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Tuesday, 24 March 1987
Page: 1384


Mr KERIN (Minister for Primary Industry)(3.49) —I understand the reasons of the honourable member for Gwydir (Mr Hunt) in raising this matter today. I understand the pressure that is on him and his colleagues who represent rural areas, because the same pressure is on my colleagues who represent farming and rural areas. As I have said, and as everyone knows, interest rates are very high. There is simply no denyinjg that. I was reminded today of an old dog named Ralph that I once had on the farm. He only learnt one or two tricks. What we have seen today falls into place with the rest of the Opposition's rather cynical, broad political strategy, and that is to focus on problems and to put forward rather wet or ineffective solutions. Often it puts forward solutions that are cynical in the extreme because it plays on fears, it plays on voodoo economics, and it plays on the gullibility of people.

For example, it talks about a wages policy, yet in the Heathcote and Bankstown by-elections the Leader of the Opposition (Mr Howard) was running around saying: `Labor doesn't represent the wage earners anymore. Wages are down by $31 since the Labor Party came into office'. The Opposition wants to freeze wages. It has opposed every wage increase and wage case that has gone to the Australian Conciliation and Arbitration Commission. Many Opposition members are aligned with the new Right that wants wages at $171.30 a week. The average rural wage happens to be about $220 a week, so probably it is not much to take it down by another $50. On the one hand it is saying that the real standard of living is going down-as it is-because of the international balance of payments situation we have on our hands, yet on the other hand it wants to run this wicked, cynical political campaign. Similarly, the opinion polls tell the Liberal Party and my Party that people are confused about the exchange rate going down. People think that this is a comment on the adequacy of macroeconomic policy. So the Opposition is saying that it is a terrible thing for the exchange rate to be down, yet the National Party-whichever one we can take any notice of these days-is saying that the exchange rate should go down further; more cynicism.

We heard the same bleatings in this place yesterday about youth because someone saw in the polls that the youth vote is a little disenchanted. But the Opposition, of course, would never change the young people's unemployment benefit. What it would do is introduce university fees. If honourable members want to see a full analysis of the Opposition's education policies just look at page 20 of the Age today. What we hear today is cynicism. If we had time I would like to go through this whole rural debt problem, the relationship between the exchange rate and interest rates, and the balance of payments. We would have to look at what are the problems, we would have to find out what is the true situation and what are its causes. Secondly, we would have to look at what can be and is being done. Then we would have to look at what else can be done. What are the alternatives?

The Deputy Leader of the National Party has put forward four matters. He says, firstly, that bounties should be replacing tariffs. We are doing that where we possibly can with agricultural machinery including headers and a range of cultivation equipment. We are trying to get more progress in other areas, but as I have explained to him and others, there is a compositional problem-we cannot delineate all machinery as being purely agricultural machinery. In other words, a portable five-horse power motor can be used for agricultural purposes or for other purposes, so can generic bearings, axles and other things.

With respect to excise, the big problem on petrol-I must point out that we have taken that decision with respect to distillate and it is now worth an estimated $260m to the rural sector-is quarantining it to the rural sector itself. We all know that a direct budgetary cost is involved here. As we all know the National Farmers Federation wants us to take $10 billion off the Budget deficit. Des Keegan in the Australian today wants to take $20 billion off the Budget deficit and yesterday the Leader of the Opposition, according to the front pages of newspapers, wanted to take $5 billion off. So there are budgetary problems.

The second point that the honourable gentleman makes as a solution relates to the rural adjustment scheme. That has been increased this year some 14 times. In addition to this there is the sugar adjustment package which is part of a $100m contribution by the Commonwealth Government and another $50m by the Queenslanders-if we can possibly spend the money on that industry as it is so hide-bound in regulation. Then there is the dairy adjustment scheme where the moneys have been paid over to the States. Overall, the rural adjustment scheme is not an interest subsidy scheme per se.

On the farm development fund and the relationship of that to the statutory reserve deposits-his third point-the problem is with deregulation in the banking sector. The SRDs are now there for prudential purposes, not so much there as fat that can be used. That is one matter that we are looking at. His fourth point was to have a meeting. We believe that the NFF is best placed to talk to the banks in the manner they are today. We believe that that is entirely appropriate. Since I had two meetings with the banks last year, we have an ongoing monitoring device. The Friday before last I sat down for most of the day with the State governments and their rural adjustment Ministers. It is not as if we do not have enough facts on the situation.

I said: `What are the alternatives and what is the rural sector running with?'. Basically the farming organisations are saying that the Government is maintaining high interest rates to keep the exchange rate up. That is not true. They fail to look at the other side of the coin. If the exchange rate went down, interest rates would not go down. They cannot get the relationship right. If the exchange rate went down, interest rates would go up. They could get a little more for their commodities overseas, costs would go up because inflation is feeding through the economy where there are inputs into production and the international debt would go up. On the other side of the coin, if the exchange rate moves up, interest rates would go down, farmers would get less revenue overseas for their goods, costs would go down and the international debt would go down. We have only to refer to the newspapers day by day. A headline in the Australian of 26 February reads: `Dollar breaks through 67c level'. The article stated:

The rise sparked further falls in interest rates on the money market, where yields on 90-day bank bills, the indicator rate for the rest of the market, finished at 16.4 per cent, down from 17 per cent just a week ago.

Every time we see a movement in the exchange rate it tracks out the relationship I have just described. Mr Walsh in the Sydney Morning Herald this week when referring to the harlots in the Senate on the Australia Card said:

The price for not taking the necessary decisions will be a lower exchange rate . . .


Mr DEPUTY SPEAKER (Mr Leo McLeay) -Order! I think the Minister should probably not reflect on the other House in such a manner. He might withdraw that remark.


Mr KERIN —Yes. I was quoting directly from Mr Walsh.


Mr DEPUTY SPEAKER —I see. It is quotation. I apologise. If it is a quotation it is in order.


Mr KERIN —He pointed out why Mr Hawke must challenge the harlot.


Mr Cadman —Does that mean we can read anything into Hansard?


Mr DEPUTY SPEAKER —The Chair can do without any help whatsoever from the honourable member for Mitchell. If the honourable member for Mitchell wants to make some contribution he might do so from his seat and not from some other part of the House.


Mr KERIN —I will just clarify that. I was not referring to senators as harlots. I was saying that Mr Walsh used the overall, general description of the Senate as a harlot.


Mr DEPUTY SPEAKER —If the Minister is quoting from the document he might continue.


Mr KERIN —The quote is:

The price for not taking the necessary decisions will be lower exchange rate which will automatically increase our indebtedness and therefore our interest payments. It will mean continuing high interest rates. Inflation will be locked into double digits and unemployment will quickly move to that range.

Most economic commentators fully understand the relationship, but the Opposition and the farming organisations will continue to fail to recognise what the relationship is. The reality about interest rates is that they reflect a number of factors including economic growth, inflationary expectations, balance of payments, as well as the Government's monetary policy. At present, the Government must run a tight monetary policy in order to reduce inflationary pressures, but in no way can this be considered excessively tight at present, but it is tight nonetheless. A lax monetary policy-if that is what the Opposition is advocating-would be an inflation disaster because high equity ratios would be even worse than the high interest rates for most farmers. In other words, the monetary policy has the effect of temporarily supporting the currency at a higher level than would otherwise be the case. However, it is not the sole purpose of the monetary strategy.

There has been a very substantial depreciation. The Bureau of Agricultural Economics index shows a depreciation in real effective terms of 37 per cent since the December quarter 1984. That has resulted in record levels of competitiveness. We should be moving to capitalise on the benefits of the devaluation we have had, not put forward all this witchdoctor stuff, voodoo economics, that the Opposition is suggesting. The honourable member for Gwydir incorporated in Hansard a table which incidentally shows a very good performance by the Whitlam Government. He misread one figure. The differential between Australia and the USA in 1985 was 6.47. There is no figure of 10 per cent there.


Mr Hunt —It is 10 per cent now.


Mr KERIN —It is not in the table. What does the table show? It shows that there is very little correlation in the table. The honourable gentleman fails to understand that we are dealing with a different situation altogether since we floated the currency and since we deregulated financial markets. The terms of trade have moved against us by 20 per cent to 30 per cent and we have had a loss of export income of $6 billion to $8 billion per annum. We should be capitalising on the benefits of the real devaluation of 37 per cent, rather than adopting some of the policies put forward by the rural sector, which wants us to push down the exchange rate even further. That would be against the interests of the rural sector, as interest rates and the national debt would go up.

The other part of the honourable gentleman's comments related particularly to inflation. The currency depreciation and the terms of trade shift fully explain Australia's relatively poor inflation performance against the rest of the Western world. High interest rates are necessary to narrow and finance the balance of payments deficit in the context of a risk premium; hence both inflation and interest rates will fall as the balance of payments deficit falls and the currency stabilises.

The honourable member for Gwydir referred to suggestions by the National Farmers Federation of Australia that the United States experience of a 40 per cent currency depreciation yet low inflation, a rate of 2 per cent against our rate of 9 per cent in 1986, and low prime interest rates-7.5 per cent, against our 18 per cent-contradicts this view. There is no such contradiction as the United States is very different from Australia. The United States average depreciation has been much less than 40 per cent. It is 30 per cent at most against the trade weighted index, which is only a little less than our 32 per cent over the two years to December 1986. Some people have suggested that a proper re- weighting of the United States index would give a depreciation of only 5 per cent.

Imports are a smaller share of the United States gross national product-13 per cent against our 20 per cent-so that depreciation has a greater effect on our inflation that on inflation in the United States. In addition, the United States is such a large market that importers attempt to retain their market share, which reduces the effect of depreciation on inflation even more. Most importantly, the United States has not experienced a terms of trade decline. Falling agricultural export prices have been matched by falling import prices, particularly oil prices. So while our inflation will fall as the terms of trade stabilises, the inflation rate of the United States will rise. The United States depreciation will turn its balance of payments around quicker than ours because historically it has been a net creditor overseas, so it does not have the same J-curve effect from foreign debt that we have. The United States is such a major economy that world interest rates are basically set there. Our real interest rates are much closer than a comparison with nominal rates would indicate-about 8 per cent in Australia and 5 per cent in the United States. Wage movements cannot be blamed for our poorer circumstances because our real wages have fallen substantially over the past two years whilst United States real wages have hardly moved. In other words, the comparison put forward by the National Farmers Federation is nonsense.

Let me bear down a bit more on the relationship of inflation to our terms of trade situation. The currency depreciation we have experienced explains our increased inflation rate. If one only includes the direct movements in import prices and ignores the indirect effects, it does not fully account for it all. I believe that we must include price increases arising from increased input prices, domestic import-competing producers taking advantage of increased import prices to increase their profit margin, increased domestic prices of exportables, and some wage response to all the above. In other words, discounting could never account for all of the factors. So our 32.3 per cent depreciation in the last two years would directly increase domestic prices by 6 per cent as imports are 19 per cent of the gross national expenditure; so the total effect will be much greater than this.


Mr DEPUTY SPEAKER (Mr Leo McLeay) —Order! The Minister's time has expired.