Transcript No. 99/44

Hon Peter Costello MP

Press Conference

National Accounts

Wednesday, 2 June 1999

12.00 pm

SUBJECTS: National Accounts

TREASURER:

Well ladies and gentlemen, in the March quarter the Australian economy grew by 1.1 per

cent and through the year by 4.8 per cent. This is a growth rate which is practically the

highest in the developed world. Whilst the Australian economy was growing at 4.8 per cent,

that was faster than the United States at 3.9 per cent, faster than the OECD average at

2.2 per cent and faster than the G7 industrialised nations at 1.6 per cent. This quarter

of growth, the sixth consecutive quarter of growth above 1 per cent has never been

previously equalled in Australian history. We have never previously had six consecutive

quarters of growth above 1 per cent. And this is one of the great periods of growth in the

Australian economy. We now have a situation where in our region in the last year you had

Korea contracting by 5 per cent, Malaysia contracting by 8 per cent, Hong Kong contracting

by 5 per cent, Indonesia contracting by 19 per cent, Singapore contracting and New Zealand

contracting. And the Australian economy grew by 4.8 per cent to record the longest

consecutive growth rate above 1 per cent in Australian history. The economy is being

driven by strong growth in domestic demand and also by very strong business investment.

Business investment grew by 9.6 per cent in the quarter and plant and equipment grew by

21.6 per cent. The area that detracted from growth was the net export area, as you know.

Australia’s current account deficit for the quarter as released yesterday was about 6

per cent of GDP. That’s a consequence of a weak external world economy, meaning low

prices for our exports and a strong domestic economy. But we would expect that as the

world economy picks up in the next year or so exports will return to contributing to the

growth of our economy.

The National Accounts show that inflation continues to be low as measured by the

deflators of about 1.7 per cent and you see continued strong growth in productivity. And I

think this is going to be the story of the Australian economy in the next decade, the

productivity growth of the Australian economy. If we can sustain this step up in

productivity growth, which we’ve seen in Australia in the last two to three years,

then we can actually lift the long term growth rate of the Australian economy and cut the

long term unemployment rate amongst our people. These are excellent conditions. A 4.8 per

cent growth rate; a inflation rate 1.7 per cent; a Budget which is in surplus; reduction

of debt; and what it shows is the benefits of good economic policy. The Government locked

in low inflation, brought down interest rates, that helped consumer demand, gave

confidence, we’ve had employment growth and we are now the standout economy in the

world in terms of growth.

Treasurer, it’s hardly a tax system holding us back is it?

Well, what could we do on a better tax system? On a better tax system we could actually

lift the long term growth rate of the Australian economy. Let me give you one example,

where is the weak part of the picture here? The weak part of the picture here is on the

trading front where you’ve got net exports detracting from growth. If we reform our

tax system we can lift $4.5 billion of tax off Australia’s exports. That will help

Australia’s exports. That will go to the weak area of the Australian economy. And we

ought to be asking ourselves, this Government asked itself, what could we do in this

country? You know, the results of today are the benefits of the reforms of the last three

years. And the results in three and five years time will be the results of the reforms of

today. And if Australia were to shut up shop and say, gee we did well, let’s give the

game away, in three and five years time future Australians would suffer. We are not going

to give the game away. We are going to do the reforms now for the benefits of tomorrow.

Will you do something about the savings ratio?

Well, the savings ratio as you see in relation to the National Accounts is low,

although the statistician makes the point in relation to the savings ratio as he always

does, that caution should be exercised in interpreting it. That’s the caution which

is on page 7, because major components may be subject to significant revisions. But I

think what’s happening in relation to savings is that you’re getting this net

increase in wealth in households. The net increase in wealth in households is coming from

the stock market, and it’s coming from the appreciation of properties. And people are

now prepared to either borrow against the increase in wealth or to spend against it, part

of that is the result of increased confidence. By international standards our indebtedness

to wealth ratios in Australia is still quite low. You see, the households in Australia,

not only have you had the benefits of increased employment, rising wages, low inflation,

low interest rates, but you’ve also had appreciation in capital values and there has

been a very significant increase in household wealth.

They’re not saving for a rainy day?

Well they are, in the sense of the capital which they now have. They now have great

capital appreciation which is savings, savings which isn’t measured in these ratios,

the savings which is invested either in their shares or it’s the savings which is

invested in their homes. Having said all of that, we think that it’s important to

encourage savings in Australia. And one of the reasons why we run Budget surpluses, the

Government is a net saver.

There is a lot of red ink in our trade and foreign debt books. How long can we continue

growth at this pace while that’s going on?

Well, we are looking forward. We have forecast that growth would abate somewhat in

1999/2000, forecasting that growth would be around the 3 per cent mark. 3 per cent growth

in 1999/2000 probably still be one of the best growth rates, if not the best growth rate

in the developed world. But, will the Australian economy keep up the clip of 4.8 per cent

through 1999/2000, we don’t think so. As it slows partly because it’s a natural

slowing off a very fast base, partly because the international scene will still be weak.

As it slows you will see that current account deficit lessen. But you have a current

account deficit at the moment for this reason, a weak external position. Our export prices

are now at the lowest they’ve been for 20 or 30 years. Now, you also have a strong

domestic economy and we can’t do anything about a recovery in Japan. Japan’s had

five negative quarters of contraction, we can’t do much about a recovery in Asia. But

what we can do is we can keep our own domestic economy strong and we intend to do that. If

you are going to have these external trading conditions, I’d in fact say, you’d

want to have internal domestic strength to offset it.

Treasurer, why do you think business investment picked up in the quarter and is that a

sign that things, you say are going to slow down a clip, but if it’s still going

strong does that suggest pressure on interest rates in the next year?

Well, it picked up in the quarter off a bit of a low base for the previous quarter,

that had something to do with it. But also it picked up because demand is strong, interest

rates are low and confidence has recovered. The interesting thing right throughout 1998,

and go back and look at it, most of the newspapers were predicting recession and although

the economy was growing strongly I think confidence was down here. Now what’s

happened in the last two quarters is confidence has recovered to where it probably always

should have been and I think that has led to strong business investment. Switch forward,

what do you think business investment will be in 1999/2000? We think business investment

will weaken somewhat off a very high base. It’s one of the reasons why we think that

growth will be more in the order of 3 per cent in the forthcoming year. In our recent

Budget we suggested that growth in this year would be 4 per cent, that’s in this

year, it’s growing at 4.8 to the end of the March quarter, I think you might even be

looking at a higher outcome for the year. But, we said 4 because we’re expecting a

slowing into calendar 1999 with a quickening through into 2000, and the slowing seems to

have been delayed and that’s a good thing.

(inaudible) for interest rates?

Well, look I think our policy on interest rates is pretty well known. Our policy on

interest rates is to maintain 2 to 3 per cent underlying inflation over the course of the

cycle. Not only have we met that, we’ve exceeded that. And you’ll see in

today’s National Accounts that inflation is in the ones. You know, inflation in the

ones is the kind of society that Harold Holt and Robert Menzies would have recognised and

very few political leaders since. Anybody of my generation grew up in a society where

inflation was in the sevens and the eights and beyond. These conditions are conditions

which you haven’t seen on interest rates and inflation since the sixties. Now our

interest rate policy is set at 2 to 3 per cent, we’re actually predicting that there

will be a bit of a rise, but if it’s a rise to, a rise which is consistent with our

target then monetary policy will follow.

On saving Treasurer, rather than being a sort of a one off, I mean the ratio has been

trending down in the three years of the Howard Government from about 6 per cent down to

sort of, about 4 or something, despite those revisions, and given that as you say, that

households are borrowing on the back of paper wealth of their assets, isn’t it time

to really start thinking seriously about doing something on private saving?

Well, I think we’re doing a number of things on private savings and we have a

number of schemes that we’ve actually introduced to encourage it. We’re allowing

spouses to take out superannuation on behalf of the non-working partner, for example.

You’ve got the super guarantee charge which is increasing and set in legislation,

you’ve got the encouragement of private saving with a low inflation policy. I mean,

let us make the big economic point, the best thing you can do to encourage saving is to

maintain the value of savings, which is another way of saying keeping inflation low. But I

don’t want to for a moment say, that people shouldn’t save, because I think

savings are important. But it’s not just borrowing against paper wealth, a lot of

this is bricks and mortar wealth. It is true to some degree that if people are running

down savings they might be spending a little too much, but there is another way of looking

at a rundown in savings. It is also a measure of confidence, and I think there is a lot

more confidence out there now. People are seeing that jobs are increasing, the

unemployment level is at the lowest in a decade, they’re confident that interest

rates which have been brought down, have stayed down. I don’t think, and I will go

back and have a look at this, but it would be a long time since you’ve had a monetary

policy which is as stable as this one’s been. We’ve brought official interest

rates significantly down, and they’ve been stable now really for about two or three

years.

But given that the household expenditure, that national expenditure is running at 1.7

per cent, I mean, do people, does the economy really need those tax cuts from July next

year? Wouldn’t it be better to think about putting some of that into superannuation?

Well, I think people pay too much income tax in Australia. And I think that paying too

much income tax destroys their incentive to work, and I think it destroys their incentive

to save actually. I think taking high income taxes out of people leaves them with less

money to save, and I think we should have lower income taxes in Australia. I think it will

be good for our economy. And what’s more our Government has promised people that they

should have income tax cuts and we intend to deliver it. And I think that’s totally

consistent with good economic policy. In fact, I think that giving lower income tax cuts

will have a very positive effect on our economy in 2000-2001. Income tax cuts will take

place, all other things being equal in the Senate from 1 July 2000.

Treasurer.

Mr Bongiorno.

Treasurer, can you clarify something, for a number of media commentators seem confused.

Did you ring Meg Lees yesterday, or did she ring you? And was the purpose of the phone

call for you to say sorry to her and for her to be assured that you’re on-side?

Well, I had sought to contact Senator Lee’s the day before on that day, and left

messages, and she got back to me. The purpose of the phone call was not that for a moment.

The purpose of the phone call was to consult on the amendments, and we discussed some of

the amendments. We’ve consulted again today, we are consulting on a daily basis.

Because at the moment we are seeking to draw amendments to put into effect the designed

principles. And I have consulted again today and I expect to consult again tomorrow, and

whoever suggested that mischievous matter that you have just put to me is entirely wrong.

So did she take any objections to you poking fun at the tenor of her amendments?

None what so ever. None what so ever.

Treasurer, could you tell us for a second question on tax, what the projected Budget

surpluses will be should the Government/Democrat tax deal go through the Senate?

On which basis did you ask sorry?

What will be the predicted Budget surpluses for 2000-2001, 2001-2002 should the

Government/Democrats tax deal go through the Senate?

For 2000-2001 it will be the net fiscal surplus that we’re showing, which I recall

is about fiscal balance of 7.2, less the $1.4 billion cost of the package.

Would that mean that you are (inaudible) there will be no further compensation for the

States?

The States are fully compensated. There is no net cost in this package to the States.

The States are losing approximately $3 billion of revenue. That is the lost revenue

through the carve out of food. That $3 billion is being made up in a number of ways. In

the first place, the $3 billion is made up by the fact that the Commonwealth resumes the

funding to Local Government, that’s about $1.4 billion. In the second place, it is

made up in that year by the postponement of the abolition of financial institutions duty,

which is about half a billion. As to the balance in that year, it is made-up by the

Commonwealth making a grant to the States, and the Commonwealth takes the balance on

it’s balance sheet, meaning that the cost of the package is $1.4 billion, and the

$1.4 billion is shown on the Commonwealth’s account, and it comes off the previously

projected surpluses.

After nine years of growth, you say there’s a Budget surplus of $5.4 billion, and

do you think that financial markets should be satisfied with that?

Well this will be, this year in 1999-2000 will be our third surplus in a row. The year

after that, the year that you’re talking about 2000-2001, will be fourth surplus in a

row, and in the years following that, provided the economy continues to grow, you will

have your fifth and sixth surpluses in a row. Now, you would have to go back a very long

period of time, I would think, to see five or six surplus Budget’s in a row,

that’s the first point. The second point is this, the Government’s debt

reduction programme could by then, completely eliminate Commonwealth debt. Bear this in

mind, before our Government came to Office, Labor had accumulated, in five budgets $80

billion of debt. Our surplus Budgets, plus our privatisation programmes could completely

eliminate Commonwealth debt. Now, when you say this to financial markets, you say, what is

the average debt to GDP ratio let’s say in Europe? 60 per cent. What is it in

America? 50 per cent. What would it be in Australia? Zero per cent. Let me make this

point, if you were running a surplus Budget and you have no debt, what would you do with

your surpluses? What would you do with your surpluses once you’ve retired all debt?

Well, what you would do with your surpluses is what we’re proposing to do, you would

cut taxes.

Treasurer, on the debt reduction programme, now you’re obviously not going to get

the full sale of Telstra. Are you hopeful of getting 16 per cent? But apart from that, how

serious is the loss of the full sale?

Well, with the, I am hopeful of getting the 16 per cent. And with the 16 per cent, the

proceed of which retires debt, I think we get our debt to GDP ratio down into single

figures. With the full sale of Telstra we get it to zero, that’s the basic

difference.

So how serious is that now?

Well, zero would be a fantastic outcome, to eliminate Commonwealth debt. To have not a

dollar owed by the Commonwealth would be a fantastic outcome. How many countries in the

world in that situation, three or four by my reckoning. We’d be in the top three for

four countries in the world. 8 per cent, well considering when our Government came to

Office, Commonwealth debt to GDP was 20, 20 per cent to have got it down to 8 would be

still a significant achievement. It would certainly be better than Europe and America. It

would be better than Japan. But I’ve always taken the view if we’ve had a good

performance why shouldn’t be try for even better. Why should we, if we can eliminate

Commonwealth debt, why should we settle for 8 per cent? Now, what would happen if you had

no Commonwealth debt? If you had no Commonwealth debt, it means you need no taxes to pay

your interest bills, and you can do one of two things, you can reduce taxes, which I think

you should be doing, or on the same taxes you can improve services. But you don’t

need to raise money to service debt, that’s the wonderful thing about it. We become a

debt free nation. What does it do in terms of confidence? Well, it comes out of the

question of Mr Henderson. Markets are amazed at this debt reduction strategy that

we’ve got in place, and keeping the debt reduction strategy in place is a very

important part of maintaining confidence.

Mr Costello, on that privatisation issue. Do you support the sale of Medibank Private?

Well, I’m not sure what the Government’s position, policy is. As I understand

it I don’t think it is the Government’s policy to privatise Medibank Private.

And if that is the Government’s policy then I support the Government’s policy.

Michael Hennessy. What is your assessment to the public reaction to the tax package

since the details were announced. Do you think that antagonism about the compliance costs

and confusion of what’s in and what’s out food, pose a problem for the

Government at the next election? And are you contemplating some sort of selling campaign

to explain the changes to them?

Well, actually I think if you say to the average person in Australia, the Government is

not going to tax food, what do you think of that? They support that. And every opinion

poll has always told us that, that your average person in the street would prefer a GST

which doesn’t apply to food. And opinion poll after opinion poll has shown you that.

And your average person in the street is not going to be aware of compliance costs, nor

will they have to deal with it in the slightest. In fact, I think the average person in

the street will wake up on 1 July 2000 and will say what was that argument all about. The

compliance argument is a compliance argument for people who will be running food shops.

And I have made the point that for these people, these are the people currently caught in

the compliance quagmire of wholesale sales tax, and it’s going to less of a quagmire

for them. See the public doesn’t care that much about the compliance of wholesale

sales tax because they don’t interact with it, and they won’t care that much, in

my view, about compliance in relation to food, because they won’t interact, they

won’t have to administer it. And what you are getting now is a classic fear campaign,

you can always have fear about change. But I think at the end of the day, here we are,

we’ve got some big issues in our country, we’ve got, we’re in the midst of

an Asian financial crisis, we are an economy which is as strong as it’s been in

thirty years, and what do you see the Leader of the Opposition doing – walking out

the front of Parliament House with packs of soup. How trivial, I mean what a trivial

performance. Yesterday in Question Time, you got, you know its all stuff, no substance.

They’re bringing in packets of caesar salad, I don’t think I’ve ever seen

anything like that in the Parliament and then at 3.07, the Labor Party got up to ask a

question about the current account deficit. A question which I answered an hour earlier.

I’m happy to get on with the business of economic management and I’ll give them

the stunts every time. It belittles them. Now as to your second question about the selling

campaign, I have made the point, I have made the point since we released the tax package,

that the legislation has to be passed by the 30^th of June and the reason for

that is I have always said it will take 12 months to have an educational campaign and to

get the systems going. It’s after the passing of the legislation that we will have a

campaign, we’ll have a full campaign to ensure that business knows how to treat with

compliances. It’s not a new idea, this has always been my planning, I think, I think

a lot of journalists were quite cynical when I said you had to pass the legislation 12

months in advance because, you know, journalists say he’s only saying that because

the Senate will change. No, no it’s always been our view, we’ve always factored

this in, we’ve always known it would be necessary, we always wanted to do it this

way.

Would you revise those tables on the net impact on families?

Oh we can update those families, but, it’s not so much a campaign with the public,

it’s a campaign with the business sector to help them get their systems right, that

I’m talking about. I’m not talking about so much a campaign with the public,

because as I said before the public won’t have to deal with the compliance. At the

end of the day, I mean, why does the public not care about the wholesales sales tax,

because they don’t have to administer it, they walk into a shop they buy toothpaste

and toothbrush. They don’t know that one’s taxed and the other isn’t. They

don’t have to interact in it. On 1 July of 2000 they’ll walk into a shop, food

will actually be cheaper and I don’t think too many of them will be saying on 1 July,

oh gee we don’t like this cheap food because we know behind it all there’s a

compliance cost, I think they’ll be happy to say, gee foods cheaper, that’s

great.

Treasurer on the current account, the budget surpluses that are in prospect which,

2000-2001 on your figures would be something like 1 per cent of GDP from here on, which

leaves the possibility of selling, the likelihood of selling, in your view, 16 per cent of

Telstra, but the chances of any further privatisation of Telstra I would have thought, are

a bit slim. Is that enough to ensure that the next time there’s a cyclical downturn

in the Australian economy the current account deficit peak is less than 6 per cent of GDP?

Well I actually think, well let me make the first point. I don’t for a moment

think that the current, the current account at the moment is a result of cyclical downturn

in the Australian economy. The current account deficit at the moment is a product of a

crashing in the world economy and that’s my whole point. If you compare this CAD

episode with previous CAD episodes well you might say in ’85, ’86 it was a terms

of trade problem. But if you compare it in ’89, ’90 it wasn’t any external

weakness nor was there any external weakness in ’93, ’94. I mean, you have a CAD

at the moment that is 6 per cent in the worst export prices for 30 years. Now you could

have kept the CAD lower by whacking the Australian economy into recession and you could

have said, well we kept the CAD low, because nobody can afford imports. I actually think

that it was important to keep the domestic economy strong. Now what will ease the pressure

on the current account deficit is really a combination of two factors in the forthcoming

year, the most important of which is recovery in world growth. We can’t do much about

world growth. We can’t turn the Japanese economy, but I think the world growth will

strengthen. The second is that you’re going to have a coming off, a natural coming

off of growth a bit in Australia. But I know this, I’d rather have a CAD at 6 per

cent in an environment like we’ve now got, where inflation’s at 1 per cent,

mortgage interest rates are at 6.5 and the budget’s in surplus, than say a CAD at 6

per cent as it was in ’94, ‘95 with inflation at 4 per cent, interest rates at

10.5 and GDP and the budget at 2.8 per cent in deficit in 1994-1995. Modesty prevents me

from telling you who the Finance Minister was, but the budget was then 2.8 per cent in

deficit and you were dealing with a current account at 6.6. In 1994, there was no external

weakness in the world. You know that was a totally home grown mismanaged current account

deficit on a high interest rate, high fiscal deficit. Now I don’t get complacent

about the current account deficit, I never have. I’ve said that that’s the

reason we have to keep the budget in surplus. A lot of people have got great ideas on how

we should now be spending the surpluses, but I have always said having got this budget

into surplus, having worked so hard, having made it the anchor of our economic policy we

need to keep it there, because that’s what’s produced confidence. Can I say

where would we have been now, just picture where we would have been now, if in 1996, when

the budget deficit was at $10 billion which is what about 2 per cent of GDP. Imagine where

we would’ve been if we’d have left it there, which was the advice of the Labor

Party sailing into an Asian economic crisis. Where would we be now if we hadn’t

turned that round to a budget surplus in the middle of an Asian crisis. It’s quite

unthinkable, it is quite unthinkable what would have happened in Australia if we

hadn’t turned that around. Now it was hard work and you know a lot of people say now

in retrospect oh well you know don’t give them too much credit. They were organising

demonstrations out the front of this building, they invaded Parliament House protesting

against that strategy, having done the hard work we’re not going to let it go back I

can assure you of that.

Thanks very much.