National Accounts December Quarter 2004; Interest Rates; Labour Shortages – Press Conference, Canberra

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Balance of Payments – December Quarter 2004
March 1, 2005
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March 3, 2005
Balance of Payments – December Quarter 2004
March 1, 2005
Economy, Interest Rates, Skills Shortages, Immigration – Interview with Nicole Haack, 5AA
March 3, 2005

National Accounts December Quarter 2004; Interest Rates; Labour Shortages – Press Conference, Canberra

Press Conference
Parliament House, Canberra

Wednesday, 2 March 2005
12.00 noon


SUBJECTS: National Accounts December Quarter 2004; Interest Rates; Labour



The December quarter National Accounts indicate that the economy slowed in

the December quarter, recording growth of 0.1 per cent and 1.5 per cent through

the year. Excluding farm GDP, the non-farm GDP growth was stronger at 2 per

cent through the year.

A large part of the story was the rebalancing of growth, not altogether unwelcome.

Detractions from growth were in dwelling investment, as I have been saying for

quite some time, the Government would like to see dwelling investment which

has been very strong come off, and it has according to these National Accounts.

Detraction in relation to inventories, detraction in relation to net exports

as we saw yesterday with the Balance of Payments. But the largest contribution

to growth was from business investment, which contributed 0.8 per cent. So we

have seen something of a rebalancing out of household consumption and housing

back into business investment.

The increase in export growth has been slower than we would have liked. This

reflects a higher exchange rate, lead times on investment in the mining industry

and capacity constraints on some ports. But notwithstanding that, the terms

of trade are moving decisively in Australia’s favour, currently at their

highest level since 1974, and the contract negotiations which are going on at

the moment in relation to our major mineral exports indicate that there will

be significant addition to growth in the June quarter when they flow through.

As I noted yesterday in relation to the Balance of Payments data, the mining

sector alone has invested $26 billion over the last three years. These projects

obviously take time, but with those three years behind us, and over the next

couple of years, they will enable the mining industry to take advantage of high

terms of trade, strong demand particularly coming out of China.

The farm sector was constrained in economic growth, again the late arrival

of rain and still some lingering effects of drought subtracted half a percentage

point from GDP growth in the year to the December quarter. As I said, the area

of strength that did contribute to growth in the December quarter was business

investment – increasing 5.8 per cent in the quarter and 10 per cent through

the year. And this no doubt is partly reflective of the profit share which is

at 26.6 per cent – just off all time records.

So you have got profitable companies now investing, you have got an economy

moving out of housing, some moderation in household consumption, strong business

investment – whilst it is taking time to take advantage particularly in

the mineral industry of developments overseas, over the next few years we should

see that grow quite significantly.

Incomes remain strong with wage compensation growing quite strongly but domestic

inflation remains subdued. The household consumption chain price index increasing

by 0.6 per cent in the December quarter.

And so, although these show a slowing of economic growth in, it is not altogether

unwelcome in the fact that the composition is changing from household consumption

and the housing sector to business investment. That is laying the groundwork

for increased capacity in years to come, and at a time when we have unemployment

at 30 year lows that increased capacity will certainly drive the economy further.


Mr Costello you have talked about the necessary rebalancing of economic growth

and the declining or the moderating household consumption, while exports have

been slow to take off do you feel that there is any culpability on the Government’s

part for fuelling that consumption with election handouts, some of which are

still coming through the pipeline?


Not in the slightest. Can I say that the Budget bottom line is stronger at

mid-year that it was at Budget time? And I think the Reserve Bank Governor,

who I think you will accept is independent on this point, made the point that

there would be no Government in the western world that would have a stronger

fiscal stance than Australia.


So does this have any implications for the Budget and if so what are they?


Well I have done nine Budgets – seven surpluses. I would hope to do eight

surplus Budgets, and although it is true that the private sector is borrowing

from overseas strongly, the Government is not. The Government is not borrowing.

In fact in net terms since 1996 we haven’t borrowed, so the Government

is actually contributing to savings. Now I believe very strongly at a time when

you have a high current account deficit, the Government has to add to savings,

not detract from them.


What about Treasury’s…?


This is one of the big differences from the 1980s incidentally.


What about the growth figure?


The growth figure? Well the growth figure as I said indicates a slowing economy

in the December quarter and a rebalancing. But I must say to you that some of

this rebalancing is welcome. I’ve been saying for some time that we should

be rebalancing out of the housing sector and into business investment. Now it’s

taken some time for that to show up in exports and still will. I don’t

expect a significant change in the export position until the June quarter as

I said, but with such strong investment in the export sector you will see things

picking up over the course of the year.


Michelle partly picked up on it, but Treasury has got a growth forecast of

3 per cent for 2003-2004, that surely can’t be met now?


Well you’d have to look at these two quarters, and you’d have to

say to yourself there would have to be a very strong couple of quarters after

this to meet that forecast.


Or some hefty revisions.


No, we only put out forecasts twice a year. We put them out at the…




Sure, sure.


The Governor made it clear last week or whenever it was, that he didn’t

believe the story of 0.2 followed by 0.1, when business confidence and consumer

confidence have been so strong. What’s your take on that? Do you have



Well, look it’s a fair question. You’ve got two pieces of economic

news today. You’ve got a statement from the Reserve Bank Governor who

sees a very strong economy with capacity constraints, unsustainable wage growth

and you’ve got a Statistician who sees a slowing economy with 1.5 per

cent growth, which is subdued. And you want to know my view, I think the truth

lies somewhere in the middle.

You’ve got two very, very interesting economic stories today. Now, what

do we know about the Australian economy? Well, you’re quite right. Consumer

sentiment’s at all time highs. Business confidence is as strong as it

has even been. Unemployment is as low as it’s been in 30 years. People

will say to you that they’re having trouble finding labour. And yet you

then have a set of National Accounts, which comes out and says, well growth

increased by 0.1 per cent and 1.5 per cent through the year. But they are not

totally consistent stories, I must say. Now, where does the truth lie? The truth

lies somewhere in the middle.

If you want my assessment, my assessment is the economy is certainly not accelerating,

it has been strong and it is probably moderating. But it doesn’t look

to me like it’s slowing in any unreasonable way.


Do you think the Reserve Bank should have deferred its Board meeting for a



Well, the point, you people should know this, this is no great secret. The

Reserve Bank when it made its decision yesterday would not have known the National

Accounts. So it makes its decision without that information.


Should it have deferred it for that?


Well the Reserve Bank can meet on any day of the week it likes. I don’t

set its meeting dates, that’s a matter for the Board and the Governor.

I’m sorry. Louise.


Mr Costello, just on that Budget point, given that the economy is slowing and

the impact that will have on revenue and spending, will it be a much tougher



Look, it’s got to be a Budget that has a decent surplus. That’s

what it’s got to do. We need a decent surplus Budget to add to savings.

We have a situation at the moment where the private sector is borrowing, it’s

running down savings – so the Government should be running up savings, and that’s

what we’ve been doing. If the Government didn’t run up savings,

then your rundown of savings would be much greater. Sorry. Mr Paul Bongiorno,



Thank you for asking me. Doesn’t today’s figure here, or don’t

today’s Accounts show how big a risk the Reserve Bank is taking with its

decision to raise rates?


Look, I appointed the Reserve Bank Governor. I entered into the agreement with

the Reserve Bank Governor to give the Bank independence and to target inflation

and I’m not going to walk away from that. And so I respect the independence

of the Bank and the decisions that it makes. Let me make that entirely clear.

The Bank in its statement sees upside risks. The Statistician in his finding,

finds downside risks. You want my view? Somewhere in the middle. And I’ve

been making that clear. The one thing I’ll say in relation to these National

Accounts, is that I don’t see any evidence of inflationary pressures.


Do you disagree with the Reserve Bank then?


No, as I said to you earlier, I put these arrangements in place, I appointed

the Reserve Bank Governor. I gave the Reserve Bank Governor the target. He has

a target to focus on inflation. He has to make decisions in relation to that.

And these are the decisions that he has made. Now, notwithstanding all of that

by the way, I have my own views on the Australian economy and my own responsibilities.

My own view is this, that in the December quarter the economy moderated, it

slowed. The extent to which is slowed may be an open question, it may not have

slowed as much a 0.1–1.5 outcome would lead you to believe. That’s

my view.


On exports Mr Costello…


Sorry, I’ll go back to hands. But you’ve already started, please.


Exports have been roughly flat since the Sydney Olympics but the Government

didn’t really acknowledge exports as a problem until late last year. Was

that too long? Why did it take so long to recognise the problem?


Well let’s go through the export story. About two fifth’s of our

exports are in mining, one fifth in agriculture, about one fifth in manufactures

and about one fifth in services. Okay. We know we could export more resources,

which after all is our largest export sector. We know we could. Why aren’t

we exporting more? Well, some of these investments take a long time. And you’ve

got to go back and say that probably the companies themselves didn’t anticipate

the opportunities.

I’ll make another point. Back in 2000-2001, most of the economic parrots

were saying mining was an old economy industry. It was very hard to raise money

for mining. In fact, I was under a lot of criticism for defending the mining

industry because dot-coms were going to take over the world. You might recall.

And I remember strongly arguing at that time that the mining industry might

be out of favour but people would be wrong to think that it wasn’t important.

But if you go back to 2000-2001 when people were floating dot-coms and couldn’t

get enough money into the dot-coms, and everybody was talking about the new

economy. I think it was hard to see that there would be these opportunities,

certainly hard for the companies to raise money.

Now we can see today that it was never a bad industry, the mining industry,

the old economy wasn’t a too bad an economy. In fact, the new economy

doesn’t look so good. But a lot of these investments take time. We’ve

got $26 billion coming into the mining industry over the next three years. So,

I think that it’s quite possible that financial markets and a lot of other

people missed it. Did I miss it? Well, I’ll go back and send you some

of my speeches. I don’t think I did miss it. Yes, sorry.


Mr Costello, how do you feel when you see the banana word in the headlines?

What is the difference essentially between Paul Keating’s banana republic

and yours?


Well, I will tell you, just so that I get my facts right. Paul Keating had

inflation at 9.3 per cent, today it is at 2.6 per cent. Paul Keating had mortgage

interest rates at 13.5 per cent today, it is at 7 per cent so what are we doing

this on, an inflation rate which is a third and an interest rate which is a

half. Seven surplus budgets, $73 billion dollars of Keating debt repaid. Now

having said all of that, because, I think that probably ends that argument.

I don’t know what I said the interest rate was but it could well be 7.3,

I don’t want somebody to pick me up on that point.

But having said all of that should we be ambitious to increase our exports,

yes of course we should. I have been saying for some time that we must get ambitious

to increase Australian exports. How are we going to do it? Well there are some

blockages and I have identified them. It is taking time for some of the investment

to come through and that will fix itself. The exchange rate is making things

difficult for exporters but what you have got to do is you have got to try and

help people lift their productive capacity and I can think of no better way

of lifting Australia’s productive capacity than revolutionising our industrial

relations system. I have been banging on about this for 20 years, for 20 years.

We have made some improvements but there are a lot more to do and I want people

to focus on these figures and say ‘Yes we now need to reform our industrial

relations system’ we really need to make Australia as competitive as it

can possibly be. Mark.


So it is not a banana republic but it might be a pineapple republic in that

mortgagee holders are getting the rough end. Your promises to keep interest

rates low but on international comparison were the third highest in the developed

world only Iceland and New Zealand are above us, it’s not low is it?


Well the mortgage interest rate let’s say is at 7.3 per cent by Australian

standards is low, yes it is. When this Government was elected it was 10.5 per



But not by international standards….


…well, well


…by today’s international comparison, Australians interest rates

are higher.


Well look, by Australian standards a 7.3 per cent mortgage interest rate is

low. When the Government was elected, let me just tell you, when the Government

was elected it was 10.5 per cent and the difference between the 10.5 per cent

interest rate and the 7.3 interest rate on the standard Australian loan is $565

a month. Now you know Mr Beazley tried to pull some stunt yesterday about interest

rates and was terribly embarrassed because some of the news channels had footage

of him in the Parliament boasting about how low a 9.5 per cent interest rate



Didn’t you do the same saying that 9.5 per cent or anything with a single

figure would be low?


No, I did not do the same no, no. When I became Treasurer interest rates were

10.5 per cent that is what I inherited and I have made the point since we have

put in place our reformed program they have varied between six and eight. That

is what they have varied between. They have been as high as eight something

whilst I have been Treasurer and I made this precise point, a variation between

six and eight is qualitatively different to a variation between 10.5 and 17

but that is where they varied qualitatively under the Labor party 10.5 to 17

and notwithstanding the early years when we inherited the 10.5 by the time we

had our program in place they have varied between six and eight.


Isn’t it a more pertinent comparison Treasurer though how Australia is

performing alongside comparable economies today rather then how it’s performing

historically against itself 15 years ago?


Well you have got to compare like with like because most comparable countries

have been recession economies. Go through them. The United States was a recession

economy. France has been a recession economy. Japan is a recession economy.

Germany is a recession economy, go through them. This is, if you want to compare

us with other countries find another country, there are some but they are not

the main ones, but find another country that has survived the East Asian financial

collapse of 1997 and the US Global recession of 2001 I could point you at a

few but they are not the major G7 economies.


Treasurer, over the last couple of weeks economists were predicting two interest

rate rises, does the National Accounts today rule that out (inaudible) would

it be fair to say there is no need for another one.


Look, I do not comment on future movements of interest rates. I haven’t

for the last nine years and I am not going to start now. But I think this is

a very important point. In 1996, the Government entered into an agreement with

the Reserve Bank and said to the Reserve Bank, the Reserve Bank will set interest

rates with the objective of keeping inflation between 2 and 3 per cent. Now,

if we keep inflation within 2 or 3 per cent, that is the secret to keeping interest

rates low. And all of the indicators to me are that inflation is within that

band. Now, the Governor himself I think made that point today. He said, ‘Consumer

price inflation, although currently consistent with the target, was higher than

had been expected and is forecast to increase to around 3 per cent by the end

of next year.’ Well, that is the target. And that is the end of next year.

We are now, what are we? March of 2005, he is talking about the end of 2006,

still within the band.


Treasurer (inaudible)…


I’m sorry, Mr Bongiorno, Mr Davis.


Treasurer the Reserve is clearly worried about wage inflation, you talked about

industrial relations reform, further reform, what about the skills shortage?

How are you going to address that? Will it be higher immigration, will it be

lowering HECS, will it be extending HECS maybe to technical students? I mean

how are you going to address that which is one of the roadblocks if you like?


Well look, can I preface by saying I don’t think we just have skills

shortages in Australia, I think we have unskilled shortages in Australia. Speak

to the farmers in the stone fruit areas of northern Victoria. Speak to some

of the citrus growers. We have unskilled shortages. Why? Because unemployment

is low. This is actually what happens when unemployment falls, it makes it harder

to get people to work and that is actually the object of policy. Now, you say

what about immigration, let me give you a figure. The skilled immigration intake

was 23,500 in 1995-96, today it is 71,000. So that is what, tripled? Now, that

is actually a good thing. And you know the even better thing? Because notwithstanding

we have tripled that, we could still give more jobs to more people. You know,

I keep on saying as a Treasurer you have always got problems but some problems

are better than others. The problem of labour shortages is a better problem

to have than mass unemployment.


Treasurer do you share the call from business for a higher level of migration,

is that something that you would…?


Well look, I think we should re-fashion our immigration programme to skilled

immigration, I think we have got places for people, I would like to encourage

that, I don’t want to overlook the fact that we should train young Australians

in skills and I would say to young Australians, there has never been a better

time to be a plumber or an electrician you can make a really decent income.

You can earn a lot more than a Federal Treasurer.


Do you think you can take the community along with you in a dramatic increase

in immigration, if that was what is to occur?


Skilled migration, skilled migration, you know, but I must say to you it is

not just as easy as saying we will take more skilled migrants. There are, I

think world-wide shortages of skilled tradespeople today, you don’t just

open the tap and have them flooding in. I think around the western world there

are great problems. Now, yes Mark and then…


On another aspect, industrial relations reform which you are obviously keen

to see a lot of, is minimum wage regulation, do you think there is merit in

moving from the current structure of minimum wages to a single minimum wage?


I would prefer a system where there are fewer minimum wages.


How many fewer?


Well, it is very difficult to actually get a grip on how many there are today.

Some people say there are hundreds. If you say that you know, there is a minimum

wage for each classification in each award, you can even get up to thousands.

It depends how you define it. So to me that is incredible complexity and I think

we should have far fewer minima?


So far fewer?


Far fewer.




No, no sorry Michelle.


The National Accounts is showing that part of the re-balancing you are talking

about is an increase in wages share relative to profit share of income, (inaudible)

where you give future consequences of business investment given that is such

a strong driver of growth at the moment?


A re-balancing out of profits to wages?




Well, the profit share is still quite high according to these National Accounts,

it is from memory 26.6 per cent which is one notch off all time records so I

am not worried that the profit share is weak, no so I am not worried about that,

no I think Australian corporations are quite profitable at the moment.


Two questions, one to take up your point about un-skilled labour shortages.

How do you think that can be addressed and secondly we all know the old jokes

about economists but this does seem a bit ridiculous that we had two such divergent

interpretations of the economy, how do you, you have said where you stand on

it, but how do you explain that these experts could be so different?


Well the Statistician measures what has happened in the December Quarter and

that is a scientific measurement. You can at the margins say that some of the

data has been, you can have methodology questions with some of the data, some

people question retail trade figures and how they are measured and all the rest

of it, but that is a scientific, as scientific as you can be, a measurement

of what happened in the December Quarter. The Bank would say, well we are not

looking at the December Quarter, we are trying to look at what will happen next

year. And it would say we are forward looking and forward looking we see all

of these issues arising. So one of the ways they would reconcile these different

pictures is by saying we are looking at different timeframes. Another way is

if you strip down into the indicators behind it you can get much more of a marrying

but on this central question, is the economy slowing or is the economy accelerating,

there does seem to be a bit of a difference. My own view is it has slowed somewhat.




I’m sorry, what was…


Or the unskilled labour, unskilled labour?


Well, if you speak to people particularly in rural areas they will tell you

that there is a shortage of unskilled labour.


But what do you do about it?


Well I would encourage unskilled people who are unemployed by saying that there

are some good job opportunities going and I would encourage them to look at

some of those job opportunities. I would say there has never been a better time

to look for a job in Australia, well not in the last 30 years anyway and we

have more people in work than ever before. We have the lowest unemployment for

30 years and I would say to people even if they are unskilled that there might

be good opportunities for you in some of these rural and regional areas.


Treasurer last night on television…


I’m sorry, now hold on – Louise and then Mr Bongiorno.


What about guest workers?


Look, in some countries where there are labour shortages they have guest workers

don’t they? Singapore does, the Middle East does. I don’t think

Australia would agree to that. I don’t think it is a part of the Australian

ethos, I don’t think it is consistent with our culture and I don’t

think it would be acceptable.


Can I just ask you one other question while I have got you. Would you like

to see people like the Reserve Bank Governor or the head of Treasury on a panel

to set a minimum wage?


Look, a minimum wage can be set in different ways. It can be set by an Industrial

Relations Commission as it is in Australia. In the US they set it by legislation,

in Britain from memory they have some kind of commission. In the setting of

a minimum wage I would like to see some strong economic input, yes, I think

that would be good. At the moment with an Industrial Relations Commission the

people who staff it tend to be either union advocates, employer advocates or

lawyers who have practised. And what they get good at doing is arbitrating between

two sides. There is ‘A’, there is ‘B’- let’s split

the difference. That is what they get good at doing. That is why they are actually

appointed. But I would like a much bigger focus on, let’s fix something,

not because it is the midpoint between two claims, let’s fix something

on the grounds that one – it can help the unskilled get into work, two – it

can be consistent with national economic growth, three – it can help productivity.

So I would like to see people with economic expertise engaged in that process,



Treasurer, last…


Mr Bongiorno, the last question, Sir.


…last night on television on another channel, there was a young couple

struggling to meet their mortgage repayments and they felt that the Government

was not keeping its promise to keep interest rates low. I suppose in their terms

it will be 7.3 or lower. What do you say to them?


I would say that the 7…under this Government interest rates have varied

between 6 and 8 per cent. If you factored in today’s rise at a rate of

7.3 per cent by Australian standards, by historical standards, these are still

low interest rates. And if you compare them to where they were before this Government

put its programme in place, they are significantly lower. Now, we know of course

the importance of low interest rates and we know that if we run a strong economy

with low inflation we can keep them low. And that is what this Government will

do and its record is there for all to see. Thank you very much.