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Thursday, 9 December 1976


Mr MALCOLM FRASER (Wannon) (Prime Minister) -by leave-Throughout this year the Government has had one clear goal in front of it. That goal is a sustainable economic recovery which will lead Australia towards sustained economic growth and increasing employment opportunities. A prerequisite for achieving that goal is the control of inflation. The dominant goal of our whole economic strategy has been, and remains, directed towards the control of inflation. In this statement I want to set the measures of the last 2 weeks in the context of that strategy. A realistic assessment of the impact of those measures must take into account the effects of policies already implemented during the year. These policies have already achieved a slowdown in the rate of inflation and in the growth of wages and salaries. The increases in each of the last 3 quarters in the Consumer Price Index were lower than any increase for 2 years, leaving aside the effects of Medibank. In the September quarter, the increase was 2.2 per cent, the lowest since the March quarter of 1 973.

Components of the index show very encouraging trends. Other price indicators have also been encouraging. For example, the price index for materials used in house building rose by 0.5 per cent in October, the lowest increase since November 1972. Similarly, the price index of materials used in building other than housing increased by 0.4 per cent in October, which was again the lowest increase since November 1972. Figures published recently show that Australia's rate of inflation is now broadly in line with the average of the Organisation for Economic Cooperation and Development. In fact the Consumer Price Index, expressed as a compound monthly rate of 0.7 per cent, is actually marginally better than the 0.8 per cent for the OECD countries as a whole during September. While other indicators are mixed, there are encouraging signs. Among these is the index of industrial production, which has firmed since July, and in October was 9 per cent above its low point of June 1975. Recent figures show that investment spending on new buildings and structures in the manufacturing industry is expected to increase by some 31 per cent in the half-year to December. Some of the distortions inflicted on the economy during 1974-75 are beginning to be corrected. For example, business profitability has grown; the savings ratio has declined; and the shake-out in stocks appears to have run its course.

Despite this progress we could not put off facing the problem posed by our loss of reserves. On coming into office, the Government faced an exchange rate which was already susceptible to speculation and uncertainty. In the weeks immediately following the election in 1975, several hundred million dollars of private capital flowed out of Australia mainly due to a widespread belief that the Australian exchange rate was overvalued. In the 3 months to the end of November 1976, the decline escalated. Our reserves fell by over $700m if official borrowings by the Government in this period are left to one side. The decline in reserves continued despite the additional monetary measures of 7 November. The continued outflow of reserves stemmed from the fact that most observers in Australia and overseas believed that our currency was overvalued.

The week before last the Government 's official advisers jointly presented 2 options to the Government: Overseas borrowing of around $ 1,000m or immediate devaluation. The

Government looked at these options with a number of facts in mind. One central fact was the uncompetitive position of Australia's export and import competing industries. In the last 6 years, wages in Australia's manufacturing industry increased by 130 per cent compared with 53 per cent in the United States and 70 per cent in West Germany. The Industries Assistance Commission estimated that the general competitiveness of the Australian import-competing sector fell some 17 per cent between 1970-71 and 1975-76. One drastic consequence of this and related factors is that employment in Australian manufacturing industry fell by almost 100 000 between May 1974 and the end of June 1976. What a terrible legacy for the Australian Labor Party that pretended to support people in trade unions who work in the factories of Australia

Government supporters- Where are the Labor Party members?


Mr MALCOLM FRASER -They have gone home. There has been a growing tendency for some sections of manufacturing industry to move offshore to minimise cost disadvantages. This export of jobs had to cease. These facts were of deep concern to this Government. They could not be ignored. Further, uncertainty about the exchange rate was causing new projects involving overseas investment to be deferred. There was continuing and growing belief overseas about the inevitability of an Australian exchange rate adjustment. Increasingly, the overwhelming view in international circles was that the Aus.tralian exchange rate was overvalued, and that sooner or later an adjustment would have to be made.

Throughout this year the Government has done everything possible to protect the exchange rate as part of the fight against inflation. Ultimately the point was reached where the rate was no longer sustainable. By the time this decision was unavoidable we had been able to bring each of the other major arms of policy to focus in the fight against inflation. Policies in these areas must now be tightened further. In all these circumstances the first option of borrowing around $ 1,000m including funds from the International Monetary Fund, presented substantial risks. A borrowing of this magnitude would not have ended speculation against the downward movement of the dollar because people were looking as much at our underlying cost position as at the balance of payments position. To take just one example- as the chief international economist of Morgan Guaranty has said: 'You simply lost competitiveness because of the amount of inflation. This situation has been widely recognised over the last year'.

Since Australia began in the battle against inflation only in December last year, further borrowings in the situation which had arisen would not have provided the change in attitudes the Government was determined to achieve. It would not have removed the uncertainty about the exchange rate. It could indeed have accentuated that uncertainty. Without a change in attitudes the strengthening economic recovery would have been threatened and the eventual devaluation or further borrowing could well have been greater. In these circumstances it would have been nonsense for Australia to have gone to the IMF. The Government was not prepared to put Australia in that position.

Once we had made the inevitable decision to devalue there were a number of options open to us on the extent of devaluation and on the form of the new exchange rate system. We could have moved to a new fixed rate which would, perhaps at some future time, require a further significant alteration up or down in the exchange rate- a move which, as the devaluation demonstrated, is attended by major public concern. We could have a market-determined float which would make fluctuations possible on a daily basis or, in the case of some other countries, even within a day. We could have an administered and controlled management of the exchange rate. A further question requiring very careful consideration was the magnitude of the initial change in the rate which would have to be made.

The choice before us was to make a move which would decisively end further speculation against the downward movement of the dollar or a move which would leave the way open for speculation about a further devaluation perhaps in the not too distant future. The Government took the view that it was essential to end definitively further speculation against the dollar and to establish a regime which would in future permit the exchange rate to adjust smoothly to changing circumstances. The decision therefore to devalue by 17V4 per cent was made after full consultation with the Government 's advisers and on the basis of a technical evaluation of the magnitude required to achieve the Government's desired result. The magnitude of the devaluation indicates the seriousness of the cost disadvantages which had been weighing with increasing heaviness on Australian manufacturing industry and on Australian employment. It should awaken all Australians to the serious weaknesses in our economic situation which will require a concerted national effort to overcome. It is important that there should be a much wider understanding than now exists of the implications of adopting a managed regime.

In taking this decision, the Government has brought Australia more into line with the system adopted by other major trading countries. It needs to be understood that most major countries have tended to adopt exchange arrangements that permit more flexibility in rates in response to changes in economic circumstances. The experience of a number of countries, including the United States, Germany, Japan and Canada, has clearly demonstrated the important role that a managed exchange rate can play in the pursuit of domestic policy objectives. In this context, it is interesting to note the comments of the IMF in its 1 976 annual report:

Faced with substantial uncertainty concerning future balance of payments developments and exchange rate patterns, and aware of the persistence of marked differences among national economies, in particular with respect to rates of inflation, interest rates and levels of economic activity, as well as of structural changes, the major industrial countries have continued to permit their currencies to float. Indeed, as underlying economic conditions have continued to differ among countries whose currencies are floating, frequent exchange rate variations have been a major form of balance of payment adjustments.

Some people have expressed surprise that under the new system of a managed exchange rate the first change in the rate should have occurred so soon. I regret to say that this indicates a lack of understanding of the nature of an administered exchange rate. Suppose that we had adopted a fully floating exchange rate, under which it is not unusual for rates to fluctuate daily. If under such a float the rate had moved upwards on the first day, would anyone have suggested that it should not have done so? I hope not. Under the regime we have adopted not infrequent changes are likely to occur in the ordinary course of events. That is deliberate. The regime is designed to avoid the large jumps, as the Treasurer (Mr Lynch) has so often repeated in the last few days, that have occurred in the past. This is, indeed, the purpose of adopting a managed exchange rate.

The initial decision was taken in the context of the adoption of such a system. Critics of the 2 per cent revaluation are tied to the past. They have not understood the nature of the change that has been made. For example, some critics have asked why all the criteria used by the bank in making decisions about the rate should not be made public. Such a course would only advance the cause of the speculator. There is no responsible Reserve Bank in the world which would give the precise grounds on which decisions about changes in the rate would be made or, for those on floating rates, about daily interventions in the market. As understanding of the new system grows it will be fully accepted as a great advance. Devaluation inevitably means that a number of other difficult decisions had to be taken. It is a decision with some inflationary consequences which can be countered only by a tightening of policy in other areas. Devaluation makes it more necessary than ever that the antiinflation strategy we have pursued throughout this year be persisted with. In the light of the seriousness of the situation made clear by the devaluation, that strategy will be pursued with renewed intensity. The Government has already announced a number of measures designed to counteract the inflationary impact of devaluation.

On the fiscal side, a review of expenditures aimed at identifying scope for further savings through the deferment of expenditures has been put in hand, through the new Department of Finance. The Government is determined to hold government spending firmly in check. This is essential to reduce the pressure on monetary policy. Let me emphasise also that responsible further relief in income tax also is highly dependent on success in this area. Further to this, in the preparation of forward estimates of expenditure for next year- now under way- Ministers have been asked by my colleague, the Treasurer, to identify any increases in existing programs so that these can be looked at separately in the same way as entirely new proposals. Keeping a very tight grip on government spending continues one major line of the anti-inflation strategy we have been pursuing with success. It is an unpleasant reality that if we want to beat inflation and restore employment opportunites, the pressure on national resources from high and unreasonable government spending and high deficits must be reduced continually. There are widespread calls for further tax cuts. The Government, in principle, accepts this. But if these tax cuts are to be made responsibly, they must be matched by further restraint in government spending which can only, in the ultimate, make such tax cuts possible. This year, we have shown that we are prepared to take the decisions required in this area. We intend to demonstrate that determination again in the coming months and in the preparation of next year's Budget.

On the monetary side, action has been announced already to help to make sure that monetary conditions do not become accommodating to increased inflation but, at the same time, providing adequate funds to underwrite economic recovery. Yields on Treasury notes were raised by 0.5 per cent on 29 November. Subscriptions to the notes have been encouraging. Non-official holdings presently are more than $ 1 ,400m- about half of which is held by the non-bank public. Subsequent action by the authorities has brought about an adjustment of similar magnitude in yields on short-dated bonds with consequential adjustment- on a diminishing basis- of yields on other securities. The long term bond rate has been increased by 0.3 per cent to 10.5 per cent. The yield on savings bonds has been increased to 10 per cent. Bank lending will be monitored so as to prevent any increase in inflationary pressures. Normal financing requirements of business will be met.

I should not need to emphasise that wages policy has assumed an even greater importance in the post-devaluation context. To allow the rate of increase in wage settlements to escalate as a result of devaluation would be to negate the beneficial effects which will otherwise flow from devaluation for the competitive position of Australian industry and for Australian- as opposed to off-shore- employment. The Government, therefore, will be doing everything within its power to make sure that any identifiable effects of devaluation on the consumer price index do not flow through into wages and salaries. The wages area is one where- as both the Treasurer and I have emphasised throughout the year- the Government cannot achieve success on its own. In this area, particularly, it will take a commitment by all sections of the community to take up the fight against inflation and to restore employment opportunities.

It is somewhat ironic to recall that we were attacked earlier in the year for arguing as strongly as we did in our first submission to the Conciliation and Arbitration Commission. Even then, there were those who predicted that if the Government based it policies on economic common sense, the result would be confrontation with the trade union movement. Unfortunately, too much credence has been given to the threats of extremist union leaders to create further conflict. In this area, there has been a capitulation to threats instead of recognising economic common sense. Not enough weight has been given to the great common sense of the vast majority of the rank and file trade union members who know full well the importance of restraint at this time. I believe most of them and most Australians are fed up with the disruptive tactics of a few who are not supporters of the democratic system in this country in many cases.

This Government will not allow an unreasonable burden in the fight against inflation to fall further on any section of the community including wage and salary earners. The Government deliberately has taken a number of major measures designed to encourage wage and salary restraint and to protect potentially disadvantaged groups from the costs of inflation. These measures include the automatic adjustment of pensions for inflation, the family allowance scheme and full personal income tax indexation. These measures, which are of continuing benefit, should provide an important support to wage and salary restraint. Further, the Government's submissions before the Conciliation and Arbitration Commission are designed to protect lower income earners. There should be a recognition that the important fact to the wage and salary earner should not bc gross income but final real disposable income. These measures provide a totally reasonable basis for wage and salary restraint.

It is in this context that the Government intends to argue more strongly before the Commission for recognition of the absolute importance of wage and salary restraint. Beyond that, the Government will be taking every step within its power to secure restraint. The Treasurer, for example, will be discussing with the Premiers the impact of wage levels on the State loan programs at the Loan Council meeting next week. Quite clearly, with wage restraint the States can achieve more effective loan programs, larger loan programs and the greater employment of people. This, again, is part of action to tighten the main lines of the strategy we have followed throughout the year. In addition to action on the budgetary, monetary and wages front, action also has been taken on the prices front.

The Prices Justification Tribunal has been asked to pay special attention to price increases consequent on devaluation. This will not be limited to companies technically covered by the Act required to notify. The purpose is to make sure that devaluation is not used as an excuse for unjustified price increases. The Government's legislation regarding the Prices Justification Tribunal will, in fact, increase its surveillance capacity and its ability to investigate areas where there is evidence of price abuse. The Prices Justification Tribunal will report progressively to the Minister. At the end of 3 months, the Government will review its requests.

In the external area, as a result of the devaluation of the Australian dollar, the Government has examined the Australian tariffs. We have not made across-the-board cuts in tariff but we have acted selectively to reduce inflationary effects arising from the devaluation without negating the improved competitive position that devaluation has brought to Australian industry. Let me repeat: It was firmly the Government's intention to put Australian industry in a much improved competitive position, and in the Government's judgment that was necessary after the results of recent years. This improvement is greatly needed by Australian industry if jobs are to be created and industries are to be discouraged from going off-shore. Our decisions on tariffs have been the right decisions taken at the right time.

An across-the-board tariff cut would have been foolish. Selectivity was necessary and therefore it was imperative to take advice before there could be action. In this case advice could not be sought until after devaluation was announced. To have done otherwise would have been imprudent, to say the least. It would have extended beyond reasonable bounds the circle of people who knew about the devaluation. Accordingly, the decisions on tariffs had to be taken after devaluation. We were fortunate to have before us an Industries Assistance Commission report and recommendations, and we acted on those recommendations.

The Government's decision, as my colleague has announced, has affected over 900 of the 2750 items covered by tariffs, the value of the trade in these items being around $2,000m. The reason for the selectivity of the tariff reduction, for our refusal to engage in across-the-board cuts, is clear. Manufacturing industry in recent years has had its competitive position eroded by rising wage costs, a dollar which was until recently over valued and the shocks imposed by the Labor Government's 25 per cent across-the-board tariff cut. What needs to be understood is that the competitive position of Australian industry had to be restored. Devaluation will achieve that. At the same time we have sought to reduce the inflationary impact of the decision.

Thus, following devaluation the Government had acted with respect to each of the major arms of policy. On monetary policy there have been adjustments to interest rates on Treasury notes, Australian savings bonds and other government securities. On tariffs there has been a review of temporary assistance arrangements followed by measures announced to offset the inflationary impact in certain areas. On budgetary policy there has been a further review of Government expenditure aimed at holding real expenditure levels. We will also maintain pressure on the wages front and we have acted to establish conditions in which wage restraint is possible and reasonable. We intend to persist with our antiinflationary strategy in full measure.

In the circumstances that Australia faces it is disappointing to note that some people, who should by now know better, continue to promote policies which would only add greatly to inflation. The vast majority of Australians realise that it is no longer possible to spend our way out of inflation and unemployment. One consistent feature of all the alternatives offered by the Labor Party has been the willingness- some might well say eagerness- to vastly increase public spending once more or to pump up the size of the Federal Budget deficit. The Leader of the Opposition (Mr E. G. Whitlam) some weeks ago urged the Government to adopt measures which would increase the deficit by $ 1,000m. The Premier of Tasmania followed with an extravagant 24 point plan. The Premier of New South Wales outshone both with proposals for almost $2,000m more in Federal spending. Others have urged, and continue to urge, tax cuts and inflationary spending.

It would seem that these proposals are made in total disregard for their consequences under present circumstances. Each of these proposals, without exception, would be inflationary. The overriding need of this country is to conquer inflation. What the Labor Party is proposing would create yet more inflation. Surely it understands that by now. Throughout its period in office the Labor Party failed to develop -


Mr Stewart - What are you going to do?


Mr MALCOLM FRASER - We are going to keep the honourable member for Lang where he is until he retires from this Parliament or until we take his seat in the next election. The honourable member for Lang should be the last person to interject in these matters. There are certain things he should say in this Parliament which he has not said. All the Labor Party's essays in economic policy this year have been designed to give a further spur to inflation- all the essays of the Labor Party. Every new expenditure means a higher deficit which must be paid for in some way.

Let me explain in plain terms how this happens. It needs to be explained even though it should not. It can be done by the Reserve Bank printing money which adds further to inflationary pressures. That, of course, is the easiest choice and that is just what the Labor Party would accept. Secondly, it can be paid for through higher interest rates which can lead to a credit squeeze on business and a loss of job opportunities in the private sector. Thirdly, it can be met by increased taxes, but I understand no one is proposing that. All these alternatives are inflationary. The clear consequences of further increases in spending are unacceptable at this time.

When people propose policies of this kind they must be prepared to follow through the full consequences of those policies. Unfortunately too often this is not done. The Government rejects these as desirable or viable alternatives. Higher Government spending, larger deficits, would do nothing whatever to correct the imbalances in the economy. Such an approach would further damage the private sector, increase further government's demands on the nation's resources and add to unemployment. Those who propose to solve our problems through yet higher government expenditures are in fact, whether they know it or not, perpetrating a cruel deception on the people of Australia.

Contrast those policies with the effects of devaluation. It does not add significantly to the deficit. It will reduce the burdens on those sectors which have been hardest hit by inflation and which have not been protected by some form of indexed returns, which have not had guaranteed selling prices for their products. It will create conditions where jobs can be created. It will reduce the reason for Australian companies to move offshore. Overseas and domestic investment projects will start moving again.

The real possibilities of increased production for domestic industries constitutes a substantial benefit from devaluation. Many manufacturing firms are able to expand their currently underutilised capacity. At present their fixed costssuch as plant and equipment depreciation, capital costs, rent and salaries- represent a high proportion of total costs. In this situation, increases in demand and production can produce quite significant reductions in unit cost. It is worth recalling the words of the 1975 Jackson Committee report which stated:

Australian manufacturing industry is in acute financial crisis. Unemployment is high. Factories are running below capacity .... Their profit record and prospects make it hard to raise equity.

The Jackson report also mentioned the damage caused to manufacturing industry by recent adjustments in the exchange rate and the levels of protection. Our company tax measures have made a contribution to alleviating this situation, but beyond this devaluation presents an opportunity for much needed relief in the problem areas identified by the Jackson report. The alternatives to devaluation would have been massive subsidies or even higher tariffs. Those who criticise the decision to devalue fail to appreciate the continued thrust for more and more tariff protection which carries its own inflationary impact, and which was present before the decision to devalue.

In the last few weeks there has been a remarkable unwillingness on the part of some commentators to assess the decisions objectively in their full ramifications. One well known economic commentator writing on the devaluation of the Australia dollar has made the following points. He stated, firstly, that: . . most spectators would have felt the devaluation would have been timed for some time next year. The Government, by getting in early before speculative pressures built up, has avoided a haemorrhaging of Australia's international reserves through capital outflow.

The same commentator stated:

The extent of the devaluation will be sufficient to convince potential foreign investors in Australia that there is unlikely to be any further devaluation.

The third statement was:

The devaluation will give a breathing space to some Australian industries now suffering from severe import competition.







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