Press Conference

Treasury Place,

SUBJECTS: December quarter CPI, superannuation tax, Senator McGauran

TREASURER:

The Consumer Price Index rose by 0.5 per cent in the December quarter and by 2.8 per cent through the year. These are welcome figures.

They indicate that inflation is moderate in the Australian economy, notwithstanding intense pressure which is coming from the oil price and petrol prices. As it turned out, in the December quarter petrol prices were a little lower on average than they were in September. And so petrol prices actually detracted from the Consumer Price Index.

We can’t be complacent about this however because as consumers know all too well, in the current month prices have gone up again. And unless they come back, petrol prices will contribute to inflation in the current quarter.

The good news however is that the increase in petrol prices does not seem to be having second round effects into the general economy. And this is where we have to remain very, very vigilant.

Over the quarter of December, as I said, petrol prices detracted somewhat from the Consumer Price Index. Health costs came down, largely because the Pharmaceutical Benefits Scheme cut in. Food costs were up and they were the significant driver of the increase in the CPI. We have also seen that construction activity, which is still strong in some capital cities, is keeping housing costs significant.

But overall a Consumer Price Index increase of 0.5 per cent for the December quarter which is very moderate. Through the year a CPI of 2.8 per cent. It is within the band that we set at 2-3 per cent. It shows that although the Australian economy continues to grow, pressures are moderate, but the message that I would take out of these figures is there is certainly no room for complacency.

JOURNALIST:

Treasurer, both you and Senator Minchin have recently suggested that we have to be very careful about further interest, further tax cuts sorry, because they might put upward pressure on interest rates. Is the economy really that finely poised you can’t afford further tax cuts?

TREASURER:

I have made the point that you wouldn’t want to overheat the Australian economy and put pressure on inflation because we know what the consequences of that will be. We have inflation at 2.8 per cent, we know that petrol prices are troubling our economy and so the point I would make is that anybody who thinks that we can engage in policy without carefully considering the macroeconomic effects is sadly mistaken. And I will make two points here, considering the macroeconomic effects from the point of view of inflation but also from the point of view of national savings, some people seem to think that we don’t need to run balanced Budgets any more or we don’t need to run surpluses. Households are not saving, businesses are not saving, the only component which is adding in net terms to national savings at the moment is the Government. If the Government gives that away then the dis-saving rate in Australia will be significantly more than it is currently.

JOURNALIST:

But can you fit in tax cuts with still retaining your responsible fiscal policy?

TREASURER:

Well bear in mind we are having tax cuts in the next financial year. They have already been legislated. There is a round of tax cuts which is coming on-stream as from 1 July. A lot of people seem to forget about that and they are already factored into the Budget.

JOURNALIST:

They haven’t had the impact on inflation or the Reserve Bank’s attitude to monetary policy as far as we can see. The Government tells us that the movement in the Budget from surplus to large or small surpluses hasn’t been large enough to worry the Bank, why would another round worry it?

TREASURER:

Well, let me make this point, when I brought down last year’s Budget in May of last year, over a four year period we introduced $22 billion of tax cuts. Those tax cuts were opposed by Labor and criticised by some financial institutions on the grounds that they would be too expansionary. I judged that they were consistent with our macroeconomic objectives, what are we now, seven eight months later, they have been. But you don’t want to think that this is the realm of never-ending possibility where there won’t be consequences if you move the basket too hard. There will be. And when we are setting economic policy in this country we are setting it with a view to making sure that we are not over-expansionary, keeping the Government in the business of building savings, making sure that growth is continuous and the other thing that we must bear in mind here is we don’t want to return to the old boom and bust. It is the last thing Australia wants because busts do a lot more damage than booms.

JOURNALIST:

Mr Costello, Richard Doncaster from Sky News, Senator Barnaby Joyce had a bit of a spray on Sky News today, he is essentially accusing you of orchestrating McGauran’s defection and he isn’t buying in to your denials and I guess he has also accused you of a lack of judgement. What, do you have a response to that?

TREASURER:

The decision that Senator McGauran made is made by Senator McGauran. He is a Senator who I think has been in Parliament for on and off nearly 20 years. This idea that he can’t make his own decisions, he does. And if you want to know what prompted his decisions ask him. He made it. Ask him.

JOURNALIST:

Do you support his move though?

TREASURER:

Well he made his decision and as I understand the situation he is no longer a member of the National Party and so the options are these: he sits in the Senate as an Independent and the Government loses it majority or he sits in the Senate as a Liberal and the Government retains it. Which do you think would be preferable for the Government and the Coalition?

JOURNALIST:

The other option is if he resigns and the vacancy is filled by the National Party.

TREASURER:

He is a sitting Senator and he has been elected. Relations between the National Party and the Liberal Party have always been strong. He has to my knowledge voted for all Government legislation and he has made his decision, he has applied for membership of the Liberal Party, the Liberal Party will make its own decision on that. But I don’t think it would be in the interests of the Liberal Party to have any Independents sitting in the Senate.

JOURNALIST:

Are you upset that the National Party has lost one member of Cabinet as a result of this defection?

TREASURER:

Well they haven’t lost a member of Cabinet.

JOURNALIST:

There is one fewer National Party Minister than there was.

TREASURER:

That is right. But they have not lost a member of Cabinet.

JOURNALIST:

Can you explain that please?

TREASURER:

Well they had three in the Cabinet and they have got three in the Cabinet.

JOURNALIST:

Ministry then?

TREASURER:

Look, as the Prime Minister said yesterday, these things are determined on proportional representations between the Parties, between the States, between the Upper House, between the Lower House. That is the way the arithmetic works. Now, you know, the best thing I think we can all commit ourselves to do, is to win more seats the next election. And if we win more seats at the next election then we will have better opportunities for representation.

JOURNALIST:

Do you think the National Party has much of a future in Victoria ?

TREASURER:

Well look, politics takes place at two levels doesn’t it. It takes place at the State level and at the Federal level. At the Federal level here in Victoria we have worked very well in Coalition, we have worked well with John Forrest, Peter McGauran, and I want to see us continue to work well. Unfortunately at the State level there is no Coalition but I have no influence over that. That is a matter for the State Parties concerned. They are going into an election in the course of this year and they will have to deal with that.

JOURNALIST:

Did you talk to Senator McGauran about his decision and try to talk him either in to it or out of it?

TREASURER:

I tried to neither talk him in to it or out of it. He notified me of his decision after notifying Mark Vaile. And I asked him what Mark Vaile’s response was, and I make it clear, I say I have said it before and I will say on the record he has been given no inducement, no job, nothing. He has been a Senator I believe on and off for nearly 20 years. He makes his own decisions. Now if anybody wants to know what motivates Senator McGauran they should ask him.

JOURNALIST:

Would you expect the agreement that delivers the second Senate seat every second election cycle to the National Party to remain in place or will the Liberal Party be seeking to renegotiate the agreement now that Senator McGauran

TREASURER:

I am not flagging any changes.

JOURNALIST:

None of your backers were promoted yesterday. What does that signal for your leadership ambitions? Long-term ambitions?

TREASURER:

Well you must have a very exhaustive list of my backers. I am not sure that I agree with your premise. And I don’t want to speak about it any further. Serious questions, any

JOURNALIST:

Can I come back to the economy? You talked before about two of your policy concerns being inflation and national savings. But Greg Smith a former senior Treasury and taxation official said recently that the Howard Government Budget surpluses have been built on the back of superannuation taxation and this was simply a transfer from the private to the public sector and therefore greatly diminished the economic benefit of surpluses. What is your response to that?

TREASURER:

Well I don’t agree with that because the only tax, for a short period a surcharge applied in relation to superannuation as you know, but other than that, which we abolished, but other than that, the only taxes that apply to superannuation are those taxes which were introduced by the Keating Government. We haven’t increased taxes on superannuation at all and you would know Alan that there are some newspaper outlets that claim that tax expenditures are growing too fast. The largest tax expenditure in the Federal Budget is superannuation. That is, superannuation is still so concessionally taxed that it appears as a tax expenditure and is the fastest growing tax expenditure. Now, I have actually defended it as a tax expenditure, that is, I have defended the concessional nature of superannuation taxation. But bear this in mind, if the taxation of superannuation were to become more concessional the tax expenditure would increase. And you would be aware that there are newspaper outlets that complain about tax expenditure.

JOURNALIST:

Are you ruling out therefore any change in the contributions tax?

TREASURER:

Well I am not speculating. I make this point, and I think the Prime Minister made this point earlier today, superannuation is concessionally taxed. That is, if you put money into superannuation, the taxes you pay are substantially less than if you take it as income. If you are on the top rate of tax and you have the employer put money into superannuation rather than take it as salary you get a 32 per cent discount on the tax rate. And the tax that you pay on the contributions is also rebated on the exit. Now, you know, let’s establish one point here very clearly that you get a rebate for the contributions tax and if you were to change your contributions tax of course you would have to change your rebate.

JOURNALIST:

Treasurer, which sectors are not passing on second round price increases? Companies such as leading manufacturers such as Amcor and Orica have indicated that they are passing on the price increases this month, are you confident that second round price increases are not yet to come?

TREASURER:

We have to remain vigilant here. We are living under, in dollar terms, the highest oil prices ever. And the consequence of that is that petrol prices are higher than they have ever been. Now practically every business in the country uses a car or a truck and this is putting enormous pressure on the economy as a whole. But the good news is, that because the economy is so competitive at the moment it has been harder for people to get price rises. And my message to manufacturers and my message to the distribution companies is this, that we want to keep the economy competitive, we don’t want to see prices rises increase, we don’t want to see price rises passed on because that would be bad for consumers and we don’t want to see them passed on because that would be bad for inflation and if inflation gets away in this country we all know the consequence. So we have to remain vigilant here. This is a way of summarising:- under trying circumstances, so far, so good.

JOURNALIST:

But how do you get them to keep, a lot of them are absorbing the costs now of the increases in costs so how do you as a Government keep them doing that?

TREASURER:

We keep the economy competitive and we say to any manufacturer or distributor or anybody else, take price rises at your own peril. There is a lot of competition out there and you might try and get one but your competitors might steal some of your market. And the other thing I would make, the other point I would make to businesses is of course that businesses are very profitable at the moment. It is not as if businesses are down to their last dollar. The business situation in Australia is quite profitable and I don’t believe that there is any grounds at all for the passing on of general price increases. And I am warning against it and I am saying that it will be bad for the economy if businesses try to do it. And the biggest pressure I am going to apply on them is competitive pressure.

JOURNALIST:

Mr Costello are you concerned

TREASURER:

Last question.

JOURNALIST:

at the threat by certain National Party Senators to cross the floor in terms of the McGauran defection?

TREASURER:

Look, my position is this, that the Government has been a very successful Coalition for nearly 10 years now. We have been able to accomplish some wonderful things. More people are in work than ever before, home mortgage interest rates are much lower than they were under the Labor Party, we are close to paying off Labor’s debt. We have been recognised probably as one of the most successful economies in the world and all of this is because we have had a good strong united Government. And I want to go on having a good strong united Government. It is in the interests of the Liberal Party, it is in the interests of the National Party but most importantly it is in the interests of the people of Australia. That is why we do this and I think that our two Parties have compatible aims and objectives, compatible aims and policies and the most important thing is to work together in a Coalition.

JOURNALIST:

What would you say to Fiona Nash then?

TREASURER:

Well that is what I am saying. Thank you.