PRIME MINISTER
FOR PRESS 2 FEBRUARY 1977
ADDRESS AT THE PERTH CHAM4BER OF COMMERCE AND CONFEDERAT ION OF
INDUSTRY
I welcome this opportunity to talk to you about the economic
progress Australia has made in 1976, this Government's first
full year in office, and about the Government's economic
policies. We all remember that under Labor Australia's economic situation
was grave, and getting worse. There were no quick andq easy
solutions to the problems of high inflation, of high unemployment,
and declining activity which were besetting Australia a year ago.
The Government's clear goal has been to bring about a sound
economic recovery to create the conditions for sustained1 economic
growth and to expand employment opportunities.
As the main stumbling block to the achievement of this goal
was the rampant inflation inherited from the previous Government,
our first task was to bring all the arms of economic policy
budgetary, monetary, external and wages policy to bear on
combatting inflation.
In the course of last year, we imposed the most rigorous restraint
on Government spending, reducing the deficit and providing
incentives to industry to resumne expansion and getting job
opportunities going. We moved to limit the inflationary growth
in the money supply. We argued strongly for wage restraint
before the Arbitration Commission. We maintained the exchange
rate through toe November.
1976 was a year of substantial progress in the three-year task
we set ourselves of bringing Australia's economic problems under
control. The extent of this progress has not been widely recognised.
Inflation has been significantly moderated. In the first three
quarters of 1976, the C. P. I. rose by and 2.2% compared
with an average rise of 4% per quarter in 1974/ 75. T~ he C. P. I.
of course records price movements in only part of the economy.
What has not been general~ ly appreciated is that the downward
trend in the rate of inflation is shown similarly or even more
markedly by other indicators.
For instance, in the first three quarters of 1976 the deflator
for the major components of gross national expenditure rose by
4.0% 9 This compared with an average rise of over
4% in 1974 and 1975. In the three months to October, the price
index of the articles produced by manufacturing industry
registered a rise of 2.0% compared with 2.7% and 2.9% in the two
preceding three-monthly periods. / 2
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The effects of the changod arrangements for health-insurance
will of course boost the CPI for the December quarter. Most
commentators will focus on this. This " once and for all" effect
should not distort our awareness of the steady underlying
improvement in the rate of inflation. The more broadly based
deflators derived from the national accounts, which will not
be affected by Medibank will provide a much better guide to
underlying trends.
Partly because of our success in the fight against inflation other
necessary precond itions Lfor sustainable growth have beeii gradually
emerging. The massive distortions caused by the disastrous
ves of 1974/ 75 to a number of key economic relationships,
particularly the saving ratio and the wage profit sharp have begun
to be corrected. The rise in business profitability is shown by
the shift in the ratio of the gross operating surplus of trade
companies to gross non-farm product from 10.5% in the final quarter
of 1975 to 12.6% in the September quarter of 1976. The September
quarter profit share was still below the longer run norm, But
an encouraging start has been made.
This restoration of the profit share from the very depressed level
to which it was driven in 1974 and 1975, is central to the revival
of business confidence, the willingness to invest and ultimately in
the creation of more employment. Other indications of economic
recovery can be seen in the fact that aggregate expenditures and
product began to grow in 1976; the national accounts figures show
a 7.5% rise in real gross non-farm product between the December
quarter of 1975 and the September quarter of last year. This
figure is subject to revision, but it is very much better than
the 4% decline during the seven quarters to the end of 1975.
I am not suggesting that economic activity is booming. The rise
has been uneven, but though recovery has been slower in other
areas, it is still apparent. Real consumption expenditure increased
moderately in the first nine months of 1976. Private investment
in plant and equipment benefited from substantial taxation
incentives, particularly in the first half of the year. Tlhe
depressed non-residential building and construction sector also
showed signs of improvement in the second half.
Before we camne into office, employment opportunities were
declining. We have arrested this trend. The modest increase in
private employment is characteristic of the early stages of
recovery, during which employers first of all make fuller use
of existing employment. The result is that the rise in employment
has no more than kept up with the growth in the labor force,
so that unemployment has virtually remained unchanged.
At the present high levels of labor costs, an employer wil~ l
seek out every alternative means of increasing his output before
hiring additional full time workers. We have thus seen increases
in overtime and part-time employment.
More noticeable progress on the employment front should begin
to emerge as the recovery spreads and consolidates. The
Government's object is, and must be, to get people back into jobs.
Unemployment causes people to lose their dignity and self-confidence
and contributes to severe social problems. It also prevents the ./ 3
-3-
expansion of living standards and the strengthening of the
nation as a whole. The Government is particularly con-cerned
at youth unemployment and has initiated a number of innovative
schemes to assist with this problem. Ultimately, the speed
with which we can reduce unemployment depends on the degree
of wage restraint which is achieved in the course of this yearand
I will return to this later,
Your State's economic performance in 1976 was better than that of
' Australia as a whole. This is an impressive record of achievement
and is a tribute to the sound economic management which Sir Charles
Court's Government has given to your State. Western Australia's
economic activity is more export-oriented than in most other
states, and on that account you have been reaping benefits
particularly in the minerals area. Devaluation will fiirther
strengthen this trend. Last year the residential construction
sector recovered strongly in Western Australia new dwelling
approvals increased 23%. Registration of new motor vehicles
in 1976 grew by 9% in Western Australia compared with the
national figure of just over The value of non-residential
building approvals in the three months to November stood
above the level of the same period in 1975 again much better
than Australia as a whole.
The State's unemployment rate of 4.6% at the end of Decemnber was
the second lowest among all the States, and represented a slight
decline since December 1975.
Major expansion of iron ore developments in the Pilbara is
projected. The Agnew Nickel Project and smelter expansion near
Kalgoorlie, the Alco-Reynolds Bauxite/ Alumina project south of
Perth, and of course the massive north vest shelf natural gas
project.
Several hundred million dollars is likely to be spent in this
State in the next 2/ 3 years. An audience of businessmen from
this State would be well aware that the development of mineral
resources is not something which can be turned on quickly. The
development phase must be preceded by a long lasting preliminary
phase of exploration not less than five years, and usually
much more. We recognise this fact and have done a great deal to
restore the incentives necessary to revive exploration. This
will contribute significantly to overcoming Labor's policies
which not only held up development, but stamped out exploration.
We have adopted a more flexible policy towards foreign investment.
The co-operation of the States has been actively sought towsards
issuing permits over vacant off-shore areas, The $ 2 a barrel
levy on oil from new discoveries has been removed, and generous
taxation incentives were announced in the 1976 Budget.
I am glad to say that exploration is recovering. Last year, 21
exploration wells were drilled throughout Australia. Only 6 of
these were in Western Australia. This year, the number of
exploration wells is expected to be up to 44. Up to 19 of -them
will be in Western Australia. This threefold anticipated increase
in exploration drilling in this State is particularly encouraging.
The discovery of additional reserves of petroleum ranks high
amongst the objectives of my Government.
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I am also pleased to say that base-metal exploration has begun
to revive, and that in parts of this State, valuable discoveries
continue to be made. A key element in our philosophy of
Government is that economic progress does not depend upon
Government owning and actively carrying out the work of exploration,
mining and processing.
We believe that if the Government provides the right climate,
the private sector, at times together with overseas partners,
can be entrusted to develop Australia's resources, and that
the fruits of this development will be of benefit to-the economy
as a whole.
The policies and philosophy of both your State Government and the
Commonwcalth Government have created the conditions forlmineral
exploration to start again in Australia. The extent of progress
made is as much as we could reasonably have hoped for.
Australia's overall economic performance has followed the course
the Government has charted a decline in the inflation rate,
combined with a progressive recovery in activity which have laid
the groundwork for future improvements.
Managing the economy is a continuous process and the balance
between the different arms of policy must be constantly kept
under review.
Towards the end of 1976 a modification was required in the
exchange rate. The immediate background to this was the
persistent speculation against the Australian dollar. The position
had been reached where continued and substantial Governmeni'
borrowings overseas to offset the drain on the reserves would have
been counter productive. There was a risk that such borrowing
would have advertised the vulnerability of the existing rate and
heightened speculation. This was not, of course, a new development.
It was one of the first problems we encountered upon coming into
Government. Speculation was based on the fact that under the
previous Government, Australians costs and prices had risen well
above those of competing countries.
The costs of maintaining the exchange rate in such circumstances
were high. It meant the continuing displacement of some Australian
production by imports, with resulting difficulties in maintaining
employment opportunities. It was aggravating the position of some
parts of the rural sector.
As 1976 proceeded, it also became clear that, at the existing
exchange rate, a range of major mineral projects would be of'
doubtful economic viability. Generally, investment decisions
were being postponed. While speculation continued about the
exchange rate, Australian industry faced severe difficulties
in raising new funds from overseas sources.
Nevertheless, we decided to maintain the existing trade-weighted
parity of the Australian dollar, through most of 1976 in the
overriding cause of maintaining downward pressure on inflation.
Bu~ t the paint was reached where the escalating outflow of our
reserves, and the disadvantages which stemmed from the overvaluation
of the dollar made change inevitable. This change did not mean
that our objective of breaking inflation was changed or altered.
What was involved was a necessary adjustment of policy to see
that there would be a broad based recovery across a wide range
of Australian industry.
Our export and import competing industries were bearing a
disproportionate burden and some sections of manufacturing
indust ry in particular just did not have a chance under the old
exchange rate of the Australian dollar.
These industries can now play their part in providing important
new investment and expanded employment opportunities. Their success
in finding growing markets for their products will largel determine
the pace of the continuing recovery and rising productivity. This
will, in turn, allow economies in unit labour costs and ease
inflationary pressures.
Once we had made the inevitable decision to devalue there were
a number of options open to us on the extent of devaluation and
on the form of the new exchange rate system.
We could have moved to a new fixed rate which would, at some
future time perhaps require a further significant alteration
in the exchange rate. A move, which, as the devaluation
demonstrated, is attended by major public concern.
2. We could have a market determined rato which would make
fluctuations possible on a daily basis similar to the
majority of OECD countries.
3. We could have an administered and controlled management
of the exchange rate which would avoid daily fluctuations
but still leave us with the ability to make gradual
adjustments in the rate.
A further question requiring very careful consideration wras the
magnitude of the initial change in the rate which would be made.
The choice before us was either to make a move which would
decisively end further speculation against the downward movement
of the dollar. Or, on the other hand, a move which would leave the
way open for speculation about a further devaluation perhaps in
the not too distant future.
The Government took the view that it was essential to end definitively
further speculation against the dollar, and to establish a regime
which would in future permit the exchange rate to adjust to changing
circumstances. The benefits of devaluation are clear: increased opportunity
for Australian manufacturing industry to compete against imports
in the domestic market; the bringing forward of some major
resource projects; arid an improvement in the position of primary
industry. ./ 6
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Devaluation will also facilitate capital raisings by indus-try and
the Government has deliberately exempted longer term borrowings
for high priority capital investment from the capital inflow control.
We intend that resource development projects of the kind proceeding
in your State should have the benefit of the lover cost of capital
overseas and the special facilities available in overseas markets
for borrowing long term capital. Mining companies with existing
contracts expressed in overseas currency will benefit from
devaluation through improved cash flows. With these additional
funds they will be in a sounder position to finance their new
development projects.
The advantages of devaluation are many and can bring great rewards,
but there are also dangers if the other arms of economic pol'icy are
relaxed. We intend to retain the benefits of devaluation by making
the appropriate adjustments in the other arms of policy.
There will be some moderate direct price and cost effects front
devaluation. These will register in the broad price indexes,
primarily in the March and June quarters. But this needs to be
seen in the context of the fall in inflation in 1976 and the further
potential for recovery in profitability.
The Government will not countenance any reversal of the underlyin
downward trend in inflation which was established last year.
Let me be quite clear on this point. The fact the Government has
been forced to take a decision which has some inflationary cons; equences
can not be adduced as evidence that the anti-inflationary strategy
has been abandoned. In balancing the arms of policy, the Government
considered and still considers inflation as the number one
impediment to economic recovery and thus the number one priority.
But we have never intended that it was the only priority. What is
now required is that we do not relax our efforts to get on top of
inflation. If ire did relax, the substantial progress in achieving
economic recovery I outlined earlier wrould be quickly undone, and
the potential benefits of devaluation would not be realised.
This will happen if first-round effects were permitted to snowball,
through wage indexation and a lax fiscal and monetary environment,
into a renewed inflationary surge. We will ensure that the tots. l
anti-inflationary thrust of all the main arms of policy is not diminished.
Let me outline the steps already taken. In budgetary policy: the
Government has announced further savings in outlays for the current
financial year of $ 250 million; for 1977/ 78 outlays will be kept to
within zero " real"' growth and-the deficit will be reduced further;
Commonwealth Public Service ceilings will be reduced by another 700
as at June 1977.
In monetary policy: the Government has moved to prevent excessive
easing in monetary conditions, the Reserve Bank has increased
statutory reserve deposits; bank lending has been contained
within firm guidelines; lending by non-bank institutions is being
watched closely so that it will not be excessive.
While carrying out these steps, monetary management has been
concerned to ensure an orderly June quarter. The authorities
have been counselling the need for adequate preparation in
anticipation of the seasonal tax collections.
Indications are that substantial preparation has been made. The
more attractive terms offered for Treasury Notes have resul-1ted in
an increase of more than $ 2 billion in non-official holdings since
early September.
Measures also aimed at slowing growth in the domestic money supply
have been taken to restrain the inflow of capital from abroad. It
might be asked why we are concerned about excessive capital inflow.
The answer is that excessive capital inflow can give rise to excessive
liquidity in the economy and fuel inflation in much the saie way as
a budget deficit.
The reason for the high rate of capital inflow is clear. Capital
can be obtained overseas at interest rates which are very lov by
Australian standards. Hence, there is a major incentive perhaps
in some cases amounting to up to a 50% saving in interest. for
Australian-based companies to borrow overseas,
There could be no assurance that conventional monetary policy
techniques would be sufficient to prevent this while interest
rate differentials remain as large as they are.
If the Australian exchange rate were adjusted so as to neutralise
interest rate differentials between Australia and overseas capital
markets, some Australian manufacturing industries would again find
it difficult to compete and jobs would be exported overseas.
Thus the new capital controls were necessary in the present
circumstances to assist the overall task of firm restraint on
money supply growth. This is not a matter of achieving a numerical
objective for the money supply for its own sake. It is a concern with
the broader implications of an over rapid expansion of credit and
the availability of finance in the economy.
In the long run, of course, the best way of removing this differential
and easing the threat to domestic monetary management will be to
further reduce the rate of inflation in Australia. This, as I have
already outlined, remains a major objective of policy.
On the wages front, the Commonwealth will intensify its efforts
to convince the Conciliation and Arbitration Commission of the
absolute economic necessity in present circumstances of considerably
less than full wage indexation. Nothing would more quickly and surely
undermine the progress we have already made than a flow-on of the full
C. P. I. increase into wages. This would increase the problem of
inflation. It would increase the problem of unemployment. It would
erode the benefits of devaluation the increased investment, more
healthy growth and increased job opportunities. V../ 8
In this area, the Government cannot achieve success on its own it
will need the support of the community at large. I believe that
this support exists in the community, and amongst most of the rank
and file unionists who realise the costs inflation is havinag on
employment opportunities.
Those union leaders who refuse to face reality and keep demanding
excessive wage increases aro, in the current economic envi: xonment,
putting men out of work.
Final~ y, I must comment upon the many calls for cuts in taxation.
The Government is committed to taxation reforms. This commitment
is demonstrated by the number and significance of the reforms already
made. There is tax indexation the most important refori in the
history of our taxation system; the new arrangements for Commonwealth
Estate Duty; new system of income equalisation deposits; the
investment allowances; incentives for the mining industry; the easing
of distribution requirements for private companies; the trading stock
valuations and investment. In terms of revenue forgone, these amount
to very large taxation reductions -over $ 3000 million by 1977/ 78.
( See Attachment Ela)
/ 8a
3 a COST
1976/ 77 Tax indexation -the most ' important 1977/ 78
reform in the history of our
990 taxation system 1050
The new arrangements for
2 Cornmonwealth estate duty
New system of income equalisation
2 deposits4
200 The 40% investment allowances 550
0 incentives for the mining industry
The easing of distribution requirements
I for private companies
The trading stock valuations.
0 and investment 400
1195 -Total -2079
9 9 -9-
We are committed to reform of the taxation system. We havre
made substantive reforms and will go further in reforming the
personal tax area when it is responsible to do so.
The one question which must be asked of those demanding fL~ rther
immediate tax cuts is: how is the resulting increase in the deficit
to be financed?
There are, as you know, only four ways. First, through a reduction
in Government spending by au amount sufficient to cover the costs
of the tax cuts. Although we have made very substantial cuts
in Government expenditure. I have head no one advocate cu-ts of
thism ' agnitude.
Second, through an increase in other taxes and we have heard
of no suggestions for this.
Third, by an increase in Government borrowings from the private nonbank
sector. But this would be at the expense of the funds available
to finance investment by the private sector and would involve a
significant increase in interest rates.
None of the proponents of tax reductions have advocated these policies.
Some have even suggested that interest rates should be reduced at
the same time as tax was lowered.
But even if it were suggested that interest rates should ris; c in order
to fund the deficit through higher bond sales, it would be necessary to
think through the implications for building societies ( financial
intermediaries) the housing and building industries, and bus~ iness
generally. The momentum behind the call for the immediate tax cuts could quickly
subside if it were realised that its consequence is higher interest
rates. But those calling for tax cuts do not mention the need for
higher interest rates. That leaves only one other way of funding
a higher deficit. By borrowing from the Reserve Bank. That is,
by printing money.*
When it is put this way, how many people would concede that this is
what they are asking for. There is no surer, faster. way to national
disaster. We have no intention of taking this path.
Against this background, the Government decided a fort night ago that
tax cuts would be quite inappropriate at this time. The Governmentts
decision to keep Government outlays to within zero real growth and
to further reduce the deficit is designed to provide the maximum
room to make further income tax reforms, as is appropriate.
People have made their preference for tax cuts over increases in
Government expenditure well known and we intend to move as quickly
as is responsible on this path. As I have said before, the inevitable
consequence of several years of gross mismanagement of the economy is
that it will take an equal period of time to recover our equilibrium.
In the last year, we have been able to make a substantial progress
in righting the economy. This year, we have set out policies in
position to fight inflation and to continue this progress. But
policies do not work by themselves no Government can be successful
if its policies do not get the support of the community. I believe
that we have this support we will be successful.