-A _ nLL EM4BARGO: 1. 30 p. m.
PRIME MINISTER
FOR PRESS 17 AUGUST, 1978
ADDRESS TO TIHE AUSTRALIAN FINANCIAL REVIEW LUNCHEON, MELBOURNE
I congratulate the Conference on its choice of theme for this
address " The Budget and the Challenge of the Future".
This 1978-79 Budget is addressed to overcoming the great challenges
f acing our nation.
The Commonwealth's annualBudget is the major vehicle whereby
Government gives effect to social and economic policy objectives.
Budgets tend to be judged from at least two different perspectives:
their particular measures, and their economic impact.
As the role of government has increased, scrutiny of a particular
Budget from the first point of view has taken on more importance
for wider and wider sections of the community. Governments
claim and dispense high percentages of our national income
through the annual Budget, and many people are thus interested
in seeing whether the Budget increases spending on this or that
particular objective.
But the Budget is much more than an annual accounting of
government expenditures and receipts. To look at it only in those
terms risks missing the main point of what any Budget,
but particularly this year's Budget, is all about.
Budgets are most importantly the major economic instrument through
which governments can shape the course of economic events.
This is also where this year's Budget has most relevance to the
" Challenge of the Future". To assess the 1978-79 Budget, we need:
an understanding of the fundamental economic problems which our
policies address, an understanding of the " challenge" we have
been facing and continue to face.
In 1975 the Australian people gave my government a mandate and
overwhelmingly re-affirmed it in 1977, to restore the Australian
economy to a prosperous condition, to repair the damage that had
been done in the years prior to our taking office, and to restore
confidence in our economic system.
This faith had been severely undermined by a number of very severe
shocks, shocks that moved us far from the economic stability we
enjoyed in the 1950' s and 1960' s. / 2
2.
Greatly increased uncertainty as a result perhaps more than
anything else of high and accelerating inflation rates has
had very corrosive effects on our economic performance.
The challenge has been to restore a climate in which consumers and
investors can make their decisions with reasonable faith in the
future.
Accordingly, my Government's economic policies have emphasised not
the chase after short-term growth rates, but getting the
fundamentals of the Australian economy right. The challenge
has been to ensure not merely a temporary lift in output, but
lasting growth into the 1980' s and beyond.
The need to take a medium-term view of the policy formation
process was recognised by this government from the outset,
as was the need for substantial staying power in applying those
policies in a steady, resolute way.
Gradually, the inescapable truth that lasting growth will be
achieved only by establishing the essential pre-conditions for
growth, is being increasingly accepted. This is true not merely
of Australia but abroad. This is most encouraging.
The problems which faced the Australian economy at the end of 1975
can be summarised briefly as follows. Wage rates had outrun
prices and productivity, producing excessive wage increases,
as a result of which workers were, and still are, being priced
out of jobs. As a counterpart, there was a significant decline
in corporate profitablity and in the profit share, with disastrous
effect on business investment. There had been a huge, and irresponsi..-1
expansion of government expenditure, the Budget deficit increased
markedly, even though tax rates remained unadjusted for
inflation. Monetary expansion had accelerated apace.
Inflation was at double digit rates and interest rates had risen
sharply. General confidence in the economic system and the
Government's ability to manage it were shattered. Consumers
and businessmen had gone into their shells, private capital
inflow had dropped considerably.
Since taking office we have steadfastly pursued the objectives
re-stated in the 1978-79 Budget speech: " First, both for its
own sake, and as the only real basis for achieving our other
objectives, we are determined that Australia will have still lower
inflation. Secondly, and subject to the constraints still upon the
economy, we shall pursue higher levels of economic activity and
greater job opportunities."
To implement that strategy we first need. toredress the key
economic imbalances to which I have referred. It was inescapable
that until fiscal and monetary stability were restored inflation
could not be brought down, inflationary expectations could not
be curbed and confidence in our ability to overcome our problems
could not be restored at home or abroad.
3.
Accordingly, we have exercised rigorous control over public
expenditure. This has assisted in achieving firm control of the
monetary aggregates. And in turn, has contributed much to the
wind down in inflation,' and increasingly to the reduction in
interest rates, from which all Australians are benefitting.
We have consistently argued for moderation in wage demands, not
only because this is an integral part of the battle with inflation
but because it will allow the imbalance between wages and productivity
to be removed more quickly, and business profitability and
employment opportunities restored.
The process of reviving the economy has necessarily been a slow one.
Though we have a good way to go, there is already abundant
evidence of achievement. This is especially true of inflation
which has fallen much faster than predicted.
In the year to June 1978, the Consumer Price Index rose 7.9 percent
which was a most substantial improvement on the increase of
16.9 percent in the year to June 1975.
Australia lagged well behind the OECD group of countries in
recognising the seriousness of inflation, but during the last
few years, we have had considerably more success than the OECD
group in slowing down the rate of increase in costs and prices.
The most recent OECD report shows that Australia has now brought
its inflation into line with that of the OECD average.
That of course, is a tremendous improvement.
But it never was good enough for Australia to r-ank in the average
class of the international league table. We used to do very much
better than that, which is an important reason why we became a
prosperous enterprising society, attractive to international
investors and able to sell many products in world markets.
What we must now do and what above all the government's policies
are designed to achieve is to drive inflation down further.
We are determined this financial year to have our inflation well
below that of the OECD average.
With respect to the CPI, the Treasury forecast is that by:
" mid 1979, or perhaps before that time" we shall have:
" lan ongoing ( inflation) rate approaching 5 percent per annum".
( Budget paper no. I, page 49).
That could happen more quickly and the rate could be lower, if only
the Arbitration Commission would be more restrained in granting
wage increases. The comparable weighted average rate for the
OECD countries is presently expected to be about 7 percent.
Because this is a Conference looking ahead to the 1980' s, let
me also say that I certainly do not regard the achievement
of a 5 percent inflation rate as a satisfactory long-term objective. 4
4.
Our aims go beyond that. I am confident this is what Australians
want. We will not slacken our policies in the way some other
countries have been tempted to do. It is only too easy to
re-ignite inflationary expectations by taking off the pressure
too early.
My objective is to see Australia join those few countries in the
world the Japans and Germanies -which having brought their inflation
down to 3-4 percent and are reducing it further. In the context
of a highly competitive world trading scenebringing inflation down and
killing off damaging expectations of rising inflation is the only
realistic option we have.
This is the only way we will keep our products competitive,
gain new mar" Ikets for our exports and attract overseas private
capital to A.-s tralia.
This is the route we must take if we are to be ready to gain
a growing share of world trade and investment. World trade
is going to be difficult for a few years yet. Australia does
enjoy some special advantages particularly in the natural resources
available to us. With inflation down below the world average, and
withstability and responsibiiity in government,' we have the
capacity to attract more than our normal share of investment.
If we take our opportunities, we can weather the difficult international
jx-riod ahead rather better than iaoSt. T~ hile -we have been making considerable
headway against inflation, and, as I have said, we will do
better, we should not overlook the fact that, at the same time,
the economy has been recovering.
Let me remind you of some recent indicators. Real private consumptic.
rose at an annual rate of 3 1 percent in the first half of 1978.
Business investment in plant and equipment rose at an annual
rate of 13k percent in real terms, in the first half of 1978.
Surveys indicate continuing very strong performance there in the
period ahead. In money terms, total new capital expenditure rose
in the year to June by 76 percent in rvining, 13 percent in
manufacturing, and 23 percent in other industries. Real final
domestic demand rose by an annual rate of 4k percent in the first
half of 1978.
I mention these factors to indicate that amid the generally
subdued situation, there are strong and increasingly reinforcing
signs of progress.
There are still further important areas in which we have made headway.
Largely as a consequence of our success in lowering inflation,
interest rates have started to come down. The fundamental policy
has been to see that reductions in the yields on the government's
own securities could be sustained, and in that we have been successful.
Unlike the policies which have been adopted in some countries,
we were determained to introduce a Budget that would allow a steady
and continuous fall in interest rates. This will further
benefit home buyers, builders, manufacturing industry, farmers,
consumers and investors.
The burden of taxation has been lightened substantially
even allowing for the increases the government has reluctantly
had to make in this Budget. To illustrate, the cost
to revenue of full personal tax indexation in 1976-17 was
$ 990 million; in 1977-78 the cost of full tax indexation and the
rate scale reform in February was an additional $ 1,370 million.
Net savings fLor taxpayers for this financial year, derived from the
rate scale reform and half tax indexation, after allowance
for the temporary standard rate increase, will amount to a
further $ 700 million.
As a result o-f all our measures, taxpayers will pay over
$ 3 billion less in 1978-79 in personal income tax than if the
tax rates at the time of the last Hayden Budget still applied.
I have gone to some lengths to stress the medium-term perspective
in which the 1978-79 Budget must be viewed, because to view
it in isolation from what the government has been trying to do
for the last two and a half years would be, again, to miss the point.
There are those who have described the 1978-79 budget as the
toughest budget in well over twenty years. Those are the sorts
of catchphrases that sell newspapers, but to see the Budget in
those terms is to miss the point. This Budget takes its place
in the Government's ongoing strategy to remove the fundamental
constraints on our economy. It rejects the illusion that there is
a quick and easy way to economic prosperity.
By firmly controlling government spending and the deficit, this
budget paves the way for continued firm control over the monetary
aggregates, further sustainable reductions in interest rates, and
most importantly, further reductions in inflation.
The Budget has involved difficult and unpopular decisions, but to
have backed away from those decisions would have meant
squandering our hard-won gains in reducing inflation and interest
rates and progressing towards economic recovery.
Let me turn now to some of the main features of the Budget measures,
and the way in which they will contribute to achievement of our
basic objectives. Measures in the Budget constitute an
important step towards winding down the share of our national
product that is pre-empted by the public sector.
The projected increase in Commonwealth outlays 7.7 percentis
the lowest in a decade. All government programmes have been
scrutinised rigidly. Expenditures on social security, for instance,
have shown the lowest rate of increase for about a decade.
Nevertheless, the aged, the handicapped and the poor will not find
this a harsh Budget. Economies have been made by directing
resources in areas of greatest need. And despite the impression
that one might get from press reports, expenditure on key programmes
for the aged, handicapped, and children have recorded
significant increases. .16
Restraint in payments to the States is encouraging them to
review their own programmes critically, in order to ensure that,
like Commonwealth programmes, they represent good value for the
taxpayer's dollar.
A major feature of the Budget is the change in the health financing
arrangements. We were not satisfied by.-the health care arrangements
inherited from the Labor government. They provided no
effective constraints either on cost escalation or usage.
The changes we have made in this area over the past 2k years
have produced significant economies and improvement, but we
reached the v,; iew that those arrangements were capable of further
simplification. The Budget changes provide basic, universal
health cover for all Australian s, particularly directed to the
coverage of major or " catastrophic" disability.
The Government pays 40 percent of scheduled medical fees,
and 100 percent after the patient has paid $ 20 of the bill.
All Australians remain eligible for standard ward accommodation and
treatment in public hospitals, without charge. Pensioners and
socially disadvantaged people are fully protected by bulk billing
arrangements. Under this approach, the individual decides whether to take out
further insurance on top of the basic cover the government provides
to cover the gap in medical costs, intermediate and private ward
hospitalisation. Even after reducing the prospective growth in outlays to less than
one-half that implied by the forward estimates, it was not
possible to produce what we regarded as a responsible budget deficit
for 1978-79 without taxation increases. A significant factor
in this was that the government faced, for the first time in
twenty years, a reduction in revenue in real terms.
Previous governments have avoided this problem by leaving taxation
scales unchanged in times of inflation. They were thus able to
increase the real burden of taxation covertly, and without the
need for openness with the Australian people.
As part of its programme of taxation reform, my government put an
end to this easy option. There can now be no increase in the
taxation burden without a deliberate and public decision.
Under our system of personal tax indexation the merits of which
have been widely recognised both within Australia and abroad
the yield from taxation is no longer boosted by the hidden toll
of inflation. However, developments since the last budget have
meant that we began this financial year with a revenue base
which was lower than we thought it was going to be.
These develo=-~ ents adversely affected taxation receipts in 1977-78,
and resulted in a shortfall compared with Budget estimates of
$ 977 milo. Two factors in particular accounted for
$ 700 million of this: the higher individual tax refunds and
the lower non-PAYE tax receipts. 7
In 1977-78 there was also a decline in the profit share, whereas
a recovery had been expected a year ago. This is affecting revenue
in 1978-79. Had taxation revenue not been affected in these ways,
we would not have needed the temporary tax surcharge a surcharge
which by legislation expires in June 1979.
But the Government was not prepared to mortgage Australia's future
with the." soft option" of an excessively high borrowing requirement.
It believed that adherence to our basic economic strategy called
for a substantial reduction in the budget deficit from last
year's outcome. The measures chosen are more equitable and
responsible than the other alternatives we were faced with.
The temporary increase of 1 cents in the dollar in the standard
rate of income tax is an important element in that reduced deficit.
Against what I have said, you will appreciate that this decision
was not arrived at lightly, and the alternatives would have been
far more inequitable, and would have been detrimental to economic
activity and inflation.
The temporary increase should also be seen in perspective.
Even with that temporary increase, the growth in personal income
t-ax collections in 1978-79 will be significantly less
( 6.7 percent) than in 1977-78 ( 9.7 percent). In both years,
tax collections will have risen more slowly than personal incomes,
reversing the trend towards a rising tax burden which has persisted
so long. It should also be remembered that this year $ 3 billion
less is being collected in personal income tax than if the
Labor Government's tax scales still applied, and that the temporary
increase is being imposed under legislation which specifically
provides for its termination on 1 July 1979.
The immediate move to import parity for crude oil is an important
revenue decision. But it is much more than that, it is a move
that will have benefits for energy conservation and the adoption
of more energy-efficient processes and technologies.
This measure has brought forward, so far as consumers are concerned
the effects of increases in crude oil prices that would have been
inevitable over the next few years. The price to producers will
continue to reflect the arrangements announced last year.
The motorist will face a rise in petrol prices, but he will also
see a large fall in car prices, resulting from the reduction in the
rate of sales tax on passenger motor vehicles over $ 500 for a car
with a retail price of $ 7000.
This reduction from 27k percent to 15 percent will also reiaove
the sales tax advantage enjoyed by commercial motor vehicles,
some of which are directly competitive with passenger motor vehicles.
The Government expects this measure to be of benefit to the
automotive industry a major employer and to the *--any other
industries which supply it with materials and components.
It should facilitate the adjustment to smaller, more efficient cars
as the price of petrol rises. / 8
The revenue increases have enabled the Government to achieve
a smaller deficit which will as markets are already showing
provide essential confidence for private investment,
and which will contribute to monetary growth in the range of
6 to 8 percent during 1978-79, while interest rates keep coming down.
At the same time, our economic policy is that adequate funds
will be available for sustainable recovery in private sector
activity and employment, while continuing to bear down steadily
on inflation and inflationary expectations.
We have taken special steps to make sure that our policy of
monetary resF~ raint does not unduly restrict the supply of finance
to certain key sectors such as housing. The Budget represents
a continuation of our economic policy strategy, in which fiscal
and monetary restraint is the cornerstone of the battle against
inflation and the other major distortions in our economy
presently inhibiting a return to full prosperity.
The speed with which our strategy yields its rewards also depends
on the decisions made by the Arbitration Commission.
Preliminary figures for average weekly earnings for the June quarter
1978 show an increase of 8.4 percent over the figure for the
June quarter of the previous year. This increase exceeded the
CPI increase of 7.9 percent.
Wage restraint is vital in the struggle to defeat inflation.
We regret that the Comrnisison has not paid the heed it might have
to the views which the Government has put to it. We shall
continue to press our views.
We shall not accommodate wage increases by a passive monetary
policy. It should not be assumed that there will always be
finance available to accommodate excessive wage increases.
The community must appreciate that the sharp increases in labour
costs since 1973-74, relative to productivity have~ put many
Australians outof work.
A start has been made to reverse this trend. This progress must
continue if the economy is to recover if we are to be a leading
trading nation, and if employment is to grow.
The overall short run challenge we face is to keep that strategy
in place, so that in time sustained recovery can speed up,
generating expansion of production, incomes and employment.
The 1978-79 Budget meets that challenge. As 1978-79 unfolds
we will, I believe, see the continued benefits of that strategy
and the increasing community confidence in it.
I want to conclude by commenting briefly on the call for stimulus
raised by some commentators. When people talk of stimulus they
usually have in mind increased government spending on government
services, transfer payments and other programmes. We have firmly
rejected that course for a stimulus, of this kind would be false and
short-lived. / 9
Our view is that the only way in which the community as a whole
can be given a lasting stimulus is through lower inflation
and lower interest rates, for it is in this way that we can encourage
more home purchases, more business development and investment,
which in turn will lead to strong and sustained growth.
It is when a government adopts policies which bring about lower
inflation and lower interest rates that domestic and overseas
investors are encouraged. These investors know that Australia is
one of those countries which is moving forward from its own inner
strength, and not from the kind of stimulus attempted by a
government which could not stand the pace.