be.
UNDER EMBARGO UNTIL 9PM CHECK AGAINST DELIVERY
SPEECH BY THE PRIME MINISTER
AUSTRALIAN FINANCE CONFERENCE
CANBERRA 25 JULY 1984
Ladies and Gentlemen,
Thank you for inviting me to speak to you tonight.
I do so at a time of far reaching change in the Australian
financial system.
Not change for its own sake. And . not unsettling change
without a clear direction. But carefully managed change,
directed to ensure that the financial system olays its full
part in the dynamic, flexible and productive economy that we
are seekina to build in Australia as we move towards the
twenty first century.
We are a skilled and resource-rich nation, in the geographic
neighbourhood of what are now the world's most dynamic
economies: the Japanese economy undergoing continued
industrial transformation at the frontier of technology; an
increasingly outw. ard-looking China achieving impressive,
early success with its modernisation plans; and continued
growth at spectacular rates in the Republic of Korea and
several of the ASEAN states.
Our challenge, as a nation, is to canitalise on the
opportunities which our location and resource endowments
provide. The Australian Labor Government is committed to
seeing that Austialia and its institutions rise to that
challenge. The decisive reversal in our economic fortunes since we tool:
Office from declining output in the year and a half to the
June quarter of 1983, to what the nation; al accounts will
probably come to show as the strongest growth ever recorded
in the year to the June quarter that has just ended,
provides an opportunity for our nation to address long-term
structural problems.
And you will be as aware as we are that many of the
structural problems that have inhibited Australian economic
growth over the last decade have been in financial mar'-ets.
Australians clearly wanted a fresh start in March 1983: a
fresh approach to the longer-t-erm problems increasingly
facing the economy. They wanted a Government which did not
bury its head in the sand when faced with difficulties, or
make promises which it had little or no chance of delivering
on. What was required was imagination, flexibility and
creativity. As a Government we owed it to the Australian
people to demonstrate these qualities.
Our immediate goal to generate strong economic recovery
has now been largely achieved. The Prices and Incomes
Accord was a major factor in reversing the deteriorating
economic performance, and returning us to the path leading
to economic stability and growth.-Continued public
commitment to its principles is vital.
We are confident that the economic recovery will. continue,
at rates of growth that are impressive by the inadequate
standards of Australia in the last decade.
But a short-term economic recovery is not enough. The
hardships of years of recession, the burdens borne by the
unemployed, and the jobs and careers destroyed for so many
of our young people, these have been too great to permit usas
a government and a community, to be satisfied with any
mere temporary restoration of economic growth.
We have achieved economic recovery with the support of the
trade unions, the business community and the State
governments. And we will continue to work with the whole
Australian community as we consolidate the gains that have
been made and implement the reforms that are necessary to
lift our long-term economic growth performance.
The permanent' lifting of our growth performance, to
sustained rates that support full employment for an
increasing population at rising living standards, requires
firm management and reform in a wide range of economic,
social and political areas.
None is more important than the maintenance of favourable
conditions in financial markets.
Now that private investment is clearly lifting itself out of
the trough associated with the collapse of the resources
boom, all levels of Government must find ways of reducing
their demands upon private savings. Otherwise a combination
of high interest and exchange rates will threaten the
recovery we have all striven so hard to bring about.
Paul Ke3ting and I obtained the State Governments'
acceptance of this essential message at t*, ie June meeting of
the Premiers' Conference and loan C'-uncil. The ', oan Council
agreed upon a new approach to the set'uirg o" borrowing
limits for statutory authorities. The aim is to achieve
agreement between Heads of Gox~ ernnient on the level of total
borrowings which is appropriate to current economic
conditions. At the same time the Loan Council has abandoned
much of its outmoded regulatory role, p~ roviding authorities
with greater flexibility in arranging their financing.
Aggregate global limits in 1984-85 will be about the same in
nominal terms as actual raisings in 1983-84, a substantial
decline in real terms and as a proportion of GDP. Further,
under the global approach which we proposed and which the
States have accepted on a trial basis all borrowing is out
in the open. Markets need no longer fear substantial
authorities' borrowings beyond thbse discussed in Loan
Council. rphe forthcoming Budget will also be important. I can tell
you now, from the perspective of the current deliberations
of Budget cabinet, that the simultaneous achievement of a
lower budget deficit, and the provision of a meaningful
personal income tax cut, while providing adequately for
social welfare services to the genuinely needy, is
enormously difficult.
Despite the strong economic growth of the last year, and our
good prospects for continued growth, we simply cannot afford
to address all of our policy objectives to the extent that
we would wish. In this process the interests of particular
sections of the community have to be w~ eighed against the
overall interests of the nation. And there is no doubt that
when the social welfare obligation and demands on the
Government have increased, the choices are more difficult.
And the essential first priority the condition that is
necesary for the Government to achieve all of its long-term
social and economic goals is sustaining the recovery.
In sustaining the recovery the interests of all Australians
require us to maintain our simultaneous attack on the twin
evils of unemployment and inflation. Accordingly, our
Government's economic strategy must reflect a fine balance
between the fiscal stimulus that is useful to support
expansion, and the restraint on that expansion which is
necessary to keep inflation and interest rates on a downward
path.
We will find the right balance this year, just as we did
last year.
in achieving this outcome the Government will not shirk the
hard'decisions that are required by our commitment to find
the right fiscal balance.
While for some this will mean disappointment, it is
essential for long-term national prosperity.
The same longer-term view underpins the emphasis we have
given to the need for a sound approach to the restructuring
of Australia's industrial base. We see an effective
industry policy as critical to realisation of the
Government's objectives of sustained economic growth,
sustained growth in employment and reduction in
unemployment. The rebuilding of the Australian economy Eo provide secure
full employment, and rising Australian living standards,
inevitably involves structural chafnge. [ It involves the
shift of resources into activities in which Australians are
most productive.
Inevitable as such change might be, its implications must be
fully understood and accepted by all concerned. Hence the
importance we have attached to widespread consultation
amongst Commonw-. ealth and State Government~ s, unions, business
and the wider community on the issues involved.
Already we have some runs on the board. Imaginative,
programs are already in place in respect of the steel, motor
vehicles and computer industries, directed at strengthening
the competitive position of those industries while keeping
them open to the stimulus of inteynational competition and
avoiding increasing costs to users of their products.
And alongside these initiatives in manufacturing industry,
our reforms of the financial svste:-have a crucial role.
The finance industry plays a vital. role, as you would all
appreciate, in facilitating the economic growvth we as a
nation need. An efficient financial sector will direct
resources at least cost to the most productive areas of the
economy and3 thus assist in raising the wealth and living
standards of all Australians.
Regrettably, the Australian finance industry has been
operating at less than its full potential. In part this is
because of lack of competition, itself partly the result of
artifical restrictions imposed by Governments.
The Campbell Report presented a thorough-goinq annlysis of
the Issues iuvolvad. The response of the previous
Gover.,.-nent was half-hc-arted. There.: were same changes to the
savings hank recula'ions to enable them to compete more
effectively, and the suggestion to move to competitive
tenders for treasury bonds % qas-taken up. There was long
vacillation about the more difficult recommendations in
the areas of foreign bank entry, financial deregulation and
exchange rate management.
By contrast the Australian Labor Government is committed
firmly to a clear course of reform of the financial system.
This commitment does not arise from any blind faith in the.
inevitable virtues of the free market.
Rather, it stems from our recognition of Ehe practical
necessity to promote restructuring and innovation in order
to advance the economic and sociar well being of all
Australians. To advance this task of reform, the Government commissioned
in May last year a group headed by Vic Martin to examine and
report on the financial system in the light of the Campbell
Report and Labor's own objectives and values.
Of course, as events unfolded, one major change in the
system of financial regulation could not wait for the Martin
Report. Late last year we were confronted with large
capital inflows and rapidly increasing foreign exchange
reserves in the wake of speculation on the authorities'
management of the exchange rate.
These large inflows had the effect of pumping tip cur
domestic money supply and threatening a renewed outbreak of
inflation. We were not prepared to allow our strategy for
economic recovery to be jeopardised in this way.
The decision to float the Australian dollar and abolish mes. t
exchange controls on 9 December la. st was a clear indication
that, when circumstances demand it, this Government is
prepared to act quickly, decisively and effectively.
The float has since proved most successful. The exchange
rate is now free to settle at the levels required to clear
the market. And we have a greater capacity to maintain
monetary conditions appropriate to domestic needs.
In this context, it is pleasing to note that monetary growth
in the financial. year that has just ended fell within our
monetary projection, as revised in December in recognition
of higher rates of real economic growth without increased
inflation. This would not have been possible without the
float.
For the future, it is no longer possible for the financial
system as a whole to approach overseas markets to obtain
additional Australian cash reserves to support domestic.
operations. Better control of the domestic cash base will
permit better control of domestic monetary conditions.
Of course, the process of deregulation and the move to the
floating of the $ A has raised a number of issues which
monetary policy will need to address in 1984/ 85. One of
these is the need to interpret carefully movements in M3 as
a monetary indicator at a time of structural change.
If deregulation increases deposits with the trading banks at
the expense of other financial assets, the measure of
monetary growth upon which we have placed greatest emphasis,
M3, will be artifically inflated. As a result, any given
rate of M3 growth would represent tighter-monetary policy
than would otherwise be the case.
We will need to take this fully into account in formulating
our 1984-85 monetary projections. We will also need to be
prepared to review the target in the light of relative
movements ioi financial assets as well as in the light of
developments in real economic and financial conditions.
The Martin group's Report was published last February. In
the relatively short time since, the Government has taken
several initiatives in the reform of the financial system.
Martin has pointed the way. But we have not always followed
Martin to the letter.
Among the major initiatives since the report was released
has been a reorganisation of the Commonwealth Banking
Corporation to place it on a more equal footing with the
private banks.
The structure of the Corporation Banks has been modernised,
bringing it into line with the practices of private banking
groups. This will permit a more effective organisation of
the Banks' resources, including its capital. In addition
the Government has injected $ 15 million of capital into the
bank and changed policy to enable it to retain more of its
earnings. In future, the savings bank, development bank and
the corporation itself will pay tax, in line with the
obligations of all private banks.
We have also freed up access to foreign exchange dealing,
enabling many merchant banks and finance companies to enter
the long-standing bank preserve in that market.
The logic of the floating of the Australian dollar calls for
a competitive and efficient foreign exchange market. Over
new dealerships have been authorised; many of them have
already begun to operate. Further applications are being
considered. Banks have also been empowered to write forward
contracts to cover capital transactions, a facility
previously available only in the hedge market.
We have as well abolished all maturity and interest rate
controls on bank deposits, commencing from 1 August.
A network of maturity and ii. terest rate zontrols on trading
and saving bank deposits had been part of the regulatory
structure since the. Banking Act was passed in 1945. These
restrictions on bank deposits have limited competition and
restricted the range of financial services offered by banks.
For example, they have prevented the payment of interest on
cheque accounts. Also the short-term maturity controls have
arbitrarily prevented banks from competing in the short-term
money markets and go a long way to explaining the present
domination of those markets by the progressive and
innovative merchant banking industry. The removal of this
restriction will enable the banks and their customers to
benefit from closer competition with these innovators.
Long-term maturity controls limit banks' incentives to
provide long-term loans. This restriction has tended to
discourage finance for investment projects with long lead
times projects that must play a major part in the more
productive, internationally-oriented economy that we are
seeking to build.
As another step, we have established the Australian Payments
System Council to oversee developments in the payments
system, starting with access of non-banks to the cheque
clearance system.
Access to the domestic payments system has in the past
conferred a significant competitive advantage on banks,
offset to some extent by regulations not imposed on non-bank
intermediaries. The payments system in the past has been
dominated by cheques and, more. recently, by bankcard.
However, the development of payments systems in the future
is likely to be dominated by exciting technical achievements
enabling the transfer of funds electronically. The Martin
Group argued that these development should be supervised by
a body concerned to ensure fair competition in access to
these facilities. This body was also intended to promote
the application of uniform technical standards to take
maximum advantage of the very considerable economies of
scale associated with EFT technology. The Payments Council
has been set up to undertake these tasks.
We have also supported in the National Companies and
Securities Commission a proposal to allow finance companies
to issue short form prospectuses. This will allow those
companies considerably more flexibility in organising
approaches to the market for funds.
In short, we have already done in a few short months a great
deal to restructure the financial system. As a result of
close consultations with all concerned, this transition to a
less regulated environment has been achieved in a stable and
orderly fashion. All Australians stand to gain from such
carefully managed change. . t
I
The major item of unfiniished business is the matter of
granting additionl banking licences, including to foreign
equity interests.
While the Campbell report recommended in favour of fairly
unrestricted access to the Australian banking industry, the
Martin Group accepted the traditional Australian attitude in
favour of local participation in any major venture.
Accordingly, the formula developed by the Martin Group was
to allow a limited number of new entrants to the banking
industry with up to 50 per cent foreign participation in any
new entrant.
For several months now, Paul Keating, other members of the
Government, some State Premiers, and I have actively
explored the principle of foreign bank en'ry.
Following a series of mergers over several years, the
banking industry has become increasingly concentrated.
Desirable as this development may be by certain criteria of
efficiency, it has not served to maximise competition.
Additionally the exclusion of foreicn banks has begun to
inhibit the capacity of our banks to operate in some key
overseas economies, whose Governments demand reciprocal
rights of access to the Australian market.
This has limited the capacity of our banks to provide full
banking services to Australian industry, including in
respect of finance for exports.
It was for these reasons that we were able to persuade our
36th National Labor Party Conference held earlier this month
to change our Party's policy platform to permit the entry of
a limited number of foreign participants in banking.
Following the Conference, the Government will be moving
quickly to promote the establishment of new banks in
Australia. Foreign entry will be subject to a number of
conditions, including that every effort is made to ensure
per cent local participation in any new banking venture and
that new banks do not concentrate their efforts in the
low-employment areas of wholesale banking. We will also
insist on a history of very sound prudential management of
depositors' funds.
But, most importantly, we will be looking to new banks with
foreign equity to provide a competitive edge and a range of
improved services to bank customers.
Foreign banks with a history of providing finance to promote
new ventures, emerging industries, restructuring initiatives
and other new opportunities for growth and development will
be particularly well regarded.
S"
Our attitude to new wholly domestically-owned banks remains
unchanged although we will be consiJerir. g the Martin
recommendation to increase maxi. mum shareholdings from 10 per
cent to 15 per cent. Expressions of interest from suitably
qualified domestic entities will, naturally, be welcome.
But one of the main reasons identified by the Martin Group
for permitting foreign participation in new banking ventures
was the limited number of suitably qualified domestic
partners, and we need to be realistic about further
expansion. Through our reforms, we aim to tap the verve and
competitiveness of the non-bank sector and to channel those
energies also into providing heightened competition in the
banking area.
Some financial activities could well be inconsistent with
the broader, pivotal role which banks play in the financial
system. In a world of specialisation, even in the provision
of financial services, there will always be a need for
entities other than banks.
We do not intend to favour banks at the expense of other
financial institutions. We want an efficient financial
sector overall: one which is responsive to the economic and
social needs of Australia; and one which is based on fair
competition amongst a number of efficient and effective
participants. Our achievements in this crucial financial sector of the
Australian economy are, I believe, by any measure
impressive. I sometimes hear the observation in praise
from some of your quarters, in. anguish from some of mine,
that this is the best Liberal Government in memory. The
observation is quaint but of itself unrevealing.
Our changes do not derive from some profound political
philosophy. They are based squarely upon, first, clear,
level-headed perceptions of what is necessary to create the
conditions appropriate for optimum growth and, second, a
commitment to take the action required to give effect to
those conditions.
Our predecessors may have had the perceptions; they
certainly lacked the commitment. We have demonstrated that
we have both and it will be to the enduring benefit of the
whole Australian community.
There are many other important issues raised by the Martin
Group to which the Government will respond in coming months.