Joint Press Conference with the Prime Minister

The Hon John Howard MP

Prime Minister’s Courtyard

Parliament House, Canberra

Wednesday, 8 August 2007

10.15 am

SUBJECTS: Interest rates, economic management, Queensland local council amalgamations, National Plan for Water Security

PRIME MINISTER:

Well ladies and gentlemen the Treasurer and I have called this news conference to comment upon and take any questions on the decision of the Reserve Bank this morning to lift the official cash rate by 0.25 per cent.  I am aware, and the Government is aware that this decision will hurt some homebuyers and we’re very conscious of that and it will have an impact on some household budgets.  That is all the more reason that we were very pleased that we had a sufficiently strong budget position to provide tax relief and other benefits to other families in the recent budget which was the fifth budget in a row where the Government was able to provide taxation relief whilst still retaining a very strong fiscal surplus, establish the Future Fund, complete the payment of the debt obligations incurred by former governments.  What this decision by the Reserve Bank does is to place economic management once again front and centre in the political and social debate in this country.  It’s a reminder of the balancing act that good economic management represents.  It’s a reminder that even in a strong economy there are pressures and challenges which if not properly managed can undermine the fundamental strength of the economy.  There is nothing in today’s decision which suggests that the economy is weakening, rather the very strength of the economy as identified by the Governor as the principal reason why there are pressures necessitating this interest rate adjustment.  We should, of course, keeping it in perspective, remind ourselves that housing rates at present, after the increase, will still be lower than they were at any time under the former government and the average housing interest rate under the former government of 12 and three quarters per cent is a full four and a half percentage points higher than what the housing rate will be as a result of today’s increase.  I think the other comment I would make before inviting the Treasurer to make some comments and put the issue into economic perspective, is to say that the worst possible thing any government could do at the present time is to embrace a policy that would put upward pressure on inflation and therefore on interest rates and I think particularly of Labor’s intention, if it wins government, to dismantle our industrial relations reforms.  That will, by re-establishing a centralised wage fixing system, lead to a wages break out in areas of the economy that can’t afford wage increases, with negative consequences not only for employment but also for higher inflation, and through that, higher interest rates.  Changing industrial relations will put upwards pressure on interest rates.  It will be a fundamental policy reversal that will be bad for the economy and bad for interest rate settings.  Treasurer.

TREASURER:

Thank you very much John.  As you know, this morning the Reserve Bank moved in the market to increase the official cash rate by 0.25 per cent to 6.5 per cent.  The statement released by the Bank made it clear that the reason why it increased the official cash rate was that domestic economic demand has signalled a pick up in the pace of growth, that is, that the economy is strengthening.  It noted that there are international factors at play at the moment which have given turbulence on stock markets, particularly developments in the United States, but looked through those to see a strengthening Australian economy.  The official cash rate of 6.5 per cent is lower than it was when this government was elected and that is after 11 years of growth and 2.1 million new jobs.  The fact that after the longest continuous expansion in Australian history and 2.1 million jobs the official cash rate is still lower than it was when the Government was elected indicates the distance that we have travelled since 1996 and the improvement in economic fundamentals.  As the Prime Minister said, the standard variable mortgage rate which you would expect if this is passed on in full to be 8.3 per cent, is lower than the standard variable mortgage rate at any time under the previous government, is lower than it was at any time during the previous government, and is about 4.5 per cent lower; this rate is about 4.5 per cent lower than the average that it was over the complete period of the previous Labor Government.  One of the things that is working very much in Australia’s favour at the moment is an increase in the Terms of Trade.  The prices we are getting for our exports, compared to the prices that we are paying for our imports, has improved markedly.  That is bringing a lot more money into the country.  In previous Terms of Trade booms, by this stage we would be in double digit inflation.  The fact that our inflation will still be consistent with our target of two to three per cent over the course of the cycle, indicates how much stronger we are today.  And I just want to echo what the Prime Minister has said, nothing could be worse than to go back to the old industrial relations system which would pass on the income from this terms of trade boost right throughout the Australian economy, set off inflation and bring about the inevitable punitive interest rate correction.  That is the risk of Labor. Labor’s risk is to go back to an industrial relations system that let us down in the past and will not allow us to cope with the future.

JOURNALIST:

…last election for keeping interest rates low, do you accept the blame for today’s rise?

PRIME MINISTER:

Well today’s rise is the cause of a number of factors and I accept that I will be criticised, the Government will be criticised, I accept that.  But I do point out, as the Treasurer has done, that if you factor in the expected increase in the housing rate of today’s announcement, you’ve got a rate of 8.3 per cent and that’s a full four percentage points or more below the average of the former government and less than half of the notorious 17 per cent.  I mean they hit 17 per cent under the former government and I have no reluctance to say again, as I said during the last election campaign, that they will always be lower under us than under a Labor Government.  And the fact that Labor is committed to an inflationary change to industrial relations in this country only reinforces our argument.

JOURNALIST:

Do they have a chance of being disappointed…in 2004 you went on low interest rates, there was a lectern saying keeping interest rates low.  They’ve now risen five times, do you think some voters might just feel a little bit disappointed?

PRIME MINISTER:

Well look what voters feel about all of these things we’ll find out on election day, I’ll find out, the Treasurer will find out and you’ll find out on election day.  Voters take a lot of things into account. Voters look at the current state of the economy, they see a 33 year low in unemployment, they see a booming economy, they see the pressures of the boom, the pressures of growth and they ask themselves who’s better able to manage and maintain this booming economy, do we really want to elect a government that is going to take us backwards in the area of industrial relations with all of the inflationary consequences of that?  So I would say to voters, yes, reflect on what I have said in the past about interest rates but also reflect on who is better able to manage the finally balanced challenge of economic management and economic policy at a time of great prosperity, is it wise to throw away one of the great reforms that has helped to give us this prosperity?

JOURNALIST:

If this is a function of a booming economy and the economy continues to boom, won’t interest rates just continue to go up?

PRIME MINISTER:

Not necessarily.  They will certainly go a lot higher if you take away some of the reforms that have helped underpin the boom.  Our criticism of Labor in relation to industrial relations is that if you go back to a centralised system, high wages paid in areas of the economy that can afford them will flow through to other sectors of the economy and that will have damaging consequences for employment, as well as for inflation, and thereby interest rates.  And that is a view that’s widely shared in the business community and is a view held by many economic commentators.

JOURNALIST:

…Governor’s statement which says this is the fault of the states?

PRIME MINISTER:

No I’m not saying the Governor has said it’s the fault of the states, let me deal with the issue of the states.  We are not saying that they are the only culprits, but what we are saying is that state borrowing is adding to the pressures in the economy which are referred to by the Governor.  He doesn’t name state borrowings.  But does anybody here argue that if we were out in the markets now in deficit, borrowing to finance that deficit, that that wouldn’t be exerting upward pressure on interest rates?  The Opposition would be crawling all over us at question time if we had gone into deficit saying that it had put upward pressure on interest rates.  Well if that were the case, hypothetically, if we were in deficit, why on earth isn’t it reasonable to point out that as states go into debt, and $70 billion of debt has the same impact on financial markets as a $70 billion Commonwealth debt, why isn’t it legitimate to list amongst the factors that are adding to pressures in the economy the extent of state borrowings?

TREASURER:

I just want to add a point on this if I can. At the moment there is a great deal of demand and activity in the economy, a lot of it led by the private sector, a considerable amount of it done by the Commonwealth Government.  The Commonwealth Government funds all of its infrastructure spending out of its revenues – out of its revenues – that is, we pay for all of our infrastructure spending and at the end of the day we save too.  The states will be borrowing $70 billion and that is putting additional pressure into what is already a strong economy.  Now I just want to make this point to you: the person who actually raised the impact of the states in relation to monetary policy was Ian Macfarlane.  He raised it in August of 2006 in The Weekend Australian when he said this, and I’ll just read you the quote because you asked for the quote, “I have been lucky, for most of my time fiscal policy has consisted of small surpluses.  The movement in the Government account has not been big enough to be important in the consideration of monetary policy.  It might become an issue because the states are now part of the equation.”  Now, he did that in August of 2006 in the round of state Budgets we saw the states become part of the equation and here’s the point: that that is adding pressure in what is already a strong economy and it would add less pressure if state infrastructure spending, like Commonwealth infrastructure spending was done out of its revenues rather than out of its borrowings. 

JOURNALIST:

Isn’t $30 billion worth of tax cuts also adding pressure?

TREASURER:

$30 billion worth of tax cuts, Paul, after they have been delivered is still consistent with delivering a surplus in addition, over and above, of 1 per cent of GDP.  Now, if $30 billion of tax cuts were paid by $30 billion of borrowings that might be one thing, but after $30 billion of tax cuts, to still be producing fiscal surpluses of 1 per cent of GDP shows in fact that you are living within your means and rather than borrowing and putting upward pressure on interest rates you’re putting downward pressure.

JOURNALIST:

Treasurer, would it be better for the economy if the states weren’t spending money on productive export infrastructure?

TREASURER:

What would be better for the economy is if the states did what the Commonwealth did, that is invested in infrastructure and still balanced their budgets.  That’s what would be the best for the economy.

JOURNALIST:

Given that they’re not doing that, would it be better that they weren’t borrowing…

TREASURER:

That’s what they ought to do.  Can I recommend to the states and bear in mind the Commonwealth has a huge infrastructure program going on at the moment.  We have from memory I think $12 billion in Auslink I, I think we have $25 billion in Auslink II.  We have the biggest, was it 25 or 22? We have $10 billion in water, we have the biggest defence procurement program that you’ve seen in a generation, but the point is that we pay for all of those things and balance our budget and save.  Now the point about the states is some things they do is good and some things they do is bad, but at the end of the day because they’re short of money they’re borrowing.  And my recommendation to the states would be this: do good infrastructure but do it with a balanced budget.  Get your recurrent expenses under control.

JOURNALIST:

Mr Howard, you said the most important thing was to avoid putting upward pressure on interest rates.  Should we take it from that that you won’t be announcing any new Commonwealth outlays between now and the election?

PRIME MINISTER:

No, you can’t take it from that that we won’t be announcing any new Commonwealth outlays.  Not all new outlays put upward pressure on interest rates, it depends how your budget is.  As the Treasurer rightly says, good spending is good spending providing it’s responsibly financed and if we can provide $30 billion of tax cuts and still have a strong budget surplus and still put away money into the Future Fund and still establish a higher education fund, then that’s good economic management.  You have to look at the impact of outlays and taxation relief on the overall budget and what we have been able to do is to provide all of these things, balance our budget, have a surplus and pay off debt.  Our criticism of the states is not the fact that they spend money on infrastructure, we all like spending money on infrastructure, but they finance it by borrowings. We finance it out of revenue and there’s an enormous difference. It’s a very simple difference but it does have a big economic consequence so I would say to you the measure of whether expenditure or tax relief is responsible is how it’s financed.  If it’s financed out of a surplus it’s good, if it’s financed out of borrowings it’s bad.

JOURNALIST:

Mr Costello, you’ve been critical, you’re on record as being critical of pre-election spending.  Do you have any special message for your colleagues in the next couple of months?

TREASURER:

Well let me say this.  Under the Charter of Budget Honesty there will be a pre-election fiscal outlook which will be released and under the Charter of Budget Honesty, any party that wants to submit its election policies will have them independently costed and we will do that.  We’ve done that in the last two elections, Labor hasn’t. And in fact in the last election I think Medicare Gold was dropped in for costing about 48 hours before the election so that the costing couldn’t come back before the vote.  Now we will have all of our policies independently costed and released under the Charter of Budget Honesty.  I ask Kevin Rudd to today announce that he will put all of his policies in for independent costing in time for all of his policies to be released.

JOURNALIST:

…what about the overall level of spending?

TREASURER:

And you will see that when all of our policies are independently costed as against the PEFO, the Pre-Election Fiscal Outlook, you will see how responsible they are and you will be able to judge and the public will be able to judge, and I demand, or I call on Mr Rudd to do the same.

JOURNALIST:

Prime Minister, are you concerned that New South Wales might pull out of your $10 billion plan?  They’re concerned that you’re not going to pick up the compensation of farmers as was originally promised.

PRIME MINISTER:

Compensation to farmers?  What in relation to buying back the entitlements?

JOURNALIST:

For the loss of irrigation allocations.

PRIME MINISTER:

Well the buying back of the entitlements, we are obviously going to honour that. We will honour everything that we offered on the 23rd February.  I have received a letter from Mr Iemma and I have written back providing him with the same assurances that I provided to Mr Rann and Mr Rann has said publicly that he accepts those assurances.  We will honour to the full what we said on the 23rd February.  I say to Mr Iemma, stick to the deal I made with you.  I made a deal with Mr Iemma and I made a deal with Mr Rann and Mr Beattie and Mr Stanhope.  Mr Bracks said he was going to ultimately come on board but he hasn’t and we are left with this lamentable situation where we’ve had to legislate separately and with a less desirable outcome, but a better outcome that we have at present.  So I would just say to Mr Iemma, you have no justification for pulling out because what I promised on the 23rd February will be delivered.

JOURNALIST:

Prime Minister on your decision to offer the local councils in Queensland AEC ballots if required, given that Premier Peter Beattie has said that this is going to be law on Friday and it’s a waste of money, could you explain what practical benefit there is in conducting such ballots because isn’t the only benefit here, political benefit for the Coalition?

PRIME MINISTER:

Well what about the right of the people of Queensland to express a view?  I mean I am astonished that a state government is actually threatening to fine people for expressing an opinion in a ballot.  I mean that is essentially what the Queensland Government is doing.  Are you suggesting or is Mr Beattie suggesting that once something has become law or as far as he is concerned he is not interested in people’s opinions?  I think it is a total travesty of democracy to not only refuse to consult people about what you are going to do that is going to affect them.  But having refused to consult them, threaten to punish them if they dare to express their opinion in a vote, and that’s really what he is doing.  So the answer is, the offer will remain and the offer is a very simple one, it’s not particularly radical or interventionist.  The AEC has conducted ballots for local government on a fee-for-service basis for years.  So there is nothing particularly new or radical, the only difference is that on this occasion we are offering to relieve the local councils of the responsibility of doing it.  And in the particular circumstances of what is occurring in Queensland I think that is a reasonable thing to do.  We are not saying that local councils have got to have ballots, we are simply saying if you want to have them, the AEC will help you and we will underwrite the cost and I think for Mr Beattie to turn around and carry on about constitutions and injunctions and so forth shows that he’s really getting a little drunk with power. I mean he is talking about having no opposition, he’s talking about this, that and the other, it’s about time Mr Beattie understood that even he with a huge majority in the Queensland Parliament is accountable to the people of Queensland, and to insult them by saying I’ll not only not talk to you, but if you dare express your view I will fine you.

JOURNALIST:

… just asking what the practical benefit of having these polls if it is already law?

PRIME MINISTER:

I think there’s always an enormous practical benefit in giving people an opportunity to express their view because it re-affirms their faith in democracy and, you know, if some of these local councils went ahead and held these referenda, the Queensland Government might be a bit reluctant to fine them and in fact they might have an impact on the attitude of the Queensland Government.  If you had a string of councils holding referenda, particularly those councils where there is very strong opposition to this proposal, and those referenda are carried by big majorities, I think that could have an impact, and in any event it would be a wonderful validation that popular democracy is still alive I Queensland and I think a lot of Queenslanders would like… I think this will be the last question, because I can see you are shivering Phillip.

JOURNALIST:

But isn’t that what elections are for, I mean you’ve taken economically conservative decisions that have been unpopular and you’ve said judge me at the ballot box, why isn’t Peter Beattie entitled to take an economically conservative decision and say judge me at the ballot box if you don’t like it? Why do you have to have these plebiscites in the interim?

PRIME MINISTER:

Well because you are dealing with the dismantling of a structure of government.  I mean we haven’t tried to dismantle any states or territories, we’ve intervened within our powers, but what he’s actually doing is dismantling a structure of government and what I find hypocritical about the attitude of the Queensland Government in particular, whenever we do anything they say you are riding roughshod over the states.  I mean our treatment of the states is a model of ultra-conciliation and warmth and compassion compared with the way in which local government in Queensland is being jack booted into submission by the Beattie Government. Thank you.

JOURNALIST:

Prime Minister what Peter Beattie is trying to do and what other state governments have done about council amalgamations is designed to reduce the burden on the public purse which is exactly what you are criticising the states for not doing in terms of their own budgets.  Why not support what is a sensible rationalisation?

PRIME MINISTER:

That is the argument that is advanced, but my response to that it is a perfectly legitimate thing and something wholly consistent with economic responsibility to say that if you are dismantling a structure of government, you ought to ask the people subject to that structure of government, whether they want that dismantling to take place.  Thank you.

TREASURER:

Thank you.