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The 1991/92 budget

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THE 1991/92 BUDGET

Thank you for this opportunity to address you this afternoon.

This is, of course, the first time I have addressed the National Press Club as Treasurer. It is a pleasure to do so. The main purpose of this traditional event is to allow for some elaboration on the Budget and for some questioning.

I would therefore like to say a few things about some aspects of the Budget which I did not have time to discuss in detail yesterday. And since several of you have shown such encouraging interest in the precise economic terms which I have been using lately, I have decided to talk about the short-term, medium-term, and longer-term dimensions to current economic policy.

But before doing so, I want to say a word about the process of putting a Budget together.

This year has been the first time that I have been so closely tied up in the entire procedure of putting a Budget together. For several weeks, day after day, a small group of us sat down with the Prime Minister on the Expenditure Review Committee. From my point of view, the team worked very well.

The point that I am making is that it is a mistake to think of the Budget as a document which just I or Treasury is largely responsible for. My fellow Ministers — people like Ralph Willis and Brian Howe — participated just as much in the process as I did.

I know it grieves some of you, but I believe in responsible Cabinet Government where decisions are not made as a result of deals or based only on perceptions, but which are made on the basis of detailed policy analysis. We don't always rely on the consensus of newspaper editorials or talkback shows,

although certainly anecdotal evidence needs to be examined as closely as statistics.


Turning now to the current economic climate, I'm naturally well aware of the fact that consumer and business confidence is fragile at present.

Since becoming Treasurer, I have taken every opportunity to meet as many people as I can to hear what they have to say about the current state of the economy. Needless to say, many people are worried. I know that. Businessmen, especially, are worried about sluggish sales. They are waiting

for clear signs of an upturn in demand before they undertake new investments.

I notice, too, that several statements have been issued by leading businessmen recently. A week or so ago, a group of Australia's most well-known businessmen put out an Action Plan which detailed a number of specific steps that they believed need to be taken quite soon. And just several days ago when the Confederation of Australian Industry issued its most recent survey of

confidence, the CAI made a point of emphasising the worries that the survey threw up.

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The reasons for these concerns are clear. It would be surprising to find much optimism around when the economy is passing through a recession. But against this, we need to remember several things.

First signs

First, the best information to hand is sending early signals that the Australian economy is on the turn. Some people will find this hard to believe, but as the British weekly The Economist noted the week before last:

Economists consistently underestimate the first flush of recovery; so do businessmen, since recessions necessarily make them feel gloomy.

This comment was made with reference to the American economy, but the same is true for Australia as well right now.

After the 1982-83 recession for example, here in Australia the strength of the recovery at that time was widely underestimated. Indeed, in retrospect we now know that we were fully six months into the recovery before the improvement really began to show up. The danger in such a situation is clear: there is an obvious risk that government economic policy will be pro-cyclical, thus

stimulating an economy at just the wrong time.

Judging the turn

Secondly, we need to remember that when an economy is at or near the turn, it becomes particularly difficult to judge precisely where the economy stands. There are two reasons for this — one results from the effects of economic lags; the other results from the difficulty of getting a sensible readout from the masses of statistics that are always available.

As far as lags are concerned, there are three well-known lags in the operation of economic policy. These are:

. the recognition lag

. the decision-making lag, and

. the policy-impact lag.

The recognition lag is the time it takes for a change in economic conditions to become apparent. The decision-making lag is the time it takes for policy-makers to agree on how to respond. And the policy-impact lag is the time it takes for a change in policy to have an impact on the real economy.

If each of these lags is three months — and in my experience they are often considerably longer — then the total lag between a change in economic conditions and the impact of a policy response will be nine months. But in the real world, where all economists have two hands ("on the one hand ...and on the other hand") and where statisticians can rarely agree on the right

statistics to look at, the total lag is usually well over a year.

The other reason that it is difficult to know exactly where things stand when an economy is on the turn is that inevitably, the wide range of different statistical indicators give widely different signals. At the bottom of the business cycle:

. most leading indicators (but not all) give grounds for some cautious optimism;


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. most lagging indicators (but not all) are still heading downwards;

. and the so-called co-incident indicators which are expected to move in step with the cycle are typically all over the place.

As a result of this, economic forecasting when an economy is swinging at the turn is an especially imprecise art. The demand for crystal balls from economic advisers around the country tends to peak about this time. The British Labour Chancellor of the Exchequer Denis Healey got it right in his

1974 Budget Speech when he told the House of Commons that:

The best forecasts which the Treasury can make of expenditure, imports and gross domestic product ... give a spurious impression of certainty. But their origin lies in the extrapolation from a partially known past, through an unknown present, to an unknowable future according to theories

about the causal relationships between certain economic variables which are hotly disputed by academic economists, and may well in fact change from country to country or from decade to decade.

Now I know that in these days of the 30 second radio grab, political memory is rapidly becoming a lost commodity. But I remember the 1974 Labor Government's Budget well. We lost our nerve when unemployment jumped sharply, and pumped up the economy by a massive 5% points of GDP to almost 28% in just one Budget. It seems extraordinary these days, but the the real growth of outlays at that time was almost 20% in one year. Much good it did us — we paid the price in 1975.

There are two other things from recent economy history I remember quite well too. One is that when Malcolm Fraser lost his nerve in the 1982 recession, he pumped up outlays by 7% in real terms. In light of that experience — and just bear in mind that Dr Hewson was one of the Liberal Party's chief economic

advisers at the time — The Opposition has quite a nerve suggesting that yesterday's Budget was not firm enough. This is a case of 'do as we say, not as we do’. As against Maicom Fraser’s panicky 7% jump in real outlays, the

increase in this year's Budget is just 2.6%!

The other thing I remember is that it is not so long ago that quite a few financial commentators were suggesting that the interest rates of 17% were not high enough. Obviously, the economic forecasting skills of these people — who spoke so authoritatively at the time — were not especially good.

Framing the Budget

All of these things, taken together, mean that it was particularly difficult to decide just how much stimulus to build into the Budget this year.

There are several important implications which flow from the fact that, so far as I can best judge it, the Australian economy is at or near the turn.

. The first is that there is bound to be quite a clamour amongst economic commentators, journalists and lots of others about what the precise stance of fiscal policy should be. I confidently expect expect that during the next few days, quite a few people will tell me that the deficit of $4.7 billion is too large, while a few others will tell me that it is too small.


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Those people who have their eye on leading indicators will say that a deficit of $4.7 billion will stimulate inflation and generate pressure on the current account deficit. Those who are watching lagging indicators, and especially employment, will remain convinced for some time to come -­

perhaps until the end of the year -- that the fiscal settings in this Budget are too firm.

All I can say to both groups at present is that the Government is entirely aware of the arguments both ways, and that we will continue to monitor the economy on a week-by-week basis.

. The second implication flowing from the finely-balanced state of the economy at present is a policy one: it is that a central part of the Government's economic game plan at present is the need to avoid the mistake of failing to see the first flush of recovery.

It would have been easy to pump prime the Australian economy in this Budget, but it would have been the wrong thing to do. The key point to remember here is that the economy is like a supertanker which takes a long

time to turn. Thus the main economic impact of the Budget announced yesterday will not be felt for six months or so.

In adopting the fiscal settings in yesterday's Budget, we were making judgements about the state of the Australian economy at the end of this year and in early 1992.

And measured against that yardstick, the Government believes that the balances struck in this Budget are the right ones.


There is an important medium term strategy in the Budget too. The aim in the medium term is to get off the economic roller coaster that Australia has been riding for too long.

Large swings in our domestic economic fortunes caused by shocks transmitted from overseas have always been part of our history. And because Australia is a small trading nation, we can never hope to insulate ourselves entirely from these fluctuations. Neither should we, because our links with the

international economy bring great benefits as well as costs.

But since the mid 1980s, the fluctuations have been particularly severe.

Recent boom

Throughout the late 1980s, along with many other countries Australia experienced an asset price boom. There was excessive investment in shares, in houses and in office blocks. Our high level of inflation encouraged such speculation. And our high level of interest rates failed to discourage it for

a long time.

But the bubble of the investment frenzy of the 1980s was one that had to burst. The beginning of the end came in October 1987 with the world wide stock market crash. When that happened, for a time it looked as if Australia — along with most other industrialised countries — was on a roller coaster

ride down into a severe recession.

With hindsight it is clear that there was an over-reaction to the crash although few people seem to be aware of what the real costs of the crash and the subsequent over-reaction were.


In the event, the much-predicted world recession never arrived. And no sooner had the threat passed when the international roller coaster abruptly changed direction. In 1988 and 1989, an unexpected jump in international commodity prices carried the Australian economy quickly into a boom.

This boom, clearly, could not last. The economy was growing at an unsustainable rate. We were importing too much and borrowing too much. We therefore needed to take the top off the boom.

We could hardly look to wages policy to do the job. The union movement, acting through the ACTU and the Accord, was already making a more than fair contribution to restraint.

And we could hardly put more weight on fiscal policy. The shift in fiscal policy towards restraint was already quite remarkable.

Thus we turned to monetary policy to quench the boom.

But the lag in monetary policy proved to be very long. For a time, surprisingly, the monetary brakes seemed ineffective. But when we had another collapse in export prices — particularly wool and wheat — and when monetary

policy finally took hold, our economy eventually slowed and went into recession.


The lesson from this experience is that we must try to dampen down the roller coaster swings of the business cycle. Other countries had similar experiences during the 1980s. As a result, both in Australia and elsewhere, there is a growing realisation these days that there are strict limits to what short-term

fine tuning can do.

I believe that it is sensible to be quite realistic about this. Governments are not omniscient. Governments do not have perfect knowledge. It is therefore no more possible for governments than for anyone else to forecast business cycles with 100% accuracy. I am emphasising this point because, as I have said before, to expect too much from government is a sure prescription for cynicism about governments — not that any of this audience is so afflicted, of course.

This is the reason that we have been putting increasing emphasis on the need for a medium-term approach to policy in recent months.

. The first main aim of the medium-term approach is to avoid the roller coast ’boom and bust' style of economic management which has afflicted Australia for so much of our history.

. The second main aim of this approach is to underpin export growth. We expect that output growth during the coming year, and hopefully during the year or so following, will exceed the growth of domestic demand. That way, we will make good progress in keeping the current accound deficit

down to sustainable levels, and will also begin to get on top of our external debt problem.


The third part of the broad economic strategy in this Budget focusses on the longer term. Looking towards steady growth through the mid 1990s, we are pressing on with industry reform to improve the supply side efficiency of the Australian economy.


One of the tricks in economic policy is to balance the demand side of an economy with the supply side potential. In the short-term, the main economic tools that a Government can work with tend to influence the demand side. In the short-term, there is not much that a government can do to change the fundamental conditions on the supply side.

But in the longer term, there is a lot that governments can do to improve the supply side efficiency of an economy. I know that policy changes in this area often sound unexciting, but they are extremely important nevertheless. More than anything else, it is reforms in this area which will determine the quality of life of Australians later in the 1990s and well into the next


On the supply side, we must continue the program of industry and structural reform. We must bear in mind, for example, that we are a small trading nation, and need to develop new export-oriented industries or expand the ones we have. I accept, of course, that Greenpeace and the people who support it

think otherwise.

We can do many things well if we want to. We have world class industries in mining and agriculture, and we are good at some types of manufacturing as well. The fact that manufacturing exports have risen by around 20% during the past year shows this.

And we can be much better in the information and service industries as well. These are important for our future too. There will be an explosion in demand for information and service industry products in Asia during the next few decades. We need to be well-placed to meet this demand.

There are many other supply side reforms that we are proceeding with as well. In the Budget yesterday I mentioned the agreement to establish a National Rail Corporation. Sounds dull I suppose? But just think of the long term impact that this will make towards integrating the economy of our country.

And the changes in the education, training and labour market programs have been dramatic in recent years too. The number of young Australians in higher education rose by almost 40% between 1983 and 1990, while the number of students in Year 12 of high schools rose by 70%. Retention rates are now

close to 75%. Over the long term, changes of this sort make an enormous difference to skill levels in the Australian workforce.


In addressing you today I have chosen to focus on the broad picture of the economic strategy in the Budget. My aim has been to sketch out for you the way in which the strategy is intended to work over different periods of time,

I have said only a little about the social reforms in the Budget. I imagine that you will ask about some of these things in a few minutes.

The social reforms are important, and deserve a separate speech in themselves. The Government is proud of these reforms. The Better Cities program will be in operation until well into the mid 1990s. We are continuing to work to improve the natural and urban environment in Australia, and to take up our international environmental responsibilities as well.

The changes I announced yesterday to Medicare should be seen as the first stage of a major reform of our health care system. Details will be elaborated by my colleague, Brian Howe, over the following months.



It is essential that the health care system be reformed in order to ensure that it can be maintained. We must apply the much over-used word 'sustainable' to Medicare.

As for the co-payments themselves, I want to clarify a number of important points:

- about four and a half million people - those with various health care cards and usually their dependents - will pay no more for their GP visits at all.

- provided their doctor charges no more than the schedule fee, no family, however well-off they are, or however frequently they have to go to the doctor, will pay more than $246 a year in co-payments. This family safety net includes gap payments made as well as the

$3.50 co-payment, whether or not it is charged by the doctor

- 86% of people have less than 10 visits to the doctor a year. This means that, again, however well-off you are, there is about an 86% chance that the change will cost you less than $35.00 a year.

I also want to stress that the changes I announced yesterday mean there is absolutely no change for pensioners. All pensioners who have been receiving free medical care can be confident they will continue to do so.

And the superannuation reforms will make a fundamental difference to the lives of Australians in the years ahead. Superannuation will turn us into a nation of savers. And the superannuation reforms, of course, are tied in with the way that our whole wage system is changing for the better.

That is why, as I see it, the Budget is designed both to respond to the present economic situation, and to lay the base for long term sustainable growth over the longer term.