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Democrat challenges Howard

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No. 82/102


30 August 1982

Senator John Siddons today challenged the Government to implement

the Campbell Committee's recommendation that the Government sell

variable rate and inflationVlinked securities.

Senator Siddons, the Australian Democrats' Treasury Spokesperson,

said the only reason the Government could have for not doing so was

that it did not believe its fight-inflation-first strategy would


The Campbell Committee suggested inflation linked securities could

provide risk averse household savers, unwilling to invest in ,

equities, with some protection from loss of real capital (before

tax). They would also lessen the scope for arbitrary redistribution

of wealth between borrowers and lenders as a result of inflation.

Senator Siddons said the Government was perpetrating an enormous

confidence trick on the Australian public.

"The Government offers bonds at ;around 15 percent interest but

subjects the interest to income tax at marginal rates up to

60%. But inflation takes the first 10.75 percent though this is

really only maintaining the capital value of the original investment.

"So despite record interest rates, more investors, certainly

those who choose to put their money into Government securities

are actually losing money, after allowing for inflation and

income tax. .

"Inflation proofed bonds at rates of interest as low as 2 or 3

per cent would be very attractive as an investment to middle-class

Australia, desperately seeking some haven for its hard-earned


"So why doesn't the Government introduce inflation-linked

securities?" Senator Siddons asked.

A copy of Senator Siddons1 speech in the Senate on Wednesday 25 August is attached. . '

FOR FURTHER INFORMATION CONTACT Senator John Siddons (03) 622 521 ex. 76

Budget Papers 25 August 1982 SENATE 499

the Government were prepared to offer, say. S2 billion worth of bonds indexed for inflation.

Senator M artyr- But who would buy them?

Senator S1DDONS—1 am coming to that. One might ask whether this would put pressure on the loan market, whether it would increase interest rates and whether the economy is capable of taking up $2 billion worth of government bonds. The answer to that last question is, yes, the econ­ omy would be capable of taking up $2 billion

worth of indexed bonds for the simple reason that we would have already put $3 billion into the economy via the deficit and we are taking out $2 billion via the sale of the bonds. One might ask:

why put money in and take it out? There is a very simple answer to that.

Senator Martyr— But haven’t you got a $5 billion deficit by this stage?

Senator SIDDONS- The Government has budgeted for a domestic surplus. 1 can only go on the figures as they are set out in the Budget. 1 am not commenting on whether the figures are rub­ bery or not. I am saying that the Government’s strategy is based on a domestic surplus, and that is what 1 am commenting on. What is achieved by putting money in and taking it out? It achieves this: If we pul money into circulation via a deficit this money goes directly to where it is needed most. Say, for instance, SI billion of a $3 billion deficit went to the social security area where it is urgently needed. This money would be spent there immediately and this would immediately stimulate demand and consumption. Further, $1 billion of a $3 billion deficit could be directed towards reducing payroll taxman iniquitous tax on labour -which would immediately stimulate production and have an immediate effect on unemployment.

Would such a deficit increase interest rates? First, the major factor affecting interest rates in this country is the level of interest rates overseas, particularly those interest rates in the United States of America. So selling bonds will not affect

interest rates one way of the other. The other major factor causing high interest rates is un­ doubtedly inflation. The level of inflation will not go down until unemployment is reduced and un­ employment, of course, represents an enormous unproductive cost to the community. If bonds were indexed for inflation they would be a very at­ tractive investment to the public even at very low rates of interest- say, 2 per cent. The report of the Commitee of Inquiry into the Australian Financial System the Campbell Committee-­ recommended the sale of indexed bonds. This leads us to the question: Why has the Government

been so quiet on this aspect of the Campbell re­ port? I suggest there can be only one answer to this: The Government itself does not believe it can get inflation down quickly. The Government's financial advisers cannot have it both ways. If they are confident that a tight money strategy is the way to reduce inflation they should be de­ lighted at the chance to sell inflation indexed bonds at low rales of interest. 1 challenge the Government to explain why else it has refused to index the sale of its bonds. 1 conclude with these comments: The price of economic bigotry is high. Does this country, does the Western world, have to plunge into the abyss before this Government sees the light?

Debate (on motion by Senator Thomas) adjourned.

498 SENATE 25 August 1982 Budget Papers

seen that this was modest even by the Govern­ ment’s own standards. In 1976 its deficit was 3.1 per cent of gross domestic product, in 1977 it was 3.7 per cent, and in 1978 it was 3.4 per cent. One media commentator pointed out that a deficit of 3 per cent of GDP would represent the highest in this country’s history. In purely mone^ .;rms that is certainly true. Today, three per cent of GDP would represent a deficit of $4.8 billion, whereas a deficit of 4.2 per cent of GDP in 1974 represented only $4.5 billion. However, a $4.8 billion deficit in

1974 values is equivalent to a deficit of only $1.9 billion today. So in constant money terms a deficit of 3 per cent today would be less than the deficits brought down by this Government in 1977 and


1 want to refer now to cyclical adjustments, a term used in economic management circles around the world, but not in this country. Earlier I said that one commentator claimed that the

Budget was neutral in its effect on the economy. But is it neutral? I put it to honourable senators that it is in effect far from neutral on jobs, in- llalion and interest rates. A small exercise with a pocket calculator will show that on a constant

employment basis, which is the only reasonable way to look at a Budget, this Budget is grossly con­ tractionary. On a constant employment basis rev­ enue in this Budget would he about $48 billion and expenditure about $46 billion. In other words, on this basis the Government has budgeted lor

something like a $2 billion surplus overall or a nearly $4 billion surplus domestically. What do I mean by a constant employment budget? I put it to honourable senators that the nominal figures given in the Budget are a mere bookkeeping exer­ cise, almost totally unrelated to the Budget’s im­ pact on the economy. This impact can be

measured only by a constant employment analy­ sis. which shows how the Budget would be if it were adjusted for a constant level of activity and employment. This sort of analysis evens out the distortions caused by swings in the economic

cycle. Obviously in a recession this cuts tax rev­ enues and boosts social security payments. In a boom the reverse happens. Constant employment analysis evens out these fluctuations.

In case honourable senators think this is a novel idea, I point out that it is widely used around the world, and even, 1 understand, in Mrs Thatcher's Britain. The Australian Treasury has consistently opposed such an analysis on the grounds that any adjustments are somewhat arbitrary and that the

figures can be fudged. This is true. It is also true that the Treasury is gelling away with the ulti­ mate fudge in the form of crude and meaningless figures. If we modify the Budget to take account

of the situation that would apply under constant employment of, say, 2 per cent and 5 per cent greater economic activity -these aims surely are quite modest -we get the sorts of surpluses I


I now turn briefly to government sector bor­ rowing. I want to do this before I comment on one or two specific features of the Budget. We have heard on many occasions that we have to be con­ cerned about Government sector borrowing to make way for private sector borrowing. There is one point that completely explodes this shibbol­ eth. If we look at the national debt indexed for in­

flation, the facts of the matter are that Australia has been reducing its national debt since the con­ servative Government came to power and this is a

feat that has not been achieved by any other member country of the Organisation for Econ­ omic Co-operation and Development.

Senator Martyr Isn’t that a good thing?

Senator SIDDONS- Where has that got us? Australia has applied the monetarist policy more rigidly than any other OECD country and what do we have? Where has it got us? Where has the big deal got us? In November 1975 the level of inflation was 14.6 per cent. In 1982 inflation is rising dramatically. In November 1975, 232,400 people or 5 per cent of the work force were regis­ tered as unemployed. At the beginning of 1983 it is anticipated that at least 8 per cent will be unem­ ployed. In November 1975 the overdraft rate charged by trading banks was 11.5 per cent and the interest rates on the average home loan was 8.5 per cent. Today the interest rate on overdrafts is 13.5 per cent and the interest rate on the aver­ age home loan is 14.5 per cent. All taxes and rev­ enues collected by the Federal Government in

1975-76 were only 23 per cent of gross domestic product. Today they are .29 per cent of GDP. To rub salt into the wound we are getting less for it. We do not even have Medibank for a start.

There is a way that we can have a synthesis be­ tween Keynesian and supply-side economics. The argument generally applied against deficits is that- they create excessive liquidity and therefore con- iribute to inflation. In a time ol unused capacity such as we have at the moment I doubt that this argument is valid. But just assuming it is, I suggest that the Government could readily soak up any excess liquidity that a large deficit or even a mod­ est deficit may provoke by the sale of bonds indeT'

xcd for inllation. For instance, if we had a dom­ estic deficit of, say, $3 billion this wouta, ol course, increase liquidity in the economy by ST billion. But this could be reduced if, for instance^

Budget Papers 25 August 1982 SENATE 497

our economy but also that of the United State of America, the greatest power-house in the world. We are now on the brink. An article by Maxwell Newton in the Australian on Monday last stated:

Yet the economic policies of the administration both tax and monetary -a re dmh taking on more the aspects of the policies implemented by President 11 cover in the ••irly 19.30s.

Under Mr Hoover, the mones supply was drastically re­ stricted at a time of economic reception.

At that time, the American federal reserve, fear­ ing inflation, strongly restricted bank reserves and starved the economic system of money. In 1932, the Hoover Administration increased income tax by $900m, or nearly 30 per cent, and a severe re­ cession turned onto the Great Depression. I need hardly remind honourable senators of the result.

Extremism flourished, demagogues who promised easy solutions came to power and the world was plunged into catastrophe.

I said we were on the brink of an abyss. Until this year nobody thought that was possible. Had we not learned from the past? Did we not know how to stimulate the economy when times were

tough and dampen it down when times were good? The counter-cyclical approach has vir­ tually been abandoned in this Budget. Instead, the Government has brought down a Budget which

has been described by some commentators as neu­ tral in its impact on the economy.

At a time when the economy is desperately short of demand and cash, a neutral Budget is the best that the Government can do. The critical problem of this Budget is the domestic surplus of $230m. This means that the economic screws are being tightened at a time when the economy de­

mands that they be loosened. 1 quote from page 317 of Budget No. I: . ·

The domestic deficit measures the Budget's immediate con­ tribution to liquidity in the economy . . . the domestic deficit or surplus is of key significance for monetary conditions and monetary conditions and monetary management in the short term.

I intend to focus my remarks on the Govern­ ment's domestic surplus. In simple terms the dom­ estic surplus means that the Government is taking $230m more out of the economy in the form of various sorts of taxation than it is giving back to

the people in the form of social welfare and other payments.

Senator Martyr- -Should we have a domestic deficit?

Senator SIDDONS —I am coming to that. I ask the honourable senator to be patient. The Government is taking money out of the economy and restricting liquidity at a time when the econ­

omy is balanced on the brink. We have heard fore­ casts of 8 per cent unemployment. In fact,

Senator Button said 9 per cent. The Government has not revealed these sorts of forecasts, in fact, it has gone out of its way to tell us that we are in for '

a bad time. What possible justification could the Government have for coming up with a Budget with a strategy almost identical this year to the strategy we had last year? Last year the Govern^

ment was talking of a resources boom. If a dom­ estic surplus was justified last year, how can the Government possibly justify a domestic surplus of about the same magnitude this year when the economic conditions are so much worse and everybody realises that they are?

The answer to this strategy by the Government is simply this: It is justified on the basis that the only way to get rid of inflation is to tighten the monetary screws, irrespective of the hardship that this approach can cause to the community gener­ ally and irrespective of whether it creates massive unemployment. The tragedy is that the Govern­ ment has had three unfettered years to solve infla­ tion its way—through tight money—and it has

failed. The problem of inflation has not been solved in Australia. Let us look at other countries. In recent years Germany has budgeted for very substantial deficits. It has. been one of the most successful countries in the Western world in fight­

ing inflation. The same situation applies to Japan and Austria. Those countries have budgeted for domestic deficits well in excess of 3 per cent of gross domestic product. So we have to ask the question: How long is the Government going to

persist with policies that are just not working? There is another way. It is a way that many finan­ cial institutions do not particularly like but it is the alternative. That way is to loosen the money screws.

Let us look at the Government’s Budget strat­ egy over recent years. Between 1974 and 1975 not once did Budget deficits as a percentage of gross domestic product fall below 3 per cent. Over the

last three years Budget deficits have been dra­ matically different, as the deficit is this year. In the past three years the deficit has been respect­ ively 1.8 per cent, 0.9 per cent, and 0.4 per cent of the gross domestic product. This year it is one per cent of GDP. So we see that sinee 1979 there has been a dramatic change of policy by the Govern­ ment in its handling of the economy. The Govern­ ment’s tight money supply started then, and it has persisted with that policy right through to this

Budget, in spite of our rapidly deteriorating economy.

Some weeks ago I advocated that this year the Government should budget for an overall deficit of 3 per cent of gross domestic product. We have

4% SENATE 25 August 1982

Budget Papers

Senator SIDDONS (Victoria) (9.6) inspire------of the comments by the Minister for Veterans’ Affairs (Senator Messner), this Budget does not represent a change of direction by the Govern­ ment. It may well be a vole catching Budget but it is not a Budget designed to stimulate the econ­ omy. The mirage of goodies conjured up by care­

fully contrived Budget leaks is nothing but a con­ fidence trick. They arc boiled lollies for the purpose of hiding the real medicine. Last year, in a speech on the 1981 Budget, I said that it was time for the Herbert Hoovers in the Government to be thrown out and for men of vision like Franklvn L). Roosevelt to come to the fore. Little did I realise how urgent that calls was. But, alas, the Hoovers in Australia and around the world are still presiding over the destruction not only of