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Thursday, 7 May 1970


Mr CREAN (Melbourne Ports) - There are 4 Bills before the House and perhaps 1 can briefly say that 2 of them relate to the financial year ended 30th June 1970 and 2 of them relate to Supply for the financial year that will begin on 1st July 1970 and continue until 30th June 1971. There are 2 sets each of 2 Bills because what are called normal annual appropriations appear in 1 Bill and capital works appear in the second. As far as Bills for this financial year are concerned, inevitably some expenditure cannot be anticipated at the time a Budget is drawn or at least some purpose cannot be foreseen. Sometimes expenditure exceeds the original appropriation; sometimes a new appropriation has to be made. In Appropriation Bill (No. 3) 1969-70 a sum of about S90m is being sought. In Appropriation Bill (No. 4) 1969-70 a sum of S34m is being sought. The other 2 measures provide Supply for the period 1st July 1970 to the end of November 1970 because the Budget session will not start until August and, as we know, it is necessary to continue government in that time.

Nevertheless measures such as these give us the opportunity to exam ne the impact of Government finance on the economy. This year the Budget provided for expenditure in the region of $7,000m, which is more than a quarter of the gross national product, and States and local government authorities between them will spend a sum or raise taxes themselves of another $ 1,300m or S 1,400m. It will be seen therefore that government is very big business in terms of total activity in the economy. I th think that it is a bit doubtful these days whether the Budget balances the economy or whether, in the final analysis, the economy balances the Budget.

A curious sort of method is adopted now of presenting the Budget accounts in more ways than 1. At 1 time, these accounts were strictly cash only. Technically, of course, that is what is of concern to this House. Nevertheless, for analytical purposes, it is useful to present the Budget in what is known as the national accounts form to show the impact of total expenditure on the part of the Commonwealth Government in an overall context.

I wish to say something this afternoon about what, for want of a better term, might be called the state of the economy. I must say that 1 find myself in substantial fundamental disagreement with some of the measures that have been taken recently supposedly to guide the economy. In particular, I refer to the recent increases in interest rates. These increases have begun to work right through now. A few days ago, when a Commonwealth loan was being sought, the rate of interest being offered for long term Commonwealth securities was 1%. I suppose that one could hark to other times. I note that, at 1 stage during the term in office of this Government, the bond rate was as low as 3i%. So, in approximately a 20-year period there has been a considerable increase in what is known as the gilt edged interest rate.

Of course, people can obtain an interest rate of 7% on government securities which are described as being gilt edged although I would think that some people would be a little dubious about that description. I refer to those people who invested in a loan some time ago when the interest rate was under 6%. Some of these securities were sought as far ahead, I think, as the year 2005. The details of this loan are given in the latest issue of the 'Treasury Information Bulletin' for April of this year. This shows that, as far as the previous government loan was concerned, the long term interest rate was approximately 6%. So, anybody who bought those bonds and who has to sell them faces quite a serious drop in the amount that will be received.

I think that, in some respects, the Treasurer (Mr Bury) is in some bother at the moment about managing the refinancing and extending of the national debt. The other day I read somewhere a figure of $ 1,000m in this respect. Approximately $ 1,000m comes up for conversion in the very short term period that is ahead of us. One of the difficulties in recent years is that, because the short term rates have been so attractive, the tendency has been for people to go into short terms securities rather than long term ones. At page 14 of this 'Treasury Information Bulletin' we read that for the Commonwealth loan on 11 th February 1970 - that is, the last loan offered before the one which is now current - an interest rate of 5.6% was offered for a loan maturing in July 1971, an interest rate of 5.75% for a loan maturing 2 years later in May 1973, an interest rate of 5.9% for one maturing in July 1977, an interest rate of 6% for a loan maturing in October 1991 and an interest rate of 6% for a loan maturing on 5th July 2005.

The 'Treasury Information Bulletin' shows how that loan was subscribed to the extent of $209m. We read that $116m, which is more than half of the amount raised, was in the short term. That is, it falls due by July 1971. Another $42m was taken in the next short term to May 1973. Nearly $30m was subscribed for the loan maturing in 1977. There were virtually no takers for the long terms loans. I think that a shade under $>2m was subscribed for the loan maturing in July 2005. It seems to me that one of the difficulties in the Australian economy has been that the short term rates of interest have been too high and too close to what the long term rates of interest are. A degree of flexibility has not been given. I believe that this flexibility is necessary in the Australian economy to manage the national debt.

Each year, when the October issue of the Treasury Information Bulletin' is published, details are given as to how Commonwealth securities on issue are held. I quote from page 15 of the October 1969 issue of the Treasury Information Bulletin'. At the end of June 1969, Commonwealth securities redeemable in Australia aggregrated $9.736m. Only approximately fi ,100m - that is about one-ninth of the total - was actually held by what might be called by individuals as apart from institutions of I kind and another - government, financial, and so on. Even of the $l,118m in the hands of other holders, $680m was held in the form of special bonds, which is a form of security tailored for individual investors. So. at least the small man in the community is really not significant when it comes to loan flotations.

I have said before in this House that where the Government is confronted with the major part of its loan holdings - and it has some directed powers of compulsion in some directions; it has some powers of gentle persuasion via tax concessions in another direction - in my view that Government is well equipped as the seller of those securities and also as the buyer sometimes through the Reserve Bank to set a rate of interest that could be lower than is current yet still be acceptable by financial institutions. That is why, for our part, we are irked by the decision taken recently to increase bank interest rates in the community.

It is our view that this increase in interest rates will have very little impact on some sections of the community but that it will have tremendous impact upon those who in no way are responsible for what might be called the speculative upsurge in demand. I think that my colleague, the honourable member for Reid (Mr Uren), has pointed out in recent times in housing debates that it does not seem much when the Government says that the rate of interest has gone up from 7% to 8%. But this increase makes a considerable difference to somebody on a moderate income who is required to finance a mortgage at 8% instead of at 7%. Of course the result of rationing the purse is always to force out certain people who, in a sense, may be called the most deserving section of-the community.

I always read with much interest the papers that are written by the Treasurer and delivered at various learned and nonlearned associations throughout the community. With all respect to my friends in the Australian Finance Conference, I do not know whether they regard themselves as a learned group or possibly a shrewd group but on 27th April 1970 the Treasurer delivered an address at the annual meeting of. that Conference and he entitled it 'The Domestic Economy'. He observed, I think quite wisely, to the finance group that to some extent the rapid growth in business being written by finance companies reflects the fact that the main direct effects of monetary restraint tend to fall on the banking system. Later in his address he pointed out that the banking system supplies less credit now than was the case 15 or even 10 years ago and that the group that has made the most significant increase relatively has been the finance group. He observed that less than half of the balance outstanding to finance companies relates to instalment credit for retail sales. They have gone out of just being the suppliers of credit for automobiles, refrigerators, washing machines and so forth and have gone into such fields as land sales on quite a broad scale. The Treasurer at least acknowledges that when be does put monetary restraint upon the economy via the interest rate, to some extent there is a large section that is outside that restraint. He has gone further and has said that within the ambit of monetary restraint the harshest impact is felt by those least entitled to bear it.

Towards the end of his address he gave what 1 suppose he would call economic indicators. He listed retail sales, new motor vehicle registrations, dwelling approvals, non-residential building approvals, private investment in plant and equipment and public sector spending. In relation to dwelling approvals he said:

Meanwhile at the end of December 1969 there were 69,000 dwellings under construction, 12% more than a year earlier.

In the paragraph immediately following that he said that non-residential building approvals are running 45% above the level of a year earlier in the March quarter. I submit again that the effect of the monetary restraint will be to cause a much heavier impact in the field of dwelling approvals where the upsurge is only 12%. but that very little impact will be experienced in the field of non-residential building approvals because, after all, the interest paid by a business concern that is financing a building is a tax deduction. Even if we increased the interest rate by 4%, because a company is involved and it is paying company tax at the rate of 45c in the SI, the additional burden is in the region of only i%, again indicating the uneven impact of monetary policy.

Honourable members should read the Treasury bulletins, the most recent of which was published a few days ago and relates to the economic situation at the end of March 1970. We could not get much closer to current circumstances than the quarter ended in March 1970. lt would seem to me that some rather contradictory statistics are contained in this bulletin. They seem to suggest that trying to curb interest rates on home dwelling is scarcely the way to combat any disturbance, if inflationary disturbances are prevalent. I want to quote 1 or 2 of these statistics because in some respects they are rather illuminating. On page 11 is a table entitled 'Financing the Deficit'. It shows what has happened to overall Government finance in the 9 months from July 1969 to March 1970 as against the same 9 months for 1968-69. The interesting point of difference is the item 'Net change in Treasury notes on issue'. It shows that for the 9 months in 1968-69 the amount on issue was S253m. For the same 9 months in 1969-70 there is an item of $492m from which the sum of $250m is subtracted. A footnote indicates that Treasury notes to the extent of $250m were issued by the Commonwealth Government against the payment of a similar sum of $250m by the Reserve Bank to the Australian Wheat Board. Of course that payment of $250m to the Wheat Board is to finance wheat that has been produced but which cannot be sold.

In the early part of the Treasury bulletin occurs a rather curious phrase. I quote from the introduction on pages 1 and 2:

It has to be borne in mind that the large proportion of both rural and mining production which is exported does not provide an offset to growing domestic demand.

I have marked this quotation with a query because, candidly, I am somewhat per plexed as to what is meant. I think it means that we export wool, wheat, butter, sugar, copper, zinc and so on - goods that we have distributed and on which expenditure has been made within Australia for wages and so forth - but those goods are not available for consumption in Australia. I would hope that they would help to pay for our imports. Surely what we export conditions what we are able to import. I find it a rather curious piece of philosophising to say that we should do everything with the right hand and to forget that we have a left hand. In some respects this is only too true of much of the Government's action at present. It is prepared to pay - I am not objecting to this particular method of financing - $250m into the pockets of people while there is no equivalent supply of goods coming onto the domestic market. It is to be hoped that we will sell the produce eventually.


Mr Griffiths - Why not feed it to the starving stock?


Mr CREAN - A lot of things could be done with it. But all I submit is that it is rough justice to suggest that it is not inflationary and to solve what the Government calls an inflation problem by putting the penalty on other people altogether by increasing the impact of the interest rate.

I have no doubt that honourable members from time to time read the economic publications that are available in the Parliament Library. It is surprising to find the popular levels at which economic thinking is made available to the public these days. In American journals such as 'Times', 'Business Week' and 'Newsweek' a lot of mention has been made in latter days of a conservative American who, oddly enough, seems to have some fairly radical views about finance. The gentleman to whom I refer is Professor Milton Friedman. I have no doubt that the Treasurer knows who Professor Friedman is. Honourable members may obtain from the Parliament Library a copy of the 'American Economic Review' of March 1968 in which appears an article entitled 'The Role of Monetary Policy' by Milton Friedman, which is an account of the Presidential address delivered at the 18th annual meeting of the American Economic Association in Washington on 29th December 1967. On page 14. towards the end of the article, he states:

The first requirement is thai the monetary policy should guide itself by magnitudes that it can control, nol by ones that il cannot control.

He is talking in the context of the American reserve system. He goes on:

If, as the authority has often done, it lakes interest rates for the current employment percentage as the immediate criterion of policy, it will be like a space vehicle that has taken a fix on the wrong star. No matter how sensitive and sophisticated its guiding apparatus, the space vehicle will go astray. And so will the monetary authority.

I submit that this is the situation that we may have reached in this country. Again I am fortified by another opinion, this time from a Canadian source. I would hope that some day we will get round to having in Australia a publication such as the sixth economic review by the Economic Council of Canada, which is the sort of body that the Vernon Committee of Economic Inquiry suggested would be useful in the Australian context. This publication which was prepared in September 1969 and which is entitled 'Perspective 1975' also makes some mention of the matter to which 1 have just referred. On page 1 59 it states:

During the past year, considerable controversy has arisen in North America about the influence and effectiveness of monetary and fiscal policies as instruments of demand management. We have no doubts about the ultimate power and effectiveness of these policies when properly used. At the same time, we believe strongly that they are necessary, but by themselves insufficient, for achieving and maintaining high standards of performance in our economy.

I submit that that is a very pertinent lesson for Australia. The monetary instrument should be used not on its own but in conjunction with fiscal policies. I want to say something more about fiscal policies in a moment because 1 think that unfortunately we have got ourselves into a situation in Australia where monetary policy is about the only weapon left available to us. As the Treasurer quite clearly underlined in his address to the Australian Finance Conference, monetary policy does not have the same impact on the total economy that it used to have. Therefore if it is to have any effectiveness it has to be rather brutally and crudely applied to that part of the economy which it can affect. Professor Friedman also pointed out some salutory lessons. He said:

A second requirement of monetary policy is that the monetary authority avoid sharp swings in policy. In the past, monetary authorities have on occasion moved in the wrong direction - as in the episode of the Great Contraction that I have stressed. More frequently, they have moved in the right direction, albeit often too late, but have erred by moving loo far.

With all respect to the Treasurer, I would submit that not only has he moved too late but he has moved too far. He should have read a little less gloomily some of the trends that were evident enough in the quarterly figures for the national income and which it seems to me are pointed out in his own Treasury bulletin. One of the things that intrigued me is the statement on page 16 of the April Treasury bulletin about the increase in the volume of money. Those who read Milton Friedman carefully will find that he suggests it is more important to regulate the volume of money than it is to regulate the interest rate. He suggests that there should be a regular increase in the volume of money of between 3% and 5% per annum, which in Australia would be between $500m and $600m. The Treasury bulletin points out that the increase in the volume of money in the 3 months to March 1970 was $172m, which compares with an increase of $295 in in the corresponding months a year earlier. There was not the same increase in the volume of money from 1st January to the end of March 1970 as there had been from 1 st January to the end of March 1 969. The writer of the Treasury bulletin goes on to give further reasons:

The reason behind the smaller increase in the volume of money this year were the much smaller rise in the Rural Credits advances-

I have no doubt that my friends in the Country Party know why that has occurred too. The bulletin goes on:

.   . in the more recent period and the smaller rise in the Reserve Bank's holdings of gold and foreign exchange compared with the March quarter of 1969.

On page 17, for those who want to read the lesson tn full, there is an analysis of changes in bank liquidity and money, which shows that the upsurge was not as great in the first 3 months of this year as it was in the first 3 months of last year. I am disturbed to some extent about the analyses that are made of the total trend in the economy. Sometimes I yearn for those blessed days when one had to make ones own estimate of the national income. Now it is done for you quarter by quarter and comparators are made in every field. I think at times we are inclined to be puzzled by too much information. It seems to me that what has disturbed the Treasurer is what he calls the 'rise in the average weekly wage'. I think he said in his address to the Australian Finance Conference that it is expected to go up by 9% this year. Again 1 point out that every year in the last 10 years there has been an average increase in prices of 2i%. In some years the increase has been a little more and some years it has been a little less. Over the same period average weekly earnings have risen by Si% each year. This at least teaches us one lesson, and that is that an 8i% increase in wages has not led to an 8i% increase in prices.

Some people curiously suggest at times that wages are the sole cause of price increases. The increase in average weekly earnings has been 84%; the increase in prices has been only 24%. This situation has continued in Australia under the present Treasurer, under the previous Treasurer and under the late Mr Holt who was Treasurer prior to the other 2 incumbents of that office. Why should the Government suddenly get disturbed because this year wages will increase by 9%? I have asked this question categorically here before. In an economy where, according to the statistics, the majority of people are wage earners, how can the wage earner obtain his proper share of increased productivity, if prices do not fall - and it would be odd to find prices that have fallen in the Australian economy in recent years - unless his wage increases year by year at a minimum of, say, 64% to 7%. He is then getting only his share of the increase in productivity.

Of course the real evil of inflation is that it benefits a few and robs a lot. Not everybody is able to redress his own situation. People on a fixed income, such as pensioners and superannuitants, have no automatic means of insulating themselves against the effects of inflation. That is why sometimes governments have to intervene by fiscal policy and transfer payments. That is the task of government. One of the reasons that we work almost with both hands behind our back in the Australian context is because, as I have said, we rely on monetary policy. But fiscal policy cannot be effective. All that is effective about fiscal policy is that the Government collects what has been described in this American literature as fiscal dividend. As prices rise, if scales of taxation are not altered progressively people automatically pay a higher proportion of their income to the Treasury. This is inevitable in such a system, unless the scale is periodically altered. I submit that a scale of progression which operated in 1954 and which collects well over half the taxes of companies and individuals - I am dealing more particularly with individuals - cannot be equitable in 1969. I do not thing there is any argument about that.

If the average rate of inflation is 24% there is a case for altering the taxation structure every 4 or 5 years. Our taxation structure has not been altered for 15 years. There have been some minor adjustments to family concessions, but if they are related to price increases they are not worth as much now as they were originally. They distort the scale even further. Then if inequity is bowed into the system by allowing deductions for life assurance at the rate of $1,200 per annum - almost $25 a week - how many people in the community could avail themselves of it? This is the sort of review that is needed. There has been talk about it now for 2 years at least. The Minister for External Affairs (Mr McMahon) said 2 Budgets ago that he would like to reform the tax structure, but he felt the time was not propitious. If inbuilt devices in the progressive tax scale are to be relied on to control inflation, a great deal of injustice will be done to people in the lower income groups, and particularly the family taxpayer. This is to say nothing at all about the unequal impact of indirect as well as direct taxation.

Now is the time for taxation reform. It cannot be delayed on the ground that it would be too inflationary to do it. The same amount of tax can be collected but it could be distributed very much differently among various sections of the community. I have made calculations before and I shall certainly quote them again when the tax rates are being dealt with later this year. Let us take as an example an average wage earner on $72 or $73 a week with a wife and 2 children. If the Treasurer is too horrified about the likely impact of his wage being increased by 9%, let us have a look at the tax scale and see what he is paying in income tax. He is paying anything from $3 to $5 per week more than he should. Maybe if the Government did justice to people in this group through tax concessions it might not have to worry so much about what it thinks crf the horrendous impact of inflation.

I have taken this opportunity to explain and expatiate on certain aspects of the economy. Perhaps I can sum up by saying that it is the opinion of the Opposition that the Government and the Treasurer, through the Reserve Bank, have acted wrongly in increasing interest rates recently. If they had looked at other signs available to them they might have seen that there is not quite the upsurge that they thought in certain directions. In any event, it is crude and cruel to solve the demand in building by leaving untouched the activity which occurs in the non-dwelling section which is more than half of the total activity and confining the impact to the dwelling section where most of the people are on average incomes - a little bit above or a little bit less than I have mentioned. I am referring to the sort of people who have just married and who want a modern home which could be financed from their existing income. With the impact of the last i% increase, the previous i% increase and the increase a couple of years ago, they are paying something like li% more now for mortgage finance. If we look at the statistics we will see that this adds something like 25% to the weekly cost of financing a mortgage if the amount is $8,000 to $10,000. We do not believe they should be the victims of the failure of the Government to take the right steps in other directions. We have voiced our protest here on 2 occasions already. I simply underline it here again this afternoon.







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