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The Australian economic outlook



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THE AUSTRALIAN ECONOMIC OUTLOOK SPEECH BY THE TREASURER OF AUSTRALIA THE HON JOHN KERIN MP AT A LUNCHEON CO-SPONSORED BY

THE ASIA SOCIETY AMERICAN AUSTRALIAN ASSOCIATION THE AUSTRALIA SOCIETY

IN NEW YORK ON 21 OCTOBER 1991

INTRODUCTION

Thank you for the opportunity to address this gathering today. The three organisations co-sponsoring this luncheon promote co-operation and understanding between the United States and Australia and, in the case of the Asia Society, the Asia-Pacific region as well. This is an objective which I

fully endorse.

Australia is the southern anchor of the dynamic Asia-Pacific region and our links with the region are dramatically increasing. We now sell 73 per cent of our exports to the Asia-Pacific region compared with 62 per cent a decade earlier.

Australia's trade and investment links with the Asia Pacific region will clearly continue to grow. With that in mind, I welcome the opportunity, on my first visit to New York as Australian Treasurer, to outline the changes and challenges central to the Australian economy and the way in which the Government is addressing them.

In all I will say today, I appreciate that the Australian Government does have a key economic role to play and that it has to set the economic framework for the private sector. But, I believe that the private sector also has a key role to play.

ECONOMIC PROSPECTS

Australia, like the United States, is starting to come out of recession, and is expected to recover at a moderate pace. Unlike previous recoveries, however, Australia's inflation rate is very low at 3.4 per cent, the lowest rate recorded since March 1970 and significantly below that of our major OECD

trading partners.

The Government's basic economic objective remains solid, sustainable economic growth and increases in employment and living standards. As an aside, Australia’s real GDP is 32 per cent above what it was in 1982/83 and employment is 23 per cent higher. Given the circumstances Australia now

faces, important elements relating to our objective are:

. building on our low inflation;

. stabilising external debt by continuing to ensure the growth in production exceeds the growth in domestic demand; and

. improving the competitiveness of the Australian economy in order to increase its productive potential.

COiviMONVVEALT, PARLIAMENTARY Lib m icah

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On this last point, Australia has, on a unilateral basis, substantially reduced our trade barriers and instituted a phasing down to insignificant levels by the end of the decade. We have also set in train major reforms to our wages system and to our public sector.

This audience knows only too well the benefits that can be derived from free trade, from flexible labour markets, from reducing unnecessary government interference in the economy, and from promoting and sustaining a spirit of entrepreneurship. My aim today is to explain some of the changes that are

taking place in the Australian economy, concentrating on:

. the task of maintaining low inflation;

. external debt stabilisation; and

. micro-economic reform.

INFLATION

One of the keys to sustained economic growth is the maintenance of low inflation. Low inflation promoted expansion in the most successful industrialised economies during the 1980s because governments were able to avoid damaging stop-go economic policies.

As I mentioned, Australia's inflation rate is now below our major OECD partners and inflation expectations are also falling.

The challenge for the Government is to make this a permanent change. We are doing this by maintaining firm monetary settings, ensuring wage increases are broadly in line with productivity increases and through microeconomic reform - the more flexible are our goods and labour markets, the more successfully can we handle shocks to our economy.

Monetary policy will be set with the medium-term focus on inflation, but we will not ignore what is happening to demand. Our aim is not to choke off the recovery but to ensure that it proceeds at a moderate pace.

Consistent with this approach, monetary policy has been progressively eased since January 1990. Cash rates have been reduced some 8.5 percentage points below the peak of 18 per cent in late 1989.

As regards wages, a feature of the 1980s was the unique agreement - the Accord - between the Government and the central union body (ACTU). This agreement permitted the profit imbalance that existed when the Labor Government came into office in 1983 to be corrected and in turn for business investment to be

restored. The Accord delivered a decline in real wages, a recovery in the profit share to record levels, rapid employment growth and a surge in business investment. The Government's obligation with respect to the Accord was to maintain the social wage and involve organised labour in elements of decision making.

With the country increasingly open to international influences, the need for greater decentralisation and flexibility in wage fixation is a key priority on the Government's agenda.

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The Government, the unions and the major employer bodies are all committed to building on the record of responsible wage setting by ensuring that wage outcomes will be more directly linked to productivity improvement.

This will require that both employers and employees take greater responsibility at the enterprise level for wage and productivity outcomes. This will allow for greater flexibility in wages between enterprises, allowing individual enterprises to adjust more rapidly to economic and technological

changes.

EXTERNAL DEBT

An important element of sustained growth is the stabilisation of our external debt. This is important in order to reduce our vulnerability to external shocks.

In recent years we have made considerable progress. In 1990-91, the current account deficit fell by around 30 per cent and further improvement is expected in 1991-92. A measure of the progress made is that our trade in goods and

services is expected to be in surplus in 1991-92, the first time for more than a decade.

The improvement is such that there is the prospect that we will begin to stablise our net external debt as a proportion of GDP in 1991-92.

But debt stabilisation is an ongoing requirement. The key is to ensure that production grows faster than domestic spending for an extended period, producing a "wedge" of net exports. It is essential that we guard against the current account blowing out with the recovery. In this regard, fiscal policy

has been set so as not to over-stimulate the growth in demand during the recovery and to contribute to an increase in national savings.

The second half of the eighties was a period of fiscal consolidation by the Commonwealth.

The Commonwealth budget deficit was turned around from a deficit of 4 per cent of GDP in 1983-84 to a surplus of 2.2 per cent of GDP in 1989-90, despite very large reductions in personal and company tax rates. This reflected the effects of economic growth on the budget balance, and a major scaling back of outlays - that is, the size of government - from 29.4 per cent of the economy in 1983-84 to 23.6 per cent in 1989-90.

Australia is not a high tax country. As the most recent annual OECD report on revenue statistics shows, in 1989 Australia had the third lowest ratio of total tax revenue to GDP in the OECD. .

While the economic downturn has resulted in a cyclical deterioration in the Commonwealth’s budgetary position, the underlying structure of the Commonwealth Budget has been broadly maintained, ie the Government has resisted the temptation to pump prime. This call by the Commonwealth on

national savings will fall as the economy recovers.

Our task is not simply to restrain domestic demand - it is to increase production and productivity, thereby allowing for increasing domestic expenditure while maintaining the net export wedge required to stabilise external debt. Export and import replacement industries need to grow. In the

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current recession, a substantial export performance had helped to cushion the effects of falling domestic demand. This reflects the increased interest shown by business in export markets. Australian business is learning the importance of diversifying into export markets rather than relying solely on

the domestic market.

The moderate recovery projected for the world economy in 1992 will provide an important backdrop to those efforts, particularly in respect of mining and manufactured exports. The export performance of the rural sector in recent years has been harmed by a number of special factors, including the disruption

of our wool market and a sharp fall in wheat export prices. The establishment of a more market responsive wool price structure should encourage the recovery of wool exports. Wheat prices should improve as world stockpiles are diminished. Given its underlying competitiveness, the rural sector should

therefore make a stronger export contribution in the medium term.

However, this contribution can only be fully realised if fundamental reforms to the agricultural policy distortions of the major economies are implemented soon through a successful conclusion of the Uruguay Round. There will need to

be stronger political will in the major economies to achieve those reforms.

This message was reaffirmed on 9 July by the Cairns Group Ministers and I must say I was encouraged by the dialogue, and the words of the GATT Secretary, at the World Bank/IMF meeting in Bangkok last week. At the end of the day a successful conclusion to the Round may depend on the G7 leaders - and lead they must.

MICROECONOMIC REFORM

The Government's efforts to increase Australia's productive capacity does not rest on macroeconomic policies alone. Australia's experience over the 1980s emphasises the need to put in place a framework for a dynamic and competitive economy.

We recognise the need to continue to increase flexibility in goods and labour markets in order to improve our capacity to respond to new opportunities, changing price signals and technological developments.

As well as added flexibility, productivity improvements associated with structural reform will raise the potential for long term growth. These reforms will also help hold down inflation. In recognition of this, the Government has taken large strides in reducing the level of protection afforded to Australian industry.

We must bear in mind that as a small trading nation, we need to develop new export-oriented industries and expand the ones we have. 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 per cent during the past year shows this.

And we can be much better in the information and service industries as well. There will be an explosion in demand for information and service industry products in Asia during the next few decades. Australian industry must be increasingly well-placed to meet this demand.

On its own front, the Government is pressing ahead with significant reforms to public infrastructure.

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Significant changes are underway in the area of Government Business Enterprises (GBEs). Some GBEs have been subjected to greater competition, or fully or partly privatised. This will encourage GBEs to lift their performance.

Commonwealth GBEs have been freed from Government day-to-day controls and most GBEs are now subject to Commonwealth, State and Local taxes and charges. Where competition is not considered adequate, GBEs have been commercialised and placed under various forms of price control. They are expected to provide

a commercial rate of return.

GBEs have been made subject to financial reporting and performance assessment.

At the sectoral level, we have some impressive points on the scorecard.

In telecommunications, Telecom's longstanding monopoly on network services will be abolished with the introduction of a private competitor in 1992. Moreover, the duopoly will end on 30 June 1997, after which time open competition will be permitted.

In transportation, the establishment of the National Rail Corporation, flowing from the Special Premiers' Conference, will lead to a more efficient Australian interstate rail freight network. The National Rail Corporation will operate as a fully commercial organisation in line with best practice overseas. Productivity gains of at least 35 per cent are targeted.

In electricity supply, individual States have made efforts to improve efficiency over a number of years. The Special Premiers' Conference processes will now provide for greater co-ordination of electricity supply in Australia's eastern and southern States. That will ultimately translate into

better and lower cost service.

I have referred particularly to telecommunications, rail freight and electricity, because these are probably the most significant services provided by government to business.

But recent micro-economic reform has ranged much further; and includes the ending of excessive regulation of the domestic avaiation market; shipping, waterfront and port reforms; reduction in general tariffs; negotiation of mutual recognition of standards of goods, services and occupations amongst the States; and the establishment of a National Road Transport Commission to develop a national approach to regulating and charging heavy road vehicles.

There have also been considerable reforms to the Australian taxation sysem.

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 per cent between 1983 and 1990, while the number of students in Year 12 of high schools rose by 70 per cent. Retention rates are now close to 75 per cent. Over the long term, changes of this sort make an enormous difference to skill levels in the Australian workforce.

ROLE OF BUSINESS SECTOR

If governments do their job properly, they can provide the right environment for business, but clearly it is up to individual firms to make the final decisions and to exploit the opportunities.

Adopting international best practices means a variety of changes for Australian business.

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. For one thing, competitiveness goes beyond price to embrace a variety of factors such as quality, reliability, timeliness and customer services.

. For another, it means focussing on the long term rather than on shorter term speculative activities. Here, of course, the Government's own role in keeping inflation low and maintaining a stable policy framework is particularly important.

. And thirdly, it means higher standards of corporate behavior. I think all countries have learnt from the experiences of the 1980s, and Australia is no exception. Australia has significantly strengthened its corporate regulatory framework and the Government is committed to ensuring vigorous enforcement of appropriate corporate standards and behavior. While some of our corporate cowboys have tarnished our reputation, you should be aware that the Australian business sector is a lot more than those firms.

All these things mean that greater outward orientation is a central requirement for Australian business in the 1990s.

CONCLUSION

The 1980s was a period of major structural change for the Australian economy. The decade ended, as for a number of major OECD countries, with a business cycle more severe than anticipated. However, the Government has not been deflected from its fundamental economic objective.

Indeed, if anything, it has strengthened our resolve to press ahead with the task of internationalising the Australian economy.

The Government is committed to ensuring low inflation, we are restructuring, we are improving our competitiveness, our outward orientation and our flexibility. The international environment is tough - but Australia has

enormous advantages. We are building on those advantages so as to thrive and make a positive contribution to the dynamism that characterises the Asia Pacific region.

Thank you for the opportunity to speak to you today.