Transcript No. 2000/86

Well, today’s June quarter consumer price index showed a increase in the consumer

price index of, through the year terms, of 0.8 for the June quarter and 3.2 per cent for

the year ending June 2000. The forecast was in line with Budget forecasts, both the

outcome in 1999/2000 and the starting point for 2000/2001. Principally the increase in the

consumer price index was as a result of increased world oil prices which have increased

more than 60 per cent in US dollar terms over the year to June. In Australia the increase

in petrol price through the year to June of 2000 was around 22 per cent, as a result of

those increases in world oil prices. Extracting the increase in petrol prices the CPI rose

by 2.4 per cent in through the year terms. In relation to world oil prices, which are

obviously influencing petrol prices at the moment, through the June quarter they were for

much of the time substantially over US $30.00 barrel. The good news is with the recent

announcement by Saudi Arabia of increased production they have come down through $30.00 a

barrel and if they come down below $30.00 a barrel and stay down I would expect that to

feed into lower petrol prices in the next quarter and the petrol price rather than

contributing to inflation to work its way out of the system.

In relation to the new tax system, this of course is the June quarter, that is before

the introduction of the new tax system, so it doesn’t measure directly any of the

effect of the new tax system, except in two possible respects, one is that during the

course of the year to June 2000 there was a reduction in the highest wholesale sales tax

rate from 32 per cent to 22 per cent which would have been detracting from the consumer

price index, particularly as I note in my release, in relation to electrical equipment.

And as a result of the introduction of the new tax system we did notice a jump in housing

which for market reasons we would have expected to have increased the price of housing,

that is it wasn’t a direct tax effect but it was a tax effect which may have lead to

an increase in demand and for market reasons that may have led to an increase in prices.

Now, this is not to say that we can afford to get complacent about prices, it is very

important that we continue to watch them very very closely. These forecasts are in line

with what we said would be the outcome at Budget time and in line with our expectations

for the forthcoming year, principally reflected by world oil prices and it’s

certainly my hope that with increased production that world oil price, which has increased

60 per cent over the year to June will moderate somewhat in the future.

Treasurer, does this mean that the inflation dragon is no longer subdued, it is

starting to stir?

As is consistent with our forecast, this is what we thought would be the outcome both

for the 1999/2000 year and the 2000/2001 year. But, the point I make about inflation is we

never get complacent about inflation. We have had some of the best outcomes in the last 30

years over the last three years. Prices are being pushed principally as a result of events

beyond our control, but we shouldn’t get complacent about that. What a figure like

this illustrates is the importance of getting your domestic fundamentals right, because

you are seeing the inflation rate creeping up not because of domestic events but because

of international events. The only thing you can do to insulate yourself against

international events is to run strong economic policy. Budget surpluses, open trading

competitive environment, efficient taxation system, and making sure you get the domestics

right gives you some degree of insulation in relation to international events.

So Treasurer, where you being overly exuberant when you declared the dragon slain?

No, I’ve said that we always have to keep our eye on inflation, always. The fact

of the matter is that over the last three years inflation has been lower than we’ve

experienced in the last thirty, but we have to keep it there. We don’t want to go

back to the days, the Labor days of 8 per cent per annum. And that’s why it is so

important that we lock in good economic policy, Budget surpluses, structural policy which

gives you an open and competitive market, a tax system which leads to efficient allocation

of resources and strong good economic policy.

Treasurer, are you concerned about some sectors like food and clothing which has been

raising prices in the June quarter prior to the introduction of the GST?

I don’t think there is anything out of the ordinary in any of those price rises.

Food varies, always does vary as a result of seasonal conditions, and I think fresh fruit

prices fell substantially in the June Quarter, principally fresh fruit prices relate to

seasonal conditions whether or not in the particular industries there are floods, whether

or not there are shortages, what world production is like, and so there were obviously

some counter balancing. But I wouldn’t read into those changes, which are pretty much

in line with expectations, anything in relation to the tax system.

Treasurer, 3.2 per cent, is that a higher base than you might have wanted ahead of the

looming impact on the GST?

It’s a base we forecast. That was the base we forecast. We thought that, if you

look at our Budget papers, we would in ongoing terms have a through the year outcome of

around 3 per cent. So that’s what we expected, that’s what we forecast and

it’s important that we keep our eye on that ongoing inflation rate as we come through

these particular tax changes. We’ve said that the tax changes, of themselves, we

would expect over the course of the year in year average terms to have a component of

about 3 per cent. And the Government and the Reserve Bank will look through those, because

they’re one-off taxation changes at the ongoing rate. We thought that the ongoing

rate in average terms over the course of the year would be 2 -, starting off about 3 and

ameliorating somewhat throughout the course of the year.

Just looking at the current set of numbers as opposed to the post-GST numbers that we

might get. How should the Reserve Bank then be regarding this set of data?

Well, this is a set of data which is consistent with Budget forecasts and consistent

with the monetary policy, the inflation target that we target, that is 2 to 3 per cent

underlying inflation over the course of the economic cycle. So, we would see this as a

consistent CPI outcome, consistent with Budget forecasts and consistent with our inflation

target. But having said that, we’ve got to make sure we keep it consistent, and there

is no room for complacency on economic policy.

So without asking you to comment on monetary policy, this shouldn’t ring any alarm

bells at the Reserve Bank even though it is outside the target range?

The target is 2 to 3 per cent over the course of the cycle. I think for something like

the last three years we never got into the band. The target contemplates that at some

points you’ll be below the band and at some points you’ll be above the band, and

over the cycle it will average 2 to 3 per cent.

We’re consistent with that and particularly if you take the view which I do that

we’ve had an unusual increase in world oil price, which I hope to stabilise, and I

hope it will come down, but I think there has been some good news on that front in the

last week. You would see this as consistent with the target that we’ve had in place

now since the Governor of the Bank and I reached our agreement back in 1996.

Treasurer are you concerned about the weak currency and that impact on (inaudible)

inflation?

I think the most important factor in relation to the oil prices, is the price of

production. And that has fed into today’s consumer price index, in quite a dramatic

way actually. World oil prices have increased 60 per cent, leading in Australia to

increasing petrol prices of around 22 per cent over the last year. 22 per cent is quite a

significant effect. Now, that’s the past, that’s what happened up until the 30^th

June. The critical thing is what you think is going to happen now. Well, at this point in

early July the news has been better. I hope that that continues. I can’t guarantee it

because I neither control oil production nor world prices, but I have more grounds for

optimism this point in July than I did this point in June.

Treasurer have concerns about rises in upstream costs given the producers price index

shows inflation in the June quarter 1.8 per cent?

Look we look at these things very carefully and as I said it is another reason why we

are not going to be giving up on good economic policy. I make this point very clearly,

some of the results that we’ve seen in the last four years, the lowest unemployment

in a decade, the equal longest continuous run of growth above 4 per cent, our fourth

Budget in surplus, and our low inflation rate, the increase in productivity, are largely

the result of good economic policy, concentrating on the fundamentals, having an inflation

target, getting our budget back into balance, structural reform to the Australian economy.

Now, this is not something we can now say has stopped and has finished. We can’t say

all of the great economic challenges are over. We have to continue to work at the economic

reform. The biggest of course is the taxation reform, which is now I think, what is it, 26

days old? And my message would be, in relation to manufacturers prices, the important

thing is to not lose sight of our clear economic goals, the benefits that we’ve had

came as a result of good policy, the benefits today – from good policy of yesterday,

good policy of today will bring the benefits of tomorrow. And certainly anybody who thinks

that, you know, Australia can now afford bad economic policy, or Australia can afford some

of the kind of irresponsibility that you hear from Labor, or this bizarre concept of

roll-back. Anybody who thinks that, you know, now is the time to let the economic vandals

back into control of the economy will be sadly mistaken.

Given your derision of the roll-back proposals, do you promise not to match any of

those roll-back proposals?

We’re not in the business of rolling back the taxation system which we have now

fought for for decades, and is 22 days old. I think it is absolutely bizarre that

Australia goes through an election, through the legislation, through the implementation,

through the successful introduction of the new taxation system, and after all of that time

and expense and effort, all you can hear from the opposition is that they are going to

change it all again. You know, it would be like building, like, you know, you build the

Taj Mahal and all of a sudden Mr Beazley says, I’d like an attic on the top and

I’d like to change the foundations down the bottom and, you know, I’d like it

black rather than white, and, it’s bizarre, you know. Mr Beazley fought taxation

reform and said it could never be made fair. That’s his view. He should, if he’s

ever elected, repeal it. To this day I cannot understand why the Labor Party, if it was

really against GST won’t commit itself to repeal it. Now, there is only one

explanation, the explanation is, they were never really opposed to it anyway. It was just

a trick, it was a political device, they always hoped to take advantage of it. And mark my

words about this roll-back, this roll-back is diminishing by the day. I’ve got one

simple question for Mr Beazley, is your roll-back 50 per cent or is 33 per cent? Because

if it’s not even a third, if he won’t even commit himself to rolling it back by

a third or a half he’s not serious. And I’ve said all along he’s not

serious. He is not serious about taxation.

Mr Costello, Mr Howard has been pondering his political future post the next election.

Has the leadership baton in your knapsack grown at all?

I don’t think I’ve ever talked about such things, or about such knapsacks or

about such batons.

Has Mr Howard discussed with you at all his plans for after the next election?

Other than to win the next election and to govern well which we’ve discussed on

numbers of occasions, no.

Do you know what his intentions are?

Well, that is a matter for Mr Howard and I thought he explained it all on radio this

morning. And I have nothing to add.

Mr Costello, do you see yourself as the likely successor?

Look, I’m now coming into my fifth year, I think, as Treasurer and during that

time we’ve done some good things. We’ve reformed the Australian taxation system,

we’ve reformed the Australian financial system, we’ve modernised corporations

law, we’ve had the longest growth above 4 per cent in Australian history and

we’ve had the lowest interest rates in the last thirty years. So I feel as if there

is a lot of continuing work to be done as Treasurer which I’m only to happy to do.

That just sounded like a leadership pitch?

No, it was a pitch to remain in the job of Treasurer and to continue to deliver good

policy. I’ll tell you one thing I would hate to see in Australia. I would hate to see

after all of this work a group of people who have never done any hard thinking about the

economy in their lives, the Labor Party. Never done any hard thinking about the economy,

Beazley and Crean get in control. Here is a group of people who want to get control of a

taxation system which they utterly oppose. When you actually think about it it’s a

breathtaking claim. They claim they are utterly opposed to the taxation system, which

we’ve now introduced, so opposed to it they want to get into office and try and run

it. It is absolutely breathtaking. And I say to you, the whole thing, and I think a

journalist said it in the paper today, the whole thing has been elaborate fraud, the Labor

Party’s position on taxation, it’s been elaborate fraud. They’ve been

pretending all of the time they are opposed to the tax reform, and they thought they could

win votes, when they always intended to take advantage of it. And the reason Mr Beazley,

mark my words, the reason Mr Beazley is today in trouble with his leadership is that he

never had the courage to tell the truth, and this roll-back which has been an elaborate

fraud is now starting to engulf him. That’s his problem, he won’t get out of

that problem until he has the decency to actually put his hand up and say tax reform was

necessary for Australia. Thanks.