Media Release

Transcript - Radio 2SM Leon Delaney program - interest rates

Wednesday 2nd December 2009

Subjects: leadership, interest rates

LEON DELANEY: What a huge day yesterday.

SCOTT MORRISON: It was a long one and in fact the Parliament has technically been sitting on the same day since last Thursday. I think we are up to about 150 hours on the one Parliamentary day so that is indeed a very long day.

LD: It certainly is. But of course quite dramatic scenes inside the Liberal Party room yesterday and all sorts of reportage today about how events unfolded. I guess in some respects a somewhat surprising outcome. It wasn’t what was expected before it happened was it?

SM: Well politics can always be surprising particularly in this place. I think with all the goings on and what has happened here in Parliament in the last few weeks, the one thing that comes home to me is that all that is terribly interesting but we are all here because of the people who aren’t in this building and we have to get our focus on them and not on ourselves and I think that goes to every member of this Parliament on both sides of the divide. That’s where our focus needs to be and that’s why I thought the real thing that happened yesterday that would concern people most was not what happened in the Liberal Party but what happened to interest rates. They have gone up again for the third time in a row, which is the first time that’s ever happened.

LD: Now it’s not really surprising is it given that interest rates were reduced to record low settings in response to the global financial crisis. They were extraordinarily low to deal with extraordinary circumstances. By that reasoning they have to come back up again to what might be described as a more normal level.

SM: The government likes to maintain that interests rates have to just keep rising and rising but the point we have been making, and I am not surprised they went up because the government keeps spending. The government has taken no action, they have not stopped, they have not looked around at their own budgetary settings and how they are spending money. As we know our economy is doing better than virtually anywhere else in the world and we all know the reasons for that, it isn’t just Kevin Rudd in fact there are many other more important reasons than Kevin Rudd in this - how we went into the crisis, the reduction in interest rates in the first place, the strength of the economy more broadly as we face this crisis. All of that is important but the point is the government is refusing to adjust its fiscal policy and when you look at it a bit further with all these billions of dollars that are being spent, we have to ask ourselves, what are we going to get for that at the end of the day? With important projects in roads and rail and ports - economic infrastructure - only one in seven of these infrastructure dollars are being spent on those things. The money has to be spent wisely for a long term dividend and we are not getting that and by continuing to spend money the way they are recklessly, its putting a lot of pressure on interest rate and that means families are going to spend more on their mortgage this Christmas than they are on the presents for the kids and Kevin has to take some responsibility for that.

LD: Alright. Explain to a lay person how it is that government spending translates into higher interest rates.

SM: Well when the Reserve Bank sits down and looks at what is going to happen in the economy they look at how the economy is performing and how demand is travelling. When the government spends more money in a stimulatory way than it needs to, then that puts pressure on the Reserve Bank to calm the economy down to control interest rates. Basically Glenn Stevens is having to make these tough decisions because Kevin Rudd won’t. That’s not fair on the Reserve Bank. The Reserve Bank aren’t elected by the Australian people…

LD: That’s not what the Reserve Bank has said and that’s not what Glenn Stevens has said. What the Governor and the other board members have said is that interest rates need to return to what is described as a normal level because they have been at unusual low levels, extraordinary low levels to deal with extraordinary circumstances.

SM: The Reserve Bank would not have increased interest rates yesterday, I do not believe, had there not been as much pressure in the system that has been created by Kevin Rudd’s spending. Government spending puts pressure on interest rates, the government themselves were making that point prior to the last election and since the last election. They said the problem was you have backed the Reserve Bank into a corner, the Treasurer said, because you spent and you spent and you spent and you spent. Well that’s what the Treasurer said then and it’s true now.

LD: Yes but at the time the circumstances and the economic environment were utterly different prior to the global financial crisis. There was rising inflation, there was concern that inflation would begin to destroy the economy and the idea that there would be any kind of global financial crisis was the furthest thing from people’s minds. It was an entirely different landscape.

SM: Well again Leon, that’s what the government argued, that we had…

LD: Well it’s true.

SM: Well, no it wasn’t. There was not an inflation crisis as the government projected. All the government was doing then was trash the record of the Howard Government…

LD: Inflation got to the point where it was above 5 per cent.

SM: No it did not, that’s not true. We were still with the target band for inflation at the time and they were talking up inflation as a way to trash the economic record of the Howard Government. That was the government’s line and if we are going to talk about how circumstances change, the Reserve Bank governor made it clear that circumstances have changed from the time when the government put the stimulus measures into place. They said things have not turned out the way they thought they would turn out. The Reserve Bank governor has said that on numerous occasions now. So they’ve stopped, they’ve recalibrated, the government hasn’t…

LD: Yeah, they’ve also said the economic stimulus packages actually helped though.

SM: Well I’m not disputing that when you spend billions and billions and billions of dollars of money some of it is going to stick. We are going to be saddled with the burden of debt for all of those things but the spend has to be good, it has to have long term benefits and I think Australians are wondering about what the economic long term benefits of this are going to be and this Christmas they are seeing interest rates go up in the last three months, putting over $2000 onto their annual mortgage bill. That’s what is happening, the government has to take responsibility for its own decisions and its decided to keep spending money rather than recalibrate their policy which is going to continue to put pressure on interest rates. So they are making a choice – they will have higher interest rates instead of cutting back on their spending. That’s their choice, they should own it.

LD: So if there is a double dissolution election in March, which there could be now…

SM: Sure

LD: And the Coalition actually wins, which you could do because there is a lot of concern about certain other matters relating to the climate change issue…

SM: True.

LD: If the Coalition should win, you are going to stop interest rates from going up further, is that right?

SM: No, what we would do is we would do what the government should already be doing, we would go over every single line of expenditure. We would look at all the waste, all the mismanagement, all the projects that aren’t being delivered on time, all these examples of buildings being knocked down and replaced with exactly the same building. We would look at all of these programs and we would weed out the waste and we would weed out the inefficiency and the failure of state governments to deliver these programs.

LD: So in other words you couldn’t stop interest rates from going up?

SM: No, we would take the pressure off by getting spending under control. Interest rates will do what they are going to do. It is the job of the government to not put any more fuel on the fire. What the government is doing by continually spending, without recalibrating what they are doing and taking account of the circumstances, is they are putting fuel on the fire for interest rates. We have seen today Westpac has gone even further than that because under the government’s policies we have the lowest level of competition amongst banks for new mortgages than at any other time. So the banks now basically, under the government’s policies, can do exactly what they have done and the Treasurer can whinge and moan about it all he likes but they have created the set of lack of competition conditions in that sector which means that as rates rise, consumers are just not in a position to get the best deal.

LD: So how is it exactly that the government created that lack of competition when the truth is the smaller mortgage lenders were basically driven out of business by the global financial crisis when their sources of funding from offshore dried up?

SM: Well I can tell you why. In Canada what they decided to do, and we made a number of recommendations along these lines at the time, they actually guaranteed the mortgages. They recognized the people who owned the debt at the end of the day which is mums and dads and they went out and guaranteed the mortgages rather than the banks themselves. What that did is kept the level of bank competition in Canada higher and they were also able to secure their own banking system at the same time. So the government chose a different path and what that lead to was a collapse in the non-bank financial sector. That was their decision and that is the policy environment they set. They decided to back the big banks rather than support the smaller banks and as a result they were driven out of the market. Less competition, consumers get a worse deal. They are rightly the government’s choices Leon, they have every right to make these choices, but there are consequences for these choices – more spending, higher interest rates, backing the big banks over the small banks means you get less competition and consumers don’t get a better deal.

LD: Yesterday’s decision puts the official rate at 3.75%. Once the global financial crisis is behind us and things are considered to be back to normal, what is the appropriate level for interest rates? What is the target rate that you would see as appropriate?

SM: Well as I said, the Reserve Bank is independent. What the government has to do is manage its policy and they have to do everything they can to ensure they don’t put any unnecessary pressure on the Reserve Bank to raise rates and that’s our argument…

LD: Yes but if you are using interest rates as a yard stick, you must have obviously some idea of what the benchmark is.

SM: Well if you are going on benchmarks our interest rates today are higher than virtually any other country in the developed world. Iceland and Turkey…

LD: That’s because they all went broke and we didn’t.

SM: No, they are higher than the US, they are higher than Canada, they are higher than New Zealand. Canada didn’t go broke, New Zealand didn’t go broke, so there are other ways to deal with this crisis. What we see with the Prime Minister, whether it is on emissions trading or whether it is on this issue, is he is the sole source of wisdom. He has sovereign knowledge on every issue and if you don’t agree with him you actually want to torch the planet or trash the economy. I don’t think Australians are buying that anymore, I don’t think they believe Kevin Rudd has any sovereign wisdom on these issues and I think it is time the government and Kevin Rudd, I am sure he is feeling very cocky today and those in the government are feeling all very cocky about what has happened on the Opposition side of politics - but I think the Australian community understands that they have concerns about Kevin Rudd and we will be giving voice to those concerns between now and the next election and strongly.