I PRIME MINISTER
CHECK AGAINST DELIVERY EMBARGOED UNTIL DELIVERY
SPEECH BY THE PRIME MINISTER
N. S. W. BRANCH OF THE ECONOMIC SOCIETY
SYDNEY 30 JULY 1985
Ladies and Gentlemen,
I understand that today you have been hearing various
forecasts of major interest rates and the exchange rate.
This is undoubtedly a fascinating pastime; and one which
has both made and lost the reputation of many
distinguished economists and none too few public
servants. So I trust that you will understand if I do
not do the same.
-Let me instead begin with a brief advertisement for two
of our major trading banks I know there are ' four but I
have now an established track record that I only do ads
for half of any product.
Over the last month or so these two banks have treated
Australians to rather a rare event in this country.
Despite very rapid growth in their lending to business
and higher borrowing costs, these banks have offered
temporarily lower interest rates on new loans taken up
during July.
This may seem a trifling event in the overall scheme of
things. But it illustrates a number of important points
which .1 wish to address tonight.
These are the strength of the Australian economy, and
the associated economic policy context; the new spur toI
competition which our policies have provided to the
financiai sector and the Australian economy at large;
and the implications of these for the conduct and
measurement of monetary policy.
With all of the other media preoccupations of recent
weeks, these are developments which have largely been
ignored.
L.
Unlike the strong growth leaders overseas, we are
expecting our growth performance to be muintained in
1985-86 our third year of Etrong ecor., omic expansion.
Through the past two years Australia has been bracketed
with the United States as the industrial economy
performing-most strongly on real growth and employment.
Now the international commentators are expecting us to
do better than the United States.
The Australian people can take pride in this achievementI
and can draw inspiration from it as we tackle issues
that must be addressed alonq the path to permanently
improved growth performance.
The March quarter National Accounts suggest that, if
anything, growth in 1984-85 has been faster than the
per cent or So expected at the time of the Budget.
Most pleasingly, the improvement since the Budget
results from higher than expected growth in the private
Private consumption, abstracting from the purely
statistical impact of the introduction of Medicare,
seems likely to have exceeded 3 1/ 2 per cent, compared
to the forecast a year ago of 2 3/ 4 per cent.
-Private business investment also seems likely to have
grown more strongly than earlier expected, with a
particularly strong performance likely in the June
quarter.
This strength has been reflected in the stark turnaround
in the labour market since 1983.
Employment has grown by around 384,000 since April 1983,
including 133,000 jobs in the last year. Indeed
employment growth has been strong enough not only to
absorb the new entrants to the labour force, but also to
cut the unemployment rate to 8.7 per cent, significantly
1983.-
Moreover contary to widespread expectations we are on
the threshold of a year which again promises economic
growth in the order of 5 per cent, and which offers
every prospect that our commitment to creating 500,000
jobs in our first three years will be met ahead of time.
As we enter the third successive year of 5 per cent
growth, it is worth remembering that there was not a
single year of 5 per cent growth in the seven lean years
of Coalition government which preceded our election in
March 1983.
And with over 380,000 new jobs having been created in
the past 26 months, it is worth remembering that already
this handsomely exceeds the 340,000 new jobs in the 88
long months of Coalition rule.
This dramatic improvement has not happened by accident.
It is the result of responsible policies, consistently
applied. Policies which were clearly outlined in the
1983 election campaign, and restated in 1984.
our policies have produced for Australia a sharp
reduction in our inflation rate, a sharp reduction in
industrial disharmony, the restoration of business
profitability and a return to levels of real unit labour
costs last seen in the early seventies.
our policies are based squarely on the Accord and
equitable restraint in income claims; a progressively
less stimulatory fiscal policy as private sector
recovery intensifies; and a supportive monetary policy.
Alongside these macro-economic policies, our industry
policy has emphasised the importance of strengthened
competitiveness in an international environment. Our
trade policy has focussed on opportunities for expansion
of our most productive and potentially productive
industries. It has been a hard slog : the steel industry and motor
vehicle plans; the dairy plan now hostage to the
political expediency of the Senate; the consultations
with unions on industry issues in other highly protected
industries, in coal, iron ore and other mining, and
throughout the economy; and the steady efforts on trade
policy, especially as it affects opportunities in the
Western Pacific region. I
We are raising productivity and reducing costs through
improved performance within a wide range of industries.
The further reduction in relative costs brought by the
devaluation provides the additional necessary element
for u-s finally to establish in Australia an open,
competitive industry structure to take us confidently
into the 1990s.
Some of the very recent news underlines: the potency of
these developments.
The contract won by Australian industry for the supply
of light railways to Hong Kong is a major breakthrough.
The low tariff premium on four-year motor vehicle quota
announced last week, at 11 per cent, shows that our
costs of producing vehicles are now closer to
a L it & 2..... J. AtflIk2t t. . SAñ.
international le-els than seemed possible a year ago.
Data presented to the media by BHP this-week show that
the combination of productivity improvements and
depreciation has turned the Australian steel industry
dramatically, from mediocre performance vulnerable to
lower-costs competition from more dynamic economies
three years ago, to highly competitive production today.
And parti cularly pleasing but not yet able to be
released in detail data available to the Government
today show dramatic reductions in tariff premia for
footwear and clothing import quota at this year's
tender.
We recognise as well the fundamental importance to the
longer-term growth of the economy of education and
training of ensuring that programs improve Australia's
skill base and enhance the employment prospects of our
young people. This is an issue the Government has been
examining closely in recent weeks, and on which I shall
be making a major policy statement next month.
Our general economic policies have thus laid a firm
foundation on which to build the future prosperity of
Australia. Prosperity which will bring with it more
jobs and higher living standards.
-Indeed it is because this government places so high a
priority on creating job opportunities and curbing
unemployment that we have placed so high a priority on
containing inflation; on restoring Australia's
international competitiveness; on encouraging expansion
in the private sector; and on ensuring an equitable
distribution of national income. I
It is for this reason that the government is committed
to the unprecedented fiscal trilogy a commitment whichI
will be convincingly honoured in the coming Budget. it
is for this reason that we ensured that real progress
was made in the May Statement.
It was for this reason that the States joined us in the
cause of national economic recovery through the
unprecedentedly restrained outcome of this year's
Premiers' Conference.
It is for this reason that the government has
consistently pursued a responsible monetary policy and,
indeed, that we tightened monetary policy earlier this
year. It is for this reason that the Accord with the ACTU was
negotiated in 1983 giving the Government a further
instrument for the pursuit of macro-economic policy.
And I note that it is not an instrument available to the
opposition in this country.
I painted for you earlier d generally optimistic
scenario of further growth and more jobs in 1985-86. A
scenario o * f yet another year. of 5 per cent growth in
Australia. A scenario moreover which is more optimistic
than most of the private sector forecasts which have
appeared but with justification.
The indicators point to private sector demand continuing
to grow strongly. Consumer demand is buoyant and likely
to be sustained as employment expands. Surveys of
investment intentions are favourable to further growth.
There is scope for an increase in business stock
holdings. But a major factor in the outlook is the substantial
improvemcnt of our international competitiveness which
has occurred following the depreciation of the $ A
earlier this year.
The depreciation provides the opportunity for domestic
producers across a broad range of industries to capture
a larger share of the still rapidly expanding demand for
goods and services. It permits exporters to earn higher
returns if their prices are set in world markets, or to
compete more aggressively for a larger share of world
trade. Largely as a consequence, net exports could
contribute I or 2 percentage points to economic growth
in 1985-86, after detracting from growth in 1984-85.
That kind of stimulus to private sector economic
activity is worth taking some trouble to preserve. it
could generate, on its own, in the order of 100,000
additional jobs in the next few years if Australia can
maintain and capitalise upon the improvement in our
competitive position. But it will take substantial
effort to sustain the benefits in the period beyond
1985-86. Already the improved competitiveness from
depreciation is threatened by signs of an acceleration
of inflation.
The most recent Consumer Price Index, which increased by
2.4 per cent in the June quarter, provided a sobering
reminder of the inflationary implications of
depreciation. of course some initial price rises in the wake of
depreciation were only to be expected. Domestic
producers can become more price competitive following
depreciation only because the prices of imported
subsitutes rise.
Up to 1 percentage point of the June quarter CPI rise
seems to have been directly attributable to that
process, and there will be further adjustments in coming
quarters as higher prices of landed imports are
progressively passed through into retail prices.
As a consequence our inflation rate could reach 8 per
cent or a little more in the course of the next year.
If the depreciation is to make its full contribution to
growth in employment, there must be, temporarily, slower
growth in real wages than there might otherwise have
been. What we need is a temporary slowing for those in work,
to reap the benefit of the 100,000 potential new jobs
which could flow from a sustained real depreciation of
the magnitude which Australia has experienced.
At 8 per cent, our prospective inflation rate could be
almost twice that of our major trading partners by the
end of 1985-86; with much of the disparity attributable
to the initial impact of higher prices for imported
final goods and components. If that disparity were to
be built into the cost structure of domestic producers
as higher wages, much of. their initial competitive
advantag= would be lost.
Furthermore, if our underlying cost structute is pumped
up to that extent, there is a risk that the re-ignition
of inflationary expectations will adversely affect
employment prospects, even in 1985-86.
In making this call for restraint~ to Australian wage
earners, I know I am asking for something that appears
hard. Australian workers, their unions, and their
representatives in the ACTU have contributed
magnificiently to the national economic recovery since
the Economic Summit 27 months ago.
I know that it is not easy to understand why further
restraint may be necessary, after two years of strong
growth, and another in prospect.
The reason is that we entered upon the expansionary
policies which have been so successful, spectacularly
successful, in delivering growth and jobs, when the
economy was heavily laden with structural weaknesses
which had accumulated over the previous decade.
Australia, like many other exporters of minerals and
rural products, has suffered an extraordinary
deterioraticn in its terms of trade over the last
decade. We might have Axpected some cotrection during
the recent international upturn, but this has not
occurred. The continued corruption of world trade in
farm products holds back any hope of substantial
improvement,-from the foreseeable future.
Over recent years, we have accumulated rapidly growing
levels of foreign debt proportionately most markedly
during the so-called " resources boom", but since then as
well, including through the $ 10 billion current account
deficit in the year that has just ended.
The maintenance of reasonable balance in the external
accounts, while servicing the accumulated debt, and
overcoming the effects of a decade's deterioration in
the terms of trade, requires markedly improved
competitiveness. But over the decade during which we accumulated these
structural problems, our productivity growth and our
control of domestic costs did not compare favourably
with many of our trading partners.
There were thus good economic reasons why the return to
strong growth in Australia two yearc ago was reflected
in a weakenr4ng balance of payments, and eventually in
. the depreciation of the dollar.
It was not our approach to let jobs and activity
languish until we had corrected the underlying
structural weaknesses of the Australian economy.
It was always our approach to fight inflation and
unemployment at the same time.
It is still our approach.
So that although now threatened by the inflationary
consequences of the fall in the dollar, we are
determined to press on with growth, to press on with the
creation of jobs.
And this means that we must ask the Australian people to
join us, in exercising restraint until we have absorbed
the inflationary impact of depreciation, and until a
strengthening balance of payments has restored stability
to the dollar.
We have gone a long way to re-establish the competitive
basis for strong growth, and we are not about to let it
slide away.
The Government has already expressed a clear view on
these matters to the ACTU within the framework of the
Accord. We have put all options on the table, Including I
deferral of the foreshadowed productivity wage round and
discounting. The matter of timing will also have to be
addressed.' r
These matters are all relevant to determining the
position the Government will take in the September wage
case. The Government's position will, as always,
promote first of all the community interest in sustained
growth in output and employment.
I have every confidence that the Accord is sufficiently
flexible to again deliver for Australia the kind of
wages growth and industrial environment necessary to
create jobs.
What is needed is that all groups exercise restraint in
income claims. Some rise in profitability is a
necessary market signal. It will redirect resources to
areas which now need them to increase production for
export or of goods previously supplied from imports.
But this must not involve imposing unnecessary cost
burdens on others.
Let there be no doubt that the government will be doing
-its part to provide firm monetary and fiscal policy, to
provi; de'the support necessary for the success of prices
and incomes policy.
I have heard it said that inflation to the economist is
as sex to the novelist : both are associated with a
rising rate of interest. For this and other reasons I
can assure you that my Government is determined to keep
-inflation within'reasonable bounds.
Which leads me back to my story at the beginning.
You will remember that this was based on the observation
that two banks had temporarily offered discounted
personal loans, something of an innovation in Australian
financial markets.
This is but one of a number of similar steps taken by
banks in recent times. Others include the introduction
of new and innovative service packages for customers,
the spread of low start mortgages, some narrowing of
margins between borrowing and lending rates and the
expansion of banks into activities previously denied
them by the regulatory framework.
Already two new banks are operational, both the result
of a conversion of the operations of a non-bank
institution. Negotiati. ons are continuing with a view to
authorizing another 16 potential new banks, as
previously announced. The majority of these will be
operati-ng before the end of.-the year.
This is part of our overall strategy to eliminate
unncessary regulation wherever possible and promote
innovation and structural change. The rationale for
this policy is precisely the same as that of our more
general economic policy: namely to create the
conditions which will permit an on-going expansion of
job opportunities and improved living standards.
Within this new, freer regulatory environment, the
financial sector is undergoing a period of transition.
Financial institutions are seeking to rearrange their
business strategies and reposition themselves in the
market place.
Banks, especially, have become far more competitive with
non-bank institutions and, as our opening story
illustrates, far more aggressive. That is the outcome
which we were seeking when we removed many of the
earlier restrictions on their op"-rations.
The growing sophistication of the financial system, both
before and after deregulation, has necessitated a
continuous review of our approach to monetary
management. Decisions on appropriate monetary policies, when and how
policies are implemented, must evolve with the financial
system.
For example, over the past decade or so, the main
objective of policy has shifted from interest rate
stability towards the rates of growth of monetary
aggregates particularly M3. And the method of
implementation has shifted from quantitative controls on
a particular group of intermediaries to open market
operations. By the mid 1980s, these shifts were virtually complete.
These days, monetary management is almost entirely based
on open market operations in a range of Commonwealth
debt instruments.
A particularly important aspect of monetary policy in
the post-float era is the day-to-day management of the
liquidity base of the financial system. Fine tuning of
liquidity conditions was impossible before the float,
because the reserve bank had no control over the
quantity of foreign exchange purchased or sold.
Efficient day-to-day liquidity management is now not
only possible, but also necessary. This is because the
external sector is now no longer available as a net
source of liquidity when the system is under pressure.
Last week the reserve bank ' released statistics which
showed 17.5 per cent growth in M3 through 1984/ 85.
In other circumstances that would rightly have been
regarded as a disturbingly high rate of increase. But a
significant element of the apparent acceleration of M3
since the beginning of this year was attributable to the
reclassification into M3 of the deposits of two
institutions that were not even banks a year ago.
Another element was the strong push by existing banks to
raise their share of total financing, which adds to bank
lending and thus M3, but not to aggregate activity. As
well, bank lending was inflated in May and June by a
need to finance purchases by 30 June of investment goods
which would qualify for the investment allowances.
It is not yet possible to estimate the contribution of
this reintermediaticn to recent growth of M3, but it has
clearly been substantial.
-The broadest published financial aggregate " Broad
Money" is less vulnerable to such distortions.
Further, broad money appears in practice to have been
more stable during the recent period of financial
turbulence than the narrow aggregates.
Broad money rose by 15.8 per cent in the year to May,
also a high rate. But that figure was inflated by the
double counting of some non-bank deposits.
Excluding that ef-lect broad money has increased at an
annual rate of 13 1/ 2 per cent so far this financial
year. But even leaving aside some statistical problems
that growth rate has, in turn, been somewhat inflated by
a shift from direct transactions between ultimate
lenders and borrowers towards intermediation by
Financial institutions.
Indeed, it is only to be expected that as the cost of
financial intermediation is reduced by additional
competition and the removal of regulatory distortions,
intermediation will increasingly replace marginal forms
of direct financing.
Thus even broad money needs to be interpreted with some
care.
With the growing complexity of the financial system, it
is clear markets will need to monitor a-much wider gro-up
of indicators than before. No longer will any single
measure suffice.
It is worth considering, however, that not all of these
alternative indicators necessarily are as easy to
interpret as in the past. Take, for example, interest
rates over the past six months.
In the long term, the costs of intermediation should be
lower in a more competitive and efficient financial
sector. But interest rates rates have been subjected to a range
of forces in recent months. Aggressive competition for
funds, especially in the short term money market, has
undoubtedly placed transitory upward pressure on some
short term interest rates.
In addition the financial system has weathered the
seasonal liquidity downturn, in the environment of a
floating dollar for only the second time.
There has also been upward pressure on interest rates
followin-. a deliberate firming of policy a firming
intended support an overly weak exchange rate and to
-dampen inflation and inflatio~ n expectations. This has
been felt initially in markets for short term funds, and
Wil ultimately show up in the volume of lending.
Yields on ten year bonds rose steadily between late 1984
and May of this year. Since yields on 10 year US
treasury bonds declined over the period, the interest
differential shifted sharply.
But in recent weeks Australian yields have declined to
levels of around a year ago and the differential has
narrowed a little.
No doubt changing perceptions of the strength of the
Australian dollar have been an important part of this
story. our inflation performance and perceptions of
whether or not the improved competitiveness of
Australian industry can be sustained have an important
bearing on views formed about our exchange. rate and
interest rates.
Given the international linkages and domestic structural
changes in both the financial system and the techniques
used for monetary control, it is thus no longer easy to
interpret monetary policy. 1 1--Ao" 0 0 9= 4 T
-4 1 But my Government is committed to making plain our
policy intentions and to pro-iding the -information which
will enable informed judgements to be miade. This
statement is intended to be part of that process. We
recognise that uncertainty about policy detracts from
economi-c performance.
So how is monetary policy now to be judged? My answer
is that there can be no suggestion that liquidity
management is anything but firm. No suggestion that
interest rates are artificially soft. No suggestion
that the government is pursuing anything other than a
firm monetary policy in conjunction with a flexible,
jobs-oriented prices and incomes policy.
Our coming Budget also is focused sharply on our central
economic and social objective jobs.
The coming budget will promote a long term improvement
in job opportunities because the deficit will be
significantly lower this year than last. That
reduction, in conjunction with the restraint in States
borrowing programs agreed at the Loan Council will lead
to a further cut of 1 per cent in the PSBR as a
proportion of GDP..
It will thus help to avoid a clash wuith the pri. vate
-sector in credit markets and reduce pressures on real
interest rates. It will also moderate further th&-e
degree of fiscal stimulus at a time when inflationary
pressures are mounting and private activity strong.
On both counts the Budget will contribute to durable
growth and jobs.
But it will also promote jobs directly. This Budget has
a particular focus on enhancing job skills and training,
particularly for our greatest national resource, our
young people.
The Budget, monetary policy, industry policy and prices
and incomes policy thus all share that central objective
to provide satisfying, long-term job opportunities.
That is the unambiguous aim of the Government.
We have come a long way.
We are determined to overcome the remaining obstacles to
securing for Australians the jobs, the rising living
standards, the capacity for improved provision for those
in need, that can come only from a long sustained periodr
of strong growth with moderate inflation. .3
I