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Wednesday, 23 March 1994
Page: 2027


Senator GIBSON (11.17 a.m.) —I rise to speak on the Taxation Laws Amendment Bill (No. 4) and to support my colleagues who have spoken before me. I want to take a few minutes of the Senate's time to talk about the general economic management by the government and the momentous decision which the government is facing in the near future with regard to its budget—that is, the deficit for the next financial year.

  Last August, the government budgeted for a deficit of $14 1/2 billion, which is a bit over 3 1/2 per cent of total GDP. It signalled that its plan was to reduce that deficit to one per cent of GDP—one per cent of the total economy—or to about $4 1/2 billion by 1996-97.

  It turns out that the government expects the actual deficit this current financial year to be less than the $14.5 billion due to the much higher economic growth which has come through, thank goodness, of around about four per cent rather than the forecast 2 3/4per cent, which was in the budget papers last year. We all welcome the news of the higher economic growth, but we believe that that growth should be used to lower the deficit, reduce the claim by government on savings and make room for private sector investment within the Australian economy.

  This is a very vital issue to everyone in Australia, not for the short term but for the next several years. I have said in the chamber several times that we are facing an absolute crisis in investment in Australia. Total business investment has been at absolute record lows for the past 30 years, and plant and equipment investment is at its lowest level for 50 years—since World War II. Why is this so? Why are people not investing here? They have not been doing so because there has been too much uncertainty over the last several years; there has been a lack of opportunities for people to make profits. I am not just talking about big business: I am talking about government businesses, companies and particularly small business. We must remember that most of the growth in business in Australia in the last several years has been in small business—very small business.

  Unfortunately, this government has accentuated the uncertainty during the period it has been in government by accentuating the boom and bust cycle—the recession we had to have. We have had much higher interest rates than we needed to have, particularly over this last deep and long recession. Added to that, there has been further uncertainty for the business community with regard to industrial relations legislation and Mabo. Instead of aiming to try to free up the economy and encourage investment—its rhetoric has been in that direction—the government's actions have deterred people from investing in Australia.

  Why does the deficit matter in all this? The government's deficit—how much it spends beyond what it gets in—matters because it has an impact on the interest rate regime in Australia. Interest rates are already on the move. In the last six weeks, interest rates on 10-year bonds have increased by about 1 1/4 per cent. The futures on bank bills indicate that by December this year, which is not far away, they will also be up by about one per cent. This morning we had news from the USA of further rises in interest rates which are likely to roll through to the Australian interest rate regime. That signifies that the government has to handle the budget very careful. If the government wants to encourage investment and sustain economic growth, we have to reduce the deficit and move towards a surplus as quickly as possible.

  Today Australia has a very substantial external debt—about $170 billion, which is 43 per cent of GDP. Over 10 years ago when this government came to power, the net debt was only about 15 per cent of GDP, so there has been a massive change. The change in external debt means that, on such things as interest rates, we are now far more exposed as a country to international fundamentals. As Max Walsh pointed out last week, if Europe and Japan get into recovery mode and start growing again, from past experience we can expect about a two per cent lift in real interest rates. What can be done about this? The government can reduce the deficit towards the figure—as my colleague Senator Short and the Business Council has mentioned—of $8 billion to $10 billion. That is the sort of target we need. The Australian community needs to understand that unless the government aims for such targets, we are back on the rocky road of boom and bust.

  Back in 1984, then Treasurer Keating ridiculed the fiscal doomsayers who pushed for lower deficits and reduced government expenditure. Only two years later he had to proclaim that we were living in a potential banana republic. Over the last 10 years or so we have had a history of very substantial booms and busts. In order to avoid that, we have to take a longer term view of the economy and seriously consider reducing the deficit.

  If business starts investing, and we all hope that it does, what will happen? Most of the investment, particularly in, say, most plant and equipment—which, as I said before, is currently at a record low level of about six per cent of GDP—comes in as imports into the country. As business investment picks up, the import levels will pick up. What will happen then? Because of our large external debt, we will have a problem of balancing our external trade. What tools can the government use to help put the lid on that? Virtually the only tool it has is control of interest rates. That is why it is important to anticipate that outcome now, to reduce the deficit, thereby reducing pressure on interest rates in the future.

  Together with investment we need increased savings in Australia. Savings are at an all time low right now. The FitzGerald report last year pointed out that the biggest culprit behind Australians not saving is the federal government and its expenditure. In this morning's Australian Financial Review, Professor Colm Kearney pointed out that public sector investment has also been substantially cut in recent years. The government has cut investment within its sector rather than cut current or operating costs. The answer to all of this is that the government has to seriously look at aiming for a surplus in its budget situation as soon as possible.