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Keating gets set to ease come hell or high water

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John Hewson Leader of the Opposition M e d i a R e l e a s e


6 March 1991


By his answers today in his Press Conference on the balance of payments, the Treasurer has signalled that he his now hell bent on easing monetary and fiscal policy as soon as he can cobble together some (any) rationale for doing so.

He is like a duck. Above the surface all appears serene but below it the water is churning.

He now realises that the 1991 economic recovery on which he has tried to hang the last vestige of credibility in his party room is in serious doubt.

So it is now panic stations.

He wanted to hang his easing on the December Qtr CPI result. He could not.

So he discounts it and simply "forecasts" a better result in future.

He wanted to hang it on a good January balance of payments

outcome. He could not.

So he discounts it and says it has no relevance to policy

settings. He speculates about net export volumes improving and ignores the adverse movements in the terms of trade.

Now he will look to something (anything) in the December Qtr. national accounts. Perhaps a deflator, perhaps some import volume number.

But ease he will. And soon.

And what will foreign investors and international credit agencies make of this?

Another $1 billion plus on the Commonwealth deficit from the March Statement, another $0.5 billion out through the Loan Council to help the Labor States.

And another 1 per cent off the official cash rate.

It is always "crash" or crash through with Mr Keating.

Unless he can come up some good excuse this time - it may well be another crash.


The unfortunate thing is that all Australians will have to spend the subsequent years picking up the pieces.

As EPAC has shown (chart attached) debt servicing obligations will not be stabilised with the current account deficit running at 4.5 per cent of G DP.

And the situation gets harder each time the exchange rate slips. Indeed with net debt at $130 billion and over half of that in foreign currencies, each 10 per cent fall in the exchange rate could add $6 or 7 billion or about 2 per cent onto the debt to

GDP ratio.

He would have to get the current account down to 2.5 per cent of GDP - as he promised in the election - to stabilise debt. But that is $6 or $7 billion away.

He will not try. So he is just going to ignore this promise and focus on something else.

He will talk about falling inflation for the time being because it suits him. But if he eases and the exchange rate moves lower, then he will not get his inflation rate outcome and he will focus on something else.


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Chart 19 also shows the outcomes for the current account deficit, and the foreign share of property income implicit in the Government’s medium term debt stabilisation objective (i.e. stabilization of the net external debt/ GDP ratio by the


Table 12 translates the previous projections for constant price investment

in the 90s into corresponding current price investment/GDP estimates assuming that stability in the relative price of investment is a reasonable baseline projection for the 90s (box 9). The ‘high investment’ scenario sees the

ratio remaining at around 27% of GDP through the 90s; the ‘low investment’ scenario sees a return to the 25% average

of the 80s — see also Chart 20.

Chart 19: Alternative adjustment paths


Foreign s h a r e of pr oper t y income

C u r r e n t a c c o u n t d ef ic it


1995 2000 1985 1990 1970 1975 1980 1960 1965 (i) F o r e ig n d e b t s t a b l e by 1993 (ii) not s t a b l e b e f o r e 2 0 0 0

If as canvassed in previous chapters, the ‘low investment’ scenario is consistent with maintaining moderate growth in real incomes per head, then the task of

external debt stabilisation over a medium term horizon appears more manageable.

But if, as is possible, investment must remain at the higher levels of the late 80s (relative to GDP) to sustain such

economic growth, then the debt stabilisation task becomes more difficult. The question is whether such growth could then be accommodated without causing unacceptable delay in external


4.2 Reconciling growth and external adjustment

It may well be that the economy will show adequate flexibility and gradually adjust to a stable growth path over the next few years. But what options are available in the event of a longer term conflict between growth and external


— postpone debt stabilization

Some argue that policy should not be concerned with higher levels of debt, if these are matched by higher investment.

They argue that if capital markets are