Consumer Price Index; inflation; interest rates; employment; US economy; corporate tax avoidance

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Nomination of Australian Director to the Asian Development Bank, Manila
January 18, 2002
Bilateral Tax Talks Scheduled on UK-Aussie Tax Arrangements
January 25, 2002
Nomination of Australian Director to the Asian Development Bank, Manila
January 18, 2002
Bilateral Tax Talks Scheduled on UK-Aussie Tax Arrangements
January 25, 2002

Consumer Price Index; inflation; interest rates; employment; US economy; corporate tax avoidance


Press Conference

Wednesday, 23 January 2002
12.20 pm


SUBJECTS: Consumer Price Index; inflation; interest rates; employment;

US economy; corporate tax avoidance


Well, today’s Consumer Price Index showed an increase for the December quarter

of 0.9 per cent and through the year a rise of 3.1 per cent. The outcomes were

driven principally by rises in prices of fresh fruit and vegetables, domestic

holiday travel and accommodation and also meat prices which rose quite significantly

during the December quarter. The increase in fresh fruit and vegetables, mainly

due to seasonal factors, and we would expect in the quarters to come that those

one-off factors would decline somewhat. Holiday travel and accommodation, driven

to some degree by the Ansett collapse, and again some one-off factors in relation

to that.

The overall picture for inflation is that inflation is still subdued. The 3.1

per cent through the year indicates that our Budget forecast for the financial

year 2001-2002 is still very much on track. We see no evidence of any break

out on the inflation front. In fact we see inflation as being still relatively

subdued, influenced quarter by quarter by some one-off factors. The Australian

economy continues to grow strongly, perhaps the strongest of any of the developed

countries in the world, and the Australian economy looks to be in much better

shape than comparable economies throughout the course of 2001, going in to 2002.

All in all a moderate outcome for the December quarter influenced particularly

by one-off factors with many of them to decline in forthcoming quarters and

a continued subdued record for inflation in the Australian economy.


Treasurer, would you see this rate of inflation, therefore, as being no barrier

to further interest rate cuts?


I would see this outcome as certainly consistent with our inflation targeting

regime. The headline figure is 3.1 per cent, as you know. Our inflation targeting

has been 2 to 3 per cent, but of course this is influenced by some one-off factors,

and because you get those seasonal variations we target 2 to 3 per cent over

the course of the cycle. So, I would describe this as an outcome which is very

much consistent with our inflation targeting regime. As you know interest rates

are now lower in Australia than they were during the decade of the seventies,

or the eighties, or the nineties. They are now at 30 year lows and the biggest

problem confronting the Australian economy is still international weakness.

And our minds are very much focused on trying to protect the Australian economy

against the recession which has engulfed most of the world. And they will be

the factors that will be weighing on all of our minds as we make economic policy

over the course of the next couple of quarters.


So that suggests a bias towards easing in monetary policy?


I am not suggesting bias either way. I am just saying this is an outcome which

is consistent with our inflation targeting regime and the other factors which

will be bearing on decision makers of course are the international factors,

particularly the fact that most of the world is now in recession. The fact that

Australia has avoided recession and the Australian economy continues to grow

may have given us a false sense of comfort in a world which is in a parlous

situation. The world economy is in a very parlous situation, it is probably

in the most parlous situation in over 30 years. The fact that the Australian

economy continues to grow should not give us any false comfort about the seriousness

of the international situation.


Mr Costello could you comment on Joe Hockey’s proposed reforms to public (inaudible).

. .?


Well, I think Mr Hockey has legitimately raised the point that businesses are

finding premiums very expensive and this has been a drag on business. And not

just business, incidentally, it is also community groups and probably householders

too. And I think it is important that we have an open discussion about the causes

of that and what can be done to restrain it. And so I welcome discussion about

the issue and I welcome the fact that people are now focusing on this particular

problem. It seems to me that there are probably numbers of things that are combining

to increase premiums and one is that society is becoming increasingly litigious.

Secondly, that there have been some large verdicts. Thirdly, that some competitors

have gone out of the market such as HIH. Fourthly, that in the wake of the terrorist

attacks of September the 11th, people are much more conscious of properly profiling

risk. And I think we ought to look at all of those factors when we consider

the increases that are affecting businesses and homeowners.


Would you support the abolition of the common law rights to sue?


Well the Government has not taken the view that those rights should be abolished.

The Commonwealth Government has not taken that view. The right to sue at common

law is governed by State law and it’s a matter for the State Governments to

discuss. If the State Governments wish to proceed down that path then I think

they should make their views very clear and I think they should have a public

discussion about it.


Mr Costello what do you think the country’s employment outlook is?


Well, we are now going through the biggest international downturn, co-ordinated

downturn, in several decades. This is not just any longer a United States recession

and a Japanese recession, this is a very severe downturn in South East Asia,

amongst countries like Singapore, Taiwan. Europe is beginning to turn down.

Australia stands out as the strongest economy at the moment. But it will be

affected by these events and our growth rate would be less than it was during

the late 1990’s, therefore our employment growth will be less than it was during

the 1990’s. Therefore the large inroads that we were making into unemployment

during the late 1990’s will slow. And unemployment, as we’ve forecast, will

not continue the decline that we had seen during the late 1990’s. The unemployment

rate is, we predicted to be, in fact a little higher than it currently is during

the course of this year. And it is only when the world economy turns and we

start getting some international recovery and it is only as we keep our own

domestic economy strong that we are going to see that employment growth continue

back on it’s upward trend and unemployment will continue to decline, which we

want to see happen. Probably in the latter part of 2002 and into 2003.


Treasurer, you’ve warned against the false sense of comfort. Does that mean

you don’t share the optimism that the US economy is now bottoming out? And do

you see risks for growth here later in the year because of that?


I think that it is too early to say that the US has bottomed. That would be

my assessment. We will get preliminary figures for the December quarter later

this month, in the US. We expect that the US is in recession. But I think it

would be too early to say that it’s bottomed and turned. I expect that it will

bottom and turn. I hope that it’s in the first quarter of 2002 but the general

view I get as I speak to the international institutions and also as I speak

to US policymakers, is that they are expecting the recovery probably at the

earliest in the second quarter and there are some pessimists who say it could

be later. So, I hope it has bottomed, I don’t think there is any evidence to

say that it has turned yet, that would be my assessment.


Mr Costello there was reports today that the ATO has launched fresh efforts

to halt corporate tax avoidance. How wide-ranging should that, those efforts



I think that . . .


How big a problem is it?


Well, I think that the public wants to know that corporate Australia pays its

fair share of tax. Now we have reduced the tax rates for corporate Australia,

we have reduced the company tax rate to 30 per cent. So what that means is that

we have reduced companies’ tax bills but we expect them to pay those tax bills

as their liability is assessed in a full and fair way. And if there is any evidence

of cost shifting, transfer pricing, or anything else which is unfairly reducing

corporate Australia’s tax responsibilities it is the job of the Australian Taxation

Office to bring that to their attention, to collect the taxes. And I expect

them to do that. And the reports are that they will continue their strong audit

activity to make sure that’s done. We say to corporate Australia, we believe

in lower taxes and having reduced the tax rate to a lower rate we expect it

to be paid. We don’t reduce their tax rates so they can take advantage of that

and avoid the reduced rate. We have reduced the rate so that they can take advantage

of a lower rate but to pay that rate as and when their full liabilities are


Okay, thank you very much.