CHECK AGAINST DELIVERY EMBARGOED UNTIL DELIVERY
EXTRACT FROM REMARKS BY THE PRIME MINISTER
AUSTRALIAN MINING INDUSTRY COUNCIL DINNER
CANBERRA 1 MAY 1986
Before turning to some matters specific to this industry, I
wish to devote some brief remarks to one or two issues in
the current debate on economic policy generally.
There is no denying that the March quarter CPI, which showed
a rise of 2.3 per cent in the quarter and 9.2 per cent over
the year, came as something of a disappointment to the
Government. But that is not the same as saying that it has
led us to markedly revise our expectations of inflation.
A number of transitory factors were at work in the March
quarter which suggest that the economy is not set on a new
upward trend in inflation. These transitory factors
include a delayed adjustment of motor vehicle prices
following the depreciations of 1985 and an apparent rise in
the average of petrol prices in the quarter, largely due to
the effects of an industrial dispute in Melbourne early in
the quarter.
Most importantly, powerful forces remain at work to pull
down our inflation rate in the period ahead.
The initial inflationary effect of depreciation is likely to
wane over coming quarters.
Moreover, under the terms of the renegotiated Accord, the
Government has argued for a 2 per cent discount from wages
indexation in the national wage case now before the
Conciliation and Arbitration Commission. That discount will
ensure that the higher costs of the imported goods component
of the CPI in 1985 do not become built into our domestic
costs structure. This, in turn, will limit the longer-term
inflationary potential of the depreciation and will thus
help to preserve the substantial improvement in our
competitiveness which has been achieved.
I would add that the payment of the current wage case
decision seems likely to be delayed longer than usual while
the Commission hears a number of related matters.
That in itself will provide an additional, though admittedly
unplanned, circuit breaker. I applaud the union movement
for its restraint while these proceedings are in train and
urge all parties to continue to abide by both the letter and
the intent of our approach to centralised wages fixation.
It is quite mischievous of some commentators who note the
proposed size of the proposed productivity award and add all
of the 3 per cent to their estimate of wages growth in 1986
to generate seemingly horrendous estimates of possible wages
growth. The reality is that, under the terms of the Accord,
payments will be spread over two years, with different
industries paying the award at different times, depending on
their circumstances. In fact the impact on aggregate labour
costs in 1986 is likely to be relatively small.
The timing of these payments is also very much delayed as
compared with the preferred position of the ACTU around the
middle of last year. This delay was agreed to by the ACTU
explicitly so as to provide a further mechanism to absorb
the effects of depreciation without adding to domestic
costs.
As a result the productivity payment is not expected to add
to aggregate inflation over the life of Accord II.
These general downward pressures on inflation will be
reinforced in the period ahead by the lagged impact of lower
petrol prices, which we expect to ratchet inflation down by
more than 1 percentage point over the next year or so.
The Government's decisions on the handling of lower world
crude oil prices strike a balance between the need, on the
one hand, to fund necessary public services while, on the
other, to pass on to consumers to the maximum extent
possible the decline in crude oil prices. The alternative
of a massively larger budget deficit simply could not be
countenanced. All told the Government confidently expects that the annual
inflation rate has peaked in the March quarter and that a
significant fall is in prospect, starting with the current
( June) quarter.*
Taken together with continued firm compliance with
centralised wages fixation these imply that the very
substantial improvement in our competitiveness ( based on
comparative wage movements) can be substantially preserved
over the life of Accord II.
3.
This leads me naturally to another area of contention at
present, namely the pace at which we can expect an
improvement to occur in our balance of payments.
As you know I have just returned from a visit to the United
States and Europe in which I sought to raise the level of
awareness of Australia's position as a non-subsidizing
exporter of agricultural products caught in a notentially
very costly artificial trade war betweeen the USA and the
EEC.
while no one should harbour unrealistic expectations of how
quickly these policies will be changea, I was pleased to see
develop in all capitals : a deeper appreciation of the
large costs imposed on efficient producers such as Australia
of the EEC/ US conflict for world markets; and an undertaking
to do the best that can realistically be done to ensure that
Australian producers are not bloodied in the cross fire.
The latter included specific assurances in some key areas
that the EC and the US will act in a way to ensure that
Australia will be able to preserve its access to traditional
markets and that surplus stocks will not be disposed of in a
way which disrupts markets.
I was also pleased to receive high level support for the
notion that the crisis in world agricultural trade is so
acute that the time has come for discussions on agriculture
to assume a key role in the new round of negotiations about
the rules which govern world trade ( the so called MTN
Round). Because of the sicinificance of rural exports, these
assurances are vital to Australia not just the rural
sector. More generally Australia's balance of payments deficit has
been judged by the world to be unsustainably large. This
was a major factor leading to the large depreciation of the
$ A in 1985, a depreciation which contains within it the
potential progressively to reduce that deficit certainly
as a share of GDP.
As many commentators have'noted our progress in reducing
that deficit to date has been small. But then, as so many
of you here tonight know at first hand, Australia has had a
very large monkey on its back; a monkey in the form of a
deterioration in our terms of trade which was far sharper
than expected; but which by the closing months of 1985 would
have added almost $ 4 billion to our annual current account
deficit.
But even though we've shouldered the monkey, there are
encouraging signs that the necessary improvement in our
current account is underway. In seasonally adjusted terms,
the merchandise trade deficit for the three months ending
March was only a little over half that for the previous
three months. Again allowing for seasonal factors, imports
in March of goods and services most directly sensitive to
the pace of domestic activity and changes in the relative
costs of imports were some 16 per cent below the level of
three months before.
I would expect that more discernible evidence of improvement
will become increasingly apparent as time passes.
Having said that I recognise that minerals exporters face a
particularly difficult trading environment because of excess
supply in many areas. This is an environment which may
become more difficult in the short-term if lower oil prices
impact too heavily on the prices of energy-related
commodities, but which may also be lightened a little in the
medium to longer-term as economic activity worldwide picks
up, including as a consequence of the lower level of oil
prices. Even so it is pleasing to note that, notwithstanding the
difficulties, there have been some encouraging developments
in your industry. For 1example on the latest AMIC data
profits rose by about 3in 1984/ 85 in the non-petroleum
minerals industry; and the latest mining production index
shows record production levels for the December quarter,
with substantial gains in 1985 for coal, zinc, gold and
diamonds. Before I leave this topic I would add that, in my
discussions abroad, I found considerable support for the
notion that world growth can be maximized at present by
greater co-ordination of the economic policies of national
Governments. It was particularly noted that responsibly expansionary
policies in countries blessed with both low inflation and a
favourable balance of payments would hasten the process of,
external adjustment of countries in balance of payments
deficit, and thus could contribute to a more stable
international trading environment. In my discussions I
indicated the support of the Australian Government for
co-ordinated action of this kind.
GENERAL POLICY APPROACH
The expected progressive improvement in our net sales of
goods and services abroad over the course of 1986-87 is
expected to provide a significant stimulus to domestic
employment and activity in that year.
The task of general economic policy will be to both permit
and support that development by ensuring appropriate
moderation in the pace of domestic demand, after the
frenetic pace of 1.985.
The upshot is that we continue to expect respectable growth
of non-farm GDP in 1986-87, though somewhat lower than the
average of more than in our first three years.
Fiscal restraint aga. n will be required in 1986/ 87 to ease
the public sector's call on domestic savings and to directly
assist the adjustment of our external accounts. Our
objective is to bring in a deficit below the level required
by the trilogy.
Indeed the intention is to conduct fiscal policy in a way
which will also permit an easing of monetary policy, so as
to enable Australian interest rates to decline at least in
line with world trends and thus to support as high a level
of business investment as possible.
Of course the Accord will remain the centre piece of policy.
The Accord has produced not only realistic outcomes for
wages but also a startling improvement in the levels of
industrial disputation.