September Quarter National Accounts; Interest Rates; Tax Cuts; Reserve Bank; Mark Latham – Press Conference

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December 4, 2003

September Quarter National Accounts; Interest Rates; Tax Cuts; Reserve Bank; Mark Latham – Press Conference


Press Conference

Wednesday, 3 December 2003
12.00 pm


SUBJECTS: September Quarter National Accounts; Interest Rates; Tax Cuts; Reserve Bank; Mark Latham


Well, today’s National Accounts show that the Australian economy rebounded

very strongly in the September quarter, growing by 1.2 per cent.

You will recall three months ago, we had I think, 0.1 per cent growth, although

that’s been revised up a bit, and the September National Accounts show

a very strong rebound. And the rebound in growth has been underpinned by strong

growth in business investment and consumer spending. In addition, we are starting

to see a little bit of improvement in the rural sector. I don’t want to

overstate this. Exports rose 1.5 per cent in the September quarter, but that

was principally travel services, which rose by 15.4 per cent coming off the

SARS outbreak, and a little bit of a rise in rural exports.

But rural exports are still down over 21 per cent in the year, and we would

not expect to see a significant increase in rural exports until the December

quarter and the March quarter.

Although there has been an improvement in agricultural incomes, according to

this set of National Accounts, agricultural incomes are still 55 per cent down

on where they were two years ago.

So, what you are seeing in relation to the export story, is a bit of a recovery

in the agricultural area with most of it yet to occur, some good recovery in

relation to travel, but even still, not a strong recovery in other areas, which

we would expect as the world economy starts to strengthen.

Private business investment grew by 2.1 per cent in the September quarter with

new machinery and equipment growing 3.9 per cent and strong business investments

represent a favourable investment climate supported by low interest rates, high

capacity utilisation and strong corporate profitability. And I note that the

profit share as a proportion of the economy rose to 25.1 per cent, as high as

has previously been recorded in Australia.

So you are seeing a story of corporate profitability underpinning good, strong

private investment and in addition to that, strong consumer demand, led by favourable

sentiment. Consumer sentiment is quite high by relative standards.

The dwelling investment continues at quite high levels, rising by 2.6 per cent

in the September quarter. The National Accounts also indicate that inflation

is low in Australia, with the household consumption index rising 0.3 per cent

in the quarter and 1.6 per cent over the year.

Now as the world economy strengthens, we would expect Australia’s export

position to strengthen and net exports which have been detracting quite significantly

from growth should detract less in future quarters and we expect the Australian

economy to continue to strengthen through the course of this financial year.

We have forecast growth of three and a quarter per cent in this financial year,

and we will be updating our forecasts at the Mid-Year Review, when that is released

next week.

So, strong consumer sentiment, positive consumer demand, good strong business

profitability backing business investment, a weak export position as we await

the global recovery and the strengthening in particular of agricultural imports,

but firm prospects for low inflation growth through the course of the next year.


Mr Costello, are you concerned that the Reserve Bank’s decision to raise

interest rates could push the dollar higher and make it even harder for Australian



Well, leaving aside interest rates, the fact that the Australian dollar has

risen over the course of this year, and risen against the US dollar by about

30 per cent, has made life harder for Australian exporters. Now, a large part

of this story is a US dollar story. I can remember when the Australian dollar

was declining sharply in 2000-01, saying that this was principally a US dollar

story. That the US dollar had been over-valued, particularly at the time of

the tech boom and the US dollar would correct. And it has. But the correction

has been very, very large. And a 30 per cent appreciation of the Australian

dollar in the last 12 months is quite an acute appreciation. It is making life

harder for our exporters. Fortunately it is coming at a time when the global

economy is picking up and so there has been some comfort on commodity prices

for our mineral exporters. But you heard me say, all the way through 2000 and

2001, we had a super competitive exchange rate and it was helping us. We do

not have a super competitive exchange rate at the moment and it is not helping



The Deputy Prime Minister has told the Reserve Bank that enough is enough.

Do you agree with John Anderson there?


Well, the Reserve Bank is an independent Bank. It has been set up by an agreement

between me and the Bank and the Bank will make its independent decisions in

accordance with the framework that we have put in place. Now…






You have talked here about domestic demand retaining significant momentum and

the Reserve Bank is (inaudible) interest rates for the second time in a month.

In those circumstances is it very wise in macroeconomic terms to be contemplating

tax cuts next year?


Well, I take it that the import of your question is that cutting taxes could

be stimulatory?




Can I make this point, Laura? Australia would be almost alone of the developed

economies of the world in having a surplus Budget. Let’s compare ourselves

with the United States. What is the Budget deficit in the United States? About

4 per cent of GDP. In Australian terms, that would be a $30 billion deficit.

So, let me make this point, we have $30 billion of unstimulatory policy compared

to the United States, in place.


But Treasurer you said…


Now, let me make this point, name me a country, Laura, name me a developed

western economy that has a balanced budget at the moment? Because it is not

Britain, and it is not France, and it is not Germany, it is not Japan, and it

is not the United States. The point I am making is that by having a balanced

Budget, Australia is a long, long way ahead of comparable countries.


But you have also…


And that is testament to the tightness of fiscal policy in this country.


But you have also said in your press release today, you have acknowledged the

effect of this year’s tax cuts on consumer spending, now they were tax

cuts that some of your colleagues famously talked about buying a sandwich and

a milkshake, that has obviously had some sort of effect this year with the economy

continuing to go closer to the Reserve Bank’s concern, does it raise the

question about whether tax cuts are appropriate next year?


The tax cuts that were introduced in the most recent budget were $2.5 billion

this year, and I think $10.7 or $10.8 billion over four years, so I would describe

them as, I think at the time I described them as a return to the Australian

tax payer. Every Australian tax payer received a tax cut as a result of those

budgets, and I, whilst I wouldn’t say that in net terms for everybody

they were large sums of money, I think on average incomes there were something

like $300 per annum. And for many Australians $300 tax cut is a significant



Mr Costello, is there any reason why the ABS has stopped publishing the Household

Savings Ratio? Does it have anything to do with the fact that it has been negative

for six quarters?


I think it does publish the ratio. When I had a look at it, I found it, so

I will find you the tables, but I am pretty sure it does publish it. And it

was 2.2 per cent negative, an improvement on the last quarter.




Table 2. So, yes, table 2. Household Savings Ratio…


My apologies, it is not where it used to be.


…well it is no deep plot, I know you all think I have deep plots to confuse

you, but you know, deep plots are not my business. It is all there, it is all

transparent. We actually improved. Part of that could be a bit of a recovery

in agricultural incomes because I think the reason why in the last couple of

quarters it has been negative, is that agricultural incomes have been so significantly

down, and as you would expect when a farmer is getting no income, but still

spending, a farmer has a very negative household savings ratio. Sorry?


Do you expect the MYEFO figures on Monday will outshine any testimony the Reserve

Bank Governor gives to the Parliamentary Committee in Brisbane?


Will they outshine them? Well, I don’t think this is a competition, you

know, as to who has the shiniest set of figures here. There were previous Treasurer’s

that talked about beautiful sets of numbers, we don’t talk about shiny

sets of numbers. We release our update on the Budget before Christmas every

year. As it turns out, it will be next week. I think the Governor gives testimony

twice a year, is it? As it turns out it will be next week. But I am sure that

the press of Australia can handle two stories on one day.


Were you one of the people cheering in the Party Meeting yesterday when the

Labor Leadership ballot results were announced?


No, because I actually announced it. It was quite funny, Peter Slipper came

in and gave me the news, and I was in the middle of a speech. I was making some

deep point as I recall, and a piece of paper was given to me and I read it out

and everyone lost interest in my speech. I was rather upset, and it was hard

to get back momentum into my speech. I was just getting to a critical cresendo.


Do you welcome the concept of generational change in leadership?


Oh, that is a real googly Louise. I think I will just sort of step back and

raise the bat as that goes…


Pull it to the boundary.


…through to the keeper.


Treasurer, just getting back to John Anderson’s comments, is it helpful

to have senior politicians and senior colleagues of yours dictating to the Reserve

Bank on monetary policy?


Well, I don’t think he dictates to the Reserve Bank, you know, I think…


(inaudible) he was.


…well, look I don’t think he dictates to the Reserve Bank, I think

the Bank is put on an independent basis and makes its own decisions. And you

know, these are, and it has been put in place so that it can be independent.

But, does he have a view on interest rates, well he’s, of course he is

entitled to express a view on interest rates.


And you are comfortable with that intervention?


When I put in place the agreement between the Government and the Bank, enhancing

its independence, I very specifically put a clause in there, that this would

not stop the Government commenting on monetary policy, and the Government reserved

that right, and the Government is entitled to comment on monetary policy. And

you will hear me comment on monetary policy from time to time. But the point

I am making is that the arrangement which is in place is for an independent

Bank, and the Bank will make its own decisions. It can take advice or notice

of everybody as party to this, but at the end of the day, there is an independent



Do you agree with the Deputy Prime Minister then, that enough is enough?


You know, I have followed a practice, I have been Treasurer now, coming up

eight years, and I have followed a practice of not commenting on future movements

in relation to interest rates, because I think it blurs the message out there.

But I will comment on the economy, you ask me a question on the economy and

I will comment on the economy each and every day. Please…


Treasurer, would you like to see the US step in to prop up the green back because

of the effect the slide is having on the exporting industry such as our own?


During the Clinton Administration, the US used to run what they called a strong

dollar policy, and they used to reaffirm that on every occasion, it became a

mantra out of the US Treasury Secretary. But then the US went into recession,

and its current account widened, and it was clear that the US would be looking

for some stimulation and the Treasury stopped talking about the strong dollar

policy. And in fact, US Treasury Secretary John Snow went to China, and talked

to the Chinese about the possibility of the Chinese appreciating, or at least

allowing some more flexibility.

I think what has happened is that markets as they always do, tend to over shoot,

and just as I thought the run up, and I said it at the time you know, that the

$A dollar where it was in 2000-01 wasn’t reflecting real value and I think

markets tend to over shoot, and I think the green back has over shot the other

way. Now, this is a big problem for the world economy. Let me tell you why,

because the US is still a much stronger engine of growth then Europe or Japan,

and all of these countries, Europe, Japan, America are trying to get competition

or growth at the expense of others. They all have an interest in their currencies

falling against each other, but you can’t have a situation where all currencies

fall against each other. If a currency falls, another one has got to rise, and

this does make for a bit of instability and volatility on the world financial

markets. Now Australia has been affected by that because we run a floating exchange

rate and it has made life harder for our exporters, but it is mostly the story

of global realignment of currency.


Treasurer, the company profits are very high, does this point to another bumper

MYEFO number next year as far as tax revenues are concerned?


Next year.


Sorry, well in this financial year, 03-04?


This year. Well, we will be releasing the MYEFO when it is done, and that will

be on Monday, but company profitability has been strong, company revenue has

been strong, I have indicated that, you have all written the private sector

forecasters’ reports as per usual, when the figures come out, they will

have some explaining to do.


Can I ask about exports? You have made the comment that sort of, exporters

are going to be facing hard times, is there anything the Government can do to

try and make those exports more competitive from this end…


Do you mean rural exports?


Not specifically rural exports, (inaudible) manufacturing, rural, minerals,



Well look, we should do everything we can. This has been part of the Government’s

program to cut company tax, it has been part of the Government’s program

to introduce full imputation for companies, cut transactional tax. My next task

is to cut out the bank account debits tax, that is my next task.

We are trying to keep pressure up on the States in relation to stamp duty which

is a drag on companies. There is so much to be done on the taxation sphere,

industrial relations, this is part of our industrial relations program so that

companies get increased competitiveness. Now, somebody pointed out before Australian

profit share is strong and Australian profitability is strong, and the good

thing about that is that the company tax that is being paid by Australian corporations

is bearing a lot of the weight of the tax system. Company profitability is a

good thing, we want to encourage it and if we can get a more competitive environment

that is good for the companies, it is good for the revenue, but it is also for

employment. Let me remind you that since 2001, over 500,000 jobs have been created

in Australia, beginning of 2001, in the US over the same period, 2 million have

been lost. That is a pretty stark contrast.


Treasurer, do you think Mark Latham’s fair dinkum when he says under

his leadership the Opposition will be constructive towards Government policy,

more constructive towards Government policy?


See, the thing with Mr Latham is he says so many contradictory things that

it’s very, very hard, you know, unless you have weathervane to know how

long it’s going to last, you know, it flips around, flips around, flips

around, you know. It’s one thing this day, another thing the other day.

So the statements don’t mean all that much. What’s going to mean

something is action.


He says you haven’t done enough…


Now, well, well, so he’s going to be positive, right. Mark Latham called

for the disability support pension to be reformed. The legislation is in the

Senate. What will count is whether the Labor Party votes for it. The PBS measures,

which are putting the PBS on a sustainable basis, are in the Senate, they’ve

been rejected twice. What will count is whether or not the Labor Party votes

for it. Now anybody can make these contradictory statements, and he’s

made more than anybody I’ve ever seen in politics, but if it’s ever

going to mean something, it will lead to an action. That’s the point,

it will lead to an action. But, it’s like, remember when we had the flirtation

with cutting income tax for people above $60,000. He said he was in favour of

that. But if it means anything it leads to an action and when he had the opportunity

in Parliament to vote for that, he voted against it. Now, you will find that

on any issue he has held contradictory positions either simultaneously or within

24 hours, so what you’ve got to start looking for is action.


You accept negative gearing gone, (inaudible) won’t be raising that again?


Well who would know.


Treasurer, do you have anything special planned…


Where negative gearing was going to go one night, then it was back in the morning

because it had been overruled by Simon Crean, but just hang on, you know, you’ve

got today’s statement, next week’s could be entirely different.

This is the point. There is no credibility in this kind of contradictory position.

You know, today he was out there saying we should be sitting down with the Reserve

Bank discussing interest rates. Last week, he wanted the Reserve Bank to be

absolutely independent. You know last week it was Arthur, this week it’s

Martha. It’s, the national debate ought to be a little bit elevated from

contradictory statements which mean nothing. It ought to be elevated to some



Treasurer, the 20th anniversary next week of floating the Australian

dollar. Why has that been good for Australia?


That sounds like a long speech, I’ll leave that to another day. Thank

you very much, thank you.