Transcript No. 2000/57

First up Treasurer Peter Costello, flushed with success from last weeks Federal Budget.

Good morning Mr Costello.

TREASURER:

Good morning Paul.

MURRAY:

First thing I’d like to talk to you about is it’s been argued around

Australia today what effect will the rise in US interest rates have on the Australian

economy? Now, is the Australian economy inextricably linked to the American economy?

TREASURER:

No, it’s an independent economy with its own business cycle. But the Australian

economy is affected, as all economies are, by world developments. And the biggest

development in the world is the US economy. So as the US economy in this case strengthens,

and the problem at the moment is the strength of the US economy, and the world picks up

and interest rates are rising in the United States as authorities try and pull back on

what they see as excessive growth, that has repercussions around the world. Repercussions,

we have to take them into affect when we are setting our own economic policy, and you have

to balance international and domestic factors.

MURRAY:

So we won’t be able to escape what’s happening in the American economic

cycle?

TREASURER:

It has an influence on the world economy, which has an influence on us. But it’s

not a question of automatic translation, what happens in the United States automatically

translates to us. Let me give an example. In 1997/1998 when Asia went into recession

Australia was growing strongly, stronger than the US. Now we were a stronger economy, a

stronger growth economy than the United States in 1997/1998 coming into 1999.

What’s happened in late 99/2000 is that the US economy has kicked up, the

authorities are worried that there may be some overheating, they’re kicking up

interest rates to try and cool it down. The US economy has become stronger than us in 2000

so….

MURRAY:

Pushing our dollar down.

TREASURER:

It influences us, but it’s not the same precise cycle. And it’s a question of

balance and judgement.

MURRAY:

Some commentators today have said that the Prime Minister’s comments yesterday

were directed at the Reserve Bank and directly affecting the Reserve Bank’s decision

which it is likely to make on June 6 about Australian interest rates. Do you think that is

what the Prime Minister was on about yesterday?

TREASURER:

No. We have an agreement between the Government and the Reserve Bank which enhances the

Bank’s independence on interest rates. Our Government put that in place, I signed

that agreement with the Governor of the Reserve Bank. There is a clause in that agreement

that says the Government reserves the right to talk about monetary policy, that is

interest rates. The Government’s got a right to talk about interest rates and the

Prime Minister regularly fields questions about it. But at the end of the day, this is the

important point, the decisions are taken by the Bank. That’s the important point, and

the markets ought to know that. And once the markets understand that the Bank is

independent and it’s not leaned on, it actually should be understood that that gives

a Prime Minister, or the Treasurer indeed, greater freedom to talk because they can

express a view without people thinking, well this is strong arming and directing the Bank.

And I think we’ve got to get to the situation where that is fully and clearly and

concisely understood that the Bank is independent and once that is properly understood,

that should give Prime Ministers and Treasurers indeed greater freedom to speak on these

particular issues.

MURRAY:

The Bank is independent, but is it open to be pressured by Government?

TREASURER:

Not in my experience. I’ve been Treasurer now in Australia for a bit over four

years. I put in place the agreement with the Governor of the Bank to enhance its

independence. It’s got an independent Board, it’s influenced by its Board and

it’s influenced obviously by the state of the economy which it takes account of, like

we all do. But in my experiences it is not easily leaned on.

In fact I’ve never seen it tried, and I’m sure if it were tried it

wouldn’t work. It is totally independent and the Governor and the Bank guard its

independence jealously.

MURRAY:

’Cause there is an economic cycle, but there is also a political cycle. And

you’re coming into your last year of your political cycle. So these matters of

interest rates become acutely political.

TREASURER:

Well, one of the reasons for having an independent Bank is actually to try and take it

out of that political influence. And this is modelled on the US, they’ve had a bit

longer experience, as you know, they have the Federal Reserve which, the Chairman of which

is Dr Alan Greenspan, which sets their interest rates. Now, in the United States you

don’t get nearly so much political argy bargy on interest rates because it’s

been understood for such a long that you have that independent Bank. We have the same

arrangements now and I think as people become more familiar with it and there’s a

more mature understanding of it you won’t get the same kind of political argy bargy.

MURRAY:

OK. If you are happy to talk about interest rates, are you happy to talk about the

dollar as well, which has fallen through the floor this morning?

TREASURER:

Well, when I’m asked questions about the currency, again you have to be pretty

careful because you don’t want to try and influence markets or be perceived or

criticised for influencing markets. But I’ll make a couple of points. One is that

just as the problem in the world economy in 1997/98 was a weak Asia, the problem in the

year 2000 is a strong United States. The United States is raising interest rates and the

US dollar is rising against currencies all over the world. This is not unique to

Australia, people have got to remember this. When you measure the value of the Australian

dollar against the US dollar, if the US dollar rises that means that in the exchange rate

the Australian dollar has fallen, and you’ve got to actually look at where the US

dollar is going. It’s rising against the pound, against the Euro, against the Kiwi,

and for countries around the world, of which Australia is one, it’s a strong US

dollar that’s affecting their exchange rates. Now, the point is if the authorities in

the United States slow their economy, which they’re obviously trying to do at the

moment, and they’re obviously worried about the value of the stockmarkets, the Nasdaq

and the Dow in the United States, if the US economy slows to a lower, more sustainable

growth rate you’ll see that currency come back. But obviously it was the move

yesterday of raising interest rates fifty points that was directed towards the policy of

slowing the US economy and getting some kind of more gradual correction in relation to

those stockmarkets.

MURRAY:

Because we appear to be going into a very difficult time economically for the country.

The Westpac index shows consumer confidence falling for the fourth month in a row in May,

to a five year low. We’ve got the prospect of being dragged into higher interest

rates, we’ve got a low dollar which is being pushed down by the strength of the

American market, and we’ve got a brand new tax system coming in which has got

business scared. I mean, it’s a difficult time for the nation.

TREASURER:

Look, there is a lot of volatility on world equity markets and world foreign exchange

markets, and that makes life difficult, there is no doubt about that. But when you are

looking at an economy, the thing that you really look at are the fundamentals, what

affects peoples lives. Now, growth in Australia is good. It’s been very strong over

the last three years about 4 per cent, and we’re forecasting 3 – this year.

Inflation in Australia is low.

MURRAY:

But going up. And a one off effect from GST.

TREASURER:

You’ll have a one off effect from tax changes but you’ve got inflation at 2

per cent, territory we haven’t been in for thirty years by the way. Employment is

strong, 700,000 new jobs since the Government was elected, the unemployment rate down in

the 6’s where we haven’t been for a decade. So, on the important fundamentals of

the economy, growth, inflation, jobs, employment, the Australian economy is, in fact,

strong. Now, we are weathering volatility on world financial markets, just like they are

in Europe and England, New Zealand, everywhere else. It is always a difficult time. It was

a difficult time for us in 1997/98 in the Asian financial crisis, extreme volatility, that

time more in our region. But the important thing is the economic fundamentals, whether

people have jobs, whether or not incomes are rising, whether or not the economy is

growing. That’s the real economy.

MURRAY:

The dollar is down today to a, on New York last night 56.56 US cents. What’s

banana republic level these days?

TREASURER:

Well, I don’t think that was a sensible comment at the time it was made by Paul

Keating and it’s no more sensible to talk in those terms today. At the moment

you’ve got a strong US dollar, and it’s rising against currencies all around the

world, and that is affecting Australia as it is affecting other currencies. But the

important thing is in fact to keep your eye on the real economy which actually affects

peoples lives, which is growth, inflation, wages, jobs, all of those sorts of things.

MURRAY:

On Budget night you said it was coming up for time to talk about the ‘s’ word

– superannuation. I see that your Labor Party opponent, Simon Crean has jumped in before

you and started talking about superannuation already. What do you think needs to be done?

TREASURER:

I think it needs to be simplified. I think it’s too complicated. We’ve got

too many rules, too many conflicting rules, too many different taxation treatments. I

think it’s beyond the ken of most people to understand it.

MURRAY:

’Cause you’ve got the super industry petrified again, because they reckon

that every time the Government has touched superannuation it’s just made it worse.

TREASURER:

Well, they’re actually pretty supportive of simplification. They’ve been at

me for a while and they welcomed that statement. I said I’m quite happy to engage in

simplification and reform, but we’ve got to do tax first. I think it would be a

mistake to say, oh well we’ve got tax going on at the moment let’s get a new

challenge going at the same time. And I’ve said to them, look let’s do tax, do

tax on 1 July and let’s make sure that we bed down these big tax changes and then we

can turn our mind to superannuation. But I don’t think it’s right to start a new

big project until we’ve finished the last. This tax reform is the biggest thing

we’ve had really since Federation in terms of tax changes, so you know, let’s

not get onto our next meal Paul, before we’ve digested the last one.

MURRAY:

OK. Let’s get off the economy and things like that and talk about something else,

which I know you feel passionate about. The republic. Can we start talking about it again

or do we need the Prime Minister’s permission first?

TREASURER:

We can talk about it, but I don’t think anything is going to happen in the short

term. Look, we had the vote last year in November, as you know, I was in favour of a

‘yes’ vote. It was defeated, we’ve got to accept the result, and that was

only, what, six months ago that people voted, they voted ‘no’, we accept the

result. I think it will come back one day. I think that this is really unfinished

business, and one day Australia will change its situation, but we had a fair vote and the

public rejected it.

MURRAY:

My view is that it is all about generational change. And there is a whole generation

coming up behind who are terribly frustrated by what they see as being an older generation

of Australians stopping this much demanded change.

TREASURER:

Yeah. I think people recognise that we are going to have to renew our symbols in the

modern age, that they were great symbols for Australia and they served us well coming out

of the 18^th and the 19^th and the early part of the 20^th

century. But they’re not really the symbols that are going to take us forward into

the 21^st century. But, there’s then a frustration as to practically,

mechanically, how do you work all of that? And change is a hard thing, gee I know

I’ve been through this tax change. Everybody’s in favour of tax reform but the

change, accomplishing the change is a hard thing. It is the same on the republic, you

might have a view as to where people would like to end up, but getting there and the

mechanics of it is very, very difficult. And I think the best thing to say is, look we had

a referendum, the vote came in, it was ‘no’, everyone should accept the vote.

Personally I think Australia will return to this issue, but there is no point going on

about it now, because the matter was settled in November of last year.

MURRAY:

Peter Costello thanks very much for your time this morning. Never long enough but I

appreciated the time, the chance to chat to you.

TREASURER:

A great pleasure to be in Paul.

MURRAY:

Thanks a lot.

TREASURER:

All the very best.