ijjU~ rA~~ Ni O. F. 76/ 255 L
PRIME MINISTER
FOR PRESS T. a t\ 29 NOVEMBER 1976
SOUTH AUSTRALIAN CHAMBER OF COMMERCE
I am very pleased to be here tonight to discuss with y~ ou some
of the major issues confronting Australia, and the Government's
approach to these issues.
In the light of yesterday's set of economic measures, this is
a particularly appropriate time to discuss the Government's
approach. I should, however, say at the outset that the
central task facing all of us achieving a soundly based
economic recovery is not something that the Government can
achieve alone. It is a task which we all must share. We all
have an interest in economic recovery. lie all have the ability
to make some contribution to achieving that end.
The Government has constantly said and I repeat our top
priority is the defeat of inflation.
In order to achieve this objective, the Government must pursue
its economic policies in a balanced way a way which is equitable
in its impact across the community. All the objectives that
Australians share are linked to defeating inflation. Increasing
employment opportunities, reducing interest rates, acting to
assist the disadvantaged in our society they are all
dependent on our ability to cope with inflation.
In achieving this, the Government must give proper attention
to all four arms of economic policy the budgetary, monetary,
external and wages policy.
Tonight, I would like-to outline how this Government has used
the four arms of economic policy in pursuing economic recovery.
the maintenance of the balance between the various
arms was the premise underlying yesterday's measures.
To adequately understand our approach it is necessary to understand
what happened under the Government preceding us.
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The roots of Australia's economic problems the severe
inflation, unemployment, high interest rates and a record
deficit derived from the role assumed by Government in
the economy between 1973/ 75. In these years, the Government
operated on the basis of fundamentally misconceived ideas
about the role and capacity of Government in economic policy.
TI-ese misconceptiors gave rise to a number of important
consequences between 1973/ 75:
For a time, rational budgetary policy
dissolved.
wages and prices policies were pursued
which had disastrous consequences for
business profits and employment opportunities.
Concurrently, monetary and external policies
being implemented had the effect of disturbing
the economic environment.
On the budgetary side:
In 1973/ 74 the groundwork was laid for a massive
expansion in Government expenditure at a time when
private demand pressures were becoming excessive.
1974/ 75 saw an effort to counter unemployment by
greater public spending. There was an increase
of 46% in Federal Government spending.
This accelerated inflation and unemployment rose by some
180,000.
On the wages side:
The Government encouraged large increases in wages.
The wages share of G. D. P. rose substantially
while the profits share fell.
Inevitably high unemployment and inflation resulted.
On the monetary side:
The excessive growth of Government spending fed
into excessive liquidity
Consequently, excessive weight had to be placed
on monetary policy which led to a credit squeeze.
This was however followed by a resurgence of
monetary growth.
On the external side:
Attempts were made to offset inflationary pressures sustained
by the Government's domestic policy.
2-
The 25% across the board tariff cut partly
intended to counter inflationary pressures
again served to promote instability,
uncertainty and unemployment.
The result of these errors, misconceptions, and compounded
imbalances was that this Government, on being elected to
power, was faced by:
the greatest unemployment since the Great
Depression, an actual decline in the Gross Domestic Product,
a depression in company profit's share of
national income,
a desperate situation in the farming sector,
a decline in real business fixed investment
to its lowest level in three years,
a CPI that was fourteen percent higher than it
had been a year before and showing no substantive
indications of declining,
we were also faced by an overvalued currency which
placed great b, rdens on particular groups in the
community manufacturers, primary industry and
import competing industries.
In this situation, we had to establish a balance between
the various arms of policy in order to create the conditions
for a return to sustained economic growth. One could have
made a case for devaluation a year ago. We did not act
because the other arms of policy had to be brought to bear
on inflation. The Government maintained the exchange rate
and tightened the other arms of policy. We pursued stringent
budgetary, monetary and wages policies. The Government cut
spending, moved to control the growth in the money supply and
argued strenuously for wage restraint.
Yesterday, we moved to maintain the balance between the
different arms of policy by alleviating the pressure which
had built up on the external side of policy and making the
necessary supporting adjustments in the other arms of policy.
External Policy
It has been widely, indeed almost universally recognised,
that our currency has been overvalued for a considerable time.
Some of those who recognised this fact nevertheless argued
that the imbalance should be maintained indefinitely to
lighten the burden on the other arms of policy in the fight
against inflation. -3
Unfortunatelv, those putting this view have not always
recognised that the imbalance has placed a very severe
burden on our manufacturing, exporting and import competing
sectors. The Government has always recognised the dangers
inherent in the declining competitive position of Australian
industry. Recent events have nade an improvement in our competitive
position more difficult to achieve-and have placed too heavy
a burden on some parts of the Australian community and too
heavy a pressure on the external arm of policy.
The Arbitration Commaission's decision to pass
the full CPI increase for the September quarter
into wages threatened a further exaggeration of
Australia's internal costs and hence our move to
a more competitive international position.
The maintenance of unrealistic wages
levels has placed Australia's import
and export competing industries at risk.
It has also delayed the emergency of
employment opportunities.
It has not been sufficiently recognised
that continuing to run an overvalued
exchange rate has been unfair to employees
and those seeking work because the capacity
of industry to provide jobs has been
inhibited.
Uncertainty about the exchange rate resulting from
the decline in Australia's competitiveness has been
impeding the implementation of new investment
proposals and has resulted in a continuing decline
in Australia's international reserves a decline
hastened by the irresponsible statements of some
members of the Opposition.
In the last twelve months, despite substantial
overseas borrowing by the Government, our
international reserves fell by $ 1100 million.
The loss of reserves accelerated in the last
few months, declining by $ 269 million in
October and $ 260 million to the 2",! nh of
the month. 4
The prospect was for an unacceptable outflow of capital in
December and early January.
Last Thursday the Government's official advisers jointly presented
two options to handle this situation:
Further international borrowings,
if around $ 1000 million; or
Devaluation.
The Government could not accept a situation where uncertainty
and speculation would be sustained. Devaluation was therefore
the only responsible option open to it. The size of the move
mayl1ave caught people by surprise. This is perhaps because
insufficient account has been taken of the impact of rising
domestic costs on our competitive position in international
trade. The Government wanted a figure that would end that
uncertainty.
Coupled with other policies, we believe this decision will
lead to a strengthening in our international trading position.
We have introduced a flexibly administered exchange rate.
This is not a floating rate subject to daily fluctuation,
but it is nevertheless a rate subject to short term movement
in accordance with administrative decision.
I am confident that the step we have taken will greatly
enhance the processes of economic recovery.
Australia's mining, rural and manufacturing industries will
be significantly assisted by the decision, and employment
opportunities will be increased. These effects, however,
will not be long sustained if appropriate action is not
taken with respect to the other arms of policy budgetary,
monetary and wages policy.
on the budgetary side
We have this year budgetted for a reduction in the rate of
growth of Government spending from 23% to 11%.
Significant personal and company tax reforms have been introduced
and a range of incentives h.: i-e been offered to encourage private
investment. The deficit has been significantly reduced and equally, or
perhaps more importantly, its structure has been altered.
The deficit reflects measures to assist individuals and
businesses, not a Government's desire to aggradise to itself
more and more of the nation's resources.
In fact, if this Government had not introduced tax
reforms and incentives for business, the deficit would
have been $ 1.4 billion.
As a result of yesterday's decision, it is imperative that the
Government take further steps to control Government expenditure
in order to avoid placing too great a pressure on the monetary
arm of policy. Government expenditure will be reviewed with the
object of making savings by deferring expenditure for next year,
any proposals for increases in particular programmes above the
real levels of outlay in 1976/ 77 will be regarded as new
proposals. The Government will in all areas exercise an even more
stringent control over its own expenditures. Governments
cannot spend their way out of recession and unemployment in
times of high inflation. The attempt to do so merely
exacerbates underlying economic problems.
If the Labor Government taught us no other valuable lessons,
it did teach us this one.
In 1974/ 75 Government expenditures increased by 46% while the
deficit rose by almost $ 2,300 million. In 1975/ 76 expenditure
increased by a further 23% and the deficit to $ 3,585 millionand
it would have been greater if it hadn't been for the
measures we took.
During this period, prices increased by more than 30%, yet
there was a negligible growth in real output, and unemployment
increased by over 180,000.. Relaxation of the budgetary arm
would mean a higher deficit and cause problems with financing it.
We have experienced the consequences of that. Mr. Wran
unfortunately does not appear to have learnt from the
experience. His so-called plan for economic recovery
is a recipe for repeating the disastrous mistakes of the
Federal Labor Government.
In monetary policy
The Government is committed to achieving an appropriate rate
of growth in the money supply.
Action is being taken to prevent devaluation
producing an inflationary growth in the money
supply.
Official interest rates have been increased.
The Government will closely monitor the volume
of lending by financial institutions to ensure
that it promotes a sound and non-inflationary
economic recovery. -6
These measures cannot be construed as a squeeze on credit
and it is not intended that they will reduce the money
available for worthwhile projects.
On the wages side
The Government has in all forums consistently argued that wage
restraint is an essential element in economic recovery. All the
parties involved in wage determination have a great responsibility
with respect to the economic well-being of Australia. The
present situation demands wage restraint.
The relationship between unemployment and excessive wage demands
is clear at the present time, one man' s wage increase is
purchased at the cost of his workmate's job. I believe that
only a few people have failed to grasp this fact Mr. Hawke
apzpears to be one of them.
Last week he stated that wage increases would not be
inflationary but would boost consumer confidence and help
economic recovery. Nothing could be further from the truth.
Wage increases in this context are counter productive they
fuel inflation, increase unemployment and reduce spending.
Again we can turn to the experience of the late Labor Government.
In 1974, between the March and December quarters, average earnings
increased by 24%, in real terms by 10%. What happened
consumption went up by less than inflation went up by 13%.
The wage increases accelerated inflation, accelerating inflation
increased consumer uncertainty, consumers spent less, and
unemployment rose.
So much for Mr. Hawke's attempts at economics.
Unless inflation is wound down, unless wage demands are moderated,
there can be no rapid return to economic prosperity.
In the two quarters preceding th is one, the decisions of
arbitration commission not to pass the ful. CPI increase into
wages made a significant contribution to the fight against
inflation. By contrast, the Commission's September quarter national wage
decision to pass on the full 2.2% was a blow to economic recovery.
It adversely affected the winding down of inflation, the
possibility of improvement in employment opportunities, and
Australia's ability to compete internationally.
The Commission itself noted the depre: ssed state of the economy,
the poor state of the rural industry, and the problems facing
Australia in the area of international trade.
-7
Nonetheless, it went ahead and passed on the full 2.2%
CPI increase into wages.
The Commission apparently believed they had to choose between
industry chaos or economic dislocation. There is no doubt
that their choice has worsened the chances of economic recovery.
There is great doubt that it will affect the industrial
relations situation.
I greatly regret that the threats of a number of union leaders
to cause further disruption have been taken to depict the view
of the majority of trade union members, and that admitted economic
commonsense has been set to one side.
What does this say for Australia?
Those in leading positions in every sphere of life, in every
institution should apply what they know to be commonsense
not pander to the extremist statements of a vocal minority
who are actively seeking to undermine economic recovery for
their own partisan purposes.
The Arbitration Commission's decision was one of the factors
that had to be considered in our decision to devalue. P~ Anly
it contributed to a decline in Australia's international
position which could not be sustained in the long run. We
simply cannot maintain a situation in which the rate of
increases in Australia' s wages bill outstrips that of its
major trading partners.
In the last six years, wages in Australia's manufacturing
industry increased 130% compared with 53% in the US and
in West Germany. It is only common sense that the country cannot
continue to pay higher and higher wages that greatly exceed productivity
increases without this leading to higher inflation and
increased unemployment.
It is only common sense that Australia is harmed by the level of
industrial disputation frequently motivated by purely politic: .1
considerations. The OECD's figures show that in 1975 Australia
had the world's third worznL record in industrial disputes. This
year, if Medibank stoppayj:-are excluded, our record is better,
but industrial disputes are still far too numerous.
The vast majority of union members do, I believe, recognise
the irresponsibility of the minority of extremist union bosses.
Some of these men are quite explicitly seeking to destroy our
social and economic system. Others are attempting to squeeze
the last drop of advantage to themselves, regardless of the
consequences for the economy as a whole.
-8
These men have no difficulty in mouthing the words of
social responsibility while they systematically drive more
and more of their fellow unionists into unemployment.
The wilful damage these men have wreaked on the community,
their lack of concern for the people who were their workmates
before they became members of an irresponsible and oligarchic
union elite is breathtaking.
The Government intends to maintain its strong opposition to
wage and salary increases which cannot be justified by
economic conditions, and to the disruptive activities of
a few irresponsible militant union leaders. I believe
that in taking these stands, we have the support of the
Australian people and of rank and file unionists.
The union movement shares a responsibility to advance
Australia's economic recovery, not wilfully or carelessly
undermine it.
And our secret ballot legislation has given the reasonable
rank and file unionists a means by which he can exact
responsible action from his union leaders.
9
The measures we have taken are the ones appropriate to the economic
situation, but they cannot work overnight. A persistent and
balanced utilisation of all the arms of economic policy is
necessary. We intend that Australia should have this.
In this connection, I would like to turn to certain administrative
changes which will strengthen the Government's capacities in
the area of economic policy making.
The establishment of a new department of finance to take over the
existing financial management and control activities of the
Treasury, will allow the Treasury Department to concentrate its
efforts on broad economic policy analysis and advice.
In conjunction with this change, those parts of the Department
of the Prime Minister and Cabinet responsible for the evaluation
of the effectiveness of government programmes, advice to
the government on forward programming, and priority setting and
the strategic planning of government initiatives, will be greatly
strengthened. These steps will lead to greater emphasis being placed on longer
term policies by the Government's advisers.
The Government has initiated other changes too that will improve
the quality of economic advice available to it.
A bureau of industry economics has been established to carry out
research work needed to assist the Government in the formation
of industry policy. It will also assist the I. A. C. by making
submissions on the results of the research where this is relevant
to the Commission's inquiries. The establishment of the bureau
will fill a major gap in the Government's research facilities.
The new Department of Productivity will encourage innovation and
the exploitation of new techniques of all kinds.
Wce have taken the significant step of establishing a new Department
for a very special reason. Productivity until now has been a
responsibility of other ministries and inevitably it has tended
to take second place.
A separate ministry will for the first time focus attention on this
crucial subject.
The new ministry will draw together elements of Commonwealth
Government activities directed towards productivity improvement and
stimulate and coordinate the activities of other Commonwealth
Departments and authorise towards this end.
The new Department will also take over all those elements of the
Government's administration that relate to the working
environment, human, organisational, social and physical.
-11-
The dec~ sion of this weekend can be of great advantage to the
community. rtie competitive position of manufacturing industry competing with
imported goods will be strengthened, and the benefits of this will
flow on to all those dependent on a vigorous manufacturing sector.
The disastrously depressed farming sector, the gravity of whose
position is often under estimated will obtain an improved
position in world markets.
Investment projects which have been deferred can now get under
way with their job and income creating potential.
Mining and exporting industries generally, which make such
an important contribution to Australia's prospertiy will now
have their position considerably strengthened.
The prosperity of these sectors is vital to us all, and the flow
on benefits will spur recovery provided that they are not
frittered away. Balance between the various arms of policy
budgetary, monetary, external and wages policy has been
maintained by what we have done. They must be kept in balance
by each section of the community accepting its fair responsibility
in the fight against inflation.
The fight against inflation is a battle to which everyone must
expect to make a contribution. It cannot be won if the burdens
are distributed inequitably across the community. Equally it
will not be won if there is not an end of the selfish pursuit of
advantage by different groups in the community.
The fight we are involved in now is not a fight for one group,
one section of the community. It is nothing less than a fight
for Australia's future in which every Australian l-ust be involved.
Let us have a commitment by every Australian to make a personal
contribution to getting Australia back to full economic health.
Australia has a government committed to a strong private sector
as the foundation of a decent life for all Australians. Business
must be prepared to commit resources to the future of this
country, knowing that it will get full and equiable consideration
in Government policy.
Trade union members must be prepared to see that their officials
act responsibly and reflect the broad recognition of the need
for restraint in wage and salary demands. Every Australian can
make a contribution by a personal comnr: tment to make Australia
once more a country of which they can proud. Unless there
is such a commitment, we will watch a country with enormous
potential waste itself in the destructive pursuit of personal
and sectional advantage.
On the night of the Federal Election last year, I said that
we were determined to a government for all Australians.
The economic policy we are pursuint reflects that determination.
Now is the time for us all to work together to build the kind of
country we all wi-'-t Australia to be.
By recognising our common interests as a community, as a nation,
we can realise Australia's unsurpassed potential and create a
society which our children will be proud of. An Australia which
rewards industry and enterprise, which can alleviate pockets
of disadvantage and poverty, and which offers to all ts
citizens the meaningful opportunity to pursue the things they
value in the ways they desire.