PRIME MINISTER
EMBARGOED UNTIL DELIVERY CHECK AGAINST DELIVERY
SPEECH BY THE PRIME MINISTER
COO1MITTEE FOR ECONOMIC DEVELOPMENT OF AUSTRALIA
SYDNEY 26 AUGUST 1986
Ladies and Gentlemen
It is aw-ys a pleasure to address CEDA. My own
association, and that of my Government, with your
organisation has been very important and productive. in
fact this is the fourth time that I have had pleasure of
speakinq t o CEDA since becoming Prime minister. I believe
that is the best indication of the importance which I attach
to this Forum.
On the ". st occasion I was with you it was to commemorate
CEDA's Silver Jubilee. My Address then recognised CEDA's
abiding uommitment to longer-term structural & nd developmentissues.
That commitment, of course, is one which I share.
On that occasion I noted, in Darticular, that our terms of
trade w2: 3 declining faster than usual and that because of a
r. Rex zd structural changes in the world economy it would
be some time before any significant reversal was likely.
Of course that was before the outbreak of the agricultural
trade war between the US and the EEC. It also preceded the
collapse of the oil market in February, a collapse which has
dragged other commodity prices down as well. All of the
policy prescriptions which I put forward on that occasion
have very much greater relevance now.
Those prescriptions came in two interrelated parts. The
first, na~ turally, was sensible macro-economic policies I
will coma back to this issue shortly.
The second part covered a group of longer-term policies to
promote structural change : policies to raise the skill
levels and flexibility of the work force; policies which
recognioe the need to foster innovation and managerial
flair; policies to encourage a more outward looking, more
innovative industrial base, including the winding back of
protection; policies to lift the regulatory burden on
busincGee and to let Australia get on with the job.
once again these prescriptions were hardly novel. I and my
ministers have been propounding them consistently now for
more than three years.
We have beecn propounding them for one simple reason. And it
is this.
For decades Australian industry generally had been allowed
to become tired and complacent. Governments had acquiesced
in the general lassitude. Indeed at certain times in the
electoral cycle they had even encouraged it.
Australia had been lulled into a false sense of security by
a feeling of~ invincibility. We thought ourselves the lucky
country. we thought of ourselves as the natural place for
foreigners to turn when they wanted to buy seemingly scarce
primary coginiodities.
And it must be said that there was a failure of political
leadership failure to look beyond the next election and to
plan for the longer-term. There was a profound failure of
far-sighted vision.
It has fallen to my Government and I welcome the challenge
with zest to redeem the failure of decades. We have
consistently7 put forward our vision for a better Pustralia:
an Australiza which needed to undergo fundamental economic
and social change if it was to realise the aspirations which
we all legitimately hold.
It was that vision which lay behind my calling of the
National Economic Summit and the establishment of
consultativo bodies such * as the various industry councils
and EPAC. Xt is that vision which underpins our approach to
industry po'. cy and industry regulation. It is that vision
which provides the intellectual basis for the urgency with
which tye have set out to foster national reconciliation and
national Teconstruction.
In my Address to the Nation around ten weeks ago, I pointed
out the major difficulties facing Australia at the present
time because of the unexpectedly sharp change in world
trading conditions.
The point is not that there was any sudden realisation that
changes were required in Australia's way of doing things.
As I say, wu have known that for years.
The real point to note is that these new external
developments have placed new demands on policy. These
include, first, new demands on short-term economic
management. They also include, a new urgency for industry
policy because the time period available to us to effect
long-term structural changes has contracted.
I 3.
The task of coping with the new environment is daunting
enough : just consider how much more difficult it would be
if we had not begun some three years ago to give effect to
longer-term policies to promote the necessary structural
changes. Throughout our trading history Australia has been an
exporter commodities, mostly some mixture of agricultural
products and minerals. For much of this period there has
also been a trend decline in the prices of our exports
relative to imported manufactured goods.
In the post-war period this decline has been of the ord ' er-of
1 per cent per annum, a trend that all post-war Governments
were content to live with. But since the end of 1984 there
has been & an abrupt and very sharp decline in the world
prices of our exports, resulting in a fall of 15 per cent in
ouz terms of trade.
To put that in perspective, the terms of trade have now
fallen to a post-war low in year average terms. The further
8 per cent decline forecast for 1986-87 will mean, if
realised, that Australia's terms of trade will have fallen
to a level not seen since the 1930' s.
The sad truth is that the cost to Australia of our lowered
terms of trade is currently about $ 6 billion per annum.
This develo'pment, needless to say, has been most unwelcome.
But it is here and adjustment is inevitable.
The Governm-ent cannot cr-eate the conditions which will
enable us to avoid the need to adjust. What this Government
can do cnd has done is to create the conditions which
will ena'io Australia to maximize its future growth
prospects. Last week's Budget is an indispensible element in that
process. In a senso, the deterioration in the terms of trade has
effectively focussed attention on another longer-term
structural issue. Over the last decade or more Australia as
a whole hcie increased the average share of GDP devoted, one
way or another, to consumption. This has been at the
expense of saving for investing in our future.
overall domestic saving has fallen from an average of 17.5
per cent of GDP per year in the ten years ended 1973-74 to
just 11.4 per cent last year. Last year private savings
amounted to 18.3 per cent of GDP, comparable with the
average experience over the relevant 10 years. The
difference between private and total saving in 1985-86 at
6.9 per cent of GDP was devoted to financing, either
directly or indirectly, the deficits of Governments and
their authorities.
The investmrent share fell a little between these periods
by about 2 percentage points. The remaining gap between
domestic saving and our total financing requirement was met
by increzising our dependence on overseas savings.
In 1985-86 Australia spent about 6 per cent more than it
earned. The difference was borrowed overseas. This came at
a time wl'en the foreign currency value of our foreign debt
had already been doubled over two years, partly reflecting
the sharp depreciation of early 1985.
The prescnt size of the current account deficit around 6
per cent of GDP and bloated by the adverse shift in the
terms of trade is simply not sustainable. Put bluntly, we
must takc' our hands out of foreigners' pockets and learn 0to
better live within our means.
In effect, we are going to need to reduce our consumption
level belowi where it otherwise would be and increase our
national raite of saving.
1:
And as an cassential part of that adjustment, we are going to
have to inc~ rease the capacity of our traded goods industries
and to divarsify them.
As I say, ' Cliat general prescription will not como as a
surprise to any of you. It has been a consistent theme of
my Goveriimzunt over these past three years. It is neither
more nor c than the message of my Address to the N'ation.
At that tir-, I indicated unequivocally that my Government
would addre3s the' new circumstances directly through prices
and incornee policy, accompanied by complementary fiscal
restraint.
My Govern'Aent's actions subsequently have demonstrated our
capacity to respond to the new policy imperatives. Last
week's Bud,-ot produced a degree of fiscal restraint that
went beyoiid the reasonable expectations of market
commentators. Last week's Budget and its associated policies provides
Australia wi. th a substantial instalment in a medium term
strategy lor negotiating this transitional period while
Australia adjusts to the new economic realities. As a
consequence, last week's Budget offers a real prospect for
enhancing our long-term growth potential.
Central to the Budget is a very substantial degree of
restraint on outlays.
At 6.9 per cent, the growth is nominal outlays is lower than
the outcome in any year since 1968-69. The Budget provides
for no growth in real terms in 1986-87, compared to an
average rise over the past decade of 3.2 per cent.
Bringing outlays growth to a standstill in real terms has
not been an easy task. It has required us to take a number
of measures which otherwise we would not have wanted to
take. However, the Government has had no real alternative.
we have souight to apportion cuts fairly, with the least
burden borne by those least capable of supporting it.
Gross savings totalling well over $ 3 billion have been
achieved since January 1985, with cuts in all functional
areas. Defence Gpending growth has been cut to 1 per cent in
1986-87, a significant reduction on the 3.75 per cent
allowed Eor in the Five Year Defence Program. However, ' I
note that average real growth in defence spending under my
Governmenit remains greater than under our predecessors.
Inevitably, significant cuts have been required in the
hb-alth, oucation and social security areas. Our first
priority, of course, has been to exclude from benefits those
not in genuine need. We have achieved this by tightening
eligibility criteria and administration.
For example, the administration of unemployment benefits is
to be modified in a number of ways. Additional staff will
be undertaking selective reviews of recipients on a regional
basis to identify and disqualify those wrongfully in receipt
of benefit. These arrangements will also enable a better
service to be provided to the older and longer-term
unemployed. I
In additilon recipients -of unemployment benefit will now be
required to remain regi'stered with the CES and to lodge
income statements personally. Similarly recipients of
supporting parents benefits will be required to report on
their circumstances at least quarterly and to attend for
interview' after 3 months on benefit. Those and similar
measures will save $ 77m in 1986-87.
They also give the lie to glib assertions by the opposition
that substantial further savings can be found by legitimate
administ-. ative means.
Having taken all of those measures it was still necessary to
effect further savings in this area.
It was for this reason that the pension adjustments which
usually occur in November and may of each year have been
each postponed for a period of 6 weeks. It is the
Government's intention ultimately to restore the previous
arrangements, but not until it is economically responsible
to do so.
I would add that, even though significant cuts have been
made the Government continues to accord the highest priority
to the needy. This priority is reflected in the fact that
the share of outlays devoted to social security and welfare
payments is budgeted to rise by 0.4 percentage points to
27.8 per cent in this year. The shares of other elements of
the social wage remain broadly unchanged.
Tax reform iemains central to this Government's agenda.
Personal tax cuts will be delivered on 1 December, with a
final tranche on 1 July 1987. Our commitment to this second
tranche is to be reflected in legislation, to be introduced
for passage this Session.
Even after allowing for the greater contribution to health
care fund:. ng which our circumstances now require from the
Medicare levy, ordinary wage earners will receive a tax cut
from 1 December of about $ 6 per week. The value of the tax
cuts by 1987-88 will be 3 times the additional revenue
raised in the tax package.
Some administrative arrangments which affect the timing of
tax payments by some of our largest companies have been
changed to ensure more equitable treatment as between
companies. But there are no new direct imposts on business
in this Bodget.
This Gover itent has accepted an unprecedented degree of
fiscal planning discipline, represented by the fiscal
trilogy. Cutlays have declined as a proportion oZ GDP in
each of ti 1985-86 and the 1986-87 Budgets.
It remains oar objective. to reduce tax receipts to 25 per
cent of GDP, the " trilogy, limit". However, it is our view
that, as wc need to increase derestic saving in present
conditiont,, it would be inappropriate to move in that
direction in 1986-87. On the contrary, additional tax
revenue ha,; been sought.
The decision regarding the tax share of GDP in the 1987-88
Budget wi2l be taken in the light of circumstances at that
time.
Fiscal restraint is only one element of the necessary
adjustment process. A second key element is to restrain
increases in domestic costs in order to presezve
substantially the enormous improvement in our
competitiveness resulting from the depreciation of the
exchange rate since early 1985.
That depreciation has meant that Australian industries are
now more competitive on a cost basis than at any time for
about 20 yeais. But at the same time the sharp decline in
the exchange rate around 40 per cent in TWI terms has
imparted a very substantial inflationary stimulus. The
acceleration of inflation in 1985-86 was due to the
depreciation, not to increased wages costs. Wages growth in
Australia was not much different from our trading partners.
Indeed it is worth remembering the wages policy achievements
of the Accord. Our supposedly inflexible centralised wages
fixing systom has in fact delivered a degree of real wage
flexibility which few countries can match. Over the past 3
years real wages have fallen 5 per cent in Australia. But
in the US the fall was only 1. per cent and in the UK there
was a real -ise of 10 per cent.
Clearly wages have not been the cause of the increase in
inflation. But that upsurge in inflation must not be built
into our cost structure. That would simply compound our
problems not help to solve the problem but to build the
problenm in.
In addition, the growth in household incomes will also have
to share the-burden of the loss in national income due to
the deterioration in the terms of trade.
Accordingly at the next National Wage Case, the Governmient
will argue Zor a 2 per cent discount. The Government will
also seek a further adjustment of the wage increase in the
case comme~ ncing around April next year, if economic
conditions applying at the time warrant it.
This Govern. Aent's main focus will continue to be on
Australiaos ongoing competitive position and our terms of
trade performance.
on current figuring a 2 per cent discount will mean that
wages are oxpected to grow at around the saTe modorate rates
as in 1905.-86. Then, award yages grew by 4 per cent and
average ea~ nings by around 6 A per cent. Sugh an outcome.
would enTeAustralia to brsadly maintain our
competitiveniess.
Adjustment based on fiscal restraint and cost restraint
offers the best prospect for resuming sustained and Gizeable
rates of growth. It will allow monetary policy to carry a
lesser burdan than it has over the past year.
Interest raites have risen recently to underpin our currency.
The fiscal restraint embodied in this Budget will mean that
the net bond selling task is zero. The gross public sector
borrowinij requirement is set to fall from around 6 per cent
of GDP in 1985-86 to 4.4 per cent in 1986-87. That will
reduce the direct claim on financial markets and thus free a
higher proportion of domestic savings to finance investment
without tcc-ourse to foreign borrowing.
It should help to ease pressure off interest rates and
improve the capacity of business to invest in the capital
equipment necessary to diversify and enhance our traded
goods industries.
Ladies and gentlemen, the macro-economic setting is but part
of the adjustment that this economy must make.
8.
The depreciation provides a major incentive for firms to
take advantage of the freer, more open industrial structure
which cur policies havo been creating over these past three
years. The Government has laid the groundwork in many ways.
Let me give just some examples:
Deregulation of the financial sector;
Positive incentives to increase research and
development; Introduction of tax imputation to remove the double
taxation of dividends;
The e3tablishment of AUSTRADE;
o Expansion of AIDC;
The romoval of State purchasing preferences;
Rela: ation of foreign investment guidelines; and
Nov2s towards the adoption of uniform regulations across
States.
More neo: o to be done in changing Australian attitudes and
improvi:_ efficiency. My recent Address to the Nation
outlined ,; ome measures to achieve both these objectives.
Work is proceeding on these within Government.
Ladies and gentlemen, such is the nature of our present
crisis that it will take the efforts of the community as. a
whole to put the economy squarely on track for sustained
economic growth.
This Goverrment is prepared to provide the necessary
leadegsh-a and to implement the policies which are necessary
( even at the cost of some short-term popularity).
The Budc. et, to quote the Australian Financial Review, is
economically responsible and politically honest.
It is the Budget which we need, in conjunction with our
other policies, to give us the best chance to rebuild
Australia0s prosperity. The effort must engage us all.
Mr Chairnan
At the outset today, I referred to the previous occasions I
have had the honour to address your members.
With your indulgence, may I quote briefly from my Address to
your Melbourne colleagues a week before the election of
March 1983.
9.
I said then:
" This i not a challenge for the Government alone. It
is a challenge for the entire Australian community.
SWe will provide the leadership and take the initiatives
which it is the responsibility of the elected national
Government and the Government alone to provide and take.
We seek, from the whole Australian community their
co-operation, their sense of the common challenge and
their common interests in meeting and bearing the crisis
a crisis of the Australian economy and a crisis of the
Austra. ian spirit which we all face together as
Austra2lans."
May I sufgot, Mr Chairman, that there is a double relevance
in those wa:: ds today.
We facc0 onze again, a time of tremendous challence.
But even more relevant is the way we did, as a Government
and as a poople, meet and beat the crisis of 1983. The
Australian community all sectors of it did respond, in
the manner we had sought.
A new chal-onge lies before us all. Given the same response
and spirit0 I am absolutely confident of our capacity as a
nation to niet it triumphantly.