EMBARGOED UNTIL 10.00 P. M. CHECK( AGAINST DELIVERY
SPEECH BY THE PRIME MINISTER
FINANCIAL REVIEW DINNER MELBOURNE 22 AUGUST 1984
The Labor Government was elected seventeen months ago to
arrest the decline in the Australian economy, symbolised by
the huge loss of employment sind the explosion in
unemployment in the period before we took office, and by
entrenched high inflation.
The Labor Government was elected to rever'se the trend
towards greater inequality in Australian society after seven
years of neglect of equity under conservative policies.
And the Labor Government was elected to bring Australians
together : to end the confrontation and division that had
marred Australian economic life, perhaps most notably in
industrial relations and relationc between the Commonwealth
and the States.
The Government has always seen these three great
responsibilities as being closely inter-. related. Sustained
non-inflationary growth is not possible without a greater
sense of common purpose than Australia ! knew through the
1970' s and early 1980' s prior-to our accession to
Government. And it is not possible to build that greater
sense of national purpose around the restoration of growth
unless thtire is widespread agreemenL that: the benefits of
growth, and the inevitable costs, are being shared
equitably. So from the beginning of our Government, wa saw our
commitments to the establishment of sustained
non-inflationary growth, to bringing Australians-togethar
and to the building of a more equitable Australia, as parts
of the same great program.
And from the beginning it has been an integrated program.
We have had a clear plan, we have been steadily and
consistently implementing it, and it is producing the
results that we promised.
The despair of the Australian people in the Final years of
conservative rule was greatly exacerbated by the lack of any
clear strategy for economic rlcovery.
All Australians now have hope that there is a way out of our
national failures, through ouF program. This in itself has
been one reason why the economy has responded more strongly
even, for example, than any group at the Summit last April
had expected.
Each year's Budget provides an occasion to assess progress
on each of our great responsibilities, and on our great
program. It also provides an occasion to unveil new
policies, and to assess our prospects for the period ahead.
As I explained to last year's Australian financial Review
Dinner at Budget time on that occasion in Sydney we do
not believe that all of the condiTions for sustained
non-inflationary growth, for a more equitable Australia, or
for e united Australia, can be built in a single Budget, or
a single year.
Each year's Budget represents only one milestone on a long
journey. It is neither desirable nor possible suddenly in a single
Budget to remove all the impediments to progress, and to
right all the wrongs, in the Australian economy and society.
We are committed to gradual progress, without plecing
excessively large and sudden burdens of adjustment on any
particular groups of Australians.
But we are committed to certain and steady progress.
Certain and steady progress that in seventeen months has
already lifted the pessimism and despair that weighed
Australia down before we took office.
Certain and steady progress that will deliver more growth,
more jobs and less inflation in the year ahead than
Australia has known for nany years.
And certain and steady reform that each year makes our
society fairer, and each year strengthens our capacity to
grow strongly for the long period that is necessary to
banish unemployment.
Last year I asserted that the Government had found the right
balance between the provision of fiscal stimulus to promote
recovery, and the curtailment of the prospective deficit
that we had inherited so as to avoid destabilising pressures
in financial markets.
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The results speak for themselves interest rates down a
percentage point for most home loans and more for other
activities; non-farm growth year-on-year over 4 per cent,
more than twice the budget forecas, of 2 per cent; 232,000
new jobs, more in a single year than ever before in
Australian history, and in stark cuntrast to the quarter
million increase in unemployment and 187,000 loss of jobs in
the last year of conservative rule; and inflation cut almost
by half to the lowest rates for a decade.
It was a matter of particular pride to me that in our first
year. we were able to achieve substantial reductions in the
huge prospective deficit which we inherited in the event,
much larger reductions than estimated in the Budget, to
under $ 8 billion while putting into place substantial
reforms in job creation, housing, social " security and
welfare, including Medicare. These and some changes in
taxation arrangements without substantial general tax
increases represented a significant step towards a fairer
and more efficient Australian fiscal system.
There was good progress, too, in building a more united
Australia, as reflected in the proportion of days lost in
industrial disputes over the past year having been the
lowest since monthly industrial disputes figures were first
published in 1970, and in the agreement and co-operation
between the Commonwealth and the States on a fiscal program
for economic r3covery.
Last night's Budget represents another milestone on the path
to sustained non-inflationary growth within a fairer and
more united Australia.
Whereas our first Budget had as its primary aim the turning
of the economy from decline to expansion, this year we must
consolidate a second year of strong growth in output and
employment with declining inflation.
Like last year's, this Budget takes further steps to reform
the fiscal system in a way which assists Australians in
need. And like last year and as with all our future Budgets, and
as with the many economic policy decisions which must be
taken between Budgets, we have aimed to implement reforms in
ways which improve the prospects for long-term economic
growth. To consolidate a second year of economic recovery, the
central plank of this Budget has been to support the Accord,
thereby enabling the spectacular gains in reducing
inflation, and in restoring growth and expanding employment
through improving business profitability, to be extended.
There are now few who doubt that the Accord, and in
particular the commitment to centralised wage fixation, has
played a crucial role in the progress which has been made in
reducing inflation and improving business profitability over
the past year.
Real unit labour costs have fallen dramatically and the
profit share is now higher than at any time for a decade.
This has come about because real labour costs have remained
flat while average labour productivity has risen strongly.
The Accord will enable still further improvements since
there will be a sustained pause in wages growth between
April 1984 and April 1985.
That pause could not be achieved without the commitment to
wage indexation, without the recognition -by virtually the
entire trade union movement that sectional claims must be
suppressed and without the acknowledgement and acceptance of
the concept of the " social wage".
The Budget contains tax cuts amounting to $ 1.3 billion in
1984-85 and $ 2.1 billion in a full year.
The tax cuts which have been made in the Budget will, we
believe, strongly reinforce the commitment of the trade
union movement to the Accord.
For the majority of workers, the tax cut will increase take
home pay by roughly the same amount as an $ 11 per week pay
increase. There has been a great deal of ignorant comment about the
strong forecast growth in revenues this financial year.
Gross PAYE collections, which are the tax people are paying
fortnight after fortnight, will increase by 10.7 per cent.
This happens to be exactly the sum you get by compounding
the average weekly earnings increase this year ( seven and a
quarter per cent) by the employment increase ( three and a
quarter per cent).
On average, the rate of tax paid out of income has not
increased at all.
If there had been no tax cut, the increase in gross PAYE
would have been 15.8 per cent.
The tax cut was large enough to keep the growth in tax for
the year as a whole down to the growth in incomes, even
though the tax cut is only to apply from November.
After November, the share of tax in income on average will
be significantly lower than last year.
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Of course, tax receipts would grow more slowly this year if
there was less employment growth.
If employment were expected to fall by 3 per cent in
1984-85, as it did over the course uf Liberal National
Party's last year in office, ihstead of rising by 34 per
cent as it. will, then, with our tax cut, PAYE receipts would
grow only by slightly more than 4 per cent, instead of 10.7
per cent.
Obviously that would be a disastrous outcome for Australia.
Some of you may wonder why, if gross PAYE rises only by 10.7
per cent, total income tax receipts rise by 22.6 per cent?
The main reason why total income tax collections are
increasing so rapidly is that the economy is performing so
well. There is a huge increase $ 2 billion or 45 per cent in
provisional tax collections. This is because the incomes of
large numbers of small business people including farmers
and many others have grown extraordinarily rapidly. For
these taxpayers, as for employees, tax rates from November
decline by more than the proportion that would be required
to implement tax indexation up to relatively high incomes.
The huge growth in incomes and income taxes reflects only
increased prosperity, including a substantial contribution
from the success of our policy.
A similar point can be made about the large increase in
dompany income tax, by $ 1 billion, or 23 per cent.
Reflecting its first full year of operation the Medicare
levy also contributes $ 800 million to the estimated growth
in income taxes. The levy, as you know, simply finances the
provision of a service that was formerly paid for direc. tly
by taxpayers.
Reductions in income tax rebates contribute $ 400 million to
the growth in income tax receipts. These largely reflect
the replacement of Government taxation concessions by direct
Government expenditures of a related kind, as announced in
last year's May Statement the replacement of medical fund
rebates by direct subsidies to Medicare; and the replacement
of inequitable housing interest rebates by the First Home
Owners' Scheme.
The reality is that from November, there will be a
substantial reduction in the proportion of income paid as
tax, much more than would be required by a simple indexing
of the tax scales. And the distribution of the cuts
strongly favours low and middle income earners.
While the tax cuts are of greatest importance, a number of
expenditure commitments also assist in maintaining support
for the Accord throuqh improvements in the social wage
particularly the increased commitn; mnts to Medicare, social
security, education, occupational health and safety, job
creation and training.
The continued success of the Accord is the main reason why
this is the only Government in recent history which has been
able to enter the second year of a strong economic upturn
without the spectre of destructive disputes over income
shares clouding prospects for the future.
Only this Government has been able to face the second year
of a strong economic upturn with firm grounds for believing
that recovery will not disappear quickly In a mire of
inflation; and that growth in output and employment can be
sustained. The gains that we make over the next year in reducing labour
costs, containing inflation and improving our
competitiveness should provide a substantial further boost
to employment and enable us to make further inroads into the
level of unemployment, which, despite our good progress,
remains unacceptably high.
Unemployment is the single greatest cause of poverty in this
country. This is the most compelling reason why we place such great
store in establishing lasting economic growth.
. Through addressing the issue of unemployment by promoting
growth of economic output and employment, we are making the
most effective possible contribution to the alleviation of
poverty. But in this Budget we are also doing a great deal
directly to improve the position of the unemployed and other
disadvantaged groups in the community.
Before the Budget, there was much ill-informed speculation
that the needs and claims of the disadvantaged might not be
adequately addressed. This no doubt set the scene for some
post-Budget criticisims that we were doing tuo little in the
social security area.
The reality is that the Budget contains substantial
initiatives to improve levels of assistance for pensioners
and social security beneficiaries over and above the normal
indexation arrangements, and over and above the substantial
steps taken in the May Statement and the Budget last year.
This year's package of social security increases, in excess
of normal indexation, will cost $ 430 million this year and
$ 683 million in a full year.
Thus the standard rate of pensions and benefits will be
increased by $ 2.50 a week above indexation, and the married
rate by $ 2.10 for each partner.
In addition, there are increased payments for child support
and education allowances available to low income families,
and additional rent assistance for needy pensioners. More
generally, over the past two years the Commonwealth has very
substantially increased its support for public housing and
the alleviation of housing related poverty. In this Budget,
payments under the Commonwealth-State Housing Agreement will
total $ 623m compared to $ 406m in the last year of the
previous government.
It is fair, I think, to contrast the improvements in social
welfare provision during our brief period in office with the
neglect and decline in the seven years of our predecessors.
There were no general increases in pensions along the lines
of last night's measures in the seven long years of
conservative rule even in May, 1976, when indexation
adjustments were low on account of the effect of Medibank
on the C. P. I. in late 1975.
The contrast is made simply with two examples.
The single unemployment benefit fell by 19 per cent in real
terms between December 1975 and March 1983. With the
measures announced last night, it -ill have increased by 13
per cent between March 1983 and June 1985.
Similarly, the total value of pension, family allowances and
related benefits for a sole parent with two children in
' rented accommodation Fell by 2 per cent in real terms
between December 1975 and March 1983. It increased by 13
per cent in real terms between March 1983 and December 1984.
While we expect the recovery in activity and future growth
of the economy to provide a substantial boost to emplo. yment,
there remains a continuing need for labour market programs
both to provide additional job opportunities and to ensure
that Australian workers are equipped with the experience and
skills to match the opportunities which emerge.
The Community Employment Program, introduced last year, is
providing job opportunities and hence valuable work
experience for the most disadvantaged jobseekers. Funds
provided for this Program will total $ 410 million in
1984/ 85, an increase of 44 per cent.
Total expenditure on labour market and related employment
and training programs will be $ 1.1 billion this year, double
the provision for 1982-83.
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The main programs other than the Community Employment
Program such as the Special Youth Employment Training
Program, the Community Youth ^ upport Scheme and
apprenticeship training programs are currntly under
review by the Kirby Committee which was set up to assess how
well they are meeting the Gove'rnment's objectives. That
Committee has been asked to report by the end of this year.
Our training programs are complemented by our initiatives in
the field of education. We have recently announced an
8-year funding program involving substantial increases in
Commonwealth assistance for schools, and made provision for
an additional 30,000 places at universities, colleges and
TAFEs by 1987.
We regard the recussitation of our education institutions as
a sound and vital investment in our future, complementing
our policies to restructure Australia's industrial base.
Greater funding, and rising student participation in
education is not enough. My Government is most concerned to
improve the relevance of the education process to employment
opportunities and the needs of industry. Accordingly, with
those objectives in mind, we have initiated major reviews of
the quality of education at all levels. We look to industry
to make an appropriate contribution to these reviews.
A skilled workforce, the more effirient use of our resources
and improved competitiveness will enlarge the prospects for
our achieving sustained economic growth in the medium and
long-term.
Commonwealth contributions to the plans which we have
developed to strengthen the competitiveness of the steel and
motor vehicle industries are reflected in this year's Budget
appropriations. Another constructive step in the revitalisation of industry
which is funded in this Budget is the establishment of an
advisory service on computer assistance in manufacturing
industry. In addition, the increased assistance which we are providing
for industrial research and development will aid new
products and industries. The substantially augmented trade
promotion program ( up to $ 3.4 million or 36% in 1984/ 85)
will assist Australian industries to make the most of the
opportunities for developing and expanding exports,
especially in Northeast and Southeast Asia, thus supporting
our efforts to link the Australian economy productively to
the high growth that characterises economic life in our
Western Pacific region.
S. .6.
We have been concerned to promote efficiency also in a
number of initiatives which we have taken in the financial
sector. We have lifted a number of anti-competitive
restrictions on the operations of banks, and are cu. rently
considering the terms on which new entrants should be
permitted into the . domestic banking industry.
We intend to increase competition within the financial
sector and thus to stimulate improvements in the range of
financial services available to businesses and to all
Australians. Deregulation and any entry of new banking institutions
could, however, pose a problem of interpretation for
monetary policy in the next year or so.
The Treasurer indicated last night that, consistent with the
forecast movements of real economic activity, prices and
velocity, the M3 growth projection this year is 8-10 per
cent. We have an impressive record in monetary mangement.
Last year monetary growth was contained within the
projection range which, in line with our announced policy
had been revised to reflect the stronger performance of the
real economy which had btecome evident without generating
inflationary pressures.
Our predecessors did not hold monetary growth within their
projections in any of their last five years in. office.
' Our success was assisted by our decision to float the $ A and
remove virtually all exchange controls.
This year's M3 projection has been set, responsibly, to
allow the expected strong growth in real activity while
accommodating only minimal cost and price increases..-,
As was the case last year, the M3 projection will be
reviewed over time in the light of emerging economic and
financial conditions, including the impact which
deregulation may have on the growth of M3.
The point, as you will all be aware, is that banks now have
the capacity to compete for ranges of deposits and new types
of business which previously were not open to them.
If banks compete successfully for this business, bank
deposits will grow faster than usual. While the share of
banks may be higher, aggregate financing and thus
underlying financial conditions would not be fundamentally
changed. . f v o
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Obviously it would be inconsistent with the requirements of
monetary policy to respond to a faster growth of M3 which
could emerge during the transitional stage from this source
by tightening policy.
However, it cannot be predicted in advance just how much of
an impact -this kind of structural change will have on M3
growth in the year ahead.
To allow a proper assessment of the stance of policy,
therefore, closer attention will be paid than in the past to
the growth of the broader monetary aggregates, which will be
affected less by structural change.
I repeat that the thrust of monetary policy in the year
ahead, as over the past year, will be clearly to support
non-inflationary growth.
The task of monetary policy in the year ahead has been made
easier by the reduction in the Budget deficit together
with the improved inflation outlook and other factors, this
should create a favourable environnent for the further
easing of interest rates.
After striking the right balance last year between fiscal
stimulus to recovery, and the avoidance of excessive
pressures in financial markets, this year we are budgeting
for a further cut of $ 1.2 billion iI the deficit, to $ 6.75
billion. Again we have struck the right balance cutting
the deficit while still providing a substantial tax cut; and
funding Medicare and significant inprovements in social
security and education in a responsbile fashion.
The reduction in the deficit, coupled with the commitments
made by the States at the Loan Council to hold the borrowing
of their statutory authorities to about the same money level
as in 1983-84, implies a substantial reduction in the total
public sector borrowing requirement in real terms, in-the
order of 1 per cent of GDP.
Most of this will arise out of the actions which the
Commonwealth has taken to reduce our own Budget deficit.
In the context of the sharp improvement in the internal
funds position of the corporate sector and the winding back
of inflation and inflationary expectatons which our policies
have produced, this should permit the downward pressure on
interest rates to be maintained.
A reduction in interest rates will, in turn, provide a firm
underpinning to the nascent revival in business investment
which has emerged over the past 6 months.
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The Government has made very clear its view that private
sector investment is vital if economic growth is to be
sustained and Australian living standards are to be im3roved
in the future.
We have no illusions on this m'atter.
Over the past year, we have achieved very high rates of
growth by any standard.
Of course, we acknowledge the presence of several temporary
or cyclical factors the pick up in the rural sector after
the drought; the reinvigoration of the housing sector,
assisted by policies such as the First Home Owners' Scheme;
a temporary fillip from the public sector; and the stocks
cycle. In the longer term we know that business investment must
make a central contribution to growth.
With this in mind, we have introduced several measures in
this year's Budget specifically to assist investment and to
ensure that the current momentum continues.
We have decided that plant ordered prior to 1. July 1985 will
qualify for the investment allowance if it is first used or
installed ready for use or put into use before 1 July 1987.
This extends the present time limit by twelve months and
will be particularly beneficial where large items of
equipment or long lead times are involved.
In taking this decision to extend the current concession, we
had very much in mind the advice given to us by the
Australian Manufacturing Industry Council favouring the
retention of the investment allowance.
The Manufacturing Industry Council recommended the extension
of the investment allowance for three years, pending r. eview
of deprecietion and other provisions of the corporate income
tax. We judged it best to allow the allowance to expire on
the timetable previously legislated by the Fraser
Government, with an extended period for installation of
plant. We believe that further community analysis and discussion is
required before we are in a position finally to settle our
view on appropriate .' ong-term corporate income taxation
arrangements. In the meantime we have decided to introduce three features
into the corporate income tax, which we are confident are
consistent with any long-term reforms that we might
contemplate.
12.
We have increased the rate of depreciation on 1
non-residential income producing buildings from 212 to 4 per
c en t. This concession will assist cash flow, especially as
time passes, and ii thu process reduce a disincentive to
these furms of business invesitment. It will also provide a
welcome early fillip to the n-on-residential construction
industry, which has only recently begun t~ o feel the impact
of the broader recovery in economic activity.
We have also decided that group taxation provisions should
be introduced with effect from the 1984/ 115 income year.
Foll-owing the recommendations of both the Asprey and
Campbell Committees, group treatment will allow losses made
by one company to be offset for income tax purposes against
profits made by other companies in the group with 100 per
cent common ownership.
This measure will especially impr~ ve the cash position of
groups which undertake investments requiring long periods
before becoming profitable. Perhaps even more importantly,
it will remove an incentive to distortion of corporate
structures that is inherent in the curzrent arrangements.
Finally, we have decided to allow money spent on general
mining exploration to be deductible against income from any
source. I am confident that the combined effect of our policies will
be to consolidate the expansion of output and employment in
an environment of co-operative industrial relatCions and
moderating inflation.
Many of you here tonight will be as much concerned about
whether the Government is willing and able to reduce the
Budget deficit in the course of further growith in private
investment in future years, as you are with this year's
deficit. This is a valid concern, and one that the Government takes
s er ioau sIy
We will continue to reduce the deficit in the course ofl
economic recovery.
We believe that this is consistent with continued
implementation of reforms and new programs which strengthen
the Australian economy and society, and improve our
provision for Australians in need.
It is consistent with this continued program of reform
because we are prepared to contain and reduce expenditure on
low priority programs. S. s-l.
1 3.
In this context, the real growth in outlays of 6.1 per cent
in this year's Budget represents much mor3 substantial
overall restraint than is imm . diately apparent.
If we exclude the once-for-all increases associated with the
Medicare reforms, this year's real growth in outlays is
about 4 per cent compared with 6.7 per cent in 1983-84 and
6.3 per cent in 1982-83.
This 4 per cent itself is ir. flated by two considerations
which are important this year but which will be much less
significant in future.
The domestic reductions in expectations about inflation as
measured by the GDP deflator by about two and a half
percentage points between February this y'ar when the
forward estimates were prepared and the completion of work
on the Budget, meant that a number of commitments entered in
money terms early in the year were larger than would be
necessary in more normal circumstances. Similarly, debt
servicing commitments are set in the short term in nominal
terms, and thus real terms equivalents are raised for a
while by sudden and large reductions in inflation.
Further, the strong growth in outlays through 1982-83 and
1983-84 would have carried through into significant growth
in real outlays in 1984-85, even if there were no growth in
expenditures from the level of Junc 1984.
Thus it will be clear that a very substantial degree of
expenditure restraint is reflected in this year's
appropriations. Following the experience of two Budgets, I am firmly of the
view that we must review our traditional procedures of
Budget formation with a view to utilising fully the
opportunities for financing new and expanded programs while
continuing substantially to reduce the Budget deficit..
When Budget decisions are taken on the eve of or even after
the commencement of a new financial year, a Government's
options for securing major savings without disruption and
waste are severely truncated. In future Budgets, we must
seek to extend the lead times in preparation of the
expenditure side of the Budget, and in implementing
expenditure decisions, and to improve on the traditional
practice which we have inherited.
We are working towards the continuation this year and in
future years, of the strong performance that began a year
ago. o t o
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Non-farm GDP is forecast to rise by 5 per cent this year a
second year of extremely strong expansion by the standards
of the past decade, and in line with our long-term
requirements. With employment forecast to expand b' 2, per
cent, by next June, over 400,000 jobs will have been created
since the Summit comfortably within reach of our election
promise, widely thought to be unrealistically ambitous at
the time, to create half a million new jobs over three
years. Consumer prices are expected to rise by only 5 per cent
through the current financial year less than the expected
average of O. E. C. D. countries without any Medicare effect,
after being twice the O. E. C. D. average when we took office.
None of these favourable outcomes is bein'g purchased at the
expense of our equity or long-term growth objectives. The
opposite is the case, since our min initiatives to promote
each of our three broad objectives are mutually reinforcing.
The Budget takes a substantial further step towards
providing ddequately for Australians in need.
And through the reforms in education, industry policy,
financial deregulation and business taxation in particular,
it establishes a firmer base for long-term growth.
The problems of Australia's economy and society that we were
elected to resolve cannot be overcome with one or two good
Budgets and one or two years of good economic performance.
But they can be overcome if every Budget and every year
makes steady and certain progress.
There was good progress last year. There will be good
progress this year.
And I look forward to building with the Australian people,
over many years, the fair society within which we can
realise the great ambitions which we share for Australia.
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