Treasury—Advice on Risks to Economy

Hon Dr MICHAEL CULLEN Link to this

Treasury’s measure of oil price is based on the West Texas Intermediate price of oil, and its forecasts of those are based on prices in the future market for oil. In other words, of course, to the extent to which Treasury has underestimated the increase in prices for oil, so indeed will have all those people who are betting their money on prices for oil, as well.

Hon Dr MICHAEL CULLEN Link to this

By running a strong fiscal position and maintaining a constant focus on the long term—exactly what this Government has done. The main Opposition party is promising to borrow more, which is exactly the wrong response in a time of economic uncertainty of this sort.

Hon Dr MICHAEL CULLEN Link to this

That last part is certainly untrue. The surplus has grown very substantially only over the last 3 years, or so. On the first part, the member should read the 2005 briefing to incoming Minister more carefully. It actually told us that Treasury’s view was that if the growth in spending was cut back by $500 million each year—in other words, by $500 million, $1 billion, $1.5 billion, $2 billion, and so on—then that money could have been put into tax cuts. Treasury was not proposing additional revenue reduction over and above what the reductions in spending should be according to its forecast. The member, therefore, needs to specify what the $500 million, $1 billion, and $1.5 billion in cuts were going to be, over that period of time.

Hon Dr MICHAEL CULLEN Link to this

I think there is a very, very high probability that any forecasts are likely to be wrong in this area; it is the nature of the high level of volatility of oil prices over both the short term and the long term. What is equally true is that our economy, and that of most developed economies, have shown much more resilience in the face of these kinds of oil price rises than previously had been thought likely—compared, say, with the events in the 1970s, in that respect. So, in other words, of itself it is not a disaster if it leads to more fuel-efficient cars or the development of alternative fuels; it might actually be helpful for causes that the member and I have a shared interest in.

Hon Dr MICHAEL CULLEN Link to this

To the extent that that flows through to the bank’s view of general price rises—and the Reserve Bank, of course, can look through the one-off effects of a commodity price increase such as oil—that would tend to have led it to a somewhat looser monetary policy than might otherwise have been the case. But I think that probably most would agree that the overall impact has not been huge, in that regard.

Hon Dr MICHAEL CULLEN Link to this

I think the last statement is a statement of fact. Looking over the last 40 years we have seen, in real terms, very large fluctuations in oil prices—and it is worth reminding ourselves that oil prices now are not that much more in real terms than they were when they last peaked at a very high level—and they have not affected, actually, the rate of growth in demand for transport. That in part is a consequence of a stronger economy, people’s leisure preferences, and a range of other factors, particularly as both alternative fuels and alternative vehicles are developed. One thing I do not share with the member, I suspect, is a view that higher oil prices will lead to an abandonment of the private motorcar.