PRIME MINISTER
EMBARGOED UNTIL DELIVERY CHECK AGAINST DELIVERY
AUSTRALIAN FINANCE CONFERENCE ANNUAL DINNER
CANBERRA 4 MAY 1987
Ladies and gentlemen,
It is now nearly three years since I last had the pleasure
of addressing the annual dinner of the Australian Finance
Conference. Perhaps by more than anything else, those three years have
been characterised by an increasing acceptance throughout
the whole nation of the fact that if governments are to
succeed, they must get the economic decisions right.
when I last spoke to you in July 1984, my Government had
already proven, over fifteen months in office, that it
recognised and accepted the fundamental importance of the
economic task it faced.
Today, we romain committed to it, confident in the knowledgo
that our efforts are yielding fruit.
It is not just that the majority of the community now
accepts that the prime question facing the nation is indeed
an economic one. What has also happened is that the
evidence for the success of our policies, despite the
difficulties we have endured as a nation, is now starting to
accumulate. Since we meet today at a time of crucial economic decision
making, in the lead-up to the May Statement and the Premiers
Conference, it is appropriate that I take this opportunity
to reaffirm the fundamental principles which, through our
whole time in office, we have brought to this central task
of government.
At the same time, let me acknowledge the great assistance we
have received from organisations such as your own.
The finance industry along with most other parts of the
national economy has undergone significant reshaping. New
competitors and the reduction of rules which previously
created artificial distinctions within markets have probably
made the daily task of a finance manager more challenging.
But at the same time those reforms have provided significant
new opportunities to a more competitive national economy.
Because economics is such a central and at the same time
relatively complex task, it is not surprising that it has
spawned a thousand analogies. Journalists, commentators
even politicians on rare occasions have resorted to the
analogy of allocating slices of the national cake, walking
the tightrope of monetary policy, juggling rival priorities,
and so on.
But to describe what we saw when we came to office in March
1983, no analogy seems more fitting that that of a jigsaw
puzzle where all the pieces had been shaken out of place. We
saw excessive inflation, disastrous levels of unemployment
and a profoundly uncompetitive industrial structure.
It was our task, and our achievement, to rebuild that jigsaw
puzzle. indeed, we set ourselves no less a task than the
revitalisation of Australian industry to prepare it for the
new challenges of our time. We put particular emphasis on
innovation, on restructuring our most highly protected,
least competitive industries, and on opening up Australia's
trading opportunities at a time when many in the world were
seeking to close them down.
We had the courage to float the dollar and to even up the
playing field between competing types of financial
institutions. We increased competition, especially through
the admission of foreign banks.
In short, we proposed and began to implement a radical
reshaping of Australia's economic structure.
Since those early days of Government however, we have had to
manage a second majoir economic challenge the sudden
collapse in our terms of trade, which inflicted immense
damage on the Australian economy.
Put simply, the decline in our export prices has by now
stripped around $ 9 billion from our national economic
capacity. Completion of the economic jigsaw puzzle was made
much harder.
The current account deficit ballooned to an
unsustainable 6 per cent of GDP in 1985-86;
Under the weight of a declining currency the rate of CPI
growth expanded from a low of just over 5 per cent
during 1984* to a temporary peak two years later of 9.8
per cent,
And interest rates, which we had been bringing down in
1984 and 1985, rose again.
My message to you tonight is that despite these temporary
setbacks, our macroeconomic strategy demonstrably is
working. of course, much remains to be done. But tonight,
I want to report on how much progress we have achieved.
As I said in my Address to the Nation last June, the initial
task we faced as a nation after the terms of trade collapse
was to begin to adjust to our lowered standard of living
our lowered national economic capacity by reducing
domestic spending on goods and services, particularly
consumption spending.
There was, and is, no realistic alternative to that course.
It would have been unacceptable and dangerous to embark on a
course of increased borrowing and spending. Equally
unacceptable would have been indiscriminately slashing
government spending without regard to the effects those cuts
might have on needy people who depend on Government support
for their well-being.
I want to underline again that this Government is not about
to abandon Labor's traditional commitment to the
underprivileged and the needy.
Indeed, we are determined that the rigorous disciplines we
are applying to our budget will produce, as far as we can, a
fairer society and one where the limited resources are
fairly applied to those who need them most.
The need to reduce private consumption spending which is
around 60 per cent of GDP also requires wage and salary
earners to accept lower increases than they would have
expected in easier times.
Despite the progress which has already been made in reducing
real unit labour costs 6 per cent since 1983 continued
wage restraint is still required.
In summary, two key areas of restraint needed to promote
successful economic adjustment are fiscal and wage
restraint. I am aware that your Budget submission urges the Government
to make a substantial contribution to allowing sustained
reductions in interest rates.
Nobody is more aware than I that high interest rates bring
hardship to businesses, farmers and home buyers.
But let me make it clear that no one in Government would be
crazy enough to want interest rates a jot higher than is
absolutely necessary.
If interest rates were expected to remain high indefinitely,
the damage to business investment prospects would be
unacceptable. But the Government will not be pushing for a premature, but
ultimately counterproductive, easing in monetary policy.
Experience shows that such action only delays the day when
sustained reductions in interest rates are achieved.
There is some evidence that rates are beginning to fall.
Ten year bond rates are down by a percentage point from
their peak earlier this year. Recent Treasury note tenders
have posted the lowest yields this financial year. The bank
bill market has followed this trend. Bank prime rates are
down by around half a point from the peak in December 1986.
Having mentioned the exchange rate and the Australian dollar
in passing, let me make a comment specifically about them.
The weakness of the US currency has greatly reduced the
significance of movements of that currency as an indicator
of changes in the average value of the Australian dollar.
Greater attention needs to be focussed -by markets, by
policy makers, by potential exporters -on the trade
weighted value of our currency. The value of the $ A
measured in TWI terms, although it has risen significantly
agains. the US dollar, is in fact little changed from its
level of a month ago.
on average recent currency movements have not adversely
affected the competitiveness of Australian producers
though they do reduce the profitability of those exporters
who sell in markets quoted in US dollars and who compete
against producers in the United States.
Earlier, I said that the most important short term task was
to stem the growth of domestic spending, particularly
consumption spending.
Let me outline the success we are enjoying in that regard.
In 1985-86, Australia's real Gross Domestic Product grew by
an estimated 41.2 per cent, Domestic demand contributed
of these percentage points of growth, with consumption
private and public accounting for 2.4 percentage points.
Significantly, net exports contributed only 1.2 percentage
points to growth in that period.
By contrast in the six months to the December quarter 1986
domestic demand actually fell to record a negative
contribution to growth of around 1.5 percentage points in
annual terms. At the same time there was a virtual doubling
in the contribution to growth from net exports in only six
months. That shift towards production for export and towards lower
demand for imports is one important piece of the economic
jigsaw puzzle that we have locked into position already.
The pay-off is already to be seen in our current account
position. Manufacturing exports are 30 per cent higher so
far this financial year than a year ago. And our net
services deficit, that is, our net expenditures on tourism,
freight insurance and other services has fallen 21 per cent.
The current account deficit in the March quarter 1987 was
almost $ 500 million below that of the March quarter 1986.
Indeed, the improvement in the balance of payments over the
past few months has been such that latest estimates of the
1986-87 current account deficit are about $ 1 billion less
than the Budget forecast of $ 144 billion.
A substantial decline in Budget outlays as a proportion of
GDP is expected in 1986-87. Moreover we have reduced the
Budget deficit from the 5 per cent of GDP which we inherited
from our predecessors to around 12 per cent in 1986-87.
I would add that that is an achievement which virtually no
other comparable country has matched over the period.
A further demonstration of the Government's commitment to
fiscal restraint will be provided on Wednesday week when the
Treasurer announces a package of savings measures to the
Parliament. This statement, in advance of the usual Budget date, has
been chosen to give our savings measures maximum impact in
1987-88 so that we can continue our efforts to reduce the
deficit as a proportion of GDP. It is intended to show
clearly that this government is serious about the
painstaking task of reviewing its expenditure.
Many of the cuts the Treasurer will announce could involve
short term political costs for the Government. But we have
never allowed fears of temporary unpopularity to deter us
from making tough but necessary decisions.
As everyone knows, I contemplated calling an early election
which I am certain, and all the available statistics
indicate, we would have won. Indeed the continuing chaos in
the Opposition ranks makes me certain we would have won an
increased majority.
However, I resisted the tempation to grab at short-term
political advantage for this reason: to do so would have
been inconsistent with our long-term strategy to restructure
the economy.
I repeat what I said in my Address to the Nation last June
I would rather risk electoral defeat than implement policies
which would prevent successful economic adjustment.
We have accepted the responsibility of ensuring that welfare
payments do not go indiscriminately where they are not
needed. I don't suppose there is a single person here from the
business community who has any doubt about the correctness,
and the validity, of that approach to ensure that no-one
gets something to which they are not entitled. We will do
our job there. I I
But I trust that there will be a symmetry of attitude in the
business community.
By this I mean I hope there will be an equal acceptance in
the business community of the decisions that we have taken
to ensure those who ar'e better off also don't get something
they don't need.
I hope the clarity of vision which nearly everyone in the
business communitcy has about the need to crack down on the
welfare cheats will be matched by a clarity of vision about
the inappropriateness of providing Government assistance
through the tax system to those who don't need it.
In particular, I hope we will see indeed we are already
seeing significant diminution in the nonsense and the
hypocrisy that has been expressed about the assets test and
the Fringe Benefits Tax.
After the May Statement we will be again playing host to the
Premiers.
There has already been some public comment about the
Premiers' Conf2rence and I do not wish to engage in much
public debate about it now.
The reality is that the. total Public Sector Borrowing
Requirement must decline ais a share of GDP not simply-the
Commonwealth's share of it, as has so frequently been the
case in recent years.
To return to the economic jigsaw, let me return to that very
important piece namely the role of wage and salary
increases.
Widespread commurity acceptance of the new two-tiered
structure of wage fixing demonstrates the continuing
relevance to Australia's changing economic circumstances
both of the consultative mechanism of the Accord, and of our
centralised wage fixing arrangements.
The new system provides for overall wage restraint while
allowing some flexibility at the workplace. In other words,
the decision addresses Australia's economic difficulties at
both the macro--economic level, where there is a need for
continued labour cost restraint, and at the micro-economic
level, where Australian industry needs to become more
competitive and productive.
The two tiered wage system will place a heavy responsibility
on all the industrial relations players to ensure that it
delivers the desired wage outcomes.
Ultimately it is for the Commission to ensure that any
claims made under the second tier are genuine and are not
aimed at circumventing the intent of the wage principles.
I and other members of my Government have made it clear to
both these parties that Australia requires them to act
responsibly in this matter. The Government will not
tolerate agreements which do not comply with the principles.
The arrangements in the second tier also represent a
challenge to improve productivity in the Australian
workplace. Last September I called a meeting of the peak employer
groups and the ACTU to discuss work and management
practices. I was encouraged by the fact that all those
parties accepted the need to remove restrictive work and
management practices and to promote work place reforms
designed to lift Australia's productive potential.
The importance of this commitment must not be underrated.
Australia's future living standards will depend on how
productively we work together.
If we cannot compete with the best technologies and best
working methods abroad we will permanently fail to reach our'
national potential. The cost will be felt in fewer jobs,
lower standards for those in jobs and a reduced ability to
care for the disadvantaged. There are enc-ouraging signs of
real progress being made. But because more needs to be done
I again call on all parties to redouble their efforts.
The constructive approach which has typified progress on the
productivity front has sprung from the new atmosphere of
co-operatior in industrial relations a co-operation which
has also produced the sustained wage restraint of the past
four years.
Previous periods of shrinking national income have usually
been accompanied by massive job losses. Consider, for
example, that in the last year of the Fraser/ Howard
Government, unemployment increased by two hundred and fifty
thousand.
By contrast some 3/ 4 million new jobs have been created
since Labor came to office including some 147,000 over the
past year.
AS predicted, the March quarter CPI at 1.9 per cent, on
average was significantly below the levels of late 1986.
As the impact of past depreciations continues to pass
through the pricing system we expect further reductions in
the rate of inflation during 1987 and into 1988.
The present gap between Australia's inflation rate and that
of our major trading partners will be considerably smaller
in a year's time. Lower inflation will signal another
important piece of Australia's economic jigsaw falling into
place.
of course a crucial element in Australia's capacity to pay
our way in the world in the medium term will be an
appropriate level of business investment.
The boom in non-residential construction in recent times has
been well timed to permit the Australia * n hospitality
industry and other service industries to take full advantage
of their substantially improved competitive position. It is
pleasing also to note the sharp lift in manufacturing
investment, especially in plant and equipment, which has
taken place.
Nevertheless we clearly need to do more here. This
Government's policies have been consistent, well articulated
and constructive. We are doing what can be done to rectify
the financial and structural imbalances inherited from our
predecessors and exacerbated by our reduced terms of trade.
on any reasonable judgement those policies are succeeding.
It is time for men and women of foresight to back Australia
and take the investment decisions which only they can take.
Ladies and gentlemen
I want to leave you with some thoughts and some evidence
about the comparative ability of Labor and our conservative
predecessors to manage the nation's economic challenge.
As you would romember, the previous Government had to manage
a significant decline In the terms of trade between the June
quarter of 1976 and the December quarter of 1977.
Though some improvement took place in the following
quarters, the previous government over their first four
years had to fashion economic policies to cope with a net
decline of 7.3 per cent in the terms of trade. But they
failed to see the writing on the wall. They failed to set
in train the necessary policies to restructure the
Australian economy and revitalise Australian industry.
The fruits of their economic management over that period
were real GDP growth of 13.4 per cent and employment-growth
of 4 per cent -about 4million jobs.
By contrast the decline in the terms of trade during Labor's
period has been much sharper and more protracted. The net
fall over the first four years of this Government is
expected to be of the order of 17 or 18 per cent more than
twice that of our predecessors over the same period of time.
How has Labor managed? Real GDP seems set to rise by some
19 or 20 per cent over our four years in office 40 to
per cent more than in their first four years and
employment growth under my Government has been three times
what it was under them.
So this Government has produced more growth and more jobs in
the first four years despite more than double the fall in
the terms of trade. I
Even more conclusively we have achieved it in a world
environment which has been less conducive to export sales.
Real GDP growth in OECD countries rose 16.2 per cent over
those Fraser/ Howard years but, on current forecasts, only
13.4 per cent during our first four years.
Ladies and gentlemen,
It would be remiss of me if I failed to give you some
thoughts about current events in Parliament House.
I. don't want to turn this dinner into a partisan event. But
I have to say, as Prime Minister of a country which still
faces a profound economic challenge, that it is disturbing
that the business community and the rest of the community
for that matter cannot get clear answers to legitimate
questions about the alternative Government's policies on
taxes, spending cuts and wages policy.
I have said throughout that we will not be distracted from
the central task of Government by the divisions and
diversions of the Opposition.
That central task lies before us. We have a clear goal and
a clear strategy to reach it.
We must continue to restructure the economy.
We must continue to govern with fairness and compassion.
We must continue to provide stability and strength in
government.
And we must continue to govern for the long-term future even
at the expense of copping some of the flak for decisions
which do not please everyone along the way.
We are doing that and we are determined to continue that
mission. That way, Australia will emerge from its difficulties with
renewed strength, renewed competitiveness, and renewed
confidence to build a prosperous future.
I I