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Transcript of press conference: Parliament House, Canberra: 10 January 1992: value of the Australian dollar - market reaction to Treasurer Dawkins

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10 January 1992 REF: TRANSCR\AL\CBAO 001




SUBJECTS: Value of the Australian dollar - market reaction to Treasurer Dawkins

The markets are reacting today adversely in part and in response to concerns about where the Government is taking economic policy. And, in particular, there is a real concern about Mr Dawkins and the policy prescriptions he will be advocating for the Australian economy in response to the recession - the nervousness of the markets is understandable to that extent. We have signals coming

from the Government that they will be promoting a fiscal stimulus to the Australian economy of fairly considerable dimensions and that obviously is not well regarded and is an indication, I

think, that for Mr Dawkins he's had a shot across his bow from the markets overnight. And it ought to be a cautionary warning for him about the extent of any fiscal stimulus in the statement to be brought down at the end of February or in early March.

Isn't it in Australia's best interests that the dollar fall?

Well, there are also adverse consequences from a fall in the Australian dollar. It cheapens the value of Australian assets, it allows foreigners to buy Australian assets at bargain basement prices and as a general rule, for successful economies, they have

appreciating currencies rather than depreciating economies. Now, obviously, there are some benefits for some sectors of the

Australian economy from a fall in the dollar. The consequences of a fall need to be appraised as a result of the flow on effects of the fall and in particular, the effect on inflation. And one of the adverse consequences is that it will increase the

servicing cost of a larger debt for Australia. And future






Australian generations are already burdened very considerably by a massive buildup in debt under the Hawke/Keating Government, partly as a result of the pump priming exercise in the early 8 0 's which saw a widening current account deficit, a buildup in debt

so that we, today, have a debt of 130 odd billion dollars and climbing. I've done some calculations using the Murphy Model of a lower exchange rate at a pump priming exercise of $2 billion. That would add $30-40 billion to Australia's debt, a huge debt

load on top of an already massive debt. It would see a fall in real wages and a big boost to inflation, seeing inflation go over 7% and staying there for 2 or 3 years in advance. So, there's a fair bit of downside with a fall in the dollar and that needs to be taken into account. A run on the dollar, particularly, is evidence of a lack of confidence in the Keating administration.


What should the Reserve Bank do then? Should they step further in the market?


Well, I'm not an advocate for anything other than a freely

floating exchange rate. The Reserve Bank has a role for

smoothing out the market and I certainly have never advocated and don't advocate any greater role for the Reserve Bank.


. . . (inaudible) ... perhaps the Government and the Reserve should be wary of dropping interest rates again?


Well, there certainly is a question mark about further drops in interest rates as there is a warning coming out of the latest current account deficit figures where, clearly, Australia has a structural problem with the current account deficit. We've got

a massive deficit in the worst recession for 60 years and if that doesn't send a message to the Government, nothing will. And obviously, we've got a lot of structural reforms ahead of us in this country to deal with some of these very big problems.


What should the Government do to try and resolve the problems that you say with the dollar?


Well, they should implement the "Fightback!" program. They should abolish payroll tax, they should abolish the wholesale sales tax.



Realistically, what should they do?


Well, that is very realistic. It might be difficult for them - in the past, their reaction to a recessed Australian economy is just to go to the old remedy of pump priming and that, obviously, would be a futile political stunt which would do great damage to

the Australian economy without addressing the problems. There is no simple answer, but there is one response and that is, to move to a series of sweeping, radical reforms to the structure of the Australian economy - nothing else will do, nothing else will suffice. Any alternatives are just "embroidery on the

fabric" - to pinch a phrase - and let's hope that this Government does not run a pump priming exercise which will just cause more damage to the Australian economy than has already been caused by their remedy from the last lot of pump priming.


Is there anything really wrong with the dollar at its present level just before 74 cents, or are you more concerned about a genuine slump?


Well, I'm concerned about the switch in sentiment towards the Australian economy and Australia's economic management - a switch brought about by the words of Mr Dawkins in part, who is

obviously moving towards a major fiscal stimulus. He is up there talking to the Gallery about a very big switch in Government policy - that would not be warmly received internationally. And yet, we know from Mr Dawkins who is on the public record, that

he is little concerned with international assessments of the Australian economy. I think this will show him he's going to have to be a lot more concerned than he has advocated we be in the past.


Can the economy sustain its present level of the dollar - just below 74?


I don't comment specifically on the level of the dollar at any one point in time. Obviously, the dollar is affected by a number of things and the outlook for commodity prices is one important factor on the Australian dollar. The level of interest rates is

another factor which underpins its value and obviously, the series of reforms that we are proposing would have some

consequences for the value of the Australian dollar and, to some


extent, the dollar has been a bit higher as a result of higher interest rates in the past. But, that's only one of the factors that impinges on i t .


What's the ideal level for the dollar, then ... (inaudible) ...


That's the last question. I'm not putting an ideal value on it. What I'm saying is that the problems we've had in the last few weeks as demonstrated by rising unemployment and the high current account deficit, are all good reasons for structural reforms

other than fiddling at the edges. And all the signs from this Government are that they are going to fiddle at the edges and go for pump priming and you can't buy your way out of these

problems. Let's not put Australia through the pain and the agony of a political stunt when real reforms are the only way ahead.