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Hewson promises to deliver worst inflation since Whitlam



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THE TREASURER

AUSTRALIA,,

PRESS RELEASE JOHN KERIN MP

HEWSON PROMISES TO DELIVER WORST INFLATION SINCE WHITLAM

"Dr Hewson's High Road scenario would deliver the highest inflation rate Australia has seen since the Whitlam years," the Treasurer, Mr Kerin told a dinner in Sydney on Friday night.

"Under the Opposition's scenario, inflation will already be running at 7.7% in 1994-95, before Dr Hewson's claimed 4.7% CPI impact from the GST,'· Mr Kerin said. .

"Let me be totally clear on this, the Opposition’s own document says that inflation will be 12.4% in 1994-95 *

- that is 12.4 per cent before we add in the inflationary effect of the Opposition's health policy - which could be anything up to 1 per cent;

- before the impact of higher inflation of the road user charges they have committed to introduce; and

- before the impact of higher inflation on home mortgage interest rates," Mr Kerin said.

"The Opposition's policy package points to inflation as being the economy's greatest fault. Yet Dr Hewson is promising to deliver inflation in excess of 12%," Mr Kerin said.

"The only tool open to him to keep inflation to 12 per cent will require that monetary policy be tight - in other words, we will have much higher interest rates,” Mr Kerin said.

29 November 1991

Contact : David Cox, (06) 277 7340

COMMONWEALTH PARLIAMENTARY LIBRARY MICAH

TABLE A.3 - WAGES & PRICES; EMPLOYMENT & UNEMPLOYMENT

1 1 1-

1

Date |

(1) NA16

(2)

PGDPT

(3)

PCPIT

(4) WT

(5) NTT

(6)

PARTT

(7) URT

1 1

1 1984-85) 216230 100.0 137.2 4976 6626 60.89 8 50 1 1 1985-861 240595 106.9 148.7 5287 6893 61.73 7 95 1 I 1 1986-87| 265054 114.8 162.6 5655 7036 61.90 8 26 1 1 1 1987-88| 299363 124.0 174.5 6015 7236 61.99 7 <74 1 1 1 1988-891 339765 135.6 187.3 6468 7558 62.71 6 67 1 1 1 1989-901 372153 143.3 202.3 6930 7850 63.61 6 19 1 | 1 1 -1990-911 379147 147.3 213.0 7346 7807 63.67 8.381 111 -SCENARIO A, B, C : 1 1 1991-92 I 389156 149.1 218.6 7597 7707 63.20 10 2 9 I 1 11992-931 417110 155.4 227.8 7953 7819 63.04 10.101 1 -SCENARIOA;1993- 9 4 |1994- 95 I1995- 96 I1996- 9 7 |1997- 98 I1998- 99 I1999- 00 I454927491722531479573373614473656379 701776164.5241.7 α8334806163.339.11174.4256.8 .8867824363.508.71184.3272.6'9426838163.598.70194.6289.19986851863.728.75204.3304.910507866563.898.77213.2 319.2 10980 8832 54 . 11 S . 70 222.0 333.0 11445 9024 64 . 40 8.50SCENARIO B:I 1993-941 454901 I 1994-951 492992 I 1995-961 531636I 1996-971 570819 : 1997-981 609543 i 1998-991 650378 I 1999-001 697188I SCENARIO C:164.5241.78323174.2257.08806183.5271.99308192.2286.09763200.0298.810156207.2310.510519215.1322.610921806263.339.11826363.568.58842763.748.41859663.978.28879164.298.02901864.697.61927465.177.071 1993-941 460675 164.9 242.6— ,-.«83 3 2 1 1994-951 506568 176.7 2 6 1 . 3 8 910 1 1995-961 546440 136.1 276.7 94 92 l 1996-97] 587602 193.2 288.4 9899 1 1997-981 627777 198.5 297.4 10177 ! 1998-991 669425 202.8 304.6 10422 1 1999-001 720431 207.9 312.7 10749807482978454865089189238 960163.37 63.68 63.8364.14 64 . 68 65.3666.159.03 8.37 8.25 7.95 7.27 6.34 5.22(1) NOMINAL GROSS DOMESTIC PRODUCT(2) GROSS DOMESTIC PRODUCT DEFLATOR(3) CONSUMER PRICE INDEX(4) AVERAGE EARNINGS (NAT. AC BASIS)(5) EMPLOYMENT ‘(6) PARTICIPATION RATE(7) UNEMPLOYMENT RATE$ m1984-85=100 1980-81=100 $ p.q. pers. '000 per cent per centSupplementary Paper No 1 23

EMBARGO 9.00PM - 29 NOVEMBER 1991 CHECK AGAINST DELIVERY

ADDRESS TO THE ALP FUNDRAISING DINNER BY THE HON JOHN KERIN, FEDERAL TREASURER HYATT KINGSGATE, KINGSCROSS - 29 NOVEMBER 1991

THE "FIGHTBACK" DOCUMENT IS A COMPLEX SET OF POLICY INITIATIVES WHICH HAS THE OBJECTIVE OF REALIZING THE COALITION'S "VISION"*OF WHAT THE AUSTRALIAN ECONOMY WOULD IDEALLY LOOK LIKE BY THE TURN OF THE CENTURY.

WITH A TOTAL LENGTH OF 655 PAGES, IT IS A WEIGHTY DOCUMENT. ITS DIGESTION NECESSITATES SEVERAL READINGS IN ORDER TO COME TO AN UNDERSTANDING OF THE MAIN MESSAGE.

HOWEVER, THE ESSENTIAL ELEMENTS OF THE PACKAGE ARE BASED ON THE TENET THAT AUSTRALIA'S MAJOR ECONOMIC PROBLEMS ARE FOURFOLD:

BIG GOVERNMENT AND AN EXCESSIVE TAX BURDEN, POOR CURRENT ACCOUNT PERFORMANCE WITH HIGH FOREIGN DEBT. POOR PRODUCTIVITY GROWTH, AND POOR INFLATION PERFORMANCE.

THE PROPOSED SOLUTIONS INCLUDE:

SUBSTANTIAL CUTS IN GOVERNMENT OUTLAYS; REMOVING TAXES FROM BUSINESS, REMOVING DIRECT TAXES FROM EARNED INCOME, AND REPLACING THESE TAXES WITH A TAX ON CONSUMPTION, THE GST.

MY PURPOSE IN TALKING TO YOU THIS EVENING IS TO PUT THIS POLICY PACKAGE UNDER THE MICROSCOPE.

I'LL FIRST SHOW THAT THE OPPOSITION'S ANALYSIS OF THE AUSTRALIAN ECONOMY IS NOT BASED ON FACT.

I'LL THEN TALK ABOUT INFLATION AND THE ROLE OF MONETARY POLICY. IN SO DOING, I'LL DEMONSTRATE THAT THE OVERALL POLICY IS FUNDAMENTALLY FLAWED. IN PARTICULAR, THE COMPENSATION PACKAGE DOES NOT WORK. THIS MEANS THAT AVERAGE AUSTRALIANS WILL END UP WORSE OFF - NOT

BETTER OFF AS THE OPPOSITION ARE ARGUING.

LET US BEGIN WITH THE ASSERTION THAT AUSTRALIA SUFFERS FROM BIG GOVERNMENT, AN EXCESSIVE TAX BURDEN AND AN OVER RELIANCE ON PERSONAL INCOME TAX.

THE FACTS ARE QUITE UNAMBIGUOUS:

. COMMONWEALTH GOVERNMENT BUDGET OUTLAYS AS A PROPORTION OF GDP ARE NOW SIGNIFICANTLY LOWER THAN IN THE EARLY 198OS.

CONTRARY TO POPULAR BELIEF, AUSTRALIA IS NOT A HIGH TAX COUNTRY - WE HAVE THE SECOND LOWEST TAX BURDEN IN THE OECD AREA, EQUAL WITH THE UNITED STATES.

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AUSTRALIA'S RATIO OF PERSONAL TAXES TO GDP IS THE TENTH LOWEST OF THE 24 OECD COUNTRIES - 14 OUT OF 24 HAVE HIGHER TAXES THAN IN AUSTRALIA. .

- THE OTHER PART OF THIS CLAIM IS THAT WE RELY ON PAYROLL TAXES MUCH MORE THAN OTHER COMPARABLE COUNTRIES.*. IT IS THE CASE THAT ONLY 10 OECD COUNTRIES - INCLUDING AUSTRALIA - HAVE PAYROLL TAXES. HOWEVER, THE OTHER 14 COUNTRIES ALL

HAVE SOCIAL SECURITY LEVIES ON EMPLOYERS. AFTER TAKING INTO ACCOUNT THESE TAXES, AUSTRALIA HAS THE THIRD T.OWEST RATIO OF SUCH TAXES TO EITHER GDP, OR TO TOTAL TAXATION, IN THE OECD.

IT IS UNDENIABLY TRUE THAT AUSTRALIA'S PERFORMANCE IN DELIVERING SUSTAINED GROWTH IN PRODUCTIVITY HAS BEEN, AND REMAINS ONE OF THE MOST IMPORTANT OBSTACLES TO HIGH PERFORMANCE.

I HAVE NO ARGUMENT WITH THE OPPOSITION ON THIS FACT.

IN ORDER TO OVERCOME THIS PROBLEM, THE GOVERNMENT HAS STOPPED AT NOTHING TO SECURE THE APPROPRIATE SET OF MACROECONOMIC, MICROECONOMIC, INDUSTRY POLICY AND INDUSTRIAL RELATIONS REFORMS NECESSARY TO BOOST OUR PRODUCTIVITY PERFORMANCE. AND THE GAINS ARE

NOW COMING TO FRUITION.

TO THIS END, THE GOVERNMENT HAS UNDERTAKEN THE MOST FAR-REACHING PROGRAM OF REFORMS IN AUSTRALIA'S ECONOMIC HISTORY, INCLUDING:

TARIFF REDUCTIONS, \

REFORMING WORK PRACTICES ON THE WATERFRONT AND IN TRANS-TASMAN SHIPPING;

. DEREGULATION OF THE FINANCIAL SECTOR ,

. DEREGULATION OF AIRLINES .

. DEREGULATION OF GRAIN HANDLING AND STORAGE

. COMMERCIALISATION OF GOVERNMENT BUSINESS ENTERPRISES

. REFORMS IN TELECOMMUNICATIONS INCLUDING THE INTRODUCTION OF A COMPETITITOR TO TELECOM

. REFORMS TO RAIL FREIGHT ARRANGEMENTS

. AGREEMNT WITH THE STATES FOR FURTHER REFOPRM OF ROAD TRANSPORT

. REFORM OF BUSINESS REGULATIONS INCLUDING ON NATIONAL STANDARDS; AND

. A MANAGED TRANSITION TO GREATER DECENTRALISATION IN WAGE DETERMINATION THROUGH THE INTRODUCTION OF WORKPLACE BARGAINING.

THESE REFORMS HAVE DELIVERED A MORE EFFICIENT AND PRODUCTIVE AUSTRALIA.

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OF COURSE, THE RATIONALE FOR RELENTLESSLY PURSUING PRODUCTIVITY GROWTH IS TO FACILITATE TRADE PERFORMANCE ENHANCEMENT.

THIS GOVERNMENT HAS RECOGNISED THAT THE KEY INGREDIENT TO THE GENERATION OF LONG-TERM SUSTAINABLE GROWTH AND JOBS IN AUSTRALIA IS THE ACHIEVEMENT OF LOW INFLATION AND STRONG NET EXPORT GROWTH.

THE NET RESULT OF OUR ENDEAVOURS IS RECENTLY BEGINNING TO BE * REALISED. LET ME SPELL IT OUT.

THE GOVERNMENT HAS SUCCEEDED IN REDUCING OUR INFLATION RATE TO ITS LOWEST LEVEL FOR 20 YEARS.

AUSTRALIA’S MANUFACTURING EXPORT GROWTH PERFORMANCE HAS BEEN THE BEST IN THE ENTIRE OECD AREA OVER THE PAST 5 YEARS. AND THIS IS NOT BY A SMALL MARGIN - OUR GROWTH RATE OF REAL EXPORTS OF MANUFACTURERS HAS AVERAGED 15% OVER THE LAST 5 YEARS - COMPARED TO AN OECD AVERAGE OF 6%.

THIS GOVERNMENT IS PROUD OF THESE ACHIEVEMENTS WHICH THE AUSTRALIAN BUSINESS COMMUNITY HAS DELIVERED IN RESPONSE TO OUR POLICIES.

THE GOVERNMENT HAS DONE THIS BY RECOGNISING THAT ECONOMIES CONSIST OF PEOPLE.IT HAS DONE IT BY RECOGNISING THE NEED TO REFORM THE SYSTEM OF INDUSTRIAL RELATIONS IN AUSTRALIAN BUSINESS. IT HAS SUCCEEDED IN REDUCING INDUSTRIAL DISPUTATION DURING 1990 TO THE

SECOND LOWEST LEVEL SINCE FIGURES BEGAN IN 1967.

THE INTERESTING THING ABOUT ALL THIS IS THAT ON DR HEWSON'S OWN FIGURES, AS SET OUT IN HIS FIGHTBACK DOCUMENT, AFTER SEVEN YEARS OF HEWSON GOVERNMENT, FOREIGN DEBT WOULD HAVE RISEN TO OVER 50 PER CENT OF GDP AND THE CURRENT ACCOUNT DEFICIT BY THE END OF THE DECADE WOULD BE 3 3/4 PER CENT OF GDP, LARGER THAN IT IS FORECAST FOR THIS YEAR.

LET ME PREFACE MY REMARKS ABOUT WHAT THE OPPOSITION WOULD DO TO FISCAL POLICY, BY NOTING THAT THIS GOVERNMENT IS PROUD OF ITS RESPONSIBLE FISCAL MANAGEMENT. SINCE GAINING POWER, IT HAS TURNED AROUND A SIZEABLE COMMONWEALTH DEFICIT OF 4.1% OF GDP IN FISCAL YEAR 1983/84 TO A SURPLUS OF 2.2% OF GDP IN FISCAL 1989/90.

THE CURRENT FISCAL STANCE REMAINS RESPONSIBLE AND SENSIBLE IN ALLOWING THE AUTOMATIC STABILISERS TO OPERATE WHILE ECONOMIC ACTIVITY PICKS UP.

IN CONTRAST TO THIS, THE LEADERS OF THE OPPOSITION HAVE COMMITTED THEMSELVES TO EXTREMELY TIGHT FISCAL POLICY.

THIS ENTAILS A FURTHER NET $4 BILLIONS CUT IN OUTLAYS.

THIS IS ACCOMPANIED BY A $13 BILLIONS CUT IN INCOME TAXES AND THE IMPOSITION INSTEAD OF THE GST WHICH THEY ESTIMATE WILL COLLECT $27 BILLIONS.

WE NEED TO PUT THE PROPOSED CHANGE FROM THE WHOLESALE SALES TAX TO THE CONSUMPTION TAX INTO PERSPECTIVE. THE WHOLESALE SALES TAX ADDS LESS THAN 2 PER CENT TO THE COST OF BUSINESS INPUTS FOR VIRTUALLY ALL INDUSTRY CATEGORIES.

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MOREOVER, THE COST BURDEN IS SPREAD RELATIVELY EVENLY ACROSS ALL INDUSTRY GROUPS.

SO THE WST IS-IN PRACTICE FAR LESS DISTORTIONARY THAN THE . PROPONENTS OF CONSUMPTION TAXES ASSERT. INDEED, MANY COMMENTATORS SEEM TO FORGET THE DIFFERENCE BETWEEN LEGAL INCIDENCE (WHO PAYS THE TAX OFFICE) AND ECONOMIC INCIDENCE (WHO REALLY PAYS - CONSUMERS, WORKERS OR SHAREHOLDERS). ·

AS FOR EXPORTS, THE EFFECT OF THE WHOLESALE SALES TAX ON THE COST OF INPUTS TO EXPORTS IS ONLY 1.24 PER CENT.

ANOTHER ARGUMENT THE OPPOSITION PUTS FORWARD FOR THE GST RELATES TO INCENTIVE EFFECTS.

THE OPPOSITION ARGUES THAT ITS POLICIES WILL RESTORE THE INCENTIVE FOR AUSTRALIANS TO WORK HARDER AND TO SAVE MORE.

HOW WILL THIS COME ABOUT? THE OPPOSITION ARE SILENT. I CAN ASSURE YOU THAT IF IT WAS THAT EASY, THIS GOVERNMENT, AND ALL OTHER GOVERNMENTS THROUGHOUT THE WORLD WOULD HAVE DISCOVERED IT BY NOW.

IT IS SIMPLY WRONG TO ARGUE THAT A SHIFT FROM DIRECT TO INDIRECT TAXATION WILL RAISE THE INCENTIVE TO WORK.

LET'S TAKE A SIMPLE EXAMPLE OF A REVENUE-NEUTRAL SHIFT FROM A 50% TAX ON INCOME TO A 100% TAX ON CONSUMPTION.

SUPPOSE AN AUSTRALIAN WORKER IS CONSIDERING WHETHER TO WORK HARDER OR LONGER IN ORDER TO EARN AN ADDITIONAL $10 PER WEEK.

HE OR SHE WOULD FIND THAT WITH INCOME TAX, THE EXTRA $10 WAS REDUCED TO $5. WITH A CONSUMPTION TAX, HE OR SHE WOULD TAKE THE FULL $10 HOME - BUT WOULD DISCOVER THAT IT WOULD ONLY BUY $5 WORTH OF GROCERIES, BECAUSE THE OTHER $5 GOES IN THE GST.

PEOPLE ARE NOT THAT EASILY FOOLED. THEY ARE AWARE OF THE REAL SPENDING POWER OF THEIR POST-TAX EARNINGS. IF THEY WERE'NT, THEY WOULD BE CONTINUALLY FOOLED INTO WORKING HARDER BY INFLATION.

YOU MAY BE INTERESTED TO KNOW THAT THIS EXAMPLE COMES FROM NO OTHER THAN DAVID KAY AND MERVYN KING, TWO OF THE FOREMOST TAX SPECIALISTS IN BRITAIN. KAY IS A FORMER DIRECTOR OF THE INSTITUTE OF FISCAL STUDIES AND NOW A LONDON BUSINESS SCHOOL PROFESSOR - KING IS AN EXECUTIVE DIRECTOR OF THE BANK OF ENGLAND.

THEY HAVE ACCOMPANIED THEIR TAX POLICY WITH A "GUARANTEE" THAT THE GST WILL NOT BE RAISED.

LET ME SAY IN PASSING THAT I PERSONALLY DO NOT PUT A GREAT DEAL OF FAITH IN GUARANTEES OF THIS TYPE. I'M SURE YOU WILL AGREE WITH ME, THAT ONCE GOVERNMENTS ARE GIVEN SUCH A POTENT MECHANISM FOR RAISING REVENUE, THE TEMPTATIONS ARE OFTEN TOO GREAT TO RESIST.

INDEED, A CRUCIAL ARGUMENT IF THE UNITED STATES DEBATE ABOUT THE INTRODUCTION OF VAT, IS THE CONCERN AMONGST THE COMMUNITY OF PROVIDING LEGISLATORS WITH SUCH LICENSE TO TAX, AND RAISE RATHER THAN REDUCE THE SIZE OF GOVERNMENT.

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THE INTERNATIONAL EVIDENCE BEARS THIS OUT. THE INTERNATIONAL MONETARY FUND HAS RECORDED HOW GOVERNMENTS THROUGHOUT THE WORLD HAVE SUCCUMBED TO THE TEMPTATIONS TO ALTER THE EXEMPTIONS, THE ZERO RATINGS AND THE OVERALL RATES ON VAT. "

LET US NOT BOTHER TO DWELL ON THE MYRIAD OF CASES IN WHICH FISCALLY WEAK GOVERNMENTS IN PERIPHERAL EUROPE AND LATIN AMERICA HAVE · RESORTED TO SUCH MEASURES. LET US INSTEAD LOOK FOR A MOMENT AT HOW SOME OF THE MAJOR ECONOMIES OF WESTERN EUROPE HAVE ALTERED THEIR VAT RATES.

BRITAIN: WENT FROM 10% TO 17.5% FRANCE: WENT FROM 13.6% TO 18.6% GERMANY: WENT FROM 10% TO 14% SWEDEN: WENT FROM 11% TO 25%

IN THE INTERIM, HOWEVER, WITH LESS DIRECT TAX REVENUES, TIGHT EXPENDITURE PLANS, AND AN 'IMMOVABLE' GST RATE, THE SCOPE AND POWER OF FISCAL POLICY WOULD BE TOTALLY EVAPORATED. ALL MACROECONOMIC MANAGEMENT WOULD THEREFORE BE FORCED ONTO TIGHT MONETARY POLICY AND

HIGH INTEREST RATES.

THIS IS A CRUCIAL ASPECT OF THE COALITION’S PACKAGE WHICH HAS NOT YET BEEN FULLY APPRECIATED.

LET ME NOW DRAW OUT ITS IMPLICATIONS - WHICH BRINGS US TO TALK ABOUT MONETARY POLICY, INFLATION AND INTEREST RATES.

AS WITH MY REMARKS ABOUT FISCAL POLICY, LET ME PREFACE MY REMARKS ABOUT THE OPPOSITION'S MONETARY POLICY, BY FIRST POINTING OUT THAT THIS GOVERNMENT HAS SUCCEEDED IN REDUCING INFLATION TO ITS LOWEST LEVEL IN 20 YEARS, TO BELOW THE OECD AVERAGE, AND MORE IMPORTANTLY,

TO BELOW THE AVERAGE OF OUR MAJOR TRADING PARTNERS.

AND LET ME ASSURE YOU ALL, THAT THIS GOVERNMENT IS FULLY DETERMINED TO LOCK IN THESE CONSIDERABLE GAINS IN ORDER TO SECURE THE NECESSARY CONDITIONS FOR BUSINESS TO PLAN, INVEST AND GROW WITH CONFIDENCE.

BY CONTRAST, UNDER THE OPPOSITION’S SCENARIO, INFLATION WILL BE RUNNING AT 7.7 % IN 1994-95 BEFORE WE ADD ON DR HEWSON'S CLAIMED 4.7 % CPI IMPACT FROM THE GST.

IN OTHER WORDS, UNDER THE OPPOSITION’S SCENARIO, INFLATION WILL BE 12.4 % IN 1994-95

- THAT IS 12.4 PER CENT BEFORE WE ADD IN THE INFLATIONARY EFFECT OF THE OPPOSITION’S HEALTH POLICY - WHICH COULD BE ANYTHING UP TO 1 PER CENT;

- BEFORE THE INFLATIONARY IMPACT OF THE ROAD USER CHARGES THEY HAVE COMMITTED TO INTRODUCE; AND

- BEFORE THE IMPACT OF HIGHER INFLATION ON HOME MORTGAGE INTEREST RATES.

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IN SUMMARY, THE OPPOSITION'S SCENARIO, WHEN IT IS CLARIFIED, DELIVERS THE HIGHEST INFLATION RATE THAT AUSTRALIA HAS SEEN SINCE THE WHITLAM YEARS.

THE ONLY WAY THIS COULD BE RESERVED TO ACHIEVE THE 0-2% COMMITMENT IS BY SEVERE MONETARY CONTRACTION TOGETHER WITH UNPRECEDENTED HIGH REAL INTEREST RATES. *

THIS WOULD CAUSE INVESTMENT TO COLLAPSE, GDP GROWTH TO HALT, UNEMPLOYMENT TO RISE, - AND IT WOULD WORSEN AUSTRALIA'S ABILITY TO COMPETE IN FOREIGN MARKETS IN THE LONG TERM.

IN ADDITION, ANY POSSIBLE GAINS TO FAMILIES DUE TO THE PROMISED TAX CUTS WOULD BE WIPED OUT BY A MULTIPLE FACTOR.

THIS IS AN ENORMOUS HOLE IN THE PACKAGE. LET ME ILLUSTRATE WITH SOME EXAMPLES.

THE SIZE OF THE AVERAGE MORTGAGE IN AUSTRALIA IS ABOUT $40,000 WITH A MONTHLY REPAYMENT BILL OF $420. THE AVERAGE SIZE OF NEW MORTGAGES NOW BEING TAKEN OUT IS ABOUT $75,000 WHICH COMES WITH A MONTHLY REPAYMENT BILL OF $850.

NOW CONSIDER A PERSON WITH AN AVERAGE MORTGAGE WHO EARNS $20,000 A YEAR - REMEMBER THAT 50% OF AUSTRALIAN WORKERS EARN LESS THAN $23,000 A YEAR.

THE OPPOSITIONS POLICY PACKAGE WILL GIVE THIS PERSON AN INCOME TAX CUT OF $15.60 PER WEEK. HOWEVER, A 2 POINT RISE IN INTEREST RATES WILL RAISE THIS PERSON'S MORTGAGE REPAYMENTS BY $13.80.

THIS LEAVES $1.80 TO COVER ALL THE PRICE HIKES IN FOOD, CLOTHING, HEALTH AND EVERYTHING ELSE THAT WILL RESULT FROM THE GST. CLEARLY - THIS PERSON WILL BE SUBSTANTIALLY WORSE OFF.

NOW CONSIDER ANOTHER PERSON WITH A MORTGAGE OF $75,000 WHO EARNS $30,000 A YEAR - WHICH APPROXIMATES AVERAGE WEEKLY EARNINGS.

THE OPPOSITION’S PACKAGE GIVES THIS PERSON AN INCOME TAX CUT OF $30.40 PER WEEK. BUT A 2 POINT RISE IN INTEREST RATES WILL RAISE THIS PERSON'S MORTGAGE REPAYMENTS BY $26.00. THE NET GAIN OF $4.40 WILL NOT COVER THE GST PRICE HIKES - AGAIN, THIS PERSON WILL ALSO

BE WORSE OFF.

THE POINT I AM MAKING IS THAT THE OPPOSITION'S "FIGHTBACK" POLICY IS FUNDAMENTALLY FLAWED BECAUSE THE COMPENSATION PACKAGE SIMPLY CANNOT WORK.

THERE IS NO FISCAL POLICY, AND THERE HAS NO WAGES POLICY TO CONTAIN THE INFLATIONARY IMPACT OF THE GST. SO THE ONLY POLICY LEFT TO THE OPPOSITION TO CONTROL INFLATION IS MONETARY CONTRACTION AND ITS ACCOMPANYING HIGH INTEREST RATES.

AND IT IS PRECISELY THIS DESIGN FAULT IN THE PACKAGE, THAT IS, ITS EXCLUSIVE RELIANCE ON TIGHT MONETARY POLICY, THAT NEGATES THE COMPENSATORY TAX CUTS.

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AND THE EXAMPLES I HAVE GIVEN YOU OF POSSIBLE INTEREST RATE SCENARIOS ARE PROBABLY CONSERVATIVE.

THE OPPOSITION'S PACKAGE COULD RESULT IN LARGER INTEREST RATE HIKES. IN THIS CASE, THE OUTCOME FOR ORDINARY AUSTRALIANS WOULD BE EVEN MORE CATASTROPHIC. '

LET ME ASSURE YOU, HOWEVER, THAT IN THE WEEKS AHEAD, WE WILL BE EXPLAINING THIS AND OTHER UNDESIREABLE FEATURES OF THE COALITION'S PACKAGE TO THE AUSTRALIAN PEOPLE. AND WHEN THE PENNY DROPS, SO WILL THE ILLUSORY APPEAL OF THE PACKAGE.