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Tuesday, 21 August 1973
Page: 52

The influence of the budget upon the economy, and the appropriateness of that influence, should only be evaluated by close reference to the economic context in which it is framed.

The budget is not, however, solely an instrument of short-term demand management; it is also a major vehicle for the implementation of longer-term social and economic programs. An assessment of the 1973-74 Budget should, therefore, be gauged by reference to its overall objectives of accommodating the Government's social and economic policies and of not adding, in terms of its impact on the demand for available resources, to inflationary pressures. 1972-73 in Retrospect

The economy recovered strongly through 1972-73 from the 1971-72 slowdown. The 1972-73 Budget was framed in the early stages of that recovery and imparted a strong stimulus to it, particularly after the personal income taxation reductions and increased social welfare and repatriation benefits became effective.

The stimulus given to personal consumption expenditure by the Budget was reinforced by the programs initiated by the new Government after its election. These were concentrated in the area of social service benefits and pensions, where the main economic impact is on consumption expenditure. These post-budget measures were, of course, largely responsible for lifting the 1972-73 budget deficit, on the 'conventional' basis, from the budget estimate of $630 million to an actual $774 million. Details of the 1972-73 Budget results are provided in Statement No. 6.

The upturn in economic activity in 1972-73 is reflected in the acceleration in key economic indicators during the year. Gross domestic product at constant prices increased by 3.8 per cent in 1972-73, compared with 3.2 per cent in 1971-72. Drought conditions caused a sizeable fall in farm output but gross non-farm product at constant prices rose by 5.2 per cent - nearly twice as rapidly as in 1971-72. The rate of growth of gross non-farm product at constant prices within the year was considerably higher - in the first half of 1972-73 the seasonally-adjusted annual rate of growth was6½ per cent and there was an acceleration on this in the second half.

Estimates of the components of gross domestic product and expenditure in 1972-73 are given in the document National Income and Expenditure, 1972-73. In terms of constant prices, the key changes shown by the estimates are: ° a rise of 3.8 per cent in gross domestic product, made up of a rise of 5.2 per cent in gross non-farm product and a fall of 10. 1 per cent in gross farm product; ° an increase of 3.6 per cent in gross national expenditure for the year as a whole (compared with a 1.3 per cent increase in 1971-72), including increases of 5.5 per cent in private final consumption expenditure, 9.5 per cent in gross private fixed investment in housing, and 2.0 per cent in public authority final expenditure on goods and services; ° a decline, partially offsetting these increases, of 9.9 per cent in private gross fixed investment other than in housing; ° growth of 5 . 5 per cent in exports of goods and services, and a smaller increase of

4   . 9 per cent in imports of goods and services, giving rise to a further substantial excess of exports of goods and services at constant prices of $840 million in 1972-73, following an excess of $771 million in 1971-72.

Also in 1972-73: ° there were continued high rates of increase in money wages and prices, particularly in the second half of the year; ° there was a transformation in the labour market situation, with registered unemployed falling from a seasonally-adjusted peak of 2. 10 per cent of the labour force in August 1972 to 1.55 per cent at the end of June 1973, and registered job vacancies rising sharply in the closing months of the year to their highest seasonally-adjusted level in almost 20 years; o there was a rapid growth in the volume of money which expanded by 26 per cent in the twelve months to June 1973, although there was a marked slowing in that growth in the second half of the year when tighter restrictions on capital inflow were brought into operation and the Reserve Bank raised the Statutory Reserve Deposit ratio of the major trading banks.

Prospects in1973-74

The 1973-74 Budget has been framed in the context of an economy operating at almost full capacity and with widespread growth in demand seemingly set to continue strongly in the year ahead. Although economic activity seems certain to remain buoyant, it would be unrealistic to expect a continuation of expansion at the rate achieved during 1972-73, which had in it a substantial recovery element. As the margin of unused capacity dwindles, the scope for rapid increases in economic growth must likewise lessen.

Gross domestic product at constant prices seems set to rise by about 7 per cent this financial year. This prediction of considerably faster growth in gross domestic product than in 1972-73 reflects very largely the expected improvement in the rural sector. The outcome in the rural sector is, of course, dependent upon seasonal conditions, and while these have been generally favourable to date the final outcome will remain very tentative until well into the year. The growth in gross non-farm product at constant prices of about 6} per cent, seen as attainable in 1973-74, is based on the expectation that employment will grow by 3$-4 per cent and productivity by 2j-3 per cent. The high employment growth implies a marked increase in labour force participation rates and this will be achieved only by greater female participation. The expected increase in productivity is less than that achieved in the recovery upsurge during 1972-73 but is about equivalent to the longer-term average rate of productivity growth. The forecast increase in gross non-farm product at constant prices is thus only moderately greater than that achieved in 1972-73. There are, however, two important differences underlying this comparison.

The first of these has already been touched on - the movement within the two years. In 1972- 73 gross non-farm product at constant prices grew considerably faster within the year than for the year as a whole, reflecting the recovery from the subdued activity levels of 1971-72. The estimated rates of increase of gross non-farm product at constant prices, in seasonally-adjusted annual rates, were 61 per cent for the first half of 1972-73 and about 8 per cent in the second half. With the economy now operating close to full capacity, a continuation of growth at the latter rate in 1973-74 is not feasible.

Secondly, the relative movements of gross domestic product and gross national expenditure seem likely to be reversed in 1973-74. In constant price terms, exports increased faster than imports in 1972-73 so that gross domestic product grew faster than gross national expenditure. In 1973-74, however, exports are forecast to grow somewhat more slowly as buoyant domestic conditions impose restrictions on export capabilities. More importantly, it has been evident for some time that very strong growth in imports could be expected in 1973- 74, in response to domestic pressures and relative price movements. The uniform reduction in tariffs by 25 per cent, announced on 18 July, should add further to this import response.

Of the major expenditure components, private final consumption expenditure is the dominating influence. The expected rapid increase in average weekly earnings - reflecting both the timing and size of the 1973 National Wage Decision and the increasingly strong pressures in the labour market - coupled with strong employment growth, will ensure a high rate of increase in wage and salary incomes in 1973-74. Increases in social security benefits will sustain a considerable increase in total spending by recipients. Farm incomes are expected to remain high. Offsetting these income movements will be the fact that, in contrast to 1972-73, personal income tax liabilities will rise considerably faster than incomes. In all, non-farm disposable incomes are expected to grow a little more quickly in 1973-74 than in the previous year. The expected increase in consumption expenditure, strong though it is, still implies an increase in the savings ratio.

After a lengthy period of decline, private fixed investment at constant prices is expected to increase during 1973-74. Dwelling investment is forecast to grow more slowly as constraints on the capacity of the dwelling construction industry intensify. Non-dwelling investment, which typically lags in the recovery cycle, should respond to demand conditions during the year. Inventory accumulation is also expected to make a moderate contribution to product growth in 1973-74.

Stronger growth in public authority expenditure at constant prices, most markedly in gross fixed capital investment, is expected, reflecting chiefly an acceleration in Australian Government spending programs. In 1972-73, direct expenditure by the Australian Government's authorities is estimated to have declined in constant price terms while expenditure by State and local government authorities increased moderately. All levels of government are expected to increase their call upon resources during 1973-74.

It should bc said that this outlook for the coming year is subject to substantial margins of error. Neither good data nor good econometric techniques nor even good judgment, can ensure that forecasts will, in the event, prove to have been correct, especially in detail. There are too many unknowns involved and it would be pretentious to suggest otherwise. This discussion of the 1973-74 outlook is presented, therefore, solely to indicate what seems, at present, to be at the centre of the range of possibilities. It should not be taken as indicating more than that.

The Economic Context and the1973-74 Budget

So far as the economic context is concerned, the overriding consideration in framing the Budget was that the economy at the outset of 1973-74 was already under stress, with inflation the dominant worry. The major problem, therefore, was one of ensuring that the diversion of resources to the public sector needed to get major programs under way did not add to total demand pressures. This need reinforced the arguments, strong in their own right, favouring an immediate full-scale review of existing budget expenditures inherited from the previous Government.

These were the factors underlying the setting up of the Task Force under Dr Coombs. The Government, using the Coombs Report as a working document, has decided to prune continuing expenditures, including disguised expenditures through the tax system, significantly. In framing new budget spending policies, the decisions taken reflect the Government's own priorities.

In addition to the expenditure review, specific measures have been deemed desirable on the revenue side to accommodate budget outlays. As outlined in the Budget Speech, increased revenues of 8223 million are being sought in 1973-74 from increased rates of customs and excise duties.

The Economic Impact of the Budget

In general terms, the influence of the budget upon trends in the economy operates through the effects of changes in particular types of budget outlays and receipts on incomes and expenditures, and through the effects of the budget and its financing upon liquidity. Moreover, and often importantly, the budget may affect private sector expectations about economic prospects. This Statement is devoted primarily to an examination of the first of these transmission mechanisms within a framework of a national accounting presentation of receipts and outlays. Statement No. 3 examines the implications of domestic budget transactions for monetary conditions.

Budget Outlays

The economic effects of particular classes of outlays and receipts differ significantly one from another. On the outlay side, it is particularly important to distinguish between outlays within Australia and overseas. This distinction is necessary because the immediate effects of overseas outlays are on the balance of payments. They do not add directly to domestic incomes and the demand for locally-produced goods and services.(1) There may be indirect repercussions if, for example, the purchase overseas of defence equipment requires complementary expenditures within the domestic economy to service and operate the equipment. By way of contrast, domestic outlays exert a direct impact on the level of domestic economic activity.

In 1972-73 overseas outlays actually fell by 5.3 per cent while domestic outlays (on an adjusted' basis - see table below) rose by 16.0 per cent. By contrast, as the table shows, overseas outlays are expected to rise by 6.0 per cent in 1973-74. None the less, it is the estimated 20.0 per cent increase in domestic outlays (on the same 'adjusted' basis) which chiefly accounts for the accelerated growth in total budget outlays expected in 1973-74.

 

Within the area of domestic outlays there is however a further important distinction to be made, namely that between expenditures on goods and services, on the one hand, and transfers and advances from the budget, on the other. Whereas an increase in government direct expenditure on goods and services is reflected in full in the level of aggregate demand, the initial impact of transfers and advances on economic activity depends upon the spending propensities of the income recipients.(2) This distinction is particularly important in assessing the primary impact of different expenditures on the level of effective demand.

The following table highlights the major compositional aspects of domestic outlays for 1973-74, compared with the previous year, by separating net expenditures on goods and services from transfer payments and net advances. A striking feature of this table is the very

(1)   Payments within Australia may alternatively add to overseas rather than Australian incomes if, for example, orders met by local suppliers include an import content. Although it is not possible to make reliable estimates of the import content of budget expenditure within Australia, the proportion would not be large, and it may be assumed that it is unlikely to change markedly between one year and the next. By contrast, direct payments overseas from the budget may fluctuate widely between one year and another.

The main overseas components are shown separately in Table 2 of the Supplement to the Treasury Information Bulletin, National Accounting Estimates of Public Authority Receipts and Expenditure, published concurrently with the Budget.

(2)   It is important to distinguish, in practice, between different types of transfers and advances, because of the differences which may exist between the ways in which the amounts are spent by the various recipients. high proportion of budget outlays which takes the form of transfer payments and net advances. The spending behaviour of the recipients determines the net call on domestic resources ultimately arising from these outlays.

BUDGET DOMESTIC OUTLAY

(a)   As noted earlier the figures appearing in this table have been adjusted for factors affecting yeartoyear comparisons. See footnote to the preceding table for further details.

(6)   Consisting of subsidies, grants for private capital purposes, purchases of existing assets and unfunded employee retirement benefits.

Both net expenditure on goods and services and transfer payments and net advances are estimated to increase faster in 1973-74 than in 1972-73. Features of the table include: o the very small increase in domestic outlays on defence; o the rapid acceleration in capital expenditures on goods and services, which are estimated to rise by over two-fifths in 1973-74 compared with little change in 1972-73; o the rapid acceleration in net advances (other than to the States), which are of a capital nature, and which are estimated to rise in 1973-74 by more than two-thirds compared with little change in 1972-73; o the very rapid increases in payments to the States, which are particularly noteworthy because of the absolute magnitudes involved; and o the very large absolute and percentage increases in cash benefits to persons notwithstanding a somewhat slower rate of increase than in 1972-73.

The identification of budget outlays as either direct expenditures or transfer payments is, however, only the first step in disaggregating budget data. Account needs to be taken of the permanency of the initial outlays since this affects both the continuing stimulus to economic activity and the type of economic response from producers and consumers. Account also needs to be taken of subsequent adjustments in the economy, leading to further rounds of induced spending. These induced responses inevitably take some time to develop, because of the lags with which production and hence incomes respond to an initial increase in demand. Accordingly, some assessment of the timing of budget transactions and the time lags associated with the economic responses they induce must also be made.

The full economic impact of budgetary measures clearly extends beyond any given budget year. Current economic experience fully testifies to this fact. The stimulatory effects of last year's budget, for example, will continue to bear on economic performance in 1973-74. Similarly, measures taken in this year's budget will have effects in 1974-75 and beyond. Indeed, some measures taken now, including some of the revenue measures announced in the Budget Speech, will have no direct financial effects until 1974-75.

Budget Receipts

As with outlays, differences exist between various taxes and charges in terms of their economic impact. Likewise, these differences pertain both to the magnitude of their effects upon real expenditures and prices, and to the time lags between implementation and effect. Tax measures may also have important psychological effects, in some cases transcending their direct or 'mechanical' effects on spending and activity.

Ideally, when assessing the economic impact of a given budget, it would be desirable to extract the 'automatic' growth in budget receipts and outlays from the total, thus exposing the 'discretionary' or newly adopted policy changes. In reality, it may often be exceedingly difficult to draw a clear line between what is new policy and what is inbuilt. This is particularly so on the outlay side.

On the receipts side these identification problems are less difficult. The relevant distinction is that between revenues which would have been collected with unchanged tax rates and charges, and the estimated collections due to specific rate changes announced in the budget. Changes in estimated revenues in the former class result from changes expected to occur in the economy, which affect the bases on which taxes are levied. (3) Such revenue changes, in turn, exert an influence on economic activity. However, only changes in revenue arising from changes in rates and charges can be considered as capable cif varying or offsetting economic trends which, prior to the budget, are foreseen. In contrast, the existing tax structure is part of the complex of factors producing presently foreseen trends and therefore cannot be seen as capable of offsetting them - the effect of the existing tax structure is already built-in', as it were, to those foreseen trends.

Even this distinction is somewhat blurred, however, by changes in effective rates of tax, which are themselves the product of changing economic trends. In particular, due to the progressive nature of the income tax scale, as incomes rise the average, or effective, rate of tax will increase. Similarly, since different classes of goods are subject to different rates of sales and excise taxes, changes in the composition of sales will yield changes in the overall effective rates of those taxes. By convention, however, changes of this sort are classified as arising from economic trends rather than from policy measures. (4) By implication, only changes in revenue of the 'discretionary' rate change type are considered as part of the explicit impact of the budget.

New revenue measures are estimated to yield $339 million of revenue in 1973-74 and $648 million in a full year. This revenue yield is additional to the 'automatic' increase of $1,621 million estimated to result from applying current schedules of tax rates and other charges on the basis of assumed economic conditions in the year ahead.

(3)   For the most part, movements which would be expected in gross collections of PA YE instalment deductions, indirect taxes and the income of public enterprises, at existing rates and charges, fall within this class. Collections of income tax from individuals subject to provisional tax and from companies are also of this type although in these cases past changes in the economy are also involved. (*) It might be noted that particular revenue estimates may reflect prospective trends in some particular areas of activity which are not the most desirable from the point of view of economic balance and reasonable price stability but which cannot, in practice, be corrected fully or quickly by fiscal or monetary means. Should average earnings rise by less than assumed in compiling budget estimates, taxation revenue would for that reason tend to be less than estimated and a larger budget deficit would tend to emerge (although the extent of the increase in the budget deficit would not reflect the full extent of the shortfall in receipts, because some components of expenditure - for example, financial assistance grants to the States - could also be lower than estimated if average earnings rose more slowly than assumed). It would not follow, however, that the budget objective of maintaining an environment conducive to balanced economic growth would be affected adversely by such a development.

The taxation measures proposed by the Government in the 1973-74 Budget have been formulated, for the most part, to steady the pace of growth of private sector activity, and thereby modify the pressure of total demands on available economic resources. Such a check now, designed to counter over-rapid expansion in a period of widespread economic recovery, would be generally seen as preferable to deferring action to a time when much stronger corrective measures would be required.

Review

The budget is but one of many influences upon economic developments, particularly in a relatively open economy such as Australia. Any assessment of economic prospects in 1973- 74 must therefore be subject to a degree of uncertainty and, for this reason, policies must be readily adaptable to changing economic circumstances. In early 1973-74, however, the prospects are for rapid growth in all major areas of demand.

To contain the growth of demand pressures, the Government has therefore acted to steady the growth of total expenditures and to encourage increased supplies. With respect to public sector growth, this has involved an overall review of past expenditure programs and a considered ordering of priorities in implementing new expenditure initiatives. The additional revenue measures announced in the Budget Speech will affect private sector expenditure.

Overall, the budget is likely to keep the economy growing strongly. Whereas in the very different economic circumstances of 1972-73 outlays increased at about twice the rate of increase in receipts (due to substantial reductions in taxation), in 1973-74 the Government has seen as appropriate a budget in which increased receipts more than cover increased outlays. In short, in the context of the very different circumstances that now prevail compared with those of a year ago, the 1973-74 Budget is designed to be much less stimulatory than its predecessor.







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