James Bidgood (Dawson, Australian Labor Party) Share this | Link to this | Hansard source

My question is to the Prime Minister. Will the Prime Minister update the House on today’s Reserve Bank decision and the government’s response?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

I thank the honourable member for Dawson for his question. A short time ago, the Reserve Bank of Australia announced that it had decided to leave the cash rate unchanged at 7.25 per cent. To quote from the governor’s statement:

Inflation in Australia has been high over the past year in an environment of limited spare capacity and earlier strong growth in demand.

This of course will be a welcome reprieve for Australian families who have now faced 12 interest rate rises in a row, but we must treat today’s announcement with caution for the future. Twelve interest rate rises in a row have already significantly impacted on the Australian economy. Yesterday, we saw some slower growth in retail sales and last week we saw lower private sector credit and consumer confidence.

To support the economy we need to put downward pressure on interest rates and that means putting downward pressure on inflation. The government in January of this year was clear cut about its five-point strategy for dealing with inflation: one, to bring about an appropriate discipline, when it comes to public demand, through generating a significant budget surplus; two, to encourage private savings; three, to work on our capacity constraints through what we can do on the infrastructure front; four, to work on capacity constraints when it comes to skills; and of course, five, to boost workforce participation. This is the direction the government has been working on all year. This will be a long-term fight, but it is one which the government is seriously engaged in.

The cornerstone of the government’s fight thus far has been our $22 billion budget surplus. Again I would say to those opposite that, as they consider their votes in this place and in the other place on the budget measures, if they continue with their proposed plan to conduct a $22 billion raid on the budget surplus, its consequences will be to put upward pressure on inflation and upward pressure on interest rates.

Furthermore, the government’s strategy for dealing with inflation deals with capacity constraints. When it comes to skills and when it comes to infrastructure, through this budget we have announced our plans for the future, not just in terms of the year ahead but also for the decade ahead. We also see long-term planning through the establishment of an Education Investment Fund of some $11 billion, together with a Building Australia Fund for infrastructure of some $20 billion.

We have also indicated for the future, when we deal with capacity constraints through these funds and the proper decision-making processes that exist beneath them, that we are acting to deal with long-term capacity constraints in the economy. This is part and parcel of nation building—long-term economic decision making for Australia—and it is important also in the fight against inflation.

As I said before, inflation is currently running at 16-year highs. In the House yesterday I reported that the TD Securities-Melbourne Institute Monthly inflation gauge released yesterday showed a 0.3 per cent increase in May, to be 4.5 per cent higher than a year ago. This of course is of concern to families, but it also represents a real concern in terms of our overall macroeconomic management.

Looking at household debt servicing, the burden faced by working families and those doing it tough—working Australians—is at a record level. The ratio of interest payments to total household disposable income has reached an all-time high of 11.9 per cent. That is the most recent RBA data from December 2007.

Today’s RBA decision is welcome news for many Australians, but we must treat the RBA’s decision with caution because, when you have inflation running at 16-year highs, we are faced with increased upward pressure on inflation and, together with that, continued upward pressure on interest rates. We believe that this will be a long-term fight against inflation. Other governments around the world are faced with similar challenges, both through the combination of fiscal policy settings but also through the constraints which are now beginning to arise as a consequence of the global increase in the price of oil and global increases in the price of food.

This will be a 15-round fight; it is going to go on for a long time. There is no knockout blow when it comes to inflation but we are resolved with absolute determination on the part of this government to fight the fight against it. It is a core challenge for responsible econ-omic management for Australia and, unlike those opposite, we do not regard it as a charade or a fairy tale.