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Wednesday, 29 August 1973
Page: 545


Mr LYNCH (Flinders) - The distinguished American economist, John Kenneth Galbraith, in his book 'The Affluent Society' referred to the problem of inflation in these terms:

Social imbalance is the natural offspring of persistent inflation. Inflation, by its nature strikes different individuals and groups with highly discriminatory effect.

That statement has particular relevance in Australia's present economic circumstances. Inflation is an insidious economic and social evil. It generates an utterly capricious and unjust distribution of the national product. It causes the unplanned and inefficient allocation of our resources. It is akin to a rapacious tax which, unlike normal forms of taxation, pays no regard to principles of equity or logic. Its most harmful effects are borne by people on fixed incomes, the pensioners, the superannuitants and the lower income groups in our society. It discriminates against those who are unable to invest in real assets to take as much capital gain and as little income gain as possible. A government which imposes this most regressive economic burden cannot lay a major claim to the principles of social justice and human dignity.

The Labor Government, in its first Budget, has failed to meet the test of economic responsibility. In the name of equity this Budget will create inequity. In the name of social reform, this Budget will discriminate against the most disadvantaged sections of the Australian community. In the name of human welfare this Budget contributes towards fundamental disequilibrium within the economy and not towards reformist or redistributive objectives. In the name of progress this Budget simply redresses the retrogression in the standard of living which has resulted from government-generated inflation. It is a matter of national concern that this Government, which inherited a sound economy in which inflation was tending to decline, is now presiding over a serious inflationary spiral with neither the wit nor the will to confront the basic components of this most serious problem. It is self evident that neither the Prices Justification Tribunal nor the Joint Parliamentary Committee on Prices has any means of curbing inflation. They are ineffectual by their very nature, design and application. The recent cut in tariffs, for which the Government sought to claim a direct impact on import prices equal to a revaluation of 6 per cent, will be no more effective. Indeed, the Budget Papers estimated rise of $390m in imports as a result of the tariff measures implies a rise of 17 per cent in these imports on which protective duty is levied in response to a fall in their prices of only 6 per cent. This in turn would imply a price-elasticity of demand of three - appreciably higher than elasticities of the order of one and one-half to two that have previously been found for manufactured imports.

Indeed, there is a real danger in an overexpectation of either increased imports or lower prices. The statements in both the Budget Papers and the recent Treasury White Paper relate merely to the effects on import prices. In its overall effect on the price level or an international reserves the cut in tariffs was equivalent to a revaluation of no more than 0.5 per cent to 1 per cent.

The absence of real policy initiatives designed to control inflation placed a special responsibility on the Government's first Budget. The Treasurer (Mr Crean) himself stated in his Budget Speech:

In a buoyant and strongly growing economy, with inflationary pressures intense, we are limited by the over-riding need to bring down a Budget which does not add to those pressures.

It is an extraordinary exercise in dialectics to include a statement of that nature in a Budget which seeks approval for an 18.9 per cent increase in Government expenditure. That massive increase in Government spending must place intolerable and unreasonable strains on the economy by stimulating the already rapidly increasing level of demand.

The huge uplift in expenditure clearly contradicts the warnings contained in the recent Treasury White Paper which noted that:

Demand, already tending towards the uncomfortably high, is set to increase considerably in the period ahead.

It is absurd to maintain that there is little the Budget can do to restrain inflation. From the point of view of inflation, the only justification for not reducing individual income taxation is that money needs to be taken out of the hands of the private sector, and a Government surplus budgeted for. Instead, the remarkable increase in public revenues from this and new sources is to be more than spent. In doing so the Government is quite clearly contravening the responsible economic advice of the Treasury, as evidenced in the last Treasury White Paper.

Effective demand management is a basic and necessary condition for effective control over inflation. In most industrial economies, the most serious increases in inflation have tended to occur when periods of expansion have been allowed to proceed too far. In his report on inflation the Secretary-General of the Organisation for Economic Co-operation and Development noted that while the causes of inflation are many, the emergence of demand pressures on occasions during the 1960s has been a major contributing factor to the present inflation. The control of aggregate demand in major overseas countries has proved difficult for a number of reasons including political constraints on the implementation of fiscal and monetary policies, errors in forecasting, disruption to international trade and exchange conditions and also a hardening in the reactions of the private sector to government policies. This last factor has at times led to perverse reactions to fiscal policies such as additional wage and other income claims and downward movements in savings in response to increases in taxation. However, it is universally true that if effective measures are not taken until the pressures on capacity, costs and prices are clearly evident, stronger action than otherwise will be necessary to check the expansion of demand. This is the lesson of overseas experience.

In spite of the warnings from all sectors and sections of the community and at a time of near full employment, the Government has introduced a Budget which expands public spending by $'1,93 8m, yet imposes additional taxes designed to increase revenues by only $3 39m: An expansionary impact of $ 1,599m equal to 4.2 per cent of non-farm national product. .This is one of the most expansionary Budgets introduced in Australia over 20 yeaTS, and at a time when inflation is running at record levels, when resources are fully employed and real restraint is required.

The expansion of public sector spending must necessarily have a highly stimulatory effect on the private sector. An increase in the level of demand must accompany the new stimulus. In a situation where the available resources are fully employed there must inevitably be competition for scarce resources between both the private and the public sectors. I have already adverted to the highly exaggerated effects claimed for the recent tariff adjustments by the Government. This is a claim which has grown large on the fallacy of its assumptions. The .fact is that this measure cannot be relied upon as the necessary relieving factor in domestic resources.

The total addition to market supplies likely to become available in 1973-74 is put in the Budget documents at about 7 per cent. This implies a wholly over-optimistic assessment of me probable rise in participation rates. The additional demands to be placed on these supplies by the rise in Government spending on goods and services plus transfers to the States will be of the order of 2} per cent of the gross national product - a much greater proportion of the additional potential supplies than Government spending on goods and services at present bears to GNP. This must lead to excess demand.

The Budget, in fact, is a manifest failure. It totally ignores its primary role as a major economic instrument in controlling inflation in this country. It was introduced in an isolated manner and not presented in the context of an overall and coherent economic philosophy. It dishonours a number of significant pre-election and postelection promises. It will disadvantage lower income families by failing to lower income tax scales in the face of Government induced inflation and by failing to offer assistance by way of tax concessions or additional child endowment. It neglected to provide an adequate response to the major quality of life issues such as the environment, conservation and urban improvement. It is a significant blow to young married couples and other home seekers by not providing positive answers to the problems of rising land and housing costs, by deferring the promised tax deductions of mortgage interest and by abolishing without prior warning the home savings grants scheme.

The Budget forces lower income families, pensioners and superannuitants to bear the main burden of Labor's spending spree by imposing a wide range of indirect taxes and charges. Its range and size of social welfare benefits fall far short of its election promises and the increased benefits do not keep pace with the erosion of real money values caused by inflation. Pensioners and superannuitants will, in fact, under this Budget, as a consequence of the lack of Government activity and the forces of inflation, be far worse off. Its provisions in respect of the rural community will be a major disincentive towards the principal aims and objectives of decentralisation schemes. It tightens the grip of centralised power by expanding the expenditure of the central Government by more than twice the rate of receipts payable to State governments.

The Budget is a clear anti-incentive for the future development of the manufacturing and mining sectors and creates new problems for small business and entrepreneurs. It seriously weakens Australia's defence capabilities by reducing expenditure to 2.9 per cent of gross national product in contradiction to the promised level of 3.5 per cent. Its basic economic thrust is quite contrary to and inconsistent with the advice of the major economic policy branch of government - the Federal Treasury. It is a complete anti-climax and falls far short of the historic document of major economic and social reform which the Australian public was led to believe would be brought down.

The excessive nature of the Government's expenditure has no better illustration than the fact that, in spite of a 25 per cent increase in personal taxation revenue, the Government has now seen fit to introduce a wide-ranging series of indirect taxation measures. It is pertinent to refer again to the election speech of the Prime Minister (Mr Whitlam) in which he said:

The huge and automatic increase in Commonwealth revenue ensures that rates of taxation need not be increased at any, level to implement a Labor Government's program.

The Prime Minister then reassured the more affluent sections of the Australian community in these terms:

The rates for which the wealthier sections of the community including companies are liable are already high enough.

It is a sad commentary on the integrity of this Government that as soon after these pledges were made they were dishonoured. The imposition of increased indirect taxation, increased company tax and the removal of existing taxation concessions all represent a major denial of clear policy pledges. It would be quite misleading to assert that there has been no rise in personal income tax rates. Only when the ratio of income tax receipts to personal disposable income does not rise should one consider that income tax rates are unchanged. The use of indirect taxation on items of very general consumption which figure prominently in the cost of living, or on such an item as petrol representing an important input to most industries, is especially likely to add to wage induced inflation. The rise in indirect taxes in the Budget will increase the consumer price index by approximately 1 per cent. It is also increasingly true that people take account of personal income tax in bargaining for wage and salary increases and the substantial rise in effective income tax rates will have a significant upward effect on wage and salary bargains.

It is the average income earners who will be held to a position of neutrality by the taxation provisions of this Budget. Calculated on the basis of average weekly earnings and accepting the Budget forecasts of an increase in average earnings of 13 per cent, the rise in post tax earnings of the wage earner will be almost exactly swallowed up by the 10.5 per cent increase in prices which is likely to occur if average earnings rise by 13 per cent and productivity by 2.5 per cent. Thus, even the implicit assumptions of the Budget itself imply that the average wage earner in Australia will be no better off in June 1974 than he was in June 1973. A more realistic view would assume, in fact, that the average wage earner will regress during that same period.

That is the position of the average wage earner. But even pensioners throughout this country will fare no better. They have not been subject to generous treatment. The full year's increase will certainly be less than the increase in average earnings during 1973-74 and they will have to bear the greater burden of increased tobacco duties, increased rents as the housing boom continues, and increased bus fares that will flow from increased petroleum duty. The decision to tax all pensions will mean that some full-rate pensioners will be liable for tax equal to two-thirds of the extra pension provided in the Budget. Complete with the means test for those not yet 75, the combined effect of tax and loss of pension can take over 70 per cent of the additional benefits. The avowed purpose of the Labor Administration is to raise the level of age pensions to 25 per cent of average earnings. They promise 2 increases during the year each of $1.50. The first of these was given in the Budget. These increases, totalling $3, will raise pensions from $21.50 to $24.50 by the end of the financial year. This is an increase of only 11.5 per cent. Yet the Budget estimates that during the year average earnings will rise by 13 per cent. In other words as a result of the present Budget - and its inflationary consequences - age pensioners will fall further behind average earnings rather than beginning to catch up on them. As in most fields inflation favours the strong against the weak. The Australian Commonwealth Pensioners' Federation referred to the Government's pension provisions in these terms:

We are bitterly disappointed that the Government has not seen fit to make provision for greater pension increases for those whose only means of subsistence is the pension itself. It would appear that this section of the community, most defenceless, nothing to sell, unable to strike, are to bear the brunt of todays inflationary conditions. It is our view that inflation should be approached with a firm resolve to ensure that the poor do not become poorer and the rich richer. We view the future with no small degree of apprehension.

That is not a statement by a member of the Opposition speaking in this debate. It is a direct quotation from the Australian Commonwealth Pensioners Federation which views the future with apprehension because of this Government's manifest failure to take effective action to control inflationary forces. I make it quite clear that the Opposition welcomes the emphasis placed on education, social welfare and Aboriginal advancement but it is unfortunate that these concessions are acknowledged in the context of the erosion in the purchasing power of disadvantaged groups. It is a matter of regret that these concessions do not represent major benefits for those groups but are, in fact, demanded by the conditions created by this Government. The major requirement of welfare programs this time is to protect those who suffer most from high rates of inflation and it is always the recipients of social welfare who suffer the most. The impact of this Budget does nothing in reality to alleviate that suffering.

Just as welfare recipients have not been the major beneficiaries of the huge increases in expenditure, the major quality of life issues have been neglected. Urban improvement which was such a high priority in December has served its electoral purpose. The urgently required funds to overcome the backlog in sewerage services in major urban areas have just not been provided. An advance of $30m is a totally inadequate response to a problem which requires funds in excess of $ 1,000m. Inadequate sewerage facilities contribute more than any other factor to the incidence of water pollution in Australia. No real progress can be made towards the improvement in the quality of our water resources unless the Federal Government is prepared to provide the funds required. The Treasurer told the Parliament that the Government would support a wide range of activities in the fields of environmental protection and conservation. Yet the funds which this Government intends to spend cannot hope to make major strides in this area. Environmental protection is an endeavour which has been conspicuous for its neglect by the Government. Not only does the Budget make an inadequate allowance for environmental improvement but the Minister whose area of responsibility is directly involved has yet to make any statement to this House outlining his activities during the past 9 months. And in spite of the unprecedented number of Bills introduced we have yet to see a single environment impact statement tabled in this House.

The Minister for the Environment and Conservation (Dr Cass) has been an abject failure in his portfolio. No new initiatives have come from his Department. In fact, the major adjustment that the Minister sought in this Budget was the reduction from $150,000 to $50,000 in the grant to the Australian Conservation Foundation.


Mr Peacock - He lost his submission to Cabinet.


Mr LYNCH - Yes. I am not surprised that his intention to reduce the grant to the Australian Conservation Foundation was overruled. It was overruled by the Prime Minister (Mr Whitlam) on his return from Ottawa. Even the pre-election promises on Lake Pedder have been conveniently put aside. Australian environmentalists in all the groups in which they are active will be rightly disappointed with the meagre provisions this Budget makes for the vital concerns of environmental improvement and conservation and its promises and pledges in the area of the environment. As honourable gentlemen sitting opposite know full well, the promises and pledges have been dishonoured by lack of activity in the ministerial portfolio in which the environment has become the lost cause of the Labor Administration.

Lower and middle income earners, particularly young married couples in those categories, will now find themselves even more disadvantaged as a result of the massive increase in housing and land costs. The Budget arbitrarily and without warning removed the homes savings grants which have in the past substantially assisted people in purchasing and owning their own homes. Not only has the Government removed this provision, but it has clearly violated yet another clear promise by not introducing the scheme of deductibility of mortgage interest outlined by the Prime Minister (Mr Whitlam). Little has been done to solve the problem of housing costs. The much vaunted claims of the Australian Labor Party are not in evidence in this Budget. A capital investment down-turn is likely to arise from the combined effects of the abolition of the 20 per cent investment allowance, increases in private company tax and the abolition of mining industry investment concessions. These can only be described as being major disincentives for considerable and important sections of the Australian business community. Estimated net investment in plant and equipment during 1972 was a little over $500m compared with amounts of over $900m in each of the preceding 3 years. The abolition of the investment allowance will prevent any significant recovery of net investment in equipment. Demand restraint is required, but it should be aimed at current expenditure and expenditure in the building industry, not at investment in equipment which, in the long run, will have a major influence on our capacity to meet demand. The irony is that the only really deflationary move in the Budget was aimed at the weakest sector of the economy - the one which must expand if the pressure on our resources is to be eased. The Crean Budget will go down in history as the Canberra Control Budget.

At the recent Premiers' Conference all State Treasurers stressed the extreme financial difficulties their governments were experiencing during this period of strong inflation and the accompanying rapidly rising salary bills for government employees. The States were firmly told that it would be out of the question to consider giving the States an increase of more than 9 per cent in their tax reimbursements because of the difficulty the Commonwealth would have in finding the funds. The Treasurer announced that income tax revenue for the financial year would increase not by 9 per cent, but by an astonishing 25 per cent and that receipts from taxation of all types would increase by 22 per cent. A substantial proportion of this money is being used to dictate policy to the States in State areas of responsibility. In case of money to be made available for public transport, not only are projects mentioned in great detail but also the Commonwealth wants the right to approve contracts in addition to having a representative on the board spending the money in this area.

Local government grants have been made available for certain chosen municipalities in the western suburbs of Melbourne, for example. This may be good news for the west, but it represents bad news for the north, south and the east as well as for the entire country areas of Victoria. In other words this Government is endeavouring to tell the States in minute detail how money should be spent in State constitutional fields. During the past decade general purpose grants to the States have increased by $1,1 56m or 165 per cent while tied special purpose grants to the States under section 96 have grown by $1,4 10m or 600 per cent. The trend has been greatly accentuated this year, with general purpose grants increasing by 9 per cent and specific purpose grants increasing by 80 per cent.

This approach is also evident in the section of the Budget which claims an increase of 92 per cent in educational expenditure. The real figure is 60 per cent not 92 per cent. A &um of $145m equal to 32 per cent is to be expended on tertiary education which would have been provided by the States under the old scheme. The Commonwealth announced this year that it would take over financial responsibility for tertiary education. On the other hand it took away from the States the $145m that they would have allocated to tertiary education. Thus the increase for tertiary education directly resulting from this manoeuvre is nil. It is quite improper to take $145m of tertiary education money from the States and then claim this as a figure for Commonwealth expenditure, as if by some magical formula the expenditure by the Commonwealth has suddenly increased. To claim, as this Government has done, an increase of 92 per cent without developing the reasons why that increase has taken place is, I believe, a dishonest approach to the needs and responsibilities of education in this area.


Mr Edwards - It is a phony estimate like other estimates.


Mr LYNCH - As my colleague the honourable member for Berowra has said, it is a phony suggestion. I turn now to those positive measures which the Leader of the Opposition so cogently and clearly put down. The Government must provide effective national leadership in seeking to reduce the level of inflation. It must put before this Parliament and the nation a comprehensive and cohesive anti-inflationary policy en compassing the major instruments of economic management available to the Government and specifically designed to dampen the aggregate level of demand and reduce the x pressures of costs. Our serious inflationary difficulties can find no solution in the existing fragmented, ad hoc and ineffectual policies adopted by the Labor administration.

No government can expect restraint and co-operation from the principal parties in the community unless it is first prepared to put its own house in order: That requires a rigorous examination of its existing and future commitments. It requires the reimposition of the former growth rate limit of 3 per cent in respect of the Commonwealth Public Service. It is clearly undesirable for employment levels in the public sector to increase at a rate of almost double that applying to the private sector. The economic circumstances require in the view of the Opposition parties an incomesprices policy seen not as a substitute for effective demand management policies but as a supplement to a comprehensive package of anti-inflationary measures. In addition, the Government must be prepared to play a responsible role in respect of conciliation and arbitration; to review and increase the migration program; to reject the concept of flat rate wage increases and of course to develop the concept of a temporary freeze on incomes and prices as outlined by the Leader of the Opposition followed by the implementation of guidelines for subsequent wage and price increases. No incomes-prices policy can be regarded as a panacea, but we believe such a policy will be necessary to achieve a break in both incomes and prices expectations at the present time. The Opposition parties reject the Budget which has been brought down by the Government.

Mr DEPUTY SPEAKER (Mr Armitage)Order!The honourable member's time has expired.







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