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Wednesday, 8 December 1976

Mr WILLIS (Gellibrand) -The Bills before the House raise important issues of protection policy in this country. I hope to be able to put them into a little more perspective. It seems to me that the first point to make is that the protective effect of the devaluation of 17V£ per cent was equal to an 80 per cent increase in tariffs, which is a mammoth increase and which certainly creates a new situation for protection in this country. However, it is important also that the statement in relation to tariff cuts made by the Minister for Business and Consumer Affairs (Mr Howard) yesterday does very little to reduce that very substantial increase in protection. The overall effect is equivalent to a VA per cent across-the-board cut in tariffs if we take for gospel what is reported in this morning's Press as coming from Government sources. On the Opposition's quick analysis, that would seem to be something like the case. Taken with the subsequent 2 per cent revaluation, there has now been a reduction in that 80 per cent increase in protection to a 70 per cent increase in protection -still a very substantial increase in protection in the last couple of weeks. The reason for not doing more is said to be the need to restore the competitive position of industry. I think this is a crucial issue and I will come to it in a moment.

However, I should like to make a point about the difficulties created by exchange rate fluctuations of which we have had 2 notable examples in the last couple of weeks. Firstly, it makes the job of the Industries Assistance Commission extraordinarily difficult. How can it possibly decide on what are the appropriate levels of protection when the exchange rate is jumping up and down the way it has done in the last couple of weeks? It is an impossible situation. I suggest to the Government that it virtually has made the job of the IAC almost impossible in terms of providing any rational basis for tariff setting in this country. We are told that the exchange rate will move quite frequently in the future- I suggest that it certainly will and in that case the job of the IAC becomes amazingly difficult.

Further, the Government also has created a situation in which there is uncertainty in business. This goes directly against what this Government has been saying from the time it achieved office was its fundamental aim. I said it would create an environment in which business could be certain about what was going to happen. It could look forward and plan on the basis of certain government policies. What it can look forward now is continuing changes in the rate of exchange and, therefore, continuing changes in protection policy in this country. That will do anything but create certainty and the kind of environment in which there will be substantial investment. I suggest that the exchange rate is likely to continue to alter frequently in the near future. The reason for that is that there has occurred a fundamental structural change which cannot be offset by devaluation.

This Government is attempting the impossible. It is attempting to offset a loss of competitiveness which is due not to increased wages in the main, as the Government contends, but mainly to revaluations which cannot be offset by subsequent devaluations. I will substantiate that thesis in the 7 minutes I have left to speak. When this Government decided to devalue it did so because it said that we had a loss of competitiveness. The loss of competitiveness was due to a revaluation which was brought about by the Labor Government in 1972-73. Those revaluations were absolutely essential if we were to bring the balance of payments into equilibrium.

I remind honourable members that when the Labor Party took office we had a situation in which the money supply was increasing at an extraordinary rate. Overseas reserves were increasing amazingly. They more than doubled in 1972 when Labor was not in office. The effect of that was that there were very substantial implications for the money supply. In the last 6 months of 1972 the money supply increased by 17 per cent- an annual rate of 34 per cent. The reason for that was the speculative inflow of funds which were coming in on the basis that there would have to be a revaluation. That speculation, in turn, was brought about by the fact that the balance of payments had been continually moving into a more excess situation in the late 1960s and early 1970s and that, in turn, was due to the fact that the mining industry in Australia was bringing about a total transformation of the structure of industry in this countrysomething about which this Government seems to have no concept. The fact is that in the period 1964-65 to 1970-71, mining exports increased from 9 per cent of total exports to 26 per cent of total exports- a phenomenal increase in such a short period. That brought about a fundamental change in the structure of our balance of payments which had to be affected eventually by some change in the exchange rate.

In case it is suggested that revaluation was not the basic cause of the change of competitiveness, I suggest that honourable members should examine the IAC annual report for 1975-76. When referring to the period 1970-71 to 1975-76 at page 25 of that report, the Commission states:

Most of the decline in competitiveness was caused by the exchange rate appreciation, which reflected general developments in the economy.

I suggest that the Minister for Business and Consumer Affairs would be well occupied in studying that section of the report. At page 26 of that report there are tables which analyse the loss of competitiveness in that period from 1970-71 to 1975-76. It shows that there was a 17 per cent loss of competitiveness in that period. If honourable members examine the tables in the report they will see that there is a breakdown of the 17 per cent to which the honourable member for Wakefield (Mr Kelly) referred in his speech, as did the Minister. The Minister was deceitful in that he suggested that the loss of competitiveness was mainly a cause of wages. If he had studied this report produced by a section of his own Department, he would have seen that of that 17 per cent, 2 per cent was due to a higher inflation rate in Australia compared to our trading partners; 4 per cent was due to the across the board tariff cut; and 1 1 per cent- by far the major proportionwas due to revaluation of the currency. We are looking at a situation in which we have suffered a loss of competitiveness due to a revaluation. That revaluation is the major cause of that loss. Wage increases and tariff cuts represent a relatively minor part. That is absolutely crucial to protection policy and exchange rate policy right now.

The Government seems to have no concept of what it is about and does not seem even to read its own IAC reports. It is quite impossible to offset the adverse effects of a necessary revaluation by a subsequent devaluation. We all know about the adverse effects. Firstly, in the rural sector I hope that members of the National Country Party are listening- the adverse effect of revaluation is that the returns that the farmers get for their exports are reduced and therefore they are worse off. Manufacturers are worse off because import prices are lowered and they are much more vulnerable to import competition. We cannot offset that by a devaluation. If we try to do it by devaluation we create balance of payments disequilibrium again and that balance of payments disequilibrium will bring about fundamental changes in this economy, which will take us back to 1 97 1 -72. Then we will have monetary problems which eventually will bring about the need for balance of payments revaluation again.

This has happened already. Only 9 days after the first devaluation we had a revaluation. I forecast now that further revaluations are absolutely inevitable. I say that because this devaluation was quite excessive. It was aimed at trying to compensate for revaluation, which in turn is the result of the unplanned and extraordinary growth of the mining industry bringing about a fundamental change in our balance of payments. We simply cannot ignore that fact, but apparently the Government is doing so.

If we try to offset the money supply problems and a direct inflationary stimulus which comes from a devaluation, which was brought about to try to offset the effects of a revaluation, we find that we have to take various measures. For instance, we have to impose a credit squeeze. Let us not mess about with terms such as 'credit restrictions'; there has to be a credit squeeze because our balance of payments will be in disequilibrium. That means that we will get a steady build-up of overseas reserves through the process of the balance of trade being continually in excess and also because of capital inflow. Eventually it will generate even more capital inflow on a speculative basis. That might already be occurring. So we will have this inrush of money and we will have to offset it somehow. If we do not change the exchange rate we will have to continually tighten credit internally. The result of that will be that the recessionary processes will be generated internally, which will create greater and greater unemployment. That is not the way out, and it cannot last. It will not last, because no government can afford to have it last.

Another option might be to squeeze wages, but that will not work either. Squeezing wages, if we can do it, will keep inflation down, but it will not overcome the monetary problem and eventually that is going to break out. We just cannot do it if our money supply is continually building up. The only real alternative is to revalue or to slash tariffs. If we revalue we will take away some of the advantage we have given the rural sector and will take away some of the competitive advantage we have given the manufacturing sector. If we slash tariffs the whole burden of restructuring the balance of payments to get it into equilibrium falls on the manufacturing industry. What all this comes back to is the fact that we just cannot overcome the adverse effects of a revaluation, which is the consequence of a build-up of the mining industry bringing about big structural changes in our economy, by devaluing. It is just not on. We are fooling ourselves if we believe that we can do it. We are fooling ourselves if we believe that the loss of competitiveness is due to our high rate of inflation. The IAC report says that it is not so.

The efforts that this Government is now making to foster another mining boom should horrify people in the National Country Party. If we do have another mining boom it will mean that we will build up $7,000m worth of projects which have been approved by the Foreign Investment Review Board to come into this country, mainly mining projects. If that happens our balance of payments will move further into excess and we will have to have further revaluations- and that will be very damaging to the National Country Party. Members of that Party must understand that the unplanned excessive growth of the mining industry is a disaster for farmers. They are doing them no favour whatever by supporting that sort of policy. In fact they are bringing about the destruction of the very people they say they are here to represent. The same is true of those people on the Government side who say that they are here to represent manufacturing industry. The Government will destroy manufacturing industry if it brings about another mining boom. Already they have to pay for the effects of the first one. If the Government brings about another one, it will drive the rural sector and the manufacturing sector further into disaster.

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