SPEECH BY THE PRIME MINISTER, HON. R. J. L. HAWKE, AC, MP.,
FINANCIAL REVIEW DINNER 24 AUGUST 1983 SYDNEY
Last night's Budget brings together our first five
months' work on macro-economnic policy. It incorporatzes many
of the policies that the Labor Party had developed in
Opposition, and upon which we were elected in March. It
necessarily reflects our adaptation t o the markedly
different economic, and especially fiscal environment in
which we found ourselves after the election.
We were elected to arrest the decline in the
Australian economy, symbolised by the huge loss of
employment, the explosion of unemployment and the entrenched
inflation in the period leading up to our election. We were
elected to reverse the trends towards greater inequality in
Australian society that seven years of conservative policies
had greatly exacerbated. And we were elected to bring
Australians together: to end the confrontation and division
that had marred Australian economic life, perhaps most
notably in industrial relations and relations with the
States. These three areas of commitment are closely
inter-related. Sustained economic recovery Sustained
non-inflationary growth will not be possible without a
greater sense of common purpose than Australia has known in
recent years. And it will not be possibl. e to build that
greater sense of national purpzise around the restoration of
growth unless the benefits of growth, and the inevitable
costs, are shared equitably.
So our commitments to the restoration of
non-inflationary growth, to bringing Australians together,
and to the building of a more equitable Australia are parts
of the same great program. The links between these
commitments were an important focus of the National Economic
Summit Conference. It is clear from the Budget that we have made a
strong start on that program. The Budget embodies decisions
announced in the May Statement and the Premiers' Conference,
together with decisions in related areas, especially
monetary and wages policy.
The task facing us after our election was daunting,
especially after we learnt on March 6 that the prospective
deficit for 1983-84 was several billion doll. ars greater than
the Australian community, and the Australian Labor Party,
had been led to believe.
We were committed to introducing a range of new
programs in the interests of national economic recovery
and equity. But at the same time we had to reduce the
prospective deficit, so as to avoid exessive strain on
financial markets in the process of recovery.
My Government formed the view that a deficit around
billion would provide substantial direct stimulus to
economic activity, while avoiding excessive pressures on
financial markets. In the event, we were able to come in
slightly below that figure.
Estimates of the prospective Budget deficit if the
policies of the previous government had been left intact
have varied through the year, in the light of changing
economic conditions and prospects, and of additional
information on the full-year costs of new spending proposals
introduced in the last months of Liberal National Party
government. Revised estimates of the costs of Fraser programs
in 1983-84 added substantially to the prospective deficit,
by over $ 800 million from the March figures. In the other
direction, a better outlook for economic growth in 1983-84,
itself partly attributable to greater confidence in the
economy under the policies of my Government, lowered the
prospective deficit somewhat.
The final official figuring indicated that, even
with the better growth prospects under our policies, we
requ-ired net reductions of over six hundred million dollars
through discretionary changes to revenues and outlays, to
achieve the final deficit of $ 8.4 billion.
You now all have a reasonable idea of how we got
there. It is a matter of considerable pride to me that we
have achieved our goal of restraining the deficit to under
billion while putting into place a number of our most
important programs, in job creation, housing, social
security and welfare, including Medicare; and without major
general tax measures.
We have in the May Statement and the Budget:
directly-assisted employment through the allocation
of over $ 300 million on job creation schemes for
the long-term unemployed and by expanding
Government capital expenditure both directly via
Commonwealth spending and through the States;
concentrated additiona. gross social welfare
payments totalling several hundred million on those
most severely affected by recession, notably single
unemployed and pensioners with children;
introduced a fairer method of financing the health
system based on ability to pay;
reformed the assistance provided to home buyers
both to improve equity and stimulate higher
activity; increased education allowances and funding, with a
more equitable distribution of resources according
to need;
abolished or reduced some of the more . blatant
hand-outs and taxation inequities that were
introduced or condoned by our predecessors, and
taken action that was long overdue on
superannuation taxation, asset testing of pensions,
restricting eligibility for the over 70' s pension
to those in most need, tightening tax avoidance
legislation, strengthening section 26( a) so as to
improve our ability to tax captial gains, and
reducing a number of other sectional tax or
spending concessions.
We were able to implement new high priority
programs within our deficit target and without major general
tax increases, mainly because we effected reductions of one
and a half billion dollars inl expenditure and tax
concessions on programs that we inherited from, the previous
government. To put this achievement into perspective, the
so-called " Razor Gang" of the previous government, with
great fanfare over a much longer period of time, achieved'
lasting reductions in outlays totalling only a few hundred
million dollars. Because of our reductions in outlays in programs
that we inherited from the previous government, we were able
to implement the substantial improvements in public support
for some of the most needy in our society, at a-net cost of
little more than $ 100 million in the Social Security area.
Similarly, we were able to implement the first home-owners
scheme, which will greatly enhance the prospects of young
Australians owning their own homes at the same time as it
stimulates activity in the building industry, with net
reductions in private sector housing's demands on the
budget. These decisions clearly reflect the commitment of
this Government to making Australia a more equitable
society. We have tried to do this gradually, without
placing excessively large and sudden burdens of adjustment
on any Australians, while placing the overall burdenL of
restraint on Australians who are in a relatively good
position to bear it. Ta king the May Statement and Budyet
measures together, I believe that we have succeeded In this
a im.
More generally, we believe that lasting reform of
the Australian fiscal system must be a gradual process.
This is consistent with our approach to wider economic
management. We see no point in producing a flash of
recovery, to be followed soon by a return to stagnation.
Only steady growth over long periods can provIde the base
for major improvements in the outlook for employment. Only
steady growth over long periods can provide the base from
which Australia can again provide worthwhile opportunities
and reasonable living standards for all its people.
So this year, and in this Budget, we have sought to
establish the foundations for future growth. We have sought
to avoid an atmosphere of unpredictability and instability.
The Budget has therefore been designed to ensure an
adequate, but not excessive, stimulus to activity. The May
statement and the Budget measures together will help to rein
in the Budget deficit in future years so that rising private
sector activity wfll not be faced with excessive competition
from the Government sector in financial markets as recovery
proceeds in the years ahead.
The Budget increases Government outlays by 15.8 per
cent, only a fLew per cent below the increase of 18.5 per
cent in 1982-83. We believe such growth In outlays is
appropriate in a situation of low demand and capacity
utilisation. The rate of increase in outlays will clearly
need to be reduced considerably as the recovery gathers
strength.
We were conscious of the need to avoid large
increases in taxation as part of our aim to establish a
stable environment in which business will invest and create
job opportunities. The taxation rneasuret we have adopted
have therefore concentrated on combatting tax evasion and
avoidance, closing tax loopholes, correcting some anomalies
in the coverage of both excise duties and sales taxes, and
maintaining the real level of excise rates in future years
without the destablising jumps in rates that have occurred
in the past. An improved climate of industrial relations
assisted us in obtaining an undertaking from oil refining
companies that they would increase their use of
Australian-produced crude. This undertaking has allowed us
to avoid the introduction of a crude petroleum import duty
in the immediate future.
While preparing the Budget, we discussed a number
of changes in the taxation system that would render it
economically more efficient, and more equitable as well. We
believe that measures we have introduced on the taxation of
superannuation lump sums, tax avoidance, section 26( a),
sales tax and excise anomnalies, indexation of excise rates,
and removal of some anomalous tax expenditures all have this
effect. Obviously more could be done to widen the revenue
base and improve taxation efficiency and equity. We will
continue to review carefully all of the main alternatives
and we will continue to give considerable weight to
stability and continuity in policy.
But when reform is clearly necessary, and when it
can be effected wthout imposing costs of disruption which
exceed the benefits, we will not shirk from the necessary
decisions. Our record already demonstrates our willingness
to introduce unpopular measures where we consider them~ to be
necessary. Hard choices and decisions will continue to be
needed even as Australia recovers from the recent recession.
There is no easy way to remove distortions of the kind that
have dragged down Australian society and the Australian
economy in recent years.
Our own willingness to face the necessary
decisions contrasts with the approach of the Liberal and
National parties. Liberal and National Party policies would
have led to a billion deficit on the information
provided to us on March 5. Opposition leaders have called
for a deficit of around $ 7.0 billion or even lower In the
current financial year. And yet at every step the Liberal
and National Parties have opposed the hard decisions that
were necessary to reduce the deficit to $ 8.4 billion.
They say they would have reduced the deficit by
another couple of billion dollars. If they had been in
government and had achieved this result, we would not be
looking forward to recovery in the year ahead.
But more fundamentally, they would not do what they
say they would do. On Monday in Canberra, as Andrew Peacock
stepped from the camel with unerring accuracy, he promised
100 per cent Commonwealth funding for the Alice Springs to
Darwin railway, prior to the results of an independent
economic evaluation of the project. The Opposition parties
defeated our tax avoidance and evasion recoupment
legislation in the Senate, greatly exacerbating our
difficulties in preparing this Budget. They ha-ve opposed
almost every expenditure cut and new revenue measure
although the Shadow Treasurer, to give him his due, did hint
to the Parliament that income tax increases would be one
avenue of reducing the deficit.
The Opposition parties have risen to the peaks of
hypocrisy with yesterday's movement in the Senate towards
making the new withholding taxation system unworkable. This
is their own system. The fundamental features of the scheme
are as laid out Last year by the Liberal Treasurer, john.
Howard, except for defining the industry coverage and for
three changes which make the system less onerous: the
reduction of the basic withholding rate from 25 per cent to
per cent; an increase in the minimum sc-ale of building
project that falls within the system from $ 3,000 to $ 10,000;
and deferral of the commencement date from 1 July to 1
September.
11.
No new system of collecting large amounts of
revenue can be introduced without soine administrative
problems and without some aa~ xiety in the community. Mr
Howard's withholding tax system is no exeeption. But now a
year after they announced the new system, and several months
after the legislation was passed by the Parliament with
Liberal support in the Senate, the Liberal. s have moved to
disallow the regulations that are necessary to make it work.
This is Liberal National Party hypocrisy at its
most blatant. This is the same Liber-al Party hypocrisy that
announced monetary targets and then over-ran th. em five years
in a row. This is the same Liberal Party hypocrisy that now
criticizes as excessively large, award wage increases a
little above 4 per cent this year and 5 or 6 per cent over
the course of next year, and average earnings increases of7
per cent in the current financial year, after increases of
around 13 or 14 per cent in each of the three preceeding
years under Liberal stewardship. This is the Liberal Party
hypocrisy that concealed from the Australian people through
a crucial election campaign that Australia, under unchanged
Liberal policies, was facing a prospective Budget deficit of
over $ 9 billion in 1983-84. This is the Liberal Party whose
Treasurer talked of the figuring being rubbery a few days
after a Budget.
12.
one crucial difference between my Government's
approach to economic management, and that of our
predecessor, is that we mean what we say.
This integrity of approach is as crucial in other
areas of economic managem~ ent as it is in fiscal policy.
While fiscal policy is obviously of central
importance in establishing a base for economic recov; ery, it
can be effective only within1 appropriate monetary and wages
policies. In these areas, we have gone a long way since
March in implementing policies which will support recovery
while holding inflation on a downward path.
As we have said on many occasions, we will allow
sufficient money growth to finance the likely and desirable
rate of growth in nominal gross domestic product.
The " fight inflation first" strategy of our
predecessors implied the tightest possible monetary policy.
In practice, monetary policy over the past seven years was
characterised more by inconsistency, by the setting of
unrealistic targets, and by failure to achieve them.
With our policies supported by the Prices and
Incomes Accord, our approach is different. We will
implem-tent consistent, firm policies that accommodate stron~ g
growth, but not inflation.
This year the choice of the target range for money
supply growth that corresponds to this principle is
complicated by two unusual factors -both associated with
the severity of the recent, decline in the economy and the
speed of the turnaround which we expect this year.
The first is the expected change in the velocity of
circulation of money that is the relationship between
monetary growth and nominal GDP growth.
During the r ecent recession, as in past economic
downturns, velocity fell considerably. In more normal
times, velocity tends to increase, more rapidly during a
strong recovery. While It is therefore appropriate to set the M3
projection below the expected growth in n~ ominal GDP, the
size of the appropriate adjustment is a matter for fine
judgement. The second uncertainty revolves around the speed of
the expected pick-up in economic activity during 1983-84.
We are expecting a sharp increase in nominal output
probably of the order of 14 per cent or so through the
course of 1983-84. 13.
14.
But predicting the turning points in economic
activity is notoriously difficult, so that the actual real
growth could differ from our current expectations.
As the Treasurer announced last night, the
Government decided to move the growth in financial
aggregates gradually downward to a degree consistent with M3
growth in the range of 9 t1-o11 per cent over the twelve
months to the June quarter 1984.
But as the Treasurer also indicated, we intend to
review the projection in the course of the year. At the
review, we will ensure that changed circumstances do not
mean that the money growth that we have foreshadowed is
either financing avoidable inflation, or restraining
feasible non-inflationary growth.
Fighting inflation and unemployment at the same
time requires us to adopt a balanced approach to management
of the exchange rate. We will not allow deliberate
over-valuation as an instrument of anti-inflation policies,
and so will avoid one source of damage to the
competitiveness of our export and import-competing
Industries. We should remember that Australia will be affected
by pressures in international financial markets, whatever
happens at home. Australian real interest rates will tend
to rise if United States real interest rates rise. On our
recent visit to the United States, the Treasurer and I had
extensive discussions on monetary developments with Tresury
Secretary, Donald Regan, the Chairman of the Federal
Reserve, Paul Volcker, other senior officials in the United
States, and leading participants in the New York financial
markets. While these left us with a great deal of
confidence in the short-term strength of the United States
recovery, there was also cause for some anxiety that the
continuation of extremely high Budget deficits could lead to
upward pressure on United States interest rates as private
investment expanded in the period ahead.
While we cannot insul. ate ourselves completely from
financial developments abroad, conditioi~ s within our own
financial markets can exacerbate or ameliorate the pressures
coming from overseas. Given the possibility that
international financial markets will exert upward pressure
on Australian interests rates, we will be working to ensure
that developments at home do not compound the threat to the
recovery of private investment.
Although there is wide acceptance that this year's
deficit of $ 8.4 billion is appropriate in the current
financial year, the Commonwealth will need to reduce the
demand it makes on financial markets as private investment
Increases in the process of recovery.
16.
A number of the fiscal measures that we have
introduced in recent months have their main effect in
reducing the Budget deficit not in 1983-84, but in later
years. The process of recovery itself will tend to reduce
future deficits, by raising revenue and reducing
recession-related outlays.
It is not clear at this early stage whether this
cyclical effect, together with the structural effects of the
May Statement and the Budget, will reduce next-year' s
deficit enough to meet our stability objectives without
further discretionary action. This will depend very much on
the course of private investment in the recovery, as well as
on wider developments in financial markets. Decisions in
this area can safely be left until later. But as I told the
Brisbane Chamber of Commerce two weeks ago, it is likely
that further reductions in the structural Budget deficit
will be required for next year.
My colleagues and I had little more than three
months within which to examine critically the expenditure
commitments which we had Inherited from the previous
government, from the time of the Summit to the completion of
work on the expenditure side of the Budget.
17.
This Budget embodies a considerable reordering of
priorities towards the requirements of economic recovery
and, in the welfare area, of the genuirely needy in our
society. We will. go much further in the full year lead ing
up to the next budget and in the many years that this
Government has ahea d of it.
Our expenditure review process will become part of
the normal operations of Government. We will continue to
reallocate expenditure in line with the requirements of
equity and growth as we reduce the structural Budget deficit
in the course of economic recovery.
Our fiscal and monetary policies are underpinned by
the Prices and Incomes Accord. When the Australian economy
was struggling into recovery i~ n the so-called resources boom
in 1981, a wages explosion helped to turn a great
opportunity into a disaster. That tragic episode will not
be repeated. The Budget and the monetary policy announced last
night both support the Prices and incomes Accord. We see
support for a 4.3 per cent increase In award wages, as the
only increase this year, as an investment in wage moderation
in the process of recovery. The efforts this Budget makes
in employment creation, social security, health and other
areas will help us to realise a full return on that
investment. The Government is meeting its commitments under
the Accord, and expects full compliance with the decisions
of the Arbitration Commission.
The Medicare arrangements announced last night will
reduce the increase in~ consumer prices in the first half of
1984 by a few percentage points. The A. C. T. U. acceptad at
the Summit that, within the context of the return to
centralised wage-fixing, this should be fully reflected in a
lower rate of wage Increases through 1984. This will
support the expansion of employment and the sustenance of
recovery as the momentum of economic expansion picks up
through this financial year and into the next._
The fiscal, monetary and wages policies which we
have put into place over the past five months have been
built with widespread community support-from the time of the
Summit. The Budgbt deficit is slightly lower and the wages
estimate slightly higher than in Scenario A at the Summit.
We have heeded the Summit's call to allocate social
security and other outlays more closely towards those in
need. The May Statement and the budget measures together
ask some restraint of Australians who are inl a relatively
good position to bear it, as agreed at the Summit.
The Budget assumes an outlook for growth that is a
little better than envisaged in Scenario A: year on year
growth of a bit above 3.0 per cent compared with 2.7 Per
cent, helped by the breaking of the drought, an im-proved
outlook for private dwelling investment following the
introduction of our new housing policies, and a lift in the
private consumption forecast in the light of improved
consumer confidence since the Summit.
On the other hand, consumer prices are expected to
rise by 7.5 per cent, compared with 6.2 per cent in
Scenario A. Part of the increase in anticipated price
increases is for food, and is the other side of the coin to
the higher expectations about farm growth following the
ending of the drought. Scenario A anticipated indexation of
excise, and other increases in excise announced in the
Budget are estimated to contribute 0.3 per cent to consumer
price increases in the year ahead.
Year-on-year growth of a little over 3 per cent
will prob ably be associated with growth through the year of
about 5 per cent. This is a strong reversal of our recent
experience. I know some commentators expect an ev~ en better
outcome. They may be right; and our monetary policies will
not prevent such an outcome if through the year it seems to
be achievable in a tion-iflationary way.
The employment outlook presented in the Budget
papers, like that on growth, is cautious. Nevertheless an
increase in 1.5 per cent through the year in employment
represents a sharp reversal of the disastrous decline in
employment in the year or so before we took office, as
promised in the election campaign.
We are confident that the economic policy base has
been well prepared for a return to growth and a deceleration
of inflation through the period imnmediatel~ y ahead.
But whether Australian living standards continue to
rise beyond the life of the present Parliament and into the
next, and beyond, depends on our success in allocating ourresources
to their most productive uses. Productive use of
our resources requires acceptance of new ways of doing
things, structural change in our economy, rapidly changing
patterns of foreign trade, and high levels of investment
from home and abroad.
An Australian society that is broadly united on the
great national goals, that is seen by most of its citizens
as a fair society, and which offers its people security of
incomes and employment, wll embrace these changes. But a
divided Australia, a society that is suspicious of its
Government, will cling to what it has.
21.
The measures for revitalisation of the steel
industry based on co--operative endeavours to raise
productivity, for which the 1933-84 Budget provides funds
for the first time, embody tZhese fundamnenta. realities'.
A conservative Australia, an Australia that is
afraid of change, will be condemned to declining living
standards and an increasingly insecure place in a rapidly
changing world.
Long-term growth in our living standards is
feasible only if we maintain open investment arld trade
policies. But these policies will be politically feasible
only if Australians believe that the benefits of prosperity
are being shared equitably.
Only an Australia characterised by rising
employment, falling inflation, and effective social security
arrangements based'on need will provide a congenial
environment for policies directed at long-term growth.
We are confident that Australia has made a good
beginning with the 1983-84 Budget.
I I