Transcript No. 68

Hon Peter Costello MP

Press Conference

Wednesday, 2 December 1998

8.00 am

SUBJECTS: National Accounts

This is one of those days when it’s all come together for Australians. This morning we had an interest cut. Today, mid morning, we have news of very strong economic growth in the face of the Asian financial crisis. And today we begin to lay the foundations for a new tax system for the next century.

The low interest rates in Australia are the result of good policy, policy that was put down over the last three years. It didn’t happen by chance. We had to put in place a new monetary policy. We had to keep inflation low. We had to get our budget back into balance. And you’re seeing the fruits of those tough but right economic decisions over the last three years today.

Similarly, if in three and five and ten years time we want to reap economic benefits, we’ve got to start laying the groundwork now, which is what tax reform is all about. It’s making an investment now for the next three years, the next five years, the next decades.

And today’s National Accounts show that in the face of an Asian downturn, an international financial crisis, the like of which we have not seen in our lifetimes, the Australian economy grew through the year at five per cent. Now just to put that in some context, if you want to compare it to the region, through the year growth in Japan minus 1.8. Through the year growth in New Zealand minus 1.2. Through the year growth in Korea minus 6.8. Through the year growth in Singapore minus 0.7. Through the year growth in Hong Kong minus 7. Through the year growth in Australian plus five per cent. Practically the whole of the region is in recession and Australia has grown at a rate of five per cent. If you want to compare it to other developed economies: US growth through the year 3.5; Germany 2.5; France 2.8; UK 2.3; Italy 1.1; Canada 2.3. Higher than all the major economies of the world and higher than the OECD average.

Now what has kept Australian growth going is strong domestic economy, which has been led by low interest rates, and there’s another interest rate cut today. And as a consequence of that Australian homebuyers now have the lowest mortgage rates that they’ve had since the 1960s. Good business investment, again coming off low interest rates, we have overdraft rates as low as ever recorded by the Reserve Bank, the indicator rates. And, again, the consequences of good, strong, decent, thoughtful economic policy over the last three years.

Now, a number of indicators provide evidence of continued strength over this quarter. We’ve had employment rising by 90,000 new jobs over the last three months. Measures of business confidence starting to recover and I think that’s in response to certainly less pessimistic news coverage than we had through much of the year.

I want to pay tribute to Australia’s exporters who have done a remarkable job in diverting exports out of the Asian region and to other markets in North America and Europe and I pay tribute to Australia’s exporters for the job that they’ve done – helped of course by the exchange rate changes. And we again see in today’s figures continuing evidence of low inflation which is under two per cent, around 1.8 per cent I think the deflator showed over the course of the last year. Now, we are living in a difficult time, we haven’t lived through an Asian financial crisis before, and it has global implications. And to have weathered the first year with such exceptional strength in the economy has been a major achievement. But again I say if we were to give up the game now and say well that’s it, we don’t need to do any more, we wouldn’t be investing for the future. It’s because we invested three years ago that we’ve come through the storm now as we have and now we must invest for three years in the future and five years in the future to keep the good economic policy going, and number one in that is going to be tax reform.

Treasurer do you have any concerns that whilst the economy is powering along the Reserve Bank today has hit the accelerator?

I don’t think it’s hit the accelerator. I welcome today’s reduction in official interest rates by 25 points and I call on financial institutions to give the benefits to consumers. And I note that some of the mortgage originators have already done that and if this is a competitive financial system we’ll expect the benefits to be passed on. Now, I think as the Reserve made clear in its statement, one of the things that the Reserve had an eye to is not so much now but the year ahead. And in the year ahead the Australian economy won’t continue growing at five per cent. I think I can say that with some surety. We forecast in 1998 two and three quarter per cent growth. So, world growth is going to turn down in the year ahead and I think it was a sensible move to move interest rates as the Reserve did, not so much because of the economy as you now find it but because of a picture of where it might be in 12 or 18 months time.

What would you say to financial institutions, particularly banks, that don’t pass on this cut?

Well, I make the point that if the cost of funds declines, as it will as a result of the Reserve Bank’s announcement, then the cost of lending should decline. Over the course of our Government, when this Government came to office, the home variable mortgage rate was 10.5 per cent. The home variable mortgage rate is now about 6.5.

And that was as a consequence of two factors – one is official interest rates went down by 2.5 and margins were squeezed for the balance. Now, both of those things are good things in my view. If you keep competition up you keep the pressure on margins. But official rates went down another 25 points and I say that in a competitive financial market, that should be passed on. I notice that one of the banks has already moved one of its products and I think those financial institutions that don’t meet the competition will feel the effect in relation to volumes. But this is great news for homebuyers. Homebuyers have now had the benefit of a cut in the variable mortgage of nearly four per cent. That is the biggest single expense for young homebuyers. It is one of the reasons why the Australian economy has been as strong as it has and I hope that they continue to reap the benefits of good economic policy.

Is your priority homebuyers or business lending rates at the moment?

Both. You know I think that homebuyers should be able to share in the benefits and business should be able to share in the benefits as well. I want homebuyers to share in it because that gives them income, which is good for them. And I want business to share in it because that will create jobs which is good for the economy. 90,000 new jobs in the last three months in Australia. In the midst of the Asian economic crisis.

Treasurer, the Reserve Bank says this move was designed to prop up growth which is now running at five per cent. Does that mean that your forecast for the 1998/99 financial year of 2.75 per cent is now too conservative?

We’ll be looking at that and we’ll put out a mid year review in December, or in December, later in December we’ll put out a mid year review. I think in relation to that forecast you’d probably now say that there’s a bit of upside risk. But we don’t mind upside risk. There’s a lot of people were saying by the way before the election that we were being too optimistic and I don’t think anybody would be saying that today.

Does that mean that we might see three per cent in the mid year review?

Well, as I said, I’m not going to announce it now. We’ll do the mid year review but I wouldn’t see any downside risk on that two and three quarter, put it that way.

So if it’s going anywhere it’s going up?

Well, as I said I see upside risk.

Treasurer if there is an upside risk you might be looking forward to a bit more revenue than you budgeted for. Is there any scope to use some of that windfall to make the tax package more palatable for the Senate?

I don’t think the revenues vary as much as you think in relation to growth. There are some people that think a half a percentage point means a lot more in revenue terms than it actually does. It depends on where the growth comes from for a start. If your growth is better than you expected let us say because incomes have risen, that generally means revenue. But if your growth is better than expected because of stocks or something else it doesn’t necessarily automatically translate into increased revenues. Just as when we downgraded the forecast we didn’t move the revenues that much, if we upgrade them we wouldn’t move them that much either. The other thing to bear in mind too, and you of course know this, is that our tax package is costed from 2000/2001, so the fact that you’re stronger in 1998/99 isn’t, will have an impact, it will have an impact in 2000/2001 because your base from which you take off from will move up. But it will be as influenced by the events of 1999 as the events of 1998.

Treasurer are you satisfied that given that the unemployment rate remains very high, and given that the Reserve Bank’s forecasts and the Government’s forecasts for inflation see it peaking well within the target band, not exceeding the top of the target band, are you satisfied that a 25 basis point cut in rates is enough?

Well, I always support the Reserve Bank, don’t I, because it is the, charged with the independent conduct of monetary policy. But I think if you look at the statement of the Reserve, I mean it points to what will unquestionably be lower world growth in 1999, and it points to the fact that it doesn’t see any risk to our inflation target. But if you read the statement, clearly it’s had an eye to the, what it calls the unusual degree of turmoil in international financial markets. Now, we’ve been through the most amazing turmoil ourselves in the last three months. Go back to, I think, August where the Aussie was at 55, today it’s at, what, 63. And I think that there is going to be continuing volatility in world financial markets and so obviously that’s one of the factors that the Reserve has had regard to in making its decision.

Would you say the performance of the humble Australian shopper was the biggest contributor to the economic growth?

Well the growth essentially comes from two areas. It comes from investment, plant and equipment investment, that is a big contribution, you had strong capital expenditure. And it also comes as you said from consumers. Retail is very strong, and it wasn’t just strong in the last quarter it’s strong in October. And that is shoppers that are buying. Now why are they buying? Well, I think they’re buying because of low interest rates. Strangely enough I think that there’s been a very negative press over the course of this year and if you actually look at consumer sentiment throughout the course of this year it was pretty low. But notwithstanding low consumer sentiment they were still out there shopping.

Why were they still out there shopping? They were out there shopping I think because they’ve got more money in their pockets than they’ve ever had before. If you happened to take out your mortgage at ten and a half per cent and now it’s at six and a half per cent, this is a saving of over $3,000 of after tax income for your average Australian homebuyer. Their home is their biggest expense in life and over the course of this Government they are now $3,000 better off. That’s the equivalent in pre-tax terms for your average wage earners of about a $6,000 pay increase. Now, I think in the early days people probably kept their payments together and reduced the period of their mortgage. But because they’ve had this money you’re seeing strong retail sales and that’s keeping the Australian economy up and that’s a good thing for jobs. You’re seeing that reflected in the job numbers and the thing you could say about today’s figures, five per cent growth through the year to the end of September, that means that there’s still more jobs growth to come I would think, as jobs growth is a lagging indicator and I think you would have to say that these figures are good for jobs growth.

So retail was bigger than investment in your opinion?

Well I think if you actually look at the figures in the National Accounts they’ll show you that the contribution to growth from business investment in the quarter was 1.1 and the contribution to growth from final consumption expenditure of households was 0.7. So they were the two factors but technically speaking business investment contributed more to growth.

Treasurer, I know (inaudible) early on you know it was a fact that most people didn’t change their payments. Given that we’ve had low interest rates coming down now for some time do you think that people have adjusted payments and so there is more cash flowing now, is that the (inaudible)?

Well that, yes, that was my hypothesis. I haven’t got any evidence at this stage to justify it, but I mean look at the interest rate cycle. Official interest rates went up from the end of 1994 by 2 – per cent. Official interest rates have now come down that full 2 – per cent. But you’ve had a second factor that’s been working in here, not just the rise and fall of the official interest rates, the margins come off. So even though the official rate only moved 2.5 the standard variable moved 4 because banks were forced to squeeze margins, particularly because you had new entrants. Now I think what happened is when the interest rates went up at the end of 1994 most people wouldn’t of started paying more monthly, what they do generally speaking, is they kick a 20 year loan out to a 22 year loan or whatever. When they come back I think they probably stayed on the same payments but it came back from 22 to 20. Might of even come back from 20 to 19 or 18, but I think now they’re feeling a bit more money in their pockets, either because they’re on lower payments or because they’re watching their capital sum decline. Now, you know, you’re talking about an average Australian mortgage I think of $100,000, I think that’s the average Australian mortgage. The last 3 years they’ve been saving $3000, nearly $3000 in payment. It’s starting to become quite significant. And as a consequence I think they feel that they’ve got money in their pocket, they’ve obviously been spending and I think there’s quite a deal of confidence in the economy.

Mr Costello you introduced 16 tax bills into the Parliament today, what happens if the Parliament approves the abolition of wholesale sales tax but doesn’t approve introduction of a GST?

Well, revenues would fall apart wouldn’t they.

That could potentially happen.

Well, I think we’ve got provision in the wholesale sales tax for the Bill to become effective when the GST becomes effective. You couldn’t run the risk of, I think wholesale sales tax is $8 billion isn’t it? Something like that, $9 billion, some large sum, you couldn’t just walk a sum like that hole through your revenues.

So it couldn’t happen?

No. But, you know, I don’t think it’s going to happen. The Labor Party has pledged to vote against the repeal of wholesale sales tax. They just love wholesale sales tax these people, they just love it. It’s, you know, go back as I did, go back and read the introduction speech of Scullin in 1930’s on wholesale sales tax. I think Scullin, you know, would do a triple back somersault to think that in the year 2000 people were still saying that his wholesale sales tax couldn’t be improved in. I mean, this was a society in the 1930’s that didn’t know about radio, let alone the fax or the jumbo jet or the personal computer. They didn’t know about a service-based economy. But they were good for the time, they were adventurous for the time. They were running an indirect tax base on an economy as they knew it. But it wasn’t the economy of the 21^st century. And this idea that we can’t move our tax system out of the 1930’s notwithstanding the advance. I mean, this is reactionary politics at it’s worst. What motivates the Australian Labor Party reactionary politics? It is a Party of reaction. The only thing we know that it’s in business for is to stop, is to stop. We only know what it’s against now. We don’t have a clue what it’s for. It was out there, and I remind you, it’s shadow treasurer was out there not so long ago saying that our growth would be negative by now. No widely reported, that was their position. You know, remember they said when we were balancing the budget, we were taking a bat to the economy. They opposed every single expenditure saving and then said they were in favour of a surplus budget. They’re going to oppose every single tax reform and then say “oh but we’re entitled to inherit it”, they are not entitled to inherit it. They had the, what Mr Beazley should’ve done after the election, he should’ve said this, he should’ve said “I oppose tax reform. The people of Australia voted for it, I do not support it but I will not stand in its way.” That’s what normally opposition leaders do. That’s normally what they do, they recognise a mandate. But Mr Beazley has refused to recognise the outcome of the election. It would’ve been a decent and an honourable thing, and even today I say to Mr Beazley, Mr Beazley said “well look I fought against it, I fought a valiant fight, I don’t agree with it, but I accept the outcome of the election”. We would not say aha – he’s done a double take. In fact we would praise him. We would say this is the right thing to do in the national interest.

Inaudible

Well, I haven’t had it projected yet.

Well, would you?

Well, I’m still going to get it through first time up.

Treasurer what do you think the voters would think of a legislation that knocked back earlier cuts in the prices of items like VCR’s and television sets.

I think the electorate will think they’re silly. I mean, when the legislation gets royal assent all those things that are currently taxed at 32 per cent are going to come down to 22 per cent. Now, if the royal assent were, let us say on the 30^th June next year you’re going to get immediate price falls in those items in advance of the new tax system coming into effect. The Senate holds it up, the Labor Party, the Democrats, anybody holds it up, they are holding up prices against consumers. Now, how many times have we got to go through this tax reform argument? They went through it back in the days of the McMahon Government. They went through it in the days of the Keating Government. When Labor supported reform, and I pay tribute to them because they did support reform, we went through it in the days of the Hewson fightback, we went through it in the 1998 election. What we need is action. As I said before, if we hadn’t of done the action in 1996 we wouldn’t of had the economy able to withstand the pressures of Asia now. If we don’t do the action now in 1998, we don’t know what challenges our economy will face in 2002 and 2005 and 2010. But if we don’t do the action now I can promise you Australia will be in a far more exposed and fragile position.

Treasurer, just following the wholesale sales tax (inaudible) which is not the (inaudible). Are you saying that if we, if Parliament agrees to reform the tax system we propose to replace the wholesale sales tax system with a GST and then ultimately also change the business tax regime. Are you saying that we can get growth at 5 per cent or better?

Well, I think the Government said it aimed over the course of the first decade of a new century to get growth averaging 4 per cent. Now let me make this point, growth in the economy up to the end of the September quarter was 5 per cent. We are not saying it will be 5 per cent all the way through next year. In fact, we’re forecasting 2 – for the financial year with an upside risk as I said earlier. So we think that things will slow in 1999. But, that will be cyclical and that will be externally induced. But I think if you want to get growth up and keep it up an average 4 per cent over a decade it’s the big structural reforms that will do it. I mean cyclically up and cyclically down, we’ve been through all of that but it’s the big reforms that will give you the structural basis to keep things going. My first point, my second point about tax reform is this – why do Government’s have a tax reform? Let’s boil it all down to the bottom line. Why do Government’s have a tax system? Governments have a tax system so they can deliver services, medical services, aged pension services, police services, defence services, and if you want sustainable services you’ve got to have a sustainable tax base. Now, our indirect tax base shrinks in proportion to the economy every year. Every year without moving it shrinks. If you have a tax base which grows with the economy you have a revenue which remains constant to your economy which funds your services.

And I’ve always believed, and I believe to this day that the people who genuinely support strong social services, sustainable social services in this country will support tax reform. And they will want to support tax reform because that’s the only basis on which you will deliver sustainable services.

Treasurer, how do you expect car makers to respond to your transitional arrangements for the GST?

Well, this is the last question by the way. Look, I think that there are some good measures in there for car makers. Let’s go back to (inaudible). The first thing is that car makers get long term benefit of cheaper cars. Car makers are people who’s product is going to fall in price and as they say that means in the medium and long term their production will increase and their exports will increase. That’s the first point. The second point is that we have a transitional step down in price for business users over 3 years, and I think fleet sales are something like 60 per cent of the market at the moment. The third thing that we’ve done as part of this tax package after representations from the motor car dealers is we have got a good treatment for the second hand market with the notional input tax credit system, which they asked for and they will get. Now, you know, there are some people that say “oh well even considering all that prices will fall too low”. It’s a funny problem isn’t it? Prices fall too low, you know this will effect buying decisions, well you know we’ll obviously look at that but I think the transitional arrangements will adjust the situation and I think it’s a very fair and a very generous treatment for the motor car industry. Thanks a lot, thank you, have a good day. Thanks.