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State bank of South Australia, recession, inflation, monetary policy, industry statement - March 12, wholesale sales tax, GST.

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Leader of the Opposition

11 February 1991 REF: TRANSCR\0070\BQ



SUBJECTS: State Bank of South Australia, recession, inflation, monetary policy industry statement - March 12, wholesale sales tax, GST.


There are now huge bank losses in 3 labor states, a recession that may be much deeper than originally forecast, as well as the uncertain world outlook, it is bound to mean fireworks when Federal Parliament resumes this week.

Despite a dramatic improvement in the personal popularity of the Prime Minister, the Coalition still has a comfortable edge in the polls over labor. The challenge for the Coalition in the coming year will be to provide detailed alternative policies that will

develop its credibility as the alternative government.

We have been joined in our Canberra studio now by the Opposition Leader John Hewson and he is talking to our chief political correspondent Maxine McKew.

Dr Hewson if I can just start with the SA State Bank. What do

you see as the lessons from the 80's about bank deregulation?

I think that bank deregulation was incomplete, as the Campbell Committee said at the beginning of the 1980's if you are going to deregulate the banking system and open it up to foreign

competition,. you need an effective national system of prudential supervision. So the Government put one foot on the ground, deregulation, but they didn't put the other foot on the ground which was an effective system of prudential deregulation.

Parliament House, Canberra, A.C.T. 2600 Phone 77 4022





2 .


What would you do?


There is still, as I said last year, a need for that to be put

in place as a matter of urgency. At this stage, given that there has been a very speculative boom created by the Treasurer, which has underwritten all the bank losses we have seen, and in saying that I recognise the banks have made some pretty horrific

mistakes, but it was the inflationary boom environment and overheated economy that created the circumstances for it. I think we need full and frank public disclosures of what has happened and why it has happened, so I would urge Mr Bannon's enquiry in South Australia to be as public and transparent as possible.


Do you also concede that Australia has allowed a bit of a

buccaneer mentality to take off?


Well there were buccaneers around the world in the 1980's but I guess, yes, something of a concentration of that in Australia because of the unique way in which our Government overheated the economy - they did that with a tax system that favoured debt

rather than equity. They encouraged a massive property and share market speculative boom which burst and all the falls in asset prices and share prices were the basis of all that debt and as they fell the debt has been called into question and individuals

and corporations have gone broke and now banks themselves are getting into trouble.


Well the Prime Minister now says there is no need for . . .

(inaudible) ... but he does admit that the Government got it

wrong when it said there would be no recession. Now, does this admission in part take a bit of the wind out of the Opposition sails?


No, not at all. The Prime Minister is playing his usual cynical games of trying to divert attention from the facts. Let's have an honest statement - a statement of what happened. He

deliberately eased monetary policy in early 1987 on top of a



•v4 ..


commodity price explosion. When he won the election in 1987 his advisers told him to tighten policy and he didn't, he eased it again and after the stock market crash he eased it again in the run up to the NSW elections. He knew what he was doing,

deliberately over heating the economy to save his political skin and that of Barry Unsworth, one worked, one didn't, but we all paid for it. .


But the easing after the stock market crash, why would you

dispute that?


We didn't at the time because most of the world went that way. But most of the world didn't continue down that path like the Prime Minister did and they were doing it an economy where they were already tightening - he had been easing for some time. He

dramatically overheated the economy and we were having at the same time a commodity price explosion. If you think back to 1987/88 and think of all the stories about how much our commodity prices had gone up and wool had gone up 300%, this sort of thing, that was all there and he eased monetary policy across the board on top of that.


Do you not concede that there is a plus in all the gloom we are saying, the expectation we could see lower inflation? Arguably Paul Keating is doing what Paul Volcker did in the US and that has set the scene for an expanded period of growth.


Volcker did it without a recession and without the massive rise in unemployment that we are having and maybe for another 12 or 18 months. Inflation will fall, there is no doubt in the near term, but there is nothing in the policies to keep it down. It

is only falling really because of the collapse of asset prices and because they are squeezing corporate profitability. You can't create the circumstances for a long term recovery while you squeeze corporate profitability and that is precisely the way they are getting it down. I think inflation might fall below 5%

but there is nothing to keep it down there and until they put in place a substantial set of structural reform policies they won't be able to keep it down. They have got to change the labour

market, they have got to cut back the size of Government, they have got to clean up the waterfront and inject real competition into transport and telecommunications.



The Government's next big initiative is its industry statement, it is putting a lot of investment in that. From what has been suggested about that statement do you think there will be much in it that the Opposition can support?


I hope there is. In all seriousness this is his last chance to do something correct and substantive and we don't want to see any cosmetic solutions, we don't want to see bits and pieces of money thrown around the place. There is no substitute for the long hard slog of structural reform and if the Prime Minister embarks on that he will have our support. If he is simply running a

cosmetic exercise to re-assert viz-a-viz Mr Keating and look tough and look like he is shifting policy and all that sort of stuff, he will be blow away with the next downturn in the



One of the things that is being singled is wholesale sales tax exemptions for manufacturing inputs, now you would be obliged to support that wouldn't you?


Yes, I would challenge him to go the whole hog and introduce a broad based goods and services tax where he can take all the taxes off business inputs, he can take all the taxes off exports and he can eliminate what is a very inefficient system of

taxation, which is the wholesale sales tax system. Now we have called for that, they advocated it in 1985 and in the current circumstances I would urge him to do it, there won't be any

political debate about it.


Dr Hewson, are we going to be seeing a lot more detail from you this year?


Yes, we have accelerated our policy agenda and we will be

hopefully putting out most of the details of our policies in the course of this year. In some cases we may save pieces for closer to an election, but in general I would rather have all the detail of our policy package out and spend 18 months to 2 years selling

i t .



Dr Hewson thanks very much for joining us.

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For further information contact Tony Abbott on 06