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Fightback - setting the record straight Gittins dead worng

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Peter Reith


Bulletin No 9



While it is reasonable for economic writers to be sceptical of the ability of government to successfully implement dramatic change, it is quite another to allow that scepticism to be turned into dogmatic assertions such as contained in Ross Gittins' SMH article today: "Vote Dr Hewson for High

Interest Rates".

Mr Gittins' thesis is that a Coalition government would have to maintain a "tight" fiscal and monetary policy during the implementation of its labour market reforms and maintain that stance as the GST was implemented.

Although it is not stated, there is a clear implication that the Coalition's policies would lead to interest rates always being higher under a Coalition government than under a Labor Party government which did not seek to implement reform

to either the labour market or to reshape the tax system.

But what evidence do we have for that conclusion? There is certainly no evidence that the Accord helped Australia avoid high interest rates. Or that turning our back on essential reforms in the area of tax or any other field (eg the waterfront) will help us avoid high interest rates. Indeed,

quite the reversel

We do not resile from the fact that there will need to be a firm medium-term framework for fiscal and monetary policy and that those settings will have to be better coordinated than was the case under Labor's disastrous miscalculations in the


But there is simply no basis for claiming that implementation of the Coalition's policies would require relatively higher interest rates than Labor's head in the sand approach.

Ross Gittins and other writers must accept that the Coalition's policies are an integrated package. The labour market changes will be taking place at the same time as large cuts are being made to government spending and a major program

of structural change is being introduced - both of which will be influencing the shape of the labour market and the scope for productivity improvement.

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Moreover, we have made it clear that the labour market changes themselves will circumscribe the present power of the unions in various ways and that employers will find themselves under continuing pressure from our faster phase down of protection and the opening up of public enterprise activities to greater competition through our privatisation program.

It is reasonable to expect, therefore, that the labour market reforms will be in place in late 1993 - well prior to the implementation of the GST in October 1994 and the benefits of some of our structural reforms will be flowing through by that time.

Indeed, it is not unreasonable to expect that inflationary expectations and hence real interest rates will be headed down again after the expected upward move in 1992 under Labor's do nothing approach.

Mr Gittins has also failed to acknowledge that we have explicitly recognised that the once-off effect of the GST will require a similar one-time monetary policy accommodation in 1994. The key is not to tighten monetary policy to prevent the one-off increase but to ensure that the accommodation is not so large as to set conditions which would facilitate

development of a new wage/price spiral.

There is absolutely no reason to expect that such a spiral will occur. Wage earners will be more than compensated for the price effect of the GST through tax cuts and can be expected to be more concerned to get on with working harder

and saving more under the considerable incentives offered by our tax package and the enhanced productivity related pay deals which will flow from the implementation of structural reform and privatisation.

It seems most unlikely that a circumscribed union movement would seek to push ahead with unsustainable wage demands to achieve "double" compensation when the opportunities for self gain will be enhanced and the recent history of 11% plus

unemployment is so fresh in the minds of their membership.

In short, we believe that Mr Gittins is 100% wrong and that real interest rates will always be lower under a reformist Coalition government rather than the cocoon of the demonstratively failed Accord process to which Mr Gittins

still appears to wish to cling.

25 November 1991 Canberra

Contact: David Turnbull (06) 2774277 D136/91