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Tuesday, 30 November 1976

Mr HAYDEN (Oxley) -The acknowledgments from the Prime Minister (Mr Malcolm Fraser) and the Treasurer (Mr Lynch)- less than friendly at times, I suspect- about my alleged role in recent economic decisions leave me with the feeling that the Prime Minister and the Treasurer see me as some sort of Uri Geller of Australian economic affairs- a person with such powerful influence that I can bend the mind not only of the nation but also of a substantial part of the world. Modesty proposes that I disavow this but courtesy prevents me from doing so. All that has really come out from what has been said by both the Prime Minister and the Treasurer is that blind Freddie and his dog are much brighter in economic matters than the Treasurer is. Perhaps the Treasurer needs an economic seeing-eye dog.

I put one thing right on the record. Both the Treasurer and the Prime Minister, no doubt as a well known tactic, have misrepresented comments which I made in the course of a television debate with the Treasurer during the last election campaign. The comments I made were in relation to a possible devaluation. They followed a question from the interviewer. I have obtained the record from the Parliamentary Library Current Information Section. Mrs Sluyters' services are eminently efficient, comprehensive and reliable. The record states:

Mr Hayden:I'm reluctant to talk about these things normally. There is no reason for any devaluation at all of the Australian currency. The balance of payments are strong, our currency is very strong.

That is a direct quote. It is somewhat different from the version which has been given in a freehand style by both the Prime Minister and the Treasurer. I suggest that, if those 2 prominent public figures wish to quote what people have said, they do so with some sense of integrity. In their role it is generally assumed by the public that, no matter who fulfils those high public offices, any public comments will be made with a firm commitment to integrity and that honesty will not be assaulted in the course of making those comments.

The devaluation decision was a confession of failure by the Government. The confession was reaffirmed today by both the Treasurer and the Prime Minister. In fairness I must say of the Prime Minister's speech that it was extremely interesting, even if totally irrelevant to the issue before the Parliament. The Government's economic policy is shattered. In the course of the shattering, public confidence has been destroyed. The Government is numbed by confusion, the public is gripped by uncertainty. The fact is that the Government does not know where to go next. It has made a most significant decision under conditions which are vastly different from those which applied the last time on which a devaluation was made by this country. The Government has made a decision about devaluation in circumstances which are much more difficult to administer than was the case in 1 974. So, not only is it quite inappropriate for the Government to try to draw some analogy with the situation in 1974 and accordingly somehow to try to bolster its flagging confidence but also it is gravely wrong. For anyone who understands simple economic principles it is simply disturbing. The reason is that it suggests very strongly that the Government does not know what it is about. The evidence in the House today is that the Treasurer does not know what he is about. He genuinely needs an economic seeing-eye dog to help him through the maze which he has run into through his own foolishness and imperception in relation to economic matters.

Today, in the course of question time, the Treasurer was asked a question by me, flowing from a statement he made last Sunday night about devaluation. Specifically, in the question, he was asked about future wages policy. We then had the unsettling evidence that the Treasurer could not answer the question. He had no idea at all, even in the most general terms, of what sort of wages policy might apply in the future. The Government does not know what it will do. It has made a most significant decision which, to be effective, will require wide ranging follow-up action of most important policy implications. The Government is unable to give the faintest indication to the Parliament and the nation of what might follow. I think we ought to recognise one other important thing too before I move on to some of the more significant points in this debate. The Government is now in the driving seat of the economy. It has been in office for 12 months. This decision on devaluation is a radical departure from anything that was going on before. The Government has scrubbed the board clean. It can no longer say, as it may try to do in the New Year, that the difficulties confronted by the nation arise from what happened before it came into office. Devaluation makes those proposals, which were being put before devaluation for a more effective handling of the economy by people in the Parliament and outside the Parliament, no longer relevant. Devaluation creates a whole new set of circumstances. Accordingly, new policies have to be devised by the Government.

Devaluation became inevitable on the Prime Minister's conversion to that policy. Its certainty was guaranteed by a Cabinet leak. We heard today from the Treasurer a suggestion that the alternative to devaluation at this point was a $ 1,000m overseas borrowing. But I suggest that if it had not been for that Cabinet leak and if there had been a firmer and understanding statement about possible action by the Government on overseas reserves, it may have been possible to have discouraged the flight from capital which became a panic after the leak appeared in the newspapers indicating the Prime Minister's conversion to devaluation. I substantiate that suggestion by pointing out that our holdings of gold are valued at much less than the market rate. In fact, the value is about only one-third of the market rate. Valuing our gold holdings at the market rate would have added $500m to our overseas reserves. This could have been done by one stroke of the pen quite justifiably, not by any falsification of the books. If the Government had, additionally, announced that there was still another $500m of International Monetary Fund unconditional drawing rights available to the Government- making a total of $ 1,000m- and if the Government had done that some time ago in the firmest terms it just may have been possible to stave off the problem which has arisen. But the Government's economic policies were strung up- lynched as it were- by that leak from the Cabinet which identified the conversion of all of the Cabinet except for the Treasurer, the strong man, and the Minister for Industry and Commerce, Senator Cotton, the 2 people who held out.

I cite the Age newspaper on this matter to draw out the contrast between the characters which is displayed as a result of the leak. The article, which was in the Age of 10 November, was written by Kenneth Davidson, and it states:

It emerged at the meeting that a majority of the Cabinetincluding the Prime Minister - are soft on devaluation . . .

According to inside reports, much of the time was spent on the devaluation option. Mr Fraser and the rest of Cabinet, with the exception of Mr Lynch and Senator Cotton, were drawn to the subject like moths to the light.

What contempt for his Cabinet colleagues dripped from the person who leaked that report to Mr Davidson. That person showed contempt for the majority of his colleagues in the Cabinet. The Treasurer emerges as the tough man. The Prime Minister emerges as a towering mountain of jelly. Blind Freddie and his dog were not responsible for this devaluation or for any run on the Australian currency. I put another proposition to the House. If it is simple matter of blind Freddie and his dog having this enormously powerful, persuasive effect on the economy, does anyone believe for a second that if blind Freddie and his dog went out into the public square and stated that our currency was undervalued and that there ought to be a revaluation, then tomorrow morning there would be a massive flood of money into this country from overseas? Of course he does not.

It was not only blind Freddie and his dog who were pointing out the weakness in the Australian currency. The London Economist did this on several occasions. It is one of the most influential financial journals in the Western world. Sir

Leslie Melville, an eminent economist formerly of the Reserve Bank of Australia and formerly Chairman of the Grants Commission, has pointed this out. The Australian Department of Overseas Trade was responsible on at least 3 occasions in some way or another for a leak to various journalists indicating that it was writing minutes to the Government through its Minister, warning of the inevitability of devaluation. Syntec, the economic intelligence journal, on one occasion referred to the possibility of a devaluation.

Then of course we come to the most eminent economist in the Australian Parliament, as he is always the first to acknowledge- I understand that he is the only one to do so- a former Treasurer and former Prime Minister, the right honourable member for Lowe (Mr William McMahon). In July the Melbourne Herald, amongst many newspapers that covered the story, referring to a forum at Wagga quoted the right honourable member as having said that Australia was pricing itself out of export markets and that the Government must consider devaluation as an instrument of policy to right the position. Quite frankly, I do not want to take the credit all by myself for being the most influential person in the Australian community when an expression of opinion is put forward on the issue of exchange rate values. After all we do have it on the most reliable authority- himself- that the right honourable member for Lowe is the most eminent and influential economist that this Parliament has seen.

The Arbitration Commission also warned about this. So too did the honourable member for Mackellar (Mr Wentworth) who said in this Parliament on 21 September

Australian wage costs- which arise from a combination of wage rates and industrial practices- are so far out of line with overseas wage costs that the gap cannot be bridged without some change in the terms of overseas trade. The best and fairest way to make this change is by a devaluation of the Australian dollar, and the sooner we face up to this devaluation the better.

That was said by a former Minister of a former Liberal government- a man not without influence. A whole range of people had been barking this advice, which was too obvious for anyone to deny, for a long time. I repeat: The leaking of the conversion of the Prime Minister to the policy of devaluation was probably the most damaging influence in forcing a flight, which became a panic, on Australian currency.

I want to make one other point too in relation to assertions that I somehow commended a devaluation. I was very careful with the choice of my words. I said that a devaluation was inevitable. Saying something is inevitable is not saying that it is commendable or desirable. It is like saying to someone who drinks three or four bottles of whisky a day that it is inevitable that he will suffer cirrhosis of the liver and eventually die. When the result predicted comes about, that does not make one happy, and in predicting the inevitability of the result one is not commending the sort of result to the sufferer. So I want to make it clear, as I made it clear to the people at the Melbourne University in September and as I have done before on many occasions, that the longer the Government deferred a decision on our weakening exchange rate, the greater the adjustment would have to be and, accordingly, the fewer would be the options available to government to administer the economy. Furthermore, the greater would be the difficulties in trying to administer the economy. I pointed out- I have said this on many occasions- that if we had been in Government any adjustments necessary would have been made much earlier. Accordingly they would have been smaller and certainly if there had been any dislocative effect as a result of them it would have been quite minor. That is quite different from the situation which will flow from this decision. There will be major disruptive influences fed into the Australian economy by this very high rate of devaluation which was announced on Sunday.

Before I move to some of the disruptive effects of that decision let me remind honourable members for the record, because the Government seems singularly unable to give details to bolster the argument which it puts forward, that our reserves have been deteriorating throughout this calendar year. The first point I want to make to answer a proposition put by the Treasurer, who said that in 1972-73 our reserves were the equivalent of 13 months of our import bill, that that merely exposes once again that he is guided in his understanding of economic policy by a piggy bank mentality. The fact is that a very high level of overseas reserves, accumulating at a rapid rate, was a symptom of a very serious underlying problem in the Australian economy. Reserves accumulating rapidly as they were in 1972-73 are an indication of the rate at which additional money is being pumped into the Australian economy. A rapid injection of money, as occurred in 1972-73, has highly inflationary effects-with a lag certainly, but nonetheless highly inflationary effects- and thereby lies the genesis for much of what has happened in the Australian economy subsequently. The very high and rapid rate at which our overseas reserves were accumulating was evidence of the undervaluation of our currency on the foreign exchange market.

When we went out of office, to use the words of the Treasurer, we had about 4.4 months' import bill equivalent in reserves. That is a thoroughly reasonable level of reserves. Now let us look at the situation since this Government came to office. The Reserve Bank's holdings of gold and foreign exchange at December 1975, according to the monthly average report, was $2,752m. By October 1976 it had come down to $2,26 lm. But that is not the full story. In the last 4 months there has been a series of borrowings by the Australian Government from overseas totalling $950m. If we look at the period of June and July and make allowances for borrowings which took place then, we find that there was a run-off of $600m from our overseas reserves. Accordingly the problem of a weak, over-valued currency has been with us for most of this year, and the deterioration in the strength of our currency has been most marked in recent months and has been particularly significant in June and July. I repeat that the crunch came when the unprincipled member of the Cabinet leaked to the newspapers that everyone in the Cabinet except the Treasurer and Senator Cotton were converted to the case for devaluation. The collapse has probably been even greater, since the latest figures which I have been able to obtain from the Reserve Bank show that at 10 November our reserves had fallen to $2, 122m. I presume they are much lower than that now, but allowing for borrowings that means reserves fell to less than 2 months import bill equivalent.

This devaluation has lifted the lid on a Pandora's box of economic blight for this country. First, it will lead to a fresh and substantial burst of inflation. If one looks at the submission of the Australian Government to the Arbitration Commission in the national wage case and if one looks at the tables appended to that submission one finds that for the course of this year, if there is full indexation of wages, there will be a consumer price index increase of about 13 per cent. One finds that if there is only two-thirds indexation there will be a consumer price index increase of 11.5 per cent. However, one also finds- it ought to go on the record- that there has been some deceit on the part of the Government in the budget submissions it made to the Australian public and especially to this Parliament. In its statements attached to the Budget it suggested that by the end of this year inflation would be down to single digit figures. If one looks at exhibit M09, as it is called, attached to the submission to the Arbitration Commission one finds that that could happen only if the Government were successful in having indexation at the rate of only 30 per cent, which is a completely unbelievable proposition. I suggest that that statistic compiled by Treasury, submitted officially by the Government with other statistics in that submissionI am looking forward to a discussion of them in this Parliament in the course of the next fortnight- indicates that there has been some deception practised on the Australian Parliament in the way in which the economic forecasts were presented in the last Budget.

But let me move back to the point I was wanting to make. We will probably have an anticipated rate of inflation of 13 per cent this year. The most sanguine estimate would be 11.5 per cent. Some econometric work has been done by quite authoritive economists in this country which suggests that a 10 per cent devaluation will result in a Vh per cent increase in the consumer price index in the first quarter after the devaluation. That suggests that in the first full quarter there will be an addition of something like 2'/2 per cent to the consumer price index as the first round effect, the immediate effect, of this devaluation. If we allow for that and allow for the second round and subsequent effects of this devaluation- they will multiply quite horrendously through the economy- we will be staring at an inflation rate of between 17 per cent and 18 per cent for this year. That has quite disturbing implications for the Australian economy, for business, for labour and for this country. Let me quote from the Government's submission to the Conciliation and Arbitration Commission in a situation where it is apprehending, rather sanguinely, inflation of between 1 Vh per cent to 13 per cent, a much better outlook than the one we have now. It said:

The Commonwealth remains committed to the position it took in its August submission. On that occasion it was argued that the only viable solution to the problems inherent in a decline in Australia's competitive position, vis-a-vis its major trading partners, is a reduction of inflation rates.

It said that the only viable solution is a reduction in inflation rates. That cannot be emphasised often enough because there cannot be any solution, there cannot be anything but bleakness and a great deal of gloom and pessimism in the outlook for calendar year 1977 and into 1978 as a result of this decision which clearly will result in a significant upsurge in inflation in the Australian economy. On the Government's own testimony we are in trouble. It will lead to wage turmoil and we have no less an authority on that than the Treasurer. I quoted him today at question time as saying that 'the Government would be doing everything in its power to ensure that any identifiable effects of the devaluation decision upon the consumer price index did not flow on into wages either through national wage hearings or more generally. '

That is an eminently provocative statement for him to make and I suggest with complete sincerity that in the national interest the Government had better move out into the public forum and explain, at least generally and in some understandable way, what it has in mind. Is it some sort of wage freeze? Is it some sort of disbanding of the functions of the Conciliation and Arbitration Commission? Will it really resort to the abolition of minimum wage rates, as has been suggested by one of those inspired leaks that plague the Government ranks. Does the Government want some sort of peasant standard for the Australian community with the base wage concept destroyed? How far will these people go in their extremist philosophical approach to economic policy? How much suffering are they prepared to inflict on the Australian community? This reminds me that yesterday I was talking to a lady who was a little stunned like most of the community by the devaluation and its implications and she said to me: 'Mr Fraser told me before the last election that if I voted Labor I would be voting for more unemployment, more inflation, more business failures and a worsening of the recession'. She added: 'He was right, you know. I voted Labor and we are getting more unemployment, more inflation, more business failures and a worsening of the recession'.

The wage turmoil will be not only among blue collar workers but also white collar workers- the middle class. The latter have been the people who have been bearing most of the sacrifice on the incomes front, but there is a limit to how much they are prepared to bear. There will be a limit to how much they are prepared to bear when they realise what a significant hike in interest rates is going to flow from this decision. Does anyone believe that the Government can keep interest rates down to or within one or two per cent above what they are now if inflation is to go to 17 per cent or 18 per cent before the end of this year? How are people expected to meet their housing mortgage repayments from crippled wage packets with those repayments spiralling upwards? How will business maintain its cash flow if business activity weakens further because consumer demand weakens as a result of the unemployment which will flow from this decision and as a result of the increase in the savings ratio which must inevitably flow from this decision and its attendant effects of higher inflation? If we accept the general principle put by the Treasury that the high savings ratio we have been seeing in recent times-I frankly think it is a debatable proposition but it is the Government's view- is a direct and exclusive result of the level of inflation, it follows that if we are to have a significantly higher rate of inflation and one that comes about rapidly our savings ratio will be much higher than we have been used to at any stage in recent years. If that is so, that is if the Treasury's proposition stands up, I am afraid that we are in for a very bad outlook in economic management. Consumption will stall as savings rise.

Devaluation has some initial benefits to a small sector of the economy- for example, the rural export sector- but the benefits of that small sector will be quickly swamped as will be the general economy by the cost explosion which will follow unless, and I put this caveat assuming it to be understood, there are appropriate follow-up policy decisions. Let us not believe for one minute that the most disadvantaged sections of the rural economy stand to gain much, if anything, from this decision. The beef industry will not. It will not get into the European markets any more freely because the common agricultural policy will make sure of that. It is politics and not market forces which limits us there. American and Japanese quotas are established by political decisions and not market forces and have no relationship at all with prices. Let us not talk about the possibility of selling more meat to Russia or to any communist bloc countries as a result of this devaluation because everyone in this House should know that we heavily subsidise the price of beef we sell to these countries and are selling it at less than cost price. The dairying industry will not benefit from this decision nor will the fruit industry.

Let me move quickly to another aspect that seems to have been attended to quite inadequately by commentators. I refer to the protection effect which follows devaluation. The average level of protection in Australia is about 26 per cent. The result of this devaluation will lift it to about 48 per cent. For areas such as sections of the textile industry that have about 35 per cent protection we will effectively take the protection rate to nearly 59 per cent. What does this mean? It means clearly that mothers will be paying a lot more for the clothing of their children and others in the household. Shoes will be more expensive. The things that people already find expensive enough will be a lot more expensive. Resources which are used in these protected industries will become more expensive, and I do not exempt from this labour resources because employers will find it easier to respond to wage pressures because of the way in which the protection effect increases following devaluation.

The Treasurer seems to see some saving grace in capital inflow which might flow from devaluation. That is sheer nonsense. If any substantial capital inflow comes into this country in a short period it will have an enormously destabilising effect on the economy. A rapid inrush of foreign capital will add to the money supply and goodness only knows the Government has more than enough trouble trying to get the rate of increase in money supply down to the target of about 10 per cent stated in the Budget. I do not believe it can do it. In any case, the latest figures I have extracted show M3, for whatever M3 is worth among all the other Ms which are available in the money supply, increasing by 16 per cent for the November quarter. M3 is the figure that the Treasurer quoted when he suggested that the target was 10 per cent. The Government cannot get down to it and if there is a substantial inflow of foreign capital the problems of inflationary management arising from monetary policy will be enormously aggravated.

It increasingly looks as though a large section of the community will have to bear the burden of sacrifice and disadvantage as a result of this decision, especially if there is to be substantial capital inflow. Has anyone really had a close look at the likely effects of the so-called dirty float that the Government now proposes? Given these symptoms I have been indicating to the House of a rapid increase to a high level of inflation, of the push in interest rates and of the problems on the wages front where indexation it seems is about to be totally disbanded and the whole concept that we have historically adhered to on wage fixing arrangements jettisoned and other symptoms, one discovers that there will be a very volatile inflationary force loose in the Australian economy. In that situation, if we have a dirty floating currency we may well see further devaluation effects in 1977. The economy was already heading for a tough 1977 with record high unemployment, tougher business conditions and prolonged and deeper recession, but this decision compounds that bleak outlook. Unemployment is unlikely to go below 5 per cent at any stage in the next calendar year and it may well plateau at nearly 6 per cent with higher levels for several months of the year. It is a grim outlook for school leavers. It is a grim outlook for the workforce and for those who have been unemployed, particularly those who have been unemployed for too long. It is a grim outlook for business and a particularly grim outlook for the nation. Australia was asked to turn on the lights by the Liberals and it has discovered that it turned the lights on for a horror show.

Mr DEPUTY SPEAKER (Mr Lucock)Order!The honourable member's time has expired.

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