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Thursday, 9 December 1976

The economy is running below full capacity, so the extra stimulus to domestic demand and employment will hopefully take up some ofthe spare capacity.

Finally from the same commentator

The devaluation will give a fillip to business confidence.

There could be no better description of the positive aspects of the 1976 devaluation. But these comments were made about the 1974 devaluation, which was undertaken in an inflationary context and was accompanied by a number of highly inflationary measures. The same commentator condemned the 1976 decision, neglecting his earlier arguments and assessments, not to mention the completely different policy context within which the 1 976 decision has been taken.

Many of the statements being made in recent days about the devaluation are quite out of touch with reality. They are sheer humbug. Wild assertions about interest rates, the availability of credit and the exchange rate confusion are not based on a considered assessment of what has actually been occurring in the market, in the place where it counts. Information available to the Government suggests that transformation to the new interest rate yield curve has been successful. The greater indications of support for Government Treasury notes are encouraging. A cautious observation of the stock market indicates strengthening since devaluation. The Government welcomes renewed interest from overseas in portfolio investment. The changes made in the exchange rate have halted speculation against the dollar and the haemorrhaging of our reserves. The massive inflow of capital that some have predicted has not occurred.

Much of the criticism failed to understand the changed nature of the regime and its consequences. This week's adjustment reflects no more than the success of the initial move. Commodity markets have also shown continuing strength. The hysteria and humbug coming from certain people in relation to events of the last 2 weeks are not supported by the evidence available. The Government condemns the hysteria and the humbug. The Government believes that the movements that have occurred are responsible and are appropriate and that as each day passes more and more people will come to understand that. But what a contrast to the domestic critics are the more measured reactions from overseas. In accordance with normal practice, the Executive Board of the International Monetary Fund, as the Treasurer indicated this morning, has considered Australia's decision to devalue. The Board appreciated the factors behind the decision. All directors who spoke supported Australia's decision to devalue. In addition, the greater flexibility that would be permitted under the new exchange arrangements was welcomed. What greater support could a country have than that, especially coming from the organisation whose business interest in this matter is second only to that of this Government? There was no suggestion that the devaluation could be regarded as a competitive devaluation.

Most international reaction to our measures has recognised the soundness of the decisions which have already been taken. The New York Morgan Guaranty's chief international economist described the 17.S per cent devaluation as a very correct amount and noted the wide recognition of Australia's international uncompetitiveness. Milton Friedman has observed, postdevaluation:

Australia is very well regarded internationally because now- and this is comparatively rare amongst Western nations at the moment- it appears to be pursuing a mature and steady course.

Our Ambassador to the United States has reported that our emphasis on the anti-inflationary objectives accompanying devaluation is being applauded and that the devaluation has been seen as removing a significant disincentive to investment in Australia.

In balancing the arms of economic policy, the Government considered inflation as the No. 1 priority, but we have never contended that it was the only priority; nor has it been argued, to my knowledge, that it ought to be the only priority. In a number of decisions such as the introduction of family allowances, full personal tax indexation, the investment allowance and the allocation of moneys to Aboriginal and welfare programs, the Government has moved to help sectors of the community hardest hit by inflation, and to encourage activity. If inflation had been the only priority there would have been no family allowances, no indexation and no increases in money for social programs. There would have been no Budget deficit, and there would have been more extensive cut-backs in government programs. If inflation were our sole objective we should have had a balanced budget. I do not recall the Government being urged to bring down a balanced budget on this last occasion. The reason is obvious. The hardship in other areas would have been vast and much too great. In other words, there must be a balance in objective, although there is one major objective.

The fight against inflation, although our dominant objective, cannot be conducted with an utter disregard for its effects on other areas of social and economic policy. The fact that devaluation has taken place does not mean that combating inflation has lost its place as our first priority. The fact that the Government has been forced to take a decision which has some inflationary consequences can no more be adduced as evidence that the anti-inflationary strategy has been abandoned than can the fact that the Government did not plan for a balanced budget. The reverse is the truth. The devaluation decision requires us to redouble our efforts to get on top of inflation, that there be no let-up, that we press ahead with our announced strategy more strongly than ever before.

Let me review the year's major economic decisions. In February $360m worth of savings resulting from expenditure reviews were announced. In January decisions were taken to soak up excess liquidity in the financial system. In May a package of fiscal policy decisions was introduced- tax indexation, $2,600m savings to forward estimates and family allowances. In the Budget, spending was held and the deficit contained, monetary guidelines were laid down and strategy for recovery was firmly implemented. Let me state again the main elements of that strategythe most rigorous restraint on government spending to rein in the bloated public sector and to free resources to productive private enterprise, the provision of a wide range of incentives to industry to resume expansion and to provide employment, seizing every opportunity to emphasise the importance of restraint in wage and salary demands, establishing, through a variety of measures, a climate which will make wage and salary restraint possible. This is essential to keep down costs and to create conditions in which employment opportunities can be expanded. We always said that the strategy would take time, that it would be a full 3-year program. It is the only strategy that will work.

Let me state the Government's attitude to inflation, so there can be no misunderstanding, as there has been in some quarters in recent days. Inflation is the enemy that Australia must and will defeat. It undermines security, it destroys the value of savings and incomes, it hinders the expansion of jobs, it erodes our position in the world and in the end it eats away at the vitality of our institutions and our way of life. Twelve months ago Australia as we know, was in great economic disarray. In office we were faced immediately with the worst unemployment since the 1930s, an actual decline in gross domestic product, a depression in company profits, a decline in business investment to its lowest level in 3 years, a desperate situation in the farming sector and an inflation rate that was 14 per cent. It was higher than it had been a year before and was showing no substantive indications of dedining. In the past year we have focussed the arms of policy on the problem of inflation and have achieved improvement in Australia's position to a significant extent.

The fact that it was not possible to avoid devaluation shows the magnitude of the problems which still face the Australian economy and every one of us as Australians. Some people appear to believe that devaluation was a soft option. Nothing could be further from the truth. It is the hardest option of all. If we do not take advantage of the opportunities that devaluation offers us, if we do not bring every weapon of policy to bear on inflation, the future will be a grave one for Australia. We may not get another opportunity.


Mr Bryant







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