Interest rates, housing, dollar, beer, Opposition opportunism

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Dollar,  Interest Rates,  Backbenchers
March 31, 2001
2001-2002 Budget – Media Lockup Arrangements 
April 6, 2001
Dollar,  Interest Rates,  Backbenchers
March 31, 2001
2001-2002 Budget – Media Lockup Arrangements 
April 6, 2001

Interest rates, housing, dollar, beer, Opposition opportunism

Transcript No. 2001/031



Hon Peter Costello MP


Doorstop Interview

Senate Alcove Courtyard

Wednesday, 4 April 2001


SUBJECTS: Interest rates, housing, dollar, beer, Opposition opportunism


This morning the Reserve Bank cut official interest rates by 50 basis points, 0.5 of a

per cent and I call on the Australian banks to immediately pass the benefit of that

interest rate cut on to home buyers and to small business. Passing on the interest rate

cut should bring a standard variable mortgage down to about 6.8 per cent. It represents a

saving of $40 a month, it represents a saving of $40 a month on the standard Australian

home mortgage and when you add together the savings on mortgage interest rates from when

the Government was elected until now, Australian home buyers are now saving $3700 a year,

because the mortgage interest rate, when the Government came to office was 10.5 per cent,

and it should now go to 6.8 per cent. So, the standard Australian mortgage, the young home

buyer, will be now saving $3700 a year and that takes into account the further cut in

interest rates today, of 0.5 per cent, which should save them another $40 a month.

Now, it is also important that this interest rate cut be passed on to small business

because it is not for the benefit of the banks, it is for the benefit of home buyers and

for small business. And I call on the banks to pass on to small business immediately so

that they get the benefit of lower interest rates.

An interest rate which has got a 6 in front of it, apart from the previous period in

1999, 1998-1999, it is an interest rate that we haven’t seen in Australia since the

1970’s. These are historically low interest rates now, and I would say to young home

buyers, you now have the opportunity to get a $14,000 grant for the construction of a new

home and an interest rate of 6.8 per cent and this is a very good time to go out and to

buy your first home. It is a good time for business to be able to invest in plant and

equipment, and this is unambiguously good news for the Australian economy. I think

business will welcome it, home buyers will welcome it, and those people who want to see

the Australian economy continue to grow will unambiguously welcome it.


Are interest rates now where they should be at this stage of the cycle?


The interest rates started rising in the latter part of 1999 and through the year 2000,

and from memory they rose about 150 basis points, 1.5 per cent. In the course of this

year, the reductions to date are 1.25 per cent. So, they are just a little edge higher

than they were in 1999. But, if you look at it on the home mortgage interest rate, leaving

aside that period of 1999, you would have to go back to the 1970’s to find an

interest rate which was as low as this and so that is great news for young home buyers and

they now have got a First Home Owners Grant, too, of $14,000, so it is great time for

young people to buy their first home.


So, there is further room for the Bank to maneuver with interest rates?


Look, interest rates were cut this morning at 9.30am, so I don’t think we should

start speculating on the next movement. Let’s just take into account that interest

rates were cut by 0.5 of a per cent, or 50 basis points. That will be good news for home

buyers, good news for small business, and that will be good news for the Australian

economy. And those people that want to see a strong Australian economy, I think, will

receive it as unambiguously good news.


But what does it say about the state of the economy, that it needed a 50 per cent jolt



Well, what it says about the state of the economy, is, that we don’t have price

pressures, as the Reserve Bank noted that we can afford to cut interest rates in this

economy without running risks in relation to inflation, we can afford to help home buyers

and small business because we have the capacity to grow the economy. And that is

unambiguously good news.


Treasurer, last week, the Deputy Governor of the Reserve Bank told an audience in Japan

that he expected the economy to recover very quickly from the negative growth in the

December quarter. Now the Bank’s cut interest rates by a large amount for the third

time, third month in a row, what sort of signal do you think that sends to people about

the state of economic management in Australia at the moment?


I think it sends a signal that the economy has the capacity to grow strongly without

price pressures. Now, the Reserve Bank noted, in its statement, two factors.

One, the world economy is turning down. We know that, the United States’ economy

is turning down, Japan is still in the doldrums. So, the external pressures are very

muted. In fact the world economy is being revised down, probably for the first time since

the Asian financial crisis. The second thing the Reserve Bank noticed, of course, is that

you can actually talk an economy down. If you do it often enough, you can talk it down and

it can affect confidence, and the Reserve said it saw two parts of the economy that, where

you saw the possibility of a risk emerging. One was in relation to the international

situation, one was in relation to attempts to talk the Australian economy down. This news

will be positive in meeting both of them. But, you know, I say to those people who have

engaged in the policy of talking the economy down, the Labor Party, and trying to affect

consumer confidence, it is not something that is in your own long-term interests. I think

the Labor Party is going to find that its attempt to try and talk the economy down for

political advantage will backfire on it. It thinks it can have short-term opportunism, and

you saw that with the attempts yesterday, by Mr Crean, for a short, opportunistic, free

kick, in the Parliament and it backfired on him. And I say to them, they might think it is

clever in the short-term, but that is going to come back and bite them.


Treasurer, the Reserve Bank also said that an unexpected and unprecedented down-turn in

the housing industry contributed to the economy contracting in the last quarter of last

year. Everybody, every economist, everyone knows that that was due to the GST. Will you

now accept some responsibility for this slowing and the down-turn in the housing industry?


I have said on a daily basis, that the introduction of GST meant that people scrambled

to do housing construction prior to 1 July 2000. And, if you go back to the time of April

– May 2000, there was so much work in the building industry, that some builders went broke

because they could not get supplies. The demand was so high. You came through 1 July, and

the demand, coming off record high bases, dropped away. And in the measurement of the

National Accounts you measure a change on the previous base, that made a negative, which

alone, contributed to the negative quarter in December. And I said that totally upfront at

the time, that the housing industry and the transitional effect, in relation to Goods and

Services Tax, almost alone, contributed to the negative outcome in December. In fact, as I

said at the time, if you excluded the housing industry, which was 5 per cent of the

economy, the remaining 95 per cent of the economy, grew at about 4 per cent. Now, the good

thing about that, is, that the transitional period is now passing and you have seen a

bottoming in the housing industry, in relation to housing approvals and housing finance.

You have now seen a supportive interest rate policy, you have got a First Home Owners

Scheme of $14,000, and you have got the passing of the transitional affect anyway, so, you

know, we would have to see in relation to the March quarter, but I would certainly expect

by the June quarter, you are going to see housing starting to make a positive contribution

to growth.


Just on the currency, the currency lifted this morning after the rate cut. Does that

please you?


Look, I have said on numbers of occasions, and I think every person who studies the

currency markets closely has said the same thing, that the level of the A dollar against

the US dollar does not recommend fundamentals, and for some time now has not recommended

fundamentals. In the longterm you would expect it to represent fundamentals, but it

certainly does not represent the fundamentals at the moment. Part of the story, and a big

part of the story, is the rise of the US dollar. People forget this, when you measure

yourself against the US dollar, if the US dollar rises you de-value. Not because of any

domestic incident, but it might be a domestic incident in the US that rises. Now, this has

happened to a lot of currencies in recent times – the Canadian dollar, it has happened in

relation to the New Zealand dollar. But, I say this, if you look at an economy which has

low inflation, a very strong debt position, a good Budget position, and I say that

notwithstanding the attempts by the Labor Party to sabotage the Government members in the

Senate, I think there is a lot of people internationally, that say, well, the Government

is now running into sabotage and political interference on its Budget position. It is true

that it is, but…


Does that go for the excise decision of yesterday?


Absolutely, absolutely. You know, let me…




Let me make this point, let me make this point. The Labor Party on the one hand, will

have you believe that it is somehow interested in the currency, and as evidence of its

good faith, went out yesterday, with a policy that the most important thing to do in

response, was to cut the price of beer over a bar, from a tap. And of all the responses

that you could have in relation to a currency, do you think the most important would be to

cut the price of a beer served in a pub? Do you think that is going to make some affect in

relation to the currency? If it did, the only effect it could have had, is that it took

another $180 million off the Budget, it indicated again, the willingness of an Opposition

to sabotage an economic programme in the Senate. And if you were an international investor

and you were sitting back yesterday, I don’t think you would be thinking that the

most important thing Australia could do for itself is cut beer prices. I don’t think

that. And a political party that on the one hand wants to say to you, ‘oh, we are

worried about the currency, so worried, that what we need is more free beer’, is a

political party which has no credibility.

Now, they had a little stunt yesterday, didn’t they, in relation to the currency,

and it backfired on them completely. I say this, if the Labor Party is seriously

interested in the currency, explain to me this. What does rollback do? What does more free

beer have to do with the programme? What does the programme of opposing privatisation have

to do with it? What does the programme of abolishing Australian workplace agreements to do

with it? The fact of the matter is, these people are on a populist crusade, every one of

their populist causes, you would have to say is anti-good economic management . And then

at the end of the day they would like to tell you that they are interested in that as



If this excise is going back to the Australian people in public health expenditure,

isn’t that a good thing?


The only reason why there will be more public health expenditure on alcohol

rehabilitation, is that we collected the excise from 1 July of last year up until

midnight. If we hadn’t actually collected it you wouldn’t have had one more

dollar in alcohol rehabilitation.

Now, the brewers, the brewers want the right to fix their own excise rates, and

they’ve been partially successful. But I say this to you, if the brewers have got the

right to fix the beer excise rate, why don’t we ask the tobacco companies to fix the

tobacco excise rate? Why don’t we ask the oil companies to fix the petrol excise

rate? This is a new doctrine in Australian politics. The brewers get to set their own rate

because they get supportive political parties, but they are only partially successful

because the brewers wanted to recover the windfall for their own bottom lines. They

won’t recover the money for their own bottom lines because the money that was

collected this financial year, is going to go into alcohol rehabilitation. I think that is

a very good place for it.


Is the Government’s decision on beer excise a responsible decision Treasurer?


Well, the Government was defeated in the Senate. Now, there is also a new doctrine

around from the Labor Party that if you can’t get your legislation through the Senate

and you are forced to come to a compromise with the more responsible opposition Party, the

Democrats, that that is somehow a backflip. It isn’t a backflip. We were asking the

Senate to pass our legislation. We couldn’t get it through. We had to recover the

best deal we could with the more responsible opposition Party.


But aren’t you just paying the price for loose talk during an election campaign?

Aren’t there lessons in this?


Well, the lesson in this apparently is, that if you publish a policy and you explain it

to the brewers and if they know what it is, then if they have sufficient money and they

can get political parties on side, they are entitled to rewrite it. Jim, can I say, the

policy is there, it was written, it is in a big fat volume of about 300 pages, and the

persons who understood it completely were the brewers. Whenever they came to see me about

our policy they would turn up the page on which it was written, they knew precisely what

the policy was. I think of all the meetings I had with brewers, and I think I met with

brewers more than anybody else, we always discussed the policy which they knew precisely.

Now, they go off, they find a talkback radio show, they find one ambiguous word, which I

don’t think was that ambiguous, you know, what did ordinary mean? Did ordinary mean

packaged beer, which happens to be 80 per cent of sales? Or did ordinary mean beers across

the bar which happens to be only 20 per cent of sales? Personally, I would have thought

ordinary meant the 80 per cent. Anyway, they managed to convince two political parties

that ordinary meant the minority and they were able to rewrite their excise rates. Now, if

you think that is a correct principle, why don’t we get the tobacco companies in and

if they can find an ambiguous word on a talkback radio, let them write their excise rates,

or get the petrol companies in, let the petrol companies write their excise rate. This is

a new proposition that the industry gets to write its own rates.


Treasurer, on the housing side Treasurer, did it ever occur to you last year that you

could have acted differently, for example, bringing forward this increase in the First

Home Owners Grant or even imposing a discretionary tax to slow things down so that the

housing boom didn’t get away? I mean, you had letters from the housing industry

alerting you to the possible, probable boom and then collapse.


One of the things we did, was, we introduced a $7,000 grant which had never



It wasn’t well targeted.


Well, it had never been there before had it? What was there before 1 July –



But it applied to both existing and new homes.


And so we introduced a $7,000 grant. And at the time, I think, people said well that

was a sensible approach to transition. What happened is that the bring-forward was so

great in the months of April and May, I remember saying at the time, with all the

bring-forward with demand rising, people were actually paying higher prices than they

would have if they had waited because, and I make this point to the Financial Review

because, you know, it is something that the people of the Financial Review sort of live

and die by – tax changes don’t and didn’t abolish the laws of supply and demand.

That is, you had a tax change coming in on 1 July, but the laws of supply and demand were

still the principle determinants of price. So, when the demand came in April and May, the

price went up even though it was pre-GST. After 1 July, even thought it was post-GST, as

demand fell away you could actually get lower prices so that the rush for the cheaper

deal, in many cases, turned into a rush for a more expensive deal. Now, we saw the same

sort of thing operating in relation to cars. Now, these transitional effects occur as you

change tax, but I remember saying at the time, don’t rush to sign a building contract

now – the demand is such that you could actually be paying a much higher price than if you

waited. That turned out to be the case.


If buyers were behaving irrationally as you are suggesting, why not hit them over the

head with a tax? Did that ever occur to you?


What, to hit them over the head with a new tax?


A discretionary tax to slow it down because it was getting out of control?


No, it never occurred to me in April or May to go out and give them another whack with

a new tax. It never occurred to me.


Mr Costello, you’ve consistently attacked the Opposition, you and John Howard, for

talking the economy down. But Kim Beazley used words yesterday from your Leader in 1995

which were casting great doubt on the economy then. Why was it responsible for you before

the 1996 election to be talking the economy down, and irresponsible for Labor to be

providing a critique today?


Well, I don’t think Labor is providing a critique. See, if Mr Beazley went out and

said, we think the economy would be strengthened by rollback and here’s the policy

and here is how it will add to consumer demand, here is the percentage that it will add to

economic growth and here is the new jobs that will be created by it – that would be a



You weren’t doing that in 1995.


Michelle, in 1995 I was running up and down this country saying that an economy which

was growing at 4.5 per cent should not be $17 billion in deficit and we were saying that

the expenditures which were then out of control should be cut back and we were putting out

a plan to do it.


But you were conveniently not challenging the Budget figures.


Well, hang on, right throughout 1994 and 1995 we were saying an economy which was

growing at 4.5 per cent should not be $17 billion in deficit, as it then was. We were out

there calling for a Government to have an active privatisation program, we were out there

with policies in relation to industrial relations which would have freed up the labour

market and improved productivity. But the point I make is this, if you go through all of

the things that they say should be done, right, beer excise should be cut and the budget

balance should be attacked, GST should be rolled back – can’t tell you where, but the

budget balance should be attacked, labour market should be deregulated and made less

productive, there should be no more privatisation, we should end competition, I mean, you

can run that kind of populist political agenda, they’re entitled to run it. But they

are not entitled to say at the same time, we are concerned about the economy because they

know, I know, you know, and all of Australia knows, that the critique they have is to make

things worse, not to make them better. I issue Mr Beazley this one challenge – if he says

I’m just genuinely engaging in a critique, let him sit down and call a press

conference and let him explain to you how the policy of rollback is going to be funded,

how it will boost economic growth and how many new jobs it will lead to, because he knows,

you know and I know that once you ask that question you see this is not a critique at all.

He has a rag bag of populist causes which is a recipe for worsening the economy and

that’s why he has no credibility on the issue and you saw it yesterday in the

Parliament – backfired right on them. So, next time Mr Crean, you know, sitting at the

soccer, calls the cameras in to complain about the exchange rate, he should be asked this

question: do you intend to fix it? I think the answer is no. Alright then, which of your

policies is designed to revalue? And what do you think, I’ll finish on this, what do

you think would happen if a trade union, an ex-trade union official walked into the money

markets in New York and said, ‘here’s my plan on the dollar – what we need is,

we need to take away the freedom to contract in the workforce, what we need is, we need to

make the GST more complicated, what we need is increase in income taxes, and what we need

is, we need no more privatisation’. I mean, those blokes would be out on the screen

so quick, you couldn’t say Simon Crean.

Thanks very much.