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Loan Council meeting takes place against quite a different economic background

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This year's meeting of the Loan Council takes place against an

economic background which in important respects is quite different

from that of recent years.

Following growth in non-farm product of less than 2 per cent in

1978- 79» there has been a definite strengthening in economic activity

in the current financial year. There are now good prospects that the

growth in non-farm product in 1979-80 will be in excess of 3 per cent

and that employment, which has improved markedly, will increase by

over 2 per cent.

Until recently the driving force behind the strengthening in economic

activity has been exports, which in the first nine months of 1979-80

were no less than 17 per cent higher than a year earlier in constant

price terms. The improvement in the competitive position of Australian

industry - in which the Government's economic policies have played a

central part - has been a key factor in this growth.

However, the basis of growth has broadened. In the second half of

1979- 80 internally generated private demand has been contributing more

strongly to the economy's expansion, with both private consumption

and private investment (including dwellings) recording firm growth.


The increase in real consumption expenditure, which has generally-

been running at around 2-2ijr per cent over recent years, accelerated

to an annual rate of 3*6 per cent over the half year ended March.

Business fixed investment, which was affected in the first half of

1979-80 by the bringing forward of some investment into the previous

year in order to take advantage of the 40 per cent investment

allowance, recovered strongly in the March quarter.

This improvement in economic activity has, however, been accompanied

by some lift in the rate of inflation and by mounting wage pressures.

The continuing spread of so-called 'work value* increases, and the

effects of wage indexation decisions, mean that the growth in wages

in 1979-80 will be significantly higher than the 7·7 per cent increase

recorded last year. These wage pressures are a matter of serious

concern to the Government and it will continue to be a primary aim

of policy to resist those pressures in the interests of all responsible

sections of the community.

Current claims by metal industry unions for the introduction of a

35 hour week are particularly irresponsible. Unless a 35 hour week

were to be accompanied by a pro-rata reduction in nominal weekly wage

rates - and that has not been suggested - there would be an increase

in labour costs as a result of the higher hourly wage rate and the

higher rate paid for overtime. Such a development would, of course,

add to the difficulty of increasing employment and reducing unemployment.

As the Prime Minister has recently pointed out, it is a recipe of

selfishness designed to help those who are already employed. This

is a thinly disguised attempt by a section of the union movement to

secure an increase in pay for those of their members who are /employed,


without regard to the rest of the community or indeed the longer

term interests of their members.

Every Government around this table has a clear responsibility to

resist the move to lower standard working hours. It is clear that

the 35 hour week campaign is not supported by the great bulk of

rank and file unionists, who realise that this is an unrealistic,

selfish demand being promoted by individual trade union leaders.

The 1980’s promise to be a dynamic economic decade for Australia

and the Government is determined to ensure that that prospect is not

threatened by the irresponsible actions of a few. That will require

continued responsible economic management directed towards making

steady progress in the achievement of economic prosperity.

If Australia’s favourable economic prospects are to be realised,

it must be recognised that there are limits to what can be achieved

within any given time span. Those limits axe, indeed, stricter now

than they were ten years ago. Inflation and the other constraints

which developed in the early to mid 1970's» though lessening, are

constricting our growth potential. It remains a central aim of the

Government's policies to reduce and, over time, eliminate those


In the meantime, particular care is needed in approaching the

development task. If the economy were to become overloaded, the

resultant upsurge in inflation would soon bring economic growth to

an end and severely impair our medium-term prospects, just as it

has done in many overseas countries. The Government is determined

to prevent that happening. In the economic circumstances now facing


us, we cannot afford to pursue more "relaxed" policies - rather,

the opposite.

The possibility of overloading the economy exists despite the fact

that unemployment, while stable over the past year, continues high.

As the Government has consistently argued before the Conciliation

and Arbitration Commission, with wages at historically high levels

relative to profits - and particularly with real wages of unskilled

(including young) workers at high levels relative to the productivity

of such workers - employers have little incentive to increase

employment of the less skilled categories of labour. Until the

Commission recognises these facts in its decisions the prospect is,

regrettably, that there will be only limited scope for reducing

unemployment in these areas of the labour market.

The natural growth of the labour force, and the possibility of

increasing participation rates, will of course continue to provide

sources of additional manpower. There are, however, already some

signs of a developing shortage of the skilled manpower needed to

bring the increasing list of announced private investment projects

to fruition. Through immigration and increased training efforts,

action is being taken to increase supplies of skilled labour. But

even using these avenues for supplementing our. labour resources,

considerable care will be needed to ensure that wage increases designed

to attract more skilled manpower do not, under our centralised wage

determination system, give rise to a general lift in wages that would

do serious damage to the economy.

Nor can the possibility be ignored of pressures on the supply of

materials, particularly building materials. Notwithstanding the

additions to industrial capacity in recent years - and the further


additions now in prospect - it may not take much in the way of

further strengthening in demand for supply difficulties, already ' · Ί : - .

in evidence, to develop.

The potential for supply constraints to develop has to be considered

against the strengthening of internally generated demand across a

wide spectrum.

As indicated, until fairly recently, the external sector had been

the driving force behind the strengthening recovery in economic

activity. With the slow-down now occurring in overseas economic

activity, particularly in the United States, exports cannot, of

course, be expected to continue to increase at recent rates. However,

the composition of our exports suggests that Australia will not be

affected as much as many other countries. Over 45 per cent of our

exports now go to Asian and Middle East countries which, in general,

appear to be better placed to sustain their growth rates over the

next year. Moreover, Australia is an important supplier of foodstuffs

and energy related products, the market prospects for which are

generally better than average. On balance, there seems a reasonable

prospect of maintaining some real growth in exports next year,

provided international competitiveness is sustained.

Even so, this slow-down in overseas demand might in other circumstances

give cause for some questioning of Australia's domestic economic

prospects. However, with continued responsible economic management,

the strengthening of internally generated demand should be more than

sufficient to offset the expected slower growth in exports.


The recent faster rate of growth in consumption expenditure may

not be fully sustained in 1980-81. However, faster growth in

consumption demand than in recent years could well continue over

the period ahead. .

Such a prospect for consumption comes at a time when the outlook

for private business investment is extremely buoyant. Current

price estimates of expected new capital expenditure by private

businesses for 1980-81 are no less than 35 per cent higher than

were the expectations for 1979-80 at this time a year ago. Even

allowing for some over optimism, private business investment is

clearly set to grow very strongly in real terms in 1980-81; and

the outlook is for continuing strong growth well beyond that.

Moreover, although this strengthening private investment outlook

is centred on resources projects, it is spread broadly across the

economy as a whole. Meanwhile, private dwelling expenditure, which

has increased markedly over the past 18 months, is giving every

indication of at least maintaining recent high levels. The number

of private dwellings under construction at the end of March was

7 per cent higher than a year earlier and the number of private

dwelling approvals picked up strongly in the three months to April.

Private demand for housing is to-some extent in competition with

other demands likely to be placed on the building and construction


All in all, the conclusion seems clear. Private sector demand seems

set to strengthen considerably in 1980-81. Given the potential for

supply constraints to develop, the aim must be in these circumstances

to limit and, if possible, reduce the public sector's demands on

both real and financial resources. Over recent years, public sector

outlays have run at a fairly steady 38 per cent of gross domestic

product, compared with the much lower average of 33 per cent in the


five years to 1974-75· With the rapid increase in "borrowings by

State and Commonwealth authorities, the total public sector

borrowing requirement has also risen sharply. In fact, although

this year's major reduction in the Commonwealth Budget deficit

will produce the first break for some years in the upward trend

in the public sector borrowing requirement, it will still leave

it at a high level by historical standards.

In the current financial year, even with the major reduction in

the Commonwealth's Budget deficit, pressures on the domestic

capital market have resulted in the growth in the money supply

exceeding, by more than the Government would have wished, the

figure of about 10 per cent set as the projection for M3 growth

in the 1979-80 Budget. This was primarily a reflection of the

strong growth in private sector usage of bank credit - itself an

indication of the strengthening of private sector demand - and of the

somewhat larger than anticipated surplus on private sector foreign

exchange transactions, which reflected an abnormally low current

account deficit and, more recently, a resurgence in private capital

inflow. The successful introduction of the tap system has resulted

in increased sales of Government securities in the recent period,

but this has not been enough to offset these developments.

In the economic circumstances likely to prevail in 1980-81 as the

Government sees them at this stage - and particularly in the light

of the acceleration in wage costs that has been occurring recently -

the Government will continue to aim for a growth in the money

aggregates that will bear down on inflation and inflationary

expectations while allowing adequate finance for a continued


strengthening in private sector activity. That is not going to

be an easy task. For one thing, the large volume of maturing

Commonwealth bonds will itself make for a difficult re-financing

task - which will not be eased by the increasing volume also of

State authority maturities. Moreover, there seems certain to be

a strong increase in private sector demand for capital funds to

finance investment expenditures. In these prospective circumstances,

and having regard to developments in overseas interest rates, the

likelihood is for a further increase in 1980-81 in the inflow of

private loan and equity capital from overseas.

Such a development would, of course, bring to a successful conclusion

the Government's programme of expanded Commonwealth overseas borrowing.

As such, and as a return to the situation prevailing in earlier years

whereby Australia was normally a significant net importer of private

capital from abroad, that prospect is to be welcomed. But it also

means that, if the overall growth in the money supply is to be

constrained within the necessary limits, and if pressures on interest

rates are to be minimised, the scope for additions to credit from

other sources will be limited.

For private sector financial demands to be accommodated satisfactorily

there is a need to continue to restrain the public sector borrowing

requirement in 1980-81.

As in the current financial year, when total public sector borrowings

were reduced by about $1,600 million, the Commonwealth is prepared

to make a significant contribution to this objective. It is against

this background that the Commonwealth looks to the State Governments

to accept firm restraint in borrowings for their own works programmes


and for those of their authorities, as the Commonwealth will be

for its own. .

The past few years have seen considerable progress and it is

important that hard-won gains be preserved and built upon. There

is at stake here nothing less than the health and prosperity of

our economy in 1980-81 and beyond.

26 June 1980