Transcript No. 2000/08

TRANSCRIPT OF

TREASURER

Peter Costello, good morning.

Good morning Fran. Can you hear me?

I’m sorry about these technical hitches. Look, the Government’s taken enough

credit in the past for the lowest interest rates since “man walked on the moon”

is, I think, the phrase you’re fond of saying. Is it only fair now for you to take

some credit for these latest rises.

Well, these are the lowest interest rates in the seventies, eighties and nineties.

Probably still, I’m just looking at my table now, the lowest since the 1960s and so

that’s a good thing. But, the important point to bear in mind is that as interest

rates rise around the world, because the world economy is stronger, Australia will have to

take those developments into account. Not an all bad thing, incidentally, because a

stronger world economy is going to mean more Australian exports and also an Australian

economy which can be stronger in the future. But, obviously, it was international factors

that had something to do with yesterday’s events.

But it’s a fact the Reserve Bank in its statement does mention international

factors, that’s true. It also says, that inflationary pressures will tend to build as

the year progresses. Isn’t it a simple fact that some of these inflationary pressures

due in the next 12 months are caused, are going to be caused by the GST and your tax

package?

But, as has also been made clear by the Bank, and I think it’s a very important

thing to keep in mind, structural changes which are one off, which occur because of tax

changes, are not going to be used to set monetary policy which is directed at underlying

or cyclical inflation. I think that’s cited there. And nobody would be sitting down

saying, because you’re having this one-off 30 year tax change you should change a

monetary policy which has to operate on a month by month or year by year basis. Underlying

inflation will go up as the world economy goes up, and we’re thinking it’ll go

up into 2 per cent or a little bit over. Now just to put that in context, I mean, 2 per

cent we now talk of as a high inflation rate, for all of the eighties and nineties,

including the worst recession we had in 70 years, the average inflation rate was 5 per

cent.

Sure, but Treasurer, the Reserve Bank said in its statement that, and I quote,

“with growth and confidence high and with the economy in its ninth year of expansion,

inflationary pressures will tend to build as the year progresses”. Now, isn’t

your new tax system designed to keep growth and confidence high, doesn’t it follow

that it’s one of the factors leading to this build in inflationary pressures that the

Bank’s predicting?

There’s nothing wrong with keeping growth and confidence high . . .

No, but it will add to inflationary pressures.

Well, keeping growth and confidence high is a good thing. We’d all be sitting

around here saying, wouldn’t it be a terrible thing if growth was low because it

would put people out of work. And I’ve already made that point. But the trick with

the Australian economy is to keep growth going in such a way that you can continue 4 per

cent. And what’s the benefit of a 4 per cent growth? Well, in the last four years

624,000 jobs, and if you did it for another four years you’d do that again and

you’d eat up unemployment. But the point I’m making about interest rate policy

is it’s not being set, and the Bank has made this entirely clear, for one-off

structural tax changes. It has been set according to the underlying inflation rate which

is picking up to 2 per cent level, particularly as the world picks up and also with an eye

for the international situation. I said yesterday, I made this prediction, I said, Mr

Beazley will no doubt say, oh, interest rates rise caused by GST, and on cue he did . . .

But Treasurer . . .

Hang on.

. . . just in terms of that link from the . . .

Just let me finish what I said. And I said, and when the US Fed lifts interest rates

overnight, presumably that will be because Dr Greenspan is worried about the Australian

GST as well. Now, of course, Dr Greenspan isn’t setting interest rates according to

the Australian GST, nor is the Bank of England which raised rates . . .

Okay, but in terms of any possible link between the GST and interest rates . .

Well . . .

. . . I mean you’ll, we’re going to have an extra $12 billion worth of tax

cuts poured in after July 1^st, into the economy, isn’t that going to heat

things up even more and fuel spending even more, one of the factors that the Bank talked

about in its statement yesterday?

Well, let me just finish the last point. I mean, the possible link, I think, you know,

any reasonable analysis will say, what possible link is there, for example, between the US

Fed, the Bank of England and Australian GST? Obviously there’s none. The fact is,

that as you see that international rates rise and Australia is lower than England and

lower than the United States, they are rising for the same reason, that the world economy

is picking up, and Australia has to take that into account when looking at inflation. Now,

let’s come back to the question of tax cuts . . .

The tax cuts (inaudible) stimulus into the economy.

Sure. I would’ve thought that – and I think your argument was this, that it’s

bad to have tax cuts because that will give stimulation to the economy. Let me turn it

around the other way of course, I think most people would say, prices are rising, they

would prefer tax cuts because it wouldn’t make them in any better position to have

rising prices without tax cuts. But again, I come back to the point that we have to

accomplish some structural changes in Australia, one is we have to lower income tax rates.

Now, to say that we won’t do big structural changes because, let’s say inflation

is creeping up to 2 per cent, but when would you do them Fran? You wouldn’t have done

them in the seventies and eighties when inflation was at 10 and 11 and 12. You

wouldn’t have done them in the early part of the 1990’s when inflation was still

double what it is now. In fact, if you wanted to do the big structural changes of cutting

income taxes, the best time to do them, in fact, would be when your inflation rate is

around 2 per cent, which we now call a high inflation rate, but for the last 30 years

would’ve been considered an impossibly low inflation rate. In fact, if you . . .

Okay, but . . .

. . . (inaudible) historically, this is the lowest inflation rate, the best climate to,

in fact, do big structural tax changes.

But for everyone out there who’s anticipating, all of us anticipating our tax

cuts, I mean, the fact is now that with these last two rate rises, before we get the tax

cut on July 1, a lot of it will have been, the impact of it will have been eaten up by

this increase in interest rate rises on our home loans and business loans. I mean,

isn’t that a simple truth, most of the tax cut will be gone before people even get to

have to face the impact of a GST 10 per cent rise?

But what base are you looking at Fran? I mean, when we were elected mortgage interest

rates were 10 per cent . . .

I suppose I’m talking to you about the political issue of that. Is this going to

be a political management issue for you?

No, you’re fairly representing to me what the Labor Party is trying to argue,

right, that . . .

No, no. What I represented to you is the simple fact, is that a lot of us who have

mortgages will be paying more on our interest rate rise now, we’re all anticipating

and looking forward to a tax cut . . .

Sure.

. . . in fact a lot of that, you know, the disposable income impact of that will be

gone, a lot of, because of these rate rises. Doesn’t that make it more difficult for

you to sell the GST, which will see a lot of prices go up, because people won’t have

the extra money in their pocket that they were hoping to?

No, that’s a fair representation of the argument the Opposition is putting, and

now I’m going to give what the answer to that argument is. Sure, there’s been a

rate rise to 7.2 per cent and I think the Murdoch papers today highlight, you know, $50

more a month, that of course is after a $400 a month fall. So in net terms if the

Government hadn’t been putting its economic programme, you wouldn’t have had a

$400 a month fall and a $50 a month increase, you’d be still paying $350 a month more

on your mortgage. Now, let’s take the second point. They then say, oh well, what this

means is we’re only net in front $350, we shouldn’t have tax cuts. In fact I,

which of course is the Labor position, that you shouldn’t have tax cuts. In fact

I’d say, if you want to look at it from that point of view, it makes tax cuts more

important. That’s the first point, from a voters point of view. But from a big

economic point of view, the time to do structural change, which is to reduce income tax

rates, is the time when you’ve got a 2 per cent inflation rate. Let’s suppose we

were cutting income tax rates and inflation was averaging 5 per cent, as it has for the

last 15 years, I mean, the situation would be much more difficult to accomplish and indeed

never was accomplished.

Treasurer, we’ve got to leave it there. Thank you very much.

Thanks Fran.