Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
The current economic debate



Download PDFDownload PDF

P A R L I A M E N T O P A U S T R A L I A

H O U S C O P R E P R E S E N T A T I V E S

DR JOHN R. HBWSON. M.P. SH A D O W M IN IS T E R F O R F IN A N C E M E M B E R F O R W E N T W O R T H

ifpRESS RELEASE if

COMMONWEALTH PARLIAMENTARY LIBRARY MICAH

THE CURRENT ECONOMIC DEBATE

Thia text formed the basis of Addresses to the

Syntec Outlook Conferences

held in Sydney and Melbourne this week

Dr. John Hewson M.P. Shadow Minister for Finance

THE CURRENT ECONOMIC DEBATE

This text formed the basis of Addresses to the

Syntec Outlook Conferences

held in Sydney and Melbourne this week

Dr. John Hewson M.P. Shadow Minister for Finance

23.2.89

I feel I should begin by congratulating tho Prime Minister on his recent elevation to the exalted position of a Knight Grand

Cordon (Special Class) of the Most Exalted Order of the White

Elephant.

I can assure the Prime Minister that we, in the Opposition, are

determined to ensure that he lives up to the letter and the spirit of that Award this year, and becomes a genuine white

Elephant I

With the considerable evidence now built up as to the extent that the Treasurer has misled and mismanaged the Australian economy, and assuming an awareness on your part of his well

documented capacity to give colourful "character references",

you are no doubt aware that he has been particularly " toey" in recent weeks.

Rather than admit, of course, that he has done anything wrong, or made any mistakes, he has attacked everything and everybody. A brief look at the press- in recent days reveals that he has attacked business generally; business executives, in particular,

tax minimisation by business; the Statistician; the State

Premiers, especially Nick Greiner; Yuppies; John Elliott (not related to the former category); sections of the media, but in particular the Sydney Morning Herald and the Canberra Times, and

in t u r n e s p e c i a l l y Max W a l s h and M i k e S t e k e t e e ; the

Fraser/Howard administration; the Opposition; and even the Reserve Bank, and that is in addition to the usual range of "sleazebags", "scumbags" and "dummies".

Por example, when the December quarter CPI figure was released which, for the fourth quarter in a row, confirmed the full extent of the illusion the Treasurer had attempted to create

that inflation was falling, he immediately blamed the

Statistician claiming he treated housing costs incorrectly in the CPI, and he simultaneously tried to push the problem to the States by calling yet another "Summit".

2.

I guess the Treasurer's motto has become "don't waste a bad statistic, spread the blame around."

It's interesting, isn't it, that the Treasurer forgot to mention that he once thought it was a good idea to include housing costs in the CPI. He also forgot to mention that it was his mates in

the ACTU who pushed for their inclusion. And I didn't hear him

complain a year or so ago when housing interest rates were falling and having a negative effect on the CPI.

The Canberra Gallery is also rife with rumours to-day that the Treasurer and/or his office are now bad mouthing the Reserve

Bank.

Apparently, so it goes, the Treasurer had wanted to tighten

monetary policy somewhat earlier last year but he couldn't get the Reserve Bank to agree. It doesn't sound right does it? Particularly if we remember that monetary policy wasn't

tightened until just after the N.S.W. election.

Other stories being propagated are that the Reserve Bank is "no good in a crisis". Obviously a fair bit of poetic licence in

that one too, ehl

And apparently somebody in the Treasurer's area has been floating the idea that Bernie Fraser (or somebody else) ought to be appointed Governor of the Reserve Bank, so that one of the

Treasurer's other mates can be appointed to be Secretary of the

Treasury.

it seems that there is no limit to the extent to which this

Treasurer is prepared to go to politicise the process of economic advice, even though this very politicisation# perhaps more than anything else, has led him to to make such fundamental mistakes in economic management.

It's classic "Yes Minister" stuff, isn't it?

3.

Paul will be pleased to know that he can now view the "Yes

Minister" series in the Parliamentary Library. They're showing

it ae a documentary for people like him. Although I understand that he might prefer to watch "Yes, Prime Minister".

The most disturbing thing from my point of view is that the Treasurer has run for cover. Even though I have offered him

endless opportunities to debate economic developments and his economic mismanagement, he has never taken up the invitation.

indeed he walks out of Parliamentary debates, Matters of Public

Importance on his economic mismanagement, and so on.

He has obviously now totally lost his way. He is trapped by his own jargon and the errors of his Department. He is devoid of

any capacity to think independently on economic matters; he is devoid of any ideas.

What's more he knows, that I know, that he doesn't know, what

he's doing I

My role to-day is to help you formulate your business plans by giving you my views of where the economy is, where it's likely

to go, and how the Government is likely to respond.

In simple terms, to try and help you understand what's

happening.

Might I suggest two things;

1. First, you should start by recognising the Government's so-called "strategy" for what it is - essentially a

shortsighted political strategy. It's clearly not primarily an economic strategy aimed at producing sustainable solutions to our underlying economic problems.

But of course, they've tried to dress this political

strategy up as if it's a "responsible economic strategy".

4.

If the truth be known they've never really had a full

blown economic strategy in the sense that I have defined

It. You might like to recall some of the so-called

" s t r a t e g i e s 1 ' they've followed sinCe 1983. All were

political and short term in their orientation. For

example, when they came into Government they ran on the line, designed to differentiate them from Fraser, that you did not need "to fight inflation first". They had this

magic thing called "the Accord" that would control

inflation. So, therefore, they could simultaneously run

an expansionary monetary and fiscal policy. We all remember what happened. They blew out government

spending. They forced interest rates down in 1984. And so

1985 saw inflation running away and a series of exchange rate crises.

And then, of course, we had a new "strategy". This time

you apparently you did have to worry about inflation etc.,

otherwise you would become a "banana republic". But they've done very little about our fundamental problems

ever since. Indeed, the Treasurer failed to capitalise on the very real opportunity, which he inadvertently created by his throwaway "banana republic" line to put our

economic house in order.

Without exaggeration, Keating is a politician not an

economist. He always plays politics with economics. He is yet to recognise that while you can get away with it for some time, the economic realities always win outti

2. Second, might I also suggest that you interpret what is happening at the present time, and particularly what the Government Is 'doing' (or in some cases, I should say is

'not doing'> as that political strategy going wrong. In these terms you should look at what the Government has been doing, and will continue to do, simply as an attempt to "patch up" that strategy, as distinct from actively

5.

identifying and attempting to deal with our fundamental economic problems.

In these terms you could describe what's happening as a clash between Keating's political strategy and economic reality.

So don't be swayed by all the rhetoric about "economic

responsibility" or "genuine concern", or "not being railroaded

into damaging policy" etc... Also, don't be swayed by the

promises of "rising living standards" or "trend improvements in

our the balance of payments", or "underlying improvements in our

inflation outlook" or of the benefit of "managing" a "strong" or "robust" economy. None of these will be sustainable without fundamental economic policy adjustment; and none of that is really contemplated in their current political strategy.

I am prompted to refer you all to that wonderful section of the

Edna Carew's biography of Keating where it is reported that on the occasion of an address on neo-classical art to a gathering

at Canberra's National Gallery, he admitted he felt more at home dealing with the current account deficit than he did discussing

art. It gives you some idea of how appallingly inadequate is

his knowledge of art.

He now virtually disappears between the releases of each of the

"bad" economic numbers.

To return to my theme, I believe you will find it particularly

helpful to think of what the Government is doing as simply nursing a now decidedly battered political strategy; don't

simply take what they say at face value.

Clearly their aim is to now do as little as possible; to "muddle through"; in particular, to try and not rock the boat any more than it already has been before an early election this year.

It might be helpful if I briefly run you through the origins of this political strategy and the various steps Keating has taken

6.

to date to patch it up.

The strategy arose early last year with the realisation that they were unexpectedly "awash with revenue", essentially from a

host of new taxes and "bracket creep". "Bracket creep" alone

has contributed about $10 billion to revenue in the last four y e a r s . So, in effect, almost the whole current (and

prospective) budget surplus is due to "bracket creep". There

clearly has been only minimal restraint on the Commonwealth's

expenditure following the expenditure binge in the first two years of the Hawke Government.

Keating soon recognised that the unexpected revenue windfall

could have some pretty significant consequencest

. The '87/88 Budget outcome could be about $2 billion,

compared to the Budget projection of a zero balance.

. It also seemed possible that the '88/'89 surplus could be around $5 billion or so, which would allow the Government to reduce the public sector borrowing requirement (PSBR)

to zero. Indeed, the Government actually buried about

another $1.5 billion of revenue behind the '88/'89 Budget

figuring.

. And all this revenue would make it possible to give a tax cut in '89 and probably still keep the PSBR near zero.

The World's Greatest Treasurer had done it again 1 l Or so it

seemed?

He obviously became quite enthusiastic when he realised the magnitude of his windfall last year. For example, he couldn't

contain his enthusiasm, when he briefed his caucus colleagues,

just prior to the Mini Budget last year in the following terms;

"Well, here it is folks. All you people who thought you

were going to lose your seats at the next election, this

7.

will save you. This will get ue back into Government".

This Mini Budget ultimately became the 1988/89 Budget which he described as the one that would "Bring Home the Bacon".

As an aside, it's worth recognising that Keating not only

thought, at that time, that this Budget would "Bring Home the Bacon" to the ALP, but also to him personally.

He obviously saw it as the base on which he would challenge

Hawke to take over the leadership of the ALP. But as the year

went on, of course, he realised that he had very little real support for such a leadership challenge. He had no idea that Bob Hawke intended to eat his "bacon" for breakfast.

However, apart from the recognition of the tremendous revenue w i n d f a l l , Keating needed two other things to complete his political strategy.

1. An optimistic assessment of our economic prospects. Treasury were quite happy to give him that (as most of

them still have delusions of grandeur about the so-called

"Canberra model" - the eyes of the world are upon us, you

knowI)

2. A media campaign designed to massage business and

electorate e x p e c t a t i o n s . A substantial effort was

required to convince people that "the economy has turned the corner", "we're on the mend", "living standards are

about to rise", and so on.

To put it simply - you were to be conned - you were to be "sold

a dump".

But almost from the very time Keating began gloating about the success of his "brilliant" strategy, it all started to go wrong.

Two factors were at work.

8.

. The Treasury had misled the Treasurer; the pick up in the

terms of trade was much stronger than they had thought and the economy was overheating quite dramatically.

. The Government's electoral position and confidence had weakened following a series of bi-election "losses" and the NSW state election result. The backbench was getting

restless and various pressure groups came in for their cut. This pressure has grown as it has become clear just

how far the Treasury's assessments were wide of the mark.

So, since early last year, we've seen a succession of "bandaids"

applied in an attempt to patch up the strategy. But as the "economic sores" have continued to fester, the "bandaids" have got bigger and their application more frequent.

To date, about six main bandaids have been applied. Even at this point, the Keating strategy is starting to look like a character

in a Pickering cartoon.

The main "bandaids" have been:

Bandaid One

To begin to quietly tighten monetary policy, but not to admit

it. This was certainly the case in April and May last year and again in October. Remember how the Treasurer used to

consistently deny that monetary policy was being tightened, even

though it became clear as "official" cash rates were increased.

He initially tried, for example, to blame this on the "seasonal rundown" in the second quarter of last year; in fact, he was trying to use the "rundown" as a cover for the tightening of

policy. He repeated this misleading behaviour as monetary

policy was again tightened in October.

The f a i l u r e to c l e a r l y declare his policy intentions

significantly reduced the effectiveness of the monetary policy adjustments, as I discuss in more detail below.

9.

Bandaid Two

The Budget brought down last August where we saw a formal

backtracking on so-called "expenditure restraint" with about

$400 million worth of new initiatives directed at key pressure groups.

We also saw the "CPI fiddle" - the cut in the excise on beer

designed to reduce the CPI by half a percent, towards what was even then widely seen as the unrealistic Treasury projection that inflation would fall to 4.5% by the middle of this year.

By way of another aside, Keating was too smart by half with his

excise cut, which he partially replaced with a sales tax on <99% of) beer for the first time. It should be clear that it

was this decision that opened the way for John Elliott and CUB

to lower the price of beer, by the use of leased bottles, by exercising Item 94 of the First Schedule to the Sales Tax (Exemptions and Classifications) Act, which apparently had been in the legislation since about 1935.

Keating was directly to blame for what I guess he would now d e s c r i b e as an " u n i n t e n d e d c o n s e q u e n c e " . There have

unfortunately been many of these in the Hawke Government.

Obviously, on this occasion, Treasury was simply hell bent on f u d g i n g the CPI, and did not fully think through the

consequences of shifting from excise to a sales tax on beer.

Bandaid Three

The formal admission at the end of last year by Hawke that monetary policy was indeed being relied on as the sole policy

instrument. Remember how he explained that high interest rates were required, so that tax cuts could be given in July.

10.

Bandald Pour

The January "wage deal" demanded by Kelty and the ACTU - a minimum 830 wage Increase and the $20 tax cut.

It shouldn't be forgotten that this deal involves Keating giving an enormous amount of ground to the union movement and

effectively destroys his notion of a "wage-tax trade-off".

You shouldn't forget that it was only last October when the

Treasurer said in New York that a "zero wage increase" was "a

possibility" in return for the July tax cuts. He is now being

forced by his mate Bill Kelty to effectively "institutionalise" a wage break out, and probably agree to a bigger tax cut than he had in mind at the time of the last budget.

Bandald Five

Jawboning.

This bandaid was applied following the release of the January balance of payments last week, and involved a conscious attempt

by Keating to talk down the value of the $A.

The process was begun in his press conference on the January balance of payments number, and was backed up by supportive noisee from Senator Button and the Reserve Bank, actually

selling $A dollars every time the $A looked like it was making

some sort of recovery or upward correction.

Bandald Six

Application of the "mushroom principle" that is, as you know, to

feed you bullshit and keep you in the dark.

One can only be angered at the extent to which Keating goes in making statements which are designed to give us all a "warm inner glow", but which don't stand up to close examination Of the data. You can pick virtually any of his speeches or press

11.

conference remarks and find that he has pushed the facts. Let me just pick a couple of examples from his speech this week to the Business Council of Australia.

Consider, for example the following paragraphs from pages 1 and 2 of that speech:

"....the pattern of demand is very encouraging for

Australia's longer term future.

And the wage-tax tradeoff will permit wage pressures to be contained

Public demand is flat.

And private consumption is also relatively flat. Investment, though, is very strong - the strongest it has been as a share of GDP.

This surge in investment is very encouraging.

In the short-run it is showing up as an increase in the current account deficit.

But in the longer term the investment which is presently being put in place will pump out sufficient export and import-competing output to restore the trend improvement

in the current account."

This is classic "Keating speak". it represents a clear attempt

to exaggerate, if not misrepresent, the situation.

Several comments might be made;

. While it's true the "wage-tax tradeoff will permit wage pressures to be contained", it clearly only substitutes demand pressures for wage pressures, and is therefore Just

as potentially inflationary (which is presumably the real

concern), even though the timing of these forces may be

altered somewhat.

. How "flat" is "flat" in respect of public d e m a n d .

Government consumption expenditure has contributed

positively to growth in nine out of the last eleven

12.

quarters according to the latest national accounts.

Is private consumption really all that flat? While retail sales have been mixed, motor vehicle sales and a host of

'retail' items excluded from the retail sales statistics,

have been particularly strong. Private consumption expenditure has contributed 2% of the total 6.9% growth in

GDP, since the December quarter of 1986, the quarter in

which our terms of trade began to improve. it has been a

more significant contributor to growth than investment .

It isn't true that investment has been "the strongest it

has ever been as a share of GDP". That share was 11.4% in

the September quarter of 1988, which is lower than it was in the previous three quarters, and lower than the last two quarters of 1981, and the first two quarters of 1982.

The suggestion that imports of investment goods will have only a temporary impact on the current account deficit ignores a major structural weakness of our balance of payments, namely that we are so dependent on Imports of

capital goods and industrial supplies; we have no

significant import subaitution industries for these goods.

There is also little or no evidence to support the views that investment "will pump out sufficient export and import-competing output to restore the trend improvement in the current account". What "trend improvement" in the

current account; hasn't there been a trend deterioration

apparent since the early 1970's? It is very much like the old "infant industry" argument for protection. The

industries rarely, if ever, grow up. Seriously, I doubt

whether I will live long enough to see any genuine and sustained improvement in export and import- competing output from the recent investment activity.

One might also note that in recent times "consumption

13.

imports" have been just about as important as "investment

imports". Also one might note that the import to sales

ratio has risen by about 23% since our terms of trade

began to improve in the December quarter in 1986.

We l l , what has been the result of all these bandaids? There

have been two main consequences:

. Keating has never really stood back and reassessed our

economic p o s i t i o n , admitted his mistakes and then

proceeded to address the problem. He has simply let our economic performance and his economic management drift.

. Hence, we've lost about 12 - 18 months in terms of needed policy adjustment.

And he is unlikely to change, unless economic circumstances completely overtake him, in what would be a full-blown economic crisis. He is most likely to push on to an early election

hoping that the economic patient doesn't require drastic surgery

before then.

Dr. Keating's bedside manner should have seen him struck off

the Register by now.

His budget strategy, already is in tatters. The two key forecasts are wildly off track.

. The balance of payments deficit is likely to come in at $14-15 billion at best (compared to his forecast of $9.5

billion).

. The inflation rate is unlikely to fall much below 6.5%-7% this year at best (compared to his forecast of 4.5%),

Ironically, Keating, having denied it for months, is now

prepared to admit that the economy is significantly overheated- too much effervescence in the glass of champagne. But, he still fails to admit that he was the one who poured the champagne.

14.

It was Keating who played politics with monetary policy throughout 1987 and into early 1988. Specifically it was

Keating who pushed down interest rates on three major occasions

through that period, on top of a commodity price boom and the stimulatory effects of the devaluations of 1985 and 1986. Even a first year economics student could have told him that that combination of circumstances would be sure to overheat our

economy.

Of course, the problem is just not one of overheating. It's not just a H c y c l i c a l " p h e n o m e n o n . it also has an important

structural dimension, which he basically ignores. I will say more about that in a moment.

Apart from these major policy failings, Keating has left himself no room to manoeuvre in policy terms. He is locked into a

stance and mix of macro policies that are far too expansionary

in our current and prospective economic circumstances. He's committed to unfunded tax cuts, wage increases that are

unrelated to productivity, further spending increases and no

real micro reform. He is therefore now totally locked in to monetary policy and high interest rates, as the sole instrument of macro adjustment.

There are five or six major problems associated with this sole reliance on monetary policy, apart, of course, from the

political pain and bluntness of such a policy.

First, he's forcing monetary policy to do that macro adjustment

job in the least auspicious circumstances.

Keating got off to a particularly bad sart by attempting to

disguise the fact that he was tightening monetary policy and raising interest rates in April and May of last year. Indeed, he tried to hide that fact in the "seasonal rundown" which would normally put upward pressure on interest rates, and he

persistently denied, when asked, that he was in fact tightening monetary policy. This had the effect of reducing the direct and

15.

expectations impacts of the interest rate increases achieved, and considerable uncertainty persisted about his actual monetary policy intentions.

This failure to give a clear announcement of policy intentions also created other problems. Foreign exchange dealers for example, who mostly play the interest differentials, saw this

dribbling up of domestic interest rates as making the $A a "one

way bet" for most of the last 12 months. This appreciation of

the $A, in turn, worked against any improvement in our balance of payments as it made imports cheaper and discouraged exports.

The appreciation of the $A over this period was about 23% - 25%.

The second problem with relying on monetary policy was that the hi g h i n terest rates also worked against the inflation

objectives, as higher official interest rates ultimately pushed

up most other rates, most importantly, housing rates, which fed

directly into the CPI.

The third problem is that even though interest rates are now

quite high, there is still plenty of money (credit) around. We

have a "price squeeze" but not a "credit squeeze". The demand for credit, and therefore economic activity, is yet to respond significantly to the higher interest rates.

This suggests that interest rates may still need to go quite a

lot higher before they really start to bite on economic

activity.

Apparently, individuals and companies have been happy to borrow despite high and rising Interest rates, presumably in the expectation that the high interest rates would be short-lived. Clearly, if they are not short-lived, these expectations will

soon be revised. As a result there could be a quite

s i g n i f i c a n t ,.and perhaps even sudden, reconsideration of personal and corporate spending plans, significantly reducing the demand for credit and leading to a sharp flattening of

economic activity - a "hard landing".

16.

Fourth, hie whole strategy of relying on monetary policy is

crucially dependent on sustained support for $A assets from foreign investors. We know, from the experience of recent years, that foreign investors can be a fickle and often, quite uninformed, lot. Their perceptions can shift easily, and

rapidly; they are easily frightened. Hence the recent policy of

"jawboning" i.e. talking the $A down, could frighten them. It's obviously a very high risk strategy, particularly if "jawboning" is too successful, as we could ultimately see even

higher interest rates to stop the $A falling.

Moreover, in principle, unless there is a permanent shift in foreign investor sentiment, it will be impossible to maintain

the $A at the new, artificially low levels, especially if

further increases in interest rates are in the pipeline, from domestic pressures that might arise from further "bad" balance of payments and inflation numbers in months to come.

In simple terms, without a permanent shift in foreign investor sentiment, it will be difficult, if not impossible, to hold the 9A at a lower level, especially when you are already having

trouble holding it at a higher level.

Foreign investors might even become entirely cynical about the merits of "jawboning" in our current circumstances. They could

sell out as the "jawboning" starts, and then buy back in when

the dollar has fallen to a level the Government apparently seeks, in the expectation that interest rates will be maintained or indeed, that there may be further increases in domestic

interest rates - this would pull the dollar back up again. And

so the process could repeat Itself in something of a "saw tooth

pattern".

Fifth, the sole reliance on monetary policy leaves us

particularly vulnerable to further increases in world interest rates, which seem likely; particularly if Bush doesn't come to grips with his Budget deficit problem and given the growing

17 .

concerns in the U.K. and Germany about the rekindling of

inflationary pressures,

Finally/ the whole strategy of relying on monetary policy has a very real, inherent risk of "overkill", and this is especially so as the Government has now lost the initiative in interest

rate policy, leaving it to the market to lead.

Obviously the situation is difficult for the authorities to

read, as most relevant data come out with varying reliability and different lags, many of which are still poorly understood,

but suspected to be quite variable. But, these difficulties of interpretation and judgement are now being compounded as the authorities are locked into market pressures. So, "bad" balance of payments and inflation numbers almost immediately push up

market interest rates. The authorities are then under pressure to validate these jumps by the upward adjustment in official cash rates and the rediscount rate. This process can be a oneĀ­ way slippery slope to economic overkill and disaster.

Hence, for these and a host of other reasons, the Opposition has

been arguing for a shift in the mix of macro policies, with far less reliance on monetary policy and high interest rates.

What will happen from here?

Well, in my view, you had better count on the Government trying

to press on with its political strategy towards an early elecion

this year, barring a major exchange rate/balance of payments crisis, which would then force some economic responsibility, some real policy adjustment, and probably delay the election

until as late as possible next year.

Hawke's a gambler. He now probably figures he has got little to lose by another roll of the dice. And things could be a whole lot worse next year if the world economy flattens out and

commodity prices dive. Indeed, he probably does not see our economic circumstances as any more than an economic craps game.

18.

You can just imagine him in The Lodge blowing in hie hand before

he rolls the dice, one more time.

On this basis you should expect a number of thingsi

. They will announce a budget surplus for '89/'90 of about $11 - 12 billion - and they can be expected to do this, even if it becomes quite unrealistic and unsustainable.

. They will announce about $1 billion of additional

expenditure on "political sensitivities" like families,

grey power and so on.

. They will cut taxes by around $20 p.w., on average. These

tax cuts may be targeted or phased. If targeted, they will be directed to income groups of between about $15-

$30,000. But, if they are phased, the top rate will be the last to come down. Although Keating has, as recently

as last week, said that he is still disposed to do the tax cuts in one go.

This will cost them about $5 or $6 billion of next year's

surplus.

. And it would allow them to keep the FSBR near zero and

allow Keating to pull off a couple more of his "loan

repayment" stunts overseas.

. They will effectively agree to a wage increase of about $25 - $30 p.w. - this will be a minimum, as the "safety

net" is tied to a particular inflation rate of 6% and that

is likely to be exceeded next year.

. Expect no more micro reform, but a lot of talk.

And all this will probably be announced in April.

The key point is that they will hope that it will all hang

together to get them through to circumstances where they can

19.

manipulate an early election.

In my view, the strategy is unsustainable and, as every day goes

by, the probability of the "muddle through" strategy failing, and them being forced to make serious macro policy adjustments,

grows.

There are several dangers in all this. The most Important are:

. Interest rate overkill. It will be very difficult for

them to engineer a "soft landing"? it has not been

characteristic of the Australian economy. It looks like we will again see economic activity go from "too fast" to "flat".

. An exchange rate crisis. It could happen if "jawboning" is carried too far. It will certainly happen if world

commodity prices suddenly fall quite markedly. (i.e. over

and above the downward drift that is already evident in commodity prices).

In such circumstances, we would see a collision between

these falling commodity prices and sustained import

demand, which would cause a "double whammy" on our balance of payments and would be sure to precipitate a major exchange rate crisis. We would also certainly have an

exchange rate "crisis" if the Government suddenly decided to push interest rates down in the run up to an early

election, without compensating policy adjustments.

. Another stock exchange market "crash" or sizeable

correction. This is importantly tied to movements in the U.S.long bond rate, which recently have been held down by renewed Japanese interest, in conjunction with perceptions

of willingness of the authorities of the major countries to deal with their fiscal and balance of payments

Imbalances.

. Impatience. Keating and Hawke could try and force the

20.

pace of their economic optimism, or, more likely, Keating

could simply again become impatient with Hawke as Leader and attempt to destabilise his leadership, especially now

as Hawke is obviously running Crean for the Parliament.

One final comment. Most of what we have talked about to-day has been focused on short term demand management issues. What you

might call the cyclical dimension of our current economic

difficulties, if you like. But, there is also a very important "structural" dimension to our current problem as well which, of

course, receives very little attention by the Treasurer who

prefers to ignore our real economic problems, and to concentrate on his short term political strategies.

Clearly, for example, our balance of payments problems are not

only reflecting the effects of an overheated domestic demand,

t he y a re a ls o r e f l e c t i n g some important "structural"

deficiencies including;

- our export dependence on a few unprocessed commodities

- our import dependence on capital equipment and industrial

supplies.

- and we are locked into substantial debt service burdens.

Similarly, our current inflation problem is not only due to the recently overheated demand, it too, has an important structural dimension. Specifically, it now seems that it is difficult to

drive out inflation rate much below about 6%. Inflation seems

to have a floor under it due to the centralised wage fixation s y s t e m and its f a i l u r e to r e l a t e w a g e s increases to

productivity.

The "structural" dimension to these two problems are both interrelated with, and a reflection of, a number of other structural problems in the Australian economy, including:

. a low and declining savings rate

. falling, or at best, flat productivity

21.

. a tax s y s t e m that imp os es excessive b u r d e n s , is

excessively complex and blatantly discriminates against

savings and investment and encourages debt; it is

precisely the wrong sort of tax system for a country like

ours.

. excessive reliance on government, excessive regulation by government, and interference by government in private sector activities.

. excessive levels of industrial protection and assistance.

. a decided lack of competition in a number of key markets,

but particularly in labour markets, product markets, the transportation system, the wharves and so on.

. excessively centralised non-market "corporatist" decision

making, and decision making between 'big' Government, the ACTU and 'big' business.

. poor, inward looking management.

. an obvious lack of incentive throughout the whole economic system.

Not only do solutions to these and other structural problems call for much more medium term orientation to macro policy and a

much greater weight on micro economic reform, but they also emphasise the futility, indeed, the irresponsibility of playing politics with economic management the way Paul Keating has done.