PRIME MINISTER
FOR PRESS .30 NOVZMBER 1977
MR WRITLAM'S ANTI-INFLATIONARY POLICY
We have now had over a week to asses Mr Whitlam's economic
policies. Plenty of time hap gone by for him to explain them, to
cost them, to tell us how they would work in tackling the
major economic problems facing our country. There has also
been time for me to look closely at hrs proposals.
I now want to give my considered view on his anti-inflationary
p policy. One would think that Mr Whitlam would have given the highest
priority to this subject, for it was his failure on this point
which led to the : collapse of his other major economaic policies
when lie was in government in 1972-75.
In fact, Labor's anti-inflationary policy receives
only brief mention in Mr Witlam's speech, and even that
mention is misleading.
He claims that the abolition of payroll tax oh companies would
be reflected in price reductions on the goods and services
produced by companies, and would mean a " reduction in the Consumer
Price Index of up to two percent a year" ( stress supplied).
That is his key statement on inflation, brief though it is.
My first point is this: if his proposal were to lead to any.
price reductions, the effect would be once for all, in the first
year of the payroll tax reduction. It is quite misleading
of him to suggest that this possible short-run reduction would
lead to a permanent reduction in the rate of inflation.
In other words, this proposal is not an ongoing anti-inflationary
policy at all. It is an attempt to find what no other country
has found or will find: a once-and-for-all quick " fix"
to inflation.
My second point is that even in the first year of operation of such
a proposal, the first-round effect on the Consumer Price Index
before other effects offset this iTnact would.; be much less
than 2 percent-2
A figuxe as large as 2 percent could be arrived at by assuming that
the reductions in business costs were fully passed on in price
recutions. This is obviously an extremo assumption and woiild
i1bean, am-ong other things, a sqtieeze belng pbt on those, predominantly
sm-iall, businesses that would not benefit from payroll tax abolition.
At the other extreme one could assume that businesses would seek to
use the redu-tion in costs to boost profits rather than to pass it
on in lower prices-. The miore that this hanppened the less would
be the effect on prices.
B~ ut even if there were some direct effect on prices, this is only
part of the story. Mr Whitlan proposed a " package deal", with
the 1977-78 Budget income tax reductions being " traded off" in
Mr Whitlam'S words, for the abolition of payroll tax.
This would have one immediate indirect effect on prices.
it would no longier be possibleto expect wage restraint in exchange
for the tax cuts.
M-forromeo vae-rb, L athnec ed" troandee. oTffh" e-inne t tecromsst ooff tghoev e3r3mudegnett Irse vpeenrusoen aisl far..
incon6 tax , C~ tshin. 1977-78 is estimated at $ 400 Million that -is,
$ 450 Million Jlrs-than the cost of abojition of payroll tax
for the half Yeir-This e. 450 Million-could be mrostly met by
effectively.-abolishing tax indexation for the rest of the ' year
or byk puttirig UPte rates Of tax. AJ-ternatively, it could
be added to this year's deficit, inv-' Chich case it would
come ontpo the addition which Mr Whi-lam is already proposing,
of bewen 150 million and $ 800) millio.. -a
For 1978-79, there would be a similar, effect. -The cost of the
abolition of payroll tax would exceed the increased personal income
tax collectionis by a further $ 430 million. ' Again,-this could be.
mot~ by the abolition of tax indexation. Alternatively it could be
met by additions to the deficit.
Mr Whitlam has not said what-lie would do about there additions
to the deficit, if. that is-what lie proposes-These additions would
be over. and. above-what: he has admi-tted-to-.
We are _ thus talking about the possibility of very large expansion S in
the-def ic! t with, presumably, epxansion in the money supply of
siinilar. order.. For examples-, unless ha is to abolish. tax indexa-tion, on
the basis. of his known plans, Mr Whitlam would appear to be contemplating
anf increase in the Government's planned 6eficit: for 1977-78 in. the order
of one-third to One-half. That cannot be regarded as fiscal responsibili
Quite apart from the long-run effect of such action of pushing up
prices, there are the short-rumn effects of killing confidence and
ralisi ing inflationary expectations. On top of this is the apparent
Labor wage Policy of supporting a high level of wage indexation..
M-r Whitlan has not addressed himself to these questions.-
I
3.
I must conclude therefore that Mr Whitlam has no -on-going
anti-inflation policy. He has no policy at all on this fundamental
question. He has only tried to trick people that he has one,
through deceptive drafting in his policy speech. Moreover.
if there were any short-term, once-and-for-all effect on the
Consumer Price Index through the abolition of payroll-tax it would
be much less than 2 percent and would quickly be undone by the
build-up of inflation resulting from the expanding deficit and
money supply.