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Tuesday, 9 November 1976


Mr DEPUTY SPEAKER - I ask the Treasurer to withdraw that remark.


Mr LYNCH - To withdraw what comment in the remark, Mr Deputy Speaker?


Mr DEPUTY SPEAKER -The personal reflection on the honourable member.


Mr LYNCH - If I accuse him of being an old political lag do you regard that as a personal reflection, Mr Deputy Speaker?


Mr DEPUTY SPEAKER - I think the honourable member could well do so. He has not demanded it, but I would ask the Treasurer to withdraw that remark.


Mr LYNCH - I would not want to upset the honourable member any more than he is upset now. I will withdraw.

The House would do well to recall that the monetary problems facing the economy at the present time came about as a direct result of the permissive policies pursued by our predecessors. There can be no argument with the proposition that the policies of 1975 resulted in a potentially highly dangerous situation of excess liquidity. In the year to December 1975 the liquidity base of the private sector increased by $2,702m- almost 4 times the average increase recorded in the preceding 10 years. The increase of the liquidity base of the private sector during the 6 months to last December alone was $ 1,900m, and the fiscal irresponsibility of the former Government was the major factor contributing to this flood of money. Not only did our opponents in this house open the monetary flood gates in 1975; they also clamped a monetary vice on the economy that led to the worst credit squeze in Australia 's postwar history. It was the 1974 credit squeeze, brought about by the Labor Government, that pushed the economy to the depths of its recession and forced thousands of Australians on to the dole: The rapidity with which the volume of money was contracted during 1974 has no parallel in Australia 's post-war history.

I said in response to a question in the House today that the squeeze applying during that year was more severe than on any occasion when the growth in the money supply has been curtailedfor example, in 1961, 1965 and 1970. The volume of money, broadly defined, declined at an annual rate of almost 7 per cent during the 3 months to September 1974. The violent contraction that took place did so in circumstances where the volume of money had grown at rates in excess of 20 per cent in the previous 12-month period. There is no record of the honourable member for Adelaide having expressed any concern by comment in this House, so far as I have been able to search it out, about the credit squeeze imposed in 1974. 1 take this opportunity to say to the honourable gentleman that the Government's monetary measures during 1976 have been an outstanding success. The Government 's economic policy is in line with the consensus that has emerged on this matter in international economic forums. If the honourable gentleman queries that, I believe he ought to pay attention to the 1976 annual report of the International Monetary Fund which had this to say. . . . current rates of monetary expansion are still in double digits in most of the industrial countries and still need to be reduced considerably if a return to reasonable price stability is to be achieved in the next few years.

For 1976-77 a rate of growth of the broadly defined money supply of between 10 and 12 per cent, as referred to in the Budget Speech, will on present indications be consistent with growth in overall liquidity entirely adequate to support expansion by the private sector. It will also have the effect of bearing down on the rate of inflation and reinforcing the other measures taken by the Government to curb the rate of price increase.

But, as I said on Sunday night, developments in financial markets since the Budget was brought down have meant that the Government has been less than successful in selling government securities to the non-bank public during the period of the seasonal liquidity upswing. During the September quarter loans outstanding by banks and major financial institutions increased at a seasonally adjusted rate of around 20 per cent. There have been insufficient sales of government paper in spite of adjustments to treasury note rates prior to the October loan, a slight increase in the yield on Australian savings bonds and the October loan itself. The take-up of government securities by the non-bank public since the end of June has been no more than $2 90m and, within this total, the authorities have actually been net purchasers of shorter-dated bonds. That is, in the most recent period bonds purchased by the authorities have actually been exceeding sales. All of these developments, especially in the light of the October loan result, were comprehensively reviewed by Ministers last week and the monetary measures were decided last Friday. Assertions that these measures will bring about any form of credit squeeze are in fact without foundation.

Calls to statutory reserve deposits of 1 per cent amount to around $170m, as compared with deposits held by the trading banks of around $17 billion. This will simply bring back the margin of free liquidity of the banks to around the levels existing in August and September of this year. The average liquidity ratio of the banks during August and September was 25.3 per cent, by contrast with a ratio of something over 26 per cent as at the end of October. The new monetary measures embody, of course, a lift in short term official interest rates. Treasury notes are being increased by around Vi per cent and this will be reflected in the yields on short dated bonds over the next few days. As against this, private short term interest rates have declined during the recent period, as liquidity has eased. For example, the yields on 90-day bank bills are about 8.9 per cent now, compared with the average of around 10.7 per cent in June.

As to bank lending, the fact is that the banks have been providing finance for the corporate sector, both for working capital purposes and for investment and expansion. The authorities will continue to implement Government policy which provides for adequate funds to underwrite economic recovery. If excessive growth in money and credit were allowed to continue it would result, essentially, in more upward pressure on prices. This is, after all, the key lesson of the experience in the United Kingdom in recent years, and in Australia during 1975. As well, by making more sales of government paper now, and by avoiding excessive growth in lending at this time, the seasonal tightening of financial markets in the June quarter of next year will be easier to handle. In short, action taken now will obviate the need for monetary measures towards the end of the financial year that would have been inconsistent with continuing increase in the level of activity.

It is precisely because the Government aims to lift economic activity, and to deal with the level of unemployment, that action is being taken to keep the growth of the monetary aggregates at a rate consistent with further reductions in inflation. The Government believes that its policies are being successful and it does not intend to be pushed off course by the kind of unsubstantiated assertions that have been made by the Opposition in this House today. The Government for its part rejects the matter before the Chair.







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