Doorstop Interview

Parliament House, Canberra

Wednesday, 26 April 2006
12.05 pm

SUBJECTS: March Quarter Consumer Price Index, petrol, PBS, smart card, capital gains tax

TREASURER:

The Consumer Price Index for the March Quarter rose by 0.9 per cent to be 3 per cent higher through the year. The increases for the March Quarter were particularly in the area of health, education – these are cyclical things – pharmaceutical costs go up in the March Quarter because people have been utilising the Safety Net towards the end of the last year and of course fee increases in relation to the educational sector generally by the first part of the quarter.

We have seen a little impact from petrol prices in the March Quarter but unfortunately there is a bigger impact still to come. The June Quarter with the price rises that we have seen at the bowser will have a bigger petrol impact than we have seen in relation to this particular March Quarter. I welcome what appears to be a reduction in the world oil price in response to the announcement of the United States that they will not be topping up their strategic reserve. There seems to have been quite a drop in the world oil price overnight, how long that will continue we don’t quite know but whilst the oil price is at near record levels prices at the petrol bowser are going to continue to be painful and while they are painful they will feed into the Consumer Price Index. The most important thing is that we do not get second round effects. I have been saying this for a long time, if businesses put up other prices and seek to use the petrol price as a justification for doing that you would get second round effects. Inflation is within our target but we cannot afford to be complacent and again I make the point that in a competitive economy businesses are going to have to fight for price increases, they shouldn’t become blas about it, they shouldn’t believe that they are there for the taking, this is a competitive economy and we want to continue to keep inflation low.

JOURNALIST:

Treasurer, given that we are yet to see the full impact of the petrol price surge showing up in the figures, are you worried that inflation is going to move above 3 per cent in the next quarter?

TREASURER:

Well look, we know that there is one very, very unusual factor influencing the Consumer Price Index at the moment. What we are looking for when we are looking at our monetary policy targets is underlying inflation so we can look through those factors but if those factors were to set off a second round effect in underlying inflation that would be of concern to us. And we can look through these factors because we know that these factors are influenced by overseas, these factors don’t tell us anything about inflation in the Australian economy unless they become the basis for general price rises and second round effects.

JOURNALIST:

Is this an increased risk of an interest rate rise as early as next week?

TREASURER:

Well, I don’t comment on future movements in interest rates.

JOURNALIST:

Does the high inflation of the pharmaceuticals put any urgency on PBS reforms?

TREASURER:

The reason that pharmaceuticals jump in the March Quarter – and they always do – is that we operate a Safety Net system. After you have had so many prescriptions through the year they begin to become subsidised. A new year begins, far fewer people are on that Safety Net so pharmaceutical prices always jump in the March Quarter. So you are seeing that cyclical effect if you like come through in the March Quarter. But let me come back to your question. Pharmaceuticals are a very fast rising area of government expenditure because new pharmaceuticals are being invented all the time and they are much more expensive, they can treat conditions we couldn’t treat in the past and the population is ageing. The older you get, the more you draw down on pharmaceuticals. So yes, we do have to be very vigilant in relation to pharmaceutical costs. As I have said if we are not vigilant over 20 or 30 years, the system that we currently operate – which is a good system – could well break.

JOURNALIST:

Is there a case to review the Safety Net given the contribution that pharmaceuticals are making to inflation (inaudible)?

TREASURER:

Well, remember in relation to the Safety Net we have announced a lifting of the Safety Net in last year’s Budget and we announced an increase in the co-payment some years ago. Preliminary evidence shows that this is actually working, we are not stopping the rate of increase, we are restraining the rate of increase but it is still growing far faster than the economy is growing.

JOURNALIST:

(inaudible) the measures that the Government has already taken?

TREASURER:

Well, there is some early evidence that they are working but let me say I think over 20 and 30 years you are going to see increased measures. I would be very, very surprised if the system that operates in relation to the PBS today is the system that is operating in Australia in 20 years time.

JOURNALIST:

Treasurer, in the past you have had messages if you like for the Reserve Bank, do you believe that one of the effects of the petrol prices is in fact to dampen spending by consumers and that this should be taken into account maybe when they look at monetary policy?

TREASURER:

Well, the effect of a petrol price is to push up the cost of living and you have seen that. A big part of what households spend is on petrol. Now, that doesn’t mean that general inflation has taken off, it means that one of the components which is entirely governed by international factors has pushed up the cost of living. That wouldn’t hold large implications for Australian policy unless the push up of that price became the trigger for the pushing up of other prices in the economy because at that point you have translated an international factor into a domestic one, at that point.

JOURNALIST:

(Inaudible) to spending, doesn’t it?

TREASURER:

I think what actually happens Paul, is if a family has got a limited budget and they nearly all do, let’s suppose they have got $100. If they have to spend the whole of the $100 on petrol they cut back their spending on other things. If they are spending $60 on petrol, you might go to McDonald’s that week. I think what petrol does is it changes the composition of spending, I think that is what it does and if it becomes obscenely high it can really affect households in other ways. Now, I think we are seeing some of that effect because the prices are as high as they have ever been – higher than they have ever been – the oil price is at all time record levels. But when we are looking at the CPI you have got to remember this, we are looking at the petrol price, if January February and March of this year, we are now in April and we are now trying to think about what it is going to be like in May and June and the good news is that it appears as if the price has come off internationally in response to recent announcements in the United States, if that could be maintained that would be positive. Petrol prices were bad in April, shocking, what we are looking forward to is to see if there can be some relief in May and June.

JOURNALIST:

(inaudible) PBS Australia uses just something like 17 or 20 percent of generic drugs compared to Britain which is about half and then America is even higher. Would you like to see Australia’s use of generics much, much higher because of the saving it would be to the PBS?

TREASURER:

Yes, I would like to see the use of generics become more widespread in the sense that a generic, if it does the same thing, if it has the same therapeutic use, if it can heal to the same degree and do it at a lower cost is as good for the patient and better for the economy. So if you can get both of those together that is a good thing.

JOURNALIST:

How will you do it?

TREASURER:

Let me make this point in relation to generics. Generics are only useful if they have got the same therapeutic benefit as the patented drug and we have never in Australia said to people they should use a generic if it doesn’t have the same benefit, or if it can’t cure their condition. We are only interested in generics where they have the same effect. If you can get the same effect for a lower cost why wouldn’t you do it, you do it in every other area of your spending.

JOURNALIST:

(inaudible) They are already on the PBS, so how will you encourage people to use these more…

TREASURER:

You asked me my question so that is my answer.

JOURNALIST:

Treasurer do you have a view about a national ID card, a so called smart card, and do you share the concerns that some of your colleagues have about the impact on privacy?

TREASURER:

Look, I gave a speech here in this courtyard some time ago and I set out my views on a smart card. I think a smart card would have real uses, I think it would have real benefits. For people who are dealing with the Government, that is people who are taking family benefits, people who are taking pharmaceutical benefits, people who are taking child care benefits, a smart card would ease their dealing with the federal government. Now if you don’t take those benefits or you don’t want to take those benefits you don’t have to use a smart card, but where you are, a smart card which recognises you will ease your interaction with the Government, but it will also help the Government by the way, because if the Government can ensure that it knows who it is dealing with we can cut down on false names, aliases, people that are claiming multiple times, people who are claiming in circumstances to which they are not entitled and although it would cost in the short term but it would certainly bring long term benefits to the tax payer.

JOURNALIST:

Would it include the Medicare rebate?

TREASURER:

I’m not going into all the details because no doubt if my colleagues agree such a thing would be announced at some point.

JOURNALIST:

But it does cast a broad net doesn’t it, to have to include the Medicare rebate?

TREASURER:

Well, people dealing with the Government at the moment have a Medicare card which has a name and a number on it so. A smart card which has a name and a number is not very different to a Medicare card.

JOURNALIST:

Are there any reassurances about privacy concerns?

TREASURER:

I’m sure they will come in due course.

JOURNALIST:

Is an ID card as opposed to a smart card off the agenda now?

TREASURER:

Well we will see won’t we, I’m sure someone will make an announcement at some point.

JOURNALIST:

Do you think it should have some sort of biometric component to it?

TREASURER:

I’m sure someone will make an announcement at some point. Not me.

JOURNALIST:

Mr Costello…

TREASURER:

Two last questions please, yes Mr Colebatch.

JOURNALIST:

On oil prices and second round effects you mentioned, it is only in the last few weeks we have seen the big hike in prices, the intelligence Treasury has got on the market, have you got any reason for concern that some of these are going to be built into price rises, second round price rises?

TREASURER:

Look you hear of some companies that are announcing already that they want to put up prices because of fuel costs. Some are quite open about it and you might expect that in the transport sector, but then if they put them up in the transport sector and most businesses use transportation that can start affecting other things as well so I think there is evidence that some companies are trying to get price rises. Now what I say to them is A- it is a very competitive market out there and you run the risk of your competitors undercutting you; B- there will be consumer resistance and so there ought to be consumer resistance; and C- if a large number of people were to do that then it wouldn’t help anybody.

JOURNALIST:

And D it puts pressure on interest rates, doesn’t it?

TREASURER:

And D the best answer always comes from Paul Bongiorno.

JOURNALIST:

Do Australians who hold on to their assets for a long period of time, Treasurer deserve capital gains tax relief?

TREASURER:

Well we do give them relief if they hold on to an asset for more than 12 months. That is a reform which I introduced. Imagine if we had not introduced that because you would still be paying the top marginal tax rate. Some advocates who use this mantra you know of tax reform actually want to take that reduction away…

JOURNALIST:

But do you think it should be…

TREASURER:

…there are some people I notice who believe that in Australia the capital gains tax concessions are not too limited but too generous. And I put forward international experience to say by international standards these are not too generous, they certainly don’t warrant wiping out and imagine where we would have been if we had not have introduced that and you know a little bit of fact in this debate is always worth considering. Thank you so much for all of your time.