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Press conference RE balance of payments



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E&OE - PROOF ONLY

TREASURER, PAUL KEATING'S, PRESS CONFERENCE RE BALANCE OF PAYMENTS - PARLIAMENT HOUSE - THURSDAY, 16 FEBRUARY 1989

KEATING: I might just start by making a few introductory remarks. Well I don't think I need to say that the January balance of payment figure of $1537 million as a deficit for the month is higher that the Government would have wished, but

I'm afraid this is again a consequence of the economy growing very strongly, much more strongly than we forecast at Budget time. The terms of trade this year are up by twenty percent. That means that commodity prices are pumping about an

additional ten billion into the economy this year. Exports have been expanding, as the Government predicted, as the agricultural season came in, but because demand is running so strongly, so too are the imports. But the pattern of that demand is again, as we've said right from Budget time, that is

strong investment, not strong, but exceedingly strong ,investment, indeed the strongest investment we've ever had, moderate private consumption and a declining level of public demand and public spending. So what's happening is that the

strength of the economy is essentially spilling into imports, but, that said, this January number again reflects some substantial history. That is, a lot of the decisions which would have been taken in ordering equipment, which is now

appearing on our blocks and did appear in the month of January, would have been taken a year, nine months, perhaps fifteen months, ago. And, of course, economic conditions have changed since then. So the question is, 'is the policy

response the correct one', and the answer to that is very definitely in the affirmative. What we're dealing with here is a spike in national income, a sharp lift in national income, that, of course, the attendant consequences are in demand. And the right instrument to deal with a spike in

national income is monetary policy. I remind you in that press statement that the public sector spending requirement this year is zero. That means that the whole of the public sector of Australia is not contributing to the call on overseas savings or hence the current account. That is, the demand from the public sector of Australia at all levels is not contributing to the current account call on overseas

savings. Indeed, on the Commonwealth's account, we are savirig. Not only is the PSBR zero, but on the Commonwealth's account, not only are we not contributing to a call on overseas savings in the current account, we are actually

saving. Now interest rates have risen quite substantially since last year and peaking more recently and I think it's fair to say that we think that the speculative property bubble appears now to be subsiding and we expect the big pipeline of

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restraint which we've now built up with fiscal and monetary policy to eke its reward on demand in the next six months or so. In other words, the response is in there, it's working. What you're seeing now is a reflection of conditions when much

of this equipment was ordered nine months or a year ago and that the moderating influences which the Government has induced in policy terms will change the current accounts outcome over the course of the year but, more importantly, beyond that to a position of stability where we are not seeing

this substantial addition to our national debt.

JOURNALIST: You say that the monetary policy action taken to date will be sufficient, yet you have made similar statements in past months but interest rates have been progressively increased. Can you guarantee that will not happen again?

KEATING: No, but let me just repeat what has happened. When I say 'no' I don't think that there is any cause why we should be tightening interest rates further. Let me repeat that ninety day bill rates a year ago, the average for February a year ago was 10.85 percent. The average for June 1988 was

13.15. The average for September was 13.25. The average for December was 15.2 and now the average for January, the last two weeks of January, they'll average 15.58 and today they are just under 17. So we've seen from 10.85 in February a year ago a lift in the bill rate of, let's say, 6 percent or there abouts. Now that means that many other rates, key retail rates, bank endorsed bills are, of course, higher than the bill rate and primes, which are another indicator of interest

rates in the commercial area, are, of course, higher than that. So there is a fairly substantial tightening of policy that has gone on and that's already sitting in the pipeline to work for us both now and in the coming months. But again, I

repeat, that tightening began almost a year ago. But the terms of trade lift has been so strong and the level of, the general fundamentals of the economy have been so much better. I mean, in this condition in the past we never had a financial market like this. We never had a deregulated financial market. This financial market is now funding any commercial venture which comes its way. That just couldn't happen in Australia before financial deregulation. The general

effervescence of the economy is such that we've never had a terms of trade lift on an economy which is fundamentally improved, as this is, in the financial market, in the tax system, to the PSBR of zero, and so the economy has, of course, responded.

JOURNALIST: All of your previous statements about no more tightening being needed have in fact been followed by more tightening?

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KEATING: Well we have judged in the interim that some further tightening was necessary. But we're getting to levels where I think the market now thinks that the tightening is moderating investment, moderating demand, moderating speculation, moderating property prices, generally having a moderating effect.

JOURNALIST: Are you prepared to tell the ACTU, Mr Keating, that they can't have their $20 a week tax cut and their $30 a week wage rise? Are you prepared to tell them now that that's too much?

KEATING: Well it's about, I think, that is all about context, Paul. Now we have never had a terms of trade lift that has not been accompanied by a wage explosion. Every terms of trade lift in this country, every lift in national wealth and national income is dissipated by a wage and price row. The aim of the exercise this time is to beat that historic precedent. And we believe we can beat that historic precedent by the maintenance of an incomes policy. Not just the incomes policy we developed in '83, but the maintenance of the one which has developed in the meantime,* the one we now have. And

part of that will mean delivering wage responses, a wage outcome that the economy can live with. And part of that is a moderation of nominal wages growth for tax cuts. And that's why the tax cuts are still on the table, that's why there'll

still be a negotiation and that's why, I believe, at the end of the section we'll come out with a trade-off which produces for Australia rates of wages growth we've never experienced in these conditions in the past and which will broadly maintain that competitiveness we've had in the economy or at least not debilitate that competitiveness by an inordinate growth of wages. Now before that agreement goes to bed, they'll be some

tooing and froing, no doubt, some bargaining, but, by and large, I think that agreement can be made and I think the trade unions are indicating at their conference last week that they're prepared to accept the terms of that agreement.

JOURNALIST: But if you intend to negotiate, presumably if you win anything from these negotiations, you'll get a smaller increase in personal, disposable income than what the ACTU are talking about in their package? Now are you telling us that

that's what you'll get, that you won't be accepting a twenty and thirty, you'll want something less than that?

KEATING: Well we're saying, I think, if you read the resolution, they're talking about around $20 and around $30. And, you know, within those sort of, within those ambits I think an agreement is possible. It may well be that ti?e ACTU doesn't get what it wants. I think it will be that the ACTU doesn't get what it wants. But it'll get enough to make it work.

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Treasurer, do you regard $30 a week, wage increase as in fact wage restraint?

Well the implication of that question is that we should be getting wage outcomes way below what the market would offer. The market is set in this country by companies offering wage increases ouside the system. That's how the market is created. And that market would be delivering wage outcomes now of $60 - 70 in some

cases. In some cases $90 a week. When the ACTU talks about $30 thats its abmit claim, what our response to that will be both, as timing and quantum, will be a matter for our negotiations.

Mr Keating, your talking about substantial tax cuts/wage rises either case there is a substantial increase in demand. Can the economy stand up against to figures like this one today?

Well as I'm trying to say to you is the figure you are looking at today is in large part a reflecion of conditions which might of obtained in the middle of last year. Particularly on the

import side, and we think demand, GNE, will moderate sufficiently to be able to accommodate a wage/tax package of this dimention. And the most important thing will be the nominal wage

growth which comes out the other end. And what I'm saying in answer to you and in answer to the previous question is, that nominal wage growth will I believe, be such that Australia will be

able to continue with this important and fundamental restrucuting of its economy.

Mr Keating, you've described to the ACTU a moment ago as an ambit claim. How does that sit with the Prime Ministers comments that it was economicly responsible.

Well I think that was in the context, and I think the Prime Minister made it clear that this is then going to be subject of negotiation. But that was in the context of claims which were in prospect within the ACTU forum potentially of

larger dimension. And the special unions conference rejected that approach. And I think the Prime Minister was responding to that outcome and reasonably.

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Mr Keating, isn't there a risk that overseas investors will look at your statement today basically holding the line on policy across the board and say enough is enough*, these figures

are too big and just pull out and we'll see the Australian dollar go like that?

Well, obviously the dollar is now diminishing our competitiveness. It was inevitable that the dollar would rise with the lift in the terms of trade. It was impossible to preserve all the competitiveness we had from the 1985 decline in

the dollar. Whenever the terms in trade picked up it was inevitable that the dollar would pick up somewhat. Obviously as well interest rates and the market pshycology play some role in

that. But it is moderating our competitiveness and when demand conditions moderate I expect and indeed hope that the dollar will fall and certainly the day thats starts we will not be

standing in the way of stoping it.

The Reserve Bank already appears to be trying to engineer an outcome of that sort.

That's a matter for you to make a judgement about.

Your basically validating a lower dollar? You hope the dollar falls?

I'm simply saying that when demand conditions moderate and with it interest rates, so to will probably the exchange rate, and if that happens that will improve out competitiveness somewhat.

But today, and a couple of weeks ago Mr Keating, in this room on the CPI figures that you said again that you saw no need for interest rates to rise and with days I think they had risen. The housing interest rate rose then, bankers are already forecasting again that housing interest

rates will rise within the next week to two weeks. Now does that mean you that you're losing grip with monetary policy?

No.

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Well they're not doing what you're saying they are going to do?

They do what I say, I can asstlre you of that. That you can put your money on. But that official rates you're talking about. Monetary policy in this country is not conducted as in

the United States with a division of responsiblity between the central bank and the Treasury. Its conducted on a bipartisian basis and I can just say never at any stage that I have been Treasurer have monetary conditions or monetary policy been at all out of line with the

arrangements which basically I have agreed with myself and the Govenor. Its the current condition. Now as to retail rates# of course some retail-rates may continue to rise# there is

a lot of tightening in the pipeline it may have an influence on retail rates yet# a further influence. But again we are a deregulated market. So there are judgements to be made by

banks about there market positions and about there margins and about where retail rates will finish. It's not all a matter for the government, it's very much a matter for them. So while we have tightened monetary conditions# that is true# that is certain# where that

finally ends in the retail race for particular institutions is up to those particular institutions and what they see as their strategic place in the particular markets they operate in.

Do you think all the rate rises that the banks have made so far in response to the tightening have been appropriate in fact? Are they in line with the tightening the Government....

Thats a matter for them to make a judgement about. Whether they are appropriate will depend on what their market share looks like afterwards. I mean they've got to make judgements about this. Look in the old days it was quantitative restrictions when interest

rates rose they all rose across the board, particularly in the regulated market. This is a deregulated market. If banks particularly or other institutions wish to maintain market

share, grow their market share, maintain their margins, narrow their margins, these are all commercial judgements which they know make. That's why they don’t all move at once. That's why sometimes they don't move at all. 'So that's

a judgement for them to make rather than for me.

But there is a political cost for all this?

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Well there is a political cost but the very condition which is producing the tightening is this enormous efervesence and buoyancy in the economy. We've had 300,000 job’s created in the

last year, w e ’ve got phenomenally strong employment growth, a strong lift in houshold disposible incomes and that's having, obviously, very good politicial effects, I'm sure one of

the effects which counted for Mr Dowding a couple of weeks ago. He went to an election in a very buoyant time.

Treasurer, are you going to make Bernie Fraser head of the Reserve Bank (inaudible)?

Do I take to imply the question you think Bernie Fraser is pragmatic and politically flexible?

(inaudible)

I'm glad you didn't. That's good. Well let me just say that I think the Governor's term expires about the middle of this year and the Governor will have to make a choice about who

should be the next Governor of the central bank and we will all in due time.'

What's the essential difference between the situation we are in at the moment and the situaiton we faced in '86 when you were talking about Banana Republic's. The fact that we are going broke while we're up to our armpits in money?

The difference is the economy is much wealthier. The economy is now much wealtheier and much stronger and we are now accommodating a

very big growth in investment to lift the supply side of the economy. I mean in those days all we were doing is losing national income. We were losing national income via the terms of

trade, we had virtually no investment response and we had to tighten conditions and then bring on a big program of public sector desaving. To promote the very investment surge we now have.

I mean this surge of import we've taken 20% import growth we've had in the last year is again laden with equipment and investment goods as well as some consumption goods. But if you turn up today's Bulletin, look at machinery, plant and equipment's strong again. So what we are doing now is accommodating a very big supply side responsive in the economy in the future.

In other words we're wearing of the current accout imports which will make the economy much more strong. We've got in many ways, with the investment, something we've always wanted, but couldn't get. We've now got it in a senses too much of it. Too much of a good thing can be

still too much of a good thing. So the difference....

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..... politically that we've all got to pay higher mortgage rates and tighten our belts because we are too rich?

Because we've had a surge of income which is drifting over into expenditure. I mean basically the glass is too full and the effervescence is spilling over the sides. And

that effervescence is the current account and inflation. And what we have to do is take some of the away, that is moderate it. It is that strength. But as I've said some months ago its

a better problem to be dealing with than a collapse in your national income, no investment response. I mean the Australian economy has never had an investment rate to GDP as strong as

this since we've been keeping the data and that goes back to 1948.

So this is the Eno economy?

Well I was trying to put it in terms that you would get across quickly Paul. And the strength of investment is such that it will obviously allow us to pull the current account down and

moderate that debt into the further. But in the meantime we don't have a producer goods industry in this country, we don't have a big computer industry, all the computerisation of Australian manufacturing industry is going to come from

abroad, and it is. It is coming in these numbers. We don't have a producer goods industry, its coming in these numbers. We've accommodated this year the largest surge in air

transport equipment ever. We've got a refurbishement of the Qantas, not just a refurbishement but the building of the Qantas, Australian Airlines and Ansett fleets, the likes

of which we'd never had before. In other words the economy is going to be so inordinately stronger, much stronger than it's ever been.

Mr Keating, how will you moderate demand when you've basically going to put say $15-20 directly into taxpayers pockets. They're not going to go out and buy houses with that money

but they may well go out and buy consumer goods?

It becomes a choice about whether you seek to moderate that demand through a wages outcome which would be so far below the market that you would in fact breach the very objective that you

have. That is to see wages burst away ih other explosion like 1974 and like 1981. Its a matter of judgeing what arragement can be made to keep that nominal income growth coming through

sensibly. And that's where the tax cuts play an important. And that's why monetary policy, again I repeat, is the proper instrument we are using now.

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JOURNALIST: What will it take to slow the economy to a sustainable level, sustainable in terms of the tax cuts?

KEATING: Well I should hope, within this calendar year, we will see a disernable slowing and that slowing should help give up demand numbers, GNE numbers, which we can live them in the ensuing

budgetary year.

JOURNALIST: What's your revised balance of payments forecast?

KEATING: Well I haven't got one today, but I mean it is possible that we could bring the current account in at around the same proportion of GDP as last year. I think the economy is growing as I say here much faster than the 3 1/2 per cent we had

in the Budget.

JOURNALIST: Do you think the tax you will be delivering on July 1, does this figure suggest that you should stagger them?

KEATING: They are judgements for us to make.

JOURNALIST: (inaudible)

KEATING: I've always favoured them being paid in one go.

JOURNALIST: You still do?

KEATING: Broadly yes, broadly.

JOURNALIST: (inaudible)...economically responsible surely they should just go ahead in one lump?

KEATING: Well thats got a certain ring of logic to it.

JOURNALIST: You sound like your being less concrete in a promise of the July 1 tax cuts?

KEATING: No. No change from that, July 1, they’ll be there.

JOURNALIST: So you've got no flexibility on the tax cuts, but you've got some negotiating flexibiliy on wage amounts?

KEATING: No, I ’ve go them on tax amounts.

JOURNALIST: ....timing, its still on July 1?

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I don't want it on timing, because I think it's important to bring certainty to this system. It is important to keep these outcomes coming through to bring certainty to* the system, and I think the July 1 tax cuts brings certainty to this system. Plus the fact we've got a national wage case in May which is going to consider the

next system and the restructuring. And the restructuring has got enormous structural benefits for Australia into the future. And it is important for us to capture that restructure

and the tax cuts are going to be central to capturing that restructure.

How much productivity do you think you'll get out the restructure?

I think they'll be substantial.

But they'll be able to fully offset $30 a week?

There won't be immediate offsets, but over time substantial. Its a revolutionary change in the award system.

; Are your comments on the currency to suggest that the strength of the currency has retarded the adjustment process?

No, but it's obviously moderates your competitiveness. I mean the trade weight index today is about 65, we put the budget together on a trade rate of 60. So we're looking at about

an appreciation in the rate of about 7 odd percent. Well I mean that's substantial but its not at a level which would produce inordinate concern, but against the United States dollar it

is different becuase the United States has been falling to adjust its own current account. Our competitiveness is still very strong with Japan and with the countries which are tied to the Deusch mark. It is less strong obviously with

the United States or in products which are sold in the United States dollars.

Are you concerned about the impact on inflation of any fall in the dollar which you comments in the last few minutes have probably contributed to?

I don't think they should produce a fall in the dollar, its not designed to produce that. I'm just simply saying that the dollars buoyancy is a consequence of the terms of trade, monetary conditions, and market psychology. And there will come a time as the market will understand

itself as those things change so to will the exchange rate. All I'm saying is that when that happens we won't be trying to hold it where it is. That's all I'm saying.

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How long will interest rates stay at the height they are Mr Keating and how do you think they will have to stay that height to moderate demand?

Well for some time yet, but I hope that they will well and truely moderate by the years end.

So interest rates could stay high well into the second half of this year?

Well let me just say I think by the end of the calender year we should see them moderated substantially.

Mr Keating in terms of the figures put up by the ACTU, they are looking at getting more out of the wage increase/tax cut, shouldn't it be the other way round?

Well its a matter again of getting a mix which works and which is not at levels below the market. Which will make it absurd.

Is it possible thougth that the tax cut could amount to more than the wage increase? ;

Well I don't think so, but again it depends whether you look at the tax cut it tax terms or terms of pre tax wage equivalents, which is propably the right way to look them. And then I

wouldn't be certain.

Mr Keating, are you saying that imports will moderate progressively over the next six months as monetary policy begins to bite whatever the lag time has been up till now? Is that what you're saying?

Generally demand conditions will moderate it and with it there will bring its own moderation in the current account.

I wonder how you can say that with any confidence given the buoyancy of the Australian dollar over the past three months which surely would encourage importers to make hay while the dollar's high.

Well I think that is part of the reason why imports are so strong now, that is importers are bringing forward good to pick up the currency it its current position. So in other words they currency is moderateing export returns and promoting imports in the sense that people are bringing forward imports, but that means that some point out, imports they might have otherwise ordered will have already been

accommodated.

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(inaudable) making windfall profits instead of passing on to consumers. Do you still rule out any need to give the PSA extra teeth as the ACTU wants? "*

I don't think they need extra teeth, but again one is#···

(inaudable) in relation to imports?

Broadly, but one would be deluding oneself to think that in an economy this strong that you're going to get a price transition by the exchange rate fully, that is a change in the price

levels, and be passed on fully in the prices. Obviously some people will charge what they think the market can bear and will recover margins they lost when the deprecition was on,

but all of that is simply another commentary on the strength of demand. If demand is not so strong obviously you'll get a faster transition of the lower prices. But while ever it is this strong, we're not seeing, as we would have liked to see, diminished margins on the part of

importers. Obviously many are putting it ‘ straight in their pocket.

Once the dollar falls, Mr Keating, and import prices rise, that'll obviously have an impact on unions demand for wages. Will you be trying to quarantine that?

We did in the past, but again they flowed through very slowly in the past and they may flow through just as slowly as they are flowing through now with the appreciation.

So you wouldn't expect a lower dollar and higher prices to flow through in 89-90?

Mechanically I'd have to say yes you would, but what that ends up being in practical terms, you know you don't know because an importer may say that the margin they recovered this year they may use to moderate some prices next year.

But the possibility is there that they could fuel wage demands, from where we are now?

Yes, but again with the kind of general regime in place the moderation of demand will be running in favour of moderate wage outcomes.

And you don't believe that those who are putting the money straight into profit, straight into their pocket should be exposed?

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They can be exposed but I think you'd be exposing a very large part of the importers of this country and the PSA works^ in areas where price competition is not as marked as in other

areas. But what's happening in the areas where the PSA isn't working and has virtually no charter, there just isn't the price competition becuase demand is too buoyant.

Mr Keating what was you immediate personal reaction when you say these figures today and did any momentary fear grip you?

I said two words, but I won't repeat them here. I thought well, I mean look basically the economy is exceptionally strong, I know that, one would be somewhat stary eyed to think now when we get very low numbers out of nowhere. I

just simply think that one has to say, is the policy response we have approparite, is it correct, I think it is. And that we'll have to live through this surge of wealth. We'll have

to live through this surge of wealth and this surge of emplpyment, and this surge of prosperity until it moderates to produce a better equation between imports and exports.

Mr Keating, what is your preferred timing for an election?

That's a question for the Prime Minister because its the one he prefers that matters.

In the expectations are starting to diminish about the surplus, have they any material effect on the size of the tax cuts?

Well the tax cuts, let me say this to you, I'll go back to fiscal policy. We've had some commentators in this country saying we should cut fiscal policy further. We have it from the Opposition who have not yet tabled one thing

they would thing they would cut out of fiscal policy, not one thing, but I repeat the PSBR this year is zero, that is the whole of the Public Sector is not contrubuting to the current

account in a structural way. On the Commonwealth account not only is it zero it is a surplus of 2 per cent of GDP, so if you accept the fact that the public sector is not playing a

role in the current account spilover tht that role is being played by the private economy and that in cutting the PSBR from 7 per cent of GDP in 1983-84 to zero today every year, that is 7 per cent, that's about 22 or 23 billion a year of diminished called by the public sector on Australian savings you've probably conclude as

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I have that that public sector is more than playing its role, fiscal policy is more than playing its role. So there are two.other areas left, wages policy and monetary policy. In wages policy we've had outcomes broadly of the

6-6 1/2 per cent area now for a number of years, and it looks like having it again this year, maybe a little higher but will work. In the face of this strength a superb outcome. If we

can continue outcomes like that then wages policy will be doing all it's been asked to do. So monetary policy is again the instrument you'll employ on a rapid shift in income, on a

spike. And that's what we have now, dramatic pick up in the terms of trade and a much more efervescent economy. A proper financial market,

a restoration of confidence levels in business. A pick up in investment. Its the instrument you employ.

Will you still expect to have the sufficient surplus after the tax cuts to balance the PSBR?

Well that was the end point of the question. That is, we expect fiscal policy next year will continue to play its role. Post tax cuts.

So we will still have a zero PSBR, no PSBR?

Hopefully. But that will depend upon the States borrowing programs, the Commownealth Authority borrowing program. You've got to remember this, we still have Qantas and the PSBR. It is going

through a record phase of growth and that is all being carried on our account. We are yet to take submissions from the States about their authority borrowing program. But they will be very significant in whether the PSBR net is zero or not. But the Commownealth will be in there keeping fiscal policy very tight.

Do you think with these figures we are seeing a break in the link between the rising dollar and rising interest rates?

Well I don't know. I mean the market has all the time got to make its judgement about the exchange rate/interest rate equation and it is really for the market to make its judgement about it rather than for me.

Has the strong dollar slowed any improvement 4 n the current account? ‘

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KEATING: Well it obviously has slowed the improvement in the current account. But again this is moderating the income generation which is producing the surge in the f ir*bt place. The dollar acts to moderate the $A proceeds of

exports and in moderating the $A proceeds of exports, moderates the demand. That is how the system egualibrates.

JOURNALIST: Do you accept the coal industry claims that in their case it is actually threatening their existence?

KEATING: Well it may well be in some of the smaller inefficient mines. But by and large commodity prices have picked up across the board and while they have lost on the exchange rate they have picked up in terms of prices.

JOURNALIST: They are suggesting that the ACTU proposal was an ambit claim, do you see a significant amount of room for cutting back that claim or is it

KEATING: It is aii ambit to the extent it is an ambit within bounds. It is not an ambit perhaps with all of the connotations one can apply to the word ambit; that is a crazy claim that can never

be agreed to. It is an ambit claim within bounds. They are putting something on the table which they want to be subject to negotiation with the Government, which it will be.

JOURNALIST: So do you have real flexibility there or very little in practice?

KEATING: Oh no. We have substantial flexibility there. But we have already had some substantial impact on the way in which the whole ACTU constituency views the matter.

JOURNALIST: Is it correct to say the Government were also considering the possibility of offering even a higher tax cut?

KEATING: No. That was one that just sort of came out of the blue.

JOURNALIST: Mr Keating, there are doubts in (inaudible) what spending increase in social wages as well as wage rises and they have been talking housing this week. Are you at all attracted by parts of

its plans to increase the assistance foi first home owners in particular?

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Well the ACTU's principal interest this year is wages and disposable incomes. Last year they were talking about, the year before last particularly, the family allowance supplement

and other areas of the social wage including employment. Well employment they don't have to talk about it has been running so strong at about 4 per cent growth. The ACTU will have a view on it but it is not its principal preoccupation. It's principal preoccupation this year will be disposable incomes, income growth.

Could I just verify, Mr Keating, the claim by the ACTU in its broader sense of $20 and $30, the overall slice of that, do you believe that is economically responsible?

Well I answered that earlier, that is their claim. Well talk about that claim.

Mr Keating, the dollar dropped this morning by over 1 cent, if it continues to drop in the short term despite demand continuing to run high will you consider reviewing your position on the

policy settings? *

Well it would have to be collapsing to be that.

That might happen. „

Well we'd better get you on the Reuters screen there mate. You can have your own page, the Robert Hadler page.

That doesn't answer the question, I mean will you consider reviewing policy settings if that happens.

Well I just think given the strength of the current account and the interest rates which obtain that is not a realistic scenario I don't think.

But there is a great degree of uncertainty in financial markets about the direction of policy.

That is the way we like to keep them, somewhat uncertain.

In its statement last week the ACTU made it clear that it wanted a real increase in giving standards next financial year. Is the ’ Government in a position to renew promise on

that front despite these figures?

I think so. That was what we said. That is the aim of the game and I don't see anything that has happened that could prevent that happening. Maybe in less buoyant circumstances more might

have been done. Perhaps less might be done now. But still I think that commitment can hold.

17

JOURNALIST:

KEATING:

JOURNALIST:

KEATING:

JOURNALIST:

KEATING:

Mr Keating, what is the risk of this last (inaudible) monetary and fiscal policy, you might crash land next year ....

I saw some of that reported but I don't think that is realistic.

Why not?

Well I think the thing is the economy i^ just so robust and so strong that for it to jus'c all peter away virtually to nothing is I think somewhat fanciful.

Mr Keating, how many more much of these figures can you take before you can turn around and say we can't afford any wage increases or any tax cuts, or only the very minimum ammount?

Well I think you can only say that when you believe that outcome can be sustained in the wage market. And it pretty hard to sustain that when you've got companies and public companies

for that matter, offering very large wage increases. So obviously they feel they can exploit the economic system and pay* wages to the level of their offer. Whenever one is looking

at wages policy there has got to be a certain degree of commonsense about what the market will stand and try and reeve that down. Now when we had to have a terms of trade reduction, a terms of trade adjustment to productivity, for the

fall of the terms of trade in 1985-86, we had that and we produced a real depreciation on the way through, not just a nominal one. The trade union saw that, came to the party. But we've

got the profit share in GDP now higher than in any time since the 1960s, since the middle 60s. It think it is actually higher than the middle 60s. And so what have we decided, a further moderation in wages to lift the profit share

even beyond the current experience, beyond the 60s experience. See it is unrealistic and companies will try and shift that profit share by offering wage increases. The market will operate itself with wage offers to shift that profit share around. In other words, companies themselves will moderate their own profit share. The market will encourage them to moderate their own profit share. So you know,

the Government is working in the market, and that is why I think if you try and get wage outcomes or any outcome too far away from what the market will itself pay, all you do is risk a collapse of your arrangements.

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JOURNALIST: Mr Keating, these figures indicate that Australia's beginning to move away from foreign debt and stabilisation? *

KEATING: Well this figure's moving away from that stabilisation point. If we're running at the moment around 4 percent of GDP or slightly under maybe, or around 4 percent of GDP. we're probably about one and a half percentage points away from stabilisation. Our stable point where we were

acguiring no debt was two and half percent on the current account. So now we're running about four. We were running about six or eight. We're now running about four. What this means is, we're marking time at four while the economy can re- eguip. In other words, we're saying alright, we'll cop this while the economy can re-eguip itself for another big supply

phase.

JOURNALIST: If we start marching backwards though, when do you start rethinking the position?

KEATING: Well we started rethinking, see some of you are saying, it's fair enough you are, what is the Government doing about this. We foresaw this coming as early as April 1988. We started tightening rates up, as I said, by 3 percent back

in 1988, in April 1988, just on nearly a year ago. But the economy is that strong and again I make the point about financial deregulation. Anyone walking around with a venture which is plausible can be funded.

JOURNALIST: Isn't that part of the problem, that under deregulation monetary policy is a blunter instrument?

KEATING: No, no, I don't think it's more blunter, I think it's more softer because in the old days we had quantitative restrictions on money. It was like the sort of, you know, the thing hit the wall, there was just no more money - so the credit squeeze.

JOURNALIST: Inaudible.

KEATING: No, no, no, now you get, the thing stops, but it's cushioned, it's cushioned by price, it's cushioned by price, I mean, price moderates that supply of funds to projects and to, yop know, to people and so you get the slow-down, you could

even get it at a higher price, but you get it.

JOURNALIST: Would you agree in retrospect that you should have been tougher last year? ^

KEATING: Well let me just say, when I was tightening monetary policy in April last year, in Britain and the United States,

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'P

to three months after I'd tightened, they were still loosening. And Britain tightened up in July/August/September/ October in five or six steps in the second half of 1988. We

were three or four months ahead of all of them and not by a percentage point, by three. We went from ten and a half to thirteen and a half. But at the same time we had dropped on the economy another ten billion in national income, right. But we are a commodity country. To pick up ten billion from

the terms of trade, it's a lot of income and, of course, it will promote a lot of economic activity. So obviously, in the light of that, and as that terms of trade lift is continued, and that was again another one of our Budget forecasts, that

the terms of trade lift would continue, it was continued even more strongly than we forcast. We've since made a judgement that monetary conditions need to be even tighter. That is, than that initial tightening.

JOURNALIST: You don't see any credibility gap between all of your rational, plausible explanations here which are pretty complex and peoples' perceptions out there that interest rates

have gone up and every projection you made in the Budget wrong?

KEATING: But there's another perception out there. No, not every projection on those rates. Well, well the first thing is the Budget will come in on target itself, right, about target itself. That's the first prediction. I mean, the Budget itself will come in about target. The terms of trade which, I don't know whether you remember the Financial Review

editorial on that day talking about the terms of trade, this great gamble, how the terms of it might fall apart. It didn't fall apart. If anything, they've been stronger. But, well what matters to people in the street is also employment and household income. See the flip-side of the problem is on the

current account and inflation is tremendously dynamic economic activity and while many of you, as is ought to be are interested in things like the current account and inflation, out there many people are interested in jobs, prosperity and buoyancy and that's why there isn't a political, a commensurate political shift every time interest rates go up. And there's a lot of people lending money as well. There's a

lot of people lending money in this economy.

JOURNALIST: And you believe most people out there are feeling fairly prosperous, right?

KEATING: I think this is a level of prosperity we haven't seen for a couple of decades. I think it's one of the reasons why Mr Dowding was returned.

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JOURNALIST ί A lot of people think because the Budget estimates have been off track in terms of inflation and the current account, this will end up as some sort of political disaster for the Government. You obviously disagree?

KEATING: Listen if we, look we've been looking for an investment phase like this for twenty years, for twenty years. We've finally got it, but we've got it in abundance. And that means that we've got a spill-over in demand, in inflation and

in the current account. What I'm saying is, if we have to suffer these imports, whether they be computers or equipment or what-have-you to rebuild the productive fabric of the economy, well let's wear that because what we're getting out

of it is a much stronger, resilient economy. But if this was all consumption like it has been and was in the early 1980's, in other words, the terms of trade lift was just squandered in the consumption boom as it was under Fraser and Howard, then you'd have a lot to be concerned about. This terms of trade

lift has not been squandered. It's going into plant and equipment. We've got moderate consumption out there. Retail sales have been flat all year. We've got moderate consumption. It's going basically into equipment, into transport equipment, aircraft and it has brought dwellings, and into non-residential construction. Well whatever some people may think, housing people is an important objective and while it does present problems in overheating the building

sector, a lot of people have been getting housed. So it's not being squandered in a consumption binge, the likes which we've seen in the past. At least we've grown up that much. And the second measure of our growing up - this will be the first time ever we have the terms of trade that looks like this that hasn't ended up in a wage explosion. Now, you know, these are positive outcomes the Liberal Party could never get, never had the look to get and never had the instruments to get. They had no incomes policy. They had fiscal policy all over the place. This is the tightest fiscal policy in Australia's history. It's the tightest fiscal policy in the OECD.

JOURNALIST: So all we do is sit tight and everything will be sweet?

KEATING: I think it's a case of certainly not panicking as some commentators would seek to have the Government do. And, you know, this may be particularly true for the journalists of John Fairfax and Sons when that slow-down affects the classified revenue and hence their capacity to pay their

interest rate bills.

>

ends