5 July 2017
Transcript - #2017135, 2017

Interview with Bloomberg

Subjects: G20; Trade; Wages growth; Housing market; Labor’s proposal to smash the housing market and drive up rents.

HAIDI LUN:

Given these developments over Qatar, over North Korea, is there a sense that this is really going to dominate the agenda?

TREASURER:

The G20 will always take the opportunity to address very serious issues like this. Issues around international security, terrorism, these sorts of things and the cooperation that needs to take place between countries on those issues as well as deal with these major international threats that have emerged in recent days. It’s a good opportunity for world leaders, I think, to get around the table and talk through these issues. But at the same time, the real structure and focus of the G20 has always been about how to we drive the economy forward, how do we generate the growth, how do we drive the investment, and for Treasurers and Finance Ministers it’s always been a key tool to ensure that the tax base of the world is keeping up to date with new technologies, the way markets work, and it’s been a very effective forum I think from that perspective. When you link that back into terrorism issues though, I mean how the banking system works, following the money, these sorts of things, there’s been a lot of cooperation and new programs which have been advanced through the G20 on that as well. So it will be a very busy weekend for Prime Minister Turnbull who heads out tonight, he’ll be sad to leave what is a beautiful day here in Sydney, but never-the-less a lot to do.

LUN:

Yeah quite a send-off. Other than geopolitics being a bit of a distraction from these issues of trade, of trade cooperation do you feel like the global trade environment has improved, because I think probably the last time we spoke, lots of concerns over protectionism, over whether the U.S. is retreating from globalisation.

TREASURER:

Despite that I think we have seen an improvement. We’ve certainly seen an improvement here in Australia, and that’s why it’s important these forums reassert the importance of trade, reassert the importance of economic cooperation, and keeping on with the economic reforms that are necessary. In Australia, we’re getting on with our job of our enterprise tax plan, which is taking tax rates down, firstly for small and medium sized businesses, and we want to see that extended across all businesses. On top of that we’re getting ahead with our infrastructure programs, some $75 billion over the next 10 years and these are all key reasons to invest in where our economy is heading. That’s a very similar plan to what the United States outlined last time I was at the G20; it was one of the issues the Treasury Secretary Mnuchin and I discussed, and so we’re keen to see progress on that front, there as well as here.

LUN:

Treasurer you’re joining us a day after the RBA once again kept rates on hold at that record low yesterday, at 1.5 per cent, what was interesting was the lack of a hawkish tilt in the guidance, in this environment globally, where we are seeing global peers, the Fed, even potentially the BOJ, the BOE, the ECB all started to talk about normalisation of policy. The fact that the Australian central bank isn’t even talking about it, what does that say about the strength of our economy and the position that we’re in?

TREASURER:

Firstly it says we’re at 150 basis points to begin with. We never had our rates fall as much as these other economies. I think our central bank showed a lot of discipline, a lot of measure in the way they dealt with things on the way down, and they’ve held their mark, now over many, many months and they’ve had a very optimistic view about where things are headed. Recently our employment numbers have been very strong. We’ve had a six-year high in job advertisements in the latest series, and a four-year low in unemployment.

LUN:

And what about wage growth?

TREASURER:

Well the wage growth needs to follow the profits. The wage growth needs to follow the sustained improvement in profits. Now we’ve had two reasonable quarters on the national accounts on profits. But we need to see that continue because you’re right…

LUN:

Low wage growth and ever tighter labour markets is a global phenomenon at the moment. It’s a structural thing so are these assumptions that you’ve made in the Budget too optimistic?

TREASURER:

No I don’t believe so and that’s certainly the advice that we have, and our forecasts sit very closely with where the Reserve Bank is, the IMF is, the World Bank, the OECD, they are saying similar things about the Australian economy. So, we’ll review it again in December, but we do want to see great wage growth in Australia, but that has to come from greater investment and a consistent improvement in getting the profit performance.

RISHAAD SALAMAT:

That’s going to take time, Treasurer you’ve been on the record many times concerned about house prices in Sydney and Melbourne, what are you doing about it?

TREASURER:

One of the key things we’ve had great success with in the last quarter, is we had the macro prudential measures brought in to limit interest-only loans. Australia has historically had a higher level of interest-only loans, particularly for investors. Now, the thing about the Australian housing market, which is quite different to many other markets around the world, is that we have a supply demand imbalance. That is the fundamental reason why you’ve seen prices moved so much particularly in markets like Sydney and Melbourne. Now when you have a high growth in interest only loans, with investors that can exacerbate that. Now in the latest quarter in Sydney for example, we’ve seen the price growth fall from five per cent to 0.8, and a similar average sort of movement across all the markets. We believe the macro prudential measures are working. They’re doing what they’re intended to do, it’s taking a bit of heat off the top, but fundamentally the values that sit behind the Australian housing markets are quite sound because it’s underpinned by the old fashioned rules of supply and demand. In the budget we outlined a whole range of other measures to boost supply, right across the board with our states and territories, to address a supply shortfall you’ve got to boost supply, and right across the market not just on the fringes. We’ve got tax incentives in there to invest in new affordable accommodation as well.

SALAMAT:

Treasurer, the thing is you can put as much supply in there, it’s going to be soaked up by demand particularly investment demand which is again fuelled by, well one person out of [inaudible], the most bizarre tax relief ever. And we’re talking about negative gearing here. You can get rid of that, and you’re going to solve the problems in one fell swoop.

TREASURER:

No what you’ll do if you do that is you’ll cause a hard landing in the Australian housing market which would have very negative consequences our economy. The negative gearing argument is a myth. In the UK, they haven’t had negative gearing for 100 years and they have a more severe housing affordability problem than we have in Australia. We’ve had it for 100 years. In Perth they had negative gearing but the prices had been falling, in Sydney it’s been going the other way. Now, the negative gearing argument is a complete myth. What we need to do is ensure that we need to get the supply/demand imbalance corrected, over time. You take the more scalpel-like measures that we’ve done through the instructions coming out of our banking regulator to curb the growth, particularly in interest-only loans. And we’ve seen quite a spread now, between interest-only loans for investors to principal and interest loans for owner occupiers. We’ve actually seen a slight fall in the cost of those principal and interest loans because we want to see more of the focus heading towards paying down this principal.

SALAMAT:

Treasurer I’d like to know how many of your MPs in your party have second or even third homes.

TREASURER:

I couldn’t tell you off the top of my head and I don’t see what the point of the question is.

SALAMAT:

Well, they don’t want to lose their seats do they?

TREASURER:

I don’t know your assertion is, you’d have to be a bit more explicit if you want to make an accusation, you should make it and I’ll respond to it candidly, we’re a bit like that in Australia. If you want to say something, say it.

SALAMAT:

Alright, I’m just saying you couldn’t get a rescinding of negative gearing because they’d lose their seats they wouldn’t vote for it anyway? That’s my point.

TREASURER:

No, what I’m saying is that if you abolish negative gearing in Australia, you would have a hard landing in the housing market and an increase in rents that would actually impact on household consumption, and would be very negative for our economy. It’s got nothing to do with the politics, and it’s got everything to do with good economic sense.

SALAMAT:

Thanks very much indeed, Treasurer Scott Morrison. Always a pleasure talking to you.