Transcript No. 2000/102

SUBJECTS: G20, CPI, wages, interest rates, mobile phone

JOURNALIST:

Treasurer, what sort of issues have emerged so far in the meeting today and what sort

of concrete steps do you think that this meeting can take?

I guess two issues have been raised on numbers of occasions. First, of course, the

increase in world oil prices and the effect that’s having on petrol pumps and also on

the Consumer Price Index. That’s a matter of concern to all of the developed and,

indeed, the developing countries. The second is volatility in exchange rates, particularly

the US dollar against the Euro, which has been the subject of some discussion inside the

meeting. The meeting is really designed to look at international issues, how to prevent

financial crises in the future, what can be done to strengthen the international financial

system. It’s clear that further work is necessary, particularly in relation to the

effect of globalisation on developing countries and we’ve had some discussion of our

progress to date and commissioned some further work in relation to it.

Do you think that they can actually reach agreement to, on the US dollar? Do you think

that, that’s been discussed but will any action be taken, do you think?

Well, it’s not my place to foreshadow action. It’s a matter that has been

raised as of concern, but any action that would be taken, obviously, would not be taken by

Australia. So it’s just something we’re not involved in at all.

A question from Australian television not related really to G20. The reaction to the

Australian dollar numbers, can you comment, with regarding, CPI?

The CPI numbers? Well, the Consumer Price Index for the September quarter was lower

than anybody expected. We had forecast in the September quarter that there would be a

one-off price impact of the change to the New Tax System of 3- per cent, on top of

underlying inflation of about – of a per cent and an outcome of about 4. As it turned

out, the outcome for September was better than anyone expected, at about 3-. We think the

impact of the New Tax System was 3, or a little under 3, and that the Consumer Price Index

over the year in Australia is showing, in raw terms, about 3. But if you take out

petrol, which adds about 1 per cent to that, the core inflation number is about 2 per

cent. And 2 per cent is low inflation. It’s down towards the bottom of the target

band. Now that doesn’t mean that we should be complacent about it, but the good news

is that the Tax System didn’t have the impact that even we had predicted, that the

economy was very competitive, that people have now been very generously compensated by

income tax cuts for price increases. And the best news is yet to come because the New Tax

System from here on, is going to start detracting from consumer prices. The abolition of

Wholesale Sales Tax, which will flow through the system in the December quarter and the

March quarter, and then on 1 July, we abolish Financial Institutions Duty – which is going

to detract from the Consumer Price Index – also stamp duties on shares. So from here on

in, we have a detraction and our starting point is much better than either the Government

or the private sector forecast, as recently as the last couple of months.

So with inflation at the bottom end of the 2-3 per cent target band, that’s

obviously good news for keeping interest rates down?

Well, it’s good news for consumers that prices haven’t raised as much as was

said. Let me just make this point: the Opposition, of course, said all prices would go up

10 per cent. Is that not what they said? Was that not their campaign for 2 years –

everything’s going to go up 10 per cent. We’ve come through the tax reform,

we’ve only got the first instalment, which is the instalment which puts things up,

and what was it? Probably under 3. And next quarter and the quarter after and the quarter

after – a detraction. So, all the way through tax reform, whose forecasts were right?

Well, ours were the best. But, if anything, they were on the up side and the outcome has

actually been on the down side. And I think the Opposition today ought to do a little bit

of apologising to the Australian people for all of the stories that they were putting out

during the long hard yards that were necessary for tax reform in Australia.

Well, Treasurer, is that the message which you are going to be taking to the unions who

are now saying that they want higher wages to compensate lower paid workers because,

regardless of whether you take GST out or petrol prices out, there has been – their

argument – a substantial rise in the CPI?

Well, even on their figures, income tax cuts have more than compensated for price

rises. This is the most important thing. We always said there would be price rises.

They’ve turned out less than we expected. But we always said that the cutting of

income taxes, which is a good economic thing, would put people in a better position. Their

after tax incomes would rise by more than prices. And that’s what’s happened. In

fact, it’s happened more than we expected that it would. So there’s no basis on

this, to go out and seek a wage rise. Seeking a wage rise, in fact, would be precisely the

wrong thing to do because that would try and build further inflation into the system, it

could effect interest rates, it could leave employees worse off. The thing to remember is,

that income tax cuts have made people’s take home pay better. Their take home pay has

increased as a consequence, more than the prices. There’s no need to go and seek a

wage increase because there’s more than generous compensation already built into the

system.

But what about the dollar, the Australian dollar in value now?

Well, the Australian dollar is a floating exchange rate and, as I’ve said on

numbers of occasions, in Australia, the important thing from our economic policy point of

view is to concentrate on fundamentals. What do we want? Strong growth, low inflation,

high productivity, falling unemployment, more jobs, a good budget position. These are the

things that we’re concentrating economic policy on. Over the long term, exchange

rates reflect fundamentals and it’s the fundamentals that we work on.

So do you see any relationship between the fall in the Australian dollar overnight and

the CPI figure?

I think what happened in overnight trading was related to what’s been the big

story on international exchange markets for quite some time, which is the movement between

the US dollar and the Euro. And that was the big story on overnight exchange rates. The

Australian dollar was affected by that cross trading, as it always has been. It

wasn’t that conditions changed in Australia. In fact, in Australia outcomes were

stronger than anybody expected – were stronger than anybody expected with lower

inflation.

The talks at this meeting, do they indicate that the strong US dollar is really

starting to hurt the US economy and do you think there’s potential for further G7

action?

Well, I don’t speak for the G7 and what the G7 does is a matter for them. All I

can report to you is obviously the big story in international exchange markets has been

the US dollar and the Euro, and there’s been a lot of discussion between the European

partners and the US about that. But I certainly can’t foreshadow G7 initiatives.

Given that the impact of the GST is now less than what was predicted in the Budget, do

you think the changes to the wholesale sales taxes and stamp duties will be in line with

the Budget impact that that will have on the CPI?

Well, they’ll definitely detract from consumer prices. This is – I don’t

think there’s any dispute about that, because our indirect tax system was at the

wholesale level, right. So when you took that wholesale sales tax off, as it moves through

the system it moves through slower. It’s got to go from the wholesaler to the

retailer, through transport and distribution, to the retailer, to the consumer. That tax

cut takes a while to flow through the system. When you put a GST on at the retail level,

that’s up front and that’s immediate. So you’ve had now the up front and

immediate price increase, and now you get the price reduction flowing through the system

– flow through in the December quarter, flow through in the March quarter. With

Financial Institutions Duty – again, that becomes abolished on 1 July – that

flows through in the September quarter of next year. So, you’re undoubtedly going to

see a detraction. There’s no doubt about it. You can argue about the amount. Whether

it’s going to be 1 per cent is the kind of expectation, the detraction that

you’d be getting over a period of time or a part of that. But there’s no doubt

that you’re going to actually see it.

There’s just one very quick question about Peter Reith’s mobile phone. Are

you aware of the situation with that and can you tell us if you’ve given a mobile

phone out to anybody, any member of your family?

I don’t give mobile phones to members of my family, no. They’re for my use,

and to the extent that they’re used, they’re used by me.

The Reserve Bank’s fully aware of those flowing-through benefits from the tax

system, do you think?

Oh look, the Reserve Bank – and we’ve had very close liaison with the Reserve Bank

right throughout the taxation reform process – and the Reserve Bank has made it very

clear, as the Government made it clear, that when we look at inflation we’re looking

at core inflation, we’re trying to abstract the one-off factors. And the one-off

factor is going to be tax reform. As I said, in the early days, a spike up. In subsequent

quarters, a spike down. But you look through it on both sides. So, just as I’m saying

we should look through the spike up now, when we get to the December and the March quarter

– which will be low- we should actually abstract the reduction from tax reform and try and

construct an on-going or core figure. And that’s got to be done on the upswing,

it’s got to be own on the down swing. And what we’re actually looking at is core

inflation. Thanks.