ROSS GREENWOOD: Well as I said as part of our coverage of this interest rate move today, we're joined by the Finance Minister Lindsay Tanner. Many thanks for joining us on the program.
LINDSAY TANNER: Good afternoon Ross.
ROSS GREENWOOD: What issue about today's move by the Reserve Bank - I mean, clearly it will sting people with mortgages. They've almost got use to the fact over the past six months that mortgage rates have been low. They feel comfortable with those rates being so low.
LINDSAY TANNER: There's no doubt that there'll be many people with mortgages that will feel the impact of this Ross but the Reserve Bank Governor has made it plain for some time now, that the extraordinary settings - 50 year record low settings of interest rates wouldn't last forever and therefore this movement I think has been forecast by plenty of people in recent times. But we are very conscious of the fact that it will certainly hurt people in the pocket. But interest rates of course are still way, way below where they were about 18 months ago.
ROSS GREENWOOD: Of course it has been suggested even by the treasurer today that this may not be the last of the interest rate rises. That there may be a series of them ahead. The Reserve Bank Governor has also been fairly clear that even interest rates at three and a quarter per cent are historically very low.
LINDSAY TANNER: Look, we typically, as you know, don't speculate on where interest rates will head but clearly I think that's been signalled by the Reserve Bank that we shouldn't get used to three per cent being the level of interest rates indefinitely. And I think he aptly described it as emergency settings and the thing that we can take out of this move today I think is that the Reserve Bank believes that it is now appropriate to move out of the emergency territory into a slightly more optimistic zone about the Australian economy. So it's difficult to predict where things will head of course and we don't speculate about interest rate movements but the Reserve Bank has made it fairly plain I think that nobody can realistically expect interest rates to stay at three per cent - that emergency level, into the longer term.
ROSS GREENWOOD: Now there were two phases of the economic stimulus when you know, the economy started to slow; one part of it was the interest rates coming down on the official cash rates to three per cent. The other part of it of course was the cash handouts that the Federal Government gave out at a period of time. They also phase out from the end of this year don't they really? So if you like the immediate cash stimulus that the Government put into the economy, that eventually starts to peter out like the first home buyers grant that's just - if you like, come back to its previous level or is petering out to that level just over the past few days.
LINDSAY TANNER: Look, that's certainly true. The overall stimulus package was designed to have different tranches(*) of money moving into the economy at different stages. We were very conscious of the fact that in the past a lot of money's been put into big infrastructure projects that in some cases have taken years to get moving and meanwhile there's hundreds of thousands of people losing their jobs. So we had the cash payments initially because that was the best way of getting money moving quickly. Then of course you had small scale school maintenance. You had the first home owners grant being double and trebled for new premises and of course the investment bring forward tax benefits for businesses large and small and then of course the primary school buildings. Now what's effectively happening is that as the cash payments are starting to peter out and impact, the slack is being taken up by the money being pumped into construction and associated activity through the primary school buildings and of course you'll see the first home owners grant gradually wind back and the tax break wind back. So it's all designed to try and spread the money and the stimulus to the economy over a period of a year or two to sustain the economy when the private sector was retreating rapidly.
ROSS GREENWOOD: But is it still fair to say that because you have put in place now these infrastructure projects, it's hard if you like to pull up a road midway? It's hard to pull up a railway halfway through the building phase, so therefore that phase of the stimulus has got to continue to roll out. So there's not really much the Government can do to hold that back now is there?
LINDSAY TANNER: Look, in a general sense there's some truth in what you say Ross that some of those parts of the process, once you get moving it's difficult to pull back. But people who have been criticising this - the Opposition who are all over the show on those issues are saying look you should reduce the stimulus. Well in fact the stimulus payments are a very small proportion of the total Government spending profile and of course by definition they're temporary. We've got a big challenge to get the budget back into surplus. We're very conscious of that. We want to minimise the debt from the deficits over the next few years, but really where that requires hard tough decisions on is not so much the temporary stimulus measures, it's just the ordinary day to day budget spending that goes on indefinitely and that's what we've been working really hard on and we've had some significant decisions on that front in the budget this year, but we've got more work to do on that front.
ROSS GREENWOOD: But is it also reasonable to say that really if the stimulus from the Government does continue, and the economy of the private sector starts to kick in as well, you've really got that phase of the economy starting to grow at the same time that you've got the Reserve Bank really if you like, being the one - I kind of guess pressure point, that has to raise interest rates if you like to cope with the growth that's happening in other parts of the economy?
LINDSAY TANNER: Look, I don't believe that's a reasonable way of looking at these things Ross because this has not been a normal downturn where you see interest rates and fiscal policy interacting in a certain way. The Reserve Bank dropped interest rates very quickly and dramatically - really went very, very strongly because of the fear that the semi - sort of collapse of the financial system globally and the collapse in confidence would really drive economic activity quite dramatically. So this has not been a normal set of circumstances. So I don't believe that that kind of perspective really is a reasonable way of looking at these things and it is very important to keep in mind too, that although the economy is performing better than we expected and although we're really the only significant developed economy that's been growing in recent times and that has avoided the technical recession, the growth rates we are currently experience and we're projecting for the immediate future are still very, very modest to say the least. So it's not as if we're about to burst out of the blocks with you know, dramatic economic growth and everything pumping, It's really just that we've avoided disaster.
ROSS GREENWOOD: Because seriously the one thing at the moment would be - the worst possible thing that could happen is you have a housing boom. Because if you have a housing boom or a bubble of any sort the Reserve Bank may have to raise those interest rates even further than what many people would have anticipated.
LINDSAY TANNER: Well clearly that kind of sudden burst of speculative activity and dramatic increases in asset prices - one of the factors that's been a major problem in a number of countries around the world that's contributed to the global financial crisis and the recession that we've just been living through so any kind of asset bubble - whether it's housing or any other is going to be very problematic. I don't see any signs of that and clearly we don't want to see a patter of dramatically falling house prices either because that has drastic economic consequences. But I agree with your assessment. We certainly wouldn't want to see that kind of bubble develop.
ROSS GREENWOOD: And just - even though I know that the Reserve Bank in its decisions are independent and independent of the Government, that's absolutely a given; there is coordination between the various facets of Government. Is there strong coordination between what the Federal Government does with its monetary policy - oh rather with its fiscal policy, the taxes and the stimulus and all that type of thing and what the Reserve Bank does with its monetary policy, in other words its interest rate settings - is there some sort of balance and discussion between the two?
LINDSAY TANNER: Well the Secretary of the Treasury Ken Henry is of course a member of the Reserve Bank Board and there is obviously dialogue and this would have occurred under the previous Government as well. There is dialogue and there are public statements by the Reserve Bank so clearly the Government, in setting fiscal policy, does take great notice of what the Reserve Bank says and does take into account the assessment of the economy by the Reserve Bank in where we're heading. But we are very keen to maintain the formal separation though because it's been one of the great benefits of - for Australia's economy in recent times having the reserve bank setting interest rates formally and entirely separately from Government influence or interference, I think is an extremely important part of our economic architecture so we're very conscience of maintaining that and not interfering. Yes, we obviously have dialogue. We take great notice of what the Reserve Bank says but we don't seek to interfere in their task.
ROSS GREENWOOD: Okay many thanks to the Finance Minister Lindsay Tanner for joining us on Money News tonight. Many thanks Lindsay.
LINDSAY TANNER: Thanks very much Ross.
ROSS GREENWOOD: So as I say, there's the assessment of just where our economy is headed and the reasons why. The interesting part of that commentary from Lindsay Tanner is that he doesn't see any signs of an immediate boom. But if one were to occur in the property market, then you would watch out very closely as to where those interest rates are headed in the future.
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