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Thursday, 19 February 1987
Page: 297

Senator ALSTON(5.30) —I rise to support my colleague Senator Parer, who has moved the motion before us. I think it is worth saying at the outset that there does not seem to be a general awareness or an acceptance in this chamber of the proposition that the business of government is about taking tough decisions. It certainly seems to be becoming increasingly accepted by people such as the Treasurer (Mr Keating) and the Minister for Industry, Technology and Commerce, Senator Button, who in this chamber not so long ago accepted the proposition put by Sir Roderick Carnegie that there are many tough years ahead. If we accept the Treasurer's prognostications, it will probably be another 10 years. The question is whether that is really a function of government or whether it is due to matters beyond the Government's control, bearing in mind that it has now been in office for almost four years. I do not want to go back over the past because I do not think it is relevant to the present. Certainly, one can look at a range of Government actions in recent times to see whether there has been the capacity for the Government to take tougher action to correct what I think are now generally recognised as very serious economic difficulties.

Probably a useful starting point is the area of wages policy because that is the area in which the Government has trumpeted great success, the area in which it has an accord based on an arrangement with the trade union movement. The renegotiated mark 3 version is no more than a pea and thimble trick. It has now resulted in a two-tier wage system which has led the Australian Council of Trade Unions to seek a $20 a week wage increase plus a second tier wage increase of at least 4 per cent at the national wage case. If anything were calculated to cause a run on the Australian dollar it is the prospect of that sort of claim succeeding. One would hope that the Australian Conciliation and Arbitration Commission will have the good sense not to capitulate to the ACTU in the way the Government has clearly encouraged the unions to press for the claim.

Perhaps one of the most depressing quotations that I have seen in a long while is one that was handed to me not so long ago. It gives an example of why the trade union movement is prepared to embark on wholly irresponsible claims and somehow to pretend that others should be sharing the burden. There is still no shortage of trade union leaders who will say that somehow they should not be copping all the blame and that others should wear it. Honourable senators should listen to this: The Prime Minister (Mr Hawke), when ACTU Federal President and the Federal President of the Australian Labor Party, stated in August 1974:

We know inflation is at 16 per cent and we believe it's quite likely to reach 20 per cent in the next two quarters. But we will not indulge in a trade-off in wages for some conjectural reduction in inflation.

That is a tragic indictment. Unless the Prime Minister has completely transformed his thinking, he continues to believe that inanity. If he has done so, then by his example he has encourage others to behave in a totally irresponsible manner. The end result in terms of wages policy is that there is no prospect of Australia achieving a sensible reduction in wages to make us more competitive. As a result we have a 9.8 per cent inflation rate which, as we know, is a multiple of that of our trading partners. I think Japan and West Germany now have negative inflation rates. In the United Kingdom and the United States of America inflation is very close to zero. Yet we have a rate that shows no signs of going in the required direction. That is one of the first and most obvious areas of Government neglect and default.

Probably enough has been said about the level of foreign debt, but it is quite clear that again it has not come about accidentally. It is not due to factors beyond our control except to the extent that the terms of trade have gone against us and our export prices have been pushed down fairly dramatically as a result of an oversupply in primary commodities. But again that is a question of the Government not having taken action to provide incentives to manufacturing to export more. That is tied in with wages policy and tied in generally with the economic climate. No one would suggest that somehow we could have ridden through the current crisis given the accumulation of over-protection and the way in which the economy has been allowed to ossify. Certainly, in the last four years there has been precious little attempt to come to grips with the real difficulties the country faces.

It should be no surprise to us that we face record levels of foreign debt. If we look around the world to our major trading partner, it is quite obvious that it will be faced with the same sorts of problems. There have even been estimates that it could reach a foreign debt level of $800 billion by the turn of this decade. If that were so, it would probably be in the top 10 Third World nations in terms of indebtedness. If one has debt service ratios such as that one is in big trouble. I do not know whether it is about to lose its AAA rating but it certainly suggests that--

Senator Gietzelt —Somebody must have a lot of capital out.

Senator ALSTON —It is probably spending beyond its means. We know that it is in certain areas such as defence, but the end result is that Germany and Japan have massive trade surpluses.

Senator Gietzelt —The United States, the United Kingdom, Japan, West Germany.

Senator ALSTON —The United States is one of the largest debtor nations in the world at present so it does not have the capital surplus to redistribute. The problem is that if it does the right thing and gets its house in order it will reduce world demand for its imports. Again, that would have an impact on us.

Senator Gietzelt —Nobody tells us whom they owe it to.

Senator ALSTON —Whom they owe it to?

Senator Gietzelt —Who owns the capital and lends it out?

Senator ALSTON —I suppose it is a whole set of creditors around the world. But what has happened in many ways is that with its level of interest rates it was able to attract capital into that country long after it should have flown elsewhere. We will have the same problem here. I understand why we have record rates of interest across the board extending into all areas. I think Senator Button cited not so long ago the bank home mortgage rate of 15.5 per cent, which is a fixed figure. It would probably be higher if it were allowed to float. Bank overdraft rates for amounts under $100,000 range from 17.5 per cent to 20.5 per cent and building society mortgage rates stand at 15.63 per cent. They are all at horrific levels. The reason for that is that the Reserve Bank of Australia has been forced to set rates sufficiently high to attract overseas investment. Unfortunately, most of it is highly speculative; a lot of it is Japanese capital that went back home very smartly in January, causing a run on the dollar and requiring the Reserve Bank to step in and prop it up in a massive way. That action was probably justifiable, but obviously there is no prospect of the Reserve Bank's being able to continue it indefinitely. If we have the traditional national average of about three months imports in our foreign exchange reserve there is not much we can do to underpin the value of that dollar. The Reserve Bank cannot get into the business of targeting the exchange rate, and nor should it. Therefore it is a matter of time before either the dollar falls significantly once again or interest rates go even higher, and I do not imagine that that is likely to happen in an election year. As a result we are looking down the barrel.

There are other areas in which the Government can be held responsible for not having taken the tough action that is required. A lot has been said in recent days about cutting government expenditure. I do not think any serious commentator would pretend that that is not necessary. The thesis of the Business Council of Australia in its submission yesterday was that the Treasurer underestimates the climate for change. I think that is absolutely right. Everyone in this country understands the magnitude of the problem, and people would be much more willing to accept the sorts of cuts that even a few years ago might have provoked howls of outrage and caused governments to be accused of being callous.

A range of options is open to any government that wants to act sensibly and present a May expenditure statement to introduce those cuts. Certainly, in the area of education, I do not quarrel with an administration charge of $250. We could probably go a lot further. We need to make allowances for those who genuinely cannot afford to pay, but it has been proven beyond doubt to be a fallacy that by providing free tertiary education we somehow make it harder for those on lower income levels. The fact is that it has been business as usual except that the taxpayer has been picking up a mammoth bill. I would not have too many difficulties with a proposition that allowed people to borrow in the course of their studies and to repay that money if and when they got into a position in which they could afford to do so. It seems to me that that would not discourage those who are seriously interested in obtaining tertiary qualifications, and it would put the burden where it ought to be. It is a system that applies in places such as West Germany with a minimum of fuss. It is in many ways common sense, but it has not come about because governments have been too frightened to follow it down the track. The proposition of the Minister for Finance, Senator Walsh, of $1,000 per student, in the current climate I would have thought, is well worth another look. But I cannot see this Government doing it; nor can I see it biting the bullet in areas such as health, in which the Centre of Policy Studies suggested there might even be savings of up to $10 billion.

Instead of taking the responsible course and looking seriously at fair work proposals, we will have a community volunteer program, which will probably not do much more than its predecessors. The community employment program has probably resulted in something in excess of $1 billion being spent on make-work programs. In the current climate, I think people would be prepared to accept that there must be a quid pro quo for government payouts and government transfer payments of that order. I think the Government can be held responsible for not cutting back on the size of the public sector.

If we look at the public sector borrowing requirement, the latest figures suggest that if the Government manages to achieve its $3.5 billion deficit, the public sector borrowing requirement will fall marginally to about 4.6 per cent of gross domestic product, as against the 5 per cent figure for the preceding year. The probabilities are that the deficit target will be exceeded and, as a result, there will be little or no reduction in the public sector borrowing requirement. If that is so, one must ask whether there are options open, and that is why the Treasurer has been belting the States around the head in recent days, and justifiably so, I might add. He could in particular single out Queensland as a State that has been squirrelling away much more than it has needed. Again, it has been words rather than action.

The submission of the Business Council of Australia makes it very clear that not only is the climate right, but it would be irresponsible of the Treasurer not to cut back the amount of funds available to the States at the next Premiers Conference. A one per cent cut would involve a reduction in the State authorities' global limit from $6.3 billion in this financial year to about $4 billion next year. Those are very big amounts. The Business Council says that the forward estimate of 3.5 per cent growth is overly optimistic. If one takes a more realistic growth rate of 2.2 per cent, the deficit will be $5.2 billion instead of the currently projected $4.5 billion and the quaint Budget figure of $3.5 billion. There is a dramatic need to reduce the level of current Commonwealth government outlays. If one accepts that the States' deficits will rise in aggregate terms by about $2 billion in 1986-87, that will, in any event, substantially offset any reduction in the Commonwealth deficit. So there is a very urgent need to achieve at least a one per cent cut in that borrowing requirement. The States offer a target in the sense that they are an integral part of the economy and should bear their fair share of the burden.

A number of economic indicators are referred to in the motion that almost speak for themselves. They are a litany of tragedy as far as the economy is concerned. The fact that we have the highest interest rates regime in the Western world says it all. It is the reason why we have been able to live on borrowed time for as long as we have. It does horrific things for savings ratios and investment levels. Those who pretend that somehow companies should be spending more in the current uncertain times really are ignoring reality. They will certainly not be interested in embarking on any more perilous ventures at the moment, when they are fighting for survival.

I say in passing that I was intrigued to hear Senator Maguire trot out the by now trite line about private sector overseas borrowing being a matter for criticism, and in some way excusing the Government's current economic policy. Maybe the people he talks to think that in the past it was all the fault of the public sector but if one analyses the figures I think the ratio is something like 60-40 in favour of private borrowings. But that does not excuse the Government. The reason why those sorts of moneys are borrowed overseas is simply interest rate differentials. A company would be crazy to borrow funds in this country at the rate of 20 per cent when it can borrow funds overseas at the rate of 6 per cent or 7 per cent. Companies will continue to do that. They would be acting irresponsibly, not in the interests of their shareholders, and with a very misguided sense of patriotic duty if they sought somehow to continue to borrow in this country. Those who pretend that one can somehow impose limits on the extent of overseas borrowings-in the way in which King Canute from the Australian Democrats suggested it could be done, by closing off foreign takeover borrowings-are ignoring the realities of life.

Money is a very fungible commodity. It is not a very difficult task for a company simply to readjust its balance sheet so that it is borrowing overseas for a whole range of other activities, and it then finds magically that it has enough money in the domestic kitty to enable it to embark on a takeover proposition. It is simply a matter of switching funds around. There is very little that governments can do to stop it, other than putting the whole corporate sector into a straitjacket. I am sure this Government recognises that, and that is why the Treasurer, to his credit, resisted those sorts of suggestions from the New South Wales branch of his own Party, and Mr MacBean in particular. It is another nonsense. It shows a lamentable misunderstanding of the way in which the economy works.

Senator Messner —It is a form of xenophobia.

Senator ALSTON —Yes, I think that is right. It is a matter of just identifying multinationals and all of those others in the demonology as the reasons for the problem, rather than accepting responsibility for it. The end result is that one can certainly say that that sort of borrowing will continue; that companies will continue to locate overseas. Pacific Dunlop's recent record profit level was in large part due to its decision to go off-shore. I am sure we will see more of that. I am not critical of any company that finds itself in that position. If Elders IXL Ltd embarks on a takeover for the Guinness company and succeeds, that will simply be in part because it has outgrown the size of the Australian market and because there are precious few investment opportunities left in this country. I think we should welcome companies of our own making that aspire to be genuine multinationals. The world economy is shrinking and there is no reason why they should not be doing that. They may in fact be borrowing domestically to invest in takeovers in other countries. It is simply the reverse side of the coin, and it is the way in which the world economy will continue to operate.

I refer again to the indicators. Motor vehicle registration figures for the past 12 months to December 1986 fell by 24 per cent. We know there is a combination of factors for that, but certainly the depreciation of the Australian dollar must have had a very significant impact. The imposition of the fringe benefits tax is by now legendary. It is quite clear that the sorts of massive declines in motor vehicle registrations and the massive increases in the price of motor vehicles will combine to depress that vital sector of the economy. Retail sales fell by 0.9 per cent in November over the figure for the previous month, and rose by only 1.5 per cent in the three months to November. If one accepts that inflation has been rising at a rate which is above those levels, that implies a negative rate of real growth for retail sales. Again, that is pretty depressing stuff. Building approvals have been well down in recent months. They were down 9 per cent for the five months ending November 1986. It is really a pretty depressing state of affairs. Certainly there is no light at the end of the tunnel in the current environment.

Disposable incomes for the majority of Australians have been falling because of higher taxes as taxpayers move into the higher Keating tax brackets. Again, we know the tragic figures and we know why it was that the Government felt the compulsion to convene a tax summit. The proposition was that in 1954-55 a person had to earn 17.6 times average weekly earnings to be in the top marginal tax bracket. In 1984-85, 30 years later, he had to earn only 1.6 times average weekly earnings. I think the current estimate is that by the end of this financial year more than half of the taxpayers of this country will pay the top marginal tax rate, once that rate is reduced to 49c. Again, it is a very depressing state of affairs. It is brought about by a combination of factors, but the important thing is that there are things that governments can do to rectify it. That is why it is so tragic to hear of Mr Keating's hypocritical about face, and to see that we have run the race of tax reform and that this Government is no longer interested in restructuring and providing incentive. It has simply given the game away; it has all gone into the too-hard basket, like the trilogy which has also been consigned to the dustbin of history. A consumption tax has been ruled out; there will be no changes to tax rates.

I would just like to refer back to what the Treasurer said at the time of the Tax Summit because it is instructive to do so, given his breathtaking hypocrisy of recent days in suggesting that somehow a consumption tax is not achievable in the current economic climate. He was not saying that when he was doing his best to withstand the onslaughts of his mates in the trade union movement aided, certainly, by some business interests. In regard to a 12.5 per cent consumption tax he said that he had heard all the criticisms and that:

There have been no basic effective frontal assaults on it and unless there are a whole lot of arguments we've not heard, I'll be surprised if there is.

He went on to say that he simply blamed the noise and static of special interest groups, and he and the Prime Minister said that they were parting the veil of special pleading and special interest groups. They made it abundantly plain that they believed that was the course of economic rectitude, that it was a responsible path to follow and that it was in no way contingent upon prevailing economic circumstances. Yet we now find that it is all too hard; it will not be adopted by this Government in an election year, all because it is not prepared to try to put some more `incentivation' back into the system. It is tragic for Australia. It is quite clear that this Treasurer has run his race.

I would like to touch briefly on one aspect of tax reform policy which I think is also neglected; that is, the incentive effects that can flow from a reduction in taxation rates. Even the Australian Financial Review does not understand that fact. It scathingly dismissed the effects of the Laffer curve in its editorial last Friday by suggesting that the United States experience had been that no beneficial effect flowed from a substantial reduction in top marginal rates. The fact is that in 1981-82 the top rate was brought down from 70c to 50c in the United States of America. About two years later it was seen that the group paying at the top marginal rate was paying $8 billion extra. It had gone from $34 billion, which one would have expected under the prevailing regime, to $42 billion. The latest assessments of that phenomenon are that it is about one-third due to the increased incentive effect and two-thirds due to the reduced incentive for tax avoidance. So there are very real benefits to be gained by substantially reducing the top rate of tax. It is not simply a matter of benefiting the poor; it is in fact a matter of getting more revenue in for government which can then embark on its income redistribution to the extent that that is justified. So the whole notion of a progressive tax system I think needs to be rethought. Whilst I suspect the Treasurer well understands that in private, I am sure we will not see any move in that direction in public.

So in a number of ways this Government has simply given up the game. It will go on with all those sorts of problems which are by now manifest and which not only warrant but make essential a mini-Budget. I see that Mr Keating has said he is still contemplating the proposition. Again, I am sure that he would like to do it; it is only if he is talked out of it on the basis that it might jeopardise election prospects that he will not do it. Significant reductions in government expenditure, again, are in precisely the same position. The Government knows that they are necessary, but it is a question of whether it can cope with the flak. I am sure it does not want gratuitous advice from me, but I would have thought that in the current climate the electorate would cop a lot more by way of responsible expenditure reduction than it might have done in previous years.

I want to deal briefly with the fairy tale stuff that the Australian Democrats have served up by way of amendment. The first part calls for measures to `encourage export-directed industries with a high value-added'. I suppose it is better than Senator Maguire's idea. He thought we had too much import substitution going on in this country. It is an incredible proposition if he is really suggesting that he wants more imports at the current time with the current account deficits we have had. I think the December trade figures showed an export surplus for the first time in about 14 months; but Senator Maguire wants somehow to reintroduce a whole new protection regime. The Democrats have not gone that far. They have talked about encouraging. If that means moral encouragement, that is a fairly trite proposition. If it involves subsidies then the Democrats have learned nothing either. The cost to revenue would simply not be justified and I hope that no-one would take that suggestion seriously. The Democrats want to `control flows of speculative capital in and out of the country'. Again, as Senator Messner said, that is simply a xenophobic reaction. They want to reimpose exchange controls; they want to get back to the unreal world that operated before the currency was deregulated-one of the great decisions that have been taken in the history of this country, because it has made us face up to the realities of life. The Democrats obviously do not share that view of the world. They want to reimpose exchange controls. Presumably they would tighten up the Foreign Investment Review Board, they would probably put withholding taxes on interest and they would make the economy suffocate.

They want to `implement a significant and cost-effective reduction in government expenditure'. I suppose we could say that their heart is in the right place, but it seems to be somewhat vague and to talk about a `cost-effective reduction' is somewhat tautologous. They want to `close off the taxation rorts of transfer pricing and negative gearing on interest paid on money borrowed for company takeovers'. I cannot do much better than refer them to the eloquent answer of the Minister for Finance this afternoon in answer to one of their own number. Certainly I think the logic of what he had to say is compelling. It is breathtaking in many ways to hear it from a Labor government, but the fact is that those sorts of money flows are a function of the state of the economy. I think the Minister implicitly accepts the Treasury view that takeovers are in no way harmful to the economy except in certain areas-certainly not as a general rule. They tend to make the economy much more efficient and competitive. That applies from the largest companies in the land to the smallest. I think one can therefore say that no parts of the Democrats' amendment deserve support and really do not assist the debate in this area.

I would like to conclude by urging the Government to be firm, to not sacrifice economic responsibility on the altar of electoral expediency, to once again rethink the very significant economic attractions of having a lower and flatter income tax regime, and to undertake the cuts in government expenditure in very many areas-not across the board as the Premier of Queensland was arguing in 1985, but in certain targeted areas. I do think, and I am sure most others also think, that there are substantial savings to be made in the areas of welfare, Medicare, tertiary education and unemployment.