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Transcript of Dr John Hewson MP Interview 7.30 Report

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Leader of the Opposition

15 May 1991 REF; TRANSCR\NM\0020



SUBJECTS: Inflation, GST, Recession, Current Account


Dr Hewson, thanks for joining us.


Good evening Paul.


Does Paul Keating deserve any praise for 4.9% inflation.

Well, it's the way he's achieved it that's the problem. We

welcome it of course, but I want to make sure really that it

provides the basis on which we go forward to a regime of price stability. He's achieved it by recession, by the recession we had to have and by the unemployment we had to have.

He says that last time your side was in this dilemma, in a

recession, you had inflation at 11.5%.

He's one of the best selective quoters of statistics in the business. Inflation continued to fall, but look it's irrelevant what we did in Government last time. I'm looking forward, not looking back. I don't live in the past and I don't think an

argument that dates back 8 or 9 years is at all relevant today.




Parliament House, Canberra, A.C.T. 2600 Phone 277 4022


REF: TRANSCR\NM\0020 2 .


How do you get down to zero or 2% inflation without causing even more pain than we've been suffering in this current recession?


Well, that's the line the Treasurer is running - that it's

impossible to do that, and his assumption is of course that you don't change anything else, you just continue to use interest rate policy to achieve the outcome. If you do change other

things, in particular if you push ahead with an accelerated structural reform programme, which really lowers costs...


What does that mean?


We want lower costs, we want lower waterfront exchange...


Accelerated structural reform programme.


Well, you want lower costs in waterfront, in land transport, more competitive labour market outcome by genuine enterprise bargaining. It's the cost structure that's locked in, and it's the cost structure that can be reduced by that structural reform programme. Now, that is very important and it's not an area in which the Government has made any progress.


Well, talking of cost structure, you're looking at zero to 2% inflation, and yet you're, going to bring in a consumption tax and you won't have any special Accord, sweetheart deal with the unions. Won't that really blow inflation through the roof again?


No, not at all. It depends of course the nature of the

consumption tax you bring in and the impact that it has on

inflation. But, if you fully compensate individuals for the one-off price effect, there's no reason why they should go out looking for any additional compensation. There's therefore no reason why they should expect any additional wage increase.



Middle income earners who are going to suddenly find everything 15-20% more expensive.


But if they're compensated by a combination....


Income tax cuts?


By income tax cuts, and/or direct government payments, such that they're fully offset, the additional costs, of what they consume, is fully compensated for by either tax cuts or direct payments from the Government, then there's no need for them to argue for any mo r e . And it is a one-off effect. It goes into the series

for a year and then it drops out of the series. And it is an

important structural change that has to be made. Changing the tax structure, restoring incentive is fundamentally important to boosting productivity which in the end is the only way you get inflation down and keep it down.


Paul Keating says you've criticised him right the way through this recession. When he gets to a low inflation number like this, you say - oh good, we'll have that. We'll capitalise on that, and then we'll go off and sort of try and improve on that. We'll take all his gain and his pain, and we'll go and sort of

claim it as our own.


No, my point is that we welcome the fall in inflation, but the pain as a result of the method by which it was achieved was

unnecessary and could have been avoided. If he had relied on other policy instruments over the last five years, instead of just interest rates, if he'd done what he said in the banana republic statement and that is, deal with the structural problems

in this country, then he wouldn't have had to put interest rates up anywhere near as far as he did and there wouldn't have been a recession as an element of policy. Recession, don't forget, was a deliberate policy choice by Paul Keating and he's inflicted

that on people and created nearly a million people looking for work. No wonder he's acutely sensitive of any accusation that he didn't do well enough, or that he hasn't got the structure in place to do better in the future.


And quite frankly, he has never had an anti-inflationary

strategy. You can go back to 1982. A famous interview he did with John Laws in that election campaign, where he said well, we've got the Accord, and we think we can make it work. I think we can. I hope we can. We'll make it work. And he's never done

any more than that for the last 8 years. He hasn't got an

effective anti-inflationary...;


We've got 4.9 now. That's not bad.


But he's had lower inflation in the past, only to see it rocket away. When I was not in politics, in 1985 I predicted that

inflation would rise significantly and move, I think, was 86... sorry.... from about 5 to 8-10% by the end of the year.

He attacked me publicly about that. Inflation did go back up.


But you said they were quoting you today, using it against y o u . You said we'd have double-digit inflation towards the end of this year. .


Well, they selectively quote press releases which were've got to look at the circumstance of the press release. If certain things happen, the risk was double-digit inflation. And don't forget at the time he was arguing there was no recession. The country had an investment boom and a profit

share boom, therefore....


But we do have a recession and inflation at 4.9.


Well, I stand by my point. In the worst and deepest recession in 60 years, you ought to be able to get inflation down. But the key issue now is getting it down further and then keeping it down. We should make the nineties a decade of price stability. A reasonable objective in that regard is zero to 2% as price

stability. And in that sense it's very important that the whole community starts to think and focus on what is required to

achieve that outcome because they'll all be significantly better off if we do.



Finally Dr Hewson, the Treasurer has been pointing to a lot of trade figures, export figures recently to claim real structural improvement in the economy, that there has been gain for all that pain. Is he telling us fibs or are we seeing some real

underlying changes?


No, there has been an improved export performance and I don't deny that, although some of the data he uses on manufactured exports and so on, he uses in an exaggerated way. I don't deny there's been improved export performance. But the world economy

is now slowing down and that will slow down exports and of course we haven't seen anywhere near enough improvement to turn around our current account. See, our current account is still going to be in better....


It looked better last time?


Well, one month doesn't make a success. Our current account will still be $18 billion this year, the great bulk of which will be interest payments on external debt that's been built up over the last 8 years. And even though the trade account improves a bit it hasn't improved anywhere near enough to start to make a

significant impact into that debt burden problem. And so we are in a debt trap and the movement in exports that we want is

significantly greater than anything we've achieved in the post­ war period. We have to sustain it through the 1990s if we hope to stabilise our debt, let alone bring it under control.


Thanks for your time. .


Thank you Paul.