Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
The free enterprise system



Download PDFDownload PDF

NO.

TREASURER

EMBARGO Immediate Release

ADDRESS BY THE TREASURER, THE RT. HON. PHILLIP LYNCH, M.P. TO THE SYDNEY CHAMBER OF COMMERCE, FRIDAY 11 MARCH, 1977

I WELCOME THE OPPORTUNITY TO ADDRESS SO MANY SENIOR MEMBERS OF THE SY-DNEY BUSINESS COMMUNITY HERE TODAY.

LET ME MAKE ONE POINT VERY CLEAR FROM THE OUTSET.

THE PRESENT GOVERNMENT BELIEVES IN THE FREE ENTERPRISE SYSTEM AND HAS, I BELIEVE, GONE A LONG WAY TOWARDS PUTTING THE BUSINESS COMMUNITY BACK ON ITS FEET.

UNLIKE OUR POLITICAL OPPONENTS WE BELIEVE THAT IT IS ONLY THROUGH THE PRIVATE SECTOR THAT NEW RESOURCES AND NEW JOB OPPORTUNITIES CAN BE GENERATED.

OUR POLICIES HAVE THEREFORE HAD THE SPECIFIC OBJECTIVE OF REDUCING THE SIZE OF THE GOVERNMENT SECTOR AND OF CREATING A CLIMATE IN WHICH THE PRIVATE SECTOR CAN EXPAND AND DEVELOP.

IN ALL OF THIS IT IS, I BELIEVE, IMPORTANT FOR BUSINESS TO WORK

WITH THE GOVERNMENT - TO CO-OPERATE WITH US IN GETTING THE ECONOMY ON THE MOVE ONCE AGAIN. .

THE EXTENT TO WHICH CONFIDENCE STRENGTHENS DURING THE PERIOD AHEAD WILL HAVE AN IMPORTANT BEARING ON THE SPEED OF RECOVERY, AND ESPECIALLY ON THE LEVEL OF BUSINESS INVESTMENT SPENDING.

SECTIONS OF THE BUSINESS COMMUNITY HAVE, I BELIEVE, FOR SOME TIME HAD A SOMEWHAT UNREALISTIC EXPECTATION AS TO THE TIME-FRAME WITHIN WHICH POLICIES WILL LEAD TO TANGIBLE ECONOMIC RESULTS.

2

THE GOVERNMENT HAS ALWAYS BEEN AT PAINS TO POINT OUT THAT ITS

ECONOMIC STRATEGY IS BASED ON THE PURSUIT OF A SUSTAINABLE GROWTH RATE.

OUR PROJECTIONS FOR GROWTH WERE SET DOWN IN THE BUDGET AND, TO NAME THE BASIC ELEMENT, WE SAID THAT REAL GROWTH IN THE NON-FARM SECTOR OF THE ECONOMY WOULD BE AT A RATE OF AROUND 4 PER CENT IN THE FINANCIAL YEAR.

THE INDICATIONS ARE ALREADY THAT THAT GROWTH RATE WILL BE EXCEEDED

I EMPHASISE THAT THE GOVERNMENT DOES NOT WANT TO SEE AN OVERLY QUICK PICK-UP IN THE LEVEL OF ACTIVITY FOR THE SIMPLE REASON THAT THIS WOULD UNDOUBTEDLY LEAD TO FURTHER INFLATIONARY PRESSURES

THE RATE. OF ECONOMIC GROWTH PRESENTLY ENVISAGED IS CONSISTENT WITH MODERATE AND STEADY EXPANSION WITHIN THE ECONOMY THAT CAN BE SUSTAINED OVER A LONG PERIOD.

AGAINST THAT BACKGROUND I MENTION THAT WE HAVE BEEN, AND INDEED

STILL ARE, GOING THROUGH A SETTLING DOWN PERIOD FOLLOWING THE DEVALUATION LATE LAST NOVEMBER.

IN ORDER TO KEEP THE INFLATIONARY IMPACT OF DEVALUATION TO AN

ABSOLUTE MINIMUM AND, IN CONSEQUENCE, TO MAXIMISE THE POTENTIAL BENEFITS TO BUSINESSES AND THE ECONOMY GENERALLY, THE GOVERNMENT HAS HAD TO MAKE A NUMBER OF ADJUSTMENTS TO THE DOMESTIC ARMS OF

POLICY.

THIS HAS BEEN AND WILL CONTINUE TO BE DONE AS NECESSARY.

IN MAKING THESE ADJUSTMENTS THE GOVERNMENT SET OUT CLEARLY THE

REASONS FOR THE ACTIONS IT HAS BEEN TAKING.

ON THE FIRST DAY OF THE 1977 PARLIAMENTARY SESSION, FOR EXAMPLE,

I MADE A MAJOR ECONOMIC STATEMENT TO THE HOUSE OF REPRESENTATIVES.

3

3

THAT STATEMENT OUTLINED, IN CONSIDERABLE DETAIL, THE ECONOMIC

PROBLEMS CONFRONTING AUSTRALIA AND THE GOVERNMENT'S STRATEGY FOR

DEALING WITH THEM. ,

THE STATEMENT ALSO DEALT AT LENGTH WITH MATTERS THAT HAVE RECENTLY BEEN THE SUBJECT OF PUBLIC DEBATE, FOR EXAMPLE, THE CHORUS OF DEMANDS FOR CUTS IN TAXATION, TO WHICH A NUMBER OF IMPORTANT BUSINESS ORGANIZATIONS HAVE GIVEN THEIR SUPPORT.

THE SO-CALLED "TAX BANDWAGON" REFLECTS, I BELIEVE, NOT ONLY FAILURE TO DIAGNOSE CORRECTLY THE PROBLEMS CONFRONTING US, BUT ALSO DEMONSTRATES A COMPLETE MISREADING OF ECONOMIC DEVELOPMENTS

DURING 1976.

I WILL RETURN TO THIS MATTER LATER ON IN MY REMARKS.

FIRST, LET ME BRIEFLY REVIEW DEVELOPMENTS DURING 1976.

THEY CAN, PERHAPS, BEST BE SEEN AGAINST THE STATE OF THE ECONOMY

AS WE FOUND IT AT THE END OF 1975. .

A COMPARISON OF THIS SORT COULD BE CARRIED OUT ACROSS A WIDE

RANGE OF ECONOMIC INDICATORS; BUT, GIVEN THE TIME AVAILABLE TODAY, LET ME FOCUS ON THE THREE MOST COMMON BENCHMARKS.

THE FIRST OF THESE IS INFLATION.

INFLATION WAS RUNNING AT AN ANNUAL RATE CLOSE TO 15 PER CENT

DURING 1975 .

DESPITE THE COMMOTION THAT HAS ACCOMPANIED THE 6.0 PER CENT

DECEMBER QUARTER RISE IN THE CONSUMER PRICE INDEX, A CONSIDERABLE

WINDING DOWN IN THE UNDERLYING RATE OF INFLATION WAS ACHIEVED

DURING 19 76.

AFTER PROPER ALLOWANCE IS MADE FOR THE EFFECTS ON THE CONSUMER

PRICE INDEX OF CHANGES TO HEALTH INSURANCE ARRANGEMENTS AND

INDIRECT TAXES AND CHARGES, INFLATION .IN THE SECOND HALF OF 1976 WAS RECORDED AT AN ANNUAL RATE SOME 4 PERCENTAGE POINTS OR

MORE LOWER THAN IN THE SECOND HALF OF 1975.

4

4

ί ' ■

THERE HAVE BEEN SOME ASSERTIONS THAT ALLOWANCES SHOULD NOT BE MADE FOR THE FACTORS THAT I HAVE JUST MENTIONED.

BUT, THE STATISTICAL EFFECT OF "MEDIBANK" ON THE INDEX HAS NOTHING TO DO WITH UNDERLYING INFLATIONARY PRESSURES IN THE ECONOMY. I ·

IT IS CLEARLY LUDICROUS, FOR EXAMPLE, TO SUGGEST THAT HEALTH INSURANCE SUDDENLY BECAME FREE IN 1975, OR MORE COSTLY IN 1976.

THE FACT IS THAT THE WHITLAM GOVERNMENT SIMPLY TRANSFERRED THE BILL TO THE TAXPAYER - WE HAVE HANDED IT BACK, IN THE MAIN, TO THE USER; HEALTH SERVICES STILL HAVE TO BE PAID FOR BY THE COMMUNITY.

IT IS IMPORTANT NOT ONLY TO REALIZE THE EXTENT TO WHICH INFLATION

NAS BRAKED DURING 1976, BUT ALSO TO APPRECIATE THE SIGNIFICANCE OF THAT DEVELOPMENT.

THERE. ARE THOSE WHO ASSERT THAT THE GOVERNMENT IS PRE-OCCUPIED WITH INFLATION - THAT IT, AS A RESULT, PAYS INSUFFICIENT ATTENTION ΓΟ UNEMPLOYMENT.

SUCH CLAIMS FAIL COMPLETELY TO COMPREHEND THE NATURE OF THE ECONOMIC MALAISE THE GOVERNMENT HAS HAD TO GRAPPLE WITH.

THE STEADY PROGRESS IN THE FIGHT AGAINST INFLATION HAS BEEN SLOWLY / RE-ESTABLISHING THE PRE-CONDITIONS FOR SUSTAINABLE GROWTH.

INFLATION AND UNEMPLOYMENT ARE NOT SEPARATE PROBLEMS.

THEY ARE INEXTRICABLY LINKED; A PERMANENT SOLUTION TO THE LATTER NECESSARILY DEPENDS ON SUCCESS AGAINST THE FORMER.

TO EMPHASISE THE POINT I QUOTE FROM THE COMMUNIQUE ISSUED LAST

YEAR BY THE INTERIM COMMITTEE OF THE INTERNATIONAL MONETARY FUND:-

"THE COMMITTEE BELIEVES THAT IN PRESENT CIRCUMSTANCES THE RESTORATION OF A REASONABLE DEGREE OF PRICE STABILITY WILL

BE NECESSARY TO ESTABLISH THE BASIS FOR SUSTAINED ECONOMIC

5

GROWTH AND THE REDUCTION OF UNEMPLOYMENT. . ACCORDINGLY-',-

THE COMMITTEE IS OF THE VIEW THAT POLICIES. IN THE

INDUSTRIAL COUNTRIES AT THE PRESENT TIME SHOULD GIVE PRIORITY TO THE REDUCTION OF PRICE AND COST INFLATION.

THIS WOULD REQUIRE FISCAL AND MONETARY POLICIES IN THESE

COUNTRIES THAT WOULD PROVIDE EFFECTIVE CONTROL OVER THE EXPANSION OF AGGREGATE DEMAND...."

THE PROGRESS AGAINST INFLATION DURING 1976 MUST ALSO BE SEEN AS PROGRESS TOWARD RESTORATION OF HIGHER EMPLOYMENT LEVELS.

IN PARTICULAR, THE DISTORTIONS TO KEY ECONOMIC RELATIONSHIPS DURING 1974 AND 1975, WHICH DEEPENED AND PROLONGED THE RECESSION, BEGAN TO BE CORRECTED DURING 1976. .

BUSINESS PROFITABILITY STRENGTHENED AND THE PROFIT SHARE BEGAN TO RECOVER FROM THE EXTREMELY DEPRESSED LEVEL TO WHICH IT WAS DRIVEN IN 1974 AND 1975.

IN THE SETPEMBER QUARTER OF LAST YEAR, COMPANY PROFITS WERE UP 39.4 PER CENT ON A YEAR EARLIER. .

as: a l l o f y o u w o u l d a g r e e , c o n t i n u a t i o n o f thi s t r e n d is c e n t r a l

TO THE REVIVAL OF BUSINESS CONFIDENCE AND BUSINESS INVESTMENT.

THE PICK-UP IN PROFITS EXPLAINS, IN PART, WHY THERE HAS BEEN A SIGNIFICANT REVIVAL IN INVESTMENT.

AND I MENTION HERE THAT INVESTMENT BY PRIVATE ENTERPRISES IN NEW PLANT AND EQUIPMENT INCREASED BY 24 PER CENT IN 1976 - A VERY HEALTHY INCREASE IN REAL TERMS.

THE SECOND IMPORTANT, AND IN EARLIER LESS INFLATIONARY TIMES SOMETIMES THE SOLE, BENCHMARK OF ECONOMIC PERFORMANCE THAT I WISH TO MENTION IS REAL ACTIVITY.,

BETWEEN THE MARCH QUARTER OF 1974 AND THE DECEMBER QUARTER OF 1975

GROSS NON-FARM PRODUCT DECLINED MORE THAN 4 PER CENT. .

' . - 5 - ■ . ,

6

IN CONTRAST AGGREGATE EXPENDITURES AND NATIONAL PRODUCTION BEGAN

TO GROW AGAIN IN 1976 IN LINE WITH THE GOVERNMENT'S OBJECTIVES.

MOST STRIKING HAS BEEN THE 7% PER CENT RISE IN REAL GROSS NON-FARM

PRODUCT RECORDED, ON A PROVISIONAL BASIS, BETWEEN THE DECEMBER

QUARTER OF 1975 AND THE SEPTEMBER QUARTER OF 1976. .

AND, AS I MENTIONED AT THE OUTSET, REAL GROWTH IN 1976/77 SEEMS LIKELY TO EXCEED THE 4 PER CENT EXPECTED AT THE TIME THE BUDGET

WAS BROUGHT DOWN.

PUTTING ALL OF THE AVAILABLE INDICATORS OF ECONOMIC ACTIVITY TOGETHER, THE PICTURE THAT EMERGES IS ONE OF CONTINUING IMPROVEMENT.

A POINT OF FUNDAMENTAL IMPORTANCE IN ALL OF THIS IS THAT THE BASIS FOR GROWTH HAS BEEN COMPLETELY IN THE PRIVATE SECTOR OF THE ECONOMY - THE CONTRIBUTION OF GOVERNMENT TO AGGREGATE EXPENDITURE

ACTUALLY DECLINED OVER THE FIRST THREE QUARTERS OF 1976.

IT IS TRUE, OF COURSE, THAT NOT EVERY ELEMENT WITHIN THE ECONOMY

HAS YET IMPROVED TO A SIGNIFICANT EXTENT AS. IS THE USUAL PATTERN OF

ANY ECONOMIC RECOVERY. .

FOR EXAMPLE, RETAIL SALES AND INDICES OF FACTORY PRODUCTION REMAIN

UNEVEN. . .

THE THIRD COMMON BENCHMARK, AND ONE TO WHICH MUCH PUBLIC ATTENTION

IS PAID, IS THE LABOUR MARKET. . . ,

SOME HAVE MADE THE POINT THAT, BECAUSE UNEMPLOYMENT REMAINS HIGH, ECONOMIC ACTIVITY IS NOT MOVING AHEAD AT A SATISFACTORY RATE.

THAT KIND OF ASSERTION IS QUITE FUNDAMENTALLY WRONG. .

UNEMPLOYMENT DATA ARE NEVER AMONG THE LEADING INDICATORS OF .

ECONOMIC RECOVERY AND THE LIFT IN DEMAND AND PRODUCTION. THAT HAS

TAKEN PLACE WILL TAKE SOME TIME YET TO BE TRANSLATED INTO. A

DECLINE IN UNEMPLOYMENT.

. . 7

I MADE THIS QUITE CLEAR WHEN INTRODUCING THE BUDGET LAST YEAR.

. . . . - 7 - .

THERE HAS BEEN RECENTLY TOO MUCH COMMENT OF A POLITICAL KIND DIRECTED TOWARDS UNEMPLOYMENT AND TOO LITTLE ANALYSIS AS TO THE TRUE PICTURE. .

FOR EXAMPLE, I REFER TO THE LAST SPECIAL SURVEY THAT WAS CONDUCTED

BY THE AUSTRALIAN BUREAU OF STATISTICS.

JUST ove r: o n e t h i r d o f t h e r e s p o n d e n t s t o t h e s u r v e y w e r e n o t

UNEMPLOYED ON THE ABS DEFINITION - AN INTERNATIONALLY AGREED DEFINITION. .

MORE THAN 25 PER CENT WERE EMPLOYED FULL-TIME OR PART-TIME OR

HAD LOST OR FOUND A JOB IN THE WEEK OF THE SURVEY.

ALMOST ONE-FIFTH OF THE SAMPLE SURVEY, RATHER THAN THE RESPONDENTS

TO THE SURVEY,. WERE FOUND NOT TO BE RESIDING AT THE ADDRESS STATED WHEN REGISTERING FOR EMPLOYMENT. .

THIS KIND OF ANALYSIS GIVES THE LIE TO THE ABSURB ASSERTIONS BEING MADE BY THE PRESIDENT OF THE A.C.T.U. AT THE MOMENT TO THE EFFECT THAT THE LEVEL OF UNEMPLOYMENT HAS REACHED 9 PER CENT.

IT ALSO EXPLAINS, TO SOME EXTENT, WHY MANY COMPANIES CONTINUE TO

HAVE DIFFICULTY IN OBTAINING SATISFACTORY EMPLOYEES IN CIRCUMSTANCES WHERE THE LEVEL OF RECORDED UNEMPLOYMENT IS HIGH BY COMPARISON WITH PAST EXPERIENCE.

MANY OF THE RECENT CALLS FOR ECONOMIC STIMULUS, INCLUDING THOSE

MADE BY MR. HAWKE, HAVE QUITE WRONGLY ARISEN BECAUSE THE LEVEL OF UNEMPLOYMENT HAS BEEN TAKEN AS THE SOLE MEASURE OF ECONOMIC ACTIVITY.

SIMILARLY, THE SAME ARGUMENTS HAVE BEEN ADVANCED BECAUSE OF AN . .

IMPRESSION THAT COMPANY PROFITABILITY HAS NOT PICKED UP.

8 .

8

LET ME SAY SIMPLY THAT ARGUMENTS FOR STIMULUS TO THE ECONOMY DO NOT WASH AGAINST THE GENERAL STRENGTHENING THAT HAS TAKEN PLACE IN THE ECONOMY AND, PARTICULARLY, AGAINST THE VERY SUBSTANTIAL UPTURN IN BUSINESS PROFITABILITY.

BECAUSE DRY STATISTICS DO NOT, PERHAPS, HAVE SUFFICIENT IMPACT, LET ME GIVE YOU SOME SPECIFIC ILLUSTRATIONS OF THE EXTENT TO WHICH PRE-TAX PROFITS HAVE RISEN:­

. ICl UP 63.3 PER CENT IN THE YEAR ENDING LAST SEPTEMBER;

. HAMERS LEY UP 80.2 PER CENT IN THE YEAR TO LAST DECEMBER;

. NATIONAL BANK UP 29.7 PER CENT IN THE YEAR ENDING LAST SEPTEMBER AND,

. BHP, ON AN AFTER-TAX BASIS, UP 41.3 PER CENT IN THE HALF

YEAR ENDING DECEMBER LAST.

WHILE THESE PROFIT" INCREASES ARE MOST ENCOURAGING THE GOVERNMENT IS WELL AWARE OF THE FACT THAT THE COMPANY PROFIT SHARE HAS.ONLY ABOUT HALF RECOVERED TO ITS HISTORICALLY NORMAL LEVEL.

WE, LIKE GOVERNMENTS ALL AROUND THE WORLD, RECOGNIZE THE CRUCIAL

RELATIONSHIPS BETWEEN PROFITS, INVESTMENT AND THE CREATION OF NEW JOBS.

FURTHER RECOVERY OF THE PROFIT SHARE FIGURES PROMINENTLY IN OUR

STRATEGY FOR RECOVERY.

AS I SAID EARLIER ON IN MY REMARKS TODAY THERE REMAIN THOSE WHO .

BELIEVE THAT TAX CUTS ARE NEEDED NOW TO SPEED UP ECONOMIC RECOVERY.

LET ME THEREFORE DEAL QUITE SPECIFICALLY WITH THE FOUR POSSIBLE WAYS OF FINANCING THE REVENUE REDUCTION THAT WOULD BE INVOLVED.

9

. INCREASING OTHER FORMS OF TAXATION; *'

. SHARPLY INCREASING INTEREST RATES IN ORDER TO STEP UP

GOVERNMENT BORROWING FROM THE NON-BANK PUBLIC;

. CUTTING BACK HARD ON GOVERNMENT EXPENDITURE; AND

. PRINTING MONEY.

WE HAVE RULED OUT THE FIRST TWO ALTERNATIVES.

WE HAVE SAID BEFORE, AND I SAY AGAIN, THAT WE WILL NOT FINANCE TAX REFORM VIA THE FOURTH ALTERNATIVE - PRINTING MONEY. .

IN CURRENT CIRCUMSTANCES TAX CUTS CAN THEREFORE ONLY BE IMPLEMENTED RESPONSIBLY IF THEY ARE ACCOMPANIED BY CORRESPONDING CUT-BACKS IN THE GROWTH OF EXPENDITURE, SO THAT THEIR RESULTANT IMPACT ON THE DEFICIT IS OFFSET AND OUR WHOLE ANTI-INFLATION STRATEGY

IS. NOT JEOPARDIZED.

IN OTHER WORDS, TAX CUTS ARE NOT THE EASY OPTION THAT SOME WOULD HAVE US BELIEVE.

AS A FINAL POINT ON THIS SUBJECT I WANT TO BRIEFLY REFER TO SOME OF THE REFORMS THAT HAVE BEEN MADE AND THAT ARE SOMETIMES GIVEN INSUFFICIENT ATTENTION BY THOSE SEEKING FURTHER CONCESSIONS AT

THIS TIME:

. WE HAVE INDEXED PERSONAL INCOME TAX;

. WE HAVE GIVEN TAXATION CONCESSIONS TO PRIVATE COMPANIES;

. WE HAVE MADE ARRANGEMENTS TO INTRODUCE THE FIRST STAGE OF COMPANY TAX INDEXATION AS FROM 1 JULY THIS YEAR;

. WE HAVE INTRODUCED A 40 PER CENT INVESTMENT ALLOWANCE; .

WE HAVE EASED THE PROVISIONS APPLYING TO ESTATE DUTY.

: - 9 -

10

OUR TAX REFORMS TO DATE WILL COST, IN THE NEXT FINANCIAL YEAR, AROUND $2 BILLION.

ALL UP, THE COST OF THESE TAXATION CONCESSIONS DURING OUR FIRST

TWO YEARS IN OFFICE WILL TOTAL SOME $3.3 BILLION.

IT NEEDS TO BE UNDERSTOOD THAT OUR SUCCESS IN RESTRAINING EXPENDITURE HAS MADE TAXATION REFORM OF THIS MAGNITUDE POSSIBLE.

LET ME NOW DEAL WITH THE PERIOD AHEAD. .

THE DECISION TO DEVALUE THE AUSTRALIAN DOLLAR IN LATE 1976 DOES NOT SIGNIFY AN ABANDONMENT OF THE ECONOMIC STRATEGY SO DEMONSTRABLY SUCCESSFUL DURING 1976.

NOTHING COULD BE FURTHER FROM THE TRUTH.

THE BACKGROUND TO THAT DECISION IS WELL KNOWN.

THE DECISION WAS INEVITABLE BECAUSE OF THE EARLIER EXPLOSION OF WAGES AND COSTS AND THE RESULTANT SPECULATION THAT BUILT UP TO

AN IRRESISTIBLE LEVEL IN THE SECOND HALF OF 1976.

THE GOVERNMENT STAVED OFF FOR ALMOST TWELVE MONTHS THE CONSEQUENCES

OF THOSE EARLIER DEVELOPMENTS, TO ALLOW TIME FOR OUR BASIC ANTI­ INFLATIONARY POLICIES TO TAKE EFFECT.

BUT IN THE END OUR DECISION AT THE END OF NOVEMBER REFLECTED A JUDGEMENT THAT, VALUABLE THOUGH AN UNCHANGED EXCHANGE RATE HAD BEEN THROUGHOUT 1976 IN CEMENTING THE TOTALITY OF OUR ANTI-INFLATIONARY MEASURES, THE COSTS OF RETAINING IT IN THAT ROLE FOR ANY LONGER WERE BECOMING TOO HIGH TO BE ENDURED BY THOSE SECTORS OF THE ECONOMY ON.WHOM THE BRUNT OF THOSE COSTS WAS FALLING.

I CANNOT EMPHASISE TOO STRONGLY THAT THIS CHANGE DOES NOT MEAN THAT

OUR OBJECTIVE OF BRAKING INFLATION IS IN ANY WAY ALTERED - STILL

LESS THAT IT HAS BEEN ABANDONED.

- 10 -

11

11 -

THE TASK NOW BEFORE US IS TO ENSURE THAT THE SOLID PROGRESS

ALREADY MADE IN REDUCING INFLATION IS NOT UNDULY INTERRUPTED BY THE UNAVOIDABLE INFLATIONARY CONSEQUENCES OF DEVALUATION.

ONLY IF THIS CAN BE ACHIEVED WILL THE POTENTIAL BENEFITS OF DEVALUATION - THE IMPROVED COMPETITIVE POSITIONS OF OUR EXPORT AND IMPORT-COMPETING SECTORS - MATERIALIZE INTO PROVIDING NEW JOB OPPORTUNITIES AND REDUCING UNEMPLOYMENT.

TO PRESERVE THOSE REAL AND IMPORTANT GAINS, A NUMBER OF STEPS DI RECTED AT .LIMITING THE SECOND ROUND EFFECTS OF DEVALUATION AND ENSURING THE MAINTENANCE OF OUR BASIC STRATEGY HAVE BEEN TAKEN.

NOTWITHSTANDING THE FORCED RELAXATION OF THE EXTERNAL ARM OF

POLICY, WE HAVE IN ESSENCE SOUGHT TO MAINTAIN THE ANTI-INFLATIONARY THRUST OF POLICY BY TIGHTENING UP OTHER POLICY INSTRUMENTS IN AN ORDERLY WAY.

IN DOING SO WE HAVE, AS ALWAYS, HAD TO STRIKE A BALANCE BETWEEN INITIATIVES IN THE DIFFERENT AREAS OF POLICY.

FIRST, IN TERMS OF FISCAL POLICY, THERE HAS BEEN SOME FURTHER TIGHTENING IN THE EXPENDITURE AREA.

AS SOME OF YOU WILL RECALL, I RECENTLY ANNOUNCED THAT THE GOVERNMENT HAS IDENTIFIED A FURTHER $250 MILLION OF SAVINGS THAT CAN BE MADE IN THE BALANCE OF THE FINANCIAL YEAR.

IN ADDITION, BY IMPOSING A NEW STAFF CEILING WE HAVE MADE FURTHER

PROGRESS IN REDUCING THE SIZE OF THE CANBERRA BUREAUCRACY; IN JUST 18 MONTHS COMMONWEALTH EMPLOYMENT WILL, AS A RESULT OF OUR

POLICIES, BE REDUCED BY SOME 15,000. ,

LOOKING AHEAD THE GOVERNMENT HAS DECIDED THAT EXPENDITURE WILL

NOT BE INCREASED IN REAL TERMS DURING THE NEXT FINANCIAL YEAR AND

THAT THE BUDGET DEFICIT WILL BE DECREASED.

12

SIMILARLY, SOME. NECESSARY ADJUSTMENTS HAVE BEEN MADE TO THE

MONETARY INSTRUMENTS SINCE DEVALUATION.

I EMPHASISE, HOWEVER, THAT THESE ADJUSTMENTS IN NO WAY REPRESENT A CHANGE IN THE OBJECTIVES OF MONETARY POLICY THAT HAVE BEEN PURSUED, CONSISTENTLY, FOR OVER TWELVE MONTHS.

I REJECT COMPLETELY ANY SUGGESTION THAT THE POST-DEVALUATION MONETARY ADJUSTMENTS WILL LEAD TO A CREDIT SQUEEZE.

SOME MODERATION IN LENDING FROM THE UNSUSTAINABLE LEVELS OF .

MID-1976 IS BECOMING APPARENT FOR SOME GROUPS OF FINANCIAL INSTITUTIONS BUT THIS IS NO PORTENT OF A CREDIT SQUEEZE.

FINANCIAL MARKETS ARE BETTER PREPARED THAN IN RECENT YEARS FOR THE IMMINENT SEASONAL CONTRACTION IN PRIVATE SECTOR LIQUIDITY.

INSTITUTIONS HAVE BUILT UP THEIR PORTFOLIOS OF SHORT-TERM GOVERNMENT PAPER TO HELP SMOOTH THE LIQUIDITY RUNDOWN.

TREASURY NOTES MATURING BETWEEN NOW AND THE END OF THE FINANCIAL

YEAR WILL PLACE AROUND $2 BILLION IN PRIVATE HANDS. .

THE REVERSION OF THE MINIMUM LGS RATIO FROM 23 PER CENT TO 18 PER CENT AT THE BEGINNING OF NEXT MONTH WILL IN EFFECT RELEASE

MORE THAN $850 MILLION IN.FUNDS TO ASSIST TRADING BANKS IN MEETING THE SEASONAL DRAIN ON THEIR FUNDS; AND SAVINGS BANKS HAVE CONSIDERABLE VOLUMES OF FUNDS ON DEPOSIT WITH THE RESERVE BANK.

TALK OF GOVERNMENT PRESIDING OVER A CREDIT SQUEEZE IS THUS

QUITE WITHOUT FOUNDATION. -

LET ME TURN NOW TO THE QUESTION OF INTEREST RATES. ,

I RECOGNISE THAT THERE ARE THOSE IN THE COMMUNITY WHO BELIEVE

THAT THERE SHOULD BE A MOVE TOWARDS LOWER INTEREST RATES.

. . . . · · - 12 . - . " ■ . .

13

THE CURRENT HIGH NOMINAL INTEREST RATE STRUCTURE IS, OF COURSE,

AS UNPALATABLE TO ME AS IT IS TO YOU.

IT IS A COMMON OBJECTIVE TO REDUCE THE LEVEL OF INTEREST RATES AS SOON AS POSSIBLE.

BUT THE PLAIN FACT IS THAT THE RATES ARE A NECESSARY ELEMENT OF CURRENT ECONOMIC MANAGEMENT. .

IT WOULD BE AN ARTIFICIALITY TO ENGINEER A PREMATURE REDUCTION IN THE LEVEL OF NOMINAL INTEREST RATES; THAT WOULD BE POSITIVELY WORKING TO CREATE AN EXCESSIVELY EASY MONETARY ENVIRONMENT.

THE KEY TO REDUCING THE INTEREST RATE STRUCTURE, THE COST OF CAPITAL, IS INFLATION CONTROL.

BY ATTACKING INFLATION ON ALL FRONTS THE GOVERNMENT HAS BEEN

FOLLOWING THE ONLY PRACTICABLE ROUTE TO CREATION OF THE CONDITIONS WHICH WILL LEAD TO LOWER NOMINAL INTEREST RATES.

WITH REGARD TO EXTERNAL POLICY THE DEVALUATION MEANS, OF COURSE, THAT THIS INSTRUMENT IS CARRYING LESS OF THE BURDEN THAN IT DID

DURING MOST OF 1976.

NEVERTHELESS, ACTION HAS BEEN TAKEN ON THIS FRONT TO LIMIT THE

EXTENT TO WHICH BORROWINGS CAN ADD TO DOMESTIC LIQUIDITY.

AND, PARTIALLY FOR REASONS OF DOMESTIC MANAGEMENT, THE EXCHANGE RATE HAS APPRECIATED SO THAT THE EFFECTIVE DEVALUATION NOW STANDS AT 12.2 PER CENT.

I TAKE THIS OPPORTUNITY TO POINT OUT THAT THERE ARE REAL ADVANTAGES

TO BUSINESS IN THE WAY IN WHICH THE EXCHANGE RATE SYSTEM IS BEING

MANAGED.

THE FACT IS THAT, BECAUSE THERE WILL BE SMALLER AND MORE FREQUENT

SHIFTS IN THE RATE, BUSINESS WILL NOT HAVE TO FACE AGAIN THE . PROSPECT OF MAJOR SHIFTS AT LONG INTERVALS. .

- 13' " - - ' .

.14

THERE ARE MANY COUNTRIES IN THE WORLD, OF COURSE, WHERE BROADLY SIMILAR EXCHANGE RATE SYSTEMS OPERATE .... AND OPERATE SUCCESSFULLY.

I SEE NO. REASON WHY THIS SHOULD NOT BE THE CASE IN AUSTRALIA.

ASSOCIATED WITH DEBATE ON THE EXCHANGE RATE AND LEVELS OF

PROTECTION THERE HAVE BEEN MANY EXPRESSIONS OF CONCERN ABOUT THE ROLE THAT THE MANUFACTURING INDUSTRY IS GOING TO HAVE IN THE AUSTRALIAN ECONOMY IN THE FUTURE.

THE GOVERNMENT ATTACHES CONSIDERABLE IMPORTANCE TO THIS SECTOR OF THE AUSTRALIAN ECONOMY AND THIS WILL BE REFLECTED WHEN THE WHITE PAPER ON MANUFACTURING INDUSTRY IS RELEASED.

THE PRESENT ADMINISTRATION WANTS TO SEE A. VIBRANT AND STRONG MANUFACTURING SECTOR. AND OUR POLICIES WILL CONTINUE TO BE BASED ON THAT VIEW.

I TURN LASTLY TO WAGES POLICY. '

AS I HAVE STRESSED REPEATEDLY, THE BEST SETTINGS OF MONETARY AND FISCAL POLICIES CAN BE THROWN OFF COURSE IF DEVELOPMENTS IN THE FIELD OF WAGES POLICY ARE OUT OF KILTER WITH THE ANTI-INFLATION OBJECTIVE.

SINCE COMING TO OFFICE THE GOVERNMENT HAS, FIRMLY AND CONSISTENTLY, POINTED TO THE CRUCIAL IMPORTANCE OF WAGE RESTRAINT FOR THE

SPEEDY WINDING DOWN OF INFLATION; FOR THE RESTORATION OF CONSUMER AND BUSINESS CONFIDENCE; FOR THE RESTORATION OF THE PROFIT SHARE; FOR THE SAFEGUARDING OF OUR INTERNATIONAL COMPETITIVE POSITION; AND ABOVE ALL FOR THE PROVISION OF JOBS

FOR THE GROWING WORKFORCE.

THE GOVERNMENT HAS, OF COURSE, ACTED DECISIVELY IN THOSE AREAS

IN WHICH IT HAS A DIRECT CAPACITY TO DO SO.

15

- 15

BUT, IN THE AREA OF WAGES, THE GOVERNMENT CAN ONLY SEEK TO PERSUADE BY FORCE OF ARGUMENT ___ IT CANNOT DICTATE.

IT IS NOT MY INTENTION TO SPEAK FURTHER ON THE SUBJECT OF WAGES

WHILE THE CURRENT CASE IS PROCEEDING EXCEPT TO SAY THIS:

AUSTRALIA CAN NO. LONGER AFFORD TO APPEASE THE INCREASINGLY OUTRAGEOUS DEMANDS FROM THE NEW MONOPOLISTS IN OUR SOCIETY -

THE TRADE UNIONS.

IT IS, OF COURSE, NOT ONLY THE HEAVY COSTS OF IMPROVED WAGES AND CONDITIONS THAT TRADE UNION ACTION HAS, SO OFTEN IN THE PAST, HAD THE EFFECT OF IMPOSING ON THE ECONOMY. .

UNNECESSARY DISPUTATION AND PROTRACTED SETTLEMENT PROCEDURES ' ' ASSOCIATED WITH THAT ACTION ARE ALSO VERY COSTLY BOTH TO ! $

EMPLOYERS AND EMPLOYEES.

THESE ARE COSTS THAT THE NATION AS A WHOLE CAN ILL AFFORD AND THE GOVERNMENT WILL CONTINUE TO PRESS FOR A MORE RATIONAL ENVIRONMENT ' 1 FOR INDUSTRIAL RELATIONS IN AUSTRALIA.

IN CONCLUSION, I WANT TO STRESS THAT THE GOVERNMENT HAS MADE CONSIDERABLE PROGRESS TOWARDS THE THREE YEAR GOALS WE SET OURSELVES

AT THE LAST ELECTION.

MANY OF OUR PROMISES - FOR EXAMPLE, TO CURB FEDERAL WASTE AND EXTRAVAGANCE, TO REDUCE THE CANBERRA BUREAUCRACY, TO CUT TAXES,

TO PUT A BRAKE ON BIG GOVERNMENT - HAVE BEEN MET OR ARE WELL ON THE WAY TO BEING FULFILLED.

WE RECOGNIZE THAT THE TASK AHEAD REMAINS DIFFICULT BUT I AM

CONFIDENT OF OUR CAPACITY, WITH YOUR CO-OPERATION, TO PUT AUSTRALIA BACK ON THE PATH TOWARDS STABILITY AND PROSPERITY.

11 March, 1977