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Monday, 30 March 1987
Page: 1445


Senator SIDDONS —My question is directed to the Minister for Finance. The Government promised that financial deregulation would deliver low interest rates, but we are now labouring under the highest interest rates in our history. The Treasurer is now saying that reduced government debt will bring lower interest rates. However, Mr Kenneth Davidson's article in the Age this morning pointed out that Government debt, as a percentage of gross domestic product, is low by Organisation of Economic Co-operation and Development standards and, interestingly, is low by historical standards. I ask the Minister: First, in view of the fact that for most of this century a regulated financial system was able to carry government debt at more than twice its present level without resorting to high interest rates, is the Government's move to lower its debt a tacit acknowledgment of the fact that has become patently obvious to most observers, namely, that deregulation is not working? Secondly, will the Government take action to control financial markets now, or must the Australian people wait for a disastrous crash before this becomes the only option available?


Senator WALSH —At the beginning of his question Senator Siddons asserted that interest rates are now higher in Australia than they have ever been. That is not correct. For example, the 90-day bank bill rate in April 1982, when Mr Howard was Treasurer, was 22 per cent. I am not sure where it is now, but it is significantly below that.

I know that among bourgeois left populists-a category which includes the Australian Democrats, past and present-it is popular to ascribe high interest rates to financial deregulation. That raises a number of questions: Firstly, it is a fact that Australia has had a significantly higher level of foreign debt as a proportion of GDP. In the 1930s it was very much higher. The world financial system was very different in the 1930s in that we lived in a regime of more or less fixed exchange rates perceived to be-although in most cases not in reality after about 1931-also tied to the gold standard. Leaving aside whether that was a good policy, that world no longer exists and has not existed since at least 1970, and it has changed progressively since 1970. The notion that one small country can in isolation pretend that the rest of the world is where it was in the 1960s, let alone the 1930s, is not one which is viable as a policy.

Secondly, although it is true that it has been higher, Australia does have by post-war standards, currently a high level of accumulated foreign debt and a large current account deficit, caused by a number of factors but to a very substantial degree by the cost of servicing the debt which already exists and also, of course, because of the large gap in the current account which has been opened by the export price collapse of the last couple of years. If one were to annualise the terms of trade reported by the Statistician in the December quarter of 1986, where some $2.3 billion of national income has been lost since December 1984 by terms of trade changes, that comes out to something over $9 billion of national income lost because of the terms of trade movement on the collapse of export prices since December 1984.


Senator Lewis —That is over the period of two years? It is not per annum? That is the total?


Senator WALSH —Yes, it is the movement in the terms of trade between December 1984 and December 1986-over that two-year period. That information was published a couple of weeks ago by the Australian Statistician. Based on that terms of trade movement it was calculated that some $2.3 billion in the December quarter 1986 had been taken off national income by that shift. To annualise that is a bit of an oversimplification but it will give some idea of the magnitude of the effect of that export price collapse on Australia's national income, expressed through our current account deficit-and Australia habitually has run a current account deficit of some size. But there is a major contribution now from the cost of servicing existing foreign debt and another major change in the last two years from the export price collapse which leaves us in such a position that it now seems likely that this year's current account deficit will be less than that forecast in the Budget but, barring an export price recovery-and a major export price recovery does not seem a reasonable expectation in the short term-Australia will continue for another year or so anyway to have a current account deficit of the order of $10 billion.

Any country which is in the position where it must shut off exports-that includes net exports of both goods and services-and which has a current account of that size must in the short term borrow abroad to close that deficit or run down its existing foreign reserves. At that rate, Australia would not take much over a year to exhaust its foreign reserves. We are in that position. The interest rate is determined by what we have to pay for money to bridge that current account deficit. It can be argued legitimately-argued, but not proven-that some things at the margin can be done about that. But that would not have a fundamental effect on the level of interest rates.

Interest rates can be reduced only by its being demonstrated that Australia has made the adjustments that our changed circumstances require, thereby in the short term enhancing the perception around the world that the Australian Government has come to grips with the problem-and I believe that perception is growing-and thus strengthening international confidence in the dollar. When that is done, and I believe it is being done now, interest rates can come down but in the long term, unless we want to punt on the long shot of there being a passive export price boom, the only way the nation's problems can be addressed is through a restructuring of our domestic industry in a way that makes it more competitive internationally and eliminates the structural current account deficit which we now have.


Senator SIDDONS —I ask a supplementary question. Senator Walsh implied that having a regulated financial market was a peculiarly left wing approach. How does he account for the fact that Japan, for instance, has had and does have a regulated financial system and interest rates are at four per cent? The Minister said in the latter part of his answer that the balance of payments is the problem. Then how does he explain the fact that Bangladesh has had and does have a regulated financial system? It is not a peculiarly left wing point of view.


Senator WALSH —I was not suggesting that having foreign exchange controls is a particularly left wing policy. I think it was probably practised by the Marcos regime in the Philippines and, indeed, just about every banana republic in the world. Officially regulated foreign exchange controls are applied, and under that system those people who are in with whatever the ruling clique of the day happens to be buy cheap foreign exchange and everybody else buys very dear foreign exchange on the black market. That is about what would happen if the Bjelke-Petersen push to become Prime Minister of Australia were to succeed. In that case we would very quickly see the development of such a system here. My reference to bourgeois left wing populism was a reference not to regulated exchange markets per se but to the cop-out that is popular with many people who come within that description-copping out of the problem by neatly reversing the cause and effect of our current account deficit. They say that our current account deficit is caused by overseas borrowings whereas, of course, the current account deficit is the cause of the overseas borrowings.

Japan is in a position where, overlooking its domestic political problems, it can virtually dictate whatever it wants to the rest of the world because it is in precisely the opposite position to that which we and the United States of America are in-that is, instead of having a very large current account deficit, Japan has a very large current account surplus which has pushed up the value of the yen massively compared with either the Australian or the United States dollar-by a factor of more than two in our case over about a three-year period and close to two in the case of the United States. That reflects that Japan has some sort of a problem arising from a current account surplus. But it is much easier to deal with a current account surplus-domestic political considerations aside-than with a current account deficit. Unfortunately, we are in that latter category.