KERRY O'BRIEN: The Prime Minister Kevin Rudd joins me now from our Canberra studio.
Kevin Rudd, you're clearly bracing yourself for your first interest rate increase on your watch this week.
How long do you think you will be able to get away politically with blaming the Howard Government for inflation?
PM: Well, Kerry, the statistical facts speak for themselves. The last couple of years we've had 20 successive warnings by the Reserve Bank, in fact, over the last two years plus, to the previous government about inflationary pressures in the economy arising from infrastructure bottlenecks and skills shortages. None of these were acted upon.
Secondly, we've had ten interest rate rises in a row under the previous government, six during the last term. Now, I think these two things plainly fall together and there's one other piece in the fact jigsaw here, that is that which comes from the ABS itself and that is in the CPI data most recently put out, you've got inflation running at an analysed rate of 3.6 per cent. That's a 16 year high.
Now that's what we've inherited. Our challenge is to deal with the inflation challenge. We've put forward already in the speech I gave a few weeks ago our five point plan for attacking inflation in the year ahead. The Reserve Bank will do what it needs to do.
But from my point of view my job is to run a tight fiscal policy given the inflation legacy left to us by our predecessors.
KERRY O'BRIEN: OK you talk about a five point plan for the year ahead, at what point will the inflation buck stop with the Rudd Government and I am sure that you would agree that regardless of what arguments you might want to put up, those people out there who are going to feel serious mortgage stress increasingly with each interest rate increase that comes are not going to be, and those interest rates that are now getting uncomfortably close to double figures, are not going to be too interested in who did it, they're looking at your Government?
PM: Yeah, but exactly Kerry. I think people in the Australian community are sick and tired of politicians just playing the blame game or buck-passing. That's why I just cited you three set of facts which are beyond dispute about where we got to.
KERRY O'BRIEN: Sounds like you're blaming the previous government, isn't that the blame game?
PM: Is the ABS blaming the previous Government, is the Reserve Bank blaming the previous government? It is their data I am quoting, not my opinion. These are just facts but going forward, our challenge is to make the job of the Reserve Bank as easy as possible and the five point plan I've outlined seeks to do that.
Firstly in terms of what we can do through public demand, the budget surplus, outlining a clear cut goal of 1.5 per cent of GDP budget surplus for the upcoming budget.
Secondly, to do what we can to boost private savings. All that on the demand side of the equation, and on the supply side, our strategies for acting on skills infrastructure and workforce participation. That's a strategy. We haven't seen one like that for many, many years.
KERRY O'BRIEN: The economy is at full capacity now, at full stretch now but potentially the full impact and the full pressure of the resources boom is yet to come, isn't it? It's yet to be really felt. I mean, business has been borrowing to pay for its expansion to meet the demands of China in the resources field, but the full hit of exports is yet to flow. I mean, there's a lot of this is in the pipeline ahead, is there not?
PM: Well, in Australia right now we're faced with a unique set of economic circumstances.
We've got on the one hand inflationary pressures at home which have been building the last couple of years and secondly we've got uncertainty in the global economy coming out of subprime and other factors in the United States, causing some predictions, particularly from the IMF most recently in their global economic outlook for a revision downwards of growth projections in North America, in Europe, to some extent in Japan. But absent at this stage, China.
So, this is a very complex picture for us, but we believe that the priority now lies in fighting inflation on the home front through the measures that I've outlined. We'll keep a very close weather eye on what's happening internationally in case we need to adjust. That is what a responsible economic strategy consists of and that's the conservative approach we'll be taking.
KERRY O'BRIEN: You're intent on stressing time and again in the brief period you've been in Government, as does Wayne Swan, the independence of the Reserve Bank, that it's the Reserve Bank Board that takes decisions on interest rates. But you have a representative on that bank board in Treasury, Secretary Ken Henry. What are you as a government asking Ken Henry to tell the Reserve Bank tomorrow, in terms of what you believe should happen on interest rates?
PM:Kerry, if you accept the independence of the Reserve Bank, which we have done as a matter of policy for a long, long time and Wayne Swan in his policy announcements as Treasurer since the change of government has reinforced the independence of the Reserve Bank, you don't go round trying to provide either public lectures or trying to convey some sort of an internal message. They will make a judgment as a Reserve Bank based on a number of factors, a number of pieces of data, one of which will be the fiscal policy settings of the incoming Government.
We've tried to be up front and frank about that. That is, our predecessors were projecting a budget surplus for 08/09 of about 1, 1.1 per cent of GDP. We said we can do a lot better than that. We're projecting or aiming for 1.5.
That's the concrete action you can take to say, "We understand the pressures of public demand," that's what you should do, rather than trying to chip away at the independence of
KERRY O'BRIEN: But I'm not talking about chipping away at the independence of the bank, Mr Rudd. I'm talking about the fact that you have a Government representative sitting at that Reserve Bank Board. You also express sympathy for struggling homeowners who are going to face more mortgage stress if rates go up. Presumably there's a strong prospect that Ken Henry is going to sit there as your representative on the bank board tomorrow arguing for an interest rate increase?
PM: The Secretary to the Treasury's responsibility in part, will be to reflect the fiscal policy reality of the Commonwealth. That's what he would do. We don't seek to direct his course of action. You've actually got to believe in the independent monetary policy, because inflation is the ultimate enemy of working families and businesses.
That's why we believe in the independence of the Reserve Bank. Therefore, we've always said that if we deal front and centre with the fight against inflation we're acting most responsibly in dealing with the economic challenges not just for the economy at large, not just for businesses but for working families, as well. Hardline on monetary policy, our job and our Government's side is to act on fiscal policy and our predecessors let the reins far too loose on that one.
KERRY O'BRIEN: Are you saying that Ken Henry's on his own when he goes into that Reserve Bank Board, he doesn't take advice from the Treasurer, he doesn't take advice from the government on a government position on interest rates?
PM: Ken Henry as Secretary to the Treasury will reflect the view and the situation in real terms of the Commonwealth vis a vis the fiscal situation that we have, and the fiscal projections that we have. That's what he's to do.
What's my job as the Prime Minister is to make his tidings as happy as possible vis a vie where we'll take the budget balance. And I say again, we are projecting a budget surplus as our aim for this year, considerably in excess of what our predecessors were projecting only three months ago because we've unleashed Lindsay Tanner to take the scalpel through the razor gang to government expenditures and our predecessors never did that.
KERRY O'BRIEN: Just so I understand this clearly Mr Rudd, are you saying that Ken Henry will not have a position on whether interest rates should go up, he'll simply reflect Government policy?
PM: Ken Henry's responsibility is to articulate clearly to the Reserve Bank Board the fiscal reality of the Commonwealth. That is, where we stand, where we're going and, therefore, that becomes one ingredient in the overall mix of presumably of the independent decision of the bank.
KERRY O'BRIEN: But at no point does he say, "I think interest rates should go up or shouldn't go up" on behalf of the Government?
PM: I believe the responsible course of action for the secretary of the Treasury is to make sure that the bank is completely familiar of where we are going in terms of the Government's Budget policy data. They then will make an overall policy setting.
KERRY O'BRIEN: OK.
PM: Beyond that, the deliberations of the board and what may or may not be said within the board, logically are the province of the board.
None of us out there want to see working families punished by interest rate decisions, none of us want any mortgage rate pressure in addition to the half million people already under mortgage pressure prior to there being a change of government. My job, though, is to make sure that our Budget policy direction is sober, consistent and conservative.
KERRY O'BRIEN: You've blamed the previous government for profligate spending also feeding inflation but the Reserve Bank said in its minutes when it put rates up last November that even after all the spending of the Costello budget in May last year and further spending by the Government or spending promises by the Government through the year including their election promises, that that fiscal policy was roughly neutral in its overall effect on growth.
In other words, that the Reserve itself seems to argue that the Howard government spending was not profligate in contributing to inflation?
PM: Well, our view is that if you put together the aggregation of what happened on the supply side of the economy, which no attention to the skills shortage, no attention to the infrastructure bottlenecks in the economy by the national government.
At the same time you're running a very slack policy when it comes to the public demand impact on the overall inflationary stimulus in the economy.
Put that cocktail together, it was not a happy cocktail.
If you look at the consistent set of warnings from the Reserve Bank, they were consistently critical of the Howard government's performance on the supply side.
That is, through their warnings if you like on skills shortages and infrastructure bottlenecks over many years, 20 successive warnings, each of them ignored, the result being a succession of interest rate rises. Our job is to turn the corner. Turning the Queen Mary around will take time but we take this responsibility very seriously.
KERRY O'BRIEN: On your plan to give an apology to the Stolen Generations of Indigenous Australians as your first action in the new Parliament, how close are you to a form of words and in the interests of bipartisanship, when will you make those words available to the Opposition?
PM: Well, Kerry, we made it very plain that this is an important piece of unfinished business for the nation. It's been unfinished for far too long. We need to do this and move on. Aboriginal Australians and non-Aboriginal Australians together.
Jenny Macklin the Minister has been out there with Aboriginal leaders for several weeks now. Completed one round of consultations, we've got some more to do this week.
I was on the phone the other night to Brendan Nelson and said I'll be happy to have a discussion with him this week in Canberra. We'll do that over the next couple of days and I'll be giving him a pretty clear indication of where we're going.
Can I just say this, it's clear cut. You either apologise to the Stolen Generations or you don't. We said before the election we were apologising. I'm not quite sure what Brendan's position is as of today, Monday night. But, you know, you can play around with text here and there and we've got to get that right in terms of the Indigenous people and make sure that the apology is effective. But can I say let's not just play word games with the Opposition. You either support it or you don't and I see Shane Stone has a particular view on that this evening.
KERRY O'BRIEN: Your ideas summit, 1,000 people engaged in 10 simultaneous mini-summits over a weekend in a couple of months' time. Can you really expect that a weekend spread so broadly to lead to a whole new burst of policy vision, a 20 year vision or a 10 year vision?
PM: Are you suggesting to me, Kerry, that it's not worth rolling the arm over and having a go? What I've discovered you know, in the last six weeks or so that we've been in government is that right across the country and certainly within the bureaucracy, there's been a bit of a lid on things.
A whole lot of people have got some real ideas about the future direction of the country. The bureaucracy in my experience seems to have suffered from a culture whereby they feared there was a right answer and a wrong answer and if they gave the wrong answer they had get into strife. I think it's time to turn the page on that.
Secondly we've been, I think, plagued as a nation by too much short-termism, short electoral cycles. It's time to look out to a 10 year vision to the country.
Secondly, harness the energies, enthusiasm and ideas of the nation, and guess what? Everything that gets put forward in this summit is not going to be flash. It's not going to be completely useable the next day. But if you get a dozen good ideas out of 1,000 people gathering together in Canberra at their own expense over a weekend, frankly it's an effort worth going to. Guess what? We're going to debate the future of the ABC as well.
KERRY O'BRIEN: I look forward to that Kevin Rudd.
PM: Do you want to come along?
KERRY O'BRIEN: We'll see. In one form or another
PM: You can participate it and cover it, whatever you like.
KERRY O'BRIEN: We're out of time for tonight, thanks for talking to us.
PM: Thank you very much.
KERRY O'BRIEN: Might be a little bit of conflict of interest - covering and contributing.
[ends]