Transcript No. 2000/95

Today’s National Accounts show that the Australian economy in the June quarter

grew at 0.7 per cent and throughout the year to the end of June 2000 4.7 per cent. This

was the thirteenth consecutive quarter of growth above 4 per cent, an outcome which is

unprecedented since Australia began the system of quarterly National Accounts in 1959.

That is, this is the longest run of consistent growth above 4 per cent that we’ve

recorded in Australia. Not only was growth consistently strong at 4.7 per cent through the

course of the year to June of 2000 but inflation was low and the household consumption

deflator which is part of the National Accounts released today, a broader measure of

prices than even the consumer price index rose by 0.5 per cent in the June quarter and

just 1.4 per cent through the year. So you had 4.7 per cent growth on very low inflation.

Exports made a positive contribution to growth in the June quarter and we expect that they

will continue to make a positive contribution to growth in 2000-2001, the first time that

we’ve had a positive contribution to growth from exports since the Asian financial

crisis. In fact over the year to June 2000 Australia’s exports by value increased 29

per cent. 29 per cent compared to a growth in imports of just 21 per cent. Showing an

improvement on the current account, and that improvement being led by exports. The

prospects I believe for growth in 2000-2001 are very solid. The Government forecast 3 –

per cent in its most recent May Budget but exports in particular, I expect will continue

to strengthen through the year supported by a stronger world economy, the exchange rate

and a boost from the Sydney Olympics. With thirteen quarters of growth above 4 per cent,

strong employment growth, unemployment now the lowest it’s been in a decade, we have

the prospects to reduce unemployment further. The task for the Australian economy is to

continue the strong non-inflationary growth, that’s what the Government’s

economic settings are all about.

Mr Costello given that you say it’s a strong growth on low inflation does that

mean the case for people that have to make these decisions about interest rates, should be

that rates can stay on hold for the foreseeable future?

Well as you know, I never comment about the future movement in interest rates. But

monetary policy in Australia is set within a well known framework, a transparent framework

by an independent central bank, and the framework is that we’re targeting underlying

inflation of 2 to 3 per cent over the course of the cycle. The good news about

today’s National Accounts is that it shows strong growth and low inflation; the kind

of outcome that you would be trying to produce. Having produced it now for thirteen

consecutive quarters, and where are the results? The results are in job creation.

We’ve now got an unemployment rate of 6.4 per cent. We have historically high

participation rates, up around 64 per cent. That is, a lot of people who gave up looking

for work coming off the Keating recession of 1990 are now back looking for work. The

participation rate is as high as 64 per cent and our unemployment rate is the lowest in a

decade. Now we forecast it to come down. We forecast that it would be lower than it is

today by the end of the financial year and if it goes through 6 per cent in the year after

that, that would be the lowest in twenty five, thirty years.

(inaudible) the Australian dollar is 55.25 this morning, that’s an all time low,

it appears this you know, remarkable data that you have this morning, is it good enough to

reassure investors that Australia’s a good place to put their money?

I don’t think there’s any problem with investment in Australia. In fact

investment particularly equity investment has been extremely strong, extremely strong.

Now with the dollar are you concerned at all that numbers like this still leave the

dollar at an all time low?

As I pointed out yesterday part of the story on world currency markets is the rise of

the US dollar, not just against the A dollar incidentally but against nearly every

currency in the world and most dramatically against the Euro. And that is partly because

there is strong growth in the United States, partly because there are high interest rates

in the United States, but as far as Australia is concerned we are determined to ensure

that we have the right policy prescriptions in place for the real economy. They are the

following – we will now enter our fifth surplus Budget in a row, over the course of

this year our debt to GDP will fall to about 7 per cent. We want to keep the Australian

economy growing strongly. We want to keep inflation low, we now have a much better tax

policy, and we’re going to ensure that we keep the Australian economy competitive

with our structural policy. These are the important things for the real economy.

Mr Costello I think you say you’ve got the right policies. How can you say that

when, when Government spending in these National Accounts are up 10.8 per cent for the

year, it added half a per cent, 0.7 increase, surely that’s not the appropriate

policy in a very strong economy?

Well, Government spending only accounts for about 1/3 of Commonwealth outlays, and

Government spending is actually quite a small proportion of overall purchases of goods and

services. That is that the Government spending on goods and services is small, a small

part of the Government’s spending, and the Government purchases of goods and services

is a very small part of overall purchases of goods and services. And if I can just find

you the amount, I think it’s around about 10 or 13 per cent. So whilst that has

actually grown, it’s on a very small part of actual Government spending and it’s

on a very small part of overall goods and services spending. Now, 14 per cent, 9 per cent,

Commonwealth spending on goods and services accounts for about 9 per cent of total

spending on goods and services in the Australian economy, and spending on goods and

services by State and local Governments accounts for about 14 per cent of total spending

in the economy. Now, that’s in the year past. We haven’t yet issued a final

Budget outcome for the year past, that is, the year ending on the 30^th of June

2000, but I expect it will show a very strong outcome in fiscal terms for the year ended

on the 30^th of June 2000, and all of that will be devoted to paying off

Government debt. As you know, in the five Budgets before this Government was elected net

Commonwealth debt increased $80 billion. We have not borrowed a dollar since we were

elected. We have now paid off $50 billion. And the debt to GDP ratio in Australia in

2000/2001 will be 7 per cent. Japan is something like 130 per cent, the United States

about 40 per cent, and Europe about 50 per cent. So in the fiscal position, which is

measured by your debt liabilities, Australia becomes one of the strongest countries in the

world. And I’ve made this point, if the Government were successful in its

privatisation programme of Telstra, we could be in a position where the Commonwealth

carried no debt, no central Government debt, and when I last looked at this there were

only three countries in the world that were in such a position.

Treasurer, do you accept the argument that perceptions of Australia as an old economy

is one thing that could impact on the dollar, whether those perceptions are right or

wrong, and if you do accept the argument is there anything the Government can do about it?

Look, there’s been a lot of discussion about this old economy/new economy,

it’s been going on for some time in Australia, and various people, I guess, have

different perceptions. The traditional industries of Australia were agriculture and

mining, and there are some people who think, who haven’t updated their understanding

of the Australian economy. Undoubtedly there are some people that think that these are the

only really, big, significant industries in Australia. But, those people who have updated

their thinking know the facts. And the facts are that we now have a very substantial part

of our Stock Market index, which is comprised of telecommunications stocks, of financial

services, and of new industries such as telecommunications. In fact, on our estimates,

since September of 1990 the share of the All Ordinaries Index devoted to the new economy

has grown from 2 per cent to 36 per cent. Financial services are now a very big part of

Australia’s economy and its exports, and we now have telecommunications stocks,

probably our largest company Telstra, a big part of the All Ordinaries. Let me go through

a couple of other measures, very interesting. We have either the second or third highest

penetration of Internet use and personal computers in the world. One of the highest

penetration and use of cellular phones in the world. And we pulled out some statistics

recently – June 1998, 63 per cent of all employing businesses in Australia use

personal computers, and 44 per cent of Australia’s adult population accessed the

Internet at some time over the 12 months to November of 1999. The rate of uptake is on a

par with North America and double that of Western Europe. In other words, on all of these

indicators the United States tends to be number one in the world and Australia number two.

That is on all of the indications: Internet usage, personal computers, cellular phones,

use of personal computers in business, we tend to outrank Western Europe, that is, to be

second in the world. The point I want to make about the so-called old economy/new economy

debate, there’s been a lot of work done on this, and the most recent work was at the

OECD. A measure of a new economy is a measure of productivity, that is, the extent to

which you are harnessing all these technological innovations to boost your productivity.

The OECD, when it considered this, found that Australia was among the six economies of the

world that had had significant productivity improvements in part as a result of the uptake

of information technology. And in fact, the increase in labour productivity in Australia

over recent years has been significantly more than the United States. In 1998

Australia’s labour productivity growth, 4.3 per cent, compared to the US of 2.8 per

cent. And in 1999 3.3 per cent compared to 2.5 per cent. That is, the point about the new

economy is not whether you’re making semi-conductors or personal computers. The point

about the new economy is, are you utilising semi-conductors and personal computers in

financial services, in mining, in agriculture, are you using it in manufactures, are you

using it in other IT? It’s the extent to which you adapt new technologies in

industries and get productivity lifts from them. Now, the story of Australia is quite an

impressive adaptation of productivity, borne out by quite an impressive leap in

productivity, as recognised by the OECD along with few other economies in the world.

Mr Costello, did you get upset that Australia does have a big IT deficit and it seems

that some of the countries are faring better against the US dollar, such as Korea, Japan,

those countries that actually do manufacture IT, significantly?

Well look, you know, you raised Korea and Japan. You’ve got to be very careful

when you make international comparisons. I mean, Korea has just been through a very

significant financial crisis and an extraordinary devaluation as a consequence, it is now

coming back off a low base . . .

But during this crisis they’re doing better than us.

Korea was in an IMF programme in 1997 and 1998. It ran out of foreign exchange. The

Government was appealing for people to bring in gold bracelets and donate it to the

Government. It went through a very severe crisis. Now the good news about Korea is that it

is now growing very strongly, but off a very low base. So, I think you’ve got to be

very careful when you make these international comparisons. Now, compare Australia with

Japan, I think on any measure technology uptake, utilization, Australia’s rates are

much higher than Japan on any measure. In fact, it’s one of the discussions

that’s been going on down at the World Economic Forum. It could be one of the

explanations why Japan is limping along in its fifth year of either negative or bare

growth.

Do you share the Reserve Bank Governor’s view that the Australian dollar is

undervalued against the US dollar?

Look, I’ve found over years that there’s no point in commenting on values of

exchange rates. As I said earlier, a big part of what’s going on in the world at the

moment is the rise of the US dollar and the financial markets love affair with all things

American, not just against the Australian dollar, but against the Euro in particular, the

New Zealand dollar, currencies from all around the world. And that’s the only

observation on the question that I would make.

Treasurer (inaudible) stronger dollar at the moment, how can you then justify it on

economic fundamentals grounds, you also make the task of economic management much more

straight forward? I mean, we have a surge in export income, which is what (inaudible)

already said, a potential problem with inflation, a stronger dollar would ease that

problem for us.

Look, we have a floating exchange rate, and the reason for a floating exchange rate is

so that you can take some adjustment on your exchange rate. That doesn’t mean that we

aren’t interested in the exchange rate. We are, we watch it extremely carefully, but

in these particular areas its not wise to actually, in my experience, comment on levels.

But I make this point:- over the long term, levels relate to fundamentals. And if you have

an economy which is growing for thirteen consecutive quarters above 4 per cent on an

inflation measure which is one or two, with a fiscal situation which is five surplus

Budgets in a row and a central government debt to GDP which outshines anything in Europe

or North America, they are policies which are designed to have a strong real economy. And

that’s the important thing to bear in mind, that you’re policies are directed at

the real economy, which we intend to do. We intend to do some more things too by the way.

We’re getting a new tax system, we want to improve industrial relations further,

we’ve got a program to unleash the private sector in Telstra and telecommunications,

we’ve got a lot of unfinished work to do.

Treasurer, the Reserve Bank Governor has said that you want to have look at the

proposal for an ANZAC dollar? What is your position?

Well, the first thing is that any change in Australia’s currency arrangements,

that is the actual currency itself are matters for Government decision and if a request

were put to the Government, the Government would look at it. But I think I can indicate to

you that no such request has been made. As far as the Australian Government is concerned,

the Australian Government is not proposing any change to the Australian currency or to our

monetary arrangements. If somebody wanted to adopt them, if somebody made an approach and

wanted to adopt our arrangements we would look at that if such a request were made. But no

such request has been made.

Those are the signals from Helen Clark though, aren’t they?

I don’t know that the signals are that they would want to adopt the Australian

dollar. There’s been some discussion about some kind of joint currency. We’re

not interested in any new currency, any third currency. We are happy with our monetary

arrangements and we intend to keep them. Now if somebody came along and said we would like

to adopt your currency and your monetary arrangements we would look at it, but no such

request has been made and what I’ve seen from the comments, the thinking in New

Zealand is not along those lines.

(inaudible) the Australian currency if New Zealand was to adopt it?

It’s just too hypothetical. It’s open to other countries to say we would like

to adopt your currency. I think there was a proposal, I think it was by Argentina, which

at one point said to the US Government they would like to adopt the greenback and I think

the US Government made it entirely clear that if they did, the US Government would not be

changing its Federal Reserve or changing the composition on its Federal Reserve. And it

was a matter for Argentina. Now I’m not sure that that has been advanced, but

obviously if somebody said to us, and this has not been said to us, we would like to adopt

the Australian dollar at a senior government level, that would be looked at. But the point

I’m trying to make clear is, we are not proposing to change the Australian dollar nor

are we proposing to go into some new currency. We are very happy with our monetary

arrangements and the banking arrangements which support it.

Treasurer, do you regret at all that the Australian dollar has fallen to its lowest

level ever during your tenure?

We concentrate on the important measures in the real economy. And the truth of the

matter is that we have a growing economy and a sound fiscal position with reducing debt

and more people in work than ever before, with lower unemployment than we’ve had in a

decade. And that’s what we’re focussing on.

Mr Costello, you said you wouldn’t comment on interest rates, but you have

discussed inflation. You’ve described growth as being non-inflationary growth and

you’ve highlighted the deflator of 1.4 per cent. I mean doesn’t that really

suggest you have a very different view to the Reserve Bank?

No, it suggests that I can read the National Accounts.

(inaudible) . . .

Well hang on, hang on, you say I refer to the fact that the deflator was 0.5. That is a

finding of the National Accounts. It’s like saying growth is 0.7 for the quarter and

4.7 for the year. I mean these are objective findings by the ABS. I don’t make them

up and I can’t refer to any other figures. The figures I have to refer to are those

that are found and reported today which on the inflation front are 0.5 per cent in the

June quarter and 1.4 per cent through the year. Now these are objective findings.

But you characterised growth as well as being non-inflationary?

Well how else can you characterise 4.7 per cent growth on a 1.4 per cent consumption

deflator? These are, these are not opinions, these are objective findings by the

Australian Bureau of Statistics which bind me and everybody else in Australia, I

can’t pretend otherwise.

In characterising it that way, does that indicate you are opposed to low interest

rates?

No, in characterising it that way, means I can read the tables. And I can’t read

them any other way. Thank you all very much for your time.