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Mr Kerin's inheritance and a strategy for recovery



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

154/91 4 June 1991

MR KERIN'S INHERITANCE AND A STRATEGY FOR RECOVERY

As Mr Kerin moves into the shoes of the failed former Treasurer, he will have cause to reflect on the shocking state of the

economy he is inheriting.

First, he will need to look at what Mr Keating has done to

business investment and profitability.

Business investment expectations have collapsed and profits have been crushed under Mr Keating's scorched earth interest rate policies.

The gross corporate profit share has slumped below both its 15 and 25 year averages (see Chart 1 attached) and the net profit share (ie after deductions for interest and taxation) would most likely be back to or below 1982/83 levels (see Chart 2 covering period to 1989/90).

As a result, business investment is collapsing (see Chart 3). It has already fallen below 10 per cent of GDP, which is where it fell back to in the 1982/83 slump, and business surveys suggest it will fall further into 1991/92.

Mr Kerin's next task must be to ditch the "computer model driven" forecasts which his predecessor served up to the Premiers' Conference with so little conviction and ask the Reserve Bank and the Treasury, and perhaps some other independent forecasters, to put together some decent forecasts which reveal just how bad

things really ar e .

At the same time he should ask the Reserve Bank to "put him

right" on his curiously stated view that lowering inflation reduces real (as opposed to nominal) interest rates.

Instead, he should ask the Reserve Bank to tell him why real interest rates are so high and what can be done to lower them so the private sector which provides the bulk of the jobs in our community can begin to recover.

But the end result of his discussions with what he has labelled the "right wing extremists" in the Treasury and the Reserve Bank must be a strategy for recovery.

C0M i/0:i\VEALT, I PARLIAMENTARY L3RARY MiCAH

At present the Government has no strategy.

It has no wages strategy.

►

*

It has no overall structural reform agenda - just a rag bag of ad hoc adjustments at the margin.

It has no strategy to achieve price stability.

It has no budget strategy except the meaningless phrase trotted out by Mr Kerin that he will "preserve the structural surplus" - what on earth does that mean?

The budget will be in large deficit next year and is likely to stay that way all the way through the next election at least.

So what practical operational significance will a target of structural surplus have? And how will he be able to use this nebulous concept to fend off Mr Howe's call for more public spending while all the other Ministers, including Mr Kerin himself, say that there is no scope for large spending cuts elsewhere.

In this context, who would have imagined that Brian Howe , that noted centralist, would be made Minister Assisting the Prime Minister on Commonwealth/State relations - that seems the kiss of death to genuine reform in that area.

Moreover, Mr Howe seems intent on selling government assets to get his hands on the proceeds for some of his more fanciful

infrastructure projects - that is, to "bleed existing government assets to broaden public ownership of other assets".

But selling assets is no long term solution. In any event, it is looking harder and harder to set a realistic return for assets such as Qantas.

It is no wonder, then, that the Australian bond market, which determines the capital cost of funds for necessary long run investment, has got so edgy and sold off nearly 50 points in the last three days.

If Mr Kerin is going to survive, he will have to act quickly to assess his inheritance and set out a believable long -term strategy for recovery.

Otherwise he will risk the same fate as another "nice man" of politics back in the Whitlam era, Mr Crean (not Simon), who found himself swamped by the Left Wing spenders and deserted by the markets.

- 2 -

FOR FURTHER INFORMATION CONTACT 06 277 4022

CHMT /

MR KEATING’S COLLAPSING PROFIT SHARE ANOTHER FAILURE IN THE MAKING

% non-farm product at factor cost

19

17

15

13

11

9

elbdbdhdbdbdkdfedbdfrdbdbTlb/HiTlbTlbTlkTlbTlbTifrTldTlbdbdlidbdbdkdfedbdfrdddbsIbdi

qtrs

25 year average ™~" 15 year average

source: Parliamentary Library MESI

CHART 3. Measures of Profit Share

Per cent 40

30

20 -

1984/86 1989/90 1969/70 1974/75 1979/80

GOS GOS less interest GOS - interest, tax

CHftfiT3

BUSINESS INVESTMENT % GDP CURRENT PRICES

14

12

10

8

6

4

2

0

% gdp

341234123412341234123412341234123412341234123412341234123412341234 Ird 76 I 77 I 78 I 79 I 80 I 81 I 82 I 83 I 84 I 85 I 86 I 87 I 8β I 89 I 90 I 91 I

FISCAL YEARS

non dwelling equipment

seasonally adjusted