JOURNALIST: Lindsay Tanner joins me here in Canberra. Minister, thank you for your time.
Did the Government ignore advice from the Reserve Bank when it decided to guarantee all bank deposits?
TANNER: Throughout the international financial crisis the Government has been in very regular contact, almost constant contact with the key regulators including the Reserve Bank and we’ve paid a lot of attention to the advice that we’ve received from the regulators. I’m not aware of the specific advice that is supposed to have been given to us by the Reserve Bank Governor according newspaper reports this morning. I’m simply not aware of the basis of that. But I can assure you that we will continue to pay very close attention and take a lot of notice of the advice that we receive from the Reserve Bank, from APRA, from Treasury.
JOURNALIST: The Opposition is accusing Mr Rudd of misleading Parliament over this, claiming that he says he would be acting on advice of regulators throughout the crisis as you’ve just repeated now. Is the Opposition going overboard with this – do they know something that you don’t?
TANNER: Oppositions routinely accuse governments of misleading Parliament and a lot of the time it’s stretching the truth to suggest that that’s the case.
Not being aware of what the Reserve Bank Governor is supposed to have said to the Government. I note that these are newspaper reports where there is no direct material from the Reserve Bank Governor, it’s difficult for me to say, but I believe that the Prime Minister has not misled Parliament on any of these matters; I believe he stated it as it is, as the Government has acted as we see things. We’ll just have to wait and see what emerges about what the Reserve Bank Governor has or has not said.
JOURNALIST: Are you aware then of any complaints that the Government has received from the Finance industry about the decisions to guarantee all of those deposits?
TANNER: Not directly. I’ve heard one or two suggestions from indirect sources that there are some things happening that some institutions may not like. But one of the things you learn in this game over the years is that the fact that businesses with self interest at play make a complaint about something doesn’t necessarily make it true. And we haven’t, to the best of my knowledge, received formal complaints of this regard. I understand that there was a suggestion that a letter was sent to the Government on Friday. I haven’t seen that letter, I’m not sure who it’s from, I’m not aware of its contents. There are always going to be arguments when you have a major regulatory intervention in totally unprecedented circumstances, there will be some who feel they have been hardly done by or that it’s unfair that the way it impacts in detail. So I don’t think there is anything unusual about that.
But obviously we will pay due attention to any points that get put to us by any player.
JOURNALIST: But as the Finance Minister, do you have any concerns that this measure could be distorting the finance market as claimed today?
TANNER: I don’t have any concerns about the measure; I think it was the right thing to do. We clearly will continue to monitor the detailed application of the measure, the implications that flow from it because it’s not a static world out there, the economy changes, the internationally circumstances change, things that international regulators do change. It’s necessarily for us to keep a very close eye on developments, particularly when you’ve got such extraordinary interventions necessary because of the global financial crisis. That’s what we’ll continue to do and just deal with these matters on their merits.
JOURNALIST: Is the Government though considering a $5million cap on these deposits as reported today?
TANNER: Not to my knowledge. And you should bear in mind that these are essentially matters for the Treasurer. I was Acting Treasurer for the period when they were actually introduced, but, typically, when the Treasurer is in the saddle I don’t get directly involved in these matters on a day-to-day basis because they are his portfolio, not mine.
JOURNALIST: Well Glen Stevens does though say today that the lower cap the better. Other countries seem to have caps in the range of $100,000 to $200,000. What was it that convinced the government, what advice was taken to convince the government we need an unlimited cap?
TANNER: The problem is that once you get to caps, even in that $5 million for example is one that’s been cited, you are covering such an overwhelming majority of total deposits, that it becomes a bit strange that you’ve got only a tiny proportion left out.
They might sound like big numbers, but the vast bulk of our deposit base in our financial institutions literally comes from people with a few thousand dollars here, a few thousand dollars there and the higher up the scale you go the smaller the amounts of money, and the smaller the number of depositors becomes.
JOURNALIST: Now though branches of foreign banks in Australia which accept wholesale deposits are also wanting their funds guaranteed as well. Is that an option?
TANNER: I don’t believe so. The key distinction here is that a bank that is incorporated in Australia, that is legally regulated as an Australian institution, even if it’s owned by a foreign organisation, is covered by the arrangements for guaranteeing deposits.
A bank that isn’t, a bank that is essentially an arm of a foreign bank is in a different position, so I don’t believe we will change those arrangements.
JOURNALIST: Well another measure reportedly being considered by the Government is introducing a higher tax on salaries of these so-called fat cats, earning more than $1 million. Is that necessary and how quickly could the Government look at introducing those changes?
TANNER: We don’t intend to increase taxes at any level and we should bear in mind that the Government has actually reduced the tax burden as a proportion of the total economy. It’s gone down quite significantly from this year’s budget and in fact, is projected to stay below where it was when we took office, what we inherited from the Howard Government. The proposal that was floated by the Australia Institute is also a little bit strange, in that it actually only involves a relatively marginal increase in the marginal tax rate being paid by the highest earners. So I’m not quite sure what the logic is in shifting up from 45 to 50, beyond a certain point, I think a million dollars, that would only raise a very modest amount of total revenue and I doubt whether those who would want to see really high income earners hit would be satisfied with that level of increase. We have no intention of increasing tax rates and income tax scales at any point.
JOURNALIST: Turning overseas, the Federal Reserve Chief has indicated that the US government’s $700 billion financial stimulus package may need to be followed by a second package. Do you think that’s necessary to avoid a deep recession in America?
TANNER: I’m not expert enough to comment on the United States. But it’s pretty clear that things are pretty grim there. They’ve got falling house prices, and a lot of economic activity slowing quickly and it’s very difficult for regulators and governments to make assessments in these circumstances to know exactly how far to go because it’s a real value judgement you’ve got to make about the state of economic activity. Clearly what we want to see is the US economy recover as quickly as possible, get back on its feet and get moving again. And also particularly just at a human level, the impact on ordinary working people in the United States being minimised. That’s clearly the real issue is here, that an awful lot of people suffering as a result of these things and the risk is that a lot more will suffer.
JOURNALIST: What are the odds though of Australia needing to also look at a second package like the US is now doing and dipping in even further to the budget surplus?
TANNER: The Prime Minister has made it pretty clear we don’t rule out options of that kind.
JOURNALIST: Is it likely?
TANNER: I don’t think it’s likely. I’ve been very careful not to rule out a wide variety of things, some of them decidedly less likely than that one. Including things like the Government buying shares, now I think that’s a very remote possibility. And I certainly don’t intend to pursue any suggestion of that kind. But I’ve been very careful not to rule out that have been floated in the circumstances we face we are in completely unchartered territory internationally. It’s very important that a Government of this country keeps all of its available options open, even though some of them are very very unusual. I don’t believe that we would ever get to those kind of levels and I think it’s pretty unlikely that you’ll see a further spending package – but that really does depends on events overseas. If things really do turn bad internationally for a prolonged period of time then we are in a different environment, have to make different calls.
JOURNALIST: In the US, the ‘R’ word is being bandied about a lot at the moment. Here though, the Chief Economist at Goldman Sachs JB Were, says Australia could be in recession by Christmas, but it’s likely to be a short-lived downturn. Is that an assessment of the economy that is too pessimistic? Are you concerned that a company of a calibre of Goldman Sachs would be weighing in and making those sorts of comments?
TANNER: You’ll be pleased to know that I was watching Sky News this morning and I noted that he was out on his lonesome.
And you had Chief Economists from other institutions putting a different point of view. Suggesting that yes, we are into slowing period for the economy, but in their view it was unlikely we’d go into recession. We’re not going to make a specific prediction, until the mid year economic fiscal outlook papers are published which will be in the next few weeks, looking at all the detailed material and estimates from Treasury and from my department with respect to spending of course that will be put out there for people to assess.
Clearly the economy is slowing; clearly we have some very powerful stimulus coming back the other way – the fall in the value of the dollar, interest rate reductions including further market rate reductions by some of the banks. And of course the Government’s spending package. We can’t predict exactly how strong the negative
internationally are going to become but as things stand at the moment, I thin the economy will continue to grow – just not quite as quickly as it has over the last couple of years.
JOURNALIST: Well, for the first time in years, China’s economy has dropped to single digit growth. Last week on this program, the former opposition leader, and now leading finance figure, John Hewson said he believes the mining boom is over here. Is that something you agree with?
TANNER: Look I don’t think so. But I think it’s too early to call frankly. We’ve seen an extraordinary period where spot prices for our major mineral exports have plummeted. But of course, most of the product we send overseas is based on long-term or medium-term contracts and they of course, have reached record levels. So it’s too early to make that kind of assessment. Clearly the fizz has come out of the Chinese economy at the moment and that’s having an impact on global demand of commodities. And it’s also one of the key things that is pushing the value of the Australian dollar. But I think it’s way too early to make a call on these things.
The dynamism and strength is just amazing – it’s just enormous. And it is predominantly domestically driven, exports are significant in the overall economic scene, but basically what’s going on there is this giant transformation, that will continue at a very rapid pace, irrespective of global conditions.
JOURNALIST: What domestic policies are in place to sure up Australia’s position against a weaker demand in commodities?
TANNER: I think the key things I’ve mentioned before are very important and that is: reductions in interest rates that help to stimulate activity – they take awhile to flow through fully, but they are already flowing through significantly now and the fall in the value of the dollar. The stabilising impact of the floating exchange rate is really really important. It’s helped to get us through a variety of international problems in the past. For example the Asian crisis in the 1990s. It’s certainly going to play a very big role in protecting us against the impact of the international problems now. And of course the Government’s stimulus package, the Economic Security Strategy, $10 billion worth of spending going into the economy and overwhelming going into people’s pockets and purses that will flow into the wider economy. All of those things together will really push back hard against these downward pressures.
JOURNALIST: You mentioned interest rates today, Glenn Stevens is delivering this major address and we’re all looking forward to getting the notes from the meeting where it was decided to cut interest rates by a full per cent. In hindsight, do you think the RBA made a mistake early in year, when it raised rates especially as the sub-prime crisis was already unfolding in the US? Did they read the situation correctly?
TANNER: I don’t presume to comment on the judgements made by the Reserve Bank about interest rates. It’s important that its independence is respected. But there is one thing I would say that I think is widely misunderstood in commentary, that is, the judgements the Reserve Bank makes are about what it sees coming in the future.
People of often make the mistake of thinking that the assessment the Reserve Bank makes for example about the level of interest rates and inflation is looking in the rear view mirror. In fact what they have to do, is look into the future. Read the signs that are in the economy now and interpret where they are taking things. That’s why late last year and earlier this year they could see that inflationary pressure, we had government spending out of control, we had severe capacity constraints, skill shortages, infrastructure problems, and therefore they could see that this was going to inflationary problems and that could become entrenched with a wage price spiral. But equally as we got into the latter part of the year, and very different conditions, unprecedented once in a generation conditions took hold, they could see that the wider economy circumstances were going to be putting a lot of downward pressure on inflation and the outlook had changed. They don’t look into the rear view mirror, they look into the future to try and work out where things are heading and to get in front of the game.
JOURNALIST: Lindsay Tanner, thank you for your time on Sky this morning.
TANNER: Thanks very much Ashley.
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