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Address to the Australian Stock Exchange

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Address to the Australian Stock Exchange by the Treasurer of the Commonwealth of Australia The Hon John Kerin MP Sydney, 22 August 1991

Thank you Mr Cox,it is a pleasure to be with you this morning.

In my budget speech I said that

"There was an unprecedented and unsustainable boom in asset prices in the second half of the 1980s. Its subseguent unwinding pulled the rug out from many speculative investments and business ventures."

In other contexts, I have emphasised the need for a need to get off the "roller coaster" by adopting a more medium term approach to economic management.

The financial sector of the economy has, of course, been directly involved in the turbulence of the 1980s.

At times it seems some people think that the finance sector was the sole contributor to these excesses.

Moreover, it is sometimes implied that financial intermediaries are not involved in genuinely productive activity - that they are not part of the real economy.

I do not subscribe to those views.

It is important to acknowledge that, along with other sectors of the financial system, the stock market plays a crucial role in the capital formation process.

The existence of an efficient stock market is essential because of its central role in the raising of new equity capital by companies and in facilitating the secondary trading of shares.

Again, in the context of micro economic reform, we generally think in terms of railways, ports and tariffs on manufactured goods.

I recognise, however, that during the 1980s the stock market has undergone substantial reform and adjustment. Although it experienced a long bull run during this period the stock market has also seen some less happy times since 1987 which have been reflected in some closures in the broking industry and

some unemployment.

The substantial reforms undertaken during the 1980s will nevertheless stand the industry in good stead over the longer term.

. There was a substantial deregulation of many trading practices beginning in 1984.

. The six state stock exchanges were brought together to form the australian stock exchange in 1987.

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. There have been substantial innovations in relation to securities trading and the settlement of transactions with the introduction of screen trading in 1987 and the recent work which has been undertaken with a view to reforming and speeding up clearance and settlement

arrangements. These latter reforms are of particular importance since they are designed to ensure that the exchange will meet international standards for clearance and settlement and thereby be in a position to compete for business with stock exchanges in other countries.

The Commonwealth government has made a positive contribution to these worthwhile reforms in a number of ways. For example, within my own portfolio, there have been a number of changes in the area of taxation.

. The introduction of dividend imputation and changes to the arrangements affecting superannuation were significant measures which will contribute to the development of securities markets, particularly the share market.

. Recently, the relevant legislation was amended to remove scrip lending from the ambit of capital gains taxation with a view to facilitating the new arrangements for the clearance and settlement of transactions.

I make those comments by way of introduction in case, as members of the financial community, you feel unloved at the present time. As a treasurer in tough times i am becoming more familiar with that feeling myself. While I may not love you either, I trust it is some comfort for you to know that I recognise the important contribution that an efficient financial sector can make to the economic performance of the nation.

Let me turn now to the budget and the economic outlook. I will also make a few comments on monetary policy.

First, the economic outlook.

The outlook for the domestic economy in 1991-92 is for a slow recovery - which will encompass moderately paced growth through the year.

The slow recovery in prospect contrasts with the more traditional pattern of a rapid bounce-back usually seen in Australia and many other countries. The current forecasts reflect:

. farm incomes remaining low;

. a relatively subdued recovery in world activity (which will see our terms of trade remaining weak);

. further declines in the non-dwelling construction sector (where excess supply still exists); and

. policy settings remaining relatively firm.

Overall GDP is expected to increase by around 1^/2 per cent in 1991-92 over 1990-91. These forecasts imply gdp growth of around 3^/4 per over the course of the year.

The main areas contributing to growth in 1991-92 include:

. non-farm stock building, reflecting a slower rate of stock rundown by business;



. a brisk recovery in dwelling investment - in the face of falling interest rates, increased affordability, and pent-up demand for dwellings; although this is not forecast to be as fast as in previous cycles;

. a moderate recovery in private consumption. Growth in private consumption is expected to pick up as the year proceeds in the face of an improving labour market and increases in disposable income; and

. Net exports, for the third year in a row, are expected to make a positive contribution to growth.

The modest pace of recovery will contribute to further consolidation of the recent gains in both inflation and the current account. It will, however, mean that employment growth will be limited.

Employment should begin to recover in the second half of 1991-92 as a lagged response to the pick-up in activity. however, the falls already experienced in July mean that employment growth of around 1^/4 per cent during the second half of the year will do little more than return employment levels by mid-1992

to those recorded at the end of 1990-91.

With the participation rate expected to remain around the levels of recent months, unemployment is expected to peak at around 10^/4 per cent towards the end of 1991 before edging down over the remainder of the year.

With average earnings expected to increase more slowly than last year - partly because of wage restraint in 1991 - the gains made on lowering CPI inflation in 1990-91 are expected to be consolidated in 1991-92. Overall, the CPI is expected to increase by around 3 per cent in 1991-92.

Budget Strategy

Let me now summarise the key elements of the strategy behind the 1991-92 budget. It has an important role to play in the Government's overall economic strategy.

Consistent with its medium-term objectives, the Government has not attempted to offset the effect of the cyclical downturn on the budget:

. as a result the budget will move into deficit in 1991-92;

. as the economy recovers, the overall budgetary position should move back towards balance because the structural integrity of the budget has been maintained. Overall, savings since the 1990-91 budget more than fully offset new expenditure.

Through its decisions on outlays and revenue the government has built on efforts to increase the efficiency, effectiveness and equity of the public sector and service provision.

The major outlays initiatives in this year's budget are directed towards:

. improving social justice, through increased assistance to low and middle income families;

. improving national infrastructure, through the building better cities program and improving the efficiency of the rail freight system;

. improving the quality of the environment;


. improving the level of skills in the workplace by increasing funding for higher education and labour market training programs; and

. these initiatives have been funded through reforms to improve the efficiency and effectiveness of the health system, better targeting of assistance in the social security system, and by reducing proposed Defence expenditure.

Monetary Policy

Finally let me reiterate my recent comments on the Government's approach to monetary policy.

With monetary policy probably affecting the economy with lags of a year or more, adjustment to policy needs to be assessed in a prospective medium-term framework - that is, based on the outlook for inflation and the level of activity in the next year or so, rather than reacting mechanically to the

latest piece of economic news.

With the recovery now in prospect, it is vital that we proceed with caution in adjusting policy so as to avoid a resurgence of demand pressures that could rekindle inflation. We don't want to loosen policy now and have to slam on the brakes again in a year's time.

Monetary policy has already been substantially relaxed. Over the past year-and-a-half, bank lending rates have fallen substantially. In particular, housing rates are now 13 per cent or less which is below the previous regulated ceiling.

With the lag, much of the impact of the past easings remains to come through the pipeline. Further easing now would not affect the economy until 1992, when the recovery should be well under way - a case of too much, too late. These points serve to emphasise the need for caution at this stage.

We will continue to set monetary policy in a transparent way and within a forward-looking, medium-term framework. This means focussing on reduced inflation and inflation expectations while remaining very much alive to the implications of policy settings for demand, economic activity and employment.

In combination with a fiscally responsible budget and a medium-term approach to monetary policy I am confident that we will secure a sustainable low inflation recovery in 1991-92.