EMBARGOED AGAINST DELIVERY CEKAANTDLVR
SPEECI BY THE PRIME MINISTER
DECISION MAKERS LUNCHEON PERTH 12 APRIL 1985
Ladies and Gentlemen,
3I II
I Thank you for inviting me here today to address your
" Decision makers" luncheon. It is a pleasure once again to
visit a State where there are so many exciting economic
developments taking place.
This weeks news from the business world has focussed
attention on progress towards the launching of the largest
private project in Australia's history the export phase of
the Northwest Shelf. I am pleased to be able to say that
the excellent co-operation between Brian Burke's government
and my own, in part icular through our respective Resources
Ministers, Gareth Evans and David Parker, helped recently to
avoid a last-minute hitch in arrangements for the project.
I am particularly looking forward to the visit over the next
few days of General Secretary Hu Yaobang, which will begin
here in Western Australia.
One of the matters that we will discuss here in Perth
tomorrow and in the Pilbara on Sunday, is co-operation in
th-e iron and steel industries of Australia and China.
Already this co-operation has meant a great deal to Western
Australia, through China's increasing purchases of Pilbara
iron ore. And we are all aware of this State's interest in
the on-going negotiations on the Channar and Kwinana
projects. Hu Yaobang's visit will' signal a new era in
Chinese-Australian relations. It is indicative of a growing
relationship between our two countries that will be
important for a~ ll Australia, and because of the
significantly increased prospects for resource development
that this relationship offers, particularly for Western
Australia. CHECK AGAINST DELIVERY
More will be said over the next few days of the strength and
developing character of our relationship with China, and I
do not wish to dwell on that aspect of our overall policy
approach in these remarks.
Rather I wish to concentrate today on economic policy more
broadly, paying attention to some critical policy questions
which are now before the Government.
I do so in the knowledge that some commentators seem
sceptical of the Government's ability to deliver the
necessary policy responses.
I remind the doubters that the sceptics were even thicker on
the ground two years ago. Yet we delivered, as promised.
And we will continue to deliver.
The historic National Economic Summit began two years ago
yesterday. On that occasion, and throughout the election campaign which
preceded it, I outlined the Government'* s approach to
economic policy and economic policy making.
Our approach to economic policy was based on an integrated
package of prices and incomes policy, monetary policy and
fiscal policy.
Our approach to policy making was to seek to foster
consensus and co-operation and particularly to ensure that
those most affected by decisions of Government were provided
with sufficient information to make proper assessments of
the policy options available to the Government, and their
implications for individuals.
Taken together these approaches represented a radical
departure from the " 2zabased currency of economic policy
debate in. Australia at the time.
They were greeted at the time with much hope so dismal had
Australia's economic performance become under the more
traditional approachi of the previous government -but much
scepticism also.
Two years on, let us look at the results.
It is now a matter of record that the Labor Government's
economic policies have rescued our economy from the deep
recession of two years ago, while simultaneously halving
inflation.
Our policies to address the problems of high uneMployment
and high inflation simultaneously represented a sharp
departure from the disastrous " inflation first" approach of
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our predecessors. Not only did their approach ignore the
social tragedy of continuously high unemployment. But also
it failed totally in its primary goal of bringing about a
sustained reduction in our inflation rate.
Perhaps the most dramatic evidence of the recovery which our
policy has initiated is the 341,000 new jobs that have been
created since the Summit in April 1983.
Despite a disappointing result for March, our target of
500,000 jobs in three years should be achieved ahead of
schedule. And I take this opportunity to reaffirm strongly
the Government's commitment to reducing unemployment and
creating new jobs. Our predecessors' achievements make a
very poor comparison: it took their entire term of over
. seven years to create 340,000 new jobs.
Australia's economic growth rate during 1983-84 was the
highest annual growth rate ever recorded in Australia and
the highest growth rate in that year of any OECD economy.
Growth is proceeding strongly this year and the surveys
indicate that private investment will lead a third year of
impressive expansion in 1985-86.
The Prices and Incomes Accord was introduced as the
principal means of achieving wage moderation and lower
inflation. Despite the well-publicised fears of the
prophets of doom that such a policy would never work, the
Accord has been an outstanding success.
In two short years, Australia's rate of inflation has been
reduced to just over 5 per cent: the lowest annual rate for
13 years. Real unit labour costs have fallen to levels last
seen in the early seventies and profits have improved
dramatically. Figures released by the Australian Bureau of Statistics
this week indicate that the number of working days lost
through industrial disputes fell to the lowest level for 17
years during the 12 months to the end of January.
And this has all occurred even while Australia has
experienced its strongest post-war economic upturn.
Fiscal and monetary policy have been conducted responsibly,
to support the broad thrust of prices and incomes policy.
Our first Budget substantially cut the BuU'get deficit which
we inherited; there will be a further reduction in 1984-85,
and the Government is firmly committed to and will achieve
further reductions in the Budget deficit for 1985-86.
This has required in each year a thorough review of
Government expenditure priorities and programs. It has
required us to take tough decisions a number of which have
been taken at some political cost.
4.
The Government's achievements in monetary policy and
financial deregulation have been well rega~ rded by the
business and financial communi4ty. The monetary projection,
revised mid-year in line with revised expectations of real
growth, was achieved in 1983-84 for the first time in
years. We have set the financial sector on a path to
greater competition and innovation a path which, perhaps
paradoxically, has made it impossible to interpret movements
in the aggregates.
In short this Government has a solid record of delivering on
economic policy. We have consistently stated our intentions
clearly and then delivered, as promised.
Domestic demand has risen strongly in recent months. The
evidence indicates that consumer spending and business
investment are set to expand further in the months ahead
and in each case, to exceed the Budget forecasts.
But the signs ar e also that a high proportion of this demand
is being met from imports rather than1 domestic sources.
For this reason, and also depressed world commodity prices,
the current account deficit has risen sharply.
The recent depreciation of the dollar provides both an
opportunity to correct this position, in time, and a
challenge to the achievement of sustained growth in domestic
production and employment.
Depreciation initially implies an unavoidable reduction in
national income and wealth, measured in w,. orld prices. All
parties will need to share, in somne degree, in the initial
process of adjustment a process which nevertheless must
also ensure that resources are channelled towards producers
who have3 become competitive against overseas suppliers.
If the competitive advantage is maintained and the required
rcdirection of effort achieved, depreciation will also
provide an opportunity to achieve substantially higher
incomes and employment in the longer term.
Part of the process to redirect resources will involve
higher domestic prices of a range of imported and in
varying degrees, exportable and perhaps import-competing
goods. These price adjustments themselves are not a threat
to economic recovery. Indeed they are the most effective
means of achieving faster growth in many industries not
just exporters but also domestic manufacturers in
competition with imports and correcting our rapidly
expanding current account deficit.
But therein also lies the " challenge"* presented by the
depreciation. We have to prevent this initial rise in
consumer prices from initiating a destructive inflationary
spiral. The Government is actively addressing this task.
After the 1976 devaluation the then Government slammed on
the fiscal and monetary brakes in an effort to prevent such
a spiral.. Ultimately they were unsuccessful because their
approach did not pay adequate heed to Australia's traditions
and institutions.
The Labor Government is no less resolute in its
determination to prevent any sustained surge in inflation.
But while fiscal and monetary policy are and will continue
to be firmly anti-inflationary, we do not believe that it is
necessary or appropriate to use these instruments in ways
that stop growth. Our main anti-inflationary thrust will
come from the prices and incomes policy that has served us
so well over the past two years.
That policy recognises that none of our economic policies
operates in a vacuum. Economic policies are not like
chemical reactions that take place according to formulae.
They are implemented in a world where Individuals and groups
other than the Government are deeply affected by them~.
The Government is working within the co-operative framework
of the Prices and Incomes Accord to consider options and to
seek agreement to measures which will preserve to the
maximum extent feasible the potential employment gains from
depreciation. Many commentators have suggested that wage indexation
adjustments be discounted for the component of inflation
that is directly attributable to depreciation. We ' have that
option under examination but it is not the only option
available. Decisions on how the Government responds to the inflationary
effects of depreciation on costs through wage indexation are
not formally required for a little time yet. It seems
likely, for example, that the direct impact of depreciation
or. the CPI in the March and June quarters and thus the
amount in contention at the time of the next wage case is
likely to be relatively small. -out let there be no doubt
that,-measures will be taken, as necessary, to prevent the
emergence of a debilitating inflationary spiral.
This is because the gains from depreciation are worth
preserving. There are potentially many tens of thousands of
jobs, and perhaps a hundred thousand jobs, in addition to
the on-going employment growth that we we. Ce already
expecting before the depreciation, which could be directly
created over the next few years if we can ma-Antain the now
enhanced competitiveness of Australian suppliers. A renewed
inflationary spiral would not only put-these jobs at risk.
It could also undermine recovery itself.
6.
I have every confidence that this new challenge to providing
jobs and economic security will be worked out within the
framework of the Accord.
A related question is the Government's approach to the
mooted " productivity" case later this year.
We have always acknowledged, as do the Principles of the
Conciliation and Arbitration Commission, that there would
come a time when it was appropriate for Australians in jobs
to share in the recovery through improvements in standards,
in addition to sharing through greater security of
employment. As I emphasised on national television on Wednesday night,
our first concern is to ensure that we preserve the strong
employment growth with moderate inflation that has
characterised the Labor Government's period in office.
Any productivity increase must be of a size and timing that
is consistent with these objectives.
Within the centralised wage fixation system, the A. C. T. U.
and business groups will present their own perspectives to
the Arbitration Commission on how any entitlement to
improved conditions should be calculated.
The Gover~ iment's approach will be to work towards an out-come
that is consistent with our shared objective of sustained
growth with low inflation.
our second major policy challenge at the moment is fiscal
policy. When the economy was in deep recession, it was appropriate
to provide a strong fiscal stimulus to the private sector.
But, from our earliest days in Government, we have
emphasised that this stimulus had to be reduced as private
sector activity picked up. Thus, during the recent election
campaign I pledged the Government to a " trilogy" of major
fiscal commitments, including:
Further reductions in the Commonwealth's Budget deficit
in monzy terms in 1985-86 and as a proportion of GDP
over the life of the current Parliament;
No increase in tax revenue as a proportion o f GDP in
1985-86 and over the life of the Parliament;
A reduction in expenditure as a proportion of GDP in
1985-86 and the life of the Parliament.
These unprecedented commitments endorsed by-Cabinet are
tie measure of thn Labor Government's determination to
pursue a soind fiscal policy.
With the depreciation of the dollar, and prospects for
stronger growth and employment then previously anticipated,
the Government will be seeking to achieve maximum reductions
in outlays in 1985/ 86.
Targets-for these reductions in outlays were laid down
immediately following the election -to meet our trilogy
commitments, including a substantial reduction of the
deficit in money terms.
* The depreciation may have the immediate effect of increasing
revenue more than it raises the cost of maintaining priority
programs. None of this increase in net revenue, if it occurs, will be
jused tTo increhase Goveernment outlays.
Government will ensure that expenditure cuts are large
enough to achieve established outlays targets.
The whole of any increased budgetary flexibility following
the depreciation will be applied strengthening the
economy's prospects for even stronger private sector growth
in output and employment with low inflation.
The Government will decide on the most effective means of
achieving this result when the full extent of the
post-depreciation improvement in the budgetary outlook is
knwn. The Government took steps as early as last December to
ensure that adequate time can be given to this task by
* advancing the expenditure review process somewhat ' omnared
with the usual Budget timetable. This was intended also, to
enable us to determine whether some measures can usefully be
implemented earlier than the normal timetable would have
allowed, so that the full-year effect of tChe expenditure
saving measures are available in 1985-86.
I expect that the Government will be in a position to
announce some of these measures in time to yield full-year
savings for the tiext financial year.
As I have said on other occasions, some of these decisions
will undoubtedly be unpopular in some quarters.
The Government recognises, however, that this is inevitable,
if it is to respond to a broadly-shared view that fiscal
discipline is required if the fruits of sustained strong
economic growth are to be available for all Australians in
the future.
Fiscal restraint is, of course, required at all levels of
Government. If current agreements were extended beyond
1984-85,. Commonwealth tax sharing payments to States would
rise by 16 per cent in 1985-36. Payments to local
Government authorities would rise almost 20 per cent. it
would be entirely inappropriate to extend such arrangements.
These matters will be discussed at the forthcoming Premiers
Conference, when new arrangements for general revenue
assistance to States will also be considered.
There has been much ill-informed commentary to the effect
that the Government has " gone soft" on monetary policy.
Nothing could be further from the truth.
The decision to suspend the M3 monetary projection was taken
not to cloak loose policy, but after a full reappraisal of
the informational content of M3.
it was taken because the very process of financial
deregulation which is so warmly and so widely applauded has
also distorted the growth of M3 and other aggregates, and
will continue to do so in the period ahead of us. Their
reliability as indicators of monetary policy has been
sharply reduced.
The irony is that, even while applauding deregulation, sou.,
commentators are not prepared to make proper allowance for
the uncertainties which are introduced when interpreting the
monetary aggregates.
Interest rates have moved up since the tuzn of the year, and
often now exceed the levels of a year ago, which is hardly
suggestive of excessive monetary ease.
So let us be clear. Monetary policy is being and will
continue to be administered firmly, to support the
Government's objective of non-inflationary growth.
In the context of business anxiety about monetary policy
this -year, I must admit to some feeling of fellowship with
the Chairman of the United States' Federal Reserve System.
When we discussed monetary policy in Washington in February,
Paul Volcker described the criticism that the United 3tzates'
authorities received when distortion of monetary measurement
in the wake of financial deregulation caused them-* to suspend
monetary targetting.
I will be satisfied if the inflationary scene in Australia
following this step is in line with the United States
experience!
The achievement of sustained non-inflationary growth
growth at a pace sufficient to create jobs and to gradually
reduce unemployment over time nas been my Government's
objective since coming to Office.
Our package of policies to date prices and incomes policy,
monetary policy, fiscal policy, and industry policy has
been highly successful.
The sceptics of two years ago have been shown to be wrong.
Inflation is down and employment has expanded impressively.
Industrial disputation has been dramatically reduced.
Profitability has been restored and real unit labour costs
reduced. Consumer demand is buoyant. Depreciation can
provide a real fillip to domestic manufacturing.
Particularly heartening is the improving picture for
business investment.
The conditions are coming into place which will permit
sustained economic recovery. This is what we were elected
to do. All Australians. can be well satisfied with what we
are achieving together. ^ wM