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Turning the inflation tide



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EMBARGOED UNTIL 9.00 PM, 4 MARCH 1991

"TURNING THE INFLATION TIDE"

ADDRESS BY SENATOR JIM SHORT

SHADOW MINISTER FOR FINANCE AND ASSISTING THE LEADER ON COMMONWEALTH-STATE RELATIONS

TO THE CONSTRUCTION AND MINING EQUIPMENT ASSOCIATION

COMMON W E A i T f . . i

CANBERRA 4 MARCH 1991

I WANT TO SPEAK THIS EVENING ABOUT AUSTRALIA'S INFLATION PROBLEM AND WHAT CAN BE DONE TO TACKLE IT: TO FOCUS NOT ON WHAT THE

HAWKE GOVERNMENT HAS DONE WRONG - THE DEVASTATING RESULTS OF ITS MISMANAGEMENT ARE PLAIN FOR ALL TO SEE - BUT INSTEAD TO OUTLINE SOME OF THE ANSWERS AND SOLUTIONS THE COALITION WILL PROVIDE ON OUR RETURN TO GOVERNMENT.

MY CENTRAL THEME WILL BE INFLATION - ITS COSTS, ITS CAUSES AND ITS CURES. I CHOSE THIS TOPIC PARTLY BECAUSE I BELIEVE THERE HAS BEEN A SEA-CHANGE IN THE POLICY DEBATE IN AUSTRALIA IN RECENT TIMES. WHILE INFLATION HAS BEEN WITH US AT VERY HIGH LEVELS FOR A PROLONGED PERIOD, IT IS ONLY NOW THAT IT IS ASSUMING ITS

RIGHTFUL PLACE AT THE TOP OF THE POLICY AGENDA.

AFTER EIGHT YEARS OF INACTION ON INFLATION, THE TREASURER HAS RECENTLY CHANGED HIS RHETORIC TO FOCUS ON INFLATION RATHER THAN DEBT - MAINLY BECAUSE OF THE LACK OF PROGRESS MADE ON THE DEBT SITUATION. IN AN ADDRESS MADE TO EPAC ON 27 FEBRUARY TITLED

"SNAPPING THE INFLATION STICK" HE SAID:

"I DON'T WANT TO JUST BEND INFLATION A LITTLE AND THEN SEE IT SPRING BACK. I WANT TO SNAP THE INFLATION

STICK AND BRING AUSTRALIA BACK TO THE COMMUNITY OF ITS OECD PARTNERS"

THIS IS AN ADMIRABLE AIM, BUT THE ANALOGY OF SNAPPING A STICK IS QUITE INAPPROPRIATE. INFLATION IS NOT SOMETHING YOU GET ON TOP OF ONCE AND THEN PUT THE PROBLEM BEHIND YOU. IT IS AN ONGOING TASK WHICH, EVEN ONCE CONQUERED, MUST BE CONTINUALLY HELD AT BAY,

LIKE THE INCOMING TIDE. IT TAKES A SUSTAINED EFFORT, AND

CONTINUED VIGILANCE. HENCE, I HAVE TITLED MY ADDRESS "TURNING THE INFLATION TIDE".

SNAPPING A STICK IS EASY. HOLDING BACK A TIDE IS VERY DIFFICULT AND REQUIRES UNFAILING COMMITMENT AND ENERGY FROM A VAST NUMBER OF PEOPLE. ONCE IT IS HELD BACK, THE UNDERTOW IS ALWAYS THERE, WAITING TO DRAG YOU BACK FROM WHENCE YOU CAME. IT IS A DIFFICULT

TASK, BUT ONE WHICH COULD WELL SAVE YOU FROM DROWNING.

THIS IS HOW THE COALITION SEES THE FIGHT AGAINST INFLATION.

IN ADDRESSING THIS ISSUE, I WILL TOUCH ON THE IMPORTANT ROLES OF EACH OF THE MAJOR ARMS OF POLICY - MONETARY (AND EXCHANGE RATE), FISCAL AND WAGES POLICY - BECAUSE IT IS ONLY WITH A FULLY CO­ ORDINATED APPROACH TO EACH OF THESE THAT OUR ECONOMIC PROBLEMS, PARTICULARLY INFLATION, CAN BE OVERCOME.

THE COSTS OF INFLATION

WHAT ARE THE COSTS OF INFLATION?

ON THE FACE OF IT THIS MAY SEEM NOTHING MORE THAN A RHETORICAL QUESTION FOR WHICH THE ANSWERS ARE CLEAR. HOWEVER, IN REALITY, I SUSPECT THAT THE MAJOR REASON TACKLING INFLATION HAS NOT ASSUMED GREATER IMPORTANCE IS BECAUSE THE DAMAGE CAUSED BY IT AND THE PROBLEMS WHICH ACCOMPANY IT ARE NOT WELL UNDERSTOOD OR WIDELY

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RECOGNISED

THE COALITION BELIEVES THE CONTROL OF INFLATION MUST ASSUME A CENTRAL ROLE IN GOVERNMENT POLICY. IN AN INFLATIONARY

ENVIRONMENT:

. THE DISTRIBUTIONAL EFFECTS ON INCOME AND WEALTH ARE UNPREDICTABLE AND UNDESIRABLE;

. PLANNING BECOMES INCREASINGLY DIFFICULT;

. THERE IS A BIAS TO SHORT TERM SPECULATIVE

INVESTMENT RATHER THAN LONG TERM PRODUCTIVE INVESTMENT;

. THE INTERACTION OF THE INFLATIONARY ENVIRONMENT WITH THE TAX SYSTEM PROVIDES A STRONG INCENTIVE FOR ACQUISITION OF REAL ESTATE RATHER THAN

PRODUCTIVE INVESTMENT AND DISCOURAGEMENT FOR FINANCIAL SAVINGS (THE VERY OPPOSITE OF WHAT THE COUNTRY NEEDS);

. TAXPAYERS ARE ROBBED BY BRACKET CREEP. ACCESS

ECONOMICS HAVE SUGGESTED THAT SINCE 1983-84 THE GOVERNMENT HAS RECEIVED $22,000 MILLION FROM TAXPAYERS IN BRACKET CREEP; AND

. THE FOREIGN DEBT PROBLEM IS MAGNIFIED BY ERODING COMPETITIVENESS, ERODING INCENTIVES TO SAVE AND INVEST, AND ATTACKING STABILITY.

THE DIFFICULTY IN SELLING THE IMPORTANCE OF TACKLING INFLATION IS THAT THE COSTS ARE VERY HARD TO QUANTIFY. WITHOUT A FIGURE TO POINT TO IT IS EASY TO DISMISS THEM AS UNIMPORTANT. THEY ARE NOT.

JUST BECAUSE THERE IS NO YARDSTICK OF THE COSTS OF INFLATION DOES NOT MEAN THEY DO NOT EXIST. ON RETURN TO GOVERNMENT, THE

COALITION WILL DO ALL IT CAN TO QUANTIFY THESE COSTS.

IN ATTACKING INFLATION, WE WILL BEGIN BY ARTICULATING THESE COSTS SO THAT NOT ONLY THE GOVERNMENT AND ITS AUTHORITIES ARE COMMITTED TO REMOVING IT FOR GOOD FROM OUR ECONOMY, BUT THE GENERAL

POPULACE WOULD ALSO BE COMMITTED TO THAT OBJECTIVE.

ESTABLISHING AN ANTI-INFLATION CULTURE

THIS WOULD BE A FIRST STEP IN CREATING AN ANTI-INFLATION CULTURE.

INFLATION, PROBABLY MORE THAN ANY OTHER OF OUR ECONOMIC PROBLEMS, IS DRIVEN AS MUCH BY PSYCHOLOGICAL FACTORS AS REAL FACTORS. WE NEED TO REPLACE THE INFLATIONARY EXPECTATIONS NOW ENTRENCHED IN OUR SYSTEM WITH AN ANTI-INFLATION CULTURE.

ONE OF THE FACTORS WHICH HAS HELPED PROMOTE THE BELIEF THAT WE CAN LIVE WITH INFLATION IS THE GROWING TENDENCY TOWARDS AUTOMATIC

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INDEXATION. THIS IS TRUE OF BUSINESS CONTRACTS AS WELL AS

GOVERNMENT EXPENDITURES AND REVENUES. INDEXATION PROVIDES THE ILLUSION THAT WE ARE BEATING INFLATION - THAT WE CAN KEEP PACE WITH IT IF WE JUST MAKE THE RIGHT ADJUSTMENTS. IT ALSO SIGNALS A BELIEF THAT INFLATION WILL CONTINUE INTO THE FUTURE.

IT WOULD BE BENEFICIAL TO LOOK AT THE IMPORTANT PSYCHOLOGICAL IMPACT AUTOMATIC INDEXATION HAS, AND TO REVIEW ITS IMPACT ON GOVERNMENT REVENUES A N D "EXPENDITURES.

WHILE THIS PROBLEM IS NOT UNIQUE TO AUSTRALIA, THIS COUNTRY FACES SPECIAL PROBLEMS IN DEVELOPING AN ANTI-INFLATION MINDSET.

PERHAPS MOST IMPORTANTLY, THE ACCORD HAS BUILT IN -

INSTITUTIONALISED - INFLATIONARY EXPECTATIONS. AS THE RESERVE BANK GOVERNOR HAS ACKNOWLEDGED, THIS HAS SET A DANGEROUSLY HIGH FLOOR UNDER INFLATION IN AUSTRALIA.

THERE HAS BEEN NO CONSISTENT COMMITMENT BY THE HAWKE GOVERNMENT TO ATTACK INFLATION. AS WELL, AUSTRALIA HAS BEEN FACED WITH THE PROBLEM OF THE GOVERNMENT DIRECTING THE PRIME POLICY INSTRUMENT AVAILABLE TO ATTACK INFLATION AT THE WRONG TARGETS.

THE PROPER ROLE OF MONETARY POLICY

THIS BRINGS ME TO THE PROPER ROLE FOR MONETARY, OR INTEREST RATE, POLICY.

AT LEAST UNTIL THE TREASURER'S SPEECH TO EPAC ON 27 FEBRUARY TO WHICH I REFERRED EARLIER, THE GOVERNMENT HAS CONSISTENTLY ARGUED THAT HIGH INTEREST RATES ARE ESSENTIAL TO ATTACK OUR CURRENT ACCOUNT AND DEBT PROBLEMS.

THIS IS A MISTAKE. MONETARY POLICY SHOULD NOT BE DIRECTED

PRIMARILY AT THESE PROBLEMS. RATHER, IT IS, AND SHOULD BE SEEN TO BE, THE PRIME WEAPON THE GOVERNMENT HAS AGAINST INFLATION.

IT WOULD BE HARD TO FIND AN ECONOMIST TODAY WHO DID NOT

ACKNOWLEDGE THAT THE THING MONETARY POLICY DOES BEST IS CONTROL INFLATION - AND THAT IT IS QUITE AN IMPERFECT WEAPON FOR OTHER PURPOSES.

THE CONTINUED EXCESSIVE RELIANCE ON MONETARY POLICY HAS BEEN SO DAMAGING FOR AUSTRALIA BECAUSE IT HAS BEEN DIRECTED AT

ESSENTIALLY THE WRONG PRIME TARGET - THE CURRENT ACCOUNT AND DEBT.

ON RETURN TO OFFICE, THE COALITION WILL BE COMMITTED TO DIRECTING MONETARY POLICY AT ATTACKING INFLATION - AND WE WILL MAKE THAT COMMITMENT CLEAR TO ALL CONCERNED, OVER THE MEDIUM AND LONGER

TERM.

I CANNOT PUT THE REASONS FOR THIS COMMITMENT ANY BETTER THAN THE GOVERNOR OF THE RESERVE BANK IN NEW ZEALAND WHEN HE SAID:

"THE OBJECTIVE OF ELIMINATING INFLATION CAN BE

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ACCOMPLISHED PROVIDED THE AUTHORITIES REMAIN COMMITTED TO THAT OBJECTIVE. ... IF THOSE WHO SET PRICES AND

WAGES COULD BE CONVINCED THAT INFLATION WOULD BE

ELIMINATED OVER THE NEXT TWO YEARS, THE SOCIAL COSTS OF ACHIEVING THIS WOULD IN TURN BE ELIMINATED. THIS EMPHASISES THE NEED FOR THE RESERVE BANK (AND INDEED

POLITICIANS) TO SAY NOTHING WHICH MIGHT REDUCE THE CREDIBILITY OF THAT OBJECTIVE. EVERY TIME CREDIBILITY IS REDUCED, THE SOCIAL COSTS OF REDUCING INFLATION ARE INCREASED."

THERE HAS NEVER BEEN ANY COMMITMENT TO THE REDUCTION OF INFLATION UNDER THIS GOVERNMENT - THE NEXT CUT IN INTEREST RATES IS ALWAYS AROUND THE CORNER, EVEN IF NO SUSTAINABLE HEADWAY HAS BEEN MADE ON INFLATION.

INFLATION IS A PRIME CONCERN WHICH MUST BE CONSISTENTLY

ADDRESSED. THE COALITION RECOGNISES THAT THERE IS ONLY ONE WAY TO BRING DOWN INFLATION ON A SUSTAINABLE BASIS. THAT IS TO

CONVINCE SAVERS THAT THE GOVERNMENT AND THE RESERVE BANK ARE IRREVOCABLY COMMITTED TO LONG-TERM PRICE STABILITY.

THIS IS ESPECIALLY DIFFICULT WHEN THERE IS A HISTORY OF

GOVERNMENT'S CAVING IN WHEN THE SHORT-TERM SOCIAL AND POLITICAL COSTS OF ACHIEVING IT BEGIN TO MOUNT.

THIS IS ONE MAJOR REASON WHY THE COALITION WILL ENHANCE THE LEVEL OF INDEPENDENCE OF THE RESERVE BANK, WHILE AT THE SAME TIME FULLY RECOGNISING THE NEED FOR THE BANK AND THE GOVERNMENT TO WORK IN CLOSE CO-OPERATION. IT MAY ALSO BE DESIRABLE TO RESHAPE THE

BANK'S CHARTER TO GIVE MORE EMPHASIS TO THE ANTI-INFLATION OBJECTIVE.

LESSONS FROM HISTORY

RECENT HISTORY SHOWS THAT PRESSURES CAN BUILD TO EASE MONETARY POLICY AHEAD OF REAL GAINS ON INFLATION. FOR EXAMPLE, IN MAY 1989, MR BOB JOHNSON, THE THEN OUTGOING RESERVE BANK GOVERNOR, SAID THAT THE EXCESSIVE EASING IN POLICY IN 1987-88 MEANT THAT

INTEREST RATES WOULD REMAIN HIGH FOR QUITE A WHILE. HE SAID:

"IT WAS BELIEVED THEN [IE AROUND MAY 88] THAT THE

COURSE OF MONETARY POLICY COULD BE A GOOD DEAL EASIER. NOW ... THE MAJOR MISCALCULATION THAT WE MADE,

INCLUDING MYSELF, WAS TO UNDERESTIMATE THE POWER IN THE ECONOMY, THE PRESSURE OF GROWTH, THE EXUBERANT SPIRIT AND THE ANIMAL SPIRITS THAT WERE AT LARGE AND WE HAVE GONE ON UNDERESTIMATING FOR A VERY LONG TIME

HOW STRONG THE ECONOMY IS - SO THAT WE WERE NOT ABLE

TO GET A SWITCH OF POLICIES, PRESSURE FROM MONETARY POLICY ON TO FISCAL POLICY, AND WE FIND NOW THAT WE

NEED THEM BOTH"

WITH EVERY PREMATURE EASING OF MONETARY POLICY THE TASK IS THAT MUCH MORE PAINFUL NEXT TIME AROUND. THE INFLATIONARY

EXPECTATIONS BECOME FURTHER ENTRENCHED AND THE PROBLEM BECOMES

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THAT MUCH MORE INTRACTABLE.

WE NEED DECISIVE ACTION TO TURN OUR DISASTROUS INFLATIONARY SITUATION AROUND. THE COALITION IS COMMITTED TO THAT.

MONETARY POLICY - THE MYTHS

MYTH 1. MONETARY POLICY MOST HAVE ADVERSE CONSEQUENCES FOR THE TRADING SECTOR

HIGH INTEREST RATES HAVE AN IMPORTANT IMPACT ON THE EXCHANGE RATE. THEY MAKE THE EXCHANGE RATE HIGHER THAN IT WOULD OTHERWISE BE. THIS TENDS TO MAKE EXPORTS DEARER AND IMPORTS CHEAPER IN THE SHORT TERM. THE ISSUE IS VERY COMPLEX, BUT A NUMBER OF POINTS CAN BE MADE.

IT IS NOW GENERALLY ACKNOWLEDGED THAT MONETARY POLICY HAS A MAJOR IMPACT ON INFLATION, BUT HAS ONLY LIMITED EFFECT ON THE "REAL" ECONOMY (OUTPUT AND EMPLOYMENT) EXCEPT IN THE SHORT TERM.

IT IS INEVITABLE THAT MONETARY POLICY, ANY MONETARY POLICY, WILL HAVE AN EFFECT ON THE EXCHANGE RATE.

THIS BRINGS US TO THE CRITICAL ISSUE OF WHETHER A FALL IN THE NOMINAL EXCHANGE RATE CAN ACTUALLY HELP OUR EXPORTERS AND IMPORT COMPETING INDUSTRIES IN THE LONGER TERM. THE VALUE OF A CURRENCY DEPRECIATION IS SOON ERODED IF INFLATION CONTINUES TO RUN AHEAD OF OUR MAJOR TRADING PARTNERS, BECAUSE THIS UNDERMINES OUR

COMPETITIVENESS. THERE ARE MANY REASONS WHY A NOMINAL

DEPRECIATION CREATES A NUMBER OF PRESSURES TO BUILD INFLATION INTO THE SYSTEM.

IT IS INTERESTING TO NOTE THAT TWO OF THE WORLD'S MOST SUCCESSFUL EXPORT COUNTRIES OVER THE LAST FEW DECADES HAVE BEEN JAPAN AND WEST GERMANY, BOTH OF WHOSE CURRENCIES HAVE BEEN STEADILY

APPRECIATING OVER TIME.

MYTH 2. MONETARY POLICY CREATES RECESSIONS, NOT GAINS ON INFLATION

THERE ARE MANY UNDERSTANDABLE CONCERNS IN THE COMMUNITY ABOUT THE USE OF MONETARY POLICY. HIGH INTEREST RATES UNDER THIS

GOVERNMENT HAVE PUT THOUSANDS OF COMPANIES AND WORKERS OUT OF BUSINESS, HAVE LEAD TO A HUGE INCREASE IN BANKRUPTCIES, AND HAVE HAD A TERRIBLE EFFECT ON HOUSEHOLDS, PARTICULARLY THOSE OF YOUNG COUPLES WITH CHILDREN.

THE DAMAGE HAS BEEN SO PERVASIVE NOT BECAUSE MONETARY POLICY HAS BEEN USED, BUT RATHER BECAUSE IT HAS BEEN MISUSED. THE LACK OF CONTINUED COMMITMENT BY THE GOVERNMENT ON INFLATION HAS REQUIRED INTEREST RATES TO STAY HIGHER FOR LONGER THAN WOULD OTHERWISE HAVE BEEN THE CASE.

MONETARY POLICY CAN PRODUCE GAIN, AND NOT JUST PAIN, IF USED CORRECTLY - IF THE RESOLVE AND THE COMMITMENT ARE THERE TO

TOTALLY UNDERMINE INFLATIONARY EXPECTATIONS.

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ONE POINT WHICH ALSO SHOULD BE MADE HERE IS THAT ALTHOUGH THE TREASURER HAS BLAMED THE BANKS FOR THE PROTRACTED RECESSION BECAUSE, HE SAYS, THEY ARE NOT PASSING ON THE FALL IN INTEREST RATES TO CONSUMERS, IT IS THE TREASURER HIMSELF WHO MUST BE TO

BLAME FOR THIS IF IT IS THE CASE.

IT IS THE TREASURER WHO DETERMINED THE RULES FOR THE DEREGULATION OF THE FINANCIAL SECTOR. IF THE COMPETITIVE PRESSURES ARE NOT SUFFICIENT TO PRESSURE THE BANKS TO "CUT INTEREST RATES AS THE TREASURER FEELS THEY SHOULD, THAT IS ENTIRELY A PRODUCT OF THE PARAMETERS THE TREASURER HIMSELF SET ON THE COMPETITORS ALLOWED

INTO THE AUSTRALIAN FINANCIAL SCENE.

MYTH 3. MONETARY POLICY SHOULD BE SUBSTANTIALLY EASED NOW

IT IS NOT POSSIBLE TO SUBSTANTIALLY EASE MONETARY POLICY

RESPONSIBLY WITHOUT TAKING OTHER ACCOMPANYING ACTION. THERE WOULD BE LITTLE TO GAIN AND MUCH TO LOSE FROM A CONTINUED EASING OF MONETARY POLICY WITHOUT OTHER OFFSETTING POLICY ACTIONS. ANY CUTS IN INTEREST RATES WOULD NOT BE SUSTAINED, AND THERE WOULD

BE NO IMPROVEMENT IN UNEMPLOYMENT OR GROWTH. THE ONLY LASTING IMPACT OF LOOSER MONETARY POLICY WOULD BE TO LIFT THE INFLATION RATE SIGNIFICANTLY ABOVE ITS CURRENT TRAJECTORY.

WHAT IS NEEDED IS A CO-ORDINATED POLICY APPROACH. SUSTAINED FALLS IN INTEREST RATES CAN ONLY BE DELIVERED IF MONETARY POLICY IS BACKED UP BY TIGHTER WAGES AND FISCAL POLICIES, AND OTHER POLICIES DIRECTED AT REDUCING COSTS, IMPROVING COMPETITION, AND

RAISING PRODUCTIVITY.

THE COALITION HAS DEVELOPED SUCH A CO-ORDINATED APPROACH. THIS MEANS THAT RESULTS ON INFLATION WILL NOT REQUIRE THE MASSIVE REAL INTEREST RATES EXPERIENCED IN RECENT YEARS. LET ME BRIEFLY OUTLINE OUR APPROACH IN THESE OTHER POLICY AREAS WHICH WILL

SUPPORT MONETARY POLICY IN PROVIDING A FULL BLOODED SUSTAINABLE ATTACK ON INFLATION.

FISCAL POLICY

DESPITE THE RECESSION, FISCAL POLICY SHOULD REMAIN TIGHT. AS WELL AS ASSISTING IN THE BATTLE AGAINST INFLATIONARY PRESSURES, A TIGHT FISCAL POLICY WILL HAVE OTHER BENEFITS WHICH I WILL ALSO OUTLINE BRIEFLY.

ANY FISCAL LAXITY WILL PUT FURTHER PRESSURE ON INTEREST RATES. REGRETTABLY, THE GOVERNMENT HAS PRESIDED OVER A MAJOR LOOSENING OF FISCAL POLICY IN RECENT MONTHS. WITH THE MASSIVE

DETERIORATION IN COMMONWEALTH AND STATE BUDGETS ALREADY EVIDENT FOR THIS FINANCIAL YEAR, THE PUBLIC SECTOR AS A WHOLE WILL BECOME A MAJOR BORROWER THIS YEAR.

IT IS DIFFICULT TO BE PRECISE ABOUT THE MAGNITUDE INVOLVED

BECAUSE OF THE PAUCITY OF DATA AVAILABLE. IN MY VIEW, HOWEVER, IT WILL NOT BE SURPRISING IF THE PUBLIC SECTOR BORROWING

REQUIREMENT RISES TO SOMETHING IN THE ORDER OF 3 PER CENT OF GDP FOR 1990-91, RATHER THAN THE BALANCE FORECAST AT BUDGET TIME.

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WHILE THE TREASURER HAS TRIED TO CLOUD THE ISSUE BY TALKING ABOUT "STRUCTURAL" AND "CYCLICAL" SURPLUSES/DEFICITS, THE FACT REMAINS THAT, WHATEVER THE REASON, THE PUBLIC SECTOR WILL BE MAKING CALLS ON FINANCIAL MARKETS THIS YEAR.

UNDER CURRENT POLICY SETTINGS, INTEREST RATES WILL COME UNDER FURTHER PRESSURE AS THE GOVERNMENT GETS ITS HANDS BACK INTO THE COOKIE JAR OF THE NATION'S SAVINGS. BY CONDONING THE MAGNITUDE OF THE FISCAL DETERIORATION, THE GOVERNMENT HAS SIGNALLED IT WILL BE LEAVING MONETARY POLICY TO ONCE AGAIN BEAR AN UNEQUAL SHARE

OF THE BURDEN OF ADJUSTMENT.

THE COALITION WOULD NOT PURSUE THIS FISCALLY IRRESPONSIBLE COURSE. IN GOVERNMENT WE WILL EMPLOY A FISCAL POLICY WHICH WILL SHARE THE BURDEN CURRENTLY BEING CARRIED BY MONETARY POLICY.

IT FOLLOWS FROM THIS THAT WE DO NOT FAVOUR THE GOVERNMENT'S ACTION IN LOOSENING FISCAL POLICY NOW. IT WILL ONLY ADD TO THE DEMAND PRESSURES IN THE ECONOMY. SINCE THE GOVERNMENT HAS BEEN UNABLE OR UNWILLING TO ADDRESS THE STRUCTURAL RIGIDITIES IN THE

ECONOMY, ANY SUCH STIMULUS WILL NOT BE MATCHED BY INCREASED DOMESTIC SUPPLY. THE DEMAND WILL THEREFORE FLOW BACK INTO IMPORTS.

IN SHORT, AUSTRALIA WILL BE BACK ON THE DEMAND-DEBT TREADMILL.

IN ADDITION, THE TREASURER HIMSELF SAID IN THE BUDGET SPEECH LAST YEAR THAT THE FORECAST SURPLUS "MAINTAINS FISCAL POLICY AS THE GOVERNMENT'S PRINCIPAL WEAPON IN THE FIGHT AGAINST THE CURRENT ACCOUNT DEFICIT AND OUR OVERSEAS DEBT". NOW THAT THE TREASURER

HAS ADMITTED THE SURPLUS WILL BE $1.7 BILLION RATHER THAN $8.1 BILLION AS FORECAST, AND SINCE THEN HAS GONE ON TO CONCEDE THE POSSIBILITY OF A BUDGET DEFICIT, WHAT WEAPON IS HE USING TO CURB THE DEBT PROBLEM?

FURTHER, HISTORY SHOWS ONLY TOO WELL THAT "CYCLICAL" SPENDING PROGRAMS INTENDED AS SHORT TERM MEASURES TO HELP IN TIMES OF RECESSION HAVE ALL TOO OFTEN BECOME PART OF THE "STRUCTURAL" BUDGET POSITION OF THE UPSWING. THIS IS BECAUSE OF THE POWERFUL FORCES WHICH REINFORCE THE "UPWARD STICKINESS" IN GOVERNMENT

SPENDING.

SUCH GROWTH OF GOVERNMENT SPENDING WOULD AS WELL BE INCONSISTENT WITH OUR COMMITMENT TO SMALLER GOVERNMENT.

IN OTHER WORDS, THE COALITION IS COMMITTED TO HAVING MEDIUM TO LONG TERM GOALS IN MIND WHEN SETTING FISCAL POLICY.

WAGES POLICY

THE GOVERNMENT HAS RELIED ON THE ACCORD TO HELP CONTAIN AGGREGATE WAGE OUTCOMES. THIS IS INTENDED TO ASSIST IN ATTACKING

INFLATION. HOWEVER, AS I HAVE ALREADY POINTED OUT, THIS HAS THE NEGATIVE EFFECT OF PUTTING A FLOOR UNDER INFLATION. IN ADDITION, THE POTENTIAL BENEFITS OF THE ACCORD ARE GREATLY REDUCED WHEN WAGE OUTCOMES ARE "BOUGHT" WITH UNFUNDED TAX CUTS, AS OCCURRED

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IN THE LATEST DEAL.

BY ABANDONING THE ACCORD, THE COALITION WILL HAVE FAR MORE SCOPE FOR A FLEXIBLE FISCAL POLICY, BECAUSE GOVERNMENT REVENUES WOULD NO LONGER BE INEXTRICABLY LINKED TO WAGE DEALS. THE LIMITS OF FISCAL RESTRAINT WOULD THEREFORE BE MUCH WIDER FOR THE COALITION THAN THE GOVERNMENT.

WAGES POLICIES HAVE MICRO AND MACRO IMPACTS. THE CENTRALISED SYSTEM FAVOURED BY THE GOVERNMENT ALWAYS SUBJUGATES TO

MACROECONOMIC GOALS, THE EFFICIENCY AND MICROECONOMIC BENEFITS ARISING FROM TYING WAGES TO PRODUCTIVITY.

IN STARK CONTRAST, THE COALITION'S WAGES POLICY, WHICH IS ENTERPRISE BASED, AND ESSENTIALLY TIES WAGES GROWTH TO

PRODUCTIVITY, WILL PROVIDE THE MICROECONOMIC BENEFITS AND THE MACROECONOMIC OUTCOME THE ECONOMY NEEDS.

IN TERMS OF MICROECONOMIC BENEFITS, THE MAJOR ADVANTAGE OF SUCH A LINK IS THAT PRODUCTIVITY WOULD BE ENHANCED DUE TO THE

INCENTIVES IN PROVIDING REWARDS FOR EFFORT, RATHER THAN HAVING WAGE INCREASES DETERMINED BY FACTORS UNRELATED TO THE SITUATION FACING BOTH THE EMPLOYER AND THE EMPLOYEE IN THE PARTICULAR WORKPLACE - AND BY OUTSIDERS WHO HAVE LITTLE OR NO KNOWLEDGE OF

THAT SITUATION.

THE MACROECONOMIC BENEFITS RELATE TO DEBT AND INFLATION. IF WAGES RISE IN LINE WITH PRODUCTIVITY DEBT AND INFLATIONARY PRESSURES ARE MINIMISED.

OTHER POLICIES TO ATTACK INFLATION

THERE ARE OTHER POLICIES WHICH THE COALITION HAS OUTLINED WHICH WILL ALSO HELP IN OUR FIGHT AGAINST INFLATION.

THE COALITION WILL IMPLEMENT A PRO-GROWTH STRATEGY TO GET

AUSTRALIA WORKING AGAIN. AS WELL AS THE ENTERPRISE FOCUS ON INDUSTRIAL RELATIONS, WE WILL ALLOW FREEDOM OF CHOICE IN UNION MEMBERSHIP, ABOLISH CABOTAGE, ABOLISH SECURITY OF TENURE ON THE WATERFRONT AND ACCEPT THAT AUSTRALIA IS PART OF THE WORLD

ECONOMY. IT CAN NO LONGER AFFORD OUTDATED ARRANGEMENTS AND INSTITUTIONS WHICH BENEFIT A FEW AND WHICH MAKE THIS COUNTRY AN UNATTRACTIVE PLACE TO DO BUSINESS.

THE INDUSTRY COMMISSION ESTIMATES THAT NATIONAL INCOME WOULD INCREASE BY $22 BILLION A YEAR IF TRANSPORT AND PUBLIC SECTOR INEFFICIENCIES WERE TACKLED ALONG WITH THE REMOVAL OF INDUSTRY PROTECTION.

THE BUSINESS COUNCIL ADDS ANOTHER $21 BILLION IF ENTERPRISE PRODUCTIVITY IMPROVED TO EQUAL INTERNATIONAL BEST PRACTICE.

TO TAKE THE EXAMPLE OF THE WATERFRONT, THE COALITION WILL:

. ABOLISH THE SECURITY OF TENURE;

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. ESTABLISH EMPLOYERS' RIGHTS TO HIRE AND FIRE AND TO DETERMINE EMPLOYMENT LEVELS?

. ALLOW THE USE OF FLEXIBLE WORKING ARRANGEMENTS;

. TERMINATE THE WATERSIDE WORKERS' FEDERATION

MONOPOLY OF WATERSIDE LABOUR AND THE INTRODUCTION OF VOLUNTARY UNIONISM;

. MOVE TO PRIVATISE PORT AUTHORITIES.

ASIDE FROM THE PORT AUTHORITIES, THE COALITION HAS A LIST OF ENTERPRISES WHICH IT WILL PRIVATISE ON COMING TO OFFICE. THIS WILL RELIEVE THE PRESSURE ON INFLATION BECAUSE THE GREATER EFFICIENCY OF THESE ENTERPRISES WILL FLOW THROUGH TO THE CHARGES

THEY IMPOSE FOR THE SERVICES PROVIDED.

IN ADDITION, THE COALITION HAS SPELT OUT CLEARLY ITS COMMITMENTS ON SPECIFIED REDUCTIONS IN PROTECTION THROUGH TO THE YEAR 2000. THIS WILL REDUCE SUBSTANTIALLY THE PRICE OF CERTAIN IMPORTED COMMODITIES, WITH RESULTANT BENEFICIAL SPIN-OFFS FOR INFLATION.

THE COALITION'S ANTI-INFLATION STRATEGY

LET ME CONCLUDE BY SUMMING UP THE COALITION'S ANTI-INFLATION STRATEGY:

A COALITION GOVERNMENT WILL CLEARLY ARTICULATE THE COSTS OF INFLATION AND QUANTIFY THESE WHERE POSSIBLE;

WE WILL GIVE AN UNEQUIVOCAL COMMITMENT TO TACKLE INFLATION FROM DAY ONE;

FISCAL AND MONETARY POLICY WILL BE CO-ORDINATED AND COMPLEMENTARY TO AVOID IMBALANCE AND

EXCESSIVE RELIANCE ON ANY ONE ARM OF POLICY;

OUR INDUSTRIAL RELATIONS POLICIES, BASED ON ENTERPRISE BARGAINING AND LINKING WAGES GROWTH TO PRODUCTIVITY INCREASES, WOULD REMOVE THE EXISTING FLOOR UNDER INFLATION AND ENABLE WAGES POLICY TO BE CO-ORDINATED WITH MONETARY AND FISCAL POLICY;

THE RESERVE BANK WILL BE GIVEN GREATER

INDEPENDENCE;

TARIFFS WILL BE REDUCED, RESULTING IN BENEFICIAL PRICE FALLS AND INCREASED COMPETITION;

MANY GOVERNMENT INSTRUMENTALITIES WILL BE

PRIVATISED AND EXPOSED TO MORE COMPETITION. WE HAVE PUBLISHED A LIST OF 14 ENTERPRISES TO BE

PRIVATISED ON OUR RETURN TO GOVERNMENT. THE

EFFICIENCY GAINS WILL, INTER ALIA, REDUCE THE COSTS AND CHARGES OF THESE ENTERPRISES; AND

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. OUR PROGRAM OF ACCELERATED MICROECONOMIC REFORMS WILL ENHANCE THE EFFICIENT USE OF OUR

INFRASTRUCTURE.

AUSTRALIA SHOULD NEVER HAVE HAD THE RECESSION WE ARE NOW

EXPERIENCING. IT IS DUE TO POLICY MISCALCULATIONS AND

MISMANAGEMENT. BUT GIVEN THAT WE DO HAVE IT, WE SHOULD USE IT TO PROVIDE A WINDOW OF OPPORTUNITY TO FORCE CHANGE, TO TURN UP THE HEAT ON THE GOVERNMENT T O REFORM ITS POLICIES.

WE IN THE COALITION ARE LOOKING AT REAL SOLUTIONS TO OUR ECONOMIC PROBLEMS . AUSTRALIA CAN NO LONGER AFFORD TO HAVE GOVERNMENT JUST TINKERING AT THE EDGES OF POLICIES WHICH HAVE ALREADY BEEN

DISASTROUS FOR OUR ECONOMIC HEALTH.

I HOPE THAT I HAVE LEFT YOU WITH A FEELING OF CONFIDENCE THAT THE ALTERNATIVE FEDERAL GOVERNMENT - THE NEXT GOVERNMENT - IS NOT JUST TINKERING. WE ARE FAIR DINKUM ABOUT FUNDAMENTAL CHANGE. AND WE ARE DEEPLY COMMITTED TO IT. WE WILL TURN THE TIDE ON OUR

PROBLEMS AND KEEP THEM AT BAY THROUGH CONSISTENT AND RATIONAL POLICY MEASURES.

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