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Wage increase, wage/tax tradeoff, inflation, unemployment

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Leader of the Opposition

30 January 1992 REF: TRANSCR\0006\al



SUBJECTS: Wage increase, wage/tax tradeoff, inflation, unemployment

This morning, the Opposition Leader, John Hewson, who's

campaigning in the Tasmanian State election, told "AM" that the Keating formula is a recipe for more unemployment and there is no room for a wage rise.

Marius Benson caught up with Dr Hewson as he flew into Launceston this morning to meet workers at the ACL bearing plant on the

outskirts of the city.

B enson:

Dr Hewson, the Prime Minister says that this very low inflation result has now cleared the way for wage increases - real wage

increases. Do you agree?

H e w s o n :

If our problems could simply be fixed by increasing wages, this country would be in great shape. The fact is that we are

uncompetitive and those sort of quick fix political promises are really just going to add to our problems. Most Australians

understand that if we're going to be paid more, we should

actually produce m o r e . And our view is that you shouldn't

increase wages unless there is an increase in performance. So, Mr Keating is trying to buy votes and not deal with our problems. As far as inflation goes, I'm amazed that he's saying what he's saying because he's not prepared to c o m m i t , formally commit to

price stability. Now, we have argued that inflation should have come down, that's a very important result. It's been achieved at horrific costs in terms of the depth of this recession. The

least he can do now is commit to keep inflation under control

b u t , I think, most people in financial markets are a good

barometer and expect that inflation is going to go back up again, that it has probably troughed, and there are already forces in the system, the movement in the exchange rate, other cost

pressures that will see inflation on the rise through 1992. So, I think that in the circumstances, he should be honest enough to admit there's no quick fix, that you're not going to be able to

Parliament House. Canberra, A.C.T. 2600 Phone 277 4022 COMMONWEALTH PARLIAMENTARY LIBRARY MICAH

REF: TRANSCR\0006\al 2 .



just give people wage increases and figure you'll fix our

p r o b l e m s . As much as we all want wage increases, we don't really want any more unemployment and a wage increase in this

environment, it will simply add to unemployment.


Well that very low inflation result does reflect a lot of

sacrifices by the w o r k f o r c e . Do any benefits flow to the workers from it?

H e w s o n :

Well, if we could keep low inflation, tremendous benefits to a lot of p e o p l e . It's been one of the great problems of this

country for a couple of decades now, that we've all fallen into an inflationary mentality and its distorted a lot of decisions and stalled a lot of what would otherwise have been productive and investment behaviour. A lot of average Australians have lost, they've seen their savings eroded and so on. So, obviously

it's very important that we get inflation under control and keep it under control. Mr Keating used to argue you couldn't achieve less than 2% inflation in Australia without a scorched earth policy. Well he delivered that, he drove the economy through the

floor to the worst recession in 60 y e a r s . As you say, everybody's paid a very big price for that, now it's up to him really to be

responsible enough to admit that the top priority should be to keep inflation under control while, of course, dealing with some of the structural problems in Australia which will keep it down.


If there's no room for a direct wage increase, a real wage

increase, what about the proposal for a wage/tax tradeoff?


We've had, how many, wages, accords and tax tradeoffs over the last 8 or 9 years - they haven't worked. Australia has become

increasingly uncompetitive. What we are seeing is Mr Keating in his job with no sense of direction. He's governing by the

seat of the pants, he gets up every morning and says "what do I

do today, I'll give them a wage increase today, tomorrow I'll

talk about lower interest rates, the next day I'll do a bit of

infrastructure expenditure". The fact is, you've got to solve the problems. And we've seen in the time that he's been Prime

Minister that while he pushed hard to get the job for himself

he's got no idea how to create jobs for other Australians. In

fact, the way he is going he'll just simply add to unemployment. The wage increase today, across the board, unrelated to our

economic circumstances, will simply increase unem p l o y m e n t .

Ends .


Leader of the Opposition

t r a n s c r i p t o f d o o r s t o p i n t e r v i e w w i t h


E & OE - PROOF COPY ONLY transcr\mm

Subject: Inflation target; infrastructure spending; pump­ priming; massaging expectations; Murphy model;




Well, it's a very important outcome for Australia. It's very good news for Australia, but there's no grounds for

complacency and I challenge the Treasurer now, the Prime

Minister, I should say, to formally commit to price stability. These inflation numbers have been achieved at an horrific

price, a scorched earth in Australia, massive loss of jobs,

massive personal hardship, he's now got to turn that to real

sustainable gain and I challenge him formally to commit to

price stability which in international terms is an inflation rate of between zero and two per cent.


But how positive is this result for our economy.


It's a positive result but, you know, the underlying rate of

inflation is still nearly 3.5 and, you know, it will easily go back up. If he pump-primes the economy this inflation number will just reverse very quickly and you're looking down the

gunbarrell today, as I said, of 5 to 7 per cent inflation very

quickly if he doesn't take responsible decisions, so it's been achieved by throwing the economy into the worst recession in sixty years, a lot of personal pain and hardship, a lot of

corporate failures, a lot of corporations have paid the price and in that sense he now should formally commit, he must

commit. If he won't commit to price stability in current

circumstances, what on earth will he commit to.

Parliament House, Canberra, A.C.T. 2600 Phone 2774022



2 .



H e wson:

There isn't $2 billion to be spent. In out view everything

should be funded. Our Fightback package is fully funded, he

should fund everything. The fiscal situation. Commonwealth and State, is very bad by historical standards, there is no

leeway, there haven't been tough decisions in the p a s t , he

hasn't got the leeway the Treasurer's saying he's got in the

fiscal policy area. And if lie does pump-prime, he risks an

acceleration of inflation, he risks an exchange rate crisis, and he risks further unemployment down the t r a c k . He may make it look better for a while, but when the wheels fall off, as

we learnt in the 1980s, you pay a much bigger price.


Will you accept the argument that financial markets will wear $2 billion?


He's doing a job to massage expectations to try and convince

people that h e ’s got the scope. And all people have to do is

think about what happened when they blew government

expenditure out in 1983 and 1984, they had the exchange rate

crisis in 1985 and 1986. He doesn't have the s c o p e .

International financial markets, I don't believe, will wear it. And he's got to face the reality of that fact, he should

fund his decisions. And, you know, there's a lot of nonsense

being put around by the government, for example, that he's got some money in the Better Cities program that he can use to

fund infrastructure expenditure. There is no money in the

Better Cities program, it is unfunded. I t ’s just a furphie

that they're throwing around to make it look as if the funds

are there to be spent. And they are not there to be s p e n t ,

they were never allocated in the first p l a c e .


But doesn't it provide some basis for further public


Hews o n :

Public expenditure is fine. If you want to have public

expenditure, fund it. You know, we want more infrastructure expenditure, but it's got to be funded. We want accelerated

depreciation allowances, but they've got to be funded.


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Y e s , what we did was to use the government1 s model and assume

that their package had three key elements, another cut in

interest rates, a lower exchange rate, and about $2 billion of unfunded expenditure and what that did was rekindle the

inflation to about 7 per cent from the 1992-93 onwards. It

created a few jobs for a while and growth picked up for a

while and then growth fell off as the increased debt and the

increased interest rate had their effect on the economy. Our debt would blow out from about $130 billion to nearly

$170 billion in net terms, interest rates would be on the rise right through 1992. There are no easy solutions. You've just got to stop and think, if there had been an easy, quick-fix

solution, don't you think Bob Hawke would have tried it, or

Paul Keating when he was Treasurer would have tried it. There is no alternative but the long hard slog of structural reform in Australia and it doesn't really matter what Keating says, financial markets will be the ultimate arbiters. He might

satisfy the Labor Party on the one hand, he'll blow us out of

financial markets on the other. I think one of the great

ironies of 1992 is going to be the Paul Keating claim that

financial sector deregulation, and in particular the floating currency, were one of his great successes, and that will be

where the discipline will come on Paul Keating in an economic sense and we'll impose the discipline in a political sense.

Thank y o u .