some prices fell in the March quarter, furniture and furnishings, holiday travel and accommodation, clothing and footwear, audio visual and computing equipment.  In particular prices for fruit fell, they fell 33.8 per cent in the quarter and the price of bananas fell 73 per cent, a correction after Cyclone Larry and the banana price is now back to the same level as it was before Cyclone Larry, what you saw go up has come significantly down.  There were some prices that went up, rents went up by 1.4 per cent, health and education went up but that is mainly an annual thing because of the Pharmaceutical Benefits Scheme which resets itself at the beginning of each year.  Bear in mind this comes off the back of last quarter’s CPI which washed out a number of those abnormal items.  Last quarter’s CPI was -0.1, this quarter is +0.1.  Now I have always said that you have got to wash out the volatile items when you are looking at a CPI but when you look at the underlying measures, the underlying measures of inflation have been decelerating in Australia over recent quarters.  It looks as if the underlying measures of inflation peaked in June 2006 and since June 2006 the underlying measures have been decelerating.  Now the underlying measures of inflation show that we are firmly within our target band which is 2 to 3 per cent.  Consumers had to wear the pain of fruit prices and banana prices as they went up and they artificially increased the headline CPI rate.  Consumers have had a benefit as they have come down and that has seen a correction the other way.  But when you look through, it looks as if on the underlying measures that inflation had decelerated in recent quarters and the Producer Price Index which is the more upstream index that we saw yesterday was flat, which shows that inflation is well contained in the economy, the economy is growing, that there will be price pressures – we know that coming out of this very, very severe drought – but in underlying terms the fundamentals are strong.

JOURNALIST:

Are we out of the woods yet on interest rates?

TREASURER:

What you have seen is you have seen abnormal increases in headline inflation particularly driven by bananas and fruit and to a lesser degree by petrol.  In more recent quarters you have seen those one-off factors correct themselves but when you look at the underlying picture taking those one-off factors out on the way up and those one-off factors out on the way down it looks as if inflation has been decelerating for a couple of quarters.  Producer prices, which are an upstream measure that came out yesterday were flat, the good news is inflation is well within the band that we are targeting.

JOURNALIST:

Are you saying there’s no case for any tightening of monetary policy in the (inaudible)?

TREASURER:

What I am saying is that inflation which was building towards the middle of last year seems to have decelerated.

JOURNALIST:

Will the headline rate go lower?

TREASURER:

The headline rate will go lower.  You will see a headline rate next quarter which will be below 2 per cent.  Your next CPI, through the year CPI, will probably have a one in front of it.  That is because some of those abnormally high figures will drop out, so your next CPI will look extremely low which is why I am directing you to more underlying measures which will be within the target band.

JOURNALIST:

Does this ease some of the pressure on the framing of the Budget, as far as stimulus is concerned?

TREASURER:

The framing of the Budget is experiencing pressures from drought.  The prospect that there will be no allocation of water in Australia’s food bowl will not only detract from growth but it will put pressure on food prices.  The exchange rate which is high in Australia is another pressure.  The future in relation to oil prices, and what that means for our economy, is another pressure and the backdrop to which this Budget gets framed is a very difficult one.  Now we have always been framing Budgets to make sure that we keep inflation within our band.  The good news is we are on track; we have got to keep it there.  We have got to keep it there because what we do today is important to where inflation will go for the next year or eighteen months.  Why do we want to keep inflation low?  It is a big part of keeping the economy growing.  We have had the longest period of continuous economic growth ever recorded in Australia and we want it to go longer.

JOURNALIST:

So are you giving an assurance that Budget spending and pre-campaign spending won’t put upward pressure on inflation?

TREASURER:

Well I’m giving you an assurance that this Budget will continue economic reform, that is what we are going to do.  We are going to continue economic reform and we are going to keep the economy strong, we want to keep the economy growing, we want to keep people in jobs, we want to keep businesses profitable, that is were this Budget is going to be going.

JOURNALIST:

(inaudible)?

TREASURER:

There will be broad reform in the Budget; this will be a Budget of economic reform, laying down markers for the next decade.

JOURNALIST:

Could tax cuts be given without putting upwards pressure on inflation?

TREASURER:

Well I make this point that we significantly cut tax last year, very significantly for low, middle and higher income earners and the biggest tax cut of all from last year, the superannuation tax cut, is still to come into effect so there is tax reform and good tax reform involves tax cuts in the pipeline.

JOURNALIST:

Is there unrealistic political expectations on this Budget from your colleagues?

TREASURER:

Budgets are always hard work, that is the reason I am in Canberra at the moment.  You have got a Budget which is about $230 billion, a 1 per cent error is $2 or 3 billion.  You have got an economy which is now $1 trillion.  You have got tax, superannuation, you have got defence spending, foreign affairs, health, education, social security, you have got the global economy, you have got the various state economies, you have got drought.  When you try to put together a $230 billion statement in the midst of all of that it is difficult.  It is hard work and the margin for error is small.  And by the way you are not just trying to think of what the situation is now you are trying to think of what the situation will be in June of 2008, that is when your Budget is going to go out to, June of 2008.  Now the trouble is this, we don’t know what the petrol price will be in June of 2008, or the drought, or the fruit prices, we are not entirely sure what will be happening in the US economy and yet we are drawing an economic plan right out to that period.  It just doesn’t manage itself.  This is hard work, hard disciplined work; it takes a lot of time and a lot of effort.

JOURNALIST:

How much more will be spent on drought assistance and assisting those irrigators in the Murray-Darling compared to what was written in the forward estimates?

TREASURER:

Well drought assistance is already up around $2 billion and the longer the drought goes the more that will become.  That is a demand driven programme so it could be substantially more.  I hope it is less because I hope it rains but…

JOURNALIST:

(inaudible) allocation for irrigators, what is the order of magnitude could the assistance to those people (inaudible).

TREASURER:

I think the first thing is to say – if the irrigators are not going to be allocated water they should not be charged for it.  Do you know that sometimes State Governments charge for water even when it is not delivered?  It is pretty rough isn’t it?  So I think one of the areas where irrigators will be assisted is the clear and unequivocal statement that if you don’t get any water you won’t be charged for it.  I think that would be a big step forward.

JOURNALIST:

Mr Costello (inaudible) emissions trading scheme?

TREASURER:

Well the Government has a working party looking at that at the moment and after its report has been considered it will make an announcement.

JOURNALIST:

Clearly that won’t be within the (inaudible) Budget (inaudible)?

TREASURER:

An emissions scheme is one way in which you can make industries that emit large amounts of Co2 gases respond to pressures, price signals, to reduce them.  That is what an emissions trading system is.  There are other ways you can do that but it is a way of putting a price signal in to make producers and ultimately consumers respond to price signals.  Now, we are on track to meet our Kyoto target out to 2012.  What you are talking about is what happens long after that – 2020, 2030, 2040, 2050.  So the price signals will be much more long term.  I think this is a point people have to get in mind – greenhouse is an important issue, a very important issue, but it is a long term one.  The projections are for movements, say a degree or two over 30 or 40 years.  So, it is something that has to be engaged in on a long term basis.  It won’t be fixed tomorrow.  It won’t be fixed in a week’s time – nobody is expecting that.

JOURNALIST:

But you can’t wait 30 years to fix it…

TREASURER:

No, no, no – but you have got to start with measures which over the course of 30 years will start making an impact.  So you are asking me about this year’s Budget – this year the Budget will be done on the basis of all the economic evidence that is with us.  But although it will be a long-term Budget it won’t be necessarily determining 30 or 40 years economic forecasts.

JOURNALIST:

In front of the (inaudible) from the emitting trading (inaudible) from the carbon trading scheme, is there any case to exclude any sector of the economy or does the standard need to be comprehensive with a lot of (inaudible)?

TREASURER:

Well I think the point about such a scheme is to have it comprehensive.  If it is not comprehensive, if for one reason or another you think you cannot be comprehensive in that scheme then the scheme is not for you.  That is my view. 

JOURNALIST:

Mr Costello, do you think that WorkChoices is contributing to the low-inflationary outcome?

TREASURER:

I have said that the fact that we no longer have a centralised wage fixation has been absolutely critical for handling this terms of trade improvement.  Every time Australia had an improvement in its terms of trade in the past – from the Korean wool boom on, you had wage settlements in profitable areas of the economy being transmitted across the general economy, you had general inflationary outbreaks, and you had the inevitable response.  Now, if we still had centralised wage fixation, if trades were getting big wage settlements in the mining industry and then transmitting them across the general economy you would be having a general wages and inflation breakout by now.  Now, if a fitter working in the mine at Hammersley who can justify a pay increase because the mine is so expensive, had a variation to the Metalworker’s Award which went back into Moorabbin and went back in to Mooloolaba and went back into every small metal shop – you would have general wages breakout, you would have inflation.  That is why decentralised wage fixing, which is best exemplified by the WorkChoices, is so important to the economy at a time like this.   And any person who stands up and says ‘oh well, we can reverse that, we can go back’ does not understand the Australian economy and does not understand terms of trade.  And maybe there is room here for some of the Labor spokesmen to acquaint themselves with the modern Australian economy.  Because I don’t think they are understanding it very well at the moment.

JOURNALIST:

(inaudible) would you be comfortable with AWB being given the carriage of the coming (inaudible)?

TREASURER:

Look, at the moment as you know we have provisional arrangements which are in place until the 30th of June whilst the Government consults and looks at an alternative.  My own view is that it is not real life to go back to the status quo.  To go back to the status quo with everything as it was – the Australian Wheat Board, a player in the market exercising power of veto against all of its competitors – to go back to that system I think is not real life, and I think that we have to move on from that system and make progress…

JOURNALIST:

(inaudible) if you do not have new legislation ASAP?

TREASURER:

…Exactly right, if new legislation is not passed, if the Government cannot get new legislation through the Senate, it defaults to that system, which is a good reason, in my view, for all well meaning parties to ensure that we can get some progress.

JOURNALIST:

(inaudible) prices which have gone up in an upward trend to 1.4 per cent, there is (inaudible) in most capital cities – is the Government still looking at what it can do to help?

TREASURER:

Look, I think that the reason that rents are going up is that vacancies are low – that is that we have had a bit of a pause in house construction – vacancies are low so at the moment it is a sellers’ market.  And the best thing that you can do to get rents down again is to boost the volume in the housing stock.  I think the housing stock will start to come back over the next couple of years.  But it has slowed, and it has slowed because it was a little unsustainable.  This is a question of supply and demand here.

JOURNALIST:

Will the Federal Government help with some stock?

TREASURER:

Well we do have some programmes that would help such as the First Home Owners Scheme and there are some fax incentives in place that actually encourage housing stock to be built.  Some people are in fact critical of those tax incentives but I think they are measures that do help.

JOURNALIST:

How long can we sustain the Australian dollar at the level it is (inaudible) interest rates at all so it is a double whammy (inaudible) who are trying to produce (inaudible)?

TREASURER:

The Australian dollar is at 20 year highs.  The rates that we have seen the Australian dollar have been the highest during the period that I have been Treasurer, and the Australian dollar is above its long-term average.  Now, that does make things hard for exporters, I acknowledge that, particularly manufacturing exporters.  You might say mining exporters have got good prices so they can cope with the higher dollar, but if you happen to be a manufacturer it is tough.  It will make things tough for agricultural producers too, but unfortunately they have got an even bigger problem – that is producing because of the drought – but it is putting a lot of strain at the moment on our exporters.  I acknowledge that but there is, in a floating exchange rate regime, which we have and which I believe to be the right regime, the Government is not intervening in the market at all.

JOURNALIST:

Mr Costello, in the past you have set the benchmark with your Intergenerational Report setting out 40, 50 years hence and taking measures within a particular budget – Pharmaceutical Benefit Scheme – isn’t it reasonable to expect that in this Budget looking out at 2020, 2030, 2050 on climate change, there would be some specific measures in the Budget on climate change?

TREASURER:

Well, that is a very reasonable and entertaining way of trying to get a Budget leak Dennis, but bear in mind the Government does do things and has already announced things to have an effect over a long period of time.  Announcements such as the Australian Greenhouse Office, the Low Emissions Technology Demonstration Fund, the Solar Cities Project.  Don’t think that we are not working on these things as we speak. 

JOURNALIST:

Treasurer…

TREASURER:

Sorry, (inaudible). 

JOURNALIST:

Can you continue to argue that the States are getting a revenue windfall when an (inaudible) Macquarie Bank economist shows that revenues from the Commonwealth to States is at a 13 year low?

TREASURER:

Who was that economist?

JOURNALIST:

Rory Robertson.

TREASURER:

Yes, I thought it might be.  I think this was used as a footnote in the commissioned report that was done for the Ministerial Finance Council and I think when you look carefully at the footnote they don’t properly source the work of Rory Robertson.  And I think as I pointed out at the time the claim has been comprehensively demolished.  So, beware of hastily convened reports commissioned on the eve of Ministerial Councils, read the footnotes very carefully and if you are interested, I will take you through them again because you will find that that was a particularly poor piece of research actually. 

JOURNALIST:

By Rory?

TREASURER:

No, by the authors who cited Rory in a footnote. 

JOURNALIST:

(inaudible). 

TREASURER:

I forget their names.

JOURNALIST:

Mr Costello, is there a case for either boosting the First Home Owners Grant or easing the Capital Gains Tax liability on investment property in order to boost our housing affordability?

TREASURER:

Well, you know, the Capital Gains on investment housing is 50 per cent of your marginal rate.  That is a pretty big discount.  So, I don’t think anybody is advocating it goes further.  There are some people that advocate it should go less but I don’t think anybody is advocating it should go further. 

JOURNALIST:

Mr Costello, in the absence of any other modelling is the cost to the Budget of the drought and the collapse of the Murray-Darling irrigation system maybe an indication or a clue to the cost of not acting on climate change?

TREASURER:

You see Paul, I think there are two issues here that people are always running together as if they are one.  There are droughts and we happen to be in probably the worst drought in 100 years.  Droughts have always been with Australia and we had a Federation drought in 1900.  We had a drought in the 1940s.  This I probably the worst drought since the Federation drought.  They have always been in Australia, long before global warming.  Then there is global warming.  This is a projection of what might happen over 40 or 50 years, the temperature might go up one or two degrees.  But over the 40 or 50 years droughts will still come and droughts will still go.  Droughts have always been with us, they always will.  Even if we fix global warming, by the way Paul, you will still have droughts, because droughts were here long before global warming came along.  So, you know, to say, here we are, the worst drought since the Federation drought, the Murray-Darling Basin in trouble and it can only be fixed by global warming or this is an example of global warming, is not right.  It is not right.

JOURNALIST:

I am looking at the cost, people are (inaudible) the costs to reduce greenhouse gases would be a cost to the economy…

TREASURER:

Sure…

JOURNALIST:

…on that. 

TREASURER:

…yes, I mean, when people say it is a cost to the economy, you have got to bear this in mind.  When people talk about reducing carbon emissions, the two key areas in the Australian economy where carbon emissions come from, one is coal fired power stations and the other is transportation.  Now, if you wanted to reduce emissions in each of those areas, what it means is more expensive electricity and more expensive fuel.  You have got to be honest about this and the people who say that they have huge reductions in mind have greater increases in electricity prices and fuel prices in mind. 

JOURNALIST:

And what about renewables?

TREASURER:

Well, that is the whole point about renewables, renewables are more expensive.  If you could get electricity from the sun at the same price as you can get electricity from a coal fired power station, we would all take it from the sun.  But as at this moment, electricity from the sun is about four or five times what we are currently paying.  Now, I think with technological breakthroughs, with investment in technology – and I announced investment in what plans to be the biggest solar power station in the world – we might be able to get the price down.  Maybe solar could come down to two times your current electricity bill.  And then maybe you are starting to get into the game but I think if you said to Australians at the moment, you said to your pensioner, we are going put up your electricity bill 400 or 500 per cent, I think you would get a bit of resistance.  

JOURNALIST:

(inaudible) an emissions trading scheme is inevitably going to push up prices (inaudible) carbon (inaudible) that is how it works, that is the incentive.  How do you think that should be dealt with by the Reserve when it is sort of casting an eye on inflation given that it is going to be a while or maybe even a continuing sort of influence on the exchange rate ahead?

TREASURER:

Well it is a good question.  It depends of course, doesn’t it, on the target and the duration.  That will determine your cost.  If people are to have draconian targets over short timeframes, have draconian costs in mind, the people who have more realistic targets over longer timeframes have more realistic costs in mind.  And that depends.  Last two questions. 

JOURNALIST:

Does Kelvin Thompson now have more questions to answer about his provision of a reference to Tony Mokbel?

TREASURER:

I think Mr Thompson and the Labor Party have a lot more questions to answer now.  Because it looks as if somebody who was appointed by the Victorian Government to a responsible position was acquainted with Mr Mokbel and working on his behalf.  And we don’t know yet whether that was the person who also asked for the reference.  But just to put this in perspective, you are talking about a person who imported drugs and made drugs to sell to children to ruin their lives – Mr Mokbel – who probably has taken out contracts on multiple people for their murder.  You know, he is no small time offender.  He is now on the run.  And to see that he apparently had enough associations with people in politics to be in a position to get and obtain references and enough of an association with people who got into decision making positions is quite scary.  And I think there are a lot of questions to be answered at the moment and I am not just talking about Mr Thompson, I think the Victorian Government has a lot of questions to answer. 

JOURNALIST:

Do you accept that climate change is in any sense a moral issue, or simply a practical economic one?

TREASURER:

Well, these are fine points of philosophy and religion which I will leave to greater minds than myself.  It is a problem that needs to be dealt with, whether that makes it moral, economic, philosophic, political, environmental, I leave to greater minds than mine. 

JOURNALIST:

Treasurer, any reaction to the injury of the Australian troops in Iraq?

TREASURER:

Well I think all Australians will feel for the troops and for their loved ones.  They will feel admiration for the way in which they equip their duty and the bravery with which they discharge it.  We know that when you go into a theatre of war it is dangerous but we respect them and we admire them and we support them for it.  And on the eve of ANZAC Day it reminds us again that through successive generations good Australians have been prepared to walk into danger and walk into war for the sake of us and for the sake of their country.  And we admire them, we respect them and our heart goes out to them but these are the modern day ANZACS on a battlefield as we speak.  Thanks.