TRANSCRIPT
of
THE HON PETER COSTELLO MP
Treasurer

Press Conference

Parliament House, Canberra
Wednesday, 23 October 2002

12 noon

SUBJECTS: Consumer Price Index, Reserve Bank, economy, child care costs,

First Home Owners Grant, defence spending, Iraq, hand guns, Asia, drought

TREASURER:

Today’s Consumer Price Index for the September quarter shows that inflation

pressures are contained in the Australian economy with the quarterly increase

being 0.7 per cent.

Through the year the 3.2 per cent is a consequence of the dropping out of the

abnormally low September quarter for last year. But as the 0.7 per cent shows,

this is consistent for the current financial year with the Government’s forecast

of 2½ per cent for the CPI through the year in 2002-03.

During the quarter price increases were recorded for housing. Fruit and vegetables

increased quite significantly due to drought restricting supply and pushing

prices up. Holiday travel and accommodation was up. A range of items actually

fell in price during the quarter: clothing and footwear, meat and seafood, petrol

and motor vehicles.

As we look at other measures of prices in the economy we see price pressures

well contained. The Producer Price Index released earlier this week shows that

there are limited upstream price pressures, the final commodities index increasing

by 0.5 per cent in the quarter and 1.4 per cent through the year.

Wage pressures do not appear to be significant. And with ongoing productivity

there are few pressures on business margins.

In a difficult international environment, a very difficult international environment,

Australia continues to be one of the world’s strongest performing economies

with good growth and low price pressures. Today’s Consumer Price Index increase

of 0.7 per cent is consistent with the Budget forecast, consistent with expectations

and consistent, over the course of 2002-03, with contained inflation.

JOURNALIST:

Mr Costello do you have any sympathy for the Reserve Bank which is having to

grapple with a very strong domestic economy, housing boom on the one hand, but

a fairly subdued sluggish world economy on the other hand?

TREASURER:

I think all policymakers are grappling with a difficult situation at the moment.

We are. The Bank is. Obviously it is a very difficult international environment.

We have Japan in recession again, Germany and France very sluggish, Europe giving

no impetus to world growth, the United States which has been in a recession

and is emerging, but is emerging slowly. You have had massive falls in relation

to stockmarkets including Australia. It has been less in Australia, but including

Australia, and it is a very difficult international environment. You have the

prospect of potential war in the Middle East which is influencing peoples’ thinking

and you have the prospect of oil price rises. Now as you look around the world,

the Australian economy continues to grow. I do not see any evidence of unsustainable

growth. I think that probably housing has peaked. I think we are seeing already

in the dwelling and unit markets oversupply which will reduce rents and reduce

prices. And we are also experiencing severe drought in this country. The drought

in particular is likely to have a downward effect on what our growth otherwise

would have been. So in a difficult international environment with some big challenges,

I do not see evidence that the Australian economy is overheating.

JOURNALIST:

Treasurer, are you surprised at the 11 per cent rise in childcare costs, given

that low childcare costs has been something that the Government’s been quite

pleased about, and do you know what has driven that, and on housing which has

gone up, do you have any response to Dick Warburton’s suggestion that the First

Home Buyers Scheme should be scrapped?

TREASURER:

Well, in relation to childcare I would have to look carefully at the figures.

But they have reduced significantly since the New Taxation System came into

effect, and notwithstanding any rises in this quarter, they would still be significantly

lower than they were a number of years ago. But I will have a further look at

that.

In relation to the First Home Owners Grant, you are aware that for a time it

was $14,000 for a first home buyer buying a newly constructed home, the maximum

amount that is available now is only $7,000 for a first home buyer whether it

is new or already constructed. That was effected as from 1 July of this year.

It is Government policy to retain that because that is the converse side of

introducing GST. You have got to remember that people are now paying GST on

the construction of new houses so, unless you were buying a very inexpensive

house, the amount that you get in the grant more or less equalises out the tax

that is collected in the transaction. I think it is fair to keep that.

JOURNALIST:

Treasurer is it a problem that the 3.2 per cent annual figure is just outside

the so-called safety limit that the Reserve Bank seemed to have set at 2-3 per

cent? Does this suggest that they will be reviewing monetary policy, perhaps

with a bit of a jaundiced eye?

TREASURER:

I do not think they will be reviewing monetary policy in the light of today’s

figures because what you have had today is 0.7 per cent for the quarter. It

was 0.7 per cent for the quarter before. The general view and it is certainly

our view, is that that annualised rate 0.7, 2.8, is probably likely to come

off. And through the year is likely to be about 2½ which is thoroughly

consistent with the band. When you are looking at inflation you are always looking

down the track. What you have seen in this figure is when the abnormally low

September quarter figure last year dropped out, you put this figure in, it is

a 3.2 per cent through the year outcome but as you look down the track through

2002-03, most people, including us, believe that the pressures are likely to

abate and probably inflation will be a little lower at the end of this financial

year than it is now.

JOURNALIST:

Treasurer, your analysis that you just put forward of the international and

local economic forces seems to amount to a pretty good case for the Reserve

Bank not putting interest rates up. Do you agree with that?

TREASURER:

Oh, I am not in the business of speculating on future interest rates movements.

As you know I have carefully, having put in place the monetary policy, I have

carefully eschewed doing so. But, I do, as being responsible for economic policy

in Australia, I do have the responsibility of giving an assessment of the risks

and on the international scene there are few bright spots. I am just back from

the IMF/World Bank Meeting, Europe is very sluggish, Japan is in recession,

the United States has been in recession, it is emerging, but it is emerging

slower than was expected. And these are the three great centres of growth around

the world. And I guess the fact that we have been continuing to grow at 3 to

4 per cent has kind of shielded us from the realisation as to how disturbing

the international environment is. Now, adding to a pretty disturbing international

environment you now have in Australia a significant drought. And we have all

been hoping that the rains would come. But they have not. And there does not

appear to be any great prospect. So that you now have a domestic factor which

is cutting in. We will be looking at our Mid Year forecasts for November, but

you know, we will have to take into account probably the downside factors which

have occurred since the Budget.

JOURNALIST:

Treasurer, do you also feel it in your bones that there is going to have to

be an increase in defence spending as a result of recent events, and in particular

would you anticipate that having to occur during the current financial year?

TREASURER:

Look, the biggest issue in relation, there are two issues here. There will

be heightened security matters in the wake of the Bali bombing. And I put that

in the category of security. And that undoubtedly will happen and we have already

been discussing heightening security. Separately to that is the defence issue.

And the biggest defence issue in the near-term of course is Iraq.

Now I am not in the business of speculating on Iraq. I hope that the UN passes

a resolution that there’s full compliance, that Saddam Hussein dismantles his

weapons of mass destruction and no military action by anybody is required in

Iraq. That’s what I hope. But people say, “What if that doesn’t occur?”

And all I can say to you is that if that doesn’t occur, we would have to look

at the situation in the light of what then happens, but I’m not going to speculate

on it now.

JOURNALIST:

Well, what about heightened security, as you say, you’ve already been discussing

that, are we talking of the same sort of magnitude again of the additional measures

you introduced after September 11?

TREASURER:

Well after September the 11^th in this year’s Budget, over a 4 or

5 year period, we outlayed measures increasing spending by $1.3 billion. So,

and that included things like the Incident Response Regiment, capacity to deal

with chemical, biological and nuclear (inaudible), heightening safety on airlines,

air marshalls that we put in place, all of those measures. So a very large amount

was done in the May Budget in response to September the 11^th and

I think as we look back on that, it was a wise investment. Now the terrorists’

threat moves even closer with Bali. So we look again and there might be a need

for some new measures, but they won’t be of the order of the measures that we

put in place in May.

JOURNALIST:

Do you think there are too many hand guns in our society, and what’s your views

on the push to get rid of them?

TREASURER:

I think there are too many hand guns in our society. When you see the events

at Monash University, and I pay tribute to the people that were engaged in the

rescue and I extend to the students and the staff every good wish in what is

going to be a very difficult time, but when you see that the suspect allegedly

was entitled to own numbers of guns, you wonder how this can happen? You would

really wonder why anybody living in the suburbs of a major city needs hand guns,

unless they’re a soldier or a security guard, why they need them? Why they need

one, let alone why they need five? And you’ve really got to ask yourself how

it is that people can own numbers of guns in the suburbs.

JOURNALIST:

You’re not convinced that a sporting shooter like a tennis player needs more

than one tennis racquet, needs five guns?

TREASURER:

Look, some of these guns didn’t look to me as if they were sporting shooter’s

guns, Paul. And you know, you just wonder why you have take them home. I can

imagine people who are sporting shooters might have them locked in armouries

at clubs or something, but why you would take your guns home, five of them or

seven of them or whatever the allegation is, is beyond me. And the fact that

this has happened and somebody has now used those guns, so it’s alleged, to

kill people, it makes you wonder why we can’t tighten the laws. I think we should,

I think we should look at it very carefully, tightening these laws, I really

do. Absolutely.

JOURNALIST:

Would you support moves for the Commonwealth to take charge and have a national,

you know, hand gun register?

TREASURER:

Well certainly the Commonwealth is going to discuss this with the States, and

I would urge the States, I think the public is very strong on this. Look, there

was a lot of controversy when we took the stand that we did in relation to long

arms, rifles and so on, but it was the right decision, and the majority of the

public supported it strongly. And I would say to the States, I think the public

has a pretty strong view on this, they can’t understand why people in the suburbs

need to own hand guns and why they need to own numbers of hand guns, and they’re

worried about the risk. And they are right to be worried about the risk. And

governments have a responsibility to ensure that it’s so tough regulation here

that we do everything we can to make sure those guns don’t get into the wrong

hands.

JOURNALIST:

Mr Costello, in a speech earlier this month, you described the importance of

Australia engaging with Asia, in the wake of the Bali tragedy. One commentator

at least described your language as “Keatingesque”. How do you feel

about that description? And do you want to elaborate on why it’s important that

Australia does engage with Asia?

TREASURER:

Well I don’t think it was supposed to be a compliment, and I certainly didn’t

take it as a compliment.

JOURNALIST:

(Inaudible)

TREASURER:

Was it you was it, okay, well. I’m willing take compliments from you Tim, but

could you make them nicer in the future. The, look, I said what I said. And

the point I was trying to make here was that Australians were killed in Asia

and that Australia’s security depends on Asian security. We have our citizens

and our young people in all of the major centres through Asia. They’re working,

they’re living, they’re part of the community, they’re investing. And their

lives are at risk if we can’t enhance security in Asia against terrorism. And

my point is that Australia has this interest and so does Indonesia, it’s not

just Australians that were killed in Bali, there were a lot of Balinese, there

were some Singaporeans, and some Koreans and we as a region have a common cause

in fighting terrorism in our region. And as an advanced economy, Australia can

help. We can help in identification and chasing down leads and forensic science.

And we’re going to have to take this relationship further and further in a security

sense. And I tried to compare it to the way in which we sought to take the relationship

further in an economic sense during the `97-`98 economic crisis, that we stepped

up and we heightened our engagement, and in the wake of this terror in Bali,

we have to step up and heighten our engagement. And I feel that the Government

is moving on this agenda, obviously with the number of people and the assistance

that we are doing. I’m not for a moment saying that the Government hasn’t done

it in the past, we have, but what is the lesson out of this, the lesson is we

have to heighten our work on law enforcement and security, and I’d go further

on economic matters as well.

JOURNALIST:

Treasurer, can I just ask about the economic impact, sorry the impact of the

drought on prices? I see the fruit and vegetable prices going up. Do you expect

that to continue, and do you expect to see prices change for other products

because of the drought?

TREASURER:

Undoubtedly the increase in fruit and vegetables is partly related to the drought,

and that’s for this reason: that the drought will reduce supply, as you reduce

supply, and, you know, demand stays the same, the price will go up. And any

other products that where supply is reduced because of demand have the same

effect. Now it may in the short term actually have the reverse effect in meat,

that is, that a lot of farmers are getting rid of stock and increasing supply

in relation to meat. So that may be one of the reasons why meat prices came

off. But it’s the impact of the drought on prices, is the impact of the drought

on supply. If the drought goes long enough then the supply of meat would reduce

as well. In the short term you get an increase in supply of meat, as people

de-stock and then if it continues, then your supply is restricted and that has

an effect in relation to meat. So it’ll be pretty uneven, but the biggest effect

of the drought of course will be in relation to farm incomes and in relation

to all of the people that rely on farm incomes, people in rural centres, machinery

supplies, everybody else. We’ll be assessing that as we update our forecasts.

JOURNALIST:

…(inaudible)…

TREASURER:

Well, we’re assessing that. I’m not going to make…look, drought will have

an effect on growth. I haven’t, I’m not in a position to announce an assessment

but when we do our mid-year review, we will. Sorry, Tim.

JOURNALIST:

You said before you thought that the housing market had overextended and that

there was going to be a fall coming in rents and prices. Do you think it’s going

to be something significant enough to have an impact on consumer spending or

will it be a pretty minor fall? And secondly, next year you have to sign a new

contract with the Reserve Bank Governor, and there’s been criticism in the markets

that the Reserve Bank’s powers at the present don’t really extend to asset prices.

It’s something that they’re not asked to target. Do you think this is something

that might be considered as part of the next contract?

TREASURER:

No I don’t think, I don’t think monetary policy is the arm that you use to

target asset prices. It’s an extraordinarily blunt instrument. The only way

in which you could use monetary policy to target asset prices is by sending

the real economy into reverse, so that it affects asset prices and if that’s

your goal it is not much of a goal, and the other thing I think about monetary

policy is that you can ask it to do some things well, and the less things you

ask it to do, the better it will do them. But if you ask it to do too many things,

you run the risk that it won’t do any of them well. At the moment we ask it

to have an inflation target and I think frankly the policy has worked pretty

well and I don’t have any thoughts of changing our current monetary policy.

Thanks