Press Conference

Treasury Place

Melbourne

Wednesday, 26 July 2006

12.05 pm

SUBJECTS: Consumer Price Index June quarter, leadership, wind farms, uranium

TREASURER:

The Consumer Price Index for the June quarter increased by 1.6 per cent and through the year by 4per cent. Of that 1.6 per cent increase in the June quarter, 0.5 was from fuel costs and 0.5 was from increases in the price of fruit. In particular automotive fuel rose 11.2 per cent and the average price of petrol through the June quarter was $1.33. The increase in fruit prices was led by bananas which increased 250 per cent. This is a consequence of Cyclone Larry which lashed the north Queensland coast earlier this year. The 250 per cent increase in bananas will be a one-off pass through the system, as the crops are now being re-established and there will be more product towards the end of the year. If you abstract from the CPI the effect of the banana increase and the fuel increase, the CPI rose 0.6 per cent in the quarter being 2.6 per cent higher through the year.

The effect of automotive fuel is more troublesome, this is being led by world oil prices which show no sign of abating. And if the increase in automotive fuel and increase in transportation costs were to get back into the general system, that would have inflationary consequences through what we call second round effects. The increase in fuel itself, driven by overseas factors, is not as damaging for inflation in the general economy unless transportation costs produce second round effects, putting up the prices of other goods and services. So far our economy has coped very well with these record and punishing high world oil prices. They are having an effect on the bowser and families’ spending habits.

The Australian economy continues to perform well, notwithstanding the very difficult challenge of world oil prices now at record levels. Our unemployment rate remains low and looking through the one-off factors in this Consumer Price Index, inflation remains moderate. But as I have said on numbers of occasions, we can’t afford to be complacent and in particular we need to be very vigilant about the possibility of second round effects flowing from world record oil prices.

The Australian economy’s prospects in the forthcoming year continue to be strong, led by strong growth, low unemployment and a very strong fiscal position.

JOURNALIST:

Is this a disappointing result?

TREASURER:

Well we always knew of course that oil prices would have an effect on this quarter and you have seen that at the petrol bowser. You have got an 11 per cent increase. In this quarter the metropolitan average petrol price was $1.33 and in the previous quarter it was $1.18. So we always knew that there would be a very large pass-through. That is an increase of about 15 cents in the last quarter, in the June quarter over the March quarter. The other thing of course which was very predictable and this was the price of fruit – a 250 per cent increase in bananas, that is the consequence of the cyclone. So, it was expected that these two factors would affect the Consumer Price Index for the June quarter. As I said, the more worrying thing would be if they produced second round effects. Now no doubt that the banana price increase will not produce a second round effect, bananas are not going to put up prices of other goods and services, but we must remain very vigilant in relation to petrol.

JOURNALIST:

So the inflation dragon which you pronounced dead six or seven years ago, has that come roaring back to life?

TREASURER:

Oh well abstracting from the cyclone and its effect on bananas and in relation to the world oil prices, as I said the CPI was 0.6 per cent for the quarter and 2.6 per cent through the year. Now as I said, you can’t afford to be complacent about this, we have to be very, very careful that we don’t get second round effects particularly on petrol prices.

JOURNALIST:

Treasurer how long does it take to sustain (inaudible) petrol prices to flow through with these second round effects that you are talking about?

TREASURER:

Well…

JOURNALIST:

You say it hasn’t happened yet…

TREASURER:

…I would hope that it doesn’t happen. I would make the observation that in a competitive economy it is hard to get a price rise and it should be hard to get a price rise. To date we have seen no evidence in relation to that, our greatest hope of course would be that the world oil price will come back but it doesn’t look like that is going to happen. So our economy is going to have to cope with higher petrol prices. I don’t like it. Nobody likes it. It will give no joy to consumers. It is bad for the economy, but the only thing that you can say is, it would be even worse if we couldn’t quarantine it.

JOURNALIST:

Treasurer, doesn’t it bring out the pressure of an effect on interest rate as well though, (inaudible) the Reserve Bank’s target band…?

TREASURER:

Well interest rate policy is directed at keeping inflation low and that is inflation in the general economy. Interest rate policy has to take into account that you will have one off effects like cyclones, not directed at undoing the effect of the cyclone but you have got to take into account all of these things when you are setting interest rate policy but the thing we are looking at, we are looking at is inflation in the general economy.

JOURNALIST:

Treasurer, can you explain (inaudible) consumer response to very high petrol prices for the last 12 to 18 months of well over a dollar a litre, why the consumer response and the voter response has been more muted compared to that episode in early 2001 when the whole country seemed to go crazy when the prices crossed a dollar a litre?

TREASURER:

Well if you go back to 2000, from 1 July 2000 we were putting in place the GST and this country got itself into an absolute lather about GST. There were unbelievable claims being made. I recall one of the claims that was being made was that the GST would increase baldness amongst men because it would put up the cost of a haircut, they wouldn’t see their hairdresser as often and the consequence was to put up and promote baldness. Another claim that was made was that it would cause more deaths on the road because the effect of cutting excise was that people would use their cars more, there would be more traffic and there would be more deaths. And at a time when the country was in fever pitch about a GST, which was being blamed for everything, world oil prices started moving and the price of petrol, which had been in the 80 cent a litre range, started moving up to the 90 and close to the dollar. And the country worked itself up to a fever pitch because it was said by some that this was a consequence of GST. It never was. But since the GST was being blamed for male pattern baldness and road deaths, it was a very small step to say it was also responsible for increased petrol prices. And the Government made its response and what we have seen since then is that although excise hasn’t moved since we removed indexation, the price of petrol, which was under a dollar is now at $1.33. It has got nothing to do with excise, excise has not gone up in fact in real terms excise is lower, it is the world oil price and I think people now understand that and I think that is the difference.

JOURNALIST:

On other issues, it is the Prime Minister’s birthday today, as you know Kevin Rudd with the assistance of your brother I understand, bought him an unusual gift, a goat for the people of Dafur. As far as presents go, birthday presents, how do you rate that one?

TREASURER:

Well I am not sure it was with the assistance of my brother, I don’t think he has gone into the goat business has he? Leaving all that aside, I am sure it is a nice gesture from Kevin and I am sure he knows a lot about goats.

JOURNALIST:

He had the choice between a donkey and a goat, why do you think he went for the goat?

TREASURER:

Well as I said, I think Kevin is probably more experienced with goats.

JOURNALIST:

Treasurer, is it now inevitable that Australians face higher interest rates?

TREASURER:

I am not going to get into speculation about the future movement of monetary policy.

JOURNALIST:

Treasurer, it is the highest quarterly growth rate since 1995, is the economy growing too strongly?

TREASURER:

As I said, you have got two factors that have affected this quarterly result. One extremely unusual, Cyclone Larry, and that will pass through the system. Another which unfortunately I think will be with us for some time, and that is the increase in petrol price off world record oil prices. But I don’t see in these figures a suggestion that the economy is growing too strongly, our economy is growing around about its long term average and we have strong productivity. We have very low unemployment but we shouldn’t be frightened of low unemployment, the object of our economic policy is to get low unemployment. So the moment we actually look like we are getting it, we shouldn’t wake in fright and try and stop it, that is where we have been trying to get to for 30 years, this is not failure, this is a success.

JOURNALIST:

On the leadership questions Treasurer, you are going back to Parliament, Parliament will resume soon, is it just business as usual for you and the PM now, that has just sort of blown over or where does it sit?

TREASURER:

Well I have been over that ground, I have answered every question that every inventive journalist could even imagine, so I am not going to continue to go over it.

JOURNALIST:

Treasurer, what do you think of wind farms?

TREASURER:

I wouldn’t want one in my own backyard.

JOURNALIST:

Why not?

TREASURER:

Because I think they look very ugly.

JOURNALIST:

Is that your only reason for not liking wind farms, because you think they are ugly?

TREASURER:

Well if you are asking me my view on wind farms, I think they are ugly, I wouldn’t want one in my street, I wouldn’t want one in my own back yard. There are people who may and if people do and if their neighbours are happy they are entitled to do it. There is no law against a wind farm. If you are happy to put a wind farm on your property and your neighbours are happy to do it and it meets all of the planning objections, you can do it, there is no law against it.

JOURNALIST:

What if your Environment Minister goes against the advice of his bureaucrats and doesn’t approve it?

TREASURER:

Well you have got to comply with all environmental requirements like every building and every structure. I say, this is not unique to wind farms, by the way, that you have got to comply with environmental requirements, every building has to comply with environmental requirements, every sub-division, every major development has to comply with environmental requirements. So there is nothing unusual about that, a wind farm is like any other structure, it has to comply with environmental requirements and on this occasion it was found that there was one that didn’t.

JOURNALIST:

Treasurer the suggestion in some of the figures that the housing market is starting to pick up again, is it too soon to have another upswing in the housing market given the level of household debt (inaudible)?

TREASURER:

The house purchase prices did grow in the June quarter by 1.1 per cent. But it was exceptionally strong in Western Australia with Perth house prices increasing 15.5 per cent through the year. Now the effect of that of course is principally the mining boom and the effect that that is having in Western Australia so you would expect that in Western Australia. We have seen a correction in the housing market generally over the last three or four years, that was very welcome. The increase that we had before was unsustainable, I had been calling for some time for a plateauing in relation to house prices. It may be that it is kicking up a little now, not so much in Sydney, I don’t believe, where the correction is still working its way through, but as long as we don’t see a strong increase in housing prices I think the fact that we’ve had a plateau over the last four years means that we shouldn’t be worried about a moderate increase.

JOURNALIST:

Treasurer, I don’t want to harp on the leadership angle but you mentioned on radio this morning that you expected an announcement from the Prime Minister between now and the election. Any idea when that announcement (inaudible).

TREASURER:

No.

JOURNALIST:

Have you had a chance to wish the Prime Minister a happy birthday?

TREASURER:

I have on many occasions and I am sure he would be having a great day.

JOURNALIST:

Do you think 67 is a fine age to retire?

TREASURER:

As I said, I am not saying any more about those issues.

JOURNALIST:

Treasurer, what do you think of Kim Beazley’s speech on uranium?

TREASURER:

Too little too late. It has taken him 20 years and when he finally gets around to it he has still got so many caveats on it that it hardly matters. He is right to get rid of the Labor Party policy, it would have been right 20 years ago but he is now doing it. But if he is going to get rid of the Labor Party policy on mines, he ought to get rid of the Labor Party policy on other aspects as well. And I would just say to him, better late than never, but it is very late and it is very little. Thank you all very much for your time.