FOR . EDIA17 NOVEMBER 1989
ADDRESS BY THE F2l IC3NSTER
E-OKZC PLANNIN ADVISMY 9UI
17 NOViN. 1939
coKIicmC CONDITIONS
The limited economic data that have become available since
the September IPAC meeting are broadly consistent with the
Budqet-ti forecasts for economic developments over the
course of 1989-90.
While at this stage we do not have National Accounts
information for the September quarter, other useful
statistics are available.
It is clear that demand and activity in the housing sector
have declined significantly.
House prices in some areas are already falling, in pert
unwinding the sharp rises of recent years.
The number of building approvals for nev private dwellings
fell by 21 per cent in the September quarter, to be around
26 per cent below the peak reached in late 1968.
The latest projection of the Indicative Planning Council is
that total commencements will fall to around 133,000 in
1989-90, 24 per cent lower than the unsustainable level of
175,000 in 1988-69.
The non-dwelling construction sector also appears to be
veakening from its recent high with a 16 per cent fall in
the value of building approvals evident in the September
quarter.
We are witnessing, therefore, a fairly general contraction
in the building sector, which is broadly consistent with
Budget projections and our strategy for slowing excessive
demand growt.
The contract-ion underway in the buildinq sector will affect
cons r durable expenditures, as will the direct impact of
interest rates.
At constant prices seasonally adjusted retail trade rose
0.9% in the September quarter, consistent with budget
projections. Monthly growth is slowing on a trend basis,
which appears to be supported by anecdotal evidence.
While business surveys suggest investment expectations
remain generally buoyant, some scaling back of intentions
was evident in the CAI/ Westpac survey of business trends
released in September.
As demand growth weakens investment intentions may be wound
back generally, to more sustainable levels.
In the labour market, we have some evidence of easing,
particularly declines in job vacancies.
Turning points are notoriously difficult to predict with
precision and I do not want to draw too much out of the
data. The main conclusion I want to leave with you, however, is
that, on the basis of the limited number of indicators
available to date, the Government has no reason to believe
that doaestic demand and employment growth will not unfold
in a manner broadly consistent with Budget forecasts.
While demand is forecast to fall significantly, overall
product growth should be sufficient to protect the
employment gains of recent years.
None of this, of course, suggests that conditions have
arrived at this stage which would allow a moderation in the
stance of monetary policy.
Monetary policy easing can only be considered when clear
economic evidence points to such a conclusion. To act
otherwise would be self-defeating from all perspectives.
On the external side, the current account deficit figures
fnr Alngust and Septaeber are consistent with the Budqet-time
view that the improvement in the current account over the
course of 1989-90 will be concentrated in the second half of
the year.
PRICES AND INCOMIS
On present indications, the Septeaber quarter consumer price
index indicated that the peak in inflationary pressures has
been passed.
As expected, the rate of increase in consumer prices in the
September quarter continued to reflect mortgage interest
charges, the lagged effects on fresh fruit and vegetables
prices from major flooding in the eastern states earlier
this year and the effects of changes to compulsory third
party insurance in New South Wales.
As the effects of those influences wane in the quarters
ahead, and donestic demand pressures ease, we expect to
observe a steady reduction in inflation.
with the first wage increase available under the Structural
Efficieny Principle now flowing smoothly through the
workforce,, the prospects are not only for a continuation of
responsible wage outcomes but for substantial workplace
reform via award restructuring.
To a significant extent, the success of award restructuring
has ben and remains dependent on the initiative shown by
manaqemint in fully exploring the opportunities offered
under the current system.
No-one is suggesting that the negotiation of change is easy.
Clearly it is not particularly when employers are
confronted with a multitude of unions and awards that often
bear little relationship to the needs of individual
prisea.
But this is no excuse for inaction.
The Irndutrial Relations Commission has ade it perfectly
clear that the award restructuring processes can themselves
be used as a vehicle for reforming award and union coverage.
Looking beyond that, broader mechanism are already in
place, with the full support and co-operation of the ACTU,
for a vore concerted move away from intar-industry or
occupational awards and fragmented, craft based unions to
arrangements which better reflect the needs of individual
industries and enterprises.
While there is a widespread recognition that wage
negotiations mst have an increasing enterprise focus there
is also an acceptance that this process aust be underpinned
by a continuing role for the Accord to ensure effective
aggregate wage outcomes.
I have already foreshadowed that the Government next year
will be looking once again to discussing aggregate wage
outCOs with the ACTU.
Both parties will be able to enter these discussions with
the confidence that the Accord has survived the threat posed
to it by the unjustified pay demands of the Australian
Federation of Air Pilots ( APAP).
It is worth recalling that barely a fev months ago many
. ommntator were contemplating the impact on the Australian
economy of a wages break-out led by the APAP.
Today it is widely recognised that the threat has been
turned back.
of course the Government does not pretend for an instant
that this has been without costs.
Early this week we attempted to address some of these costs
with the announcement of the assistance package to the
tourism industry.
But the damage incurred by refusing to meet the AFAP's
demands Uas beentonly a fraction of the economic misery that
would have resultad if the Government had caved-in.
Instead the Australian community has successfully defended a
wages system that has secured over 1.5 million new jobs in
the last 6 years and internationally competitive wage
The only certain element in the new wages system from the
Governumuts paint of view is that it must continue to
deliver aggregate wage outcomes compatible with maintaining
Australia'. international competitiveness.
Above all else, the Government will continue to stress in
theze discusions that the reduction of Australia's external.
imbalance must remain our paramount economic policy
objective. That is the only way we as a nation will be able to secure
sustainable declines in interest rates and affordableincreases
in living standards.
In this context,, the CGovernment welcomes the initiative of
the Business Council of Australia this week-in seeking to
draw awe attention to ways Australia can improve its
external imbalance.
if the ICafs initiative leads to greater understanding# good
can only come from it.
MANU7ACTURXNG 5Z='' R PWOIUIANCR
Of course, labour market reform is just one aspect of the
Goverrmnt'se multifaceted imicroeconomic reform agenda.
Another area is industry policy.
An imprtant part of our industry policy strategy is to
eps-industries to international competition by reducing
assistance and dismantling impedivents elsewhere in the
ecOMy which affect international competitiveness.
of course structural reform takes time.
I have already this week commented on pessimistic views
concqxminq Australia'a manufacturing industry,
The tacts just do not support gloomy prognosis.
A study by the Bureau of Industry Economics on the trade
performance of manufacturing released earlier this year
concluded that:
OXanufacturing has undergone major structural change
over the last few years, with a significant
re-orientation to international markets. Manufacturers
have exported an increasing share of their output, and
the rate of growth in import penetration has slowed."
More recent figures indicate that, over the two years to the
June quarter 1989, manufacturing export volumes grew by
per cent.
Over the two years to the June quarter 1989, the growth in
manufacturing output averaged 6.3 per cent a year, compared
with 5.3 per cant a year for the economy as a whole.
Productivity growth in manufacturing over that period,
averaging 2.3 per cent a year, was twice as great as that
for the whole economy.
Investment in manufacturing has been strong. Over the past
five years manufacturing investment has grown at an average
rate of 13.2 per cent a year, a stark contrast with the
story in the preceding five years.
This growth has not only been devoted to replacing old
capital, but also to expanding capacity in new product
areas.
A recent BIB survey of large manufacturers indicates that
current investments are leading to significant increases in
capacity ( 6.3 per cent growth in capacity is expected in
1589-90) and reductions in unit costs ( a 2.5 per cent
reduetien is expected in 1989-90).
Tais inveum surge is spread over a wide reunu or
manufacturers, including key sectors such as chemicals,
paper and printing, steel, transport, equipment and food
process ing.
We are, of course, far from having completed our goal of
achieving a truly internationally competitive manufacturing
sector.
We are still a long way from completely dismantling the
structure of past interventions that have protected such of
industry from the full force of competition and have stifled
the qrowth of well-manaqed and efficient industries, eager
to take their place in world markets.
But as I have already outlined, the groundwork is being laid
and compaies are beginning to react.
We will be pressing forward on a broad front on
aicroeconomic reform tackling the removal of distortions and
the enhancement of the capabilities of the economy to adjust
to change. An important catalyst for change will be the
inquiries and reports of the new Industry Commission. It is
being given a broad charter, and the first five ref erences
of a wide-ranging work program have already commenced.
Finally, in some areas of economic reform it is not only
necessary to make further advances, but also to defend our
gains to date.
It is instructive to appreciate that recent statements by
the opposition mean that there is nov a measure of consensus
on a wide range of fundamental tax reforms.
These include the previously contentious fringe benefits
tax, the denial of deductibility for entertainment, the tax
file number system and the removal of the income tax
lipemption for gold mining.
Theme reform are an accepted part of the taxation
structure, not only making the system fairer and more
efficient, but also funding significantly lower corporate
and personal income tax rates.
A significant remaining reform of contention is the capital
gains tax.
Today there is virtually unanimous agreement amongst
inforued commentators that the CGT in a necessary tax on
anti-avoidance, equity and efficiency grounds.
My pint in raising thic imeme in that I hope t'hat. the
business community will take the mature, longer term view
when assessing this issue.
Obviously, some in business, as major owners of capital, may
be tempted to think of the superficial advantages to them of
the abolition of the capital gains tax.
I an suggesting there are much broader issues at stake.
We must recognise the important efficiency considerations at
issue. Removal of capital gains tax will bias investment
towards assets that earn income predominantly from capital
gains, so perverting the proud achievement of this
Gover~ ment in attaining the highest ever recorded level of
business investment to GDP.
We must also consider whether the community will be prepared
to put up with a tax system which not only funds a reduction
in the corporate tax rate to 39 per cant, full dividend
imputation,, and a large cut in the top personal rate, but
also allow capital gains to be tax-free.
7.
it in in the lonq term interests of Australian business that
tMe tax system be socially sustainable and economically
efficient. I do not believe that the alternative proposed meets these
basic tests.