CHECK AGAINST DELIVERY EMBARGOED UNTIL DELIVERY
SPEECH BY THE PRIME MINISTER
AUSTRALIAN FINANCIAL REVIEW POST-BUDGET DINNER
MELBOURNE 16 AUGUST 1989
Seven years ago, around this time of year, the then Federal
Treasurer John Howard brought down the seventh Budget of the
Fraser Liberal-National Government.
Last night, Paul Keating brought down the seventh budget of
this Labor Government.
The contrast between the two Budgets as statements of
political leadership and of economic management could not
be more stark.
The Liberals produced a Budget that was the quintessential
failure of nerve a Budget that put the needs of the nation
firmly in second place behind a doomed attempt at electoral
survival. The results of that lack of leadership were very clear and
they were very painful:
the worst recession Australia had known since the
Great Depression;
double digit unemployment and double digit
inflation a unique, and tragic, testimony to
economic mismanagement; and
a massive prospective Budget deficit of more than
$ 9 billion.
The Liberals' 1982 Budget marked a vital turning point: it
was the last of the pork-barrel budgets.
And it taught a vital lesson: Governments that frame
budgets looking only towards an imminent election do not
only the nation, but also themselves, a gross disservice.
The truth of this lesson about political leadership is borne
out by the dramatic transformation that has taken place
since the election of this Government.
There has of course been a shift in policy away from
confrontation towards the deliberate process of detailed
analytical study and consultation; away from protected
isolation to vigorous participation in the global economy.
There has been a comparable shift in community attitudes.
Increasingly, Australians have come to understand that the
habits of uncompetitiveness and the practices of
confrontationism that were fostered by the conservatives for
most of the post-war decades must be abandoned.
We have come to a clearer understanding of the nature of the
economic challenge facing our country.
wage earners have understood that wage restraint creates
jobs some one and a half million since 1983 and boosts
international competitiveness; that greater work
effectiveness creates a greater economic capacity to pay
wages. Industries that were sheltered behind the walls of
protectionism have understood that long-term success lies
with freer trade.
If anyone doubts the significance and the breadth of this
sweeping transformation of Australian attitudes, they need
only consider the recent competition by Williamstown and
Newcastle for the frigate contract.
In both tenders, workers and managers and State Governments
presented the Federal Government with a united determination
to maximise the benefits, for the regions and beyond, of the
technical spin-offs of this very significant project.
So it is against that background of dramatic change in the
Australian economy and in the economic practices of
Australians that we brought down our seventh budget last
night. Again, it is a Budget that addresses the central long-term
issues facing the Australian economy, while ensuring relief
for those members of the community who need most help.
Ladies and gentlemen,
I think it a good insight into Australia's current economic
situation to put the 1988-89 year in context.
When we came to office in 1983 we faced huge economic
problems with, as I have mentioned, double digit
unemployment and inflation, a recessed economy and
persistently high current account deficits.
To counter these problems we set about reinvigorating the
economy, restraining real wages growth and generally
internationalising the Australian economy, and then
drastically reducing the public sector borrowing
requirement.
Progress was steady and positive. In 1987-88 unemployment
was down to 7.8 per cent, inflation was down to 7.3 per cent
and the current account deficit was equal to 4 per cent,
down by over 2 percentage points of GDP from two years
earlier. In 1988-89 this steady progress stalled. While employment
growth was excellent, with unemployment now down to 6.1 per
cent, Australia's current account and inflation rate
deviated from their path of steady improvement.
But in understanding our economy we need to ask why?
It was because, and you have heard this said before, demand
grew more than the Government or any other commentator
predicted. But in turn, we need to understand where that demand came
from. It was predominantly investment driven. our business
investment to GDP ratio was the highest for any year in
which records have been kept. It was some 3 per cent of
GDP, or around $ 10 billion more than its average level over
the past 30 years.
Nearly half our investment goods are imported, and then
there are the indirect effects of investment spending on
imports.
Without this extra investment, both imports and demand, and
therefore both the current account and inflation, should
have been considerably lower than recorded.
So as economic problems go, there are certainly worse
problems to have than this. The paradox is that if we had
not had the extra $ 10 billion investment, we would be
hearing less from the doom and gloom merchants.
Let me point you to table 7 on page 2.39 of Budget Paper No
1. It's the kind of table that would be worth re-publishing for
your readers perhaps as adornment to a Stutchbury column.
The table divides the last thirty years of Australian
history into six five-year periods. It shows first that
public sector demand grew in the most recent five-year
period at a lower rate than at any earlier time.
Second, in that same most recent period, 1984-85 to 1988-89,
private consumption increased at a lower rate relative to
GNE or GDP growth than in all earlier periods.
Third, and here I quote from Budget Paper No 1, " following
fifteen years of poor investment performance ( 2.2 per cent
per annum growth), the average increase in business fixed
investment in the last five years was a remarkable 10.8 per
cent." This isn't just playing with numbers. We're talking about
an investment boom, not a mirage.
Take a look around Australia and you realise that throughout
the nation new projects are underway, using largely imported
capital to build Australia's import replacing and export
base. Visit the North West Shelf massive new investment is
expected to create exports worth more than a billion dollars
a year over the next two decades.
Inspect the new smelters in Risdon and Kemerton, and the
chemical plants in Gladstone and Bunbury about $ 450
million in investment, all due to come on stream by the end
of the year.
BHP alone has five new projects with a capital investment of
more than $ 600 million which will serve the domestic and
export markets.
I have already mentioned the frigate project Australia's
largest defence project ever. Take a look at the submarine
project in South Australia and the new generation MDX
helicopter to be manufactured by Hawker de Havilland in
collaboration with McDonnell Douglas.
Then there are new investments such as that by Bowater at
Box Hill to make paper products and by Chargeurs in Wagga in
TCF products. And we are all aware of the major
construction projects across the nation that will cater for
tourists from around the world.
This all reinforces the point that with the public sector
now in surplus, it is investment by the private sector that
is fuelling the current account deficit.
With the stock of Commonwealth debt rapidly decreasing,
Australia's stock of foreign debt is increasingly the result
of investment decisions by the private sector.
Ladies and gentlemen,
I say all this with no sense of complacency about the
current level of overseas debt.
To the contrary our policies are actively addressing the
equation that lies at the heart of that debt problem.
Put simply, we need a long period where the amount of goods
we produce exceeds the amount of goods we wish to consume.
So we must both increase the goods we produce and lower our
demand. That's what we're doing: continuing to boost supply through
micro-economic reform and lowering demand by encouraging
saving. Let me look at each side of this equation in a little more
detail. Since 1983 we have taken major steps in the areas of
financial deregulation, floating the currency, terminating
the two airline agreement, deregulating oil marketing,
reforming company tax, reducing tariffs, increasing
competition in telecommunications and generally lessening
controls of Government business enterprises.
This activity starts to wind back thirty years of policy
making directed at imposing restrictions on competition.
What we're about with this micro-economic reform is
increasing productivity producing more goods from a given
level of resources.
And we are still engaged in this task.
More recently, award restructuring and decisions on grain
handling and transport, coastal shipping and the waterfront
have further extended the scope of micro-economic reforms.
The advent of continuous voyage permits and the removal of
excess manning have the potential significantly to lower
costs in these two areas.
Perhaps as important as the scope of these changes is the
method by which they have been achieved.
We undertake extensive inquiries to analyse the problems.
We consult those affected both to get their input and to
determine how best we can assist them in a process of
change. And we take decisions that will produce real gains
in a practical environment.
Last night's Budget continued this historic process.
In 1921 a body known as the Tariff Board was established.
It was an eminently sensible title for an organisation whose
task was to implement the prevailing fashion for border
protection sheltering domestic producers from
international competition.
In 1974, in recognition of the newly independent role the
Board was playing, that body was transformed into the
Industries Assistance Commission which has built a proud
reputation for analytically rigorous studies into industry
issues, educating Australians about the real cost of
industry protection.
It became, in a sense, an Anti-Tariff Board.
This process culminated in May 1988 with our decisions to
lower tariffs significantly over the whole economy a move
which received very wide public acceptance.
That decision is being implemented over four years but it
is time now to open a new chapter in this organisation's
history and to embark on a new phase in micro-reform.
we have decided to expand the role of the IAC to cover the
full range of structural adjustment and micro-economic
reform policies, including transport matters. It will be
renamed the Industry Commission and will be the institution
undertaking all major inquiries on structural or industry
policy issues with economy-wide implications.
The main references will cover:
Energy Generation and Distribution, and Railways, both
in close co-operation with the States
Construction Costs for Major Plants
Export Franchising and Distribution Arrangements
Raw Material Pricing for Domestic Uses
Availability of Capital for manufacturing and Service
Industries The Commercial Tariff Concession System
Mining and Minerals Processing
Statutory Marketing Arrangements, and
Product Liability
These references will help us continue our process of
careful study, educating the community of the need for
change, consultation and practical policy implementation.
That is the necessary process of micro reform. It is about
medium term, irreversable, structural change leading to a
more productive economy: not half-baked ideas, not mere
rhetoric and not policies incapable of implementation.
I turn now to the demand side of the equation.
Again we are on about addressing the real issues with an
extremely active policy of demand management through
continuing tight fiscal, wages and monetary policies.
You don't have to react to every piece of economic news by
frantically and demonstrably pulling levers especially
when the calls are coming from those who made such a mess of
their last time in the engine room. Our demand management
policies are clear cut and well established especially with
unprecedented real wages containment and public sector
surpluses.
We have dramatically improved the savings balance by an
eight percentage point reduction in the net PSBR since
1983-84.
Commonwealth outlays relative to GDP have declined by 6.3
percentage points from the peak in 1984-85, whereas revenue
to GDP has declined by 0.7 percentage points over the same
period. This turnaround in our budget position has
therefore occurred because of cutbacks in Commonwealth
outlays. To suggest other than this, as some in the Opposition do, is
a ridiculously easy fabrication to refute.
When the Opposition was last in office, their commitment to
saving was represented by a Budget deficit of 5 per cent of
GDP and a top marginal tax rate of 60 per cent.
It is worth noting as well that the more than 10 per cent
unemployed under the Liberals also had some difficulty in
saving.
As well as our public sector savings efforts, the private
sector has already been encouraged to save by
our encouragement to all workers to take 3 per cent
of their wages as superannuation;
our reduction in marginal tax rates;
our introduction of full imputation for company tax
to encourage greater savings through the share
market; our removal of division 7 tax on the retained
earnings of private companies, encouraging greater
savings by companies;
our reduction in the company tax rate to 39 per
cent; and our deregulation of the financial system, which
offered households more avenues for savings.
With the changes to superannuation announced last night we
have made further inroads into what is a structural weakness
in the Australian economy our propensity to consume rather
than to save.
At the same time we are addressing the profound question of
how the Australian economy will cope in decades to come with
the ageing of the baby boom generation.
If we make no provision now for the future, we may be asking
future generations to bear a massive, possibly an
intolerable, social security burden in the form of age
pensions payments.
The changes we announced last night the improved vesting
and preservation of super, the encouragement of annuities,
the improved tax deductibility to encourage increased
contributions into individual superannuation schemes, the
greater incentive for women to take up superannuation, and,
most importantly, from 1995 the removal from the tax system
of all full and part rate pensioners will shift the
balance markedly further in favour of superannuation.
That means, they will dramatically increase the stock of
savings in the community.
These are savings of a high quality not savings over a
couple of years aimed at acquiring a new consumer good but
long-term saving to provide for retirement years.
Ladies and gentlemen,
Any political party claiming the right to govern Australia
has to be able to provide answers not only to broad
structural and economic issues.
It also has to understand that Government is about people.
Labor in Government has embraced both these goals.
The era of profligate welfare hand-outs has long gone.
This Budget, consistent with all our previous efforts to
improve the social security system, is about targeting real
assistance to members of our community who need it.
Since 1982-83, spending on social justice as a proportion of
total Government outlays I am excluding public debt
interest has increased from about 50 per cent to a
projected 58 per cent this year. That represents an
increase of nearly $ 9 billion in current prices.
Medicare, child care, public housing, care for the elderly,
the unemployed and the sick are all important recipients of
this spending.
In this Budget we provide new assistance to the aged,
Aboriginal and Torres Strait Islanders, to homeless youth,
to fee relief for child care not giveaway measures but
steady, affordable help focused on the areas of need in the
community.
Ladies and gentlemen,
Let this clearly be understood:
We are not about to sacrifice the long-term economic
strategy the strategy that offers the only prospect for
sustainable long-term prosperity for this nation on the
altar of short-term political expediency.
The 1982 Budget was the Liberals' seventh.
It was also their last.
Last night, we brought down our seventh Budget.
It won't be our last.
Because with our Budget indeed with all our Budgets and
Economic Statements we're about securing the long-term
future of the Australian economy.
With the Liberals' seventh Budget, they were on about
securing the short-term future of themselves.
We're succeeding at our task.
They failed at theirs failed to secure electoral success
and failed to confront or even look for the long-term
structural challenges facing Australia.
This is a budget that looks to the future that gets on, as
I have outlined tonight, with solving the long-term issues
of Australian prosperity such as structural demand
management and productivity growth.
It sets out some of the elements of Labor's continuing
strategy for economic and social reform into the 1990s
into the Fourth Term of Labor Government and, if you like,
beyond. To that extent, it is a budget that affirms our energy and
determination to tell the Australian people the truth about
the hard work, and about the endless promise, of the future.