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Tuesday, 23 October 1984
Page: 2175


Senator CRICHTON-BROWNE(10.26) —The appropriation Bills are set on a false, inaccurate and improper premise. They are set on the basis of certain receipts in the coming 12 months. The appropriations flow from the August Budget, in which certain assumptions are made. The Treasurer (Mr Keating) brought down his Budget in August with a speech full of self-congratulations. We were told that the economic growth last year was a result of the Government's policies and that no one could seriously argue that 'we'-to quote the Treasurer- could have done better. We were told about the 230,000 Australians who had found jobs last year. He did not say that a number of those were part time jobs. The 664,400 Australians who did not have jobs at the end of June 1984 did not rate a mention. These are the people who are bearing the true cost of Labor's prices an incomes accord, which has been a remarkable success if one accepts that it has achieved the preservation of wages of union members at the expense of the unemployed.

Earlier this year, in March, the Treasurer, in his speech to the Economic Planning Advisory Council, described the cause of the upswing in economic activity rather differently and, in my view, perhaps more accurately. He pointed out that the temporary influences which had stimulated activity during the financial year 1983-84 would wane during 1984-85. The temporary influences which the Treasurer referred to were the end of the drought, which resulted in an enormous 47.1 per cent growth in farm product to the September quarter of 1983; the turnabout in the stock cycles; the growth in dwelling investment, which was largely stimulated by the first home owners scheme; the general improvement in world economic activity, particularly in the United States of America; and, importantly, the previous Liberal Government's wages pause which enabled progress to be made in reducing the very high level of wage costs within Australia. In the same speech to EPAC the Treasurer identified perhaps the most important factor necessary for a sustained recovery. He said:

Sustaining the momentum of growth will require business investment to replace the temporary influences which are operating at the moment.

In a later speech to EPAC in May the Treasurer emphasised the importance of private investment, this time in the context of the Budget. He said:

There is one aspect that stands out and which is undoubtedly central to Budget considerations; namely the need for a revival in business fixed investments during the course of 1984-85.

The Treasurer is in no doubt as to how governments are able to facilitate private sector investment. In June 1984 Mr Keating told the Premiers Conference:

If private sector activity is to be encouraged governments at all levels need to reduce their demands on capital markets.

In other words, government spending must be cut and deficits must be lowered. The Treasurer has now presented a Budget which, as he pointed out, will create a deficit of $6.745m-$1,216m less than last year's deficit. What was not made so clear is that this deficit is based on substantial real growth in government spending and precariously optimistic revenue estimates based on shaky assumptions of Australia's future economic performance. Certainly in nominal terms the Treasurer can tell us that the 13 per cent increase in Budget outlays is a lower increase than for any year since 1979-80. But if we look at the increase in outlays in real terms-that is, adjusted to remove the effects of inflation-the picture is very different. In real terms government spending on Budget outlays will rise by 6.1 per cent. Total outlays will reach an estimated $63.945m in 1984-85, representing an enormous 31.1 per cent of gross domestic product.

The two Budgets of this Labor Government have increased spending by an annual rate of 6.9 per cent. One should compare this with the record of the previous coalition Government, which held back the increase in Government spending to an average of 2.1 per cent over seven consecutive Budgets. Of course, we were faced with rectifying the damage caused by the three disastrous Budgets brought down by the Whitlam Government, which increased spending at that time by an average of 10 per cent per year. Furthermore, it is of the utmost concern that these vast sums of money spent by the Government will not increase the productive capacity of the economy; they are simply financing current consumption expenditure. Capital expenditure as a proportion of total outlays has fallen dramatically over the last 10 years. In 1974-75 over a quarter-25.1 per cent-of Budget outlays were payments for capital purposes. In this Budget only 8.9 per cent of Budget outlays are on capital expenditures. In addition , a very large part of this year's outlays will serve as debts which have accrued as a result of continually increasing Government spending. In 1984-85, $5,601m will be spent on public debt interest payments; that is, 8.8 per cent of total outlays, only slightly less than the 9.1 per cent of outlays spent on defence, and an increase in real terms of 21 per cent compared with last year.

The Budget is only one sector of Government spending in the economy, as Mr Keating properly points out. Governments at all levels make demands on the financial markets. The total public sector includes, as well as the Commonwealth Budget, commercial Commonwealth authorities such as Qantas Airways Ltd, Trans Australia Airlines and Australia Post, and State and local government sectors. In 1983-84 outlays for the whole of the public sector reached a staggering 41.8 per cent of GDP. Just over 10 years ago, in 1972-73, public sector outlays were 31.3 per cent of GDP. In the relatively short time since then they have increased to consume a further 10 per cent of GDP. The implications of that are clearly spelt out in this year's Budget Paper No. 1, which states:

In the short run at least, growth in total public sector outlays will tend to increase the aggregate demand for resources. Over the longer term, there are implications for the mix of goods and services which are produced and for the flexibility of the economy. The levels of taxation associated with increased Government spending can also have implications for incentives, the allocation of resources and wage demands within the economy.

The very high levels of public sector spending seen in recent years have resulted in public sector borrowing requirements in 1983-84 of $14,807m, 8 per cent of GDP. Compare that with 1971-72, when the public sector borrowing requirement was only 1.7 per cent of GDP. Under Whitlam that figure leapt to 5.6 per cent of GDP in 1974-75. Perhaps even more horrifying than the public sector deficit for 1983-84 is the level that the total stock of public sector debt has reached. Using estimations of securities on issue, the total stock of public sector debt reached $74,495m at the end of 1983-84; that is, 40 per cent of GDP. This takes account only of conventional methods of financing debt and does not show the effect of some of the alternative sources of finance which have been used by some public authorities and State governments, such as New South Wales, recently. One is the lease-back arrangement.

The concomitant of this level of public sector debt is huge interest payments, which lock in future high levels of government spending. Interest payments required to service the public sector debt were about $8,191m in 1983-84, 4.4 per cent of GDP. During the last two years business fixed investment has been at historically low levels, falling from 16.5 per cent of GDP in 1981-82 to 13.8 per cent of GDP in 1982-83, and further last year to only 12.2 per cent. At the same time there was an increase in lending by the household sector as a result of the 4 per cent increase in household income, which interestingly enough was not matched by an equivalent rise in consumption. So the savings ratio increased from 12.4 per cent in 1982-83 to 13.6 per cent.

Combined with some increase in corporate profits from the very depressed levels of 1982-83 these factors have meant that during the last year financial markets were able to cope with the demand for funds without excessive pressures. However , should this very much needed recovery in private investment materialise, the pressures created by the public sector borrowing requirements could result in increasing interest rates which would choke off business investment. The awareness of that possibility acts as a powerful disincentive for the business community for as long as we have these high and rising deficits in the public sector. This was clearly outlined, of course, in Budget Paper No. 1 which states :

Sustained growth in the Australian economy will depend very heavily on continuing recovery in private investment, which in turn requires a reduction in the public sector borrowing requirements to take pressure off financial markets and reduce interest rates.

Of course, reining in government spending is a task which might risk some short term unpopularity-a commodity which this Government is clearly unwilling to sacrifice for the longer term good of Australia, in view of its plans for this early election. The Government's failure to cut the Budget deficit by a really significant amount is also in part a reflection of the costs of buying the goodwill of the trade unions. As I said earlier, ultimately the need to reduce the deficit had to take second place to some placatory tax cuts. This eventually was foreshadowed by the Treasurer, again in his May speech to EPAC. Then he pointed out the degree of conflict between:

. . . the emphasis upon reducing the Budget deficit and on providing tax cuts to support the wage moderation aims of the accord.

An additional danger which could arise from the pressure on financial markets created by the high levels of government spending is a further increase in borrowings from overseas. Certainly the experience of 1981 and 1982 was that the sharp increase in the corporate sector's demand for funds was met, in part, by an increase in foreign lending. Foreign funds are not, of course, a perfect substitute for domestic capital because of exchange rate risks, unfamiliarity with overseas credit markets, and economic and political differences between countries. More serious, however, are the implications of Australia's steadily rising external indebtedness.

Ten years ago, in 1974-75, Australian's gross external debt stood at $5,363m or 8.7 per cent of GDP. In 1982-83 the Treasury estimated that this had risen to 20 .6 per cent of GDP and stood at $33,719m. I believe that estimates of gross external debt for 1983-84 suggest that it has risen even further to around $42, 000m or 22.8 per cent of GDP.

The cost of servicing that level of external debt is enormous. Interest and capital repayments for that estimated debt during 1983-84 cost Australia 45.4 per cent of earnings on exports of goods and services. Forty-five per cent of our exports went to repay our overseas loans. Thus a very substantial part of our export income is now being used to finance our foreign debt burden. Our ability to continue to meet these debt repayments depends upon strong growth in exports, which in turn makes it vital that we improve our international competitiveness. The total overseas debt is made up of borrowings from both the private and public sectors. While public sector borrowings abroad make up the smaller part of the total, they have followed the overall rising trend. Gross public overseas debt increased from 1.8 per cent of GDP in 1975-76 to 7 per cent of GDP in 1982-83, and is estimated to have increased further to around 7.8 per cent of GDP in 1983-84.

The end result of those borrowings depends very much upon the use to which they are put-specifically whether they are used to increase the productive capacity of the economy, such that the means to make future loan repayments is generated. Unfortunately, there are indications that this has not been the case and that the overseas loans have not all been used to contribute to productive capital development. In the supplement to the April round-up of economic statistics, ' Australia's External Debt', the Treasury concluded:

Although the net inflow of resources from abroad has been historically high in recent years, the same cannot be said of domestic investment which, as a proportion of GDP reached higher levels in the 1960s. It has been consumption expenditure-and particularly government consumption expenditure-which has been at a high level.

A recent Department of Trade paper on the same subject pointed out that a high level of external debt is indeed a risk for the domestic economy and to bear this risk it is vital that capital is put to the best uses. It is quite unacceptable that foreign borrowings should be undertaken merely to finance profligate and non-productive government spending.

Turning back to this year's estimated Budget deficit, it is based, as I said earlier, on a forecast of an increase in receipts of 17.7 per cent during 1984- 85. This growth in revenue is dependent upon a very optimistic forecast of this year's economic performance. The uncertainties which cloud this view are clearly set out in Statement No. 2 of the Budget. Of the overseas market it is stated:

Growth is expected to moderate, financial markets are precariously placed and competitive pressures are becoming increasingly fierce.

It is pointed out that Australia is particularly vulnerable to a decline in the level of world economic activity because of the effect on our terms of trade of any associated falling off in commodity prices. As it is, commodity prices are at very low levels with little sign of improvement in the near future. Wheat prices, for example, are at their lowest levels since the Second World War. The price of sugar is perhaps at its lowest level ever. Iron ore prices have fallen back to the levels of 1981. The commodity index in United States dollars shows an overall fall in metal prices of 14.6 per cent for the year ended 31 July 1984 . That index has fallen considerably since. The same index for agricultural commodities shows a fall of 21 per cent over the same period. It is anticipated that there will be a fall in aggregate farm receipts of 29 per cent this year.

On the domestic front, it is noted that a precondition for growth in employment is wage restraint and a further fall in inflation. However, the point is made that:

Past Australian experience has been that it is difficult to restrict increases in wages and other employment benefits to those granted by the arbitral authorities in an economy where excess capacity is diminishing and profits are high and rising.

In addition, I make the point that in my view, and I am sure in the view of most employers, some of the benefits that have been granted by the Australian Conciliation and Arbitration Commission recently will have the effect of dramatically increasing the associated costs of employment to the employer. In particular, I refer to the job security test case decision which was recently handed down by the Commission. This decision which sets very high levels of redundancy payments has, according to the Confederation of Australian Industry, 'potentially lopped whole percentage points off Australia's future rates of growth and has added an entirely new dimension to the problems involved in getting unemployment rates down'. The uncertainties that are pointed out in Budget statement No. 2 are not therefore vague possibilities, but a very real threat to our economic growth.

I also draw the Senate's attention to the inaugural edition of the National Economic Review, recently published by the National Institute of Economic and Industry Research. Its predictions are described in one very telling sentence in the Australian Financial Review of 18 September 1984 as 'confirming the Federal Government's political wisdom of going for a Federal election before the economy goes off the boil'.

Predicting growth in non-farm gross domestic product of 3.1 per cent in 1983-84 compared with Treasury estimates of 4 per cent, the National Economic Review says that no further improvement in the unemployment rate is likely during 1984- 85, and by the end of 1985-86 it will have risen to 10.3 per cent. With the policies of this Labor Government that is a very realistic scenario. Two-thirds of the jobs in Australia are provided by the private sector and it is upon an expansion of this sector that the creation of new, productive employment depends . Yet the resources of the economy are being directed away from the private sector towards the public sector. This Budget, which has increased outlays by 6. 1 per cent in real terms to 31.1 per cent of GDP, will, despite very large increases in expected revenues, require borrowing by the Commonwealth Budget sector alone of $6,745m. Of course, that will further exacerbate this process.

As I said earlier, it is my view that those forecasts of receipts are a great deal higher than are likely to be realised. In the minerals and metals sector commodity prices such as coal, uranium, iron ore, nickel, lead and all our basic export ingredients are showing very low levels of return. The farm sector has declined, and the manufacturing sector is very wobbly and patchy, and is very narrowly based in terms of its growth and expansion. Therefore, one has to ask from where it is likely that the receipts will come and where there will be growth in the economy in the coming 12 months. It is my view that the economy will take a serious downturn and that the Government knows that, and that is the reason it is having an early election. In the unlikely event that the Australian Labor Party is returned, the people of Australia will reap the harvest of electing a Labor government for the next period.