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Epac findings give support for 0-2 per cent inflation target



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EMBARGO: 2am, Friday 17 May 1991

EPAC FINDINGS GIVE SUPPORT FOR (T2 PER CENT INFLATION TARGET

The EPAC paper, Improving Australia's Inflation Performance*, gives a welcome summary of the benefits to be had from substantially reducing the rate of Inflation.

Only yesterday, the Coalition committed itself to achieving a 0-2 per cent medium-term inflation target for Australia. The EPAC paper gives evidence that suggests this is not only feasible, but desirable.

As the EPAC paper notes, the long-term benefits from low rates of Inflation. On page 22, for example, it notes:

"GDP growth will be somewhat stronger than would otherwise have occurred, and the economy will eventually be in a better position than if adjustment to lower inflation had not occurred."

The EPAC paper publishes the results of certain economic modelling which calculates, depending on the assumption of the models, the benefits and costs of reducing inflation to lower than 4-5 per cent.

They freely admit that they "don't have much idea of what overall gain would result* (page 22) and that for costs"... here again there are uncertainties, in part because the adjustment costs will depend on the policy approach used" (page 14).

Critically, EPAC points out such modelling Is based on the current wages system and constraints on reducing inflation are based on "inertia In the wage - prices system" (page 1).

Wages policy has always been a critical element of the Coalition's anti inflation policy. W e seek a system that bases wage rises on productivity and which offers the opportunity for employers and employees to make genuine enterprise based wage agreements.

That is the significant difference between the Coalition's policy to reduce inflation and the slash and burn destruction of the Hawke Government's anti Inflation policy/engineered recession policy.

The Coalition is seeking a first best solution to solving Australia's chronic inflation and debt problems. We are not content with the mediocre second best results that the Hawke Government are prepared to live with.

Indeed, the EPAC paper effectively tells us that In EPAC's opinion the Government's Accord process simply cannot deliver sustained reductions in Inflation beyond 4-5 per cent. To quote EPAC, on page 27:

"If wage restraint in support of lower Inflation requires some fiscal loosening (eg as part of a "wage tax deal), there could be some temporary deterioration in the current account deficit relative to GDP... So the scope for major deals of this sort may be limited in present circumstances."

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So the reason why Mr Keating and Mr Hawke try to vilify the Coalition for its sensible 0-2 per cent policy has been revealed by EPAC.

The simple fact is that with their failed Accord process they simply cannot reach the target.

Finally, I note a cryptic comment on page 15 of the EPAC report which suggests that a substantial slice of the recent fall in inflation is due to the current recession:

T h e model estimates would imply that perhaps half of the current recession in Australia can be explained in terms of adjustment to underlying inflation of 4-5 per cent p.a.*.

So much for Mr Keating's denials.

16 May 1991 Canberra

Contact: David Turnbull (06) 2774277

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D67/91