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Nomination Of Australian Alternate Director To The Asian Development Bank
March 6, 2001
Interview with Susanne Latimore, Sky News – Economy
March 8, 2001
Nomination Of Australian Alternate Director To The Asian Development Bank
March 6, 2001
Interview with Susanne Latimore, Sky News – Economy
March 8, 2001


Transcript No. 2001/018



Hon. Peter Costello MP


Press Conference

National Accounts

Wednesday, 7 March 2001

12.00 pm



Today’s national accounts show that in seasonally adjusted terms, GDP declined by

0.6 per cent in the December quarter, a very disappointing result. Through the year growth

was 2.1 per cent and in trend terms, removing short term volatility, GDP grew by 0.1 per

cent in the quarter and 2.5 per cent through the year. Household consumption grew by 0.5

per cent, which was a slowing in the rates of growth for most of the previous quarters in

1998 and 1999. Retail trade increased in the December quarter following a fall in

September as the effect of the change to the new taxation system unwound. That is, the new

taxation system led to a decline in September, but that seems to have been unwound in the

December quarter. Dwelling investment fell by 15.4 per cent in the December quarter and

the fall in dwelling investment alone detracted 4.7 per cent from the December quarter.

Now there are obviously transitional effects caused by the new taxation system in relation

to dwelling investment – a point that I’ve been making now for some time, that

obviously there was a big bring forward in dwelling construction in the March and the June

quarters. There was a fall in September followed by another very significant fall in the

December quarter. And that fall alone accounts for the full amount of the detraction in

the December quarter.

However, forward indicators in the housing sector have generally strengthened and point

to improved activity levels for around the middle of this year. That will be supported

particularly by lower interest rates. And as you know the Reserve Bank cut interest rates

by 0.25 per cent this morning, meaning that since February, we’ve now had reductions

of 0.75 per cent in interest rates in the last month.

First of all, I call on all of the banks to pass that interest rate cut on immediately.

Last time, when interest rates, official rates were cut by 0.5 per cent the banks were

able to move much quicker than they have been in the past. I think there was a general

expectation of a rate cut this morning and the banks should be in a position to move. On a

standard $100,000 loan, that is a further reduction of about $20 a month to home buyers.

And taking into account all of the interest rate reductions since the Government came to

office, there are now savings on a $100,000 loan of about $270 per month. So, in relation

to the housing sector, today’s interest rate cut will be positive. Trends in approval

and finance appear to be picking up and by the middle of this year we would expect the

transitional effects of the new taxation system to have washed through the system.

Our net exports made a positive contribution to growth in both September and December

quarters. So we’re coming off in consumption, but exports is picking up some of the

slack and that has contributed to a sharp decline in the Current Account Deficit which is

a little more than 3 per cent in recent quarters. Inflation remains very low in Australia,

with the national accounts showing that it is of the order of about 0.3 per cent in the

December quarter in line with the CPI. The favourable signs for growth in the current and

future quarters are an accommodative monetary policy and budget policy, particularly

income tax cuts which took place on 1 July. Trends showing that housing construction

should be picking up by the middle of the year, inflation remaining very low and net

exports contributing to growth, particularly in relation to the exchange rate, although

obviously the international environment, both the United States and Japan continue to be

revised down. The December quarter detraction of 0.6 per cent is a very disappointing

result. There are a number of one off and transitional factors that have been taken into

account in relation to the December quarter, but the economy shows no serious imbalances

and in fact positive signs in relation to particularly exports and a turning in relation

to dwelling investment.


Are we heading for a recession Mr Costello?


This is a negative quarter. It’s one negative quarter. You have negative quarters.

We have a history of having negative quarters which are turned around by positive quarters

thereafter. Obviously it is disappointing to have a negative quarter, but policy is

directed towards producing continuing growth in the course of 2001. That’s what

we’d be….


What about another negative quarter. I mean is that an impossibility, can you be that

confident at this stage?


I’m not, I’m not in the business of forecasting future quarters. These

figures bounce around a lot and they are quite often revised. And so you’d be foolish

to actually make predictions, but the positive signs are one, that the one off and

transitional factors which are the new tax system and the Sydney Olympics, should by now

have passed through the system. December was always going to be affected largely by those

factors. You have an accommodative monetary policy and you have a competitive export

sector and no serious imbalances in relation to corporate profits or in relation to the

availability of credit.


(inaudible)…Reserve Bank…(inaudible) confidence which would continue to

dampen growth. Now aren’t these serious concerns?


Well, let me just find what the Reserve Bank said. The Reserve Bank’s decision was

of course to cut interest rates, taking into account a number of factors including the

inflation rate and including where it thought the economy was. But as I recall in its

statement, in the last paragraph, the Reserve Bank made the point that it considered that

prospects for growth were quite favourable. I think it referred to the fact that the

profit share was quite strong, that company balance sheets were in a good position, that

there was an availability of credit and if you read the last paragraph in that statement,

I think, they indicated they had a pretty benign view of the economic prospects.


Treasurer, do you believe that the, do you believe that the rate increases of last

year, with the benefit of hindsight, were (inaudible)?


Well, the last rate increase was some seven months ago. And it was six months after the

last rate increase that the first reduction in this cycle took place in February.

You’d have to say that views of the economy have changed pretty considerably since

August of last year. What’s changed? Well, first of all, in July and August of last

year there was a surge in employment. Nobody thought that would continue, I think 100,000

new jobs in July and August and discounts were made. But probably that influenced opinion

at the time. The second thing is that the world outlook has been very seriously revised

since August of last year. Through July and August people were continuing to revise up

growth prospects in the United States, now they’re scrambling to revise them down.

What caused a change in appreciation of the economic situation from August to now? I think

one of the factors in all of the Western economies, ourselves, Canada, the United States,

possibly Japan, was the world oil price. I think that the world oil price has had an

effect throughout the industrialised world. I think probably policy makers didn’t

fully anticipate the effect that the world oil price would have on activity and on

consumption. I’m not talking just about Australia here, I think it was one of the big

things the authorities in the United States are now saying, what changed US sentiments so

dramatically in December of last year, and one of the views now amongst policy makers in

the United States was that the world oil price and the effect that that had on consumption

had a larger effect than people expected. It certainly has had a big effect in Australia

because it has affected consumption. So, if you look back to August of last year, which

was only seven months ago, when monetary policy was being tightened, obviously there has

been a reappraisal, particularly in relation to the world economy and particularly in

relation to the way in which that will effect growth prospects.



Treasurer Costello, the Bulletin poll today has put the Coalition on its lowest level

of support ever. Why do you think…


Oh look, the Bulletin poll, as I recall, has always been a pretty negative poll for the

Government and I’m not going to give you a blow by blow description of polls.

But I think, as I said earlier, one of the things that affected spending patterns and

affected sentiment in the December quarter was the world oil price and petrol prices. I

think the world oil price, which has pushed petrol prices up 10 cents and more, has meant

that people have spent more on petrol and consequently less on other things. I think for

the household which has got a limited spending budget, the truth of the matter is if you

spend $15 or $20 a week more on petrol, you spend $15 or $20 a week less on something

else. And people just don’t have the discretionary spending so that if the petrol

price goes up they maintain their spending in other areas. I think that’s had a big

effect in Australia, I think it’s had a big effect on activity certainly in the

United States and other areas as well, and I think that has had an effect on consumer

sentiment. The second point I would make is this – you’ve got to remember throughout

the course of last year, commencing in February of last year, about a year ago, interest

rates were raised from February of last year to August by 1.25 per cent. Now, obviously

that has had an affect on sentiment. The good news is that they’ve now been cut by 75

basis points and that’s put money back in the pockets of homebuyers. But, I think

there were two factors that would have affected people’s discretionary spending in

the course of 2000 – one is petrol prices, and the other was the fact that interest rates

were being tightened last year.



Treasurer, the Opposition says the GST has also had an ill affect on spending and also

on the economy generally, but they’re not the only ones saying it, some sectors of

the business community are saying it too, that the new tax system has had a negative

effect on growth and on the economy. Do you accept that?


Well, let the Opposition speak for itself…



What about business?


Well, you asked me about the Opposition.



No, no, my point is that the Opposition is saying and business is saying….


Well, hang on, well, you know, I don’t want to interrupt you. But I’ll answer

the first part of your question and I’ll come to the second part of the question.

This is what the Opposition in fact said last year – Kim Beazley, the 3rd

February: “….the net fiscal stimulus in this tax package of more than $6

billion in the first year alone, and around $20 billion over three years, runs the risk of

fuelling consumption and overheating the economy”. Lindsay Tanner: “With

economic growth at around 4 per cent, an annual fiscal stimulus of around $6 billion over

three years is not appropriate at this stage of cycle. It is likely to cause policy

difficulties and have monetary policy consequences. The GST stimulus is likely to feed

consumption growth”. So, the Opposition spent all of last year saying that they

were opposed to the Government’s tax package because it would overheat the economy.

That was their attack on the tax package. It would overheat the economy and income tax

cuts amounting to a reduction in tax overall of $6 billion was loose and overstimulatory.

Now, this year, of course, the Opposition line is – no it wasn’t stimulatory and

risking overheating, no, no it has had the reverse effect, it has actually reduced

overheating or reduced growth. So, I think we can leave the Opposition’s attack out

of this equation. You might just ask yourself incidentally what would have happened if we

hadn’t cut income taxes as much as we did on 1 July 2000. I don’t think anybody

today and, you know, we can all go back and see what was being said, would accuse those

tax cuts of being too great. A lot people in this room probably did back on 1 July 2000.

Certainly the Opposition did.

In relation to business, well, I don’t know who you are quoting in relation to

business. But I think business would make the following points, I think they are fair

points – that monetary policy was being tightened throughout 2000. I’ve never known

anybody in business to support a tightening of monetary policy. That obviously had an

effect. You had a natural slowing anyway coming off consumption which had been

extraordinarily high in 1997, 1998 and 1999. I think the one area where you have had an

effect from the new taxation system is in relation to the housing sector. I’ve been

saying that for a long time. Cast your mind back to prior to 1 July 2000, builders had

order books that they couldn’t fill. I remember talking to journalists here who were

racing to try and sign contracts to get in before 1 July. And it had the effect of pulling

forward construction and construction contracts and there was all this talk about builders

being unable to finish their work, you recall, before 1 July, because there was this

incredible pull forward in March and June, and in September and December there has been a

very severe contraction. Building and construction were at twenty year highs and you have

seen a very severe contraction in the September and December quarter, and that has been a

big factor in today’s result. Now that is a transitional factor, that is a

consequence of the taxation changes. Another transitional factor, which is not a

consequence of taxation changes, is the Olympics. You’ve got the Olympics, were in

the September quarter, remember December is measuring movement off the September quarter,

and that is now working its way out of the system. So you’ve got some big

transitional effects in this quarter and as I’ve been saying for some time now you

won’t get a clear picture, absent transitional effects until you get into the March

and June quarters.



Is there more room for stimulation in this year’s Budget?


I’m not going to discuss this year’s Budget. We are working on this

year’s Budget as we speak.



Mr Costello, you (inaudible) on the effect of fuel prices on both actual behaviour and

(inaudible). Do you in retrospect admit that you contributed to the severe political

problem by the price at which you, the price you struck for the excise, cut the price from

which flowed pressure for change?


The price at which we struck on 1 July 2000, as I recall, was 90 cents. And in the lead

up to that, the average price in capital cities was below it – it was in the

80’s. We actually erred on the side of a high price.



Everyone at the time said that was not the case……..


No, no. The strike price, I don’t think anybody’s, there was a lot of

argument about the methodology, but I don’t think anybody suggested that the strike

price as of 1 July 2000 was too low. If you look at the all capitals’ prices

throughout the course of June, they were actually below 90. In fact, if you go back

further, they were significantly below. But what was happening all the way throughout the

year 2000 was that petrol prices were rising as the oil price rose. By July of 2000 they

were still marginally below 90. But by the time you got to December of 2000, I am talking

about capital city prices here, they were closer to a dollar. It’s the world oil

price, exchange rate movements, all the way through the year 2000 that petrol price was

climbing. It wasn’t climbing because of tax changes…


So, you made a mistake is that the bottom line…


Well, hang on, it was climbing because the world oil price was climbing and exchange

rates were moving. Now, we struck a price at ninety cents. Last week, we cut the fuel

excise. When we cut the fuel excise last week we said we had changed our policy, we wanted

to reduce the amount of tax. But I made the point when we reduced the amount of tax, and

we reduced it 1.5 cents a litre, and we have abolished indexation, I made the point that

this was not going to abolish the world oil price nor the exchange rate effect. What it

was going to do, was, it was going to take 1.5 cents a litre off the excise, which was the

right decision, which the public welcomed. People are saying, oh yesterday, prices went

up. Yes, prices went up yesterday, not because of any taxation change but, because the

drivers of the petrol price was still there – the drivers of the petrol price, the

world oil price, the exchange rate and competition in the market.


…(inaudible) there is a slowdown in these figures out today, does this change your

thinking on the Budget and should you allow it to naturally go into deficit?


Oh, look I am not going to talk about the Budget today, I never do. We are working on

the Budget as we speak and you will see it on Budget night.


(inaudible)…in surplus, you are absolutely sure that this year’s Budget will

be in surplus?


All of, yes, all of the indications to date are that it is, yes.


Treasurer does the Australian dollar exchange rate accurately, does the Australian

dollar exchange rate accurately reflect the current economic conditions and economic

outlook for the Australian economy?


Look, the exchange rate, as you know, is something that the Government doesn’t

fix. We have moved to a floating exchange rate and as a consequence of that we accept that

it will move up and it will move down. But, I refer you to the statement of the Reserve

Bank that was issued today. In Australia, we are getting growth out of exports, our

company balance sheets are in good shape, the profit share is quite high by historical

standards, inflation is low, and there are strong reasons why the Australian economy will

enjoy firm prospects.


Mr Costello, you are saying that you’re confident that the economy will bounce

back and will still be (inaudible), therefore, to include voter (inaudible) in relation to

the Coalition. But what else should the Government do to improve that?


I think the Government will continue to deliver a low inflation, which leads to a low

interest rate environment, which will be good for home buyers, and it will be good for

consumers. You have got to remember we are coming off a period where interest rates rose

throughout the course of last year, and now they are coming down . That is good for

families, that is going to be good for their consumption. We cut interest rates, we cut

taxation rates on 1 July 2000. The Prime Minister gave an example in the House of

Representatives, yesterday: single income family, three kids, earning $30,000, got a net

improvement of $70 per week. That is going to be underpinning good consumption and that

will flow back into consumption and will flow back by mid-year into housing construction.


Mr Costello, you upgraded your growth forecasts by a quarter of a point to 4 per cent,

which is over three months ago, it was right in the middle of this December quarter, which

has now shown a contraction. Do you take responsibility for that decision or is it really

the result of bad advice from Treasury?


Oh look, we always take advice on these things, but we always make our own decisions.

We always make our own decisions.


Mr Costello, the Government has, the Government will stake its claim for re-election

on, largely on the basis of it is the best equipped party to manage the economy.

Isn’t that claim in tatters as a result of today’s result? Doesn’t this

undermine your re-election prospects?


Well, I think the Government’s record is a very strong record. And let’s

compare it to Labor. The home mortgage interest rate today is 7.3 per cent, passing on

today’s official interest rate cut. When we came to office it was 10.5 per cent.

Today there are more than 700,000 Australians in jobs, that weren’t in jobs when we

came to office. Today the Budget is in surplus and we have re-paid $50 billion dollars of

Labor’s $80 billion dollar cumulative deficits in its last five Budgets. This is a

Government which has reformed the Australian taxation system, which will give Australia

long-term benefits. And the proof is in this pudding, regardless of what the Opposition

says about the taxation system, there is one undeniable fact – if it ever gets

elected it wants to keep it. Regardless of what they say, there is one undeniable fact,

that they are desperate to keep the reforms that this Government put in place. Why?

Because they know, through all of the rhetoric, that tax reform had to be done in

Australia. The difference was, the Government had the courage to do it and the Lazy Party

wanted to follow it. So, I think the Government’s economic record on interest rates,

on inflation, on jobs, and in relation to the big structural changes in the Australian

economy puts it in a very strong position. Let me ask you this question: after five years

in Opposition, can you think of an economic policy of the Labor Party? They have had five

years to come up with one now. The only thing they have done…


They won’t sell Telstra?


That’s an economic policy? They won’t sell Telstra? After five years that is

their economic policy. Over five years in Opposition, the only thing they have ever come

up with is, they are so against tax reform that they want to keep it. Now, you have got to

ask yourself, with a record like that, what kind of managers would they be? I think we all

know, deep down in our hearts, don’t we.


Treasurer, what do you say to voters…


This is the last question.


Treasurer, what do you say to voters who would be inclined to judge the

Government’s performance as economic manager, using a bench mark test for the

Australian dollar exchange rate, and look back at the dollar in March 1996 and see it was

about seventy-eight US cents, and see it today, it’s fifty-one, fifty-two cents US,

and would (inaudible) the Government out against that measure.


Well, I think, and I have said this over and over again, that the story of exchange

rates in the last year, has been principally a story of the US dollar. That’s

principally what the story has been. The US dollar in relation to other currencies. Now,

there has been a huge capital inflow into the United States, sooner or later, that capital

inflow – you would think – will come to an end. But, the story in international

exchange rates, over the last year, over the last 18 months, has not been a story of the

Australian dollar, it has not been the story in the exchange rate markets, it’s been

a story of the US dollar. And I think I have probably spoken about that at length

previously, so I won’t go any further.

Thank you all very much for your time.

Thank you.