Transcript No. 2000/25

TRANSCRIPT OF

TREASURER

Well today’s National Accounts are good news for the Australian economy. They show

that the economy grew a solid one per cent in the December quarter, recording growth of

4.3 per cent for the year, and, importantly, on very low inflation. The inflationary

pressures in the December quarter of 1999 were very low.

What this means is that the Australian economy has now grown at or above 4 per cent for

the last 11 consecutive quarters – a growth rate which is unrivalled in the last 30

years. We have not had 4 per cent growth over 11 quarters in the seventies, the eighties

or the nineties, and this shows that the Australian economy is a high growth, low

inflation economy.

There’s been strong growth in private consumption over recent quarters, which we

know. Business investment has been coming off a little which is not surprising because

it’s coming off after the surge in relation to Olympics and other projects. And we

had a contribution to growth from exports in the quarter, and that is consistent with the

world economy recovering and the world economy picking up growth, which we think over the

course of 2000-2001 will mean that our current account will narrow, our prices will be

better, and we’ll start getting a contribution to growth kicking in from the outside

world. And in fact the world picture looks better now than it looked throughout the course

of 97/98 and 1999.

Australia weathered the Asian financial crisis probably better than any other country

in the world. That is, we recorded strong growth of 4 per cent right throughout that

period whilst the rest of this region went into recession. That was one of the benefits of

getting our Budget in order, our financial regulations strong and having an open and

productive economy. And there’s no reason why we can’t build on that into the

future. We have the capacity, I believe, in the future to sustain growth rates of up to 4

per cent, which is not something we’ve been able to sustain in the past and if you

are growing an economy at 4 per cent and if your employment is growing at 2 per cent

you’ll continue to see falls in unemployment. Unemployment is, at the moment, the

lowest it’s been in a decade with 50,000 net new jobs in the last month and there is

no reason why that would not continue. The growth of the last four years was bringing

unemployment down at the rate of about half a percentage point per annum and if you were

to continue to grow the Australian economy at 4 per cent on low inflation that illustrates

the benefits that are available for Australians who are looking for work.

So it’s a good story. It’s a story of a strong economy on low inflation and

if we keep working at it and keep our growth rates high there will be further benefits for

people who are looking for work in the future.

Treasurer with employment growth rates stronger and employment prospects that you

describe looking so good, why do you think it is that consumer confidence is down for the

second month in a row?

Well, I’ve been reading some of the surveys on confidence and confidence obviously

bounces around, I think, according to press coverage, a whole host of factors. What we

learnt through the Asian financial crisis, by the way, was that confidence is not

necessarily an indicator of economic activity because confidence was very low through 1997

and 1998 and as it turned out growth was quite strong. So, I read these surveys. They make

observations about the factors that could influence it. One of the things that could have

influenced it obviously is the recent tightening in monetary policy and that will be

factored in to expectations. My experience is, however, that expectations bounce around

quite a bit. The important thing is the way in which the economy moves.

What does the stronger growth and the lower unemployment rate mean for the Budget

surplus. It’s, growth is high, unemployment is low in the forecasting (inaudible).

Well, in the Mid-Year Economic Review which we brought out at the end of last year, we

forecast growth for 1999/2000 at 3 per cent, and you would have to say with two quarters

in, we would probably exceed that forecast on the indications that we’ve had in

relation to both the September quarter and the December quarter. I’m not saying

we’re going to massively exceed it, but you would think on the basis of the two

quarters that are in, that we would exceed that somewhat. In relation, the effect that

that has in relation to revenues and expenditures is not quite as straightforward as some

people say. One of the things about this growth is it’s low inflation growth.

There’s a lot of people saying oh growth’s moved up, you know, one per cent more

than expected, that means revenue has moved up by x billion. It doesn’t work that way

anymore. It used to work that way when growth was based on high inflation because people

would push up through tax brackets. But when you’ve got low inflation, when

you’re in a one per cent inflationary environment, that source of revenue is

disappeared. It just doesn’t work like that anymore. You would see a little bit of

benefit arising from the fact that there may be more people in work than was expected. But

the changes are not large changes

Hundreds of millions (inaudible) billions (inaudible).

Well, I’m talking sort of low, that order is the kind of sums that it means. I

make this point, that these are positive indicators for the Budget, overall they are

positive, but I wouldn’t put them up near ‘bills’ I’d put them down

near hundreds as you said.

Mr Costello the expectations have been building up in recent weeks that the Government

(inaudible) doing a lot for the bush in this Budget although (inaudible). Do you think

that people shouldn’t , given the overall situation, get their hopes too high for a

big spending initiative, separate initiatives on the bush?

Well, yes I do think they shouldn’t because it won’t be possible, nor was it

consistent with the Government’s policy to go into a big spending Budget. In fact,

quite the reverse. We already have legislated income tax cuts of $12 billion. That is . .

.

(Inaudible).

We already have legislated income tax cuts of $12 billion. That is, there is a fiscal,

there is a fiscal stimulus coming already by legislation on 1 July. People forget that

after abolishing wholesale sales tax and after abolishing the stamp duties on shares and

after cutting income taxes, there’s an overall net reduction in tax of the order of

$5-6 billion dollars coming on 1 July. You might have thought from the way sometimes the

press reports these things, that taxes were going up on 1 July. On 1 July, overall,

there’s a cut in tax and another word for that is a fiscal stimulus, of around $5-6

billion dollars and that’s what’s got to be funded in this particular Budget and

it doesn’t leave room for great new spending. Nor would you want to, because new

spending would add fiscal stimulus, in addition to the fiscal stimulus which is already

factored in by legislation.

And that fiscal stimulus, Treasurer, coming on top of this sort of an economy which is

largely being propelled by fairly strong household consumption, investment is coming off

as you have said. Doesn’t that sort of increase the pressure on the economy, which is

as the Reserve Bank has said, getting close to its capacity?

Well, it depends what you mean. I don’t think we’re close to capacity in the

sense that you are now seeing major inflationary signs. In fact these National Accounts

would tell you that we’re not. Although we do expect inflation to edge up in the

course of 2000. Principally, that will be led by world oil prices, which is not a domestic

economy pressure, which is feeding into inflation. We have external pressures, which are

feeding into inflation and the principle one of those is the world oil prices over which

we have no control. I think that there are some parts of Australia which, where you might

be now experiencing some supply – where you might be experiencing in relation to the

labour market full employment and there might be some capacity constraints. You think of,

maybe the house building industry might be one of them. That’s because you’ve

had the hail storms in Sydney, you’ve got very strong building which has been going

on in Sydney, you’ve got low unemployment which is going on in Sydney. There’s

been a bit of a demand in Sydney for houses and constructions and people are reporting to

me that its very hard to get builders to be building or doing renovations and I suspect a

bit of that is now factoring into prices in some of those markets. So in some areas you

are beginning to see some of those constraints. The hard thing of course is to work out

how much of this is cyclical. I think there’s a bit in the house building industry

that’s been cyclical, people want to bring forward housing renovations or bring

forward house building because of GST. But on the other hand there’s a lot of

activity that I think has been put back because of GST. Those things that are going to

become cheaper after 1 July. And it may well be, that the bring-forward on things that

people are expecting to become more expensive has taken the price up on those things, so

that pricing changes have already been factored in, and the push-back has led to

discounts, so that the pricing changes are already being factored in in other areas and

the motor market might be one of them. That is, you’re actually seeing that market

conditions are advancing and pushing back, and may well be equalising price changes.

(inaudible) to keep interest rates low, is I mean if you have investment coming off

(inaudible) and at the same time you’ve got very strong household spending and as you

said $5 billion of fiscal stimulus coming in on top of that?

Well, the thing is in relation to monetary policy, that we will principally set

monetary policy with an eye to inflation. And we have a target in relation to that, and I

think that’s been pretty clear and pretty transparent. The other thing that will need

to be factored in are world developments. I’ve made the point that you’ve seen

interest rates moving around the world, and obviously they are moving around the world

because the world is becoming stronger. People have got to bear this in mind, the world

economy has picked up. The world went through the greatest financial crisis of our time in

1997 – 1998 and as the world economy picks up, you’ve seen interest rates moving

around the world. You saw them move in New Zealand over night, there’s a lot of talk

about the United States. Now a world pick up is not an altogether bad thing, incidentally.

A lot of people sit around and put the colour on it that you did, oh well the world is

picking up, things, things are getting stronger, what a terrible thing. No, no a stronger

world economy is actually quite a good thing. It’s actually going to help

Australia’s exports. We’re actually going to be getting I hope, better prices

and we’re going to be getting better volumes. And just as during 1997 – 1998, as

the world was terrible, strong domestic economy got us through. A pick up in the world, a

weakening in the consumer demand domestically might just be the right balance. And the

focus will switch and it will be a good thing.

With a strengthening world economy and your scenario of a stronger price for Australian

exports, the Australian dollar is, (inaudible) and the weakness of the dollar, is that one

thing that you believe could be adding to inflationary pressures in this (inaudible).

Well, just bear this in mind. A dollar which was weak in 1997 – 1998, because of

the Asian financial crisis, didn’t have an effect on inflation, that was the previous

evidence. I think what will have an effect on inflation, are world oil prices. And

obviously they are going to effect inflation over the course of this year. But

there’s been a lot of discussion recently, in the context of the Australian dollar,

on whether Australia is an old or a new economy, there’s been a lot of discussion

about this. I just want to make the point, that on the empirical evidence, the Australian

economy is a very technologically sophisticated economy. The uptake of new technology in

Australia is very quick and very widespread by world terms. For example, according to

World Bank data, mobile phones per thousand people in Australia, is at a higher ownership

level than in the United States. Personal computers, according to World Bank data, we have

362 per thousand, the US has 407, but compare that with Japan, 202, and Europe, 186 –

almost double the penetration of personal computers in Europe. Internet hosts, we are

about half that of the US, but about four times that of Japan, and four times that of

Europe. So, on international measures, the uptake of technology in Australia is very high.

Now that is not only significant for the fact that the uptake is high amongst consumers,

but it’s given us a greater penetration on E-commerce. To give you some other

figures, agricultural output as a share of GDP is 3.4 per cent, finance and insurance is

6.9. So the finance and insurance output in Australia is about double agriculture. Mining

is 4.5, about the same as communications. So, I’m not saying there’s anything

wrong with mining and agriculture, by the way, but I’m making this point, because

they are very, very important industries, but I’m making this point, that this

economy like most industrialised economies is building a sophisticated services base. And

the view that Australia is just a farm, and a quarry is completely outmoded. This is an

economy with a sophisticated services base, a good manufacturing base with growing

internet and mobile phone penetration, and I think it’s important to bear that in

mind.

(Inaudible) Australian dollar undervalued given that?

Sorry?

Is the Australian dollar undervalued, do you agree with the Governor of the Reserve

Bank?

I always agree with the Governor of the Reserve Bank. I’m not entirely sure that

he was talking about a particular value of the $A because, as you know, we don’t

target a particular value. But I’m sure he would agree with me, that those people who

are in the camp that says, oh, Australia is an old economy, do not have an accurate read

on the sophisticated Australian economy of today. This is not an economy that relies on

farming and mining, as important as they are. I mean, if you wanted to build an all-round

economy, you’d want to be a strong, old and new economy. This is a sophisticated

economy, and let’s have a look at the facts: eleven consecutive quarters of 4 per

cent plus growth. Now, at the same time, since our Government was elected in March 1996 an

average inflation rate of 1.1 per cent. Outside of the US there wouldn’t be many

economies, if any, that would have had that kind of record over the last three years, and

in the midst of an Asian financial crisis.

In the new economy are you satisfied, you’ve mentioned the increase in household

wealth, and household wealth in Australia has been distributed with equity, or is it

concentrated in the higher income brackets?

Well, we would like to see an Australia where everybody did better, particularly those

in the lower income groups. And I think that there is evidence to show that people in

lower income groups are doing better. It may be that people in the higher income groups

are comparatively doing better again. But if you can bring up the living standards of all

groups, particularly lower income earners, and I believe you can in a growing economy one

of the major causes of poverty in Australia is unemployment. One of the best things you

can do for people is give them the chance of a job. And having an unemployment rate at 6.7

per cent rather than 8.6 per cent, which it was when our Government came to office, I

know, is much better for lower income people. And if you could get that unemployment rate

to 6 per cent, I know again, that would be even better for lower income people. And I

still believe that the best thing you can do for lower income people is grow an economy

which is strong enough to produce jobs, and that’s got to be our focus. Look, let me

go back over it. When our Government was elected in March of 1996, the unemployment rate

was 8.6 per cent, and after four years it’s 6.7. Now, it’s an economy that in

the last three years has been growing at about 4 per cent per annum, a little bit more

last year, but let’s say averaging about 4 per cent. What that meant, an economy

growing at 4 per cent with the employment growth that we’ve seen, the unemployment

rate was coming down about a a per cent a year. So over the course of four years it

came down from 8.6 to 6.7. That’s what we know, 4 per cent growth, if you can get

employment growth at about 2 per cent you can reduce unemployment about a per cent per

annum. Now this is an incredibly long run of strong economic growth. A lot of people say,

it can’t continue, but we ought to try and aim to prolong the cycle. Let’s

prolong this as long as we can, because if you could prolong 4 per cent growth, with the

reduction of a per cent per annum, you would be giving significantly more Australians

the opportunity to work. And that ought to be the goal of economic policy, in my view, in

Australia at the moment – how do you prolong a 4 per cent growth rate and create those

jobs? And that’s going to take a disciplined monetary policy, a disciplined fiscal

policy, it’s going to take tax reform, it’s going to take structural reform. You

won’t do it by doing nothing, I keep on saying this.

Mr Costello, in your capacity, in your other capacity as the premier Liberal in

Victoria, do you give your unqualified support to the continued leadership of Denis

Napthine?

Yes I do, because Denis was elected unopposed. I don’t know Denis well, I saw him

at the football last Thursday, we had a good exchange and I think that Denis is doing a

good job and he has my support in doing that. And I hope that the whole of the State

Parliamentary Party gets behind Denis. He’s got a tough job coming off the electoral

defeat.

He, in my view, is the only person there with the experience to lead the Liberal Party,

and I’ve read speculation in the newspapers. I say this to all of the people in the

Liberal Party in Victoria, that there is no point squabbling amongst yourselves. We have

to be united. And it is very, very important that all Liberals who want to see the Liberal

Party do well, unite together, that the talking to the press ceases. That is not going to

help anybody. That they swing their support behind Denis, and that they ensure that we

have an organisation which can fight the next Federal Election.

The next election that the Victorian Liberal Party is going to be engaged in is the

Federal Election. And I want to make sure that the Liberal Party is absolutely united

towards one end in 2001 with the best qualified fighting team that there is, to ensure

that everyone of my colleagues, Federal members, is returned, and we win some more. That

is the objective that is squarely on my mind and I want to make sure that the Division in

an unqualified way, directs itself to that end.

Thank you.