Senator JOYCE—I am fascinated by the answer, too, Dr Brown. I have three questions, so I will ask the most difficult first, and if we run out of time for the others that is fine. You have identified clearly that one of the pre-determinants of inflation is wages. I would suggest that the other two are fuel and food. You have hung your argument on why wages will not break out on ‘because they will be linked to productivity’. You did that after about five minutes of searching for the answer. Do you have any agreement in any way, shape or form with the labour market that will lock them in to only asking for wage rises when there is productivity? If you do have such an agreement, will you table it? On the basis of that, do you have an agreement with the suppliers of fuel that they will restrict their cartel-like arrangements, and if you do, will you table it? Do you have an agreement with the supermarkets that they will act in a fairer manner? If you do have such an agreement, will you table it?

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Senator Conroy—What we have is a five-point plan to address the inflationary concerns.

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Senator JOYCE—I will be more direct.

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Senator Conroy—While you are now putting forward your version of what are the inflationary pressures, let me take you again to one of the quotes I have already read—

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Senator JOYCE—No, let me be more direct, because I think we have heard it. Go to the exact spot in your five-point plan where you can table an agreement with the labour market that says that they will only ask for wage rises when there is a productivity gain. Can you please direct me to that in your five-point plan or, to be more concise, does it actually exist?

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Senator Conroy—The premise of your question was based on your version of what drives inflation. The point I am making is—and no disrespect to you, Senator Joyce—I would rather take the views of the Reserve Bank Governor about what are the drivers of inflation. Just to restate one of the earlier quotes, and then I will give you a new one which I have not yet read—

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Senator JOYCE—Minister, I have asked you a direct question.

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CHAIR—He has only just started his answer.

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Senator Conroy—To go back to the February 2005 remarks by RBA then Governor Ian Macfarlane before the House of Representatives Standing Committee:

... the biggest thing that stands out there is skills shortage. Everyone says that we are particularly short of tradespeople ...

… … …

We have to think about supply-enhancing policies.

… … …

You have to affect one of three things: you have to affect capital through new investment, you have to increase the supply of labour or you have to increase productivity.

At least, just on the headings that I have read to you about our five-point plan, two of the points of our plan specifically address two of those issues.

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Senator JOYCE—Madam Chair, I will ask the question as explicitly as I possibly can one more time. Is there an agreement from the labour market that says that they will agree only to wage rises when there is a productivity gain? The answer is yes or no.

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Senator Conroy—No, the premise of your question is—

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Senator JOYCE—No, that is where—

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Senator Conroy—The premise of your question is based on an inaccurate assumption.

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Senator JOYCE—No, no. The premise of my question is my question—

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Senator Conroy—I will not let you frame a question that is based on an inaccurate premise.

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Senator JOYCE—No, you are dodging and weaving and not answering the question.

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CHAIR—I think you have agreed to disagree here.

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Senator JOYCE—I will go to another area because I have failed to get an answer on that one. I refer to Eric Janszen’s article on ‘The next bubble’. I have heard the statement that, because America has an exposure to the subprime mortgage issue, therefore it is not in Australia, and sorry, but I disagree because I believe money flows. Do you agree with the sentiment—and I think Senator Brown has also brought this up—that if interest rates go up, then quite naturally people go out of terms with the mortgages that they currently have, so in essence we are heading towards a bubble in the real estate market that will burst, and burst in all the western suburbs, especially of our eastern capitals. What will be the effects of that when it filters through the economy? I am not just grasping at straws there; I am referring to the Australian Financial Review dated 15 February 2008.

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Dr Gruen—I am not sure that I understand the premise of your question.

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Senator JOYCE—I will make it really simple. If a person borrowed $250,000 at interest rates that were particularly low, and interest rates are now going up, if they could borrow $250,000 at 8 per cent, and they went down to, say, 6 per cent, and they went out and borrowed $800,000, and now interest rates are going back up again, they have not actually got a better, newer or bigger house, they have just paid more for the house, and now they will be out of terms with the bank because of their lack of capacity to meet those payments. Therefore, the housing bubble will burst, and as a result, and as these people predicted, overall there will be about a 38 per cent decline in the price of houses; how will that filter out, and what effects will that have on the economy when it happens?

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Dr Gruen—Again, I am not sure how to tackle this. There are certainly declining house prices in the United States, and they are falling quite fast. The reasons for that, I think, are reasonably clear. We have a rather different set of circumstances in Australia. We have had an extended period of strong growth in house prices and then, after about 2003, they grew less strongly for a while. It is certainly the case that, when interest rates go up, mortgage repayments rise, and that puts stress on some people who are heavily indebted. That is all true. I guess that is part of the way that monetary policy works. I guess the rest of it is someone’s forecast of what is going to happen. That would not be a forecast that we would share.

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Senator JOYCE—Do you believe that we are so isolated from the United States, and also from what is happening in England now in some form, that it is just not going to happen in Australia—that we live in splendid isolation from the rest of the financial world with regard to the current phenomenon where people are overextended on houses?

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Dr Gruen—There are certainly some linkages between Australia and the United States; there is no question about that. The extent to which we are affected by downturns in the United States seems to be significantly less than it used to be. The US had a recession in 2001 and we did not, although with the previous two big recessions in the US we also had recessions. I think the linkages between Australia and the US are less strong than they used to be. Clearly some impacts from the subprime crisis in the US are flowing through to Australia—that part is clear. But we are expecting very weak gr